Charter for Budget Responsibility

Jeremy Quin Excerpts

Tuesday 24th January 2017 Commons Chamber

[Mr Hammond]

I think my track record—of one fiscal event—answers the hon. Gentleman’s question. Clearly, I made the decision in November to borrow a discretionary £23 billion to invest in areas specifically focused on raising productivity in the UK economy. So, of course, the answer to the question “Can borrowing to invest ever be sensible?” is yes—if the circumstances are right, if it is a judicious amount of borrowing and if it is precisely targeted to achieve a purpose.

[Jeremy Quin (Horsham) (Con)]

This point is related to the one raised by the hon. Member for East Lothian (George Kerevan). Does the Chancellor believe that the charter gives him enough flexibility to address any economic issues that may come through over this Parliament?

[Mr Hammond]

As I shall explain in a moment, one purpose of the charter and the new fiscal rules is to allow sufficient flexibility to deal with any unexpected, unforecast shocks during a period of more-than-usual uncertainty in the economy.

The OBR’s judgment at autumn statement implied £84 billion of additional borrowing over the forecast horizon, although I should say that the OBR acknowledges a higher-than-usual degree of uncertainty in that forecast. So, at autumn statement, I had to make a judgment: I could have looked for further savings to maintain the trajectory of consolidation my predecessor set out, but I judged that that would not have been the responsible way to support the economy in present circumstances. So, at the autumn statement, I set out our new plan, which offered fiscal headroom, if needed, to deal with unforeseen, unforecast economic shocks, and scope to invest to raise productivity and so to lift real wages and living standards.

Let me set out the principles that inform the fiscal rules I have placed before the House today. First, the public finances should be returned to balance at the earliest date that is compatible with the prudent management of the economy. I judge, in current circumstances, that that will be in the next Parliament, after our EU exit is complete. In the interim, I have committed to reducing the structural deficit to below 2% of GDP by the end of this Parliament. Targeting a structural deficit means that I can let the public finances respond to any unforeseen short-term fluctuations in the economy through the operation of the so-called automatic stabilisers. The OBR forecast at autumn statement 2016 that I will meet this rule two years early. This leaves some headroom—about £27 billion—for a discretionary response to any further shocks, should such a response be necessary.

Secondly, I have committed to getting debt falling by the end of this Parliament. This will be the first time since the start of the century that debt has fallen. Again, the OBR forecasts that debt will begin falling two years before our rule requires.

Delaying the return to balance until the next Parliament not only ensures that we have fiscal headroom to respond to shocks, but means that the Government have scope to invest to improve the UK’s productivity. The productivity gap is the biggest challenge facing the UK economy. It has been said many times before, but I am going to say it again: it takes workers in Germany less than four days to produce what we produce in five days. That means that many British workers work harder—longer hours—for lower pay than their counterparts. This has to change if we are to build an economy that works for everyone.

--- Later in debate ---

[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.