Charter for Budget Responsibility

James Cartlidge Excerpts

Wednesday 20th July 2016 Commons Chamber

[John McDonnell]

Many voted to leave on the basis that they and their towns and regions felt left behind as a result of seven years of austerity, which have brought about high levels of poverty, lack of investment, and low-paid jobs and insecure jobs. As a result, I think there was an expression of anger in the referendum about a whole range of issues. People were saying to the Government, “We’re not satisfied with your performance, we’re not satisfied with the way we are being governed and we want change.”

[James Cartlidge (South Suffolk) (Con)]

There is something in what the hon. Gentleman says, and there are parts of the country that clearly felt angry and left out, but I found that, overwhelmingly, the reason why people were going to vote to leave was their concern about immigration. My understanding is that he supports limitless immigration—not putting controls on it—and that matters if he is going to bring the Brexit debate up in his speech.

[John McDonnell]

Let us be clear, because it is best not to exaggerate people’s positions. I think the response on immigration was a response to the concerns people had about the undercutting of wages, the pressure on public services and so on. That is why, on the development of the free movement of people, we have always argued—particularly from the Opposition side—that we should ensure there are sufficient controls, but also mechanisms to prevent the undermining of wages. That is why the last Labour Government—I praise them for this—set up a fund to alleviate the pressure on public services. I think a whole batch of grievances was wrapped up in the vote, and we have to learn from that.

One of the key grievances, as my hon. Friend the Member for Coventry South (Mr Cunningham) said, was the impact of austerity on people’s daily lives, which is caused by the adherence to a fiscal rule that we now know is virtually bankrupt and having counter- productive implications for our economy by holding back the investment that many people—even on the Government side—now feel is needed.

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[Mr Gauke]

I entirely agree, in relation to my hon. Friend the Financial Secretary, that the Treasury’s gain is the Department of Health’s loss. I will not pre-empt any autumn statement announcements on energy-intensive industries or any other area. I would point to the steps we have taken as a Government to help energy-intensive industries. We have responded to the points made to us by that sector with support for energy costs and so on. No doubt, the hon. Gentleman will continue to make his case on behalf of those industries.

[James Cartlidge]

I want to follow up the point made by my hon. Friend the Member for Horsham (Jeremy Quin). On cutting corporation tax, does the Chief Secretary not agree that the key point is that, although many people are calling for huge investment programmes by the Government, the investment we need must come from the private sector, and that if the private sector pays less tax, it will invest more?

[Mr Gauke]

My hon. Friend makes a very important point. In particular, in the context of corporation tax—after all, it is a tax on profits and on the return on investment—if we lower the rate and increase the return on investment, we would expect, all other things being equal, to see an increase in investment by such companies. In recent years, we have seen increases in business investment and in foreign direct investment. I would argue that we face some immediate challenges as a consequence of the Brexit vote, but I remain convinced—the evidence is very strong—that the steps we have taken on corporation tax will ensure that we are better prepared than we would otherwise have been.

In the context of the challenges we face, whatever one’s views—remain or leave—I think everyone predicted that a vote to leave would result in some short-term turbulence in our economy. As the Prime Minister has rightly said, Brexit means Brexit, but we have to get through this immediate period, in which some of the risks that exist will crystallise. Since the referendum, the value of our currency has dropped by a tenth compared with the dollar, and independent commentators expect to see a general slowing of investment, exports and business decisions. However, if we do all we can to stabilise our economy and set it back on a clear path, I believe we can prosper in the new circumstances.

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[Stewart Hosie (Dundee East) (SNP)]

I am glad that the Minister mentioned short-term turbulence as a result of the Brexit decision—the Chancellor has already spoken about that. The Minister is a pragmatic politician, so if that short-term turbulence turns into medium or long-term problems in two, five or 10 years—not least because of the absence of trade deals with the world’s biggest trading bloc—I hope that he will turn on the pragmatic tap even more strongly than he has perhaps tried to do in the Treasury so far.

This debate is about the fiscal charter, so I will run through a small bit of history and make some other comments. When the coalition Government first introduced the charter for budget responsibility, the fiscal mandate was for a cyclically adjusted current budget to be balanced by the fifth year of a forward-looking forecast period—that was similar to the plan laid out by the Labour shadow Chancellor earlier. As the Library has helpfully pointed out—it has helped a great deal with this debate—that plan was shortened to the third year of the forecast period in the December 2014 charter update. That also focused on the current balance, which is the difference between Government revenue and current, rather than capital, expenditure. Focusing on the current Budget was designed, at least on paper, to protect public sector capital investment, which is important.

