The Chief Secretary to the Treasury (John Glen) I beg to move, That
the Charter for Budget Responsibility: Autumn 2022 update, which
was laid before this House on 26 January, be approved. Before I
start my remarks, I pay tribute to my predecessor, Mr Robert Key,
the former Member for Salisbury, who sadly died on Friday. Robert
was a Member of Parliament for 27 years, a distinguished
parliamentarian and former Minister, and a dedicated Anglican. I
put on record my...Request free trial
The Chief Secretary to the Treasury ()
I beg to move,
That the Charter for Budget Responsibility: Autumn 2022 update,
which was laid before this House on 26 January, be approved.
Before I start my remarks, I pay tribute to my predecessor, Mr
, the former Member for
Salisbury, who sadly died on Friday. Robert was a Member of
Parliament for 27 years, a distinguished parliamentarian and
former Minister, and a dedicated Anglican. I put on record my
affection for him; my thoughts and prayers are with his wife Sue
and the rest of his family.
The charter for budget responsibility is, at its heart, about how
we chart a course for growth. It is a blueprint for managing the
public purse responsibly. It is a path to cement stability in our
economy and invest in public services. It is, in the current
economic climate, about acknowledging that public finances remain
vulnerable and knowing the risks that arise from debt being close
to historic highs. This Government take these risks extremely
seriously and believe that stable public finances are a key
ingredient in the success of our economy, both today and in the
future, in the south and the north, for the elderly and our
youngest. This charter sets out this Government’s approach to
managing the nation’s money so that everyone can see we are being
prudent with the nation’s finances.
We debate this charter today in the face of difficult economic
times. Like many countries, the UK faces the twin challenges of a
recession and high inflation, as global energy prices have been
exacerbated by Putin’s war in Ukraine. We have turned the corner
in the fight against inflation that has plagued nations across
Europe. Inflation has now started to fall, with inflation in the
UK lower than many EU countries. A warmer winter has helped keep
a lid on energy prices that jolted upwards following Putin’s
illegal war in Ukraine. There is, however, a challenging road
ahead. The International Monetary Fund says that 90% of advanced
economies are predicted to see a decline in growth this year, and
that is why we are taking action to support the economy through
these extremely challenging times.
(Wokingham) (Con)
Does the Minister not think there is some difficulty in trying to
steer the economy on the basis of a five-year forward debt
forecast when the official forecasters have been more than £100
billion out in two of the last three years, and £75 billion out
this year with a one-year forecast?
I will address the provisions of the charter and my right hon.
Friend’s point directly in a few moments. As the Chancellor set
out last week, we have a credible plan to generate economic
growth by getting people back into employment, reinvigorating a
culture of enterprise and continuing to drive up standards in
education, and ensuring that that happens everywhere. The
Chancellor’s plans to generate growth need to be underpinned by
sustainable public finances, but the global economic shocks we
have faced mean that borrowing remains high. We are expected to
borrow £177 billion this year—double pre-pandemic levels. That is
contributing to ever larger public debt.
Along with high debt in a time of rising inflation and interest
rates comes the £120.4 billion we are projected to spend this
year on debt interest alone. Let me remind the House why that is.
For almost two years, in the face of a historic pandemic, we took
unprecedented, bold, decisive action to support people, jobs and
the economy. We rolled out vaccines at a world-leading pace, we
paid 80% of people’s wages, and we gave grants to businesses to
help cover their bills. The costs of inaction in the face of
covid-19 do not bear thinking about. I am proud to represent a
Government who took the big decisions to keep the public and the
economy healthy.
As inflation rose to figures we have not seen in more than 40
years, led primarily by increasing energy prices, we again took
action to safeguard the nation by contributing to people’s bills.
Nobody in this Government would argue that that is not money well
spent, but we are also cognisant of the facts. At nearly 100% of
GDP, public debt is at its highest level since the early 1960s.
It would not be sustainable to continue to borrow at current
levels indefinitely. If debt interest spending were a Department,
its departmental budget would be second only to the Department of
Health and Social Care. Not only does that direct our resources
away from vital public services, but for those of us who have
paid attention to the economy, it is clearly unsustainable in the
long run. It is unsustainable because increasing debt leaves us
more vulnerable to changing interest rates and inflation. For
every percentage point increase in interest rates, the annual
spending on debt will increase by £18.2 billion. That is money we
could be using to invest in schools or hospitals and in the
transition to net zero.
Aside from investing in the services that we need and that so
many rely upon, there is another important moral point to debt.
Letting our debt increase is simply racking up debt on the
nation’s credit card and handing the bill to our children and
grandchildren. We are not alone in our ambition to reduce debt as
a share of GDP over the medium term—Germany, Canada and Australia
have made similar commitments. It is not just numbers on a
spreadsheet; it will have a material impact on the lives and
living standards of those who have not yet been born.
Instead, we choose a responsible, fair approach. We are
demonstrating fiscal discipline, which will support the Bank of
England in bringing inflation down. That is carefully balanced
against the need to support the most vulnerable and to protect
vital public services. At the autumn statement we announced a
series of difficult decisions worth around £55 billion to get
debt down, while ensuring that the greatest burden falls on those
with the broadest shoulders.
