European Communities (Amendment) Act 1993
Lord De Mauley
That this House approves, for the purposes of Section 5 of the European Communities (Amendment) Act 1993, the Government’s assessment as set out in the Budget Report, combined with the Office for Budget Responsibility’s Economic and Fiscal Outlook, which forms the basis of the United Kingdom’s Convergence Programme.
Lord De Mauley
My Lords, I welcome this opportunity to debate the information that will be provided to the Commission this year under Section 5 of the European Communities (Amendment) Act 1993. As in previous years, the Government report to the Commission on the UK’s economic and budgetary position in line with our commitments under the EU’s stability and growth pact. The Government are to submit their convergence programme by 30 April. It explains our medium-term fiscal policies as set out in the Autumn Statement, Budget and OBR forecasts, and is drawn entirely from previously published documents that have been presented to Parliament. It makes clear that this year’s Budget reinforces the Government’s determination to return the UK to prosperity, and it reiterates our number one priority—tackling the deficit and restoring economic stability.
Last month’s Budget builds on the foundations laid in the 2010 Budget to safeguard our economic stability; to create a fairer, more efficient and simpler tax system; and to drive through reforms to unleash the private sector enterprise and ambition that are critical to our recovery. As my right honourable friend the Chancellor of the Exchequer said in his Budget speech, Britain will earn its way in the world.
Today’s news that UK GDP fell 0.2 per cent in the first quarter is, of course, disappointing. We face a very tough economic situation. It is taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime, even taking account, for example, of the recent fall in unemployment. But over many years this country has built up massive debts, which we are having to pay off, and it is made much harder when so much of the rest of Europe is in recession, or heading into it. The one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt. You cannot borrow your way out of a debt crisis.
We can succeed only if we continue to safeguard our economic stability. But because of actions we had already taken, we were able to put forward a Budget this year that has a neutral impact on the public finances, implementing fiscal consolidation as planned, and keeping us on course to achieve a balanced structural current budget by 2016-17, with debt falling as a percentage of national income in 2015-16. Fiscal sustainability is the vital precondition for economic success, but there is much more that we are doing to catalyse growth. First and foremost, we are undertaking far-reaching reform to ensure that our tax system is simple, predictable, fair and supports work. We are committed to creating the most competitive tax system in the G20, cutting, for example, the rate of corporation tax to 22 per cent by 2014, the lowest rate in the G7, fourth lowest in the G20. But as well as creating the right and competitive conditions for business to flourish, we will continue to invest in our future.
We have announced that we will take forward many of Alan Cook’s recommendations for roads and developing national road strategy. We have confirmed investment to provide ultrafast broadband to 10 cities across the UK, with a second wave of cities to follow, and we will continue to support the establishment of a new pension infrastructure platform to unlock an initial £2 billion of investment by as early as 2013.
Of course, a return to prosperity depends not only on what we do here in the United Kingdom, but on events beyond our shores. As the Office for Budget Responsibility said in its March report,
“the situation in the Euro area remains a major risk”,
to the UK’s economic forecast. More than 40 per cent of our exports are to the euro area. In that regard, it is encouraging that progress has been made over the last year. The European Central Bank’s monetary loosening has helped stabilise the banking system. There has been progress in stabilising Greece, and a number of countries have announced economic reforms.
Lord Eatwell
My Lords, on the day that the British economy has fallen back into recession, it might have been expected that the Treasury spokesman would take the advantage of this economics debate to explain himself to the House. Apparently, he prefers to stay away and avoid the embarrassment. I am sure we are all grateful to the noble Lord, Lord De Mauley, for valiantly throwing his body into the breach.
We have learnt over the past couple of years that quarterly GDP figures should be taken with several grains of salt, but the figures released this morning are consistent with all the revised numbers over the two years that the coalition Government have been in office. Basically, the economy has ground to a halt and growth is negligible, and because of this the rate at which government borrowing is being reduced has also slowed down. Indeed, the deficit in March this year was higher than in March a year ago. No one can doubt that these dismal results are the consequence of the coalition policy of austerity. As the Financial Times has pointed out:
“Official figures on Tuesday showed five more years of grinding austerity were in prospect”.
Tightening your belt to pay back a debt is becoming painfully familiar to many households in this country, so simple arguments about austerity being the price of excess borrowing resonate with daily experience. Yet the analogy is false; coalition austerity is impoverishing not only the borrower but the lender too, for from whom have the UK Government borrowed this money? None other than our pension funds, our insurance companies and our investment trusts, all of which are suffering from the recession created by coalition austerity policies.
The Budget documents before us reveal the true dimension of the failure of the coalition policy of general impoverishment. It is that general failure that I wish to concentrate on today, rather than pick over the decaying bones of the Budget itself. I remind the House of the state of the economy that the coalition inherited; it was growing at 2 per cent per year, an almost inconceivable figure today. The coalition’s actions on taking office reduced that to zero in just a few months, primarily, as has been so effectively argued time and time again by the noble Lord, Lord Skidelsky, by destroying business confidence. They followed this by imposing the coalition one-club policy: austerity as the cure for all economic ills. Also, as is made clear in the Budget report, 90 per cent of planned government cuts are still to come—squeezing the life out of the British economy.
The Government also inherited an economy in which the public sector was running a fiscal deficit unprecedented in peacetime. That deficit inheritance is well illustrated in Chart 2.5 of the convergence programme report. Noble Lords will note that at the beginning of 2008 the deficit was about 2.5 per cent of GDP and was falling, as it had been doing for the previous two years. Then, in mid-2008, the Government’s finances were engulfed by a veritable tsunami as the financial crisis resulted in rapidly falling tax revenues and rapidly rising expenditure, such that the deficit rose to over 11 per cent of GDP by 2010. The question before us today is simple: is austerity securing recovery? Is it securing an effective elimination of that deficit and building strong foundations for future growth?
The answer to these vital questions can be found in the OBR report that accompanied the Budget, and indeed is embodied in the convergence report. The OBR points out that the austerity programme does not simply result in loss of output over the next five years or so, but results in a permanent loss of output as the productive potential of the economy is reduced, undermined by the lack of investment in productive capacity and the erosion of skills among a lost generation of the unemployed. The OBR could not be clearer in stating that,
“our estimates of potential growth do imply a significant and persistent loss of potential output relative to the pre-crisis trend … Our … estimates for 2011 imply a potential output loss of around 8 per cent … This shortfall widens to around 11 per cent by 2016”.
The permanent loss of potential output also results in a permanent loss of potential revenue for the Government and hence worsens the deficit, prolonging the age of coalition austerity. As the OBR argues,
“the output gap determines the ‘structural’ or cyclically adjusted component of the deficit. A more negative output gap”—
that means greater productive potential—
“implies that more of the deficit will disappear automatically as the economy recovers, pushing up revenues and reducing spending”.
