Fiscal Responsibility Bill

I did not think it would be possible for anyone's credibility to emerge from this debate weaker than the Government's, but after that speech I am beginning to wonder whether it is not the Liberal Democrats who have damaged themselves more in our discussion tonight. That really was a speech that missed the target entirely, if I may say so, yet it is a target that is pretty easy to hit. The language that others have used about the Bill is overwhelmingly condemnatory—a con trick, vacuous, irrelevant; I will not go through all the quotations that my hon. Friend the Member for Tatton (Mr. Osborne) read out. The one bit I agreed with the Liberal Democrat spokesman about was when he described the Bill as a dangerous and pathetic piece of legislation. The Bill will make bad law. It is declamatory. No explanation has been given about how it will be enforced. It will carry no credibility in the markets. Indeed, it could further erode credibility in the markets, as it may appear no more than a rhetorical substitute for the action we need. In other words, it will appear to be what it really is—mere words. But it is not just the confidence in the markets that I am worried about and that could be eroded. Legislation such as the Bill erodes confidence in Governments and gives politicians and Parliament a bad reputation. It is corrosive of respect for the rule of law and our institutions. The Bill is, of course, a political document designed to substitute for the markets' lack of credibility for the numbers in the pre-Budget report and the Red Book about how the deficit will be filled. That credibility deficit has three main causes. The first and immediate cause is that three quarters of the gap between spending and tax is now acknowledged, even by the Government, to be structural—that is to say, it will remain even after the effects of the recession on the deficit have been unwound. It has been created largely by explicit mistakes of Government policy in recent years, not by the crisis. The policy in question is the Brown spending binge that fuelled the boom and aggravated the bust. The Government increased public spending by much more than the economy was growing, and for many years. Spending has increased from 37 per cent. of GDP to 48 per cent. of GDP. In some ways, that is the most dramatic change in the structure of the UK economy since the wartime measures were unwound. Many of us on the Conservative Benches warned that such rapid spending increases posed a danger for fiscal policy. When I was shadow Paymaster General, I gave several warnings myself. I pointed out that""we could be heading for a serious financial threat to our fiscal position"." It is, I said,""extremely worrying that we should be facing that threat at this point in the cycle."—[Official Report, 17 March 2005; Vol. 432, c. 487.]" The second cause of the credibility deficit—I said that there were three—is the sustained lack of transparency in the Government's accounts. If the markets cannot be sure of the Government's figures, they will fear the worst. Examples of the impenetrability of the accounts are legion. What really is the scale of the Government's liabilities? We cannot be sure. We have had some discussion of that this afternoon. It will fall to an incoming Conservative Government, aided by the office of budget responsibility, to find out. The third main cause of the collapse of credibility has been the emphasis in presentation on language rather than substance, and spin before action in the conduct of fiscal policy over a substantial period. The Bill is just one further illustration of that phenomenon—a phenomenon that we have had to endure for years. For example, we now know that the so-called fiscal rules were mere words. Their credibility was shot when the Prime Minister, who was then the Chancellor, fiddled his start date for the business cycle in July 2005, immediately after the election, in order to avoid admitting that he was breaking his own fiscal rule. Empty economic rhetoric has been the Prime Minister's stock in trade for a long time. It was, after all, the Prime Minister who, as Chancellor, as late as 2007 said in the House that""fiscal discipline is the foundation of the strength of Britain's finances."—[Official Report, 21 March 2007; Vol. 458, c. 816.]" Handing the assumptions in the Red Book to the Comptroller and Auditor General of the National Audit Office for supposed vetting was another gesture that eroded credibility. It sounded good but it was an insubstantial thing to do, as the markets soon discerned and as the Comptroller and Auditor General more or less admitted in evidence in public session in a Committee. In the end, it has only made Labour's credibility problems even worse. I said at the beginning that the three main causes of the credibility deficit—the structural origins, the lack of transparency, and the empty rhetoric—cannot be addressed by Labour's current measures, but they can be assuaged by other practical steps. First, on the structural gap between spending and tax, the obvious answer is to set out how the gap will be plugged. That is what we have just been discussing with the Liberal Democrats. In practice, that means explaining how public spending will be cut. It means reversing a proportion of Labour's spending binge. But Labour have done the opposite. They have announced increases in spending of £3.5 billion and they have even cancelled the spending review. That leaves a gaping hole in the credibility of Labour's overall financial policy. Members of the Conservative Front-Bench team have been courageous in coming forward with a number of tough measures in recent announcements and have talked of an age of austerity. It is fair to say that the Conservative party has gone further than either of the other two in making a clear case for the reality of the situation—the reality that we will have years of very difficult fiscal policy before we can get overall financial policy back on an even keel. More will need to be done by us from within Government, where I hope we soon will be, to find out the true scale of the deficit and to make it fully transparent. Then an analysis of the relevant merits of various additional measures can be done with full civil service support. I cannot stress too strongly that it is only by working with civil servants, drawing on their expertise and reviving a Whitehall culture of thrift, which has sadly been lost, that we can hope to restore Britain's public finances. The main reason for the binge was political, but a major subsidiary reason has been Labour's failure to mobilise Whitehall to the cause of the efficient use of public money. The second point that I want to make in this respect is on the credibility of the numbers on the basis of which decisions will be taken. Have Labour really been cooking the books? Perhaps scarcely at all. Perhaps a lot. We do not know. Twenty years ago I left the Treasury and went to spend a very enjoyable year at Nuffield college, Oxford. There, among other things, I wrote a short book on public expenditure and fiscal policy. Two of the suggestions in that book, eventually published in 1996, were to create an independent national statistical office and to create a fiscal policy committee charged with the task of producing the forecast and thereby bolstering the credibility of the Government's accounts. From the Front Bench a little over five years ago, I worked up those proposals at the request of the then shadow Chancellor, my right hon. Friend the Member for West Dorset (Mr. Letwin). They were subsequently published as "The Independent Fiscal Projection Committee" and "A Framework for Statistical Independence". The Government responded to the first after the election by giving independence to the Office for National Statistics, but the second pillar of the plan was wholly ignored by the Government. I was delighted when my hon. Friend the Member for Tatton (Mr. Osborne) took up the latter idea. His proposed new body, which he has called the office for budget responsibility, goes further than I proposed in 1996—a good way further—and further than my right hon. Friend the Member for West Dorset suggested in that document. I believe that what my hon. Friend has proposed will contribute to the economic credibility needed to reduce the deficit in one crucial respect, which he mentioned in his speech. It will put the Government at one remove from the forecasting business, with all the temptations to fiddle the forecasts that can come with that. Those two measures that I spoke about earlier, a credible plan to reduce public spending and a credible, independent, depoliticised and verified forecast, will act on the credibility deficit. That is important because, as the right hon. Member for Birkenhead (Mr. Field), who is no longer in his seat, pointed out, the credibility issue is not about mere words. It comes with a price tag, potentially huge in terms of loss of market confidence in plans to fund the deficit and service the debt stock. It is the Governor of the Bank who told us that the deficit, at nearly 13 per cent. of GDP is "truly horrendous". The debt stock will have doubled as a percentage of GDP to nearly 80 per cent. shortly, as the spokesman for the Liberal Democrats, the hon. Member for Taunton (Mr. Browne) pointed out. Even if credibility is eroded only to the extent that it represents, say, 50 basis points on debt servicing costs, we are talking about billions and billions of pounds in higher taxes or lower public spending for a generation. Even more perilously, the loss of credibility could manifest itself in a collapse in people's confidence in the currency.