All Members will hope that, having faced the pandemic, war in
Europe and a bout of rising prices, we will have seen the worst
of this economic storm. The truth, however, is that we do not
know exactly what lies ahead, and we need to create the room to
respond comprehensively in the future, should another shock
occur. Last year my right hon. Friend the Member for
Middlesbrough South and East Cleveland (Mr Clarke) came to this
place to approve rules to guide us on a path to strengthen the
public finances after the worst of the pandemic had passed. By
the third year of the forecast, in 2025-26, those rules require
underlying debt—that is, public sector net debt excluding the
impact of the Bank of England—as a percentage of GDP to be
falling and everyday spending to be paid for through taxation by
the same year.
Since then the context has changed yet again. To continue
protecting the most vulnerable and investing in public services,
the Chancellor updated the fiscal rules at the autumn statement,
and we are updating the charter for budget responsibility. It
will give everyone the confidence and certainty that we are going
to repair our public finances. It will provide the foundation for
long-term growth. In following them, we will be able to get debt
down while protecting the public services upon which we all rely.
The rules require that we reduce the deficit so that debt falls
as a share of the economy in five years’ time. Expenditure on
welfare will continue to be contained within a predetermined cap
and margin set by the Treasury unchanged from the level set in
2021. I am pleased to say that the Office for Budget
Responsibility confirmed in November that we are on track to meet
all our rules, with debt falling and the deficit below 3% GDP in
the target year of 2027-28.
Aside from the fiscal rules, the charter remains unchanged. We
continue to be at the forefront of financial management through
our monitoring and management of the broader public sector
balance sheet. The independent Office for Budget Responsibility
provides transparency and credibility via its economic and fiscal
forecasts. Many colleagues have remarked on the important
principle that our fiscal plans are transparent, fully costed and
accompanied by an independent assessment of the economic and
fiscal implications. The Government agree with this principle.
There may of course be extraordinary circumstances where that
cannot be the case, as we saw during the pandemic, and it was
right not to delay announcing critical help for households and
businesses, but in normal times major fiscal announcements should
be made with one of the OBR’s two forecasts. As is usual, the
spring Budget on 15 March will be accompanied by a full OBR
forecast.
This updated charter puts stability first. It sets a credible
plan to deliver on the Prime Minister’s key promises to get debt
falling and to halve inflation, and it fosters the conditions for
growth. It continues our historic support for households, as it
allows us to increase the national living and minimum wage and
pensions. It maintains gross investment at record levels in
innovation, infrastructure and education. We have protected the
most vulnerable and vital public services, and we are protecting
the economy. After making the difficult decisions at the autumn
statement, today we have a choice: we can sit idly by and let our
economy slip into disrepair, or we can secure the foundations of
our future by protecting the foundations of our economy. For
those reasons, I commend this motion to the House.
7.38pm
Mr (Wolverhampton South East) (Lab)
May I begin by echoing the Chief Secretary’s condolences to the
family of , his predecessor as MP for
Salisbury?
It does feel like this is the time of the year when we have the
annual tribute debate. This
exercise began in his period as Chancellor, but little did we
know—and, I suspect, little did he know—that when he started this
exercise more than a decade ago, he would end up being denounced
as part of the left-wing economic establishment. The purpose of
the exercise has always been more political than economic. It was
to show that no matter how much the Government had set everything
on fire, they could turn up here and portray themselves as
paragons of fiscal rectitude—a little bit like angelic choirboys
smelling strongly of petrol. The trouble for Ministers is that
since this exercise was first conceived over a decade ago, there
is now a long economic record for everyone to see and, perhaps
even more seriously, a bitter economic reality and present that
people are living through.
The UK is the only G7 country not to recover its pre-covid
economic position, under the stewardship of the Conservative
party. Controlling debt was supposed to be a big part of this
exercise. Debt used to be numbered in the billions. It now stands
at £2.4 trillion. So successful has this exercise in controlling
debt been that we need a whole new word to describe it; it is now
counted in trillions. Of course covid added to this, as it did in
all countries, but lest Government Members claim this is all
about covid, let us remember that most of the increase was built
up before the pandemic.
There really is a gulf—one the size of the Grand Canyon—between
the statements of fiscal probity and sound financial management,
and the reality of the economic performance. When we look to the
future, we see that this Government have earned the very dubious
distinction of the UK being downgraded by the International
Monetary Fund in its growth forecast, while the rest of the world
has been upgraded. It is one thing to move in line with others,
but to move in the opposite, downward direction is an achievement
we should not want.
Will the right hon. Gentleman give way?
Mr McFadden
I am happy to—I thought mention of the IMF might bring the right
hon. Gentleman to his feet.
I would like to know the Labour position. The European Central
Bank is not selling debt at a loss into the market because it
does not want the losses. The Americans are selling debt into the
market at big losses, but they do not send the bill to the
taxpayer. Only the Bank of England insists on both making huge
losses and sending the bill to the taxpayer for immediate
payment. Who is right?
Mr McFadden
I suspect that the Bank of England will not be the only
institution attacked by the right hon. Gentleman tonight, but I
remind him that part of the purpose of the charter is to restore
our faith in the economic institutions, after what happened less
than six months ago.
The IMF has forecast that the UK will have the lowest growth
among developed countries for the next two years: bottom of the
league on the record and bottom of the league on the forecast.
And yet still the Government come along tonight and table a
debate supposedly designed to enhance their economic
credentials.