As chart 6.7 in the report shows, the output gap is being narrowed, productive potential is being reduced by the recession itself. So according to the OBR, the policy of austerity is itself reducing the beneficial impact that growth can later have on the elimination of the deficit. Put another way, if the growth rate of the economy were to be stimulated now, if the policy of austerity were to be abandoned, not only would growth be higher now, but the long-term output of the economy would be permanently higher, and the potential for cutting the deficit would be strengthened.
The essence of the OBR’s powerful case against the Government’s austerity policy is the starting point of a case for a policy of fiscal stimulation put forward by Professor Larry Summers of Harvard University, the former US Secretary of the Treasury. In an important paper, co-authored with Professor DeLong of the University of California, Berkeley, delivered at the Brookings Institution on the very day before the Chancellor presented his Budget, Professor Summers provided empirical estimates of the long-term impact of austerity, and of the alternative policy of fiscal stimulation. He demonstrated that under current depressed conditions, a fiscal expansion would pay for itself by enhancing the permanent potential output of the economy—the OBR’s point—and producing higher long-term revenues for the Government. As Summers put it,
“temporary expansionary fiscal policies may well reduce long-run debt-financing burdens”.
What if the Government were to take up the Summers policy, and undertake “temporary expansionary fiscal policies” that are self-financing in the long run? Where would the money come from to pay for such policies today?
Fortunately, the Chancellor himself has provided the answer. If the nation can afford to lend £10 billion to the IMF, then it can afford to lend to £10 billion to a national infrastructure bank directly to attack the decline in productive potential that the austerity policies have produced. Mr Osborne said the IMF loan would come from the UK's reserves, was not money that would otherwise have been available for public spending, and would not add to the national debt. Okay, let us perform the trick again, but this time at home.
However, it might then be argued that the rating agencies—to which the Chancellor regularly pledges allegiance—and the bond markets may not be convinced by the Summers argument, resulting in a loss of confidence in Britain with knock-on effects on interest rates. Summers presumes no increase in risk premia, resulting in no increase in interest rates. His point is that the expansion would be self-financing and therefore an increase in risk premium would be irrational. However, perhaps it is too much to expect rational behaviour from Mr Osborne's friends in the ratings agencies. After all these are the clowns who told us that securitised sub-prime mortgages were as safe as Uncle Sam. How might we protect Britain from their irrationality? May I offer two proposals that have been floated elsewhere?
First, it has been suggested in the United States that austerity policies—cuts in spending or increases in taxes—should be contingent on the economy reaching predefined goals in terms of growth and/or employment. Legislation would commit the Government to cutting the deficit when the growth target had been hit. The potential flaw in this proposal is obvious. Cuts in demand might stifle a recovery before it had properly begun. But at least this idea of contingent deficit reduction provides some escape from coalition austerity.
Secondly, the fact that the 2010 deficit was unprecedented should have prompted some thought. Coalition austerity might have been appropriate if we were facing normal cyclical swings in the economy, rather than the most severe economic shock since the Second World War. And it is the funding of World War II that is instructive. The war was a severe economic shock, and Britain borrowed heavily to pay for it. We finally paid off our borrowing to pay for the war in 2006, 61 years after the war ended. That is a sensible way of dealing with unique financial shocks, with important lessons for economic management. Even though the debt to GDP ratio in 1945 exceed 250 per cent, rather than the 70 per cent of today, this did not stop the Government creating the NHS, introducing major educational reform, expanding the welfare state and starting the difficult process of rebuilding the postwar economy.
Given that we are facing an extraordinary event, why not place the excess debt created by the circumstances of the global crisis into a sinking fund? The fund could be financed by selling the long-term bonds that the Chancellor has suggested be issued, and bond redemption could be tied to a dedicated revenue stream. The repayment of the debt could then be extended over, say, 20 years—it need not be 61—and the Government could pursue a sensible growth strategy managing the normal residual debt on an annual basis. Neither of those proposals is a perfect solution. There is no perfect solution. But at least they are alternatives to blindly following coalition austerity. Of course, these rational responses to a unique event may not convince the irrational ratings agencies, but we cannot allow Britain's future to be dominated by their irrationality.
The failure of the policy of austerity is becoming more evident day by day, not only here in Britain, but in Europe, too. Even Germany is coming to realise that impoverishing your own customers may not be a wise policy. Only the coalition fails to recognise reality. A source close to Mr Osborne is quoted by the Financial Times as arguing that, with respect to low growth in the eurozone:
“It’s not too much austerity: it’s too much debt and not enough competitiveness”.
That is how out of touch they are. They have not understood the OBR's case that austerity is weakening competitiveness and making debt reduction more difficult. However, abandoning the austerity policy will require a new framework, within which to construct a sensible fiscal and monetary platform. The OBR and Professor Summers have provided the necessary framework. Their demonstration that austerity is permanently destroying future production, and hence future government revenue, is the starting point for a sensible new policy debate both in Britain and in the eurozone. Policy must be changed now, before coalition austerity does yet more permanent damage to the UK economy.
Lord Skidelsky
I take it that the question for debate this evening is not whether Britain is on track to meet the Maastricht budget criteria, but why, nearly four years after the economic collapse of 2008, our country finds itself officially back in recession.
Since July 2010, the policy for recovery has been set by the coalition Government. The main plank of that policy has been an accelerated programme of deficit reduction. Since the coalition came to office, recovery has gone into reverse. In 2010, Britain’s economy grew by 2.1 per cent. In 2011 it grew by 0.8 per cent. With today’s figure showing a fall of 0.2 per cent in the last quarter, the OBR forecast of 0.8 per cent growth this year has been exposed as a fantasy. I feel sorry for the Treasury official who wrote in paragraph 6.1 of the convergence report, just published:
“We still expect the economy to avoid a technical recession with positive growth in the first quarter of 2012”.
The truth is that the economy is smaller now than it was in September 2010. According to the latest NIESR report, the present slump is the longest in British history. Naturally, the Osborne Treasury denies that its recovery policy was in any way responsible for the non-recovery. A correct policy, it claims, was derailed by external shocks such as the rise in import prices, the euro crisis, the structural impact of the financial crisis, and so on. Now the extra bank holiday for the Diamond Jubilee will apparently be a further impediment to growth this year, so the Queen joins the list of shocks. No, these are excuses, not explanations. The policy was wrong from the start and would therefore never have got us out of the hole into which we had fallen.
The eurozone crisis, for example, which has now spread from the Mediterranean to Holland and France, results from exactly the same austerity policy that is being implemented in this country. I never believed that the policy would work, either to promote recovery or to meet the Government’s own deficit targets. Speaking in this House on 1 November 2010, I said:
“I have never been able to understand how cutting the budget deficit in present circumstances is supposed to help employment and growth”.—[Official Report, 1/11/10; col. 1501.]
I still await enlightenment.
Chart 2.4 of the convergence report shows that the ballooning of the Budget deficit in 2009-10 was almost entirely caused, as the noble Lord, Lord Eatwell, has pointed out, by the collapse of national output. This ballooning was quite common, and there is a good comment on it dating from 1931, penned by none other than Keynes, who remarked that the rise in the deficit was,
“nature’s remedy for preventing business losses from being ... so great as to bring production altogether to a standstill”.
