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Fiscal Responsibility Bill

My Lords, this year the UK is set to record its largest budget deficit since the Second World War. It is one of the largest in the industrial world. The financial crisis has significantly increased the structural deficit, which means that, in the absence of large spending cuts and tax increases, borrowing will remain high and the public debt will rise to unsustainable levels. In other words, the fiscal situation is becoming very parlous. The Government have form on the issue of fiscal responsibility. In his famous— or should I say infamous—Mansion House speech of 1997, the present Prime Minister set out his fiscal rules. He said: "““We will introduce tough rules for Government borrowing””." A year later, he told us: "““I will never let the deficit get out of control. We will not spend money that we have not earned””." Well, we all know what happened to those fiscal rules. With the golden rule, the Chancellor moved the goalposts three times between 2005 and 2007. He altered the start date of the current economic cycle once, and the end date twice—both backwards and forwards. The Institute for Fiscal Studies, or IFS, said in its March 2007 Budget briefing: "““The perception that the Chancellor has moved the goalposts and has delayed the tax-raising measures and cuts in spending plans that we and other commentators had been saying will be necessary until after the 2005 election has undermined the credibility of the fiscal framework””." Like other speakers, I have sympathy with the Minister for introducing the Bill here. I also absolve him and the Treasury from responsibility for a scheme dreamt up by the Prime Minister and Ed Balls. I looked for examples of other countries producing fiscal responsibilities; I could find only one, and that was Nigeria—not a very encouraging precedent. I am not sure how successful it has been. The other scheme, the Gramm-Rudman amendment, seemed to perish after several years. What do independent experts think of the Fiscal Responsibility Bill? The IFS said that it was not immediately obvious why breaching the targets set out within it should involve a greater political or reputational cost than breaching or finessing the fiscal rules set out under the Code for Fiscal Stability that was enshrined in legislation in 1998. Independent economic observers had lost confidence in the fiscal rules well before the recent crisis. In its new year survey of the views of independent economists in January 2007, the Financial Times concluded: "““Almost none use the Chancellor’s fiscal rules any more as an indication of the health of the public finances””." According to the journal Public Finance, Gemma Tetlow of the IFS added: "““The concept of it as a law is strange. There is usually a penalty for breaking a law, but it’s hard to say what that might be. There really aren’t any sanctions that can be applied on a chancellor or government if they fail to meet it, with the exception of embarrassment. It might be more credible if they set out their plans on spending””—" that is, setting out the total departmental spending and giving a date for the next spending review. Willem Buiter, one of the economists appointed by the Prime Minister to the Monetary Policy Committee, said: "““Fiscal responsibility bills are the acts of the fiscally irresponsible to con the public””." Finally, one leading City economist, Michael Saunders of Citibank, has said: "““The Government’s plans for legislation to cut the deficit are not convincing, and probably just camouflage—a sort of fiscal fig leaf for the lack of genuine action””." Why are those independent experts so critical when, on the face of it, a Bill to control borrowing would seem to be sensible? Carefully considered legislation, debated in full—without a guillotine—and suitably amended, would give reassurance to the markets. That is particularly important as there needs to be some £180 billion of funding over the next year, and the prop of quantitative easing has been removed for the moment. Other speakers have talked about the gilt market. One can see some of the demand for gilts being satisfied by the banks, but there could still be a funding gap of, say, some £80 billion. Once the Bill is examined in more detail, the reasons start to become clear. Clause 1 says that by 2014, public sector net borrowing as a percentage of gross domestic product must be no more than half of what it was in 2010. Nowhere does it say how that will be achieved. I listened to the Minister carefully; he talked how the deficit will be decreased by means of growth, but I did not hear him say much about spending cuts or tax increases. There is to be no Comprehensive Spending Review showing in detail how spending will be cut, and there is unlikely to be one ahead of the election. Placing duties on the Treasury to reduce public sector borrowing and the deficit is not a guarantee that that would happen. Every Budget and Pre-Budget Report produced since 2003 by the Chancellor and his predecessor has promised falling net debt at the end of a five-year horizon, and every one of those forecasts has been wrong. In times of boom and bust the present Chancellor, according to our shadow Chancellor in the other place, has had his total borrowing forecasts wrong to the tune of £560 billion since he entered 11 Downing Street. It is now four times higher than when he announced his forecast for the PBR in 2007, after the credit crunch began. How can we believe his latest forecast just because it is written into the Red Book? John Redwood, in another place, pointed out a further anomaly within Clause 1. He said: "““Clause 1 tells us that ‘in each of the … years 2011 to 2016, public sector net borrowing expressed as a percentage of gross domestic product’ has to fall compared with the preceding year. To ensure that it falls by a reasonable amount, there is the added rider in subsection (2) that it needs to halve by 2014””.—[Official Report, Commons, 5/1/10; col. 98.]" While I am not an economist, it seems to me that there could be individual years when the economy was growing that the deficit could be permitted to increase even if the percentage decreased. However, if in that period we had another unfortunate period, when the economy was not growing, it would be necessary to reverse and cut borrowing in cash terms. Can the Minister give guidance on these points? The Government should change it and come up with a formula that recognises the economic cycle. Clause 2, as other speakers have mentioned, contains the strange concept of the Treasury placing an order on itself, which does not seem a very daunting imposition that will make the Treasury sit up and take notice. Again, as other speakers have said, Clause 3 seems fatally flawed because there are no penalties if the targets are not met. As the shadow Chancellor said in another place: "““This must be the first law introduced into Parliament that contains absolutely no legal sanction whatever for those who break it””””.—[Official Report, Commons, 5/1/10; col. 74.]" Overall, the Bill is very disappointing and has the appearance of being cobbled together in a great hurry for election purposes. As other noble Lords have stated, only two Labour Back-Benchers spoke at Second Reading and they were both unable to support the Government. The Chancellor says that he has produced this Bill to cut the debt. At the same time the Government are irresponsibly increasing it by introducing the Personal Care at Home Bill. This measure, which would be laudable if the money was in the government coffers, will cost at least £670 million, and several expert organisations, such as the Association of Directors of Adult Social Services across 61 councils, believe that the full cost will be more than £1 billion. As I have said several times, the Bill is opposed by the noble Lord, Lord Warner, a former Health Minister, and the noble Lord, Lord Lipsey, a former member of the Royal Commission on Long-Term Care, both of whom have some knowledge on the subject. The strength of my argument is endorsed by the leader in today’s Times in which more than 70 leaders of social care throughout England warn that the Government’s plans to provide free homecare are flawed, unfunded and will force cuts to current services. The Minister has refused to comment on two previous occasions about my concerns over the financial implications of the Bill. Can he tell me why we can afford to spend £1 billion at this time of borrowed money, however laudable the project? It is a shocking reflection of the way that the Government have programmed business in the other place that this Bill, which could have been important if discussed and amended properly, was, as other speakers have said, rushed through in two days without Clauses 2 to 6 even being considered by the other place. For that reason I shall support the amendment of my noble friend Lady Noakes.