Well, what will the effect on those credentials be of the
re-emergence of the former Prime Minister at the weekend? I have
to give her 10 out of 10 for timing. What better time to write an
article saying that her mini-Budget was right all along than the
day before the Chief Secretary has to come here and stand up for
the Government’s fiscal stability record? What better moment for
her to say to members of pension schemes that had to be put on
life support as a result of her mini-Budget that it was not her
fault? No contrition for trying to borrow from my constituents in
Wolverhampton South East in order to pay for a tax cut for people
earning over £150,000 a year; not a word of apology to the
millions of mortgage holders left paying a Tory mortgage penalty
because of the reckless irresponsibility of the Conservative
party. Just when the Government were trying to bury the memory of
that mini-Budget under 10 feet of concrete, up she pops—like one
of those hands coming out of the swamp at the end of the film—to
tell us it was all someone else’s fault.
For me, the best bit in the article was when, in a long list of
culprits, other than the Government that actually introduced the
mini-Budget, the former Prime Minister blamed the Treasury civil
servants for not warning her about the impact on pension schemes.
I had to ask myself, were these the same Treasury civil servants
that she had spent the whole summer scorning and disparaging?
Were they the same Treasury civil servants whose boss was shown
the door on the first day of her premiership? In what world are
we expected to believe that the former Prime Minister, her
Chancellor and the Government would have listened to a word those
civil servants said, when all along she defined them as being
part of the problem and not part of the solution?
The real problem for the Prime Minister, the Chancellor and the
Treasury is that this is not going away. The last Prime Minister
is not a lone voice, and the more that Conservative Members
realise the Government have nothing left in their tank and are
resigned to managing decline, the louder the drumbeat will
become; and it will be cheered on by the same newspapers that
gave such a warm welcome to that mini-Budget in the first place.
The Prime Minister, demonstrating the sureness of touch with
which we have come to associate him by now, has labelled those on
the Government Benches calling for tax cuts “idiots”. That is his
phrase, not mine—about those on his own side. And yet today,
fearful of them, the Prime Minister now says he will listen.
Which is it? Are they idiots or is he listening? This weekend’s
intervention, and those who cheer its argument, will have the
Prime Minister and the Chancellor looking over their right
shoulders every day between now and the election, when they
should be focused on the needs of the country.
This debate is supposed to be about all of us swearing fealty to
fiscal rules, but there is another problem: since this Government
came to office, they have broken their fiscal rules 11 times.
They have had even more sets of fiscal rules than they have had
Chancellors and Prime Ministers over the past year. If you don’t
like one set, don’t worry—there will be another one along in a
while! The Chief Secretary himself outlined how these rules were
different from the ones we debated this time last year in the
tribute debate of 2022, and
each time we are expected to treat the new rules as though they
were the ten commandments.
The second part of this is about respecting the role of the
Office for Budget Responsibility. The document before us is very
clear about that. It talks in great detail about the importance
of that role. Indeed, when it was first launched, the Economic
Secretary to the Treasury of the time set out the benefits of the
OBR, making clear the value of its
“strong, credible, independently conducted official
forecasts”—[Official Report, 14 February 2011; Vol. 523, c.
747.]
She said that the establishment of the OBR and its independence
from the Treasury meant that
“Governments will be reticent about introducing policies that
seem to take them off course”—[Official Report, 14 February 2011;
Vol. 523, c. 749.]
Well, there was not much sign of that reticence last year as the
Government crashed the economy, caused a run on the pound, caused
mortgage rates to rise and put pensions on life support. Indeed,
we had a real-time lesson in the cost of disparaging our
institutions—institutions that the Conservative party used to
care about. But tonight, even after that experience with chapter
4 of the charter, we are back to a hymn of praise for the
OBR.
The real problem here is not just inconsistency, but credibility.
I am afraid that the many-year record since the idea of this
charter was first conceived a decade or more ago has meant that
the Conservative party has now forfeited the right to call itself
the party of sound management; it has forfeited the right to call
itself the party of growth, because the record on growth has been
abysmal; it has forfeited the right to call itself the party of
low debt, because debt has rocketed; it has forfeited the claim
to careful stewardship of the public finances, with billions lost
in bounce back loan fraud, personal protective equipment waste
and tawdry stories of one dodgy contract after another; and it
has forfeited the right to call itself the party of low tax,
because the tax burden is at its highest for decades.
What, after all that, has this been for? We have record waiting
lists, trains that people cannot rely on, and delays and backlogs
everywhere. In fact, there is not a single public service that
runs better now than it did 13 years ago, when the Tories took
office. Low growth and high tax for a worse outcome—that is the
record. When people are faced with the question, “Are you and
your family better off?”, the answer is no.
Two weeks ago, we had the Chancellor’s speech on the way forward.
He had four Es, and more than one person said that the biggest E
was for empty, because the real problem for the Conservatives is
that, when it comes to growth, the only policy they reach for is
unfunded and untargeted tax cuts, and when they tried that in
September, it blew up in their faces. Growth is the right
question for the country, but it does not come from the
discredited idea of trickle-down economics. It comes from the
efforts of all of us—from every businessperson with a new idea
and the drive to make it happen, and from making sure we use the
UK’s strengths to make the most of the green transition that is
coming, rather than standing back and allowing those investments
to go elsewhere. It comes from every teacher equipping a pupil
with new skills and knowledge, and from not having 7 million
people on NHS waiting lists, keeping many of them out of the
labour market. Talking of former Prime Ministers, it does not
come from saying “F*** business”, but from a modern partnership
with business that brings in the long-term investment the country
needs. Most of all, in a knowledge economy like today’s, growth
has to come from everyone, not just from a tiny proportion of
people at the top.
Fiscal stability is an essential foundation for what we have to
do—I agree with the Chief Secretary on that—but it is not an end
in itself. It has to be the foundation for meeting the challenges
the country faces and for giving people a more prosperous future.
