John McDonnell
Main Page: John McDonnell (Independent - Hayes and Harlington)Department Debates - View all John McDonnell's debates with the HM Treasury
Charter for Budget Responsibility
John McDonnell Excerpts(7 years, 9 months ago)
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John McDonnell (Hayes and Harlington) (Lab)
The motion before the House rewrites the rule by which the Government intend to manage their fiscal policy, as the Chancellor has set out. This rewriting is urgently needed because the Government’s previous fiscal rule lies in tatters. As we argued when the old rule was introduced in November 2015, it was a political device rather than a sound economic tool.
We argued that the commitment in the previous version of the charter to reach a budget surplus by the end of the decade was unachievable. That became obvious by the Budget of last year, when the previous Chancellor had to stretch budget accountancy to breaking point simply to claim that the economy was still on course to achieve the target. That was well before the referendum. By the summer, the target had to be abandoned entirely. It was dropped because the surplus target was never about sound management. No credible economist could be found to support the surplus target because it had no plausible economic justification. The Treasury Committee rightly concluded that the old surplus rule was not
“credible in its current form”.
The previous Chancellor made a political choice to impose the surplus target. Therefore, the austerity measures that the target required were not just cruel, but unnecessary. Members will recall that those measures meant that people living with disability were suddenly threatened with the loss of their independence, and those going to work, doing the right thing, looking after their children and just attempting to get by were suddenly faced with serious cuts to their income. The tragedy is that all those sacrifices and all that suffering were in vain.
The record of this Government in office speaks for itself: at the same time as imposing grinding spending cuts, they have added, as of this morning’s figures, almost £700 billion to the national debt. That is not just more than the previous Labour Government borrowed; it is more than the borrowing of every post-war Labour Government added together. It is equivalent to £25,600 of extra debt for every household in the country.
Mr Philip Hammond
For clarification, will the right hon. Gentleman confirm that it is still his policy to borrow another £500 billion on top of that?
John McDonnell
That is interesting; I am pleased the Chancellor has raised that point. We have seen £700 billion borrowed over the last seven years as a result of economic failure. The Labour party’s policy, based on the recommendations of the CBI and others, is to spend £500 billion on investment over a decade. There would be £200 billion of mainstream direct funding and £100 billion would go to a national investment bank, which would prise from the private sector and elsewhere, on European Investment Bank rates, £250 billion. Such long-term investment in our economy has been recommended. Infrastructure investment is required to tackle the productivity crisis that has been caused by his Government.
Kit Malthouse (North West Hampshire) (Con)
I am a little confused and wonder whether the right hon. Gentleman can clarify things. He has just decried the fact that our national debt has increased by £700 billion. Is he saying that he would not have spent that £700 billion? Would he maintain the current deficit and spend £500 billion on top of that? I am not quite sure of his maths.
John McDonnell
We would have invested from the beginning in our infrastructure and skills, so we would have grown the economy and would not have had to borrow £700 billion for failure, rather than for growth success. Because the focus of the Government was on chasing an unachievable surplus target, they did not use the borrowing wisely. The sound policy, as recommended by international organisations such as the International Monetary Fund and the OECD, and by the CBI and the TUC here in Britain, is to put the Government to work in supporting investment. Instead, over nearly seven wasted years, the Government have cut investment to the lowest level in a decade.
Mark Field
The right hon. Gentleman is right that we have borrowed a hell of a lot of money, probably too much, since 2010—£700 billion—but does that not give the lie to the idea that there has been grinding austerity? We have borrowed a huge amount of money and struck a balance in trying to maintain welfare. One of the most insidious forms of investment under the last Labour Administration was the public-private partnership and the private finance initiative, much of which we will be paying off for decades to come—a colossal amount of so-called investment that actually is just adding more to our ongoing debt.
John McDonnell
The right hon. Gentleman will recall my opposition to PFI and its failures, but let me be clear: to borrow for investment, to ensure that people have the skills and resources necessary to tackle the productivity crisis and thereby grow the economy and create the high skills and wages which mean that people can pay their taxes and fund our public services, is creditable; however, what we have seen over the last seven years is borrowing because of the failure of the Government’s economic policy.
In the past seven years, the Government have actually cut investment, and the consequences of insufficient investment are painfully clear. Austerity measures and low investment have fed directly into what the Governor of the Bank of England has called a “lost decade” for earnings. Productivity growth has stagnated, as even the Government’s own industrial strategy White Paper acknowledged. I share the Chancellor’s concerns: every hour worked in Britain now produces a third less than every hour worked in the US, Germany and France. We have been arguing that case at least since I became shadow Chancellor, but we had no acknowledgment of it from the Government until yesterday.
With that record of under-investment, it is no use those on the Government Benches talking about a post-Brexit Britain taking on the world. An economy with low productivity can compete only on the lowest common denominator, and that means, as has happened, slashing wages and salaries and hacking away at social protections, such as the NHS and pensions. This is the grim reality of the Conservative’s low-investment, low-productivity, low-wage economy, and it can easily get worse. For some on the Government Benches, an economy shorn of basic protections in the workplace, with rock-bottom wages and social spending provisions stripped to the barest minimum, would be a desirable goal. We have had a glimpse of that future in the Chancellor’s own threats to turn Britain into a tax haven. Even to hold out this prospect is to admit that the Government have no better plan than the steady management of decline.
