Pre-Budget Report

My Lords, I thank the Minister for explaining to the House why we should approve this submission of the Pre-Budget Report to the EU. I believe that it is a requirement of a European Council regulation and a related code of conduct that the submission deadline is 1 December. In general, the lateness of the PBR means that we have been given an extension until 1 January, but here we are on 27 January in order to approve the submission. Furthermore, the relevant document, the UK convergence programme, while dated December 2008, was announced as available in a Written Statement only on 14 January. I am sure that the Government are not keen to submit this dreadful story of economic mismanagement to the EU, but will the Minister explain why they have ignored all the deadlines? My usual line in connection with these Motions, which come up once a year, is that this House should not care over much about what is submitted to Europe in the name of the growth and stability pact. We are fortunate to remain outside the euro, a topic that we will debate more fully on Thursday, so our adherence to Europe’s rules has no real meaning. However, so awful is the content of the PBR and the convergence programme document that I have revised my opinion. Anything that gets an international spotlight on this Government’s appalling record is to be welcomed. The Government deserve every criticism or rebuke that the Commission lays at their door. The Government have breached the Maastricht criteria of 3 per cent for deficits in the past and have generally used words that have implied that all was well because they were doing the right things and had strict fiscal rules, and so on. However, I do not believe that it has ever been the case that a growth and stability pact document has had to own up to a treaty deficit peaking at more than 8 per cent and remaining at more than 3 per cent for the whole of the forecast period. Nor has the treaty debt ratio been above the 60 per cent limit, but this convergence submission has that in every year, and the figure rises to 68 per cent on the EU’s measurement rules. The Prime Minister used to lecture the world on his fiscal rules, on prudence and, most of all, on bringing an end to boom and bust. He and his successor as Chancellor threw prudence out of the window some time ago, which was followed late last year by the fiscal rules. The Prime Minister is incapable of admitting that he has made even a tiny error. He has refused to admit that his boast about boom and bust was just plain wrong. He refuses to own up to the bust, which we are assuredly now experiencing, having anything to do with him. Perhaps I may read a brief extract from an article in the New York Times on 22 January. It states: "““An island nation that bulked up on debt and lived beyond its means. A plunging currency. And a financial system edging toward nationalization … it is no wonder that observers have started to refer to London as ‘Reykjavik-on-Thames’””." The Prime Minister blames the global financial crisis originating in the US and the Minister today repeated that view. But it is certainly not the whole truth. The Prime Minister, when he was Chancellor, engineered the UK becoming overburdened by debt. The Government like to quote the OECD as having said that our debt level was virtually the lowest in the G7, although the OECD will not say that now as public sector debt rises to more than £1 trillion, nearly 60 per cent of GDP. That ignores the cost of the bank rescues, PFI and unfunded pension liabilities. It amounts to £17,000 for every individual in this country. However, to get a real fix on the overleveraging of our economy, we have to add corporate and personal debt, which we have warned for years was out of control. According to an analysis by Citibank, that takes our debt ratio to more than four times GDP, which is more than double that of any other country in the G7. The publication of the PBR in November was the first time that the Government admitted publicly that their growth forecasts were completely wrong. Last week, the ONS confirmed that we are officially in recession, with the steepest quarterly GDP fall since 1980. The European Commission came out last week with its own forecasts, which showed the UK as the worst performer in the G7 and virtually at the bottom of the EU league. In the PBR, we were told that there would be a quick dip into recession this year and that we would start to come out of it in the middle of the year. However, the Commission thinks that this year we will go backwards by almost 2.7 per cent, which is nearly three times the Government’s central forecast. In 2010, according to the Commission, we would just about emerge into positive territory, compared to the Government’s wishful thinking of nearly 2 per cent growth. If the Government were a company, they would by now have had to issue a profit warning. However, the Government are, in effect, reissuing the figures from the PBR in the convergence programme document as if they were still valid, when they have clearly been overtaken by the increasing pace of the recession. Typically, the Government say that they will revise their forecasts in the Budget, whenever that is, but that is simply not good enough. It does not take a genius to work out that, as the recession deepens, the horrendous borrowing figures will get even worse and the need for action will become even more evident. That brings me to the alleged centrepiece of the PBR: the fiscal stimulus, for which the Prime Minister likes to claim world leadership. It is clear that the temporary VAT reduction has bombed. Retailers thought it a costly waste of time and I have yet to meet a shopper tempted by an extra 2 per cent discount. We now hear reports of delays in the accelerated capital spending part of the stimulus package. There is a big question mark over the effectiveness of the Government’s fiscal stimulus programme in the PBR. We question the policy itself. In a weak economy, already burdened by high debt and budget deficits, the scope for increased borrowing, beyond that caused by the automatic stabilisers, is very limited. We are not, as the Government like to claim, on our own in this. Both the IMF and the OECD have emphasised that fiscal stimuli need to be affordable in the context of sustainable public finances. The European Commission said in its recovery plan document, to which the Minister referred in his opening remarks: "““For those member states, in particular outside the Euro area, which are facing significant external and internal imbalances, budgetary policy should essentially aim at correcting those imbalances””." That was Eurocode for, ““The UK has got it wrong””. We have argued for months that the main problem in the economy is a lack of credit and we proposed a national loans guarantee scheme. Bank rescue version 1 failed to restore credit. In the last two weeks we have seen bank rescue version 2 and a package of lending measures aimed at smaller businesses. We wish them well but are far from convinced that they will solve the problems faced by the business community. Beyond that, we believe that fiscal stimuli, in the context of a bust economy, must come from expenditure savings, not debt. We believe that we should create an era of responsible spending and, if returned to power, we plan to set up new arrangements to root out and deal with wasteful spending. We would also put together serious plans to start to reduce debt and not let it carry on rising. Germany’s fiscal stimulus was by no means a mirror of the UK version, as the German one was accompanied by a constitutional amendment that requires Germany’s debt to be reduced each year. The foreign exchanges have passed their own verdict on the viability of the Government’s plans, with the pound losing around 30 per cent of its value last year, the largest depreciation since the collapse of the Bretton Woods system of fixed exchange rates, according to the Monetary Policy Committee. Investors are clearly wary about the value of the pound. We have yet to see whether this will affect the financing of the Government’s debt mountain. Other, more balanced economies are having difficulty in financing their debt and we can observe the steadily rising credit default prices telling their own story about the markets’ view of the UK. I have just three questions for the Minister. First, the convergence programme notes that unemployment has risen to 5.75 per cent, but that has already been overtaken by the official November figure of 6.1 per cent. Commentators now expect that to rise to over 10 per cent. What assumptions about unemployment were made in the PBR and what impact will each 1 per cent above that forecast add to the borrowing requirement? Secondly, the PBR estimated that next year the Government would have to borrow an eye-watering £118 billion, the highest figure as a proportion of GDP on record. All the indications are that the sum will turn out to be even higher. Are the Government confident that they can raise this debt at a reasonable price? Thirdly, the Government have announced tax rises for those on higher incomes with a new 45 per cent tax rate, thus breaking new Labour’s promise when it came into power. The IFS has already warned that the impact of this could be negative. Will the Minister give an assurance today that the Government will not raise top rates further? The submission to the EU is a sorry document. It shows the depths to which nearly 11 years of Labour misrule have taken us. The Government used to blame everything bad on what happened before 1997; now they blame the rest of the world. The truth is that they inherited an economy that was growing strongly, with a stable currency and low inflation, and they have completely blown it.