After many years of this debate, we look less at the latest
version of the rules and more at the gap between claim and
reality, because after crashing the economy and leaving the
British public to pay the bill, the Government have no
credibility to come forward and claim to be the champions of
fiscal stability.
The idea for this charter was born in another political time, as
I said at the start, and if it did have a purpose, events since
have rendered it an unconvincing exercise to say the least. It
certainly has not kept the Government to their fiscal rules,
which have been broken many times, and it is unlikely,
particularly after recent months, to convince anyone outside this
Chamber that the Government have got the economy back on
track.
Mr Deputy Speaker ( )
If I may slightly abuse my position in this Chair, let me say
that I only heard from the Minister on the Treasury Bench at the
start of this debate of the death of . He was a dear personal friend,
an excellent and dedicated constituency Member of Parliament, and
a first-rate Transport Minister. I know that those in the House
who knew him will wish to share their thoughts with Sue and his
family.
I call the Chair of the Treasury Committee.
7.52pm
(West Worcestershire)
(Con)
Thank you very much, Mr Deputy Speaker, and may I associate
myself with those passionately expressed words from the
Chair?
I did think there might be a few more people here this evening to
talk about the charter for Budget responsibility, after we have
had so much debate across the country about the Office for Budget
Responsibility and its forecasts over the last year or so. This
was the year when the Office for Budget Responsibility made it
into the headlines on numerous occasions, so I thought there
might have been a bit more of a heated debate. I listened to the
words of the right hon. Member for Wolverhampton South East (Mr
McFadden), and I am not sure I understand at the end of his
speech whether the Opposition are in favour of tonight’s motion
and of the charter. I am not sure whether they are in favour of
Budget responsibility. In fact, I did not hear any suggestions at
all for solutions to the criticisms that he raised.
This evening, I reiterate, for those who were not here in early
2010, the rationale for the setting up of the Office for Budget
Responsibility. It was because, in the Treasury of 2008, 2009 and
early 2010, it was far too easy for the Government simply to make
their own forecasts and to mark their own homework. I think there
is merit in having someone external to the Treasury and oblivious
to ministerial pressure come up with a set of forecasts. We all
acknowledge that none will be perfect, or have perfect foresight
about the future, but that externality means there is a way of
marking the Treasury work and the Treasury projections. A
Chancellor can certainly make an argument about why they may take
issue with some of the elements going into the forecast, and
there is often a more dynamic quality to tax revenues than is
perhaps put into some of the external forecasts referenced this
evening. A Chancellor can certainly have a debate about the
numbers, but we do need to remind ourselves of the importance of
this process and its external nature.
The other point I want to raise is about the fiction, which the
Treasury Committee highlighted in one of our recent reports, that
clouds the Office for Budget Responsibility forecasts for fuel
duty. Again, this practice goes back many Chancellors and many
Governments, and it is about putting into the projections for
future tax revenue a ratchet up every year of fuel duty, yet for
the last 12 or 13 years, every Chancellor coming to the Dispatch
Box has decided not to implement it. It would be astonishing—I
note that the Chief Secretary gave me a little cheeky smile—to
see what is currently projected for fuel duty in the Office for
Budget Responsibility forecast, which is for an extra 12p to go
on to fuel after the Budget if the Chancellor does nothing. I
think we can all agree that that is fiction. I cannot see the
Chancellor coming to the Dispatch Box on 15 March and increasing
fuel duty by 12p—I would be astonished—because the temporary
one-year reduction of 5p will expire and there is the cumulative
impact of the ratchet over the years.
I just wanted to highlight that there is some element of a work
of fiction in the Office for Budget Responsibility forecast. It
would be healthier for all concerned if a more realistic approach
could be taken to the forecast for fuel duty not just in the
short term, but in the medium term, because I think we all
recognise that there will have to be a change, as more and more
people are buying electric cars, in how we tax transport and
drivers. I also wanted to publicise how our Committee has come
together on a cross-party basis to make that point.
Mr Deputy Speaker
I call the SNP spokesperson.
7.57pm
(Dundee East) (SNP)
May I also offer my condolences to Robert Key’s family at this
terribly sad news?
I say to the Chair of the Select Committee, the hon. Member for
West Worcestershire (), that I was a big
supporter of the creation of the OBR, and I very much agree with
her that an independent look at Government economic plans, when
it is in full possession of all the information, remains a very
sensible thing to do.
I start by thanking Richard Hughes, David Miles and at the OBR for their autumn 2022
“Economic and fiscal outlook”. However, it is worth noting, as
they did, that this particular forecast, with its seven forecast
rounds, was under three Prime Ministers, three Chancellors and
three official forecast dates. I suspect that at least part of
the reason why the numbers and forecasts in the report are so
gloomy is the sclerotic and, one could argue, rather shambolic
way in which the Government—the last set and the one before that;
Prime Minister and Chancellor—have played fast and loose with the
UK’s economic health over the past year.
What does the OBR tell us about the health or otherwise of the UK
economy as measured against the new fiscal rules? Before I say a
little about that, I point out that there are many ways in which
one can have fiscal rules: forward-looking ones against
forecasts, like this one, will tell us something;
backward-looking ones measured against outturns will tell us
something else; measing over a fixed timescale, or in this case a
five-year rolling timescale, also is useful, as of course is a
measurement over an economic cycle. Unfortunately, however, that
tends to be a moveable feast, as it is not always clear when the
cycle actually starts and ends. I am sure those on the Labour
Front Bench will remember many happy debates over that particular
set of circumstances in the past.