It has always seemed bizarre to me to believe that the best way to eliminate a deficit caused by the collapse of output is to pursue a policy that retards the recovery of output. The OBR itself estimated in 2010 that every 1 per cent of GDP decline in current government spending knocks 0.6 per cent off economic growth. It believes that without the Osborne cuts in government spending, GDP in 2016 would be 2 per cent higher than forecast—that is, nearly £50 billion higher. Translate that into extra jobs and houses, schools and hospitals that will not be built as a result of current policy.
That brings me to a second bizarre feature of the Treasury document, which is almost too arcane to discuss in polite society. Most people understand the notion of the deficit; it is the gap between what Governments spend and the revenues that they raise in taxes. The task that the Chancellor set himself in his first Budget was to liquidate not the deficit but the “structural” deficit—the deficit that would remain after the economy had recovered and actual output was again equal to potential output. Unlike the actual deficit, the structural deficit depends on estimates of such things as potential output, the output gap and the trend rate of growth—all intellectual constructs to which a high degree of uncertainty attaches, yet the Government have tied their programme to this particular shaky mast.
One might suppose that the actual deficit would shrink as the economy recovered. The structural deficit, though, has to be eliminated by policy; that is the argument. The latest OBR forecast shows it on track to fall from 7 per cent of GDP in 2010-11 to 0.7 per cent in 2016-17. En route to this mandate that the Government set themselves, something very mysterious happened. The structural deficit, which had been chugging along at about 2.5 per cent in the Brown years without causing any alarm or increasing the national debt, suddenly turned into a structural deficit of 8.9 per cent in 2009-10, with the threat of large permanent additions to the national debt. How did a deficit mainly caused by the cyclical downturn mutate into a structural deficit that threatened the Government’s long-term solvency? That was the mutation that caused alarm bells to ring and anathemas to be rained down on the Brown chancellorship for having left his successors such a horrendous mess to clean up.
The Treasury report suggests two interesting reasons for the mushrooming of the structural deficit. The first, in chart 6.2, is that the pre-recession economy had been growing above trend. The actual level of output, it claims, was 2 per cent above the potential level consistent with inflation in the long term. Since the inflation rate was almost always below the target of 2 per cent between 2000 and 2007 and the Treasury’s current assumption of the sustainable level of unemployment, at 5.25 per cent is exactly the same as the rate that prevailed in the Gordon Brown years, it is difficult for me to understand why the Treasury thinks that the pre-recession level of output was too high.
The second explanation, in paragraph 2.8 of the report, is something that the noble Lord, Lord Eatwell, referred to: that the crisis itself has left potential output 11 per cent below its pre-crisis trend. In other words, the economy will emerge from the slump permanently smaller than it was before the recession. Again, no explanation is given for this assertion. Of course, if your policy closes down capacity, it is quite likely that you will get that result. It is on this mixture of assertion, slippery definitions, and dodgy calculations that the logical foundation of the present policy is built. The Government and Treasury clearly believe in the power of incantation—if they say often enough that their policy is restoring confidence and credibility, that will make it true.
Some time last year the penny started to drop and the Chancellor produced his Plan for Growth, a belated admission that deficit reduction is not itself a growth policy and that the Government cannot just stand back and wait for the private sector to spontaneously ignite. There were a lot of measures designed to stimulate growth: lower corporation tax, bigger capital allowances, enterprise zones, green investment and so on, and now a £20 billion credit guarantee for bank loans. The measures are useful but too small, and will hardly offset the 25 per cent reduction of public capital spending this year alone. So much for the Treasury’s claim that the Government have been,
“using the savings over the Spending Review period to fund infrastructure investment critical”.
That claim is simply wrong.
It is clear that the main plank in the Government’s growth strategy is what the report calls “monetary activism”, defined as,
“additional monetary stimulus through quantitative easing”.
There was £200 billion of it in 2009-10, and the Chancellor has recently authorised another £125 billion. Studies have shown that this is useful; it has raised GDP growth by between 1.5 per cent and 2 per cent more than it would have been in its absence. And yet the effectiveness of additional quantitative easing is far more limited—there are fewer bonds left to buy and less scope to move bond yields—so this source of growth is, at best, highly uncertain.
We are sure to get out of this recession; we always do. If, however, we are to escape from semi-slump in a reasonable period of time, we have to break free from Angela Merkel’s strategy of bringing Europe to a standstill and take some initiatives of our own. The noble Lord, Lord Eatwell, has made some suggestions, and I add three of my own. First, in its April world economic outlook, the IMF advocated “balanced budget fiscal expansion”—that is, tax increases matched by increases in government spending, a fragment of forgotten wisdom from the Keynesian era. Secondly, we could follow the example of Ireland and set up a bad bank to buy illiquid assets from the banks at fair present value, aiming to minimise losses to the taxpayer from their later realisation. That would address one cause for the much noted breakdown in bank lending. At least Ireland is growing, which is more than we are. Thirdly, I have long been an advocate of setting up a national investment or infrastructure bank to afford institutional investors such as pension funds a higher yield than they can earn on gilts. I believe that we will be driven to one or other of these unorthodox measures in the end—so why not act now, without wasting more time on excuses?
Baroness Bakewell
My Lords, I wish to address a small example of what has so far been elucidated in highly theoretical and impressive terms. In the course of this austerity Budget, the Government imposed what they hoped was an unnoticed small adjustment to taxation, but it was not unnoticed. It made the headlines and became known as the granny tax—a misnomer that was joked about on several television programmes in which I took part to discuss this move.
What was interesting about the days subsequent to the Budget and the discussion of the granny tax was the implication that pensioners had done well by the Budget. One segment of the population had been treated better than the rest. I wish to challenge that; I have on record that this is by no means the situation and that the Budget missed an opportunity to improve the economy among consumers. Some 50 per cent of pensioners pay no tax because they earn so little. The increase in the pension, which the Chancellor boasted about, was £5 for each pensioner and was merely a catch-up with inflation that had gone before; 4.5 million pensioners lost out, but not by very much. It allowed Age UK to refer to the Budget change as “small beer”, by which I think it meant small sums of money. Small sums of money for people who do not have very much are far more significant than large sums of money for people who have plenty. Those turning 75 were hit more by this Budget change than the 4.5 million who had the small loss.
Pensioners are suffering and they suffered from the Budget. They suffer because VAT affects all they consume; they suffer from the inflation in food, fuel and heating prices. I simply want to make the point that 10 million people over 65 are spending all they earn and all they get from their pension because they need to. Small adjustments in their favour would have increased spending across a large segment of the population and helped to boost the economy. This was a missed opportunity and the pensioners noticed.
Lord Pearson of Rannoch
My Lords, I trust that the noble Lord, Lord De Mauley, knows that he has my sympathy in his very difficult, some might say impossible, task. I trust he will forgive me if I start by asking whether it is not surreal, even grotesque, that we have to submit anything, let alone our Budget, to the corrupt, expensive and now pointless outfit in Brussels, which has not been able to have its own accounts signed off for the last 17 years in a row. In the background, and as a related matter, is it not even more absurd that this outfit in Brussels now presumes to tell us how to reorganise our own accounting standards, how much our banks and insurance companies should reserve and much other mischief that is actively designed to diminish the City of London and our vital financial services generally?
