Government's Fiscal Rules

David Gauke winds up the debate for the Opposition calling for the Government to concentrate on bringing down debt rather than evading its own rules and highlighting Conservative proposals for the creation of an office of budget responsibility. Mr. David Gauke (South-West Hertfordshire) (Con): It is a pleasure to make the winding-up speech for the Opposition in this debate. I begin by welcoming the Financial Secretary on his return to the Treasury; this is the second day running where I have had the opportunity to welcome a new Treasury Minister. I think that this is the right hon. Gentleman's fourth spell as a Treasury Minister. I do not know whether that is some sort of record, or what precisely he has done to deserve constantly being put back into the Treasury, but we welcome him. I know that he is well regarded by Members throughout the House. I would like to mention briefly his predecessor, the right hon. Member for Liverpool, Wavertree (Jane Kennedy) who has moved on to the Department for Environment, Food and Rural Affairs. She distinguished herself in the role of Financial Secretary.

We have had an interesting and wide-ranging debate. The hon. Member for Luton, North (Kelvin Hopkins) started the Back-Bench contributions, declaiming the end of neo-liberalism. If anything, he was being slightly restrained; I think that he wanted to go further and declaim the end of capitalism.

Kelvin Hopkins: That's next.

Mr. Gauke: The hon. Gentleman says that that is next-perhaps it is an ambition for him to achieve. I know people who share his views have been declaiming the end of capitalism for some time. Perhaps their time will come, but I doubt it. He also called for the return of 1970s levels of personal taxation, which does not have support in my party.

Kelvin Hopkins: I said that we ought to move in that direction, not return to the levels where, as Denis Healey said, the pips squeaked. That would be too hard.

Mr. Gauke: I take the hon. Gentleman's point and stand corrected. I assume, therefore, that 98 per cent. rates are merely a long-term aspiration, not an immediate objective.

On looking back to the 1970s, my hon. Friend the Member for Gosport (Sir Peter Viggers) gave us an historical perspective, going back to the 1970s and the benefit of his experience in the commercial world, as well as his long-standing membership of this House. In a wide-ranging speech, he addressed a number of the substantial concerns as we address financial matters.

The hon. Member for South Derbyshire (Mr. Todd) said that he could make a candid speech because he is leaving this House. As he is leaving the House, I can be candid about him: he made a characteristically thoughtful and balanced speech that raised a number of important points. I do not agree with everything that he said, but he looked back on the early years of this Labour Government, and the fiscal conservatism that existed then, with a fair degree of nostalgia. He was also open about the fiscal loosening that followed those early years. He raised an important point about corporation tax, which we are not concentrating on in this debate, and he raised fair questions about our proposal, which I hope to address during the debate.

My hon. Friend the Member for Stone (Mr. Cash) highlighted the need for sound money and the high level of debt in many eurozone countries, and the instability that may follow from that. He also highlighted dangers with the stability and growth pact. He raised concerns that he has consistently raised in this House and outside for some years, and I expect that he will continue to do so.

My hon. Friend the Member for Henley (John Howell) made a thoughtful and intelligent speech in which he outlined, from his extensive business experience, the need for a clear and honest framework, and he called for more rigour in our fiscal rules.

The hon. Member for Great Grimsby (Mr. Mitchell) made a lively speech. I disagree with his premise-he is a long-standing advocate of Keynesian economics, and argues that as far as borrowing is concerned, the only rule should be that there are no rules. When he made the observation that he more or less went along with the Government's fiscal rules because they were "just a PR exercise", he hit the nail on the head, however.

The hon. Gentleman also said that the rules will always be fiddled, which raises an important point that I hope to address in my later remarks. He questioned whether our plans were based on what occurred in New Zealand. Our precise proposals are not used anywhere-they are new-but within the document that we produced setting out the plans, we referred to the experience of Belgium, Denmark, Germany, Austria, the Netherlands, Sweden and the US. If we were remiss in not including New Zealand, perhaps we should look at the document again, but to clarify, our plans are not based on what is happening there.

I would like to continue on a bipartisan note, and given the remarks of the hon. Member for Great Grimsby, I should say that by "bipartisan" I mean something on which my party and Government Front Benchers agree. It is vital that public finances are sustainable over the long term. There is a need for caution and prudence-at least that is professed position of Government Front Benchers. When the then Chancellor of the Exchequer addressed the House in his first Budget speech in 1997, he said:

"Public finances must be sustainable over the long term. If they are not then it is the poor, the elderly, and those on fixed incomes who depend on public services that will suffer most."-[ Official Report, 2 July 1997; Vol. 297, c. 304.]