The OBR tells us that inflation is set to peak at a 40-year high
and that wages and living standards are set to be squeezed by 7%,
wiping out all of the growth for the past eight years. So the
combination of external shocks, inflation, poor economic
management and a series of policy decisions—some good, like the
energy price support that the Minister mentioned; some bad, like
the medium-term fiscal loosening, almost all of which has been
reversed; and some modest, like the medium-term fiscal
tightening, most of which was necessary—have led to an increase
in borrowing of over £100 billion this year and next, and an
additional £420 billion in debt by ’26-’27. The consequence for
the economy is likely to be the central bank rate being higher
than the March forecast, the exchange rate lower than the March
forecast, and gilt yields, which are the real driver of the cost
of borrowing, higher than the March forecast.
The good news from the OBR is that inflation is due to fall
steadily until the end of 2024, but with mortgage rates on
average still close to double where they were less than a year
ago, constant vigilance from the central bank, the Financial
Policy Committee and the Treasury is still required.
However, even with that it will be a long, hard road to recovery.
The OBR reports that real household disposable income has seen
the largest fall since ONS records began in 1956. As to what
needs to be done to grow the economy, again the OBR tells us that
it expects capital deepening to contribute only 0.3% to potential
output growth over the next two or three years, lower than in the
March forecast. It says that that reflects weaker business
investment, which it expects to persist over the coming
years.
So while, for example, the maintenance of the annual investment
allowance at £1 million was welcome, there is still much more to
do to attract big investment into the economy. This is one the
most troubling things that the OBR reports. The output gap is not
even expected to return to the March 2022 levels until 2027,
towards the end of the forecast period. It is equally troubling
that the trade current account balance is forecast to “widen
sharply” from 2.2% of GDP in 2021 to 5.8% in 2022. That is the
highest full-year deficit since ONS records began, and is mainly
driven by a widening trade deficit.
Yet the Government appear to be in denial about the
self-inflicted economic harm of Brexit, and it is against that
backdrop that the Government have introduced the new fiscal
charter: net debt falling as a share of GDP in 2027-28, the fifth
year of the rolling programme, and public sector net borrowing
not to exceed 3% of GDP in the same year. While the OBR reports
that both of those are to be met, the truth is that both are only
just met: public sector net debt by 0.3% of GDP; and public
sector net borrowing by 0.6% of GDP—from memory, £9.5 billion and
£18.6 billion. At the end of the forecast period GDP will be
almost £3 trillion—that is 12 zeros.
There is no fiscal headroom; the margins are absolutely tiny. So
one missed step, one missed calculation, one policy error—my
goodness, we saw plenty of those two Prime Ministers and two
Chancellors ago—or one external shock, and that either renders
the targets unmet again or requires new targets to be put in
place, or, frankly, means that the brutal cycle of cuts and
austerity starts all over again simply in order for the
Government, to meet a target irrespective of the consequences for
the real economy.
I will end with this, which is said in sadness more than anger
because I like the OBR and I like the idea of fiscal rules: we
have no target for growth, for job numbers, for increased living
standards, or for a boost in exports; rather, success will be
measured by a Government avoiding a debt target by 0.3% of GDP.
That is not, as the Minister said earlier, charting a path to
growth; that simply demonstrates a crushing lack of ambition.
8.05pm
(North West Hampshire) (Con)
I have seen many displays of nerve in this Chamber over the last
seven years, but I congratulate the Labour Front-Bench shadow,
the right hon. Member for Wolverhampton South East (Mr McFadden),
on his sheer chutzpah this evening. He was part of a Government
who exploded the deficit under , having been bequeathed a
golden financial legacy, and then drove us off an economic cliff
with a crash the like of which this country had not seen since
the second world war. I draw attention to my entry in the
register, because I still own the business that almost went to
the wall during that crash, and I determined then, as I do now,
to make sure that the right hon. Gentleman and his party never
have stewardship of the economy of this country for fear of what
they may repeat.
Before the Minister panics, I will say that I am here this
evening to support the motion and the charter. While others have
mentioned the renewal and the evolution of the charter over the
years, it is a useful instrument that introduced, albeit that I
think he probably did so in contemplation of uncertain victory in
2015, wanting to jam an otherwise profligate and untrustworthy
Labour party into a little more discipline for the future. But it
is useful in giving guidelines to the wider world, and indeed the
markets, about the Government’s intentions in the short and
medium term. However, I have some questions for the Minister on
this year’s mandate.
The first is about the independence and role of the OBR. As the
Minister knows, there has been a lot of concern in the media and
elsewhere about the role the OBR has played in the financial
turbulence over the last few years, and in particular I want to
talk about independence, accountability and its role in the
formation of fiscal policy.
On independence, I must express to the Minister, an old friend
and constituency neighbour, some concern about the evolution of
the role of the OBR. The charter points out at paragraph
3.13:
“The government has adopted the OBR’s fiscal and economic
forecasts as the official forecasts for the Budget Report.”
That means the Treasury is not now making its own forecasts; it
is relying entirely on the OBR’s forecasts. In my view, that
creates an element of conflict. I would hope that the Treasury
would produce its own forecast driven by what the Chancellor
wants to do, and the OBR would produce a parallel forecast, and
then differences between the two could be highlighted and
justified or argued about. Then those of us who rely on forecasts
for policy making or investment decisions could decide where the
fan chart of growth or of debt was likely to go. I am sure the
Minister has the charter in front of him. It says in this
paragraph that the Treasury still retains the analytical
capability to produce those forecasts and reserves the right to
disagree with the OBR, but in truth, because it is not producing
a forecast, it does not and cannot.
