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Lord Smith of Clifton: My Lords, before the Lord President of the Council sits down, does she agree that now would be an appropriate time to welcome the
appointment of Sir Brian Kerr as Lord Chief Justice of Northern Ireland and his immediate predecessor on his appointment as a Law Lord in this House?
Baroness Amos: My Lords, I totally endorse the comments of the noble Lord, Lord Smith of Clifton. I thank him very much for drawing the matter to the attention of the House.
Lord Mayhew of Twysden: My Lords, before the noble Baroness sits down, she will recall that a number of noble Lords have raised anxious questions about the change in the role of the Lord Chief Justice in the context of the removal of senior judges. Perhaps she will recall that I asked her some specific questions. Just now she said that the Bill stands upon its own merits. Why were those merits not perceived as recently as the legislation of last year and the Act of 2002? The noble Baroness will recall that I asked her some questions and I have not heard any answers as yet.
Baroness Amos: My Lords, I had hoped that I had made the position clear in my comments on our continuing commitment to the independence of the judiciary; the fact that there would be an independent tribunal which would look at the issue of the removal of judges. I apologise to the noble and learned Lord that I did not make it clear that—and this is partly in response to the noble and learned Lord's questions—we have continued to look at these issues since the 2002 Act. We see this very much as a dynamic process. I shall be very happy to write to the noble and learned Lord to give him some further detail on the specific questions he has raised and to meet him to talk about these questions in a little more detail before we get to Committee.
On Question, Bill read a second time and committed to a Committee of the Whole House.
Financial Statement and Budget Report
6.59 p.m.
Lord McIntosh of Haringey rose to move, That this House takes note with approval of Her Majesty's Government's assessment as set out in the Pre-Budget Report 2003 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.
The noble Lord said: My Lords, each year, the Government report information to the Commission on our main economic policy measures. The procedure is set out in Articles 99 and 104 of the European Communities treaty, which relate to the broad economic policy guidelines, convergence and stability programmes and the excessive deficits procedure.
The objective is to ensure that member states' economic policies are consistent with the goals of the treaty, including non-inflationary economic growth, a high level of employment and social protection and better living standards for citizens across both the UK and the EU. Those goals are consistent with the
Government's own approach to economic policy. The Government's strategy for economic policy is set out in the 2003 Pre-Budget Report, published last week.Sharing the information in the Pre-Budget Report with our European partners allows us to influence the development of the European Union, bringing enhanced employment and growth to Britain and other member states. It is subject to the usual parliamentary scrutiny and approval under Section 5 of the European Communities (Amendment) Act 1993.
Following the sharpest deceleration in both world growth and world trade growth for 30 years in 2001, world recovery began to pick up in early 2002, but lost momentum in late 2002. At the beginning of 2003, significant global uncertainties continued to weigh heavily on short-term prospects for the world economy with confidence and demand dampened by: geopolitical tensions, including the Iraq conflict; volatility on financial and exchange rate markets; and uncertainty regarding growth prospects—in particular in the euro-area.
However, the Pre-Budget Report presents a positive outlook for the UK economy, with British inflation at its lowest for 30 years, averaging 2.4 per cent since 1997; interest rates at their lowest since 1955, at 3.75 per cent; more people in work this Christmas in Britain than at any time in our history; and economic growth that is now strengthening.
So the UK is well placed to benefit from the strengthening global recovery. Gross domestic product is forecast to grow by 2.1 per cent in 2003—within the Budget forecast range—and by 3 per cent to 3.5 per cent in both 2004 and 2005. External forecasters continue to expect the UK economy, together with that of the United States, to continue leading the major economies this year and next. The Treasury growth forecasts for 2003 and 2004 are within the range of independent forecasts.
I now turn to public finances. Sound economic fundamentals, coupled with the Government's cautious approach, mean that the Government remain on track to meet the fiscal rules over the economic cycle and that public finances are sustainable in the long term. The average surplus on the current budget is projected to be positive over the cycle, meeting the golden rule. Net debt is set to stabilise at 35½ per cent of GDP—well below 40 per cent, to meet the sustainable investment rule. The UK now has the lowest level of net debt to GDP ratio in the G7.
