Lord Barnett
Main Page: Lord Barnett (Labour - Life peer)
Lord Barnett
My Lords, I add my congratulations to those already given to the noble Lord, Lord Ryder. I think he said he made his maiden speech 36 years ago on a Finance Bill and, for his sins, got put on it again either for five years or five times—I am not sure which he said. For my sins, as Chief Secretary I took those Finance Bills all the way through the House, whether it was for five years or five times, and there were often two a year in those days. I cannot remember what I said so I hope he will forgive me if I cannot remember what he said at that time.
I will not speak about the Finance Bill this year. I want to speak to speak about the central economic forecasts of the present coalition Government. The central policy, as expressed in the emergency Budget, was reducing the deficit. The only other major policy, described as a new policy, was the Office for Budget Responsibility. Unlike 1997, when the Monetary Policy Committee was a genuinely new policy given real powers, the Office for Budget Responsibility has powers only to forecast, and those forecasts can, of course, be ignored. The OBR’s independent forecasts have been semi-criticised by many as not necessarily being so independent. The criticism of Sir Alan Budd was much overstated. He himself admitted that he was a little naive. Perhaps he should learn that he should never be naive about the Treasury and its forecasts. Otherwise, I would not doubt his integrity or his honesty, either on this occasion or on any other.
There is no shortage of independent forecasts, as the noble Lord, Lord Sassoon, will know. The Treasury itself in most, if not all, of its documents constantly quotes independent forecasts. It seems a little insulting to suggest that the Treasury’s civil servants were so lacking in independence that they were not really independent at all and allowed Chancellors over the years to override what they were saying in their published documents.
The noble Lord said that one of the benefits is greater transparency. I am sorry to see that the noble Lord, Lord Sassoon, is not transparent on every occasion. In answer to a Written Question from me, asking him for various discussions that the Chancellor may have had with the Governor of the Bank of England, he said:
“As was the case with previous Administrations, it is not the Government’s practice to provide all details of such discussions”.—[Official Report, 21/7/10; col. WA 220.]
So the noble Lord, Lord Sassoon, is not transparent on all occasions, even if he is now telling us that the OBR is.
What is clear from the OBR’s forecasts is that, unlike what was said in the emergency Budget about there being no alternative to the Government’s Budget policy, there clearly is an alternative and it was shown in the pre-Budget forecasts. In the pre-Budget document we were told that if the pre-Budget forecasts had been based on the predecessor Government’s policies, the deficit would come down to 3.9 per cent of GDP in 2014-15. In the June Budget document, we were told the Budget deficit would come down to 2.1 per cent. Even if it were to come down to zero, the difference is not so huge as to warrant such major cuts as are proposed in the emergency Budget. In any event, huge uncertainties underlie those forecasts. On page 7 of the pre-Budget forecast, under the heading, “Constructing the forecast”, we are told of the uncertainties five times within some five lines. Even the OBR and its forecasts, therefore, are massively uncertain. Despite that, a substantial programme of public expenditure cuts is now being planned, based on all those uncertainties in the OBR’s forecast.
It is clear, then, that there is an alternative. Not only is the pre-Budget forecast of the OBR not so different from the Budget forecast for 2014-15, but page 99 of the Treasury’s Red Book shows net debt remaining in 2014. Total net debt is expected to be 69.4 per cent of GDP; it would have been 74.4 per cent under the pre-Budget forecast. Although the Government’s Budget anticipates the public finances being in better shape—in their terms—than under the previous Government’s forecast, the previous forecast could by no means be described as disastrous. In any case, as I have said, there are huge uncertainties in anybody’s forecasts.
Much depends on the assumptions made. For example, the pre-Budget forecast took the predecessor Government’s growth forecasts, which many thought were too optimistic. I agree that they seemed too optimistic, although I am bound to say that the figures for the latest quarter, showing 1.1 per cent growth—which is the equivalent of nearly 4.5 per cent per annum—suggest that I was being too pessimistic. Perhaps the previous Government’s growth forecasts were accurate and would have helped cut the deficit rather faster than the present Government’s plans. However, it is much too soon to suggest that growth next year will be that high. I would not suggest for a minute that it is likely to be, because none of us knows—the uncertainties remain. The forecasts may have been reasonable—it may even be that the inheritance of the Government is rather better than they have been telling us—but the figures do not provide certainty, and it is planning major policy on the basis of such uncertainty that is so wrong.
