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17. Mr. Edward Leigh (Gainsborough): What effect the human resource initiatives outlined in the Government's response to the Public Accounts Committee's 55th report of Session 200102 on fraud and error in income support had in reducing the variations in performance between local offices. 
The Parliamentary Under-Secretary of State for Work and Pensions (Malcolm Wicks): We are continually striving to improve our performance in tackling fraud and error. As the latest results cover only the period up to March 2002, it is too early to gauge the impact of training and other measures on reducing performance
Mr. Leigh : Is the Minister proud of the fact that year after year the Comptroller and Auditor General qualifies the accounts of his Department because of gross inaccuracies in them? We are in the 13th year of its accounts being qualified. One of the reasons for these inaccuracies is the level of experience and high turnover of staff, particularly in London and the major cities, where inaccuracies are twice the national level. What is he doing to rectify this situation?
Malcolm Wicks: We are not proud of that, we are working hard with the National Audit Office to move away from it, and I recognise the seriousness of the hon. Gentleman's point. On the main question, however, I am proud that we are winning the war against the fraudster and saving the public's money: money that the public want spent on education and hospitals and not on crooks and criminals.
The Chancellor of the Exchequer (Mr. Gordon Brown): With permission, Mr. Speaker, I should like to make a statement. For many decades, Governments formed from parties on both sides of the House have made the case for Britain's engagement in the European Union. It is right that at every point we show that every decision that we make on Europe is made in the British national economic interest.
Today, therefore, I will set out the following: first, the economic context for the euro decision; secondly, the case in principle, in the national economic interest, for membership of the euro; thirdly, the detailed conclusions of our assessment; and finally, the policy changes that our country must now make.
Let me start with the economic context. Since 1997, every economic decision of this Government has been designed to build and then entrench stability in order to achieve for Britain high and stable levels of employment and growth. That commitment to put stability first led us to adopt a new fiscal and monetary regime, to make the Bank of England independent, and to cut debt substantially, and it has given us low inflation, low interest rates and low unemployment. That commitment to long-term stability, growth and employment is the foundation of our decisions today.
Central to the pursuit of stability, growth and employment by Governments of both parties has been our membership of the European Union. Our assessment shows that Britain's trade with the European Union has grown from just over 40 per cent. of our total trade when we joined to 55 per cent. today.
Membership of the European Union is central to stability, growth and employment for another reason. Just as Britain benefits from being part of Europe, so, too, Britain stands to benefit from an enlarged Europe that is more integrated in the global economyglobalisation increasingly moving Europe away from an exclusive trade bloc to a Europe that must look outwards, not least to the USA, and a Europe that, to meet global competition, must liberalise and reform.
Therefore, in addition to our decisions that I will announce on the euro today, we will also make proposals that, by reducing tariffs, regulatory and competition barriers to European Union-USA trade, will fulfil our objective of a fully effective transatlantic economic partnership between Europe and the USA. Following the joint declaration of all EU Finance Ministers placing, for the first time, labour market flexibility and structural economic reform at the heart of the new economic policy guidelines for Europe, the Government will later this week publish our further proposals for economic reform in Europe.
I have no doubt that an enlarged Europe pursuing, like Britain, economic reform, and, like Britain, modernising fiscal and monetary policies, will be conducive to British stability, growth and employment. I believe that, around that, a modern pro-European consensus can be built in Britain.
When, in 1997, I set out the Government's position, I listed the potential benefits for Britain of a successful single currency in transparency of costs, currency stability and in trade and long-term interest rates. The detailed work set out in the background papers published this morning allows us to set out these benefits with even greater precision.
The first benefit is lower transaction costs for business and consumers. We estimate these as worth around 0.1 to 0.2 per cent. of GDP£1 billion a yearwith the gains greater for small companies and the gains permanent. The second is diminished exchange rate volatility, with gains for both large and small companies especially in the manufacturing sector with, again, potentially the greatest gains for the smallest companies. The third benefit is greater cross-border trade and thus the potential for increased commerce and growth.
Our assessment makes it clear that, with the advent of the single currency, trade within the euro area has already expanded and that, with Britain inside the euro, British trade could increase substantially with the euro areaperhaps to the extent of 50 per cent. over 30 years.