When the economy was especially strong, we took tough decisions in 1997 to put money aside and reduce public debt when many of our critics were saying that we should spend it. It was that prudence during the years of strong global growth, building a safety margin through cautious assumptions and reducing debt when other countries were spending, that means that Britain is in a position to borrow to invest in our schools, hospitals and transport; successfully to support monetary policy to smooth the path of the economy during a period of global uncertainty; and fully to meet our international commitments.
Our commitment to meeting our fiscal rules is, moreover, for the long term, so we have also published a report—the 2003 long-term sustainability report—which examines the sustainability of Britain's fiscal position decade by decade and compares our position with that of other countries. It shows that, taking account of population changes and the cost of ageing on public spending, the British fiscal position in this period is sustainable and in a strong long-term position compared to other countries.
The key pre-Budget announcements also included: setting out reforms that will promote business and enterprise across the UK by improving access to finance for small business, reducing red tape and promoting a culture of enterprise; taking further steps to extend employment opportunity for all, through measures which focus help on disadvantaged groups and deprived areas; tackling child and pensioner poverty, raising the child tax credit by £180 per year and providing further help with childcare and ensuring security in retirement; promoting fairness in the tax system by ensuring that everyone who can do so contributes to the extra investment in public services; and introducing further measures to improve the environment, including proposals to tackle climate change, reduce waste and protect Britain's natural resources.
On the basis of this Pre-Budget Report, we have a success story to report to the European Union. I beg to move.
Moved, That this House takes note with approval of Her Majesty's Government's assessment as set out in the Pre-Budget Report 2003 for the purposes of Section 5 of the European Communities (Amendment) Act 1993.—(Lord McIntosh of Haringey.)
7.6 p.m.
Baroness Noakes: My Lords, I draw attention to the entries in my name in the Register of Members' Interests. I thank the Minister for moving the Motion. It is right that the House takes the opportunity offered by it to have a proper debate on the Pre-Budget Report. The Motion might be regarded by some as something of a formality, but we certainly welcome the fuller consideration that your Lordships can give to the Pre-Budget Report in a debate such as this.
Lord McIntosh of Haringey: My Lords, I rather teased the Opposition last week for not asking for a repeat of the Statement on the Pre-Budget Report. I did so in ignorance of the fact that it was to be debated today; I apologise to those whom I teased.
Baroness Noakes: My Lords, it is courteous of the noble Lord to say so; I was not going to mention it.
I look forward especially to the speeches from my noble friends Lord Higgins, Lord Northbrook and, of course, Lady Wilcox, who will wind up for those of us on these Benches.
As the Minister explained, the context of our debate is not the Pre-Budget Report itself but the report under Section 5 of the European Communities (Amendment) Act 1993. The Minister explained what that report is about. It is appropriate to pause here to ascertain the relevance of the report to the European Community to our affairs.
It is clear that the Government have no current intention to take us into economic and monetary union—this side of a general election, at least; and the Chancellor's body language would suggest that some time beyond that would be an appropriate time scale. Doubtless, much will depend on the fight to the death going on between Nos. 10 and 11 Downing Street. We are promised a referendum Bill on the euro this Session, but we all know that that is simply to appease the Europhiles in the Cabinet and has no immediate importance.
The stability and growth pact is now in tatters. Only a few weeks ago, France and Germany collectively confined that pact to history. It does not apply to them; they will manage their economies as they choose without regard to treaty obligations.
It is a mystery why we bother to send a letter to Brussels about our economy. Will the Chancellor listen to what Brussels says, or will he join the Franco-German camp and tell Brussels to get its tanks off his economic lawn? I put my money on the latter. Indeed, the letter of 10th December that the Chancellor sent to Mr Pedro Solbes Mira at the Commission owned up to a deficit next year of 3.3 per cent—which is above the 3 per cent limit. But in the next breath, the Chancellor stated that that was within a prudent interpretation of the stability and growth pact. That is, Mr Brown is making up his own European compliance rules, just like the French and the Germans.
However, let us put aside that European irrelevance and concentrate on the Pre-Budget Report. The Chancellor inherited an extremely strong economy in 1997. I shall not argue that the economy is now weak, as it is not, but it has the seeds of weakness firmly sown within it. We now fear for the economy, or rather we fear for the citizens of our country, who will have to pay the price in higher taxes.
