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Pre-Budget Report 2007

My Lords, each year Section 5 of the European Communities (Amendment) Act 1993 requires Her Majesty's Government to report to Parliament for its approval on an assessment of the medium-term economic and budgetary position in relation to public investment expenditure and the social, economic and environmental goals set out in Article 2. This report will form the basis of any submission to the Council and Commission in pursuit of their responsibilities under Articles 103 and 104C. These responsibilities relate first to broad economic policy guidelines, secondly to convergence and stability programmes and thirdly to excessive deficit procedures. The objective here is to ensure that the economic policies of the member states are consistent with the terms of the treaty, including non-inflationary economic growth, a high level of employment and social protection, and better living standards. The first of the three responsibilities I will look at in detail is that relating to broad economic policy guidelines. The UK's public finances, as the Minister said, are governed by two overall rules. The first is the golden rule which states that over the economic cycle the Government will borrow only to invest and not to finance current spending. This rule was just met over the last economic cycle. However, its credibility has been severely damaged because the Chancellor has changed either the start or the end date of the economic cycle no fewer than three times. After surveying academics and city economists the Financial Times concluded: "““Almost none use the Chancellor’s fiscal rules any more as an indication of the health of the public finances””." The second overall rule referred to by the Minister was the sustainable investment rule. This states that the debt ratio must be kept below 40 per cent of the GDP ceiling. The 2007 PBR shows that over the next few years the public sector net deficit keeps within the limit. However, as the noble Lord, Lord Marlesford, has already stated, the Government’s figures exclude Network Rail, the private finance initiative and public sector pension liabilities. Does the Minister agree that if you take all these into account Government debt would be well over 40 per cent? Does he also agree with the Centre for Policy Studies’ paper of September 2007 which says that if you include all these government debt would be £1.34 trillion, equivalent to 103.5 per cent of UK GDP? The second of the three responsibilities relates to convergence and stability programmes. Despite steady economic growth, UK productivity continues to lag behind many of its EU counterparts. According to the ONS 2006 international comparison of productivity, Britain’s impressive economic growth over the past decade has unfortunately been fuelled by substantial growth in government and consumer debt. In 1996 net public sector debt was £343 billion. By September 2007 it had reached the staggering figure of £516.9 billion. Total UK personal debt has also tripled since 1993 from £400 billion to £1,380 billion and in the past 12 months growth has been 10 per cent. The PBR total borrowing forecast for this financial year alone is predicted to be £4 billion higher than predicted in the Budget. Government borrowing over the next five years is expected to increase by £16 billion more than predicted at the time of the Budget. The third responsibility I will discuss relates to the excessive deficits procedure. Under the stability and growth pact all EU countries must ensure that their government borrowing is less than 3 per cent of GDP. According to the OECD, the UK Government have the largest structural budget deficit of the 15 members to have joined the European Union before 2004. According to the IFS, after a decade of Labour Government the UK still has a relatively big structural deficit by international standards and remains mid-table when comparing the size of government debt across countries. I will now look at the UK's performance against the terms of the treaty. First, have we achieved non-inflationary economic growth? ONS figures show that inflation was kept well in check in Labour’s first and second terms but, as my noble friend Lord Marlesford has already noted, since 2006 it has generally been on a rising trend. Last week’s October inflation figures showed that the CPI had increased above its target from 1.8 to 2.1 per cent, thus exceeding the Government’s 2 per cent target. The RPI had accelerated from 3.9 to 4.2 per cent. Can the Minister explain why the Government's preferred index of inflation is half the old preferred measure? Does he not believe that the RPI represents a better measure of inflation? Also, does he agree that it is going to be very difficult to make the public sector accept 2 per cent pay rises when the real rate of inflation is over 4 per cent? The 2008 growth forecast in the PBR has been reduced from 2.5 to 2 per cent; I question the figure mentioned of 2.5 to 3 per cent for 2009. Given that the economy is so reliant on financial services—which are estimated to provide 30 per cent of taxes paid by the financial sector, according to Richard Jeffrey of Ingenious Securities—the current sub-prime crisis could mean that even 2 per cent growth is too high. Here I am much more cautious than the noble Lord, Lord Haskel; the problem could well continue for some time. I therefore ask the Minister if he believes that the sub-prime crisis is only temporary, or if he believes that, partly due to it, the UK is now entering a period of stagflation, where we have stagnant economic growth with continuing inflation. I am not an economist, but I can see the trend of higher commodity prices continuing, as evidenced by higher oil and food prices. It also seems to me that we have been bailed out on the inflation front for several years by the disinflationary impact of China and the import of cheaper European labour, both of which may be becoming less significant. I note that Chinese inflation has recently been on a strong upward trend. The Chinese October inflation figure was 6.5 per cent, the highest rate since 1996. Why is that important? It is important because our low inflation in recent years has been helped by the cheap price of imported goods, many of which have been made in China. If Chinese inflation keeps going up, its workers will want higher wages and that will make China's exported goods to us more expensive and thus contribute to our inflation. Thus, particularly in the past year, we are failing in the goal of non-inflationary growth. Have we achieved the second goal of the treaty, a high level of employment and social protection? The employment level reached 74.4 per cent in the three months to September, below the Government's 80 per cent target. However, within the employment total, the number of Britons in work has fallen sharply over the past two years. An estimated 540,000 foreigners have found work in the UK in the past 18 months but, at the same time, the indigenous workforce has shrunk by 270,000. Does the Minister agree that the problem of the indigenous workforce needs to be looked at much more carefully? On social protection, a UNICEF report published in February 2007, An overview of child well-being in rich countries, brought together comparative research on the material, educational and emotional state of childhood in 21 developed nations. Britain came bottom of the list overall. Particularly depressing was the view that British children have the highest rate of underage drinking and teenage pregnancy. Does the Minister agree with the UNICEF report? What action should be taken, and should it be by government? The final goal of the treaty is better living standards. Several recent reports show this not to have been achieved. In March 2007, the IFS calculated that absolute poverty rose in the UK in 2005-06, child poverty rose by 100,000 before housing costs to 2.8 million, and 200,000 after housing costs to 3.8 million in the same year. Between 1996-97 and 2004-05 the number of people living in severe poverty increased by 410,000 before housing costs. Excluding bonuses, incomes have fallen for every month in 2007. Research from the Institute for Fiscal Studies shows that, since 1997, the tax burden has increased by £1,300 for every family in the UK. I am tempted this year to resist the Motion due to the uncertainty of government finances, with off-balance-sheet liabilities and now the Northern Rock situation. I will return to the issue next year.