I come next to interest rates. For 30 or 40 years, continental Europe has been able to combine stability with consistently lower interest rates than in Britain, to the benefit of both business and, of course, homeowners. Indeed, over the last 30 years, interest rates in Britain have had to be, on average, 3 per cent. higher than in Germany.
With Britain in the euro, business could benefit through greater access to a more integrated European capital market. And if, on the basis of sustained and durable convergence, we could lock in stability for the long term, business could see a cut in the cost of borrowing on a sustainable basis with a long-term boost to cross-border investment flows and to foreign direct investment in the UK.
So I can today confirm the principled case: our view that membership in a successful single currency would be of benefit to the British people as well as to Europe is strengthened by the results of our assessment.
While we argue the case in principle for joining, there are those who would rule out joining the euro for ever as a matter of dogma. They would rule out joining the euro even if it was in the best economic interests of our country. And that cannot be right for the future of Britain.
The Government's view is that, if the economic case is clear and unambiguous, then the constitutional issue, while a factor in the decision, should not be a bar to entry. And my conclusion is that if, on the basis of the five economic tests, membership of the euro is shown as good for sustaining British jobs, British business and British future prosperity, then it is economically right and in the national interest to join.
Just as there are risks of joining before a clear and unambiguous case has been demonstrated, so too there are risks in delaying these potential benefits once sustainable and durable convergence has been achieved. So from the assessment we have done, I have also no doubt about, first, the potential benefits to Britain and the British people of joining; secondly, the potential risks of delaying the benefits of joining; and, thirdly, the advantages within the euro area of greater influence over policy towards the euro and thus Europe.
Provided the crucial tests are met concerning the British economy, it is our intention to join. If on the basis of the tests we can make a clear and unambiguous case, this Government's view is that it is in the national interest to recommend to the British people to vote yes in a referendum to join the single currency. In short, if the economics are right for Britain, we should join.
So let me turn to the conditions that have to be met if we are to secure the potential benefits of the euro. We must be sure that there is cyclical and structural convergence between Britain and the euro area and be sure that there is flexibility to withstand stresses and strains. Indeed the more flexibility in the economy, the easier it is to tackle problems that arise from the divergence of business cycles.
Sustainable convergence means that the British economy can live on a permanent basis with euro area interest rates, able to advance our objectives of high and stable levels of growth and employment and sustained and stable funding of our schools, hospitals and other public services. The flexibility required is, as I said in 1997, sufficient flexibility to be able to adjust our economy quickly to any shocks that arise so that we do not put at risk these objectives.
So it is my duty to demonstrate in detail whether we have secured for Britain convergence, which is compatibility with our European partners that is sustainablethe first testsufficient flexibility, the second test, and whether we can affirm conclusively and confidently to the British people that the potential benefits for investment, financial services and employment, growth and tradethe other three testsare indeed realised.
The five tests are our stability guarantee: to meet them would ensure that we would not put at risk our economy or our public services. With the tests met, Britain in the euro can enjoy the benefits that I have outlined: greater trade, investment and employment. If we entered with the tests not met, at the wrong exchange rate, then just as with the exchange rate mechanism, we could see unemployment rise, public service investment fall and growth stall. The discipline of the five tests is to ensure that there will be no repeat of the experience when Britain joined at the wrong rate and at the wrong time, without either convergence or flexibility, and the potential benefits could not be realised.
The new assessment that we publish today also shows that because of a lack of convergence with the euro area, joining in 1999as some in this House advocatedwould not have secured the stability inside the single currency that we have enjoyed outside it.
Cutting interest rates substantially to join the euro below the level that would have been right for Britain, and joining at an exchange rate that was too high for the long term, could have locked us into another cycle of stop/go economics. But I can tell the House that the consistent polices that we have pursued since 1997an independent bank, new fiscal rules, lower debt, housing market reform and greater flexibility in labour, capital and product markets, including an independent competition commissionhave contributed to meeting, quite comfortably, the Maastricht criteria for nominal convergence in a better position than some members were in 1997 and even are now, and are also leading toward the sustainable convergence and greater flexibility required by the five tests.