A number of speakers have mentioned capital investment today, but the real problem is that capital expenditure forecasts, and real capital investment, have been rising and falling over the past few years like a yo-yo. There is concern that the National Infrastructure Commission was designed not so much to facilitate investment and drive it on, but rather to delay some of it further—but I digress.

The previous mandate used a measure of the budget balance adjusted for the economic cycle to allow the flexibility to run a deficit during recessions and a surplus during booms. The fiscal mandate was accompanied by a supplementary debt target. Originally that was for public sector net debt to fall as a share of GDP in 2015-16, but that was moved to 2016-17 in the December 2014 update. That target, of course, was not met—one of a number of broken promises by the Government in the previous Parliament, in which debt, deficit and borrowing targets all failed to be delivered as promised in 2010.

That brings us to the current charter for budget responsibility and the fiscal mandate. The charter sets out the OBR’s role, how it performs its duties, and the required content of its publications. It lays out the Government’s fiscal mandate, supplementary debt target, and essentially the cap on welfare spending. The OBR assesses and reports on progress against those targets in the economic and fiscal outlook. Just in case anyone has forgotten, the current fiscal mandate target is for the public sector’s overall budget—public sector net borrowing—to be in surplus by 2019-20. Once a surplus has been reached, the target is for a surplus to be achieved every year. Frankly, that is impossible if we are to manage the economy in a sensible way. The other target is the supplementary debt target, where until 2019-20 the fiscal mandate will be supplemented with a target for public sector net debt to fall as a percentage of GDP in each year. Those targets, as the Chief Secretary said, will apply unless the OBR assesses there has been a significant negative shock. That is, in effect, where we are today.

If annual real growth in the economy is less than 1%, the OBR will judge there to have been a significant economic or negative shock and the economy will be out of what it calls “normal times”. If the OBR judges that a negative shock has occurred or will occur, fiscal targets will be suspended. That is the nub of the problem with these rules. If the OBR looks backwards over a 12-month period before confirming that growth was less than 1%, that might mean that changes to monetary or fiscal policy may not be delivered or enacted as quickly as they should have been to minimise the problems of a slowing economy. Likewise, if the future forecasts are overly optimistic—quite a common phenomenon in this place—necessary changes to fiscal or monetary policy required to protect jobs and growth might be delayed longer than they should be. In essence, the charter and the rules are a policy for inertia, rather than a policy for action.

Part of the charter requirements are that, should the rules be suspended, the Treasury must set out a plan to return the budget to surplus, including temporary fiscal targets. That plan must be approved by a vote in the House of Commons. One of the last acts of the previous Chancellor was to appear to suggest a suspension of the rules. I think he said—the Chief Secretary can correct me if I am paraphrasing this incorrectly—that the automatic stabilisers would be allowed to function and that corporation tax would be subject, potentially, to deep cuts. If that was the plan, it was not very detailed. I have not yet heard of any temporary targets and Parliament has not yet voted. We are about to go into recess and there is no vote on the horizon. I think that that tells us all that the charter is not fit for purpose and that the rules in place for when promised targets fail are not even remotely being adhered to. It would be better, I think, not simply to suspend the charter, but to rip it up and start again. I am rather less concerned with a plan and a charter to deliver an arbitrary surplus. More important is a plan to deliver real economic growth.

It is worth pointing out that over the past six decades or more, budget deficits have been the norm. Surpluses have been very rare. Since 1955-56, the UK’s public sector budget has been in surplus for only eight years. The last surplus was 15 years ago. The OBR suggested that the UK was set to return to surplus by the end of the decade, but that now looks unachievable—another broken promise. There is, however, a bigger problem than a surplus rule, which the OBR described, in civil service code, as

“ambitious relative to the fiscal performance of past governments”.

I will translate that, Mr Deputy Speaker: it means the Government will not meet their targets. The bigger problem is that it is designed to suck consumption out of the economy before recovery is secured. The scale of that, even as recently as the 2016 Red Book, is breathtaking: not just cutting £10 billion a year more than is necessary to run a balanced economy, but by 2020-21 cutting spending by £50 billion a year more than is necessary to run a balanced current budget.