The Chancellor may well make it to the next election without an explicit tax hike, but he will have to continue with his relentless programme of stealth taxes. This Pre-Budget Report is no exception to the Chancellor's practice of hiding stealth taxes in the small print. One example is the freezing of the working tax credit and child tax credit limits, which will impose an extra burden of around £240 million, according to the Institute for Fiscal Studies. We can see in the aggregate figures that the fiscal burden will steadily increase, with the tax-to-GDP ratio reaching over 38 per cent and still rising by 2008—the highest level since 1984–85. With 60 tax rises since 1997, taxes are just short of £400 billion this year, already nearly 50 per cent higher than when Mr Brown became Chancellor.
Let us now examine whether the Pre-Budget Report really shows that the Chancellor has a firm grip on the economy or whether it is starting to slide away from him. Mr Brown invented some golden rules as part of creating the aura of the prudent and trustworthy Chancellor. Those rules are under severe pressure, and, when we strip away some smoke and mirrors, we will find that the Chancellor may indeed be breaking his own rules.
Rule number one is that over the economic cycle the Government will borrow only to invest and not to fund current spending. Today I shall not get into the issue of the flexibility, which the Chancellor created, of defining when the cycle begins and ends. I shall take as read the Chancellor's interpretation that the cycle began in 1999 and will end in 2005–06. Mr Brown calculates that that will mean that he will have an average annual budgetary surplus over the cycle of 0.2 per cent, which, according to him, translates as headroom of £14 billion. But not only is that £14 billion down from £46 billion only eight months ago, it is calculated in a new way intended to deceive. It focuses on an average rate of surplus and thus, in effect, uprates the surpluses in the early years by inflation. The Institute for Fiscal Studies calculates the headroom on a correct basis as only £4 billion.
But the story does not end there. If one looks at the other assumptions affecting the calculations, the only conclusion that can be drawn is that the Chancellor must be crossing his fingers very tightly. I shall give just a couple of examples of the heroic assumptions lying behind those figures. First, there is a GDP growth rate of 3 to 3.5 per cent for the next two years—above trend, above independent consensus forecasts and heavily dependent on a recovery in business investment. Secondly, the figures include a bounce-back in tax revenues next year, after £5 billion of extra income tax and national insurance failed to materialise this year.
There are some unanswered questions. The rail regulator has just announced his determination of access charges, which will add another £1.5 billion or so a year to the Strategic Rail Authority's costs. I do not believe that allowance has been made in the Chancellor's calculations for those costs, which must be met under the terms of the franchise agreements. Will the Minister confirm the budgetary impact?
A detailed examination of the explanatory forecast shows that the totals are flattered by a staggering £14 billion turnaround in pension costs—from a cost in the 2003 Budget to a credit in the Pre-Budget Report—over the period 2002–03 to 2005–06. Can the Minister explain what is happening here?
There are strong grounds for believing that the first of the golden rules may well be bust over the next couple of years. But there is also another golden rule: borrowing must not exceed 40 per cent of GDP. We already know that the Chancellor's forecasting record on borrowing is tarnished. At the last election he told us that he would borrow £10 billion this year. That figure has been revised upwards at every opportunity, and last week the Chancellor admitted that it would be over £37 billion.
In the Chancellor's figures, the percentage of GDP rises to 35 per cent by around 2005–06. Superficially, that looks okay, but we know that his figures exclude Network Rail's borrowing, as that day of reckoning has been deliberately deferred until 2007. We know that they exclude most PFI liabilities; we know that they exclude liabilities attached to meeting public sector pension obligations; and we know that they exclude the effect of all eligible people claiming means-tested benefits, including the one-third who the Government estimate will not claim their pension credit entitlement. We know that if we included all those figures, the borrowing percentage would be well over 35 per cent and, more importantly, we would see a much stronger rising trend.
All that glistens is not gold. The rules invented by the Chancellor seem to glisten and seem to be gold, but when we get close to them they look less bright, less consistent and less durable. Perhaps they are not gold after all. Perhaps they are no more than the alchemist's dream.