Against that uncertain background, the Chancellor has chosen to make the savage public expenditure cuts that he will tell us about after the comprehensive spending review. Even if it is the right policy to cut to that degree, what are the chances of success? The Chancellor is setting about it in the right way—as Chief Secretary, I had to make rather a large number of cuts over many years—and asking the departments to choose their own priorities. They will have to set out public expenditure cuts in their own departments ranging from 25 per cent to 40 per cent, with the Chancellor, or the Cabinet if necessary, deciding. The departments know their own priorities.
Overall, when you are spending £700 billion of public money, I would not deny that there is room for cuts. However, I would not have ring-fenced any department, not even the National Health Service. After all, the National Health Service’s expenditure in 2008-09 was nearly £110 billion—it will be much higher now in real terms. To pretend that there is no room for substantial cuts in administration out of that level of expenditure is surely wrong, so one could have reduced the cuts even more.
Public expenditure can be cut, and it is clear that this was the Conservative Party’s agenda. Indeed, even if there had been no deficit, these cuts would have been proposed so that it could make the tax cuts, which is what it is really about. It is going to have considerable difficulty in making 25 per cent cuts, never mind 40 per cent, in every single department.
I have spoken to a number of other former Chief Secretaries and Chancellors, Conservative ones as well, and none of them thinks it can be achieved. If it is achieved, as the Government seem determined it will be, I am sure they will appreciate, although I am not sure their coalition partners the Lib Dems appreciate, what it will mean to those departments to make 25 per cent cuts in every one of them over a four year period. I hope we never come to it, but I fear we may if the House accepts and the Government accept that what they are doing is right.
The OBR has shown, given its uncertainties of forecasts, that it will no longer forecast what exactly is going to happen, so we should listen to Ben Bernanke in the United States, where they also have uncertainties. Indeed the phrase used by Bernanke was, “unusually uncertain”. Despite all that, we are going to get these massive cuts, come what may. I can only hope that by keeping interest rates low, the Bank of England would offset some of the worst of it.
The Bank of England is truly independent of course. It is more independent than the OBR because it has an Act of Parliament already. We have always known that a senior Treasury official attends the monthly meetings of the Monetary Policy Committee of the Bank of England. What we have never known is whether he sits there saying nothing, because no previous Treasury Minister has ever been willing to say what exactly goes on at those MPC meetings or whether the Treasury official joins in. He is not a member of course. Now we know that he does. We had an answer the other day which I think the noble Lord, Lord Sassoon, may regret, but it is worth quoting. He is shaking his head, but let me quote what he said, because I promise him that it will come back to him. It was on 20 July in answer to a supplementary question from me, in which I said:
“the noble Lord has just said that it is not for him to comment on what the Bank of England does”,
but I pointed out that a senior official from his department attends those MPC meetings. His reply was very interesting.
“My Lords, it is correct that a senior official of the Treasury sits in on the monthly Monetary Policy Committee meetings, but that official is not a member of the committee. I have performed that function myself on one occasion, and I understood that it was my duty to bring to the attention of the MPC anything the Treasury thought it ought to be aware of”.—[Official Report, 20/7/10; col. 908]
I am delighted to hear that, because it is quite sensible. I never really did believe, because it is so important an issue, that the Chancellor never spoke to the Governor of the Bank of England on this and many other matters. The sensible thing to do was to talk to the Governor of the Bank of England. In due course, if, sadly, they go ahead with these policies, will the noble Lord, Lord Sassoon, assure us that the Treasury, if not the Chancellor himself, will, through the senior official at the MPC meetings, tell the MPC the Chancellor’s or the Treasury’s views on the need to offset the worst of the public expenditure cuts by keeping interest rates low, and possibly by increasing quantitative easing? I know that the noble Lord, Lord Higgins, thinks that that is of no use anyway but it is a worth a try. It is better than doing nothing and letting the worst effects of the public expenditure cuts take effect. I have some more written questions—
Lord Higgins
I am grateful to the noble Lord. I did not say what he has just reported me as saying; I said that the quantitative easing is being frustrated, which is not the same thing.
Lord Barnett
I am sorry to misquote the noble Lord. I thought that that was what he was getting at, but never mind. I apologise to him, but I am not apologising to the noble Lord, Lord Sassoon. I want him to give us an assurance. In the event of the cuts turning out to be as bad as many are now indicating, I am not alone in suggesting that that could reduce economic growth, not see it increase. The ITEM Club, which is truly independent, has said the same as the IMF in suggesting, based on Treasury figures, that it would have an effect on economic growth.