We know where the cost of this austerity falls: it falls on the poorest in society. How do we know that? The Government have told us. As the cuts and tax rises have risen, so has the ratio of cuts to tax rises, placing the burden of austerity and an arbitrary fiscal target squarely on the backs of the poorest.

This mandate is now collapsing around the Government’s feet, along with the much-vaunted and never-delivered long-term economic plan—a plan that is a bit like a unicorn: everybody knows what it looks like but no one has ever actually seen it. [Laughter.] I used that in a previous speech, but I did not get a laugh that time. It has been said that fiscal rules can be applied in other ways, but the previous Chancellor and, I presume, the current one believe that the current level of public sector debt is too high and that running a budget surplus is the only reliable way to reduce it.

The Treasury Bench has argued that high levels of debt are too risky and too damaging for the UK, leave the UK vulnerable to future economic shocks and squeeze out other public spending through high debt interest payments. At face value that is fine, but there are other credible and fiscally responsible ways in which the deficit can come down and debt can fall as a share of GDP.

[James Cartlidge]

The hon. Gentleman is making a detailed and, in his own way, cogent argument, but—[Laughter.] It was meant to be a compliment. The key word, however, is “investment”, and my view is that investment needs to come primarily from the private sector. He talks about the benefits of getting debt down. Surely one of the key benefits is the confidence it builds in the economy among those big international companies that we want to invest in the UK.

[Stewart Hosie]

I agree that confidence will come from a reduction in debt as a share of GDP and a real reduction in the deficit, and I have no aversion whatsoever to genuine, substantial private sector investment. Unfortunately, in the current climate, because of the Brexit decision, there is a bit of a hiatus—substantial investment is being put on hold and might be lost. Trust me, in the competitive international world, every other country in Europe will be saying, “See that £10 billion you were putting into the UK—bring it here.” They will be saying that in Germany and France, and when we are independent, we will be saying it in Scotland too. This is when the UK Government should be stepping in to make sure that any gap in essential investment is filled.

On the alternatives, others have pointed out that the UK can run deficits and allow the ratio of debt to GDP to drift down over time, arguing that the value of debt can be eroded through economic growth. We have not heard a lot about growth. For many years, the mantra from the Government was: growth alone will not solve the problem. I happen to agree, but there has been no plan for growth at all. Instead, we have had almost a fetish and obsession with austerity and cutting debt, irrespective of the growth consequences.

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[James Cartlidge (South Suffolk) (Con)]

It is a pleasure to be called to speak in this timely debate. Although the Chamber is not as full as it could be, this is an incredibly fundamental debate on the key issue of the moment.

I start by congratulating the Front-Bench team on their promotions, including my hon. Friend the Member for Battersea (Jane Ellison) as the new Financial Secretary and my right hon. Friend the Member for South West Hertfordshire (Mr Gauke) as Chief Secretary. I attended a school in Hertfordshire and represent a Suffolk constituency, while he represents a Hertfordshire constituency and was educated in Suffolk. The East Anglian Daily Times was particularly excited by his promotion as a son of Ipswich. I congratulate both of my colleagues again.

I am proud of this Government’s economic record. As the Prime Minister said when she opened a fantastic performance at Prime Minister’s questions today, we have record employment once again, we have an 11-year low in unemployment at 4.9%, and we know that the deficit has been cut by two thirds—an incredibly significant achievement that cannot be underestimated. I was reassured by the Prime Minister when she said that we still aim to live within our means. That was her key point when asked about austerity by the Leader of the Opposition. I was reassured, too, by my right hon. Friend the Chief Secretary when he said that the Government are still committed to fiscal discipline, which is so important.

As both the shadow Chancellor and the shadow SNP spokesman have said, we have been looking at this change in the fiscal target as regards a surplus. As they said, the interim fiscal mandate was for the public sector’s overall budget, more correctly known as the public sector net borrowing, to be in surplus by 2019-20 in normal times. That target was to apply unless the OBR assessed that there had been a significant negative shock. Understandably, therefore, there has been a lot of discussion about why this change, putting back the time for meeting this surplus, has come about. I found the Chief Secretary’s explanation reassuring—and the word “reassurance” is key.

My understanding is that when the British people made the decision on Brexit, it was in many ways a shock for the country. Just as the Bank of England Governor came on our television screens to reassure, talking about the steps he would be prepared to take to ensure confidence was maintained in the UK economy, so has the Chancellor of the Exchequer come forward as a reassuring presence, saying that he is prepared to take any necessary steps. I view this as part of an overall package. As the Chief Secretary said, it is of course monetary policy that has the primary responsibility when there are shocks to the economy. We have heard about the possibility even of a cut in the base rate from 0.5% to 0.25%. I see the decision about the surplus as part of the reassurance that the Government are prepared to take steps and react to circumstances.