Could the noble Lord tell us what exactly the United Kingdom’s convergence programme is? With what are we converging and to what benefit? We are told that we are doing this in pursuit of the EU’s stability and growth pact. Surely even the Government must now acknowledge that this is a dead duck: that the whole EU adventure has not brought any stability or growth but merely civil unrest, unpayable debt and slump. The countries of the future sail on, including the Commonwealth, while we stay on the “Titanic”, with the iceberg obvious in front of us.
The European Communities (Amendment) Act 1993 was the Act that put the destructive Maastricht treaty into our national law. Perhaps the worst aspect of that treaty, at least for our friends in Europe, was that it paved the way for European economic and monetary union, or the EMU, the bird that cannot fly. It came complete with its attendant single currency, the euro, which is now causing so much havoc among its members and elsewhere. The United Kingdom was of course right to avoid that part of the treaty, and credit for this is often given to the then Prime Minister, Mr John Major, and later to Mr Gordon Brown when he was Chancellor of the Exchequer. However, I understand from friends in the Civil Service that neither of these gentlemen deserves much credit for this fortunate deliverance. The credit should instead go to the bureaucrats in the Treasury and the Bank of England, who disliked the EMU because it would have passed much of their power to the European Central Bank in Frankfurt. The Treasury would no longer have been top dog in the British pecking order. That position would have passed to the Foreign Office—perish the thought.
Be that as it may, it seems that our proceedings today have their justification in the failed process of European economic and monetary integration. I cannot see, therefore, why we should have anything to do with it. Why should we submit anything at all to Brussels, let alone our Budget? It is true that the Government have rightly refused the insolent demand by Brussels that they should submit our Budget to Brussels before the House of Commons sees it. They are to be congratulated on that small show of defiance. However, I come back to the question: why are we doing this at all? I fear the noble Lord’s answer will be that it is a treaty commitment, that we take our treaty commitments seriously and that we will be fined by Brussels in the Luxembourg Court if we do not do it.
I conclude with some advice for the Government, which I have attempted to give before but which I do not think has quite sunk in yet: that there is no way in which the EU can enforce a fine against a donor member state such as the United Kingdom. EU fines can be enforced against individuals and companies in the national courts where they reside. Recipient nations can have their fines deducted from the money Brussels sends to them. This, however, does not work for donor nations such as us or Germany or, dare I mention it, Holland.
Perhaps the Minister could pass this advice on to his right honourable friend, Mr David Lidington, the Europe Minister, who I learned from today’s Daily Telegraph does not want us to pay the extra £890 million now being demanded by the Commission into the bottomless pit of Brussels. A senior EU official has apparently told the Daily Telegraph that we could be sent to the Court and fined if we did not pay up. So what? Just knock the fine off the £10.2 billion in net cash we sent Brussels last year—and it is more this year. Just knock it off and see whether they dare to do it again. If Mr Cameron and his Conservative colleagues started to behave like this, they might even win the next election. So it should be with this insulting Motion before us, which I oppose.
Lord Davies of Stamford
My Lords, I will come back to the Budget, if I may, and not take up the very challenging, provocative and frankly misconceived points that the noble Lord has been talking about in the European Union context. I do not want to come back to the macroeconomic stance represented by the Budget for more than two very brief remarks, because that matter has been thoroughly dealt with by my noble friend Lord Eatwell and the noble Lord, Lord Skidelsky. I also want to talk about two particular tax proposals in the Budget, the significance of which has unfortunately not been sufficiently understood so far.
Before I do that, I have those two brief comments on the macroeconomic debate. First, it is clear that the Government are committed to the Pigouvian idea, which was discredited in the 1930s and is clearly being discredited now, that if the Government cut borrowing and spending, then the reduction in aggregate demand following from that would be automatically compensated by an equal and opposite increase in borrowing by the private sector to finance consumption or investment spending. That is a very hoary doctrine that, as I said, has been proved to be wrong in the past. The Government seem to continue to be committed to it. It has become a sort of Panglossian piece of self-deception on their part.
The phrase that the noble Lord from the Treasury used this afternoon—I heard the Prime Minister use exactly the same phrase earlier today in another place—that the solution to a borrowing crisis cannot be more borrowing reflects the preference of this Government to fall back into PR slogans rather than to think through matters carefully. It is a completely nonsensical statement. Clearly, if you have a deficit, you cannot get rid of it overnight. If you are going to continue with a deficit, you are going to continue to increase borrowing. We are merely talking about the rate at which you continue to increase borrowing. There is no doubt that the solution, whatever it is—whether it is the one we on this side of the House propose, or the one to which the Government opposite are committed—would involve more borrowing. We want more clarity, a bit more analysis and perhaps a little more straightforwardness with the public, and rather less of the generation of PR slogans to disguise reality from the public.
The two particular points emerging from the tax proposals in the Budget which I want to highlight this evening are not matters which will rouse great passion around the breakfast tables of millions of families in this country. They might even seem, at first glance at least, rather technical and esoteric but they are extremely important in terms of the vibrancy of the supply side of the economy, the ability of the economy to respond to opportunities, and the willingness of people to risk their money—to invest in new or expanding businesses, to generate wealth and employment in the future. I have already raised in the earlier Budget debate the first measure that I am concerned about. I was given a one-sentence response by the noble Lord, Lord Sassoon, which made me feel that the Government either did not want to or could not be bothered to engage seriously with the issue. This concerns the introduction of a general anti-avoidance rule. I am in favour of the introduction of a general anti-avoidance rule, with the important condition—I always make this clear in any debate on the subject—that, to avoid doing considerable damage to the economy, it must be accompanied by a provision under which HMRC would provide pre-transaction rulings to taxpayers.
Briefly, what a general anti-avoidance rule—a GAAR—means is that every taxpayer is exposed to the risk that HMRC will suddenly challenge his or her tax return and say, “We are not accepting this particular structure or bottom line of taxable income because we think that you have engaged in some artificial practice for the purpose of tax avoidance. Therefore we are going to see through this structure and tax you on a completely different basis”. Under a GAAR regime, you never quite know when you may be exposed to such a risk. I suppose that it is true to say that if you always make sure that you adopt structures which cost you the most tax of any structure that you could adopt to solve a particular problem or to arrange for a particular transaction, you would not be exposed to a revenue challenge of this kind. That, of course, would mean that there would be an enormous increase in the tax burden. That would be a very undesirable thing. It is not something that the Government have ever thought of, I am quite certain. If, in fact, you have a reasonably tax-efficient structure which you have adopted for totally respectable operational, strategic or other reasons, you are always exposed to the Revenue saying, “No, no; you only did this in order to avoid tax, so we are going to attack you with the GAAR”. The only way around this is to have a system under which you can ask HMRC in advance whether or not it would accept a particular structure and, if it does, you know that you are safe. The IRS regularly provides pre-transaction rulings, and there is no reason whatever why HMRC should not do so. I will come on to that in one moment.