We can report that since 1997 there has been significant progress in achieving cyclical convergence. The short-term interest rate divergence between Britain and the euro area has fallen from 4 percentage points to 1.75 percentage points. Long-term interest rates have virtually converged at around 4 per cent. Over the last six years, there has been a weaker euro and a stronger pound. And the inflation rate has been on average 1.1 per cent. below the eurozone average for the last three years.
Over recent months, the euro exchange rate has strengthened against sterling and the dollar, and we are today publishing an independent study examining the sustainable level for sterling reflecting economic fundamentals.
The issue at the present time, however, is being sure that there is structural convergence that is sustainable for the long term; and we also have to be sure that, if real interest rates or business cycles diverge, Britain will have the necessary flexibility to sustain growth and employment.
We do not know whether or how shocks will occur, but there are risks for the UK, and let me give the House two specific examplesone from housing, one of inflation generallyof how in the new circumstances we would need to respond.
Take the challenge of an inflation rise particular to Britain from, say, the housing market. For a 1 per cent. rise in British inflation, the British interest rate would, other things being equal, tend to rise by 1.5 per cent. The real interest ratethat is, the interest rate after taking account of inflationwould therefore rise by 0.5 per cent. as we brought inflation under control and back to its target.
Inside EMU, Britain's economy would be one fifth of the euro area economy. A 1 per cent. inflation rise specific to the UK which would today lead to a British interest rate rise of around 1.5 per cent. would lead to a euro area interest rate rise of about a third of a per cent.a real interest rate fall for the UK of around two thirds of a percent. As a result, real interest rates for Britain which ought to increase could actually decline.
These two examples show why it is important to learn the lessons not just from the experience of the euro area but also from how states and regions adjust flexibly in the United States monetary union. In other words, we must be sure of sustainable convergence and that if business cycles do diverge or shocks arise, Britain has the price and wage flexibilityand the fiscal flexibilityto ensure stability.
Our assessment finds that obstacles to convergence do not lie in the provision of small business finance or large company finance, where, in fact, overall on business finance, the UK economy is found to be not more interest-rate sensitive than others.
The issue in housing, where we are more interest-rate sensitive, is not the attainment of identical market structures for housing with other countriesall countries have unique features of their marketbut the fact that to deliver stability in Britain, the combination of house price inflation and volatility, and the impact of both on consumption, has generally led to interest rates higher than in other countries.
Indeed, most stop/go problems that Britain has suffered in the last 50 years under Governments of all parties have been led or influenced by the housing market. The volatility of the housing market and its potential for higher inflation is a problem for stability that we are determined to do more to address to produce greater stability and reduce the risks of inflation irrespective of the decision on the euro.
Because Britain has experienced difficulty in balancing supply and demand in housing, we propose to build on and extend the reforms already announced in respect of planning and supply. That includes simpler planning guidance, the speeding up of decisions, reserve powers to call in applications and the case for binding local plansand, having asked Kate Barker to conduct a review of issues underlying the lack of supply and responsiveness of housing in the UK, we will bring forward further proposals in the pre-Budget report and Budget on how we can produce greater stability in the British housing market. And because Britain has had a different system of housing financejust 7 per cent. of mortgages in the UK are at long-term fixed rateswe are learning the lessons from other countries where, for example in America, they securitise long-term fixed rate mortgages, and an independent review is now examining the structure of mortgage finance including the case for, and how we can help the development of, the long-term fixed rate mortgage market in the UK.
So further housing reforms will be put in place in the coming yearreforms right in any event for the British economythat will help to ensure that by having a reduced propensity to house price inflation, which is in everyone's interest, stability can be further entrenched.
I turn from issues of convergence to issues of flexibility. To strike the right balance between fairness and flexibility in the pursuit of full employment, we have introduced a minimum wage and a tax credit system, which guarantees a national minimum income for single persons and couples over 25 and for families. So no one should fear that when they move areas or move jobs, they will lose those national income guarantees.
