Charter for Budget Responsibility

George Kerevan Excerpts

Tuesday 24th January 2017 Commons Chamber

[The Chancellor of the Exchequer (Mr Philip Hammond)]

I beg to move,

That the Charter for Budget Responsibility: autumn 2016 update, which was laid before this House on 17 January, be approved.

This debate is not about the technicalities of fiscal policy. It is about our commitment to budget responsibility and delivering it in a way that is appropriate to our current circumstances. It is about supporting our economy through the uncertainty following the Brexit vote and preparing it to take full advantage of the new opportunities ahead. It is about securing Britain’s economic future, supporting working families and ensuring that our children are not burdened with debts that our generation chooses not to pay.

When my predecessor came into office in 2010, he inherited the highest budget deficit in post-war history, with Government borrowing £1 of every £4 that they spent. Debt had almost doubled since 2005-06, unemployment was at 8% and the UK’s percentage increase in national debt between 2007 and 2010 was the biggest in the G7. The 2008 recession showed us the price that is paid for seven years of irresponsible fiscal policy, and it demonstrated once again that it is always the poorest in our country who suffer the most when the economy crashes and unemployment rises.

We remain resolute in our determination to return the public finances to balance, to get debt falling and to pay our way in the world, but we have to do so in a way that protects our economy and our living standards in challenging times. At the same time, we must maintain our focus on the long-term challenge of productivity—a challenge we must rise to if we are to seize the opportunities that lie ahead for Britain.

In proposing this charter, I build on the work of my right hon. Friend the Member for Tatton (Mr Osborne). His plans, actioned by the hard work of millions of people up and down the United Kingdom, have turned our economy around. The employment rate is at a record high, unemployment is at an 11-year low and income inequality is at its lowest level in 30 years. The OECD and the International Monetary Fund expect the UK to have been the fastest growing economy in the G7 in 2016. The economic plan that has delivered jobs and growth also reduced the deficit from 10.1% to 4% of GDP last year, so that, in 2015-16, we borrowed £1 for every £10 we spent. These are significant achievements, but we have further to go.

In the medium term, we are well placed to take advantage of the opportunities that leaving the European Union presents. But at the time of the autumn statement, the Office for Budget Responsibility judged that, in the near term, uncertainty about our new trading relationship with the EU, coupled with the impact of higher inflation driven by the depreciation of the pound, is likely to reduce the rate of economic growth relative to its previous expectations.

[George Kerevan (East Lothian) (SNP)]

The Chancellor makes an interesting case about the strength of the economy. Does he not associate some of the growth in the economy with the fact that the Government borrowed and invested in the economy? Borrowing is therefore not necessarily a bad thing in itself.

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[George Kerevan (East Lothian) (SNP)]

I am somewhat in awe that you are back in your place, Mr Speaker.

The Chancellor was very measured in his defence of the new charter, and his presentation was without the usual gimmicks and flamboyance of his predecessor, and was none the worse for that, but I have read my Sherlock Holmes and it is the dog that did not bark in the night that we have to look out for. It is only 15 months since we last debated a new set of Treasury rules. I am in favour of such rules; rules are put in place to create stability and sustainability in the national finances, to give confidence to lenders, and to restrain politicians from using the public purse for party advantage. That said, it should be obvious to anyone that if this Conservative Government are bent on rewriting the fiscal rulebook only 15 months after the last time they did so, their motivation and seriousness are open to question.

The Chancellor did not address that serious point. If he keeps changing the rules, even though he stands up and makes a very measured defence of the new set of rules, he has to explain why he keeps changing them if he wants people to have confidence in the next set of rules, and the Chancellor patently failed to do that.

[Mr Philip Hammond]

Let me explain to the hon. Gentleman. We suffered an exogenous shock that, according to the OBR, implied an extra £84 billion of additional borrowing over the forecast horizon. I would say that when the facts change, we should change our plan.

[George Kerevan]

That is not what rules are for. The rules should not change when the situation changes; the policy should change. The rules are there to protect our sustainability and the ability of the markets to feel confidence in the Government. Yes, of course Brexit produced an exogenous shock, the full force of which has yet to arrive in the British economy. And, yes, the Chancellor is preparing the ground for when the wave hits the economy, but the point is that that is a policy issue. Why should the rules change? The rules are there to protect sustainability. If they change every time the circumstances change, what is the point of having rules?