At paragraph 4.11 the charter states that
“the OBR will provide independent scrutiny and certification of
the government’s policy costings.”
Certification is an interesting word in this context, because it
means that the OBR is basically approving the Government’s policy
costings, which implies an element of negotiation and
justification rather than assessment and opinion.
Paragraphs 4.20 and 4.21 on page 16 then say that there will
basically be an iterative process between the OBR and the
Treasury—and presumably the Chancellor—over the formation of the
forecasts. That implies an element of negotiation—that the
Chancellor will go to the OBR and say, “This is what we’re
planning to do. What do you think?” and the OBR will say, “Well,
we’re not sure this is going to produce quite the number you
need.” So policy is formed in an iterative process.
I might have expected the Chancellor to ask his analysts in the
Treasury what the impact of certain policies might be on
forecasts. However, doing that directly with the OBR, which is
supposedly independent, draws it into the policy formation
process in a way that may not be helpful to its sense of
independence or, indeed, to our sense of its assessment of the
Treasury rules. Effectively, that imbues the OBR with an
authority that should, in theory, bring with it an element of
accountability.
Forecasts that should and could be produced by the Treasury would
be produced under the name of the Chancellor, so if they are
proven to be wildly wrong, there is direct accountability in this
House through him or—hopefully in time—her. However, that is less
the case with the OBR. It will appear periodically in front of
the Treasury Committee, which is ably chaired by my hon. Friend
the Member for West Worcestershire (), who is here this evening
and who has spoken. Other than that, however, the House will have
no opportunity to properly scrutinise, test and understand why
the OBR thinks the way it does.
(South Dorset) (Con)
If I might paraphrase, Treasury officials have Ministers by the
short and curlies, which is perhaps not the best position for
them to be in.
My hon. Friend puts it in a pithy way, as he often does. It is
not so much that there is some kind of trap or problem here; it
is that a situation has evolved—probably more by accident than by
design—whereby the OBR has been drawn into the machinery of the
Treasury and therefore acquired an authority and an effective
veto, in a way that is perhaps not helpful.
The reason that is a problem is that economics is an inexact
science—if we put three economists in a room, we will have five
opinions. Economics is not delineated in the way chemistry is; it
is as much an art as it is a science, and much of it is actually
psychology. So if the OBR is to be so involved in policy making,
it is important that we understand the economic basis of its
assessments. For example, do the people who produce these now
Treasury —but actually OBR—forecasts appreciate, understand and
believe in the Laffer curve? Do they think that if we reduce
taxation, income will rise? That sits at the heart of the
argument the Conservative party has had over the last few months
about corporation tax. If we cut it, will we collect more money?
Seemingly, the forecasts say not. Those are the kinds of judgment
that anybody forming economic and fiscal policy must make.
There are also more fundamental issues—about, say, the operation
of capital. If the head of the OBR is going to be so involved in
policy formation—if there is to be a negotiation between the
Chancellor and the OBR on an iterative basis—will that person be
operating on the same ideological basis in terms of capital
versus labour? Are they a Keynesian? Are they a monetarist? What
is the impact of those kinds of belief system? Drawing the OBR
into the Treasury machine therefore creates some difficulty for
an organisation that, as I know the Minister will agree, has
value because of its independence and its alternative view of
what the Treasury is trying to do.
The second issue I want to raise is about the mandate. The
previous charter contained a point about balancing the budget
within three years; that is omitted from this charter. As the
Minister said, things have changed, so that has been dropped.
When we are effectively chasing a ratio as measured against GDP,
we are chasing a moving number, which may make our lives more
difficult. For example, if we are chasing a debt-to-GDP ratio,
and our GDP is falling, we have to work ever harder to hit our
target. The things we have to do to hit that target may also,
paradoxically, reduce GDP even further, so we end up chasing
ourselves down a spiral against a moving target. That is why, in
last year’s charter, which has changed, the idea of balancing the
budget within three years, and ensuring that our expenditure did
not exceed our income, was quite helpful; it meant that there
were two absolute numbers over which we had some control.
Fortunately, in its February forecast, the Bank of England says
that if there is a recession, it will be shallower than we
thought, which is good. That is not least because last year’s
Budget represented a mild fiscal loosening in its initial stages,
although not so much later on, with the energy price cap and all
the rest of it. That may have helped with aggregate demand,
making the recession less severe. However, if GDP does fall, the
ratio that the Treasury is chasing will worsen, unless there are
significant spending cuts or yet more tax rises, both of which
may exacerbate the fall in GDP. That is why I am nervous about
the mandate. The objective of reducing debt against GDP is
absolutely right, but I ask the Minister to guard against the
issue that I have raised.
Finally, I want to say something about the longer term. As
politicians, we often focus naturally on a three to five-year
horizon. We do that because, guess what, there are elections in a
three to five-year horizon, and it is a horizon that is
understandable and controllable. However, as the Minister will
know, there are significant long-term issues for this country,
which are driven by demographics and the nature of our economy.
He will know that there are alarming reports that look way into
the future, and if he has looked at the significant work done by
my hon. Friend the Member for Wycombe (Mr Baker) before he was a
Minister, he will know what I am talking about.