The first proposition that I put to the Minister is that the effect of introducing a GAAR without a pre-transaction ruling facility is greatly to increase tax uncertainty in this country, or to reduce tax certainty. I do not think that he will argue with that, but he will argue with my second proposition, which is that tax certainty is an important factor in the determination of willingness to exist and the location of investment decisions. That decision process which sometimes may be more intuitive and sometimes may be an explicit equation will always include certain key factors. Of course, these include political stability, the real output cost of labour, access to markets, availability of skills and monetary stability. All these things are important, but tax rates are important and tax certainty is extremely important. Therefore, if you change the variable of tax certainty, or produce a greater degree of tax uncertainty, you will change the outcome of that particular equation. You will have less investment. That is a very undesirable thing to do.
Lord Myners
My Lords, I hesitated for a moment to rise to speak because I was assuming that there would be contributions from the other side of the House. However, not only has the Minister, the noble Lord, Lord Sassoon, decided to desert the House on what is a particularly important day for an economic announcement and debate, but we have not had a single speech from the other side, and, as far as I can see, not a single Member on the other side of the House is even trying to speak in this debate.
Let me suggest that the Government’s proposal to accord with our obligations under Article 121 of the European Union Treaty on Functioning could be achieved in a better way than by submitting 500 pages of documents, as is proposed. I suggest that the Chancellor instead write a shorter letter to Commissioner Barroso, as follows.
“Dear Manuel, here is our annual submission on convergence. The news is good. We are converging with Europe on policies—austerity is the byword for everything we talk about now here at Horseguards—and we are converging on outcomes: we are back into recession, just like most of Europe.
“We are now officially into recession. In fact, output at the moment is 4.5 per cent below the previous high. We are seeing a contraction in output capacity. We are contemplating the inevitability of the longest recession for over 100 years. I have had to reduce my growth forecasts, or those produced by my Office for Budget Responsibility, on five occasions, and increase my debt forecasts each time. Between you and me, Manuel, I am beginning to lose confidence in Mr Chote and his two colleagues. To put it at its mildest, they have made an absolute Horlicks of their economic forecasting. Now I am afraid that they are going to tell me that lower growth and taxes will mean even greater public sector spending cuts in order to meet the fiscal policy constraint that I have imposed on myself.
“I also suspect that they are going to tell me very shortly that the output gap is even smaller than they previously believed it to be and accordingly the cyclically adjusted deficit and the adjustments that I will have to make in public expenditure are going to be even greater. You may remember that I was able to tell Parliament during the last Budget that we were still on course to meet my fiscal objectives. I did rather fudge the issue, as I pushed out the target date, and, importantly, pulled the wool over the eyes of my Liberal Democrat colleagues by pointing out that I was going to make a further £16 billion of unidentified public expenditure cuts in the two years after the general election—cuts which the Liberal Democrats will presumably have to reflect in their own manifesto at the time of the next election.
“I am loath to admit that perhaps Vince Cable and Andrew Tyrie were on to something when they said we needed a credible and coherent strategy for growth. I have promised Parliament on many occasions that I will produce a strategy for growth, but somehow I have not been able to find one. But needs must: I have painted myself into a corner with a policy of expansion through fiscal contraction. By the way, if you can give me any examples of where this has worked elsewhere in the world, or some academic sources, to rebut the evidence that comes at me from the Opposition Benches and Cross Benches in the House of Lords, that would be most welcome.
“I take some comfort from the fact that you in Europe are, on the whole, following the same policy. By the way, how is it going for you fellows—do you see any light at the end of the tunnel? Things have not been helped here in the UK by inflation. The Bank of England appears to have got this completely wrong: in all the time I have been Chancellor it has never hit the inflation target for a single month. Now the inflation figure is rising again. This is really squeezing consumption, particularly for the poorest in society, who, regrettably, have had to bear the largest burden of the fiscal adjustments I have announced to date. I must not, of course, be too critical of the Governor of the Bank of England. The governor keeps reminding me that he is older, wiser and more experienced than me, and writes me regular letters—one every three months—explaining that, when it comes to inflation, everything will be fixed before he leaves next year. By the way, he appears fixated now with his legacy.
“We continue to do this QE thing. I am damned if I can really understand it, but the governor says that it will be easier to reverse than to implement. I cannot see that myself, but I cannot risk asking him about how he has reached this conclusion, in case he does not know the answer, or I will not like it.
“Consumer demand in the UK economy has not been helped by unemployment. The news is not too bright here. We now have the highest level of unemployment since we were last in office. We have 1 million young people out of work, and the figure is increasing. We have the highest level of female unemployment for over 30 years. Business investment is also a bit in the doldrums. They say it is all about confidence. I do not understand that myself. There is some better news on manufacturing and exports, which are up. But this is largely due to trade with Europe, which rather pulls the rug from beneath my feet when I say that our economic problems are caused by the difficulties currently being experienced in Europe.
“Things would obviously be lot easier if the banks lent more. The Bank of England has just produced a credit report showing a further very substantial contraction in lending to SMEs. You may remember we tried that Merlin thing last year. Quite frankly, it did not work at all: the banks lent less in the end than they did before it started. We are now working on something called credit easing, although between you and me, it has all gone rather quiet on that front, and the banks do not seem very keen on it at all. Of course, it does not stop the bankers taking huge bonuses. Mr Diamond at Barclays is about to trouser another £20 million. There is very little prospect of any of that ending up in the accounts of HMRC, as he is a non-dom. In any case, he seems to have negotiated a deal under which his tax is paid for him by the bank.
“However, I must not get too annoyed about the bankers: it is not as if they got us into this problem in the first place. Nor must I get upset with the pension funds, which seem to be remarkably loath to step forward and support any of the infrastructure investment that I so proudly announced in my Autumn Statement last November.
“By the way, I am going to have to adjust the words in my speeches about the fact that the Government are increasing capital expenditure, because I realise that we confused a negative figure with a positive figure and, in fact, we are reducing public expenditure at a time when we have excess capacity.
“Interest rates, of course, are low. I claim this as one of our successes, and I have precious few others to offer in competition. But I recognise that this is largely because of QE, where we are buying back our own debt, and the generally recessionary tone of our economy. The consequence of low interest rates is hugely damaging to savers and pensioners. Please don’t mention to me the Japanese experience, where low interest rates had no positive impact on economic growth.
“I mentioned the poor earlier in my letter. I have just given 10,000 or so bankers, and others who are earning over £1 million a year, an extra £50,000 in tax benefit. Fat chance that they will give me any thanks for that. In fact, I am finding it increasingly difficult to get business people to speak up in favour of the Government’s economic policy now. All those people who signed letters just before the last general election seem reluctant to come to our kitchen suppers.
“House prices continue to fall—although fortunately not here in Notting Hill. We have introduced a new scheme, regarding which some people tell me I will be legged over by house builders, but at least we are seen to be doing something positive in encouraging new house building.