This Pre-Budget Report does nothing to reverse the continuing decline of manufacturing industry. It does nothing to raise activity rates, especially among work-less households. It does nothing to restore the rate of productivity growth to the levels in 1997. It does nothing to stop the dangerously high level of growth in household debt. Instead, we have rising public sector employment in unreformed and non-delivering public services.
We do not believe that the Chancellor will break his not-so-golden rules in the short term, but there will come a time when his optimistic assumptions catch up with him and he runs out of ways of fiddling the books. He will then have to raise taxes. He will eventually run out of ways to do that in a stealthy way and will have to raise income tax, or national insurance rates. If he is to avoid that outcome, he will need a miracle. I believe in miracles, but I do not believe that they are a sound basis for planning the finances of this country.
7.18 p.m.
Lord Higgins: My Lords, this is a traditional annual occasion, and the Minister, in his opening remarks, was traditionally optimistic—not as optimistic as the Chancellor in his Statement, which went way over the top. It seems that the Chancellor was more optimistic than the Bank of England Monetary Policy Committee. He forecasts for next year an increase in growth from 2 per cent to 3 or 3.5 per cent, a very substantial increase. But the Bank of England raised interest rates in November, which suggests that it is not as optimistic as the Chancellor. I ask the Minister whether the assumptions that the Bank of England Monetary Policy Committee uses in making its decisions are the same ones as the Chancellor uses—the so-called audited assumptions? If so, how do we account for the apparent difference in approach between the Bank of England Monetary Policy Committee and the Government?
The Chancellor sought to justify his optimism by two kinds of comparison—historic and geographic. In his research he might well have gone back to 1066,
when perhaps a slight blip caused inflation, due, no doubt, to a Conservative government at the time. The Minister went further today. He said that on the population side of things it would be higher than at any time in our history.But while it is absolutely right, as my noble friend said, that the present Government inherited a very benign situation—which has generally been taken to mean at the stage in the economic cycle that had been reached when the Government changed—that was fairly unusual. The reality is, as Mr Anatol Kaletsky has pointed out, that the improvements for which the Chancellor is taking so much credit started 10 years ago and reflect the improvements in the structure of our economy brought into operation by successive reforms under Mrs Thatcher. I was not a member of her government; I was chairman of the Treasury Committee at the time and responsible for holding her to account. But there is no doubt that the longer-term benefits of those changes are something from which the Chancellor and the entire economy are gaining. So one needs to take that into account as far as the historic comparisons are concerned.
As to geographic comparisons, the Chancellor referred to a number of comparisons with Germany, France and other countries. Of course this was justified because those countries have not carried out the kind of structural reforms introduced here under the previous government. More specifically, they have been suffering very much indeed from the fact that euro-land is now very much in an interest rate straitjacket. We are told that they have an interest rate where "one size fits all".
But it is blatantly obvious that the one size does not fit all. In fact, apart from three countries, the Netherlands, Portugal and Finland, which are more or less in line with the European Union's interest rate, for countries such as Germany, Austria, France and Belgium the 2 per cent rate is clearly too low; for Spain, Greece, Italy, Ireland and so on it is too high. These differences, as a UBS study using the well-known Taylor rule to calculate them has pointed out, are very substantial and countries in the euro-zone are suffering greatly as a result of the fact that the interest rate imposed on them—the straitjacket in which they are suffering—is under strain. This is an important reason for the Chancellor being able to point out that our performance in this country has been significantly better than in other European countries.
Following the break-down of the European summit, there has been some talk in the press during the past few days that we are moving towards a two-tier Europe. My personal view is that, while I am strongly in favour of our being a member of the European Union, there is a strong case for having a two-tier Europe in the sense that there will be countries in the euro-zone and countries outside it. For the reasons I have mentioned, the one-size-fits-all problem will become bigger and bigger as the size of the area covered by that policy widens.
This will be so, to some extent, with the new accession countries. Although the total of their economies, in economic terms, is probably only about the size of that
of Belgium, nevertheless they will have difficulties. We would certainly have them. Indeed, I believe that, were we to join, the unbalancing effect—given the problems with interest rates and monetary policy generally—would put the system under such strain that it might well break down, despite the immense problems once one has got a single physical currency in operation.For those reasons I believe that this is a relevant consideration in the context of the report that we are making to the European Union related to Section 5 of the European Communities (Amendment) Act 1993, the side heading of which refers to convergence, excess deficit and so on.