[Mark Field]

But surely the hon. Gentleman must recognise that the proof of the pudding will be in whether there is a sense of confidence drifting away from banks and corporates in relation to that shock. They recognise that Brexit is a major event, and we all recognise that its impact still lies some way ahead, but that impact means that it is quite legitimate not to be bound by rules that pertained 15 months ago in a rather different world from the one that we are going to have to experience in the months and years to come.

[George Kerevan]

I thank the right hon. Gentleman for illustrating clearly the point that I am trying to make. Conservative Members are saying that rules are a hostage to fortune. They are saying that the rules will change when the circumstances change and when they need to change them to get the result they want. What, therefore, is the point of having rules at all? The right hon. Gentleman confirms the point that the shadow Chancellor and I are putting forward, which is that rules are flexible politically, and that they are therefore not rules.

We can prove this by looking at this Government’s borrowing record. Between 2010, when this Government were elected, and 2015, the national debt rose by 50%. The latest forecast from the Office for Budget Responsibility suggests that between 2010 and the end of this Parliament, the national debt will have almost doubled. The Conservative Government cannot continue to blame that on the former Labour Government. This Government have doubled the national debt during their tenure of office. The Chancellor and his predecessor have got away with that because they keep coming to the House with rules and pretending that they are fiscally responsible, yet they have doubled the national debt.

[Mr Philip Hammond]

We must remember the size of the deficit that we inherited in 2010. There would have been a way of avoiding doubling the national debt, but it would have involved an even harsher period of consolidation of the public finances. The hon. Gentleman’s party and the Opposition voted against every single measure to consolidate. The previous fiscal rules called for a surplus in 2020-21. The hon. Gentleman seems to be advocating a policy response that would squeeze the economy harder in order to meet the old rules in the new circumstances. Is that what he would like?

[George Kerevan]

I am glad that the Chancellor has now admitted that this Government will have doubled the national debt by the end of this Parliament; so much for their fiscal prudence. I am happy to admit that, yes, actually I was in favour of doubling the national debt. That does not give me a problem. In fact, I think that that is what saved the economy. What I cannot abide is the rank hypocrisy of a Government who keep coming up with rule after rule in order to pretend that they are fiscally prudent—

[Mr Speaker]

Order. We need to be clear that the hon. Gentleman is not accusing any individual Minister of hypocrisy. That would be completely disorderly—[Interruption.] This is not a debating matter. Nor is it something on which I am looking for his interpretation. I am gently saying that if that is what he is saying, he must withdraw it. If he is making a charge at a collective, however, he can just about get away with it under our procedures.

[George Kerevan]

I am suitably chided, Mr Speaker. I cast no aspersions on the character of any individual on the Government Benches. As a collective, however, they have changed the rules to suit themselves, as the Chancellor has admitted. That is the basic point I am trying to get across. What possible faith can we have in this new set of rules that they will not be changed in another 15 months?

[John McDonnell]

I do not want to interfere in private banter, but I draw the hon. Gentleman’s attention to the fact that, in 2009, the person who is now Chancellor—he was then shadow Chief Secretary to the Treasury—condemned any concept of rules. In the rule that he eventually helped to develop in opposition, and that eventually came into force, there was a welfare cap that has now been completely disregarded. The deficit was meant to be not reduced but eliminated by 2015, with a reduction in debt. The rules seem to have gone out the window very early for this Chancellor.

[George Kerevan]

I agree with the right hon. Gentleman.

The Chancellor came to the Treasury Committee, and he answered questions clearly and in great detail. He pressed the point he has made today, that the new fiscal rules and the autumn statement were designed to give the Government enough fiscal headroom to meet any unforeseeable circumstances, should economic growth slow as a result of the Brexit decision. I respect that, but why give himself headroom for a future dangerous event? Why not take action now to forestall that event? In essence, the fiscal charter gives the Chancellor room, if the economy begins to slow in two, three or four years’ time, to use a fiscal surplus to invest in the economy and crank up growth. Why not do that now? The new fiscal charter gives the dangerous impression that somehow it will prevent the ill effects of Brexit because the Chancellor can intervene if something goes wrong. Why not use that fiscal headroom now?

