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It is interesting that, in each of the past three years, the level of borrowing anticipated in the PBR, and the actual outcome, was a good deal higher than predicted in the Budget of that year. We are now seeing substantial increases this year. I grant that the low inflation has certainly been a success so far, but there are signs of upward creep. The latest Bank of England inflation report in November concluded:
“Overall the risks to growth and inflation are judged to be broadly balanced though as in August there is greater than usual uncertainty over the outlook for inflation”.
I often wonder about the extent to which our low inflation has been assisted by two key factors. I would like to see a proper analysis of this. The Minister referred to competition from China, India and other developing countries. The reduced price of many imported products that are key ingredients of everyone’s spending has been a major contributory factor in keeping inflation low. I notice that the Bank of England’s latest quarterly bulletin, in referring to this factor without quantifying it, said that that beneficial tailwind had waned somewhat in the past couple of years. If that beneficial impact falls from its present level, and even reverses, we could see an upward pressure on inflation.
Equally, immigrant workers, particularly from former Soviet Union territories now in the EU, have contributed substantially to keeping pay levels low in certain parts of the country, especially in the south-east and even in East Anglia, and to keeping that area of inflation under control. I sometimes wonder whether our economy is not benefiting from the productivity improvements of other countries and of immigrants to this country. That may not last.
That leads me to what I think is one of the greatest concerns of all. Productivity is one of our biggest worries. Our productivity growth has fallen. In 1992-97, productivity improvement was 2.6 per cent a year. It was 2.1 per cent a year between 1997 and 2001—already declining. Since 2001 it has been a mere 1.5 per cent a year. It is no wonder that the World Economic Forum shows us falling from
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On the macroeconomic situation, we have seen enormous and significant contributions to growth and the feel-good factor from the City of London and from financial and various other services. That is certainly reflected in City bonuses at the moment. Indeed, the Bill, to which we have just given Report clearance and which the Minister knows I wholly support, is designed entirely to ensure that we remain predominantly the leading financial centre in the world. I wonder whether to some extent the feel-good factor prevalent in London is contributed to by, on the one hand, the success of the City, the substantial bonuses and wealthy people coming here and, on the other, the contribution of other immigrants to keeping the costs of services low. I wonder whether that feel-good factor extends as much to the rest of the country.
I want briefly to share a concern to which I hope we can return on another occasion. There are increasing warnings on the level of highly leveraged debt backing European companies, the majority of which is held by private equity-owned businesses. In the past two weeks, there have been three warnings. The first was from Sir John Gieve, Deputy Governor of the Bank of England, on the danger that hedge funds and equity groups are over-borrowing. Secondly, Standard & Poor’s drew attention to the fact that the average debt-payment burden of outstanding leveraged buy-out deals is now four times above the normal safe level. Thirdly, today a private equity professional has drawn attention to the fact that debt-driven private equity houses face a tenfold increase in corporate defaults, which, he believes, will come soon. While this is a subject for later debate, if some of those warnings come true, the financial sector will face a very different situation.
I now turn to two topics on which I wish to be constructive. First, the Eddington report contained two key findings that are highly related to what I said about growth and productivity. One finding was that,
- “in mature economies with well-developed transport networks it is transport constraints that are most likely to impact upon a nation’s productivity and competitiveness”.
“Eliminating existing congestion on the road network would be worth some £7-8 billion of GDP per annum”.
As a former Secretary of State for Transport I strongly support the report’s recommendations on road pricing. I could not do otherwise, because in May 1993 I published a document, Paying for Better Motorways, which, if I may say so, covered all the arguments much more succinctly than the Eddington report and others that I have seen, but the arguments were compelling. My own concern was that one of my officials suggested that motorway tolls should be known as motorway access charges, or “macs”, in the same way as teacher training days in schools became known as “Baker days”. I was not sure that I wanted to be associated with motorway charging in quite that way, but we set out all the arguments in our report. I wish to make three points.
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First, I regret the lack of progress since then. We have lacked political courage, and I am concerned that the Eddington report talks about the introduction of road-pricing within the next 10 years. We cannot wait that long. I recognise that there is a technology requirement but, having looked at this matter carefully in 1993 and gone to the United States, Norway and elsewhere to do so, I think it is clear that the technology could have been developed in the 10 years since then. I hope that we can get on with it.
