Pre-Budget Report

I congratulate the right hon. Member for Oldham, West and Royton (Mr. Meacher), who asked exactly the right questions—how can we stimulate demand and get confidence back into the economy? We differ, however, on how to resolve it. A bloated public sector, which is already extended, is certainly not the way forward, but his central point was correct. There are two groups of key questions that must be asked when considering the pre-Budget report. First, what is the present and future state of the economy, is it acceptable to the capital markets and what are the threats that are facing it? Secondly, does the PBR do anything to resolve the economic mire into which we have fallen? The answers are that the economy is in a far more perilous state than the Chancellor indicated in the PBR, and that the PBR has if anything made matters worse. Our whole economic system is based on confidence—confidence that the currency will be stable and that what we can buy today will be the same tomorrow, confidence that a job will not be taken away and confidence that an overdraft or bank loan will be there when it is needed. That confidence keeps money flowing around the economy and keeps people in work, businesses alive and factories producing. The central question is whether the PBR has done anything to improve that confidence. Has it dealt with the real risk of a strike by the purchasers of our debt, and what would that do to our economy? Equally, has it dealt with what will happen if and when interest rates begin to rise in both nominal and real terms as quantitative easing comes to an end? Of course the £4 billion that was sold yesterday in the gilt markets for 2015 and that fact that that went well is undoubtedly good news, but investor sentiment will be tested again next week for the year 2049 and far beyond, so there is still much to be concerned about in that regard. At the heart of the answer to all those questions is whether the fiscal policy for the next 12 months will be credible. Our ability to borrow is the key to the market's judgment about that and will determine the outcomes in the economy, from how much and in what terms we can borrow to how much individuals can spend. The whole object of policy should be to keep the fiscal reins sufficiently restrained so that interest rates can stay as low as possible for as long as possible. That is not what we received in the PBR—it is as simple as that. In the PBR, the Chancellor talked about the deficit as a percentage of GDP rising to 12.6 per cent. this year. Very regrettably, that may be an underestimate. The Economist Intelligence Unit believes that the figure will be more like 14.5 per cent., by far the highest in the list of 43 countries that it monitors each week. The Government's ambition is to cut their deficit in half. When viewed in the context of any borrowing record before 1997, that makes the current forecast look unrealistic in the medium term, because it is based on some very optimistic growth assumptions. On top of that, the Treasury Committee yesterday said that""although the Treasury believe the Pre-Budget Report contains sufficient detail about the way in which the structural deficit would be reduced, our expert witnesses all criticised the document for not providing enough information about how this will be achieved."" The same report expressed concern about the Chancellor's growth projections, which are fundamental. Why is that so fundamentally important? Owing to the huge amount of money that we have to borrow and raise each year and roll over, even relatively small changes in the interest rate offered on Government bonds could punch huge holes through our finances in future. That is the key point. That is what will make investors—at best—more cautious. Investor confidence in our yawning fiscal chasm remains crucial. If that fails, two things may well happen: we would have to fund the deficit through further cuts in spending or increases in taxes elsewhere, or we would regrettably find ourselves heading towards the situation that Ireland and Greece face. There is a vicious cycle of deteriorating confidence: worsening confidence leads to a further deterioration in fiscal problems, which leads in turn to a further deterioration in confidence, and so on, until we are forced to take actions that would be wholly unattractive and unacceptable to all hon. Members. How large are the holes that could be punched through the national finances? The Debt Management Office said that it needs to sell £225 billion of gilts this year to cover the Budget deficit, and that debts need to be rolled over. A rise in the borrowing rate, for example from 3 per cent. to 4.5 per cent., would certainly cause difficulties. As it is, the Treasury is forecasting paying more than £60 billion a year to meet interest charges on the national debt. How would the Chancellor do that? If his plans for taxation and national insurance contributions are anything to go by, he would raise taxes on jobs and undermine that very employment so as to protect unsustainable levels of spending. I hope my hon. Friends agree that it would be good if he did not get the chance to do that for electoral reasons, but there is always that risk that he will. That may well be the consequence of a steadfast refusal to plan for the future reduction of the deficit for the short term. In essence, that is what makes the PBR so unacceptable. The Government are refusing to publish their predictions of future interest rates costs on Government debt or say what they are likely to be. When challenged by the Treasury Committee on why that information was not provided, the Chancellor said that""at the best times there is a degree of uncertainty, now there is a great deal of uncertainty."" The Government make other projections on many other key variables in the economy, but not on that most crucial one, though it is at the heart of our ability to borrow. The Chancellor confirmed that""within the Treasury we have estimates"." Frankly, he should let us hear what they are. Many will be asking themselves what is going to happen when the Bank of England asset purchase facility stops buying gilts. The supply and demand relationships in the gilts market will alter markedly. If next year the Debt Management Office tries to sell a similar amount to the £225 billion of gilts it sold this year, what will be the price with a £200 billion buyer effectively missing from the market? David Scammell, the fund manager at Schroders, said:""With the Bank of England seemingly set to phase out its quantitative easing buying programme—which has seen it effectively fund the Treasury to the tune of £200 billion over the last nine months—the supply/demand imbalance will clearly tilt towards higher yields…A 'buyers-strike' would accentuate the move. This would be bad news not just for gilt investors, but also for the economy, the banks and the government"." That is at the heart of the dilemma. Since the publication of the PBR, it is becoming progressively more expensive for the country to finance its deficit. The PBR failed to achieve the credibility that the markets were expecting, which is what led to the view that the Government are currently able to hold down the cost of servicing the nation's debt only because those who are buying our gilts expect a change of Government in the very near future, and a Government who inspire confidence in their competence. Frankly, after the shambles of their management of the economy in the last few years, it is hardly surprising. We have heard a lot about PIMCO, the important American investment group. It has said that there is an 80 per cent. chance of Britain losing its triple A rating if the Government do not move swiftly. Scott Mather, head of global portfolio management, told Dow Jones Newswires that the current debt reduction plan""is lacking in conviction and lacking in details"." When asked about a downgrade, he said:""I think so...it's just a question of when...not if. Based on what we know today about the debt trajectory and about the inability to adjust that, I think it's greater than a 50% likelihood. Call it more like 80%."" This comes a day after PIMCO, which is the world's largest bond fund manager, decided to cut back on UK gilts—yet another buyer missing from a market where the Debt Management Office is desperately trying to sell our national debts. A clear measure that can be used to underline this erosion of confidence is how much someone would have to pay to insure themselves against losses suffered by holding our nation's debt. The figures are as revealing as they are shocking. As of last month, the annual cost of insuring $10 million of British debt for five years is $72,000. This is in the same league as Malaysia and Chile and $2,000 more than it costs to insure Slovakia's debt. How do we compare to countries such as France and Germany? One would hope that Britain would be in a similar fiscal position to such countries, but we compare extremely badly. It costs just $22,000 per year to insure $10 million of Germany's debt, and $24,000 to insure France's—a third of what it costs to insure ours. That is a clear judgment by outside markets on the risks caused by the fiscal situation in this country.