The problem, of course, is that the underlying strength of the economy is nowhere near as strong as the Chancellor tried to make out in his introduction. Yes, there is growth but, the underpinnings of that growth over the last year are largely an expansion of consumer spending underpinned by unsecured consumer borrowing.

At the same time, post the Brexit vote, the pound has fallen substantially on international markets, which is stoking up inflation. I cannot imagine a more dangerous situation than for growth to be dependent on unsecured consumer borrowing when inflation is starting to rise.

[Jeremy Quin]

I share the hon. Gentleman’s concern about the growth in inflation, but does he not regard it as in any way contradictory that he may be advocating a massive increase in Government expenditure while warning about the risks of inflation?

[George Kerevan]

Not if we take into account the fact that if inflation starts to rise, the Bank of England, as the hon. Gentleman knows, has decided to let that inflation flow through the economy. The Bank explains that inflation in terms of the falling pound, and it is going to let inflation rise to about 3%, the top of its current forecast range. The Bank thinks that inflation will then start to decline again, but others, such as the Federation of Small Businesses, think that inflation will go above that core forecast. We could be looking at 5% inflation in two years’ time, which would have a crippling effect. [Interruption.]

The Chancellor shakes his head. All I am doing is quoting the Federation of Small Businesses, which is not an irresponsible organisation. It thinks that the Bank of England’s core forecast—taking us up to 3% against the consumer prices index—will actually be exceeded, which is a strong possibility. If we go beyond 3% inflation and head up to 5%—and remember that the Bank of England said that it will not raise interest rates to combat such a rise in inflation—consumer spending will start to fall.

In reply to the question I was asked by the hon. Member for Horsham (Jeremy Quin), my argument is that if consumer spending tanks, we are in a hard Brexit, foreign investment is falling and firms are reluctant to conduct business investment, the only agency left to plug the gap is the Government. I am pointing out that the Chancellor, rather than waiting for that to happen, beyond which point it would take two or three years for the fiscal policy to kick in, should be doing it now. That is the basic point that I am trying to make.

[Michael Fabricant]

I am listening to the hon. Gentleman with great interest and I like his debating style—it reminds me of an old professor I had at university—but has he not just contradicted himself? Early on, he said that he does not see the need for any change, although we are changing the rules, and then he gave us a nightmare scenario of the future because of Brexit and said we do need change. He has to make up his mind.

[George Kerevan]

I am very clear. I do not say that the rules should be changed, because I do not like the original rules and I do not like the rules that are being proposed. I do believe in the principle that there should be fiscal rules; there should be a fiscal mandate to restrain a Government. So my primary point, to begin with, was that if we keep changing the rules that mandate does not exist, and this Government only pay lip service to them.

Under my set of rules—I do not have the time tonight to go substantially into them and I will not press the patience of the Speaker—there would be a restraint on current expenditure, although I am more liberal when it comes to capital expenditure, which, provided it is linked to trend growth, can be counter-cyclical. We can go into that another time. It does not matter what the present rules are. The fact that the Government keep changing them is the point at issue, which is why the charter is not worth the paper it is written on—they will change it in a few months anyway. They say that is their general principle.

Let me try to come to some conclusions. Back in 1956, Harold Macmillan gave his one and only Budget speech as Chancellor. What was the ratio of the national debt to GDP? It was 150%—almost double what it is today. I read that speech the other day; I forbear to read it out, but it quoted Macaulay. Macmillan read out half of one of Macaulay’s essays—we had quite sophisticated Chancellors in those days, Mr Speaker.

Macmillan went through practically every Administration since the 1600s. In every Administration, somebody got up and complained about the level of the national debt. Macmillan’s was an expansionary Budget, let me say, with a debt to GDP ratio of 150%. Macmillan, having worked his way through Macaulay, made the point that when we look back we see the benefits of that borrowing and investment, but when we look forward all we see is the dangers. Macmillan said that the trouble is, that stops us being bold.

I would like this Chancellor to be bold. I would like him to spend more money. I would like him to spend the money before the Brexit recession hits, rather than wait until it happens and then say, “Well, I have some weapons in the armoury to deal with it.” Let us deal with the problem before it happens. That is my point.