Pre-Budget Report

I am sure it does but, equally, other developed countries have the same problem of incorporating public sector pensions. However, I accept the hon. Gentleman's broad point that there is clearly a problem. A more acute one is the borrowing problem. Some 13 to 14 per cent. of GDP is currently being borrowed, and it is being done in a very artificial way because the Government are buying up their own debt in the current strange monetary circumstances. The level of borrowing is unprecedented, I believe, and it is the highest in the developed world except possibly the United States, which is in the rather different position of being able to borrow in its own currency. There is a serious cash-flow problem, which we must take seriously and which is at the heart of the debate. Two policy issues come out of that problem, both of which have been touched on. There is the historical problem of how we got into this situation and who is to blame, and the forward-looking problem of what we do next and how we manage what we all accept to be a difficult balance. The hon. Member for Runnymede and Weybridge (Mr. Hammond) summarised in numbers how we got here and why we have our public financing problem. Roughly a quarter of the problem is accounted for by the cycle, the ups and downs of the economy and the recession, and three quarters is structural. The problem is that the word "structural" is bandied around, but it is never terribly clear what people actually mean when they use it. I know that the Conservative argument has always been that the structural problem is the "hole in the roof" showing the neglect of the budget over many years. That argument is partly true, but the problem with it is that the hole in the roof was actually quite small. I have been doing this job for five or six years now, and I remember debating the matter with the predecessors of the hon. Member for Runnymede and Weybridge, the right hon. Member for West Dorset (Mr. Letwin) and the former Member for Arundel and South Downs, who had an unfortunate slip-up at the last general election. When we talked about the structural deficit then, we were talking about roughly 1 per cent. of GDP. Now we are talking about something rather different—an over-dependence of the economy on the banking sector and to some extent on the ups and downs of the housing market as a source of revenue. It is quite right that we now talk about how to adjust the level of public spending down to one that relates to stable sources of revenue. That is what we mean by the structural debate. In the wider context, it is a little disappointing that although we are talking about that very real problem, which we have to face, there is little discussion of how we can make the British economy much less dependent on banking in the long term. The Chairman of the Treasury Committee touched on this, but it is a fact that in the British economy, the balance sheets of the banks together account for about four times gross domestic product, which is about four times as large as in France or Germany, and much more than in the United States. We cannot sustain that position and it must be changed. Equally, our economy has become highly over-dependent on people's belief that property prices rise and rise, which we also need to address. That is the real structural debate, but we are not having it. On the background and the history, it is certainly true that the bulk of the problem we are now dealing with is structural rather than to do with the cycle of recession. It is almost unique to Britain and it is not shared by the US and other countries. That takes us to what we do next and how we manage the situation. I was struck that in the more temperate passages of the speeches from the Government and Conservative Front Benchers, there was an acknowledgement that that is a very tricky balancing act. It is certainly true that unless action is taken quickly, or at least unless action is seen to be taken quickly, there is a real risk of a sovereign debt crisis, with all the consequences that that brings—higher interest rates and the downgrading of credit worthiness, which is a real issue, not just a hypothetical one. On the other hand, we must balance that against the fact that precipitant action before private consumption and private investment get going risks aggravating and prolonging the recession, which in turn would make the public financing problem even worse. Getting that balance right is incredibly difficult, and nobody should pretend that there is any simple dogma that gives the correct solution. The Government and Conservative Front Benchers quoted economists on various sides of the argument. The hon. Member for Runnymede and Weybridge cited the Financial Times survey of 80 economists that was taken over the new year period. The result was rather predictable: they were roughly divided 50:50 on what we do about the problem. Some were predictably in the half who argued that we should just get on with the job and start slashing the deficit—it included Professor Patrick Minford and Ruth Lea, and Philip Booth of the Institute of Economic Affairs, who have an ideological dislike of the public sector. However, it is fair to say that that half also included sensible, balanced people, of no obvious ideological inclination, who believe, for perfectly good economic reasons, that we must get on with the job. The other half, who were equally reputable, interesting and varied, said, "Actually, we have got to be very careful, and it would be rather foolish to embark on big cuts in public spending before 2011." It is worth while going through some of the names in that half: David Blanchflower and Sushil Wadhwani, former members of the Monetary Policy Committee; Julian Le Grand of the London School of Economics; George Magnus of the UBS bank; Sir Samuel Brittan; John Philpott of the Chartered Institute of Personnel and Development; Andrew Hilton of the Centre for the Study of Financial Innovation; and Peter Spencer of the Ernst and Young ITEM Club. I have no idea of the politics of many of those people, but they are all arguing on good economic grounds that it would be dangerous to embark too rapidly on slashing public spending. The argument is therefore finely balanced. It is worth looking at what Ian McCafferty, the chief economist of the CBI, who is taken very seriously, says. He has probably got the balance about right. He said:""Whoever wins the next general election, fiscal consolidation is unlikely to start much before 2011. The exact starting point is less important than the credibility of the medium term plan, which requires…a clear direction of travel and sufficient detail on quite how the headline borrowing targets will be achieved."" That summarises what the central issue is and takes us to the Treasury Committee report.