EU: Budget Report

Lord Barnett Excerpts

Thursday 25th April 2013 Lords Chamber

[Lord Barnett]

My Lords, I congratulate my noble friend on powerfully reinforcing what my noble friend Lord Eatwell said from the Front Bench about why this government policy is so inadequate.

I must say to the noble Baroness, Lady Noakes, that I thought she was telling us that she was not too happy about even bothering with these Motions and why did we have do it. We did sign the Maastricht treaty and now this Government are following the previous Government in believing that we have to continue with these Motions. I share her certainty that we are not going to join the euro. That is not because we are as inadequate to join as, for example, Greece and Cyprus, but because Gordon Brown laid it down very clearly in five economic tests, none of which could conceivably be met by any Government. At that time I was not terribly happy with them but that made it certain that we were never going to join.

We have these two Motions before us. I have to tell the noble Lord, Lord Newby, that I could not conceivably support them. I do not know how anybody could. Indeed, if he was sitting on the Back Benches now, I am sure that he would oppose the signing of these Motions. On the first Motion, we are asked to approve what the Office for Budget Responsibility has said about the fiscal outlook and the Budget Report. I certainly do not agree with that and I could not support it. The second Motion is even worse. We are told that we should support,

“the five key priorities of the 2013 Annual Growth Survey which are in line with the Government’s domestic growth agenda”,

and,

“the Government’s view that it is important to focus on implementation of existing reform commitments”.

We are told that we have “growth-friendly fiscal consolidation”. I do not know how anyone could describe the Government’s policy as growth-friendly. I bet that the Chancellor of the Exchequer would not really be able to support that proposition.

As I said, it is impossible to support the two Motions. They are based on forecasts made by the Office for Budget Responsibility. Any forecast beyond today is difficult for anyone to support. What we have now from the Office for Budget Responsibility is regular adjustments of its forecasts. The forecasts are meaningless. I do not blame the Government for the forecasts, all of which are inadequate, but I do blame them for believing them. How anyone can believe a forecast for five years ahead I find difficult to imagine. Today’s forecast happily does not show that we are in recession, but that will be revised in a few weeks’ time by 0.1% or 0.2 %—who knows? That is only for this quarter. The noble Lord, Lord Newby, like everyone else in the Government, keeps telling us that they have cut the deficit by a quarter, a third, or whatever. The fact is that in 2010, the Government forecast that they would eliminate the budget deficit by 2015. It is now called a rolling forecast. Every year, it is rolled forward.

There is now a forecast that it will be in balance by 2018. How can anyone believe that it is possible to make a forecast five years ahead? We do not know. It could be 2019 or 2020 before we get balance; we cannot be certain that it will be in 2018. The reason is that we have not got growth. Without growth, it will get worse, inevitably. Given our constant lower growth, we cannot rely on that forecast for 2018, not 2015. All that we can rely on is what is happening now, and even that is uncertain.

In the second Motion, we are asked to support that view. How can anyone ask us to support forecasts of that kind? Even the OBR does not believe them. It states in paragraph 143 of its latest report:

“There is considerable uncertainty around our central forecast”.

I am not surprised. It is inevitable that there is uncertainty about a forecast for five years ahead. We are then told that all central forecasts are unreliable and uncertain, so why on earth are the Government accepting them and relying on them to carry on with their whole policy?

I find this whole debate, and the fact that someone like the noble Lord, Lord Newby, is blithely reading out what the Treasury have given him, surprising. Unfortunately, I have agreed to give a seminar tomorrow in the Treasury on the 1976 crisis. I took the trouble to look at what I did at the time, what I said in my book and what my dear friend Lord Healey said in his autobiography. He said that there had been a £2,000 billion error in the forecast at the time. I assume that he did not mean £2 trillion, but no one has corrected it since. Even a £2 billion error in the forecast would have been enough. He said that, without it, there would not have been a 1976 crisis. That may or may not be true, but the fact is that we had a 1976 crisis, all because we were relying on those hopeless and inadequate forecasts that Governments have believed.

Personally, because I do not believe any forecasts beyond today, I find it impossible to go along with the two Motions. I am sorry that there will not be a vote; if there were, I would be happy to vote against them.

[Lord Hollick]

My Lords, I want to discuss the political and policy judgments that have been made since the financial crisis. The previous Chancellor, my right honourable friend Alistair Darling, like everyone else, did not see the 2007-08 banking crisis coming, nor the damage that it would do to our public finances, but in the eye of the financial storm, he did an excellent job of judging what needed to be done. He organised the huge recapitalisation of the banks. He sought to find the most effective balance between policies to repair the public finances and reduce public debt and also to promote growth. He recognised that the UK’s ability to finance its ballooning deficit would require the support of the bond markets, which would need to be convinced that the Government were prepared to take the tough and correct measures to achieve those joint objectives. He rightly anticipated that external events might call for additional rebalancing of the policy mix, over and above the deployment of automatic stabilisers. His was a pragmatic and thoughtful response to an unprecedented crisis, and it commanded broad support at home and abroad.

What happened next? One of the present Chancellor’s first and very important decisions on coming into office was to ratchet up the austerity targets and to shun the flexible, carefully nuanced approach of his predecessor and instead opt to wear a very tight financial straitjacket. That approach, which we now know as plan A, was given intellectual credibility by a report from US economists Rogoff and Reinhard, which Osborne cited in a speech as,

“Perhaps the most significant contribution to our understanding of the origins of the financial crisis”.

Buoyed by that report and the plaudits from the hedge funds and bond investors in the City and, crucially, strong backing from the IMF, the Chancellor believed that he had struck exactly the right policy balance between austerity and growth which would lead to the elimination of the structural deficit by 2014-15. Crucial to that judgment was the forecast of strengthening economic growth over that period.

As we have heard from all sides of the House today, that has not come to pass. Indeed, recent employment, bank lending, government borrowing and GDP numbers all confirm that the economy is flatlining. The UK is now the worst performing major economy. As the UK’s performance has weakened, as each forecast is missed and as austerity measures are tightened and extended, confidence—an ingredient vital to economic growth— has evaporated. Domestic consumer spending is depressed, export performance has fallen well short of forecast and companies continue to defer investment projects. Rating agencies downgrade the UK, citing a weaker economic and fiscal outlook and, specifically, the lack of growth.

The high priest of the international bond market, a group that I am sure is high on the Chancellor’s Christmas card list, Bill Gross of PIMCO, the world’s largest bond investor, declared last week that,

“the UK … have erred in terms of believing that … fiscal austerity … is the way to produce real growth. It is not. You’ve got to spend money. Bond investors want growth”.

The intellectual prop of Rogoff and Reinhard turns out to be a shoddy piece of research from the “garbage in, garbage out” school of analysis, with the corrected model—