Michael Fabricant
I have been in opposition, so I understand what the right hon. Gentleman is doing, but there has to be a little reality in his speech. We are the fastest-growing economy in the G7. Like him, I have been to France, Germany and Spain. Is he aware of the rates of unemployment in those countries?
John McDonnell
Let us look at what is happening outside in the real world. We welcome the growth in employment, but we have also experienced the biggest fall in wages among OECD countries over the past seven to 10 years—the figure of 10.4% is matched only by Greece. One in five employees in this country were low-paid in 2015. Mark Carney has called this the biggest lost decade for income growth since the 1860s. The number of self-employed people has increased dramatically, but on average they earn less than 20 years ago. So, yes, I welcome the growth in employment, but I do not welcome the growth in poverty pay, whether for the self-employed or those being exploited on zero-hours contracts.
Michael Fabricant
The right hon. Gentleman will know that the Joseph Rowntree Foundation says that the gap between the rich and the poor has actually reduced since 2010. In addition, when people on zero-hours contracts were polled, more than half said that they wanted the flexibility of those contracts. Yes, people in self-employment often earn less, but it is their decision. I was self-employed when I created my own company, but I chose to do that, rather than earning more in a larger corporation.
John McDonnell
What we now have in our economy is a scandal of bogus self-employment. A lot of the growth in self-employment has happened on that basis, and it includes the most exploitative aspects. The hon. Gentleman mentions inequality, so let us look at some of the figures. If we use an index other than the Gini coefficient, which does not take into account the real outstripping of the super-rich, such as the P90/P10 ratio—this looks at the 10th and 90th percentiles of income distribution—we find that inequality has risen every year over the past five years. Let us look at what has happened out there in individual companies. If we compare the average total pay of FTSE 100 chief executives with that of their employees in 2015, we find a ratio of 129:1; in the mid-1990s, it was no more than 45:1. That shows the grotesque levels of inequality that result from the economy that has been created over the past seven years.
Yesterday’s Green Paper seemed to recognise the failure of previous policy, and there has certainly been a change of rhetoric. The Prime Minister has suddenly been won over by the merits of an active industrial policy. The recognition that the six previous years have failed badly is welcome, but nowhere is it clear that the Government recognise the scale of the problem. The weaknesses and inequalities in our economy stem from decades of underinvestment, when decisions about what and where to invest have been taken by too few people at the top and to the benefit of that tiny handful. That leads to an economy in which the Government are planning for more than £5,000 of investment per head in London, compared with just £413 in the north-east of England. It is an economy in which a single London capital project receives more Government backing than the whole of Yorkshire, and in which the £500 million promised yesterday for the north of England is set against £18 billion of cuts from local authority budgets since 2010.
Mark Field
The shadow Chancellor will recognise that he should be doing the same as me by defending London’s honour to a certain extent. Surely he recognises that if the significant amounts coming into our capital city were not invested here, they would go to another global capital, so it is not a case of money coming to London rather than another part of the UK. It is also the case that many of the cranes in my constituency—and, indeed, those in his constituency near Heathrow—are engaged in infrastructure projects involving large-scale investment. Such projects are producing huge numbers of construction jobs and are contracting well beyond the capital city. A lot of investment goes on here in London, but it has a benefit well beyond the capital city—
John McDonnell
Don’t worry, Madam Deputy Speaker; I was enjoying that.
The reality is that this is Government investment, and those figures are just not acceptable. Investment of £5,000 per head in London compared with £400 in the north-east is an unacceptable level of inequality that has to be challenged. The right hon. Gentleman is usually fair, so I am sure that he would accept that, no matter how much we are both champions for our capital city.
While the shift in rhetoric is welcome, it must be backed up by meaningful action, and that is where the revised charter still falls short. It is good to see the Chancellor taking on board Labour’s recommendations and ditching the surplus target. In doing so, he has held out at least the possibility of lifting some of the burden of the austerity measures that have led to crises in health and social care. I deeply regret, however, that he failed to take that option at last year’s autumn statement. His failure to act on both NHS and social care funding has contributed to the worst funding crisis in the NHS for decades and a social care system pushed beyond breaking point.
An image can sometimes capture the plight of a particular situation. A couple of years ago, it was the image a child’s body on the shores of the Mediterranean that brought to our attention the plight of people in the refugee crisis. Last year it was that photo of a child in an ambulance, covered in blood and dust after being pulled out of the debris in Aleppo. Two weeks ago, the image that put the NHS crisis into focus for me was that of a child below the age of five, in a hospital corridor, being treated on two plastic chairs that had been pushed together. That is unacceptable in the sixth richest country in the world, and it is the result of a failure to address underfunding in the autumn statement.
