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EU: Budget Report

My Lords, I welcome this opportunity to debate the information that will be provided to the Commission this year under Section 5 of the European Communities (Amendment) Act 1993. As in previous years, the Government report to the Commission on the UK’s economic and budgetary position in line with our commitments under the EU’s stability and growth pact. The Government plan to submit their convergence programme by 30 April, with the approval of both Houses.

The convergence programme explains the Government’s medium-term fiscal policies as set out in the 2012 Autumn Statement, Budget 2013 and OBR forecasts and is drawn entirely from previously published documents that have been presented to Parliament. It makes clear that this year’s Budget reinforces the Government’s determination to return the UK to prosperity and it reiterates the Government’s number one priority: tackling the deficit.

This debate also provides the opportunity to debate aspects of the European semester, specifically the annual growth survey and the alert mechanism report, the first stage of the macroeconomic imbalances procedure. The European semester as a whole provides a broad framework for the monitoring and surveillance of

member states’ fiscal and economic policy at EU level. It attempts to exploit the synergies between these policy areas by bringing together their reporting cycles. The Government fully support the European semester as it is vital that the EU as a whole grips the urgent growth challenge it is facing and the semester provides a framework for co-ordinating the structural reforms necessary across the EU.

Progress is being made to tackle the crisis in the euro area, but the challenges facing growth in Europe continue to be serious. We have seen a welcome fall in borrowing rates, particularly for Spain and Italy, from the very high levels they reached last summer. This reflects the gradual progress that the euro area authorities have made in tackling the crisis and, in particular, the commitment by the ECB to stand behind the euro, but recent events in Cyprus remind us that the euro area continues to be a fragile environment. Only a sustained period of successful reforms and improvements in financial markets can lay the foundations for growth.

Economic activity in the European Union remains very subdued. EU GDP contracted by 0.5% in the last quarter of 2012 and recent economic indicators suggest that the slow end to 2012 has carried over into 2013. In the euro area, most periphery economies are in serious recessions, with weak labour markets, adverse credit conditions and an ongoing process of deleveraging all weighing on growth. Without sustainable economic growth, the EU will be unable to repay its debts, create jobs or maintain its standard of living. In order to return the EU’s economy to a sustainable footing, ambitious and far-reaching structural reforms will be required. These are the reasons why the EU semester is as relevant as ever.

The annual growth survey and alert mechanism report, the two semester documents we are debating today, were published on 28 November 2012 and officially launched the European semester for 2013. The annual growth survey presents the Commission’s view of EU policy priorities for the forthcoming year. It highlighted five broad priority areas for reform in EU member states for 2013: pursuing differentiated growth-friendly fiscal consolidation, restoring lending to the economy, promoting growth and competitiveness, tackling unemployment, and modernising public administration. These priorities closely reflect the Government’s approach to growth through low-cost, supply-side structural reforms while maintaining the importance placed on fiscal consolidation as set out by the Chancellor at Autumn Statement 2012 and Budget 2013. Budget 2013 set out the Government’s assessment of the UK’s medium-term economic and budgetary position. As confirmed by the OBR, the UK economy is still recovering from the biggest financial crisis in generations, one of the deepest recessions of any major economy, and a decade of growth built on unsustainable debt levels.

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In June 2010 the Government set out a comprehensive strategy to deal with the deficit, protect the economy and provide the foundations for recovery. This economic plan combines monetary activism with fiscal responsibility and supply-side reform. Although it is taking longer than hoped, the Government have made significant

progress. We have restored fiscal credibility, allowing activist monetary policy and the automatic stabilisers to support the economy. The deficit has been cut by a third over three years and is projected to fall in every year of the forecast. One and a quarter million private sector jobs have been created, employment is around record levels, and we have kept interest rates at near-record lows, helping families and businesses.

However, there is obviously still much more to do. In March the OBR revised down its forecast for global economic growth and sharply revised down its forecast for eurozone growth and world trade. The euro area is the destination for over 40% of UK exports, so this has necessarily had an impact on our growth performance. Over the past year net trade was the key factor in the underperformance of the economy relative to earlier OBR forecasts. As a result of this challenging global economic outlook, the OBR revised down its growth forecast for the UK for this year and for the year after.

Fiscal consolidation has not had a larger drag on the economy than the OBR expected in June 2010. The UK’s fiscal vulnerabilities argue strongly in favour of maintaining our commitment to deficit reduction. Despite progress since 2010, the UK is still forecast to have the largest deficit in the EU in 2013. Public spending remains well above the historic average and debt is now forecast to start falling in 2017-18, two years later than set out in the supplementary debt target.

With a deficit that is still one of the highest in the developed world, the UK needs to continue to deal with its debts. We believe that we are on the right track, as the deficit has already been cut by a third. We have set out our fiscal consolidation plan and we are delivering it.