To take an example, the Government Actuary’s quinquennial review
of the national insurance fund basically says that it will run
out of money in about 20 years’ time. Indeed, the rise in the
pension age that we have just put through may mean that that
period will be shorter, unless there is significant Government
intervention in the form of more money going into the fund, which
will basically mean tax rises. In addition, the OBR’s financial
stability report from last year—it now does a long-term financial
stability report—forecasts that, on the current trajectory,
although our debts will start to fall in the short term, by the
time we get to the middle of the century, they will be well above
200% of GDP and heading towards 270%, and we will be running at a
deficit of 10% of GDP.
These long-term trends are driven fundamentally by demographic
issues. As a country, we are growing older. We have fewer workers
per pensioner, and we are not replacing ourselves from a birth
rate point of view, and that will cause an enormous problem.
Other countries are in a worse situation. In Japan, on current
rates, the population will have halved by the end of this
century, which will be economically catastrophic for the country.
Unless we start chasing our tail—raising taxes to pay more in
welfare and Government spending—we will be in big trouble, which
may exacerbate our GDP issues. When we put together the whole
cocktail of forecasts—short, medium and long term—they scream out
at us to think about the model we are operating.
The wealth of this country was built on three great leaps forward
in growth. We had the industrial revolution. That was followed at
the end of the 19th century and the start of the 20th century by
mass industrialisation, and since the ’70s we have had the IT
revolution. In some of those periods, particularly the last,
growth was quite turbulent, but throughout them, there was a very
high average level of growth; 3%, 4%, 5% or 6% a year was not
uncommon. We stand on the verge of another technological
revolution—a great leap forward with automation, artificial
intelligence, the way we do things and the green economy. We are
on an ellipse of scientific discovery. Life sciences are a
particular passion of mine, because there are a number of
companies on the verge of curing cancer.
If we are to capture this upswing in human ingenuity, we have to
think about the model of our economy and the operation of capital
within it, and whether we have the right fiscal measures to
encourage the kind of buccaneering capitalism that took advantage
of those three previous upswings. We did less of that in the
third period, the IT revolution. We went through a period of what
I suppose we could call centre left or socialist Governments, and
it was not de rigueur until the ’80s to be an entrepreneur. We
sat on the operation of capital and, as a result, we missed the
swing. That is why we do not have an Apple, a Microsoft, a
Facebook or a Google. We have some companies coming, and we had
some nascent companies. Some Members will be old enough to
remember Acorn. For a while it was going to be a great
world-beating company, but it fell by the wayside.
The Minister thinks about these issues carefully, and is
conscious of the need to energise capital in a way that will
build the businesses, products and jobs of the future. I urge
those on the Treasury Front Bench to reflect on the longer-term
issues that I have raised, and to recognise the kind of
straitjacket that we are putting ourselves in. That, and the
debts we incurred during covid, may well mean that we miss the
next upswing in the world economy, unless we are willing to take
risks with the mandate. There has been much debate in this House,
and certainly in the media, about going for growth, but if we
miss this upswing in growth, we really will miss a huge
opportunity for the next generation of our fellow countrymen.
8.22pm
(Wokingham) (Con)
My right hon. Friend the Member for North West Hampshire () makes some powerful points. He is right that if we
cut certain tax rates, we collect more revenue, not less. The
historical evidence is very clear on that, but OBR and Treasury
models do not capture that. He is right that if we try to guide
our economy by a debt-to-GDP ratio and we go into recession, the
ratio gets worse. We are then advised to take exactly the wrong
action, and intensify the downturn by trying to chase the radio
with tax rises that will push the economy lower; it is an
extremely foolish thing to do.
My right hon. Friend is right that the Treasury needs its own
independent forecasting, and needs to be able to say sometimes
that the independent OBR forecast may be wrong. If it is
genuinely independent, why should the Chancellor have to defend
it? When it is as wrong as it has been at points in the last
three years—for example, as wrong as it was on the deficit—it
would be extremely helpful if the Chancellor was encouraged to
disagree with it, because it is sending him exactly the wrong
signals. For two years running, it grossly exaggerated the
deficit and debt at a time when we could have done more to
promote growth. This year, predictably—indeed, I did again
predict it—it got it wrong; it understated what would happen,
because it did not understand that its other policies would slow
the economy so much. My right hon. Friend is right about the
longer-term issues, but time does not permit me to go into that,
as people apparently want to go home this evening.
On the control framework, I will be the one person who says that
I do not think that this control framework is good. It clearly
has not worked in the past, and it is fairly unlikely to work in
the future. We have one extremely important control, which is not
mentioned in this document: the 2% inflation target. That should
be even stronger and better enforced. It is very worrying that
the Bank of England, which seems to have the main responsibility
for it, allowed inflation to reach over 10% when it had a clear
target of 2%. It would not listen to those of us who said that if
it carries on printing too much money and buying too many bonds
at ever higher prices, it is very likely to have inflation. I
hope that it does not cause the reverse problem, and put
everything into reverse, giving us a bigger recession than we
need. We do not want any recession at all, but clearly a slowdown
was needed to correct the extra inflation as the Bank tried to
correct its past mistakes.
It would be good to complement the 2% inflation target, which
should apply to the Government as well as to the Bank of England,
with a 2% growth target. We would then have the balanced model
that the Federal Reserve is wisely given by our American friends
and colleagues. The Fed is told both that it must keep inflation
to around 2% as a priority, and that it must maximise employment
in doing so. A balanced mandate of 2% inflation—it would be nice
if we could do 2% growth, but the current official forecasts are
way below that—would provide the right kind of signals, and give
us more chance of a sensible economic policy.