I leave on one side the fiasco over the stability pact and the fact that what is supposed to be a binding agreement has been broken completely by both Germany and France, and turn to the question of the Government's borrowing. The figures can be put in a more dramatic context than they were by my noble friend on the Front Bench a moment or two ago. At the time of the general election the Chancellor was anticipating that this year he would borrow £10 billion. In fact, the increase over the past eight months has been £10 billion, the size of borrowing that the Chancellor expected previously to be the total. This raises very serious questions.
When he first became Chancellor, he was anxious to stress that the burden of national debt imposed a considerable cost in terms of interest rate payments by the Treasury. Can the Minister tell the House how much extra will be paid in interest rates by the Government as a result of the increase in borrowing from the originally expected £10 billion to the now expected £37 billion or more?
There are real problems as far as financing the debt is concerned. You cannot borrow £37 billion at the same interest rate at which you can borrow £10 billion. While the Chancellor has given the Monetary Policy Committee control over short-term interest rates, at the time he did so he clawed back to the Treasury the responsibility for long-term interest rates in the sense that the Treasury would be responsible for funding, which in turn determines long-term interest rates. Can the Minister tell the House—I hope he can give a very clear answer—whether it is the Government's intention to fully fund the £37 billion deficit or whether they will not do so? Whether or not they do so is extremely important in terms of future inflation.
Although it is true, as Keynes often pointed out, that fashions in economics change, we used to be obsessed by the money supply. That of course is determined to a large extent by how the Government deficit is funded. I have searched in vain through this enormous tome to find any reference whatever to the money supply. But it is still not unimportant. It may be that I have missed it and the Minister can point me to the appropriate page, but certainly it is not exactly a headline in the way that it used to be.
I fear the prospect for interest rates as a result of the Government having to fund or attempting to fund this enormous deficit. It will have a serious effect on those who have borrowed money. One only has to look at the mass of headlines which refer to,
- "Spending on credit cards to go up 38%",
- "Christmas debt crisis",
One could speak about many other issues. It is always helpful to have this debate. I merely say that, in many respects, the Chancellor's obsession with the five tests on the euro on the one hand and the golden rules on the other, combined with the absolute obsession about multiple tax credit schemes of one type or another is not a helpful way of managing the economy.
Finally, I pick up a phrase that the Minister used in his speech. He said that they were "ensuring security in retirement". That is profoundly untrue. I fear that the generation of pensioners about to retire will be significantly worse off as a result of the Government's policies than those who are retired at the moment. That is a tragic situation and reflects the way in which the Government have managed the economy.
7.31 p.m.
Lord Northbrook: My Lords, I declare an interest as an investment fund manager. I will concentrate on examining the detail of the Pre-Budget Report, and will try to demonstrate how this is not, in several ways, helping the economy. I will then examine the broader economic picture.
As usual, there were some positive details in the 2003 Pre-Budget Report, but this year I had to look a lot harder to find them. The Chancellor said that he would look at ways of widening existing tax breaks on research spending by businesses and would enhance tax relief on North Sea oil exploration, which I welcome. He also announced moves to make it easier for small and medium-sized businesses to claim tax relief on investment in new facilities and machinery. The Chancellor said that that would provide a £400 million boost to small firms over the next three years, which is welcome.
I also welcome the additional encouragement to the venture capital industry by proposing to raise the annual limit for trust and enterprise schemes to £200,000 and the increasing, for two years, of income reliefs for VCT investments to 40 per cent. I also welcome the launch of enterprise capital funds that are designed to bridge the gap for smaller businesses seeking capital in the £250,000 to £2 million range and
the Government's decision to contribute up to two thirds of the capital of funds established to target this segment.Plans to simplify the audit requirements for smaller companies are also welcome. The initial reaction of the head of the CBI, Digby Jones, was similar to my own. He said:
- "This was a positive pre-budget report for business . . . but we remain concerned about the outlook for the public finances".
- "Gordon Brown unveiled plans to crack down next year on owner-managers of smaller businesses avoiding tax. The Treasury said, 'The Government will bring forward specific proposals for action in Budget 2004 to ensure that the right amount of tax is paid by owner-managers of small incorporated businesses on the profits extracted from their company'".