I have written to the chair of the Office for Budget Responsibility to ask whether it will look into providing an assessment of healthcare funding against expected need. In the last month, the British Red Cross has described the ongoing situation as a “humanitarian crisis”. The Government’s response has been to play down the situation, despite the volume of continuing complaints from frontline NHS staff. I strongly believe that this is leading to widespread public distrust of the Government’s presentation of funding and support for the NHS and social care. It makes sense to attempt to provide an objective assessment of the real needs of the NHS to help to prevent the real-terms funding cuts that have taken place under this Government. Let me say to the Chancellor again that he can and must take action now to ensure that both health and social care are properly funded in this period of crisis.
I am afraid that the charter represents only the smallest improvement on the previous dire fiscal policy. Unbelievably and, I think, contrary to all advice, it still attempts to keep investment spending within the spending control framework. That has already been criticised by experts from the Institute for Fiscal Studies. Keeping the investment spending cap inside the overall spending cap means that every pound delivered for investment comes at the expense of possible spending on public services. At a time when the capital costs for the Government are close to their lowest in history, that choice makes little sense. As we face Brexit, the challenge for us all is to think boldly about how this country can respond, and the amended rule falls far short of that.
Mr Philip Hammond
What is the right hon. Gentleman’s position on public debt? Ours is set to peak at just over 90% of GDP, yet he is setting out a course of action that would cause it to rise indefinitely—it would go on rising forever. Is he comfortable with such a position?
John McDonnell
That is clearly not the case. If the Chancellor had looked carefully at Labour’s fiscal credibility rule—[Interruption]—and, indeed, adopted it, he would have seen that what we would actually be doing is reducing debt in the lifetime of a Parliament as a result of ensuring that we invest properly in tackling the productivity gap, in bringing people back to work and in ensuring that they have the highest skills. Those skills will produce the high wages that will make it possible to fund the economy through a tax regime that is fairer than the existing one.
It simply will not be possible to deliver the scale of support and investment that is needed to rebuild our economy within the strictures of the rules that the Chancellor is proposing. We will get half-measures and rhetorical commitments. What we will not get is a serious commitment to delivering the economic transformation that we now need, because that would require the Government to take on a few too many vested interests. Such a commitment would involve a serious attempt to clamp down on tax avoidance, reversing handouts to giant corporations and the super-rich, and ending—in reality, not just in rhetoric—the colossal imbalance in investment between a few favoured places in the south-east and the rest of the country.
In changing the rule, the Government are admitting their prior failure, but then failing to address its causes seriously. Investment is too low, productivity is too low and wages are too low. Labour’s own fiscal credibility rule follows the recommendations of world-leading economists, business organisations and trade unions by keeping day-to-day spending entirely separate from the Government’s plans to invest. In contrast, this Government’s fiscal rule is excessively tight on Government investment at the same time as being excessively loose on Government control.
The primary reason for introducing a rule is to show that a Government’s fiscal plans are consistent and planned well in advance. That allows businesses and investors themselves to plan, and reassures markets that a Government will not attempt to spend excessively. An ideal rule should be the basis of the strict enforcement of borrowing limits—we accept that—but it should also contain the flexibility for Governments to respond when unexpected shocks occur. Getting the balance between these two points is difficult so, following the best available economic advice, Labour’s fiscal credibility rule places the power to determine when we are outside normal times in the hands of the Monetary Policy Committee, which can declare under the terms of the fiscal rule that it is necessary for fiscal policy to adjust in response to an unanticipated shock. The freedom to determine the fiscal stance is a significant power for a Government, so it has to be used responsibly.
Labour does not believe that it is desirable to return to the days when Governments would produce their own economic forecasts and then decide on their own terms where the business cycle was and how much extra fiscal leeway they were allowed. That meant that the Treasury had excessive power to determine fiscal policy, and that in turn meant Governments would have the power to favour short-term quick fixes at the expense of longer-term action to rebuild the economy. A credible fiscal rule should not allow that to happen. It should be bolted into place, compelling a Government to act for the longer-term good.
Labour’s fiscal rule does that by handing power to recognise economic shocks over to the MPC, yet the new charter for budget responsibility appears to hand the power to recognise economic shocks straight back to the Treasury. It returns us to the bad old days when short-term Treasury thinking would be allowed to dominate economic policy making. It could mean that once again Conservative Chancellors would be tempted to ease off on or tighten up their spending not because of the economy, but because an election is due. In other words, it largely defeats the purpose of having a fiscal rule in the first place. Instead of breaking with the short-term thinking of the past, it bolts it more firmly into place. How can the rule be taken seriously when it is so obviously open to being undermined? In other words, the revised charter leads us dangerously close to the worst of both worlds. It is excessively tight on Government investment when building a post-Brexit economy should demand Government intervention, yet it is excessively loose on the Government themselves, handing too much power back to the Treasury.
The Chancellor and the Government are squandering an opportunity here. They could have ditched the failed existing fiscal rule and put in place a new fiscal mandate that would grant the space needed to rebuild and transform our economy as we prepare for Brexit. Instead, they have handed more powers back to the Treasury while the Chancellor has insisted on maintaining austerity spending cuts. No part of the Government’s new fiscal rule can be supported and we will be voting against the charter as a whole.
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.