Pre-Budget Report 2009

My Lords, Alistair Darling’s decency and dignity under pressure are not in doubt. Last week, fate handed him a once-in-a-lifetime chance to carve a lasting reputation as a Chancellor of granite. Alas, he flunked it, or, to put it another way, he was flunked by his neighbour and Mr Balls. As my noble friend Lord Lamont reminded us, on the same day and at the same time across the Irish Sea in Dublin, the Finance Minister, Mr Brian Lenihan, insisted that continuing to borrow and waiting for growth were not a viable proposition. He reduced unemployment, child and weekly carer’s benefits and sliced 5 to 8 per cent from public sector salaries as well as presenting other measures to clip the Irish deficit. He refused to raise taxes. A day later, that first-class newspaper, the Irish Times, took Mr Lenihan to task for not carrying out remedial action sooner, yet it congratulated him on his boldness and courage in putting the country first and leading from the front. It is now clear that, in Westminster a year ago, Mr Darling’s previous PBR amounted to yet another dodgy dossier with counterfeit forecasts. Take Treasury predictions on spending: for the ninth successive year, government spending has exceeded the Government’s own forecasts. Do Ministers and spin doctors—those grey squirrels of modern politics—tweak the figures against the advice of officials, I wonder, or are the official forecasters so gelded that the permanent secretary should recruit replacements? Again, a year ago, Mr Darling claimed, with all the solemnity of an Edinburgh advocate, that our economy would start to recover in the third quarter of this year. I then submitted to your Lordships that this was fantasy finance. It is still fantasy finance. Last year and this year in the PBR, Mr Darling announced to general astonishment that our growth rate in 2011 would reach 3.5 per cent. So a growth rate receding by 4.75 per cent suddenly leaps to 1.5 per cent in 2010 and 3.5 per cent in 2011. Yes, it is fantasy finance, because in only one year of Mr Brown’s boom years did the United Kingdom achieve a growth rate approaching that scale. How can Mr Darling dare ask us to swallow this assertion on which his entire fiscal framework is based for a second year running? It is the impurest fiction and, when it comes to Treasury fiction, truth is always a lagging indicator. Mr Darling deferred all major spending decisions in his Pre-Budget Report, yet he purports to be able to halve the deficit in the next four years without showing us how that masquerade can be achieved in practice. His explanation was non-existent last week. That was exacerbated by the Treasury’s refusal to publish debt interest figures in the official papers. The size of our debt is the worst in peacetime. Our households are more indebted and our dependence on financial services is greater than any other western nation’s. Three months ago, the IMF warned that the UK will endure a sharper decline in its potential growth rate than the eurozone, the USA and Japan. With respect to the noble Lord, Lord Radice, let me say that two years ago, before the crash, three or four Members of your Lordships’ House highlighted that our public finances were already in disrepair. Yet still we are borrowing more than other economies. By vaunting that his policies are executed from a position of strength, is Mr Darling stretching the forbearance of the bond markets and the credit rating agencies? The so-called bond market vigilantes are prowling around, paying special attention to the United Kingdom and Greece, where deficits are the highest in Europe, at around 13 per cent of GDP. This week, even the Greek Prime Minister admitted that his country had lost every trace of credibility and promised radical spending curbs soon. My noble friend Lord MacGregor referred to the fact that, last week, bond investors displayed misgivings about the United Kingdom by a sell-off that pushed gilt yields to the highest level since 2008. Some eminent City economists, such as Michael Saunders of Citigroup, contend that a bond market rout could still occur before a general election if gilt holders—most of them foreign—conclude that Mr Brown’s political gamesmanship has exceeded their patience. If the Government survive without a bond market commotion until the general election, it will fall to the next Administration to take swift, effective and credible action on public spending, along the lines of Mr Lenihan’s package in Dublin last week. In our last economic debate, on 25 November, I devoted my speech to the dangers of inflation. The British are prone to inflation as to a genetic disease. Alan Greenspan, the former chairman of the Federal Reserve, and Spencer Dale, the Bank of England’s chief economist, have both warned that inflation presents us with a special concern. Yesterday’s inflation figures confirmed those anxieties. Inflation must be staunched at source, otherwise it will impede our ability to tackle the deficit and contract the size of the state. Again and again, inflation has exceeded lax Bank of England forecasts. Excuses are always offered. However, a counter-case is clear. Oil costs will probably rise; the VAT reversal and stamp duty holiday will reach an end; bond yields on two-year gilts are at a record low; and asset bubbles, such as property in the Far East, spell potential trouble and could multiply. The asset price index has risen by 60 per cent over eight months and the gold price seldom lies, while commodity brokers in the Chicago pits are licking their lips. Of course, sterling is weaker, which will swell inflation as consumers pay higher prices for imported goods. We recover without inflation or we do not recover at all. This is yet another reason why, after May, the Government must slice the deficit with speed and intensity, otherwise inflation will become an even higher risk with unsettled bond markets. In May, the Prime Minister, whatever his hue or doctrine, must exhibit convictions underpinned by courage. He must parade the character to resist the charms and threats of vested interests and pressure groups and, above all, he must command the driving powers of leadership and tenacity to resist the trifles of tonight’s news and tomorrow’s headlines. The country found those qualities 30 years ago and they are now called for once more in the national interest.