Finally, Martin Wolf, in a recent article in the Financial Times, put the arguments well for whether the economy should be tightened in current circumstances. He is a highly regarded journalist, as I am sure the noble Lord will agree, and he put the central issue as follows. If tightening is correct, which is the Government’s policy,
“failure would bring fiscal and financial shocks”.
On the other hand, if tightening is not correct, it might,
“threaten recovery and might trigger further … shocks”.
The consequences of tightening, as I have said, could be very serious indeed. Nevertheless the Government, with Lib Dem support, seem bent on pursuing that policy. I am not sure whether the coalition partners fully appreciated what they were agreeing to. The Government, however, have always said—I started off with this—that there is no alternative. In fact, as I have shown from the OBR’s own forecasts, there is an alternative. I hope that the Government will take it.
Lord Sassoon
My Lords, as I conclude the debate on this Finance Bill—and I note that it is a debate on the Finance Bill, although I am grateful to noble Lords who have contextualised it by talking more widely about the Budget—I thank all noble Lords for their contributions, which have played an important part in scrutinising this legislation. I beg to differ from the view expressed by the noble Lord, Lord Tunnicliffe, at the outset, that this debate would be a formality. It has been an excellent debate, and I would like to start by drawing attention to the maiden speeches of my noble friends Lord Spicer and Lady Browning. Their contributions did not disappoint. My noble friend Lord Spicer drew important lessons from economic history. He started a bit of a debate with the noble Lord, Lord Barnett, about who had participated in more Finance Bills. I have to confess that I have only part of one to my name so far, but there will be another one later this year, so I will be trying my best to catch up.
My noble friend Lady Browning talked about the important need for financing for small and medium-sized enterprises, which is one key plank of the Government’s focus at the moment. Attention was drawn to this issue by my noble friend Lord Bates and the noble Lord, Lord Myners. In response to points made by my noble friend Lord Higgins and others about the money supply, the proof of the pudding is in the eating—which is partly whether finance does indeed flow particularly into the small and medium-sized enterprise sector of the economy. I remind your Lordships that today the Treasury and BIS, my right honourable friend Dr Cable’s department, jointly published the document Financing a Private Sector Recovery. The noble Lord, Lord Myners, might like to read that as an exposé of government policy in this important area.
The Government have inherited an exceptional fiscal challenge. Within seven weeks of taking office, we have set out a decisive plan for dealing with this challenge. Within 12 weeks we have our first Finance Act in place, legislation which will help to restore our public finances and confidence in our economy. We have also set up the independent Office for Budget Responsibility, which has been much discussed today. The noble Lord, Lord Stern, has today graphically shown why the OBR is so necessary. He speaks in the very guarded language of a former distinguished Second Permanent Secretary to the Treasury and head of the Government Economic Service. When he talks about the way in which revenue forecasts in particular were previously handled by Treasury Ministers and their advisers, and talks in terms of lack of clarity, hopeful judgments and inflated forecasts, I take that as a damning indictment of the way in which Ministers under the previous regime were able to play fast and loose with the data. That approach has made the OBR necessary, and the OBR will not allow Ministers to take such an approach in future.
I very much take to heart the suggestions that the noble Lord, Lord Stern, made about the conduct of the OBR. I note his well-balanced perspective on these issues of independence which other noble Lords seem to have got excessively fussed about in recent weeks. I also note that even the view of the noble Lord, Lord Barnett, on the OBR may be softening a bit. I think that I heard him talk about semi-criticism. He is shaking his head, but if we have got to semi-criticism, we are making progress, and we might have him fully on board very shortly.
As we are talking about the conduct of fiscal policy under the previous Government, I should point out that the noble Lord, Lord Myners, drew attention to the previous fiscal rules, which were open to all sorts of manipulation. The beginning and end of cycles could be changed at the whim of Ministers, and Ministers did so regularly.
The noble Lord, Lord Barnett, also drew attention to the relationship between the Monetary Policy Committee and the Treasury. Even though he attempted to put a completely false construction on my previous answer on this point, I absolutely stand by what I said. I am sorry to disappoint him on that.
Lord Barnett
I pointed out that I was delighted that the Treasury intervenes in the MPC. I asked the Minister to make sure that it intervenes again in the future.
Lord Sassoon
I thank the noble Lord for that. But I did not say that the Treasury intervened at all in the workings of the MPC. It has a representative there to point out policy matters which the Treasury might be aware of or which it thinks the MPC might be aware of. That is not in any sense intervention in the way in which I think the noble Lord means it.