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Budget Resolutions and Economic Situation

Yesterday we heard what we all assume will be the final Budget from the current Chancellor. I thought that it would be worth while in examining it to look back to his first Budget in July 1997, to assess what progress has been made on the various items that he identified in his opening remarks on that occasion. He identified what he perceived as four weaknesses within the British economy: instability, under-investment, unemployment and waste of talent. It would be fair to say that unemployment and waste of talent were closely linked—indeed, he dealt with them together in his speech—so his very first statistic in his very first Budget speech should probably have referred to three weaknesses instead of four. Perhaps he was setting the tone as far as numbers were concerned. The first weakness that the Chancellor identified was instability. He referred to the independence of the Bank of England, which, even at the time, I supported. It has undoubtedly been a success. He also referred to public finances, stating how important it was that they should be sustainable. In our debates yesterday and today, we have heard how there have been three phases for the Chancellor. From 1997 to 2000, he was fiscally prudent, conservative and careful, and he reduced the budget deficit substantially. From 2000 to 2006, however, we saw a sharp deterioration in the public finances. Public spending took off dramatically, while tax revenues at times disappointed. We have seen a sharp tightening since the 2005 general election, and we saw further evidence of it yesterday with the announcement of the public spending plans—the envelope, as it were—for the next few years. In assessing the Chancellor’s record as a whole in this area, it is worth citing the findings of the Institute for Fiscal Studies, which noted some improvement over the past 10 years but made an international comparison: of the 22 countries for which comparable data are available, 17 improved their structural budget balance by more than the UK. We have been living through a time in which the budget balances should have been getting better, yet the Chancellor’s record is not all that impressive. Indeed, he has been able to recover a degree of sustainability in the public finances only by means of a rather sharp slow-down in public spending, in which we have seen spending falling as a percentage of national income. During the last general election campaign, my party put forward proposals in which public spending would rise in real terms but fall as a percentage of gross domestic product. The Chancellor’s response to our proposals was that they would result in £35 billion of public spending cuts. Applying the methodology that he used to reach that conclusion to yesterday’s spending announcement, the Institute for Fiscal Studies has made it clear that the Chancellor would yesterday effectively have announced £8 billion of cuts by 2010-11, or £10 billion worth by 2011-12. The methodology is absurd. What the Chancellor announced yesterday were not really spending cuts in the normal sense of the word. If he is to be consistent in his choice of methodology, however, that is precisely what he did. As a member of the Treasury Select Committee, I had the opportunity after the pre-Budget report to ask the Chancellor how he would define a cut in public spending. He evaded my question, saying that we would have to wait and see what the public spending envelope looked like. That was no answer; we do not have to wait and see at all. I had another go at the question when I asked the Chief Secretary to the Treasury what constituted a cut, and he said that it was in the eye of the beholder. We are in the rather curious position of having a new irregular verb, as far as the Chancellor is concerned: ““You cut spending. I demonstrate fiscal discipline while increasing real-terms spending.”” One innovation in the 1997 Budget was the introduction of the fiscal rules, and they have served a useful purpose. We all know, however, that the golden rule that current spending must be met by taxation over the economic cycle has largely been discredited by the various changes to the economic cycle, which have always made the Chancellor’s job somewhat easier. The Chairman of the Treasury Committee, the right hon. Member for West Dunbartonshire (John McFall), raised one or two concerns about the golden rule and the economic cycle yesterday. I intervened on him yesterday, and I have an opportunity today to raise with the Financial Secretary my concern about what one might call a fiddle. In the past, the last year of an economic cycle has always been treated as the first year of the next, and it so happens that those last years have always been surplus years. Yesterday the Chancellor said that the current economic cycle will finish in early 2007, which I think probably means within the 2006-07 financial year, so my question is: will the 2006-07 financial year, which is a deficit year, be treated as part of the next economic cycle? The question seems fairly straightforward, and if the answer is yes, that would be a continuation of the policy that has applied in the past. However, when asked the question, Treasury officials before the Treasury Committee were unable to give an answer, and no answer has been given in response to parliamentary questions that I have tabled. When he winds up the debate, I hope that the Financial Secretary will clarify whether the last year of one economic cycle will continue to be the first year of the next. As far as I can see, the Government will meet the golden rule for the next economic cycle either way. According to their current projections, there is no reason why not. None the less, it is important to have consistency if the golden rule is to have any sort of credibility. The second weakness that the Chancellor identified was under-investment. As my right hon. Friend the Member for Witney (Mr. Cameron) pointed out yesterday, the savings ratio has halved since 1997. In addition, business investment in this country is less than 10 per cent. of GDP and has averaged a smaller proportion of GDP than in France, Germany and the United States since 2000. A matter raised in 1997 that is topical again this year is the rate of corporation tax. In 1997, the Chancellor reduced the mainstream rate from 33 to 31 per cent.; he subsequently reduced it to 30 per cent. and, of course, yesterday he reduced it to 28 per cent. In 1997 he boasted that our rate was lower than our competitors’ and that we had a competitive advantage, which would help both inward and domestic investment. However, that competitive advantage has been allowed to slip in the succeeding 10 years. It would be churlish not to welcome the change in mainstream corporation tax. It is right to lower the rate and to simplify the system by having fewer allowances, exemptions, reliefs and so on. That is to be welcomed. The change was foreshadowed in the report produced by the Tax Reform Commission chaired by Lord Forsyth, and the shadow Chancellor was advocating that approach only this week. In fact, the tax cut can safely be said to be the first of many tax cuts initiated by my hon. Friend the Member for Tatton (Mr. Osborne).