- "The Government is concerned by the scale of individuals who have taken advantage of big tax cuts in corporation tax rates for small businesses and exploited different tax rates on dividends and earnings".
- "This encouraged thousands of self-employed owners of small businesses to incorporate their businesses and",
- "roll up their profits without paying tax and pay themselves in the form of low tax or tax-free dividends".
The Government are intent on closing the loophole which they created. How helpful is that to a small business? How can small businesses plan ahead when the Chancellor offers them incentives that he removes only a year or so later?
Is the Treasury statement true? Will the Chancellor make a national insurance charge on dividends withdrawn from those companies? That would come as a nasty sting in the tail for those small businesses that decided to incorporate.
In another area—company regulation—the Chancellor trumpets how the Cabinet Office is planning to scrap 147 regulations under its regulatory reform action plan. How does that square with the huge extra administrative burden that will be inflicted on businesses by changes affecting two very technical areas—transfer pricing and thin capitalisation? That may seem esoteric, but firms of accountants are getting very excited about the proposals in the Budget. According to the Financial Times on 11th December,
- "Grant Thornton the accountants have warned that the moves represented a stealth tax as they would restrict the ability of businesses to take advantage of some £70 billion of historical losses within UK group companies".
PricewaterhouseCoopers director, Lyn Young, stated:
- "The Government has ignored pleas for more time by businesses to adjust to what is going to be a significantly increased administration burden".
- "There will be a significant increase in red tape with little apparent benefit for the UK economy. UK business is footing the bill for the incompatibility of . . . tax law with the rest of Europe".
On the whole issue of red tape, I echo the comments of the shadow Chancellor, who said that repealing 147 regulations would not compensate for a big increase in red tape since the Government came to power. He said that:
- "At his present rate, it would take [the Chancellor] 10 days to add that many regulations to the burden on business".
I now turn to the economy as a whole and to the Chancellor's forecast for GDP growth and borrowing. As has been stated, GDP growth for 2003 is predicted at 2.1 per cent. Although that is within the Budget forecast of 2 to 2.5 per cent, it is well below the forecast made at the time of the previous 2002 Budget of 3 to 3.5 per cent. How much of that 2.1 per cent growth figure will come from the public sector?
I repeat my caution expressed in July for the 3 to 3.5 per cent growth targets made for 2004 and 2005. The Minister said that the 2004 forecast was within the range. Actually, it is at the top of the range, because the average forecast quoted in the Pre-Budget Report is 2.6 per cent for 2004. I continue to be concerned about the rate of increase in the Budget deficit. In reply to my Question on 5th February 2002 about the importance of the stability and growth pact as a discipline for the UK economy, the Minister stated:
- "The stability and growth pact is an additional criterion to which we pay considerable attention".—[Official Report, 5/2/02; col. 502.]
The Chancellor now expects the Government to borrow £37 billion in the financial year ending next March—up from a forecast of £27 billion in April and £13 billion in his 2002 Budget. The Treasury forecasts that annual borrowing will be about £30 billion in each of the next two financial years, until spring 2006, although the respected economic team at DrKW forecasts £41 billion and £40 billion for 2004–05 and 2005–06.
The Chancellor justifies his increased borrowing by saying that the Government are still on target to meet his two fiscal rules. The first is the golden rule that the Government will borrow only to invest, not to fund current spending. The second is that net public debt will be held at prudent and stable levels, which, as has been said, the Treasury has defined as being less than 40 per cent of GDP. Crucially, both are assessed over the economic cycle.
The golden rules turn slippery under inspection. Although the Government are spending £19 billion more on current outlays than they will receive this financial year, the rule says that that is all right, as the conditions must be met only over the economic cycle. I shall not go into detail, but it seems rather arbitrary for the Treasury to have decreed that that started in 1999 and will end in 2005. Conveniently, that allows the Chancellor to count the big surpluses amassed when revenues were buoyant in the dotcom boom against the deficits now being run.