This is our one chance to remind ourselves of the big issue of
how we manage this enormous debt, bearing in mind that about a
third of state debt is owned in accounts by the Bank of England,
which means that it is owned by the taxpayers and by the
Government. When I last looked, the Bank of England was 100%
owned by taxpayers and the Government. Every pound of that debt
that was bought up, was bought up on the signature of Labour,
coalition and Conservative Chancellors, with this House agreeing
that we would indemnify the Bank against all losses. Indeed, the
Bank of England understandably put on its website that the whole
of the bond portfolio is held with it acting as an agent for the
state. These are joint control decisions, and the Government are
clearly the senior partner, because they have to pay the
bills.
It is quite wrong that we should have this uniquely difficult
treatment when it comes to handling the rundown and the losses,
when the European Central Bank and the Fed made exactly the same
mistake of buying too many expensive bonds . There is a lot to be
said for the ECB idea that the rundown should take place as the
bonds naturally repay. One does not go charging into the market
to undermine one’s own bond prices by selling even more of them
at a loss. If we want to be ultra-tough on money, like the Fed—it
probably has more of an inflation problem than we did—then if we
sell the bonds into the market, why send the bill to the
taxpayer? Why does the bill not rest with the central bank, which
can actually stand that kind of thing? As the Fed constantly
points out, the fact that it is sitting on a lot of losses does
not matter, because it can always print dollars to pay its
bills—it is not like a normal company. We should look again that
this particularly hairshirt treatment, whereby the Bank of
England expects taxpayers to send it money every time it sells a
bond at a loss—and it wants to sell a lot of bonds at a loss,
when there is probably no need to do so for the sake of the
conduct of monetary policy.
I hope that the Government look again at those issues, because we
have a very difficult nexus between decisions taken jointly,
decisions taken by the Government, and decisions taken by the
Bank of England. The treatment of this debt is having a big
impact on the Budget judgments that the Chancellor comes to.
My final point is on the strange treatment of debt interest. As
the Minister pointed out, the debt interest programme has shot
through the roof to extremely high levels, but the bulk of that
is, of course, the indexation provisions on the index debt, which
in the UK is a rather high proportion of the total debt. None of
that requires cash payments, so it is not a bill that we have to
pay today. In practice, it will wash through by our simply
rolling over the debt when the bonds fall due. We will re-borrow
the real amount rather than the nominal amount, so we will not
actually feel it. It is very odd that we put that as a cost
against the accounts. The great news, however, is that as a
result of that strange accounting treatment, we will have a great
bonanza, apparently, because I think the forecasts are right, and
that inflation will come down quite sharply over the next two
years—indeed, the Bank of England thinks it will go well below
2%. The debt interest programme will absolutely disappear through
the floor, given all this so-called debt interest throwing out
the figures. I hope some of the proceeds will be used for a
sensible policy to promote growth.
8.29pm
It is a privilege to close this debate on behalf of the
Government. I thank those who contributed to the debate,
including the distinguished Chair of the Select Committee, who
highlighted some of the issues and presumptions of Government
policy. I cannot comment on what will happen with fuel duty, as
that will be the Chancellor’s decision. I thank the right hon.
Member for Dundee East () for his contribution, in
which he seemed to suggest more targets and a poverty of ambition
on behalf of the Government, and I can assure him that that is
not the case.
I would like to respond to my right hon. Friend the Member for
North West Hampshire (), who made a number of observations about the
independence of the OBR; its certification and validation role;
and the iterative process and whether that compromised the
apparent independence of the Treasury. He described economics as
not just an art or a science but even psychology. I can confirm
that the OBR’s remit is unchanged: it is the Government’s
official forecaster. But—as he notes and I am pleased to
confirm—the Treasury maintains considerable analytical capability
to support the policy advice to Ministers, and it does a very
good job of it too. There is a clear separation between the OBR
and policymaking, but it is a matter of securing credibility for
those policies, and I think he would agree with me that that is a
very important point.
I guess the issue is: whose forecasts are they? If the OBR
produces forecasts and Treasury officials say, “Well, Chancellor,
we have looked over the forecasts and we think they are right,”
that is qualitatively different, in the public’s mind, to the
Treasury producing a forecast and the OBR saying to the public,
“Well, we have looked over them and we think they are right.”
While it does say that the Treasury reserves the right to
disagree with the OBR, the nature of the iterative process
presumably means that will never happen, because they agree
before anything is published.
What we can agree is that the budget responsibility committee has
discretion over all judgments underpinning its forecasts. Of
course, there is obviously a range of views—my right hon. Friend
the Member for Wokingham () is always clear in his
disagreements with what the OBR may or may not forecast—but what
we are saying is that there is validity in and a need for an
official forecast, and that is what we have.
With respect to the shadow Chief Secretary, the right hon. Member
for Wolverhampton South East (Mr McFadden), before he gets a
little too complacent he should be wary of the £90 billion of
uncosted net spending commitments that his party has made since
the turn of the year. I think the OBR would be very interested in
what we would find there.
The charter represents our bedrock to prosperity. It will get
debt falling but invest in the future. It will rebuild our fiscal
buffers, bolster our economic fundamentals and deliver for the
whole country. A vote for this charter is a vote for sustainable
public finances, and that is why I commend the motion to the
House.
Question put and agreed to.
Resolved,
That the Charter for Budget Responsibility: Autumn 2022 update,
which was laid before this House on 26 January, be approved.
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