Secondly, as with identity cards, in road-pricing the Government are destroying a good idea in principle by being over-complex, which could lead to excessive costs. It would be better to focus on motorways and not to try to be too sophisticated by introducing a sensitive road pricing system on many other roads in the UK. That, I believe, would also have a serious effect on rural areas. It can be done on motorways. I constantly have to make the point to people who live in urban areas, where there is alternative public transport, that there is no such alternative in rural areas. I do not see the need for road pricing in rural areas, where the congestion is not the same and alternative transport is not available.
Thirdly—and I emphasise this—it is vital that we use the proceeds for motorway improvements. During the Prescott era, we saw a substantial decline in investment in roads infrastructure. We all know that there are demands for bypasses, and so on, and we will never be able to entertain them all in the short term. If we are to get motorway improvements at the same time as the advantages of motorway tolling, which can be adjusted according to times of congestion in different periods of the day, the proceeds of tolling must be hypothecated to the improvement of the motorways. In Paying for Better Motorways in 1993 we made precisely that point and gave a commitment that, if charging were introduced, it would provide another source of finance for improving roads. That is the only way that it can be made acceptable to the public.
My final comments refer to the Barker report. I shall be brief but hope that we can return to the issue another time. It is impressive how the delays in the processes of our planning system lead to much higher costs for so many businesses and for our infrastructure generally. It is significant that that is one of the main obstacles foreseen by people who want to invest inwardly, and it is increasingly seen as a burden on businesses. I do not have time to go into the detail, but many improvements can be made in the process without diminishing the opportunities for democratic accountability and for the public to make their views known. I very much hope that the Government will pursue with sufficient speed the appropriate recommendations on processes in the Barker report.
Lord Barnett: My Lords, I am delighted to follow the noble Lord, Lord MacGregor. We have often spoken in finance debates. This pre-Budget debate is based on European Union Commission recommendations with which we have to comply. I want to comment on
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My noble friend repeated what the Chancellor said in 1997 about having a referendum on the issue. I find the idea of having a referendum on the five economic tests difficult, to put it mildly. I image that readers of the Sun,and even the Times, might find it difficult to decide how to vote. I am not altogether sure that Members of both Houses could make a clear decision on something as complex—to describe it safely—as the five economic tests. I find it more than complex; it is rather silly, but that is another matter.
In addition to talking about a referendum, the Chancellor said that,
- “in principle, a successful single currency within a single European market would be of benefit to Europe and Britain”.—[Official Report, Commons, 27/10/97; col. 583.]
I certainly agree with that, but I should like confirmation from my noble friend that that is still the policy of Her Majesty’s Government, because at times it does not appear to be.
My impression on hearing the Statement on the Pre-Budget Report, and on reading it later, was that the Chancellor had taken the opportunity of writing his successor’s Pre-Budget and Budget Reports for many years ahead. I hope that his successor will appreciate what the Chancellor has left him. One thing is clear: this is not what is sometimes described as—incorrectly, in my view—a green Budget in any sense of the word. There is a clear misunderstanding by what is meant by a green Budget.
I put a question at Question Time to my noble friend a few weeks ago on this precise issue. I said that if the tax was not high enough, it would raise some revenue but do nothing whatever about climate change. If you want to do something about climate change, you must raise no revenue by placing it at such a high level that you will not get any tax. People will stop emitting, if that is the right word, and that will help to address climate change. But most people see a green Budget, green matters and green taxes as determined only by how much tax you are raising. I do not accuse the Official Opposition of that because they would call it “stealth taxes” or something that the Chancellor has dreamt up, you might say, as a means of cutting his Budget deficit—although they would not say it as politely as I would. Can my noble friend confirm that the Chancellor’s policy that I asked about at Question Time remains basically not a green tax but a means of raising revenue, which is what it certainly appears to be?