With this national framework for fairness in place, it makes sense to recognise that a more considered approach to local and regional conditions in pay offers the best modern route to full employment in our country. In addition, in the south-east, where professionals have benefited from London weighting and other arrangements, many low-paid workers have missed out. So in future we plan to publish data on regional prices and inflation; remits for pay review bodies and for the public sector, including the civil service, will, within their nationally determined frameworks, include a stronger local and regional dimension; and the reform of housing benefit will remove disincentives to work or to move. These measureswhich will be put in place over the coming yearcan make Britain, with already the lowest unemployment of all the main industrialised countries and 1.5 million more jobs since 1997, the most employment friendly country in the world.
The other form of flexibility is fiscal flexibility. Because of our history of stop/go, prudence dictates a cautious approach. Some countries have proposed new domestic procedures for faster and more effective adjustment of their fiscal policies inside the euro area. In the principles that we have applied to British monetary policyto ensure stability and flexibilitywe have insisted on clear symmetrical rules, well understood procedures, and enhanced transparency. Central to that is the open letter system, which is a means for dealing with potential pressures. To promote stability and flexibility in future, the same principles should be applied to any new arrangements for British fiscal policy inside EMU.
To ensure stability inside the euro area we will consult on the case for an open letter system on fiscal policy and a new and additional fiscal rule. We propose a regular fiscal stability report published on a pre-announced timetable to Parliament, ensuring that fiscal decisions are fully transparent and accountable and that they are made by Parliament; an assessment in the report of the gap between actual and trend output in the economy; and when actual output materially diverges from its trend, an open letter sent by the Treasury to Parliament setting out the Government's response. In that way, inside EMU, the principles underlying our monetary policy regime, which has been successful in delivering stability, would be mirrored in a similar fiscal policy regime.
Let me give the conclusions on each of the five tests, the full details of which, the benefits and the challenges, are set out in the Treasury's assessment published this afternoon and in the 18 documents published this morning, which cover in an open and full way all aspects of British economic policy, all of which are now available for open public debate.
With regard to convergence, on long-term interest rates we have made significant progress in lowering inflation expectations and establishing a platform of stability. There are grounds too for optimism about increasing compatibility of business cycles and market structures. Today, interest rates, which were 4 per cent. above those of the euro area, are 1.7 per cent. higher. Structural differences remain that could pose a risk to stability unless addressed, which they are by the proposals I will put forward today.
On flexibility, the assessment shows that considerable progress has been made to reform markets in the UK and euro area. Flexibilityright in itself for every economyhas improved in the British and European economies. The more flexibility in the economy, the easier it is to deal with problems when cycles diverge, and the better it is for our competitiveness. Yet as the persistence of volatility in inflation rates within the euro area demonstrates, we cannot be certain that there is as yet sufficient flexibility to deal with the potential stresses. It is for these reasons that we are making structural reforms that will bring increased flexibility to our economy.
On investment, the assessment shows that inside the euro there will be new opportunities for investment, particularly for foreign direct investment. At all times, by continuing to maintain macroeconomic stability and encouraging flexibility, the Government will continue to ensure that the UK retains our position as a magnet for foreign direct investment. We have taken particular account of the views, indeed the qualitative evidence, from Japanese, and other Asian, American and European investors, many of whom have said that membership would be beneficial and is important to them. There can be confidence that on the basis of sustainable and durable convergence, a successfully operating EMU and UK membership of it on the right terms would boost investment and foreign direct investment over the longer term.
On financial services, the assessment shows that in or out of the euro, UK financial services, wholesale and retail, are and will remain competitive. Future integration of financial markets inside the euro could promote the kind of diversity, flexibility and risk diversification seen in the capital markets of the United States of America, therefore making it easier for a more flexible Britain to win business throughout the euro area.
On employment, stability and growth, the fifth test, the potential benefits in increased trade and competition, and then in higher long-term levels of output and employment, are significant. Without sustainable convergence and sufficient flexibility, we would not realise the potential benefits for stability, jobs and investment.
It is because we will never put stability at risk that the tests we set were, and indeed are, high ones: namely, to show a clear and unambiguous case for British membership. So we conclude that the financial services test is met. We have still to meet the two tests of sustainable convergence and flexibility. Subject to the achievement of sustainable convergence and sufficient flexibility, the tests for investment and employment would be met.
