---

Budget Resolutions and Economic Situation

I realise that spending is not usually a matter for the Budget, although I used to include it. However, when one considers fiscal policy, spending is still relevant to the debate. The Government are raising tax and are about to cut spending growth drastically—they argued that we were being draconian when we urged such measures in the past. There are no longer any fiscal rules by which to judge the matter. The golden rule has been discredited since the ridiculous change to the timetable for the cycle. The sustainable investment rule would be sensible, if the accounting devices for Network Rail, unfunded pension commitments and the private finance initiative made any sense. The Chancellor is flying by the seat of his pants on fiscal rules. In its annual country report, the International Monetary Fund recommends that he should start putting in some fresh fiscal rules to correct those discrepancies. Although the Budget does not contain a Budget judgment, we should know what it is. Chancellors usually loosen policy, tighten policy, try to redress the public finances or feel that they can be expansive. This Chancellor is tightening policy, and he has only just started. He must do so because of many factors that we warned him about, given his years of irresponsibility since 2000. The real economy is in the doldrums at the moment. Let us not start the fancy swapping of statistics, which involves real-terms figures, cash figures and choosing particular funny years. Everybody knows that the economy is going through a period of marked slowdown, because the 1.8 per cent. gross domestic product growth in 2005 was the lowest since 1992. Why is GDP growth slowing down? It has been based—I refer hon. Members to my previous Budget speeches—on a sea of household debt, and public debt and borrowing, for the past six years. That was not sustainable, and what is not sustainable always stops, which is why GDP growth has started to slow down. There has been a drop in consumer demand and a drop in public investment and spending. Those trends will continue, and will not pick up rapidly. Last year consumer demand grew by 1.9 per cent.—the lowest growth since 1995. It will not pick up, and I shall briefly explain why. First, household debt is about 150 per cent. of household incomes. People will not add much to absolute debt, so they are not going to spend above their incomes any more. The disposable income of the average household in this country has gone up by only 1 per cent. in each of the past two years. Furthermore, I have referred to the tax burden, and the Governor of the Bank of England mentioned it when he discussed falling demand. We have rising unemployment—there has been a slight hiccup in unemployment, which has been a good field hitherto—and last month’s increase in the claimant count was the biggest since 1992. I am most struck by the fact that next year the percentage of the working age population in employment in this country will be lower than that in the German Democratic Republic. People are more insecure about their jobs than they used to be. The pensions crisis is making people worried, which will cause the savings ratio to increase, and consumer demand will not come back. When one examines the Chancellor’s proposals and considers what the Chief Secretary must do in the public spending round, it is clear that public investment is not going to carry on providing all the growth in the economy in future years. The economy is slowing down markedly, and I cannot see any reason why it should bounce back in a hurry. I think that we could be in for several years of lacklustre performance, and I think that we have got there because the Government took too short-term a view and disregarded the warnings when the Chancellor went in for tax and spend. Since 2000, the Chancellor has made the economy ever more dependent on shoving in demand, either by encouraging consumers to borrow too heavily or having the Government spend too highly. Now, the economy will slow down. I have not even touched on global influences such as oil prices and commodity prices, which still have not had their full effect on our growth potential. There will be no quick bounce back. I have described where I think that we are, so what are my conclusions? The Chancellor has done nothing of significance in the Budget, except to announce small measures and drift on in the manner that he has already proposed. I would like us to seek to achieve so much more. What economic policy now lacks is ambition. It has become fashionable to talk about the challenge from India and China, and one can add to that Brazil and the entirety of south-east Asia. Globalisation is transforming the world in which we are competing, and the pace of technological change has never been faster, so we must be much more competitive than we ever were. To make our economic growth sustainable, we need to rebalance it. We will need some years in which growth is led not by consumer demand and public spending, but by investment, trade and productivity, and we must do things to encourage that.