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Pre-Budget Report 2007

rose to move, That this House takes note with approval of the Government’s assessment as set out in the Pre-Budget Report 2007 for the purposes of Section 5 of the European Communities (Amendment) Act 1993. The noble Lord said: My Lords, each year the Government report information to the Commission on the economic and budgetary position and our main economic policy measures. By formally sharing information from the Pre-Budget Report with our European partners, we can help to ensure a proper, accurate and effective EU system and meet our commitments, contributing to enhanced employment and growth. This information was set out in the Pre-Budget Report last month and this material forms the basis of what we are sending to the Commission. The background to this year’s report and spending review is a time of increased international economic uncertainty and a more fragile global environment, which has already seen turbulence in America, Asia and Europe. As the Chancellor set out in his speech on 9 October, provided that we maintain the course for economic stability that we have set, we can respond to this global environment. We will do so by taking no risks with stability and no risks with unaffordable promises that put public finances at risk. The full impact from turbulence in the international financial markets is as yet unclear, but the IMF has said that this international uncertainty will have an effect on growth right across the world. Independent forecasters expect growth next year in America and the euro area to fall to 2 and 2.5 per cent. In these circumstances, it is right that we, too, should be cautious. The forecast for growth next year is also of 2 to 2.5 per cent. However, because of the strength of our economy, our commitment to openness and liberalised trade across the world and our flexibility and dynamism here at home, the forecast for growth in 2009 and 2010 is 2.5 to 3 per cent, in line with the economy’s trend rate of growth and in line with the forecast in the Budget. Against the backdrop of recent events, in the UK decisive action has brought inflation down to around our target of 2 per cent, with it forecast to be on target next year and the year after, employment is at a record level and productivity is growing strongly, up 2.7 per cent in the past year. While growth in America this year is expected to be 2.1 per cent, in Japan 2 per cent and in the euro area 2.6 per cent, in Britain—with exports and investment rising—growth is expected to be 3 per cent. Britain is the fastest-growing advanced major economy in the world. The strength of the UK economy is the direct result of the monetary and fiscal policy framework that we have introduced. This Government’s monetary policy framework seeks to ensure low and stable inflation. The framework has delivered the longest period of low and stable inflation since the 1960s, along with low interest rates. This has provided the platform for record employment levels, higher investment and economic growth. Our two fiscal rules are, first, the golden rule that, over the economic cycle, the Government will borrow only to invest and not to fund current spending and, secondly, the sustainable investment rule that net debt should be held over the economic cycle at a stable and prudent level. We are meeting our first fiscal rule, with the current budget in surplus over the cycle. In the last economic cycle—1986 to 1997—that rule was missed, with a deficit of £240 billion. Over this cycle, with a current budget deficit last year lower than forecast, we have a surplus of £18 billion and are, therefore, meeting our first fiscal rule. We will also meet our second rule that net debt should be at a sustainable level. In America, debt is 44 per cent; it is 49 per cent across the euro area, 86 per cent in Japan and 94 per cent in Italy. In Britain, debt is 37.6 per cent this year and below 40 per cent in every year of the projection period, so we are meeting our second fiscal rule. Debt interest was 3.5 per cent of national income in 1997. Next year, it is expected to be just 2 per cent. That low debt allows more investment in front-line services. We can afford sustained investment in our priorities only because of our two fiscal rules, which ensure sound public finances. The rules have protected an historically unprecedented increase in public net investment, while debt and borrowing remain low and stable. Last year, borrowing was 2.3 per cent of national income—£4 billion less than forecast. Over the 10 years of this economic cycle, borrowing and debt in Britain have been lower than in Japan, the euro area, America and the OECD as a whole. Net borrowing is forecast to fall from 2.7 per cent this year to 1.3 per cent in 2012, compared to a peak in 1993 of almost 8 per cent—the equivalent of about £110 billion today. The UK also continues to meet the reference value on the treaty deficit throughout the projection period, with the deficit reaching 1.6 per cent of GDP by 2012-13. The projections that the Chancellor set out are also consistent with the Government’s prudent interpretation of the stability and growth pact. A prudent interpretation takes account of country-specific factors including the long-term sustainability of the public finances, the economic cycle and the important role of public investment. The reforms to the stability and growth pact agreed in March 2005 rightly place a greater focus on the avoidance of pro-cyclical policies and on reducing and maintaining low debt, with the flexibility for low-debt countries, such as the UK, to invest in the provision of public services. The challenges of the decade ahead require a balance to be struck between delivering further investment in public services to equip the country for change and entrenching the macroeconomic stability that is essential in the increasingly global competitive economy. Therefore, the spending review is tighter for many departments and the Government remain committed to ensuring that public spending delivers the public’s priorities and value for money for the taxpayer. The spending review has identified substantial savings that can be made by departments. The resources released through the ambitious value-for-money programme, together with the increased spending delivered in the Comprehensive Spending Review, will enable the Government to sustain the pace of improvement in public services and focus additional resources on their long-term priorities. That will be matched with reform and clear objectives set out in new public service agreements defining the Government’s top 30 priorities for the coming period. The key priorities are, first, to meet the challenge of globalisation by investing in the human and physical capital that will keep the UK economy competitive over the long term, with education spending in England growing by 2.8 per cent a year in real terms, investment in science and university research rising to over £6 billion a year in three years’ time and transport investment doubling to £14.5 billion a year by 2011-12. The second priority is to make the UK a better place to live by continuing to improve the NHS, with investment in health in England rising from £90 billion this year to a total of £110 billion in 2010, and by progressing towards the Government’s objective of decent and affordable housing for all, with total spending on new housing of at least £8 billion over the next three years. Thirdly, we intend to protect the nation from external and internal threats, with total spending on counterterrorism and intelligence rising from £2.5 billion in 2007-08 to £3.5 billion in 2010-11; we are also continuing the longest period of sustained real increases in defence expenditure in over 20 years. Fourthly, we intend to tackle climate change and protect the countryside, with Defra’s budget to increase to £4 billion by 2010-11 and a new environment transformation fund with a three-year budget of £1.2 billion. Fifthly, we intend to help to tackle international poverty. By growing DfID’s budget by 11 per cent a year over the Comprehensive Spending Review period and enabling total UK official development assistance to reach over £9.1 billion a year, we will be on course to meet our European commitment of 0.56 per cent of national income devoted to development aid by 2010, and then to meet our commitment to achieve, for the first time, the long-established United Nations goal of 0.7 per cent, which we intend to reach by 2013. Our task is to meet and master the global economic challenge, making the critical decisions to secure Britain’s long-term economic future. The Pre-Budget Report drives forward the great economic mission of our time: to meet the global challenge, to unleash the potential of all British people and to deliver security, prosperity and fairness for all. That is the programme set out in the 2007 Pre-Budget Report and Comprehensive Spending Review and that, with the approval of the House, is the basis on which we are sending updated information to the European Commission. I beg to move. Moved, That this House takes note with approval of the Government’s assessment as set out in the Pre-Budget Report 2007 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord Davies of Oldham.)