So I am today announcing major reforms, right for the British economy: reforms that will be implemented over the next year and will greatly assist the process of achieving sustainable and durable convergence and the flexibility necessary for Britain to succeed sustainably within the euro zone and realise the potential for trade and investment.
Under Bank of England legislation, it is my duty to set the inflation target. I have written to the Governor of the Bank of England today stating that, subject to confirmation at the time of the pre-Budget report, I intend to change the inflation target at that time. The inflation target for Britain will be set on the consumer prices definition. I can confirm that pensions and benefits and index-linked gilts will be calculated on exactly the same basis as now. We have said throughout that we do not believe it necessary or right to rejoin the exchange rate mechanism.
I am asking by the time of the pre-Budget report for interim reports on the step changes we need in the planning and supply of housing and on the market for long-term fixed rate mortgages. I am today publishing for consultation our proposals for a new system within EMU of fiscal reporting to Parliament.
As part of radical reforms at a national, regional and local level, I propose that by next year almost all pay remits for public sector bodies will include a regional or local pay dimension. We will publish six-monthly reports on trends and progress in flexibility in labour, product and capital markets.
At this particularly uncertain time for the world economywith adjustments only recently in the exchange rateand when we do not know the future path of growth and inflation rates in Britain and Europe, it is right, prior to the point of transition and in the light of progress, to consider both the exchange rate and the balance of monetary and fiscal policy.
We will also continue to pursue our objective of a stability and growth pact that takes into account the economic cycle, debt sustainability and public investment, and we will seek reform of the European Central Bank. It is important that we resolve the uncertainties over the European Convention, and we will continue to pursue successfully our objective of tax competition and reject tax harmonisation in Europe. We will report back on progress in all these areas of reform in the Budget next year.
It is this resolve to implement far-reaching reforms in our economy that is the practical and best expression of our intent. It is a reform agenda that is right for Britain's economic interest and right to help meet the five tests: a reform agenda on which I believe there is a realistic prospect of making significant progress over the next year.
The Government believe that the implementation of these reforms, right in themselves, would help towards sustainable and durable convergence and flexibility, so that we can, within the euro area, achieve high and stable levels of growth and employment and deliver our objectives for public services.
We will report on progress in the Budget next year. We can then consider the extent of progress and determine whether on the basis of it, we make a further Treasury assessment of the five tests, which, if positive next year, would allow us at that time to put the issue before the British people in a referendum.
I can announce the publication of the draft referendum Bill this autumn; the introduction of further paving legislation for additional departmental allocations for preparations, and the publication today of the full and complete version of the British national changeover plan, which sets out the possible timetable for a changeover, its management, and the impact on consumers, business, financial services, the voluntary sector and the public sector.
I propose Scottish, Welsh and Northern Irish preparation committees, which will examine local, regional and sectoral preparations. I am also asking representatives from consumer organisations, local authorities, the voluntary sector and the regional development agencies to join the standing committee on euro preparations.
I will publish a detailed report on euro preparations in government, the public sector and across the economy this autumn. I will shortly issue guidance to local authorities on preparation. The publication of the changeover plan will lead to a period of information and discussion in each region and nation of the country, including in each constituency.
We have shown how financial services would benefit from membership of the euro. We have shown how, with sustainable convergence and flexibility, investment can benefit from membership of the euro. We have shown how, with convergence and flexibility, employment can benefit from membership of the euro. We have also shown the critical importance of achieving sustainable and durable convergence, and I have announced major reforms to be implemented in the next year.
At all times, we have and will put stability and the national economic interest first. We have set out the real benefits to Britain of membership of the single currency; we have shown that, with the achievement of sustainable convergence and flexibility, all five tests could and can be met. We have also laid down the concrete and practical steps that we will follow.
Those radical steps set out a new direction for reform and the clear path ahead for Britain. With a programme of economic reform benefiting Britain, I believe that a modern, long-term and deep-seated pro-European consensus in Britain about Britain's role in Europe and Europe's role in the world can and will be built in our country.