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Fiscal Responsibility Bill

My Lords, I am pleased to open the debate on the Fiscal Responsibility Bill. I intend to provide a general overview of the key provisions of this important Bill and the background to it. As my right honourable friend the Chancellor explained in the other place, the Government have set out consolidation plans to halve the deficit over a four-year period and put debt on a downward path. The Fiscal Responsibility Bill enshrines these targets in law, ensuring that the deficit is reduced at an appropriate and sensible pace that allows us to protect the economy and maintain key public services. Whatever the economic circumstances, Governments need rules and objectives for their fiscal policy. As part of the Government’s reforms to macroeconomic and fiscal policy in 1997, we established a new fiscal framework with two clear fiscal objectives, which have been maintained since. The first is over the medium term to ensure that public finances are sound and that spending and taxation should impact fairly within and between generations. The second is over the short term to support monetary policy to help smooth the path of the economy. The objectives that we set out then remain today. Between 1997 and 2007, the Government operated according to two fiscal rules, designed to deliver the following objectives: to balance the budget, excluding public investment, over the economic cycle; and to keep government debt at a prudent level. Those two rules were appropriate for the challenges that we faced at the time. Over the 10-year economic cycle, we balanced the budget and significantly increased investment in public services. Those were sound rules for the time, but we are now operating in a completely different environment, and economic policy here and in other countries has adapted. Just about every country has been hit by a severe financial crisis, resulting in the worst global economic recession for decades. Borrowing and debt have risen in most countries, ours included. The recession has had a profound impact on the public finances, here and in most countries. This has resulted in a significant increase in government borrowing and public sector debt. As my right honourable friend the Chancellor set out in the other place, we have had to be flexible in our response to these changing global circumstances. The Government had a duty to support the economy when the economy was weakened. The support provided has helped to limit the severity of the downturn and its impact on businesses and individuals. There were costs to stepping in. However, not to allow borrowing and the deficit to rise to help people and businesses would have meant greater pain, more job losses and more damaged lives. As we look to the future and levels of uncertainty recede, the Government believe that it is appropriate to strengthen the fiscal framework. The UK is not alone in doing this. As Governments around the world work together in response to the downturn, many other countries are also looking at their respective fiscal frameworks. For example, Germany has introduced similar legislation, and the IMF has highlighted fiscal responsibility laws as a way to support fiscal adjustment by strengthening institutional arrangements. The Fiscal Responsibility Bill should be viewed alongside other elements of the fiscal framework. In particular, Section 155 of the Finance Act 1998 and the code for fiscal stability, a revised draft of which was published on 19 January. The Finance Act 1998 sets out five key principles—transparency, stability, responsibility, fairness and efficiency—and the code explains how they will be applied to fiscal policy. The Fiscal Responsibility Bill effectively takes some matters which would otherwise be in the code and elevates them to primary legislation. The key example is that fiscal plans now and in the future must be set out in law. The code will be retained as part of the strengthening of the framework; in particular, it will provide important information about the nature of the Government’s fiscal plans. The Fiscal Responsibility Bill sets out the Government’s first fiscal plan as a duty in primary legislation, which the Government are required to meet. It further requires that the Government set out future legislative fiscal plans for delivering sound public finances to be approved by the other place, and places a duty on the Government to meet those plans. This Bill gives Parliament a clear role in both setting and monitoring the Government’s medium-term fiscal plans. Fiscal plans must be approved before they become law, and this Bill gives a new level of scrutiny to the Government’s medium-term fiscal plans and means that Parliament should be able to hold the Government to account for them. The Bill represents a strengthening of the fiscal framework in response to new challenges. It will bind the Government and ensure that they deliver on the tough decisions to more than halve the deficit over four years and get debt falling. Clause 1 imposes three duties on the Treasury: first, to ensure that government borrowing as a share of GDP falls in every year to 2015-16; secondly, to ensure that government borrowing is at least halved as a share of GDP over a four-year period to 2013-14; and, thirdly, to ensure that government debt as a share of GDP is falling by 2015-16. These three duties are in line with the Government’s fiscal judgment, which was set out at the time of the Pre-Budget Report. In 2010-11, government borrowing starts to fall and continues to do so each and every year thereafter. Borrowing will fall to 5.5 per cent of GDP by 2013-14, so that we more than halve from the 12.6 per cent of GDP reached this year. With further consolidation thereafter, debt as a share of GDP is projected to fall in 2015-16. This is the sharpest reduction in the budget deficit for any G7 country. There is no power in the Bill to amend the duties in Clause 1. They can be changed only through new primary legislation. Clause 2 requires that the Government must continue to have a legislative fiscal plan after 2016. It also makes provision to give the Treasury the power to add, by order, further duties to the Government’s fiscal plan. Noble Lords will note that the Government published a draft order on the day of the Pre-Budget Report, requiring that borrowing, as a share of GDP, is reduced to 5.5 per cent or less by 2013-14. This goes further than halving the deficit in four years. As we emerge from the global downturn we now need to ensure sound public finances.