“You probably know that my opposite number, Ed Balls, is having a rather good run at the moment. Quite frankly, I find him very frustrating. But that hand gesticulation he makes about flat-lining is beginning to look as though it is right. Mr Balls has come up with a five-point plan for growth. Some of the ideas are quite good. In fact, one for abolishing or reducing VAT on housing improvements and repairs is rather a good one to me, although the house builders tell me that it isn’t. But I can’t really reduce VAT on repairs to domestic houses when I have just put VAT on repairs to cathedrals.
“Well, there we are. We are converging. We are tightening our buckles. We are tightening our belts. I even had to tell my father, after that rather injudicious interview he gave to the Financial Times’ How to Spend It magazine, that it really wasn’t sensible to say that my next ambition is to spend £19,000 on buying a desk. Yours ever, George.
“PS—it is going to be like a hole in the head if that Frenchman Hollande gets elected. How are we going to cope with that? By the way, can you please make sure that the IMF and the OECD don’t go through a further change of mind and begin to say that perhaps my fiscal policy is wrong and I should be doing something to encourage growth because that is the best way of reducing the deficit and the debt.
“As you know, Manuel, I have got to keep my distance from you because that is our policy as far as Europe is concerned. However, my colleague Jeremy Hunt says that you can always call me on the mobile”.
Lord Stoddart of Swindon
My Lords, I should like to join the noble Lord, Lord Myners, in pointing out that the Benches opposite are virtually, but not quite, empty. The one occupant is from the junior partner of the coalition. I have to sympathise with the Minister who is to reply, the noble Lord, Lord De Mauley, because his party has completely deserted him. It is a very serious matter for a Government when a Minister is confronted by so many erudite speeches from the Labour Benches and, indeed, the Cross Benches. The last speech that we heard was very amusing indeed. This has enabled the Opposition to make a concerted attack on the Government’s Budget, and their economic policy, without one criticism or speech of reply from the Benches behind the Minister. That is quite shocking and I hope that in future the Whips, or whoever else is in charge, will ensure that the Minister is far better supported than he has been this evening.
This debate is,
“to move that this House approves, for the purposes of section 5 of the European Communities (Amendment) Act”.
As I have already said, what we have had, except for the excellent speech of the noble Lord, Lord Pearson of Rannoch, is a debate on the Budget and economic policy. I have to say that I congratulate all those who have spoken, because the speeches have in some ways been superior to those made in the House of Commons. That is something that noble Lords and people who read Hansard might care to consider when we debate, perhaps in the next Session, the future of this House.
First of all, I support what my noble friend, if I can call him that, Lord Pearson raised—the matter of Europe and whether we should be having this debate at all tonight. When I saw the item on the agenda, my mind went back to 1992 when the Maastricht treaty was before Parliament, having been signed by the then Foreign Secretary, who then said, “Perhaps I had better now read what it says”. We had a long debate about what was going to happen with regard to the Maastricht treaty. At that time, people such as me and the noble Lord, Lord Pearson, warned that what was contained in that treaty would eventually lead to many powers reverting from this House and the Government to the institutions of the European Union. So it has happened. As the noble Lord, Lord Pearson, rightly said, it is absurd and outrageous that we, the Government and Parliament, should have to send our economic policy and our Budget over to Brussels to be supervised by the Commission and 26 other countries. That is not self-government, if I can put it that way; it represents being governed from abroad by bureaucrats who are completely unaccountable and insensitive to what our own nation state requires, or what is required by the other nation states in the European Union.
The document I am holding here is the Convergence Programme for the United Kingdom, but convergence with whom and for what purpose other than to create a single European state? Why would we wish to be concerned with the basket-case countries on the brink of default and collapse? The Conservatives say that they want to be in Europe but not governed by Europe, but convergence is about government, and about European governance. As I have already said, it is outrageous that this country should be obliged to submit its plans to Brussels bureaucrats for oversight by 26 other countries, many of which are very much smaller and less important than us.
What if Parliament refuses to agree? We could have a vote tonight. Probably everyone has gone home, so we might even win it. What if Parliament refuses to agree to submit the convergence criteria? What then? The noble Lord, Lord Pearson, raised this matter. He told the House that it was impossible for the Commission—or the Community or the Union, as it is now called—to fine, but we have been amazed at the sort of things that the European Union and its institutions can do, so I am not at all certain that he is right that no attempt would be made to fine this country if we refuse to submit our economic policy under Section 5.
Lord Pearson of Rannoch
My Lords, I did not say that no attempt would be made to fine us. It is certain that an attempt would be made to fine us. A fine would indeed be issued by the Luxembourg so-called court of so-called justice. All I said was that there is no way that Brussels and Luxembourg can force a donor nation to pay a fine.
Lord Stoddart of Swindon
I hope the noble Lord will be able to answer that question. They could not send troops over here to enforce their will. I do not want to keep the House for much longer, although there have been some long speeches tonight, but people in this country are getting quite disillusioned with politics. The Hansard Society published its latest figures today, which show that only 42 per cent of the electorate are interested in politics—a 16 per cent drop since the 2011 figures. Their disillusionment is understandable because they have realised that the United Kingdom is increasingly governed not by its own elected Parliament but by the EU and other international institutions. No wonder percentage turnouts at elections are now so low because people see no point in voting for a Parliament in which EU treaties hand decisions and governance to the EU and its institutions.
Lord Layard
My Lords, I agree with every criticism that has been made, and I note that this is not wisdom in hindsight, because all these criticisms were made before the policy was embarked on after the election.
The basic problem, which is making the policy not work, is that it is based on a misdiagnosis of the underlying issue. This is exactly the same situation as we have in Europe. The policies which are not working there are based on the same misdiagnosis. That misdiagnosis is that Governments have been behaving irresponsibly and that is why we have a problem. That is not why we have a problem. One or two Governments have—Greece, certainly—but most countries have not had irresponsible behaviour by their Governments. The irresponsible behaviour was by the private banks. That produced the economic collapse, and the economic collapse is what produced the government deficits. The government deficits were not produced by the Governments; they were produced by the misbehaviour of the private sector.
These deficits sprung up because tax receipts had collapsed. Corresponding to that there was the increase in the surpluses of the private sector as private households and companies were trying to retrench. As for how the public deficits could be financed, they would be financed by private savings. That is how it works, and it could work perfectly well provided that private savers had some assurance that they were putting their money in a safe place. What did that require? It required only two things. First, it required some guarantee by the Governments of our own country and other European countries that there would be no increase in government expenditure until tax receipts had come back up as a result of the return of growth. That was a perfectly reasonable requirement from investors. The other thing which was required was some underwriting of the public debt by the central banks.
Lord Lea of Crondall
My Lords, like the noble Lord, Lord Stoddart, I have not failed to notice the empty Benches opposite. I think that the view of members of the Conservative Party is that they do not need to worry about things such as this because they do not support the Maastricht treaty and perhaps do not support the present economic policy of the Government, although they have not been able to produce anybody to say so tonight.