The second point on which we agree with the position set out by the then Chancellor in 1997 is that there is a need for external discipline in order to reassure the public, the markets and Parliament itself that public finances will be run in a prudent manner. We agree that public finances must be sustainable in the long term and that an external discipline is needed to ensure prudent management. However-this is where the consensual tone ends-it is now clear that the Government have achieved neither an effective external discipline nor sustainable public finances.

The then Chancellor's response to the need for sustainable public finances were his fiscal rules: the golden rule, which states that over the economic cycle the Government will borrow only to invest and that current spending will be met from taxation, and the sustainable investment rule, which states that public debt will be held at 40 per cent. of GDP. He put those rules at the very heart of his economic policy. He said that they were the

"basis on which...people have seen this Government as competent"-

words that are only too true.

The issue is not only for academics. Fiscal sustainability matters to us all-to mortgage holders, who may face higher interest rates, to pensioners and others on fixed incomes fearful of higher inflation and to future generations, who will have to pay tax for what we borrow today. As Mervyn King, the Governor of the Bank of England, told the Treasury Committee last month:

"The long-term risk is a fiscal framework that is not perceived by financial markets to be credible",

which puts up

"pressure on inflation expectations because it undermines the market's belief in the credibility of both the monetary and the fiscal framework".

He continued:

"And that will make our life more difficult if inflation expectations were to remain higher than we would wish".

What of the then Chancellor's proposals? In 1997, he described the rules as providing a new discipline, openness and accountability. However, if they provide a new discipline, why do we have the highest borrowing figures for any major economy apart from Hungary, Egypt and Pakistan? If the rules provide financial discipline, why, according to the Institute for Fiscal Studies, have 19 out of 21 comparable industrial country Governments done more than the UK Government to improve their structural budget balances, and why have 16 of them done more to reduce their debt burdens? What sort of financial discipline is it that allows consistent borrowing in good years, leaving us nothing spare in the bad years? The International Monetary Fund, the European Commission, the OECD and just about every independent commentator advised the Government that their fiscal policy was reckless, and yet the fiscal rules did nothing to prevent that from happening.

Have the rules provided more openness and accountability? The Government's assessment of their fiscal rules has been characterised by a litany of self-serving definitional changes, which invariably assist them in meeting their own rules. Dates of economic cycles have been altered and public sector contracts have been pushed off balance sheet.

David Taylor: Does the hon. Gentleman agree that sustainable fiscal rules include sustainable taxation? Is he surprised to learn that in the 11 and a half years between May 1979 and November 1990 when the now Lady Thatcher was Prime Minister, the proportion of GDP to taxation was five full percentage points above the level that the current Prime Minister achieved in his 10 years as Chancellor? Surely the current Prime Minister's actions were more sustainable than those of the Lady, whom the hon. Gentleman no doubt admires.

Mr. Gauke: I am well aware that taxes initially increased under Lady Thatcher's Government. However, the Conservative Government at that time were reducing debt and borrowing at a faster rate than in the first 10 years of this Government. If the hon. Gentleman is making an argument for fiscal conservatism, I fully endorse it. However, the problem is that the Government increased taxes at a time when the economy was growing. Margaret Thatcher was able to get the public finances in a good position and then reduce taxes through the 1980s.

Kelvin Hopkins: I am sure that the hon. Gentleman will remember that Mrs. Thatcher's first act in Geoffrey Howe's first Budget was to switch the burden of taxation from income tax, which is progressive and fair, to indirect taxes by substantially raising VAT. That was a direct shift of income from the poor to the rich.

Mr. Gauke: At the time, that reduced direct taxes, because we had 98 per cent. tax on unearned income and a standard high-rate income tax of 80 per cent. It was vital to get incentives back into the British economy. It was only by returning incentives to this country that we saw the economic growth from which we have benefited ever since.

To return to the fiscal rules, so fiddled have they been, to use the word that the hon. Member for Great Grimsby used, that the IFS has said that they

"are now regarded by most informed observers with scepticism at best and cynicism at worst".