[Stewart Hosie]

The hon. Gentleman is absolutely right that monetary policy is the first port of call when there is a shock. If it were deemed to be necessary, however, to invoke some kind of fiscal measure—whether it be a stimulus or anything else—does not the hon. Gentleman agree with SNP Members that the rules are so flawed that we have to wait until the autumn before the Government can even get a green light to make fiscal policy changes that might be necessary now?

[James Cartlidge]

I agree on the importance of monetary policy, and once again the hon. Gentleman makes a cogent point in his own way. Fiscal policy has been compared to a blunt instrument. It is not easy for the Government and the Treasury suddenly to make things happen in the way the hon. Gentleman describes. We need to wait on the figures. I understand that there are reports in the media today that the Bank of England’s agents have said it is business as normal out in the country despite Brexit, and I am very reassured by that. Let me be frank: I campaigned to remain. I was concerned about the economic impact of leaving, and I still am concerned. I always felt that the biggest potential impact would be on inward investment, but I think it will take time for us to see whether that is the case.

[Dr Philippa Whitford (Central Ayrshire) (SNP)]

Is the hon. Gentleman not surprised, as I was, that the only body with a plan for Brexit was the Bank of England?

[James Cartlidge]

I will repeat the point. I think that monetary policy comes first in the present circumstances. I think that the Governor of the Bank of England is a very reassuring force in these times. He issued those warnings about Brexit because he was asked to state his opinion, and he stated it as honestly and transparently as he could. Once Brexit was the result—and it was a shock, as I think everyone concedes, even those who wanted Brexit passionately—he was a very reassuring presence for the Government.

As for fiscal policy, Opposition Members have mentioned measures such as huge amounts of investment. This may be only my personal view, but I would always emphasise that it is private sector investment that we should seek to drive, and a key part of that is the credibility of the Government’s overall stance.

[Jeremy Quin]

We hear calls for a fiscal stimulus, and I recall that there were similar calls during the financial crisis. People demand shovel-ready infrastructure projects, saying, “Let’s spend the money,” but such things always take time. The idea that a magic tap can be turned on and immediately flood the economy with a fiscal stimulus is illusory, and that is why people turn to monetary policy first. There are those who get excited and say that we need the ability to change now, but I think that that is a delusion.

[James Cartlidge]

I agree with my hon. Friend, but I would make one point about shovel-ready projects. We have quite an advanced business plan for a Sudbury bypass. If the Government decide to go down the Keynesian route of looking for shovel-ready schemes, we are ready in South Suffolk, and we are waiting for the bypass for which we have been campaigning for many decades.

There is an aspect of the charter for budget responsibility that has not yet been mentioned during today’s timely debate. The charter states:

“The Treasury’s objectives for fiscal policy are to: ensure sustainable public finances that support confidence in the economy, promote intergenerational fairness, and ensure the effectiveness of wider Government policy”.

The phrase “promote intergenerational fairness” strikes me as incredibly important. I hope that my Whip will show me some intergenerational fairness, and allow me a couple more minutes. I will not be long.

We have had a Conservative leadership election, and we are still having a Labour leadership election, but, as far as I am aware, no one has debated the following facts. Our national debt stands at £1.65 trillion; according to the Institute of Economic Affairs, our liabilities amount to £5 trillion; and it is estimated that, by 2062, all pensioner benefits will cost £491 billion. I was going to say a lot more about that, and there is a lot more that needs to be debated, but I am getting the hint.

[John McDonnell]

More!

[James Cartlidge]

I will end with this point, which I think will interest the shadow Chancellor. In March 1997, two months before what was a considerable low for our party, my right hon. Friend the Member for Hitchin and Harpenden (Mr Lilley) came up with a policy called Basic Pension Plus, and I still believe passionately that that is the direction in which our country should go. The cost of the state pension—which, after all, is only £119 a week—is crippling, and the cost of pensioner benefits is enormous.

We need to debate those matters. I simply make this appeal: I hope that when I have a chance to speak again—when we all do—we shall be able to talk openly about the huge liabilities and costs that we face. As it is, the charter is there, we have been debating it, and, as I have said, monetary policy is at the forefront.