Contrary to what the noble Lord, Lord Stoddart, said, I have no doubt that the Minister will have no difficulty at all in waving aside all the points made from this side with his Etonian insouciance. It is obviously tempting to have a vote, but I think, on balance, the fact is that for many years—10 or 15—we have been committed to this procedure and Labour Governments, as well as Conservative Governments, have thought it right to make a proper contribution to the debate about the EU stability and growth pact. That includes the input of the social partners, the trade unions and employers. That has been to the good.
On this occasion, I think that the future environment of the stability and growth pact is a big question, and I am surprised that the Treasury, with its excellent syntax and arithmetic, has not addressed any of the bigger issues which confront us at what I think is the end of one chapter in Europe and the opening of a new one.
I am referring, among other things, to the fact that we have a presidential election in France. As the Prime Minister said that he supports President Sarkozy, I will take this opportunity to give my maximum support to our comrade over the other side, François Hollande, and wish him well in 12 days’ time, or whatever it is. I shall sketch out a hypothetical scenario to which the Treasury should pay some attention. If and when President Hollande is in place and has his first meeting, as he will, with Chancellor Angela Merkel and they reach some agreements and then, one way or another, our Prime Minister meets him in Paris or London, what is he going to say? Is he going to say, “Bingo, the French and the Germans have reached a good agreement”? Have we nothing to contribute to their implicit complete relook at the stability and growth pact? Of course, there is not a word in this document, but I do not know whether any thinking is going on in the Treasury at all. I do not think that it has had any green light from Mr Osborne to do any such thinking, but it had better start in the next 10 days.
Where do we start from? The position of the incoming President Hollande, to take that hypothesis, would be—as he has said pretty consistently—not to undermine the fiscal pact but to but to add a big dimension of growth to the stability and growth pact. So this is the time to examine how on earth they would, without some highly innovative banking ideas, square the circle of getting out of a general slump. It is different from when the Maastricht treaty was created. We were there at its creation and there was a relatively good level of employment. At that phase of the economic cycle, with the underlying position at that stage, it was not unreasonable to have the figure of 3 per cent. By the way, there was a quite separate debate as to whether Greece should not have been treated much more stringently in inquiring about its position when it joined the euro. Allow me to say that that discussion has got totally mixed up with our discussion now, although in principle it is not central to it.
The circle is impossible to square unless we recognise that the arithmetic entails at least 4 per cent economic growth in Europe per annum for a few years to get the 2 per cent underlying growth of productive potential. That is to do with new technology, productivity, science and so on. I have no reason to believe that in Europe generally, one should put the underlying productive potential at less than 2 per cent growth per annum.
Lord De Mauley
My Lords, I am grateful to all noble Lords for their contributions and for the opportunity to do my best to reply. Following this debate, as I said earlier, the Government are required to report to the European Commission their assessment of the UK’s medium-term economic and budgetary position as they have done since the stability and growth pact came into operation.
There has been a large number of questions, so let me make a start on them. I cannot guarantee that I will have time—I have as much time as I like, but your Lordships may tire. I will do my best. The noble Lord, Lord Eatwell, suggests that the Government’s economic policy is not working. I acknowledged in my opening remarks that it is taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime, even after the recent fall in unemployment. Over many years, this country has built up massive debts, which we are having to pay off. That is made much harder when so much of the rest of Europe is in recession, or heading into it. Fiscal consolidation is critical for the UK to maintain confidence and minimise risks. International institutions and credit rating agencies support the Government’s fiscal strategy, with, for example, the IMF recently saying that it had,
“concluded that the degree of fiscal consolidation for 2012 is right”.
That is why Standard & Poor’s recently reaffirmed the UK’s AAA credit rating. Reversing the historic rise in public debt will strengthen the UK’s medium-term growth prospects. A recent OECD study showed that high levels of debt damage growth but, with respect to the noble Lord, Lord Eatwell, considerable action is being taken to stimulate growth. We are supporting investment in energy. The Government will introduce a package of oil and gas tax measures to secure billions of pounds of additional investment in the UK continental shelf and publish a strategy for gas generation in the autumn of 2010, recognising that gas-fired electricity generation will continue to play a major role in UK energy supplies over the next decade and beyond.
We are supporting the housing market by providing an additional £150 million to the Get Britain Building fund to help to deliver more than 3,000 more homes. We are expanding private investment in infrastructure. The Government have supported the establishment of a new pension infrastructure platform, which will make the first wave of the initial £2 billion of investment infrastructure by early 2013. We are making rail investment. The Budget gives the go-ahead to Network Rail to deliver three elements of the northern hub proposal at a cost of £130 million, subject to a final value-for-money assessment.
We are supporting technology. The Government are setting an ambition to make the UK the technology hub of Europe. To help achieve this, we will extend mobile phone coverage to 60,000 rural homes and along at least 10 key roads by 2015 and will set up a new £100 million fund to support investment in major new university research facilities. I earlier referred to what we are doing in the area of ultrafast broadband.
We are reforming planning. We are supporting investment across the United Kingdom and are decentralising decision-making power away from central government. We have agreed to proposals by the Greater Manchester Combined Authority to pilot a new model that is set to unlock £1.2 billion of infrastructure investment.
The noble Lord, Lord Eatwell, suggested that the recession was the result of the Government’s policy of austerity. Our credible fiscal plan has helped us maintain our top international credit rating and has lowered interest rates to record lows, making, for example, family mortgages and business loans cheaper. In fact, the one thing that would make us lose our credit rating would be a deliberate decision to increase borrowing and debt. As the noble Lord knows well, we argue that spending more would be counterproductive. It would increase the deficit and put the UK’s status as a safe haven at risk. Cutting the deficit is critical to maintaining market confidence. That is why the Government’s deficit reduction plan is endorsed by the IMF, the OECD, the European Commission, the credit rating agencies and UK business organisations.
The noble Lord, Lord Eatwell, proposed that long-term bonds should be issued. There has been evidence of demand for gilts with long-term maturities against the backdrop of historically low long-term interest rates which provide a direct benefit to the economy and help keep interest payments lower for families, businesses and the taxpayer. In 2012-13, the Debt Management Office will consult on the case for issuing gilts with maturities significantly longer than those currently issued.
The noble Lord, Lord Skidelsky, referred to a line in the convergence programme document stating an expectation that we would avoid technical recession. The Government established the independent Office of Budget Responsibility, and it is the OBR that expects a recovery in underlying growth momentum over the year and that measured GDP growth will be broadly flat in the first half of 2012. That forecast is unchanged, as is the overall OBR forecast for 2012. The noble Lord made quite a number of suggestions. I refer to the Government’s focus on encouraging greater investment in infrastructure, increasing access to finance for SMEs and reforming tax policies to ensure that the UK is the best place to build finance and set up a business. I would like to consider what he said and write to him addressing the issues he raised.
The noble Baroness, Lady Bakewell, is no longer in her place, so I will leave her points.