The interpretation of the rule is shaky on two fronts. First, it is far from obvious when the present economic cycle started, let alone ended. Secondly, the procedure of adjusting for the cycle is legitimate only if it strips out the impact of temporary shocks. It simply becomes an excuse for inaction when there is a permanent deterioration in the public finances, as seems to have occurred in the UK. Many independent commentators believe that the Chancellor will have to raise £10 billion in taxes but that such a move will be conveniently postponed until after the next general election.
Fiscal rules that have that level of expediency are not worth having. Voters would benefit from an independent watchdog like America's Congressional Budget Office to assess the health of the public finances. That would protect taxpayers more than the fiscal rules set by the Chancellor—the very person whom they are supposed to constrain.
The final area that I will comment on is the way in which public money is spent and whether it is spent effectively. Extra money spent on health and education is welcome but only if not wasted. The headline in the Financial Times on 12th December suggested the opposite. The paper revealed that Britain's army of regulators was costing the taxpayer £12 billion a year. It went on:
- "The level of spending is likely to lead to accusations of excessive bureaucracy and waste".
That conveniently brings me to my conclusion. Although I have no objection to increased government spending on health and education, I believe that, more and more, the general perception is that a great deal of the extra spending is unproductive. How will the Minister ensure that spending in those areas is more carefully monitored, so that it can be reported to Europe next year?
7.43 p.m.
Lord Taverne: My Lords, I was going to say something about macro-economic management, but quite a lot of it has been said and I do not want to repeat it. I start by saying that the Chancellor has been
successful in his macro-economic management. However, I sometimes think that he should pay a little more generous regard to the foundations that were laid beforehand. The fact is that much of our steady progress was due to the actions of Chancellor Lamont, who curbed consumption at a time when that was an unpopular policy. That policy was also followed by Chancellor Clarke. Nevertheless, he has been a successful Chancellor.I too was going to ask questions about the golden rule. There were some pertinent questions and criticisms in this week's Economist, but, as they have been put effectively by the noble Lord, Lord Northbrook, I will leave them aside. Forecasts are always uncertain. I have no idea whether the situation will improve next year. I see no particular reason why the deficit should disappear. It may be that, in due course, the Chancellor will face the uncomfortable choice between cutting spending and raising taxes. I shall say no more about macro-economic management, as it has all been said.
It seems to me that the weak spot in the Government's economic record has been their disappointing record on productivity. We must remember that, although we boast about how much more successfully we manage the economy than the wretched French or Germans, our productivity is 23 per cent below productivity per hour in Germany and, for that matter, the United States and 25 per cent per hour less than that of France. Incidentally, those figures show that the sclerotic European model of enterprise is not that sclerotic, when compared to the United States. The only reason why productivity per man is higher in the United States is that they are uncivilised about holidays and working hours. They work much longer hours and have ridiculously short holidays. The Europeans are far more civilised about hours and holidays, and their productivity is just as high—in many cases, it is higher. We fall behind it.
The Chancellor has sought to improve our productivity through a large number of tax incentives. The Government have also provided subsidies. They have not worked. The whole philosophy and approach is mistaken. One may be able to justify a particular measure by saying that it works. However, the Government's approach has made the tax system more complex—it has been distorted by the subsidies—and the overall result has been not beneficial but adverse. The Chancellor would have done better to concentrate on simplifying the tax system, instead of immensely complicating it.
That is only part of a general disease. We are the most over-regulated advanced industrial country. We have developed a mania for regulation in any number of spheres. The targets set by the Chancellor are part of the reason for that. Doctors, teachers and—most certainly—small businesses will say that there is no question but that we are grossly over-regulated. I have come across the problem running a charity concerned with drug treatment. The rules for residential care have been ridiculous. Nobody benefits from that. It is part of the no-risk society, with civil servants seeking to
justify themselves and protect themselves against criticism. It is done by Ministers trying to protect themselves against criticism and avoid blame.
The Chancellor claims that he has made the tax system fairer. I am not sure that he can claim such a marvellous outcome, when the richest 20 per cent pay 34 per cent of their income in tax and the poorest 20 per cent pay 42 per cent of their income in tax. Apparently, there is a general revolt against taxation. I am not sure how deep it goes. Probably one of the most unpopular taxes is the council tax. I must say that I applaud the Liberal Democrats' approach to the matter.
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