I challenge the Minister to name a single reputable commentator who now believes that the rules are taken seriously or, indeed, anyone who has taken them seriously for the past three years. Even the credibility of the Treasury's fiscal forecasts has been badly tarnished. For seven consecutive years, the Treasury has made over-optimistic Budget forecasts, underestimating the size of the Government's deficit and overestimating how quickly it would shrink, as the hon. Member for South Derbyshire has pointed out.

A balanced Budget was always round the corner. In 2003, the Budget would be back in balance by 2005. In 2004, that date was 2007; in 2006, it was 2008; in 2007, it was 2009; and in 2008, it was 2011. I predict that in 2009 the date of the balanced Budget will be moved on again from 2011. However, at least then the Government will have the defence that there is an economic slow-down. The previous years were the good years. If the rules allowed the date to be moved in the good years, there is something flawed in the rules. As Robert Chote of the IFS has put it, given that record of forecasting, the Treasury has engaged in a

"sustained display of conviction forecasting".

We must do better. It is time for a new approach that is not based on subjective dating of the economic cycle. As the Treasury Committee has consistently said, we must be forward looking, with a Government who concentrate on bringing down debt rather than evading their own rules. We will introduce an office of budget responsibility. It will assess independently the sustainability of the Government's finances. It will no longer allow a Chancellor to profess prudence on the one hand, but to borrow recklessly on the other. It will give Parliament the opportunity to hold the Government to account.

Our proposal has been criticised on the grounds that such an office would be a quango and would diminish the role of Parliament. That point was made by the hon. Member for South Derbyshire. He will know that, as a former member, I have a great deal of respect for the Treasury Committee. However, I see our proposal as a way of improving accountability. Let me give one example. In March 2006, I was a member of the Committee and wished to question the then Chancellor about the change in date of the economic cycle for the purposes of the golden rule-I am sure that the hon. Gentleman recalls that occasion. I asked whether the golden rule would have been met but for the change in date. The then Chancellor consistently refused to answer. Indeed, he provided a host of technical arguments that were difficult for the Committee to engage with.

Let us imagine circumstances in which forecasts and assessments were produced by a body as part of the Red Book. That body would therefore be independent, so we would not face the problem of conviction forecasting. It is not for us to determine how a Select Committee decides to take its evidence, but members of the office of budget responsibility would be able to give evidence to the Treasury Committee as part of an inquiry by that Committee. The Treasury Committee would potentially have an important role in appointments to that body, reviewing appointments and taking evidence from potential members.

Mr. Graham Stuart: To pick up on the issue of ensuring the office's independence, I wonder whether Conservative Front Benchers will consider giving the Treasury Committee the right of veto over appointments to the office.

Mr. Gauke: I am grateful to my hon. Friend for that. There will certainly be confirmatory hearings. The precise powers are something that we can look into, but he has raised an important point.

Mr. Cash: Does my hon. Friend agree that in the formulation of such ideas it is important to bear in mind the role of the National Audit Office-and therefore to try to integrate the thinking with it, to ensure a degree of responsibility and transparency-and the role of the Public Accounts Committee, which has not been mentioned so far? If evidence were given to the Treasury Committee, that would be a powerful reason for giving evidence to the Public Accounts Committee, too, and for subjecting such a body to cross-examination.

Mr. Gauke: I am grateful to my hon. Friend, because he has brought me on to a point that I was going to make. The hon. Member for Twickenham (Dr. Cable) also touched on the Public Accounts Committee and the National Audit Office. Our view is that the National Audit Office does not have the expertise on fiscal matters. It provides a sterling service in scrutinising Government expenditure, but it is not a specialist body, and we are talking about a specialist task. We therefore think that a separate body would be better placed to perform that task. Given that, my view is that the Treasury Committee is in a better position to do so.

I hope that I have addressed the concerns that have been expressed about parliamentary accountability. The proposal is about providing a rod for our own back. It is about providing an external discipline that will work, rather than rules that can be fiddled. It will be an essential part of the framework whereby we restore trust into politics.

The fiscal rules have failed and, in many respects, they sum up the Prime Minister. At first, they appeared a bit complex and rather technical, but worthy, prudent and reassuring. Then came the realisation that the complexity and technical details were there more to baffle and confuse than to assist. Finally, there came the recognition that the fiscal rules-perhaps like the Prime Minister-were not as worthy, prudent or reassuring as was once thought, and that they were in fact entirely ineffective in achieving their objective. They were there only for political show-a PR gimmick, in the words of the hon. Member for Great Grimsby-and when it came to substance, there was nothing there. We must do better, and we will.

| Hansard"