---

Pre-Budget Report 2009

My Lords, this has been, in the words of the noble Baroness, Lady Noakes, an excellent debate. The quality of contributions reflects very well on the House. First, I reassure the noble Lord, Lord Skelmersdale, that there was nothing that he should read into my sotto voce opening comments, other than that I had spent the first two hours of this morning with insolvency practitioners, which tends to cast a cloud over the rest of one’s day. I point out to the noble Lord, Lord Selsdon, that I do not think that I am wearing a funereal tie. In fact, it is rather bright. My wife said to me this morning when I was going out that I was wearing my bookmaker’s suit so I certainly do not want to convey the sense that I am feeling anything other than positive about presenting the Pre-Budget Report debate. I will move along apace. It has been a long debate. Many noble Lords will no doubt be wanting to travel later this afternoon. I will also be obliged to settle a wager with my noble friend Lord Davies if my closing remarks go over 20 minutes—that wager being settled in the form of me having to write a letter to our Chief Whip thanking him for his great success in securing so much support for me from our Back Benches today. Rest assured, when the clock goes to 19 minutes, I will be finishing. I shall not be able to respond to all the points raised, but I will do my best. I have already set out the key measures the Government have taken and will take to encourage economic recovery. The critical issues for us to consider today were summarised by the noble Lord, Lord Newby, in his comments. They are how worried we are about the deficit, how quickly it should be reduced and how it should be reduced. I hope that I will be able to cover those points in particular in my closing remarks. We are at a very important point in the recovery as we move towards growth in 2011. Recovery is imminent, and it may well appear in the fourth quarter of 2009 data. That is entirely consistent with the Chancellor of the Exchequer’s forecast that we would see economic recovery towards the turn of the year. As well as addressing immediate concerns, we must not be myopic and must look to the long term. It speaks well of the House that so many comments today have been focused on what we do over the medium term in terms of taking the right decisions to ensure that the economy continues to grow. I agree with the noble Lord, Lord Bilimoria, that the answer to economic growth and bringing the public finances back into a more sustainable position depends importantly on commercial success, investments, business growth and creating the right conditions for that to take place. We have taken steps to ensure fiscal consolidation. This is necessary for our future investment, but it must be done when, and only when, the time is right. That was precisely the statement expressed by Dominique Strauss-Kahn from the IMF. He said that there would be a time for fiscal consolidation, but it is not yet with us. The PBR also sets out steps to promote our long-term growth: investing in key industries for the future, our infrastructure—the noble Baroness, Lady Valentine, quite correctly reminded us that that is so important—and the skills of people in the country. The aim of the PBR is to secure the recovery and promote long-term growth and, as we do so, to build a fairer society and secure opportunity for all. I shall spend a few moments talking about growth. We are at an inflection point. Growth is returning. The range of forecasts from external economists for GDP growth in 2010 narrowed as we got closer to the end of the year. They now vary between a negative 0.5 per cent and 2 per cent. The Government’s forecast is, of course, at neither extreme, but is pretty much where the consensus now lies. We anticipate growth in 2011 of 3.5 per cent. That is a rather lower figure than some well respected economists in the City, including, in particular, Goldman Sachs, forecast, and it is lower than the central prediction from the Bank of England. The projection of economic performance at an inflection point is always extremely difficult. I know from when I was a City analyst that when you are in a steady state the teenage scribblers are able to extrapolate existing lines. It is at the point when there are major changes that it is extremely difficult to make accurate forecasts. However, the Government are forecasting a strong pick up to growth through 2010 into 2011. This is based on three key factors: first, the positive effects of a very large macro-economic stimulus, in particular, the effect of low interest rates, which will tend to come through gradually, and the consequences of quantitative easing; secondly, the positive effects of the G20 co-ordinated response; and, thirdly, the positive effects of the continued recovery in world trade and strong world growth prospects for 3.25 per cent growth in 2010, rising to 4.5 per cent in 2011, according to global agencies. The Government’s forecast is for growth rates similar to those we saw after the recessions of the 1980s and 1990s. I think that speaks to my observation about inflection points. There is therefore precedent that as you come out of a recession, particularly a deep recession, economic growth can be quite strong. UK GDP is projected to contract by 4.75 per cent in the current year, but that provides us with a basis for an expectation of a strong recovery in 2010-11, which will provide the basis for much fiscal correction. The noble Lord, Lord Lamont, made an excellent speech and I will refer to a number of points that he raised. In so doing, I hope other Members of the House will recognise that they echoed his observations and feel that I am answering their comments at the same time. All G7 economies have seen falls in output. The noble Lord asked why we were taking longer than others to come out of the recession. At the moment we are seeing only very preliminary estimates of GDP recovery. I anticipate that in several countries we are likely to see revisions of those data, as we have already seen in the UK. Our high dependence on the financial sector and the damage that has been caused there by the problems in banking have undoubtedly meant that this recession has been even more challenging than we had anticipated. While it has taken us longer to come out of recession than some other economies, it must be remembered that several other economies, including those of Germany, Italy and Japan, have experienced much steeper falls in economic activity. Unemployment in the UK remains well below the EU, G7 and OECD averages. The noble Lord, Lord Lamont, correctly told us that difficult decisions will have to be made. The critical question is when we make those difficult decisions. It is very important that we have a well-rooted economic recovery before we begin to make the inevitable fiscal adjustments that the Chancellor sees as being necessary. The Government have been very clear in their commitment. The Fiscal Responsibility Bill will secure a 50 per cent reduction in the deficit, expressed as a percentage of GDP, over four years once the recovery is established. Moreover, that deficit reduction will take place year by year, so there will be a progressive programme.