The noble Lord, Lord Pearson, supported by the noble Lord, Lord Stoddart, asked why we are converging and who we are converging with. Those who are not members of the euro are legally obliged to submit convergence programmes to the European Commission. All the euro-outs, as they are known, with the exception of the UK and Denmark, are committed to join the single currency when they meet the relevant convergence criteria. As noble Lords well know, the UK has an explicit opt-out from joining the single currency under its protocol to the EU treaties, and the Government have made clear that we have no intention of joining or preparing to join the single currency in the lifetime of this Parliament, so we are not converging and we have no intention of doing so. However, it is a legal requirement under the Lisbon treaty to submit this document.
Lord Stoddart of Swindon
I am a little puzzled by what the noble Lord has just said. He appeared to say that we do not need to converge and that there is no requirement for us to do so. Is that what he said, or have I misunderstood him?
Lord De Mauley
There is no requirement to converge, but we none the less believe that we should honour our legal commitments.
I think the gist of what the noble Lord, Lord Pearson, said is that we should not be contributing to the EU budget. The UK remains a committed member of the European Union. However, it is unacceptable for the Commission to impose an inflation-busting budget increase for the 2013 EU budget when Governments across Europe are making difficult decisions on public spending, and we will be pressing for a more realistic budget that recognises the economic reality across Europe.
The noble Lord also suggested that there was no accountability for EU spending. For the 17th successive year, the European Court of Auditors is unable to grant an unqualified positive opinion on the EU accounts. That is entirely unacceptable. The UK Government demand concrete action by the Commission and member states to improve EU financial management.
I am just coming to the noble Lord, Lord Davies of Stamford, and perhaps he will let me have a go at his initial questions.
Lord Davies of Stamford
In response to what the noble Lord just said to the noble Lord, Lord Pearson, is it not the case that the auditors have consistently declined to sign off on those aspects of the accounts of the Union which involve money disbursed by member states—for example, structural funds and CAP funds? There have been a number of difficulties in a number of countries, but there has never been any doubt at all about the robustness of the accounts of the Commission and the institutions of the Community. Therefore, this issue is an indictment of a lack of federalism, not of too much feudalism. If the Commission were directly responsible for disbursing all these funds, there probably would be no problem. The problem is with member states that have had a lot of difficulty in keeping accounts properly.
Lord Pearson of Rannoch
Before the noble Lord rises to reply to that well known canard, it is, of course, true—is it not?—that a third of the budget is under the direct control of the European Commission. If the noble Lord, Lord Davies, would like to understand how it really works, instead of continuing to produce Europhile propaganda, I suggests he reads Brussels Laid Bare by Marta Andreasen. Then he will understand how the whole thing works, and we will no longer have these fruitless debates trying to pretend that this is not the fault of the corrupt octopus in Brussels but entirely the fault of the wicked nation states, which are also at fault, of course.
Lord Lea of Crondall
Is it not absolutely clear that the funds directly being disbursed in Brussels by the Brussels bureaucracy, as is often said, are the funds that have a clean bill of health in the auditing? It is the funds down to the nation states that are the reason why the auditors cannot sign off all these accounts. It is as simple as that.
Lord De Mauley
My Lords, I am not going to enter into this discussion any further.
The noble Lord, Lord Davies of Stamford, talked about the general anti-avoidance rule. I am not sure it is entirely relevant to this debate, but I can say that the Government will consult on the GAAR in summer 2012 with a view to bringing forward legislation in the Finance Bill 2013. A targeted GAAR is the right solution to tackle the persistent problem of artificial and abusive tax-avoidance schemes. I will take the noble Lord’s specific points back to the Treasury and write to him on them.
In an amusing speech, the noble Lord, Lord Myners, referred to, among other things, IMF and OECD support. The IMF and the OECD support the Government’s policy. The IMF’s Madame Christine Lagarde said that under the current circumstances the policy in place is the “right thing to do”, and the OECD Secretary-General said on our Budget 2012:
“The Budget announced today is another important step towards a sound fiscal position for the United Kingdom. The confirmation of the UK’s fiscal consolidation programme should keep bond yields low and support the recovery”.
Lord Myners
Will the Minister also acknowledge that the OECD has said that if the UK’s growth performance is lower than that forecast by the OBR, it will be necessary to revisit the fiscal strategy being pursued, and to ask whether that was contributing to the problem rather than solving it? In the interests of completeness, the Minister should give the full position of the OECD rather than a highly selective summary.
Lord De Mauley
Perhaps I can come back to that in a moment. The noble Lord, Lord Layard, suggested that there were optimistic assumptions in the OBR forecast, in particular on oil prices and risks from the euro area. The OBR says that,
“oil prices remain a significant uncertainty and the possibility of a further temporary spike in prices represents a risk to our forecast”.
Renewed upward pressure from the record oil prices in recent weeks is also recognised as a risk to the Bank of England’s forecast, most recently in the minutes of April’s MPC meeting.
The noble Lord, Lord Lea of Crondall, spoke about what might happen in the forthcoming French presidential election. He will appreciate that it is not for me to speculate on the outcome of the French election. Of course, the UK is not a party to the fiscal compact; it does not apply to us. The SGP was strengthened last year. Any proposal for fundamental change would require treaty change and that would require the consent of all 27 nations.
Lord Davies of Stamford
Can the noble Lord tell the House why, apparently on two occasions, the Prime Minister has refused to meet with Monsieur Hollande? Are his judgment and power of prediction in political matters as bad as in economic matters?
Lord De Mauley
My Lords, no, I cannot answer that question. The noble Lord, Lord Stoddart, asked what would be the repercussions if the House voted against this Motion this evening. The result would be that the Government would not have the statutory authority to submit the information that forms the basis of the convergence programme. The UK would therefore breach its obligations under the EU treaties, which could lead to infraction proceedings brought by the Commission under Article 258 of the treaty, for failure “to fulfil an obligation”. As I have said before, the Government take their legal obligations seriously.
It is worth saying that a strong Europe is in the UK’s economic interests. The Government want to contribute to a strong, prosperous Europe, while safeguarding our interests.
Lord Stoddart of Swindon
Can the Minister explain what would happen if Parliament decided that it did not want to obey this particular instruction or law under the treaty, and infraction proceedings took place? Is it possible for the United Kingdom to be fined? If it refused to pay the fine, what would then happen?
Lord De Mauley
My Lords, as I said, we would be in breach and subject to infraction proceedings and, yes, I am sure that we would be subject to a fine. I do not want to speculate on what would happen if we did not pay it.
There were a number of questions that I have been unable to answer, including the recent question posed by the noble Lord, Lord Davies. I will, of course, write to noble Lords with answers to those questions.
It is right that we share our budgetary and economic plans with the European Commission and other member states through the convergence programme and our national reform programme. This is a key step in the European semester process. These plans are provided after the Budget is presented to Parliament, and the Budget makes clear that Britain will earn its way in the world. It shows our commitment to fiscal consolidation and economic growth and, along with the OBR’s forecast, it forms the basis of the UK’s convergence programme.