Budget 2013 also set out measures to equip the UK to compete in the global race. From April 2014 the Government will give every business and charity a £2,000 allowance towards their national insurance contributions bill, which will benefit 1.25 million businesses. We will achieve the ambition for the UK tax system to be one of the most competitive in the world, including a further cut in corporation tax to 20% from April 2015, which will be the joint lowest in the G20. We will increase capital investment plans by £3 billion a year from 2015-16 and we will devolve a greater proportion of growth-related spending to local areas from April 2015 in response to the review of the noble Lord, Lord Heseltine.

These measures will make a difference, but we are far from complacent about the challenges we face. That is why the Government support the aims of the macroeconomic imbalances procedure, a new EU-level mechanism for identifying and correcting potentially problematic macroeconomic imbalances. The alert mechanism report is the first stage in the macroeconomic imbalances procedure and presents the results of a “scoreboard” of macroeconomic indicators. The report finds that the UK exceeds pre-determined threshold values for three of the 11 indicators: public debt, private debt and export market shares. The UK, along with 12 other member states, was therefore subject to the next phase of the procedure—that is to say

an “in-depth review” carried out by the European Commission. The results of this study were issued on 10 April.

The Commission’s findings are that the UK does not have an “excessive imbalance”, but it concludes that the UK has macroeconomic imbalances relating to external competitiveness and private debt. The Government accept this analysis. We recognise that the UK economy is experiencing imbalances and have set out a comprehensive strategy to rebalance the economy and deal with the challenges we face: fiscal, monetary, financial, tax reform and structural reform.

With regard to the specific challenges identified by the Commission, we remain committed to restoring debt to a sustainable, downward path. The OBR’s March 2013 forecast shows UK exports growing strongly in future years: above 5% per year from 2015. Autumn Statement 2012 also announced £70 million in additional funding for UK Trade & Investment. Deleveraging is under way in the UK. Private sector debt is falling as a proportion of GDP. The European Commission’s report notes that policy action is being taken and confirms that the UK’s strategy for growth and rebalancing is the right approach to tackling these issues.

It is right that euro area countries are subject to a more binding enforcement mechanism for tackling imbalances, with the prospect of sanctions for failing to take corrective action. In this context, it is important to recall that the UK, as a non-euro state, is not subject to such sanctions.

The European semester concentrates on the measures that individual member states are putting in place to restore stability and growth to their economies, but there are certain levers that only the European Commission holds, and an ambitious EU-level reform agenda can make a major contribution to growth across the EU as a whole. Heads of state or government recently confirmed the EU’s growth agenda at the March European Council. This is a critical agenda and one that the UK and like-minded member states will continue to push.

It is important to maintain momentum on bilateral EU free trade agreements. Around 90% of global growth will come from outside Europe after 2015, so the EU needs an outward-looking trade agenda. The Commission estimates that EU free trade agreement deals currently under way or in the pipeline could add £200 billion to EU GDP and create 2 million jobs across the EU. We also welcome the European Commission’s commitment to bring forward in June concrete proposals to reduce regulatory barriers for SMEs.

The single market already adds €600 billion a year to the EU’s economy. Further progress is possible. Ambitious implementation of the services directive by all member states could result in a 2.6% increase in GDP. A genuine digital single market and fully integrated energy markets are also essential elements of a fully integrated single market. The Government therefore look forward to thematic discussions by the European Council on energy market integration in May, and on digital and innovation issues in October.

The Government consider that important reforms are needed in the way that the EU works. In his speech of 23 January, the Prime Minister proposed five principles for reform. The EU must improve its competitiveness and become a more flexible organisation. It must ensure that its rules are fair for all members and allow power to flow from the EU to its members as well as the other way around. Finally, the EU must improve its democratic accountability to re-engage voters across Europe.

Stabilising the euro area means that changes in the way the EU works are inevitable. The EU is evolving towards a more tightly integrated euro area within its current structure. At the same time, it is important that we ensure the EU continues to work for all its members and that the interests of those outside the single currency are acknowledged and protected. As the euro area proceeds towards deeper integration, the Government will be fully involved in negotiations to ensure that the integrity of the single market is preserved, as they have done in the banking union negotiations.

To conclude, I invite the House, in line with Section 5 of the European Communities (Amendment) Act 1993, to approve the economic and budgetary assessment that forms the basis of the convergence programme. Alongside their national reform programme, the Government will submit the convergence programme to the European Commission, which will consider these documents, as it will those of all EU member states, before making public its recommendations on 29 May. These recommendations will then be considered by the ECOFIN council on 21 June and agreed by heads of state or government at the European Council on 27 and 28 June.

I reiterate that the convergence programme contains no new information, only information that has previously been presented to Parliament, information from the OBR’s economic and fiscal outlook and from the Budget which sets out the Government’s strategy to return the UK to sustainable growth. I commend the Motion to the House.