The Financial Times recently told us—and I did not see the report anywhere else, but that is one paper I very much respect—that the Chancellor was pressing electricity and gas companies to offer more discounts for older customers. I declare an interest. Of course I am not specifically looking for a discount for myself, but I hope that the Chancellor was seeking to
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The Pre-Budget Report refers to efficiency saving and, inevitably, the Gershon report; it does not refer to the equally famous report of the noble Lord, Lord James. The Chancellor told us in the Pre-Budget Statement that that means a 3 per cent cut in costs plus a 5 per cent cut in administrative cost—not one-off but every year until 2011. I assume that that means that not only every department but also every local authority and non-governmental body will achieve this 3 per cent plus 5 per cent administrative saving. What happens if those departments do not carry out their remit between now and 2011? How do the Government intend to enforce these savings? Am I right in assuming that the assumed savings from the Gershon committee have already been included in the Pre-Budget Report figures, whether or not they will be achieved?
We have been told that 45,000 jobs have gone and that the total target was 84,000—not every year, of course. Where will the Gershon savings come from given, I assume, that they have already been taken into account in the Pre-Budget Report figures? How does the Chancellor hope to meet that target all the way through to 2011?
I wish to say a few words on the crucial area of economic growth. I am glad to see in his place the chairman of the Select Committee on Economic Affairs, whose latest report came out today. Although I have not yet had a chance to read it in full, I have read press briefings—some of which I do not recognise from my brief look at the noble Lord’s report—which seem to say that the Economic Affairs Committee believes that the Treasury’s reports on economic growth and forecasts have been taken into account by the Monetary Policy Committee, which is one reason for our high interest rates.
If the Monetary Policy Committee relied on Treasury forecasts for its decisions on interest rates, I will be even more worried about that committee than I already was. Yet I cannot believe that the Bank of England and the committee really depend solely on those forecasts. It would be incredible—
Lord Wakeham: My Lords, I did not mean to intervene, but the noble Lord has a good read in front of him if that is the case. We did not say that we thought it the sole reason—or anything like that. Around paragraphs 21 to 23 the noble Lord will be able to see what we did say, which was that, for five years, the inadequate forecasting of the Treasury on GDP had contributed to some of the problems with which the Monetary Policy Committee had to deal.
Lord Barnett: My Lords, I accept perfectly that Treasury forecasts are as likely to be wrong as right, like anybody else’s economic forecasts. I noted that the Stern report said that making an economic forecast one year ahead is not always easy. He then proceeded to make one 50 years ahead, which I would assume he accepts is even more difficult. I gather the Treasury has denied that statement, but it does not matter.
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Certainly, Treasury forecasts from time to time are just as likely to be wrong as right, as the noble Lord, Lord Wakeham, and I both know from days in government. We do not need to get too excited about them, although I noted that the committee’s witnesses from the Bank said that of course the decisions were taken on more and much bigger issues than just the Treasury forecasts. As I say, they are not so stupid as to rely solely on those forecasts.
I want to raise a point about the Chancellor’s current forecasts on economic growth, not those made in the past. It is forecast to be about 2.75 per cent this year, which most forecasters of all kinds apparently agree is likely. Next year, it will be 2.75 to 3.25 per cent, as my noble friend repeated today. Again, nobody has quite disputed that as yet, and it may well happen. However, the trend growth figure is probably even more important. We are now being told that the trend growth has gone up to 2.75 per cent—previously, it was 2.5 per cent.
I confirm, sadly, that the Government and the Chancellor do not expect the 3.25 per cent that they might achieve next year to be sustainable. Indeed, 2008 is already forecast to be slightly lower, and it might be lower still in 2009, although inflation will continue at round about the 2 per cent target figure given to the Monetary Policy Committee. Will the Monetary Policy Committee then allow, if I may put it that way, a 2.75 per cent trend rate if it affects the achievement of the remit about the rate of inflation, being 2 per cent—or, rather, 1 per cent up or down?
My impression has always been that the Governor worries more about writing a letter to the Chancellor than about his other remit, which is to consider the Government’s economic policies. He seems to be frightened to death of sending a letter to the Chancellor to say that we might have gone 1.1 per cent over the 2 per cent target. I do not know why he needs to worry in that way. He is obviously not worrying about what his policies on interest rates do to economic growth, which seems to me to be much more important. The remit could be changed to 1.25 per cent above or below the target rate of 2 per cent.
I said in a recent debate that I would not worry if inflation was slightly higher, as long as we had higher rates of sustainable growth. I was then accused of supporting a high rate of inflation. I would certainly support 0.5 per cent more if that gave us a sustainable higher rate of economic growth. I have said this before, but I worry that the Monetary Policy Committee, the Bank of England and the Governor have clearly taken no account whatever of their remit that, “subject to that”—in those famous three words—they are supposed to look at what is happening to economic policy. They do not seem to be doing that at all.
I hope that the Government and the Chancellor are as concerned about that as I am. I cannot see how we will be able to have a sustainable rate of growth higher than the average—I congratulate the Chancellor; I assume that no congratulations will come from the noble Baroness, Lady Noakes, but the past 10 years have seen an average of 2.5 per cent growth. We have
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The question is: is it sustainable at that or even a higher rate? Of course, that depends to a considerable degree on improvements in the level of productivity, to which the noble Lord, Lord MacGregor, referred. He gave one or two reasons why productivity may or may not achieve the figures that we have had up to now.
In the Pre-Budget Report, the Chancellor told us—again, we are talking of averages, which is a difficult thing to do in any forecast—that average productivity growth was 1.9 per cent before 1997 and, since then, has been 2.4 per cent. I do not know how the statisticians measure productivity rates, but I am as suspicious of them as I am of any other forecast. Even assuming they are right, that increase in productivity did not achieve a higher level of sustainable economic growth, which stayed at 2.5 per cent. I assume that it is accepted in the Treasury that it will not be able to sustain a higher rate of economic growth on average than 2.5 per cent, yet we are told that we have a trend growth rate of 2.75 per cent.
Can my noble friend tell us how the 2.75 per cent trend rate was calculated? Under the Monetary Policy Committee’s remit as it sees it—not as I would see it—I wonder whether it would allow a 2.75 per cent rate of growth while it is more concerned with having to write a letter to the Chancellor because we have gone more than 1 per cent above the target rate of inflation.
I conclude—I have gone on too long so I had better conclude—by again congratulating my right honourable friend the Chancellor and looking forward to him doing even better as Prime Minister.
4.14 pm
Lord Northbrook: My Lords, I much enjoyed the speech of the noble Lord, Lord Barnett, even though he was able to sneak in an extra minute while the Whip was away. My thoughts, for what they are worth—not being an economist—on the MPC's role are that I fear that its focus is on inflation at the expense of economic growth and perhaps its role should be more like the Federal Reserve which, as I understand it, has to take a more overall view of events.
What should have been the Chancellor’s last Pre-Budget Report was more interesting for its background of reviews rather than the rest of its content. The Leitch review on skills is a welcome contribution to the effort of improving the country's skill base. The Gowers review of intellectual property is a serious attempt to look at the complexities of the intellectual property system. The Barker review, following on her well written 2004 report on housing supply, contains valid criticisms of the current planning system, although her suggestion of the “son of development land tax” is unwelcome. The Gershon review has also been a major attempt to cut back on Civil Service costs and has achieved some successes. However, Treasury announcements of job cuts do not coincide with the ONS statistics. The Treasury stated in the 2006 Budget that 32,237 Civil Service posts had
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The other main positive factor to emerge from the Pre-Budget Report is that the Chancellor has increased his growth forecast to 2.75 per cent this year, which was well above his original prediction. I ask the same question as the noble Lord, Lord Barnett, on that. I reserve judgment on his decision to raise the growth forecast except to ask the Minister the justification for that. However, it is noticeable that the Chancellor, as the noble Lord, Lord Barnett, stated, downgraded his growth forecast for 2008 by 0.25 per cent.
The Minister may feel that I shall only applaud the PBR, but I have some serious concerns about it. This is not just a case of opposition political criticism, but it is supported by an eminent independent think tank, the Institute for Fiscal Studies, which validates my case that while growth in the economy appears strong, public finances in recent years have been deteriorating. As my noble friend Lord MacGregor stated, the Chancellor has consistently had to revise his borrowing forecasts upwards since 2002. In 2003-04, the Government spent £8.5 billion more than forecast in the previous Budget; in 2004-05, the figure was £6.7 billion; and in 2005-06, it was £5.1 billion. In the 2006 PBR he has increased his future borrowing requirements to 2011 by £7 billion more than forecast in the last Budget. The IFS has also said that the Government have continually pushed forward the date that the current Budget, after adjusting for the cycle, would move back into surplus. That does not take into account, as my noble friend Lord MacGregor said, Network Rail and PFI initiatives of balance sheet spending.
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