Charter for Budget Responsibility

Lord Clarke of Nottingham Excerpts

Tuesday 13th January 2015 Commons Chamber

[Ed Balls]

I shall provide an analysis of the new charter and why it is different from the old charter in a moment, but my hon. Friend is quite right. The Chancellor did not explain either that he had failed to meet the requirements of his charter in the current Parliament, or that he has now changed it for the next Parliament for reasons that are surprising and a bit confusing.

[Mr Kenneth Clarke (Rushcliffe) (Con)]

Does the shadow Chancellor agree that all these fiscal forecasts are based on a forecast of spending reductions and growth in tax revenues and the economy? Does he agree that in 2010, no one on either side of the House, including him and including me, realised just how persistent the global problems were going to be and how grave the banking crisis was, and that therefore the growth that everyone—including him—expected to see was not achieved? The Government stuck to their spending plans, but could not achieve the growth forecast. Is the shadow Chancellor saying that in the middle of that grave crisis, when it was still persisting, a Labour Government would have cut our spending plans more dramatically in order to hit what he is now praising as our target?

[Ed Balls]

As ever, the right hon. and learned Gentleman has got to the heart of the issue. Three factors can bring the deficit down: spending cuts, decisions to raise taxes, and what happens to the underlying growth of the economy and the tax revenues which flow from that. The Chancellor did not talk about the third factor, for understandable reasons.

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[Ed Balls]

I will give way in a second, but I want to develop a point that the former Chancellor has helped me to make, about the relationship between receipts, growth and the deficit. Before the autumn statement, the OBR said that

“weaker-than-expected wage growth so far in 2014-15”

was

“depressing PAYE and NIC receipts.”

Then, in the autumn statement, it said, “We expect earnings growth to remain subdued for longer than in March. This is the key driver in the lower forecast for PAYE and NIC receipts.”

The Chancellor had to revise up borrowing this year because real wage growth has been revised down for this year, next year and the year after. In table 4.10 of its document, the OBR forecasts a cumulative loss even in relation to the Budget, and predicts that lost income tax and national insurance revenues alone will rise to £9 billion a year. The Chancellor does not understand that unless he can bring in receipts from income tax and NICs, from growth and wage growth, he will not succeed in meeting his targets without “colossal”—that is not my word, but the word used by the Institute for Fiscal Studies—cuts in public spending. The Chancellor has never really “got” the economy, and therefore he does not understand that point.

[Mr Kenneth Clarke]

The shadow Chancellor is claiming to have a grip on economic reality which, with great respect, I do not think he had when he was in office, but on the point, which we are getting dangerously near to agreeing on, presumably he is not saying that when we had the growth forecasts not being met in those dark days three or four years ago we should have put up income tax, any more than he is saying we should have done anything other than stick to our spending reductions. Until conditions improve, we have to attack the structural problems. Has the right hon. Gentleman not noticed the banking reform, the banking regulation, the skills training, the education reforms, the support for small business, the introduction of research and development in technology? That is the real job, but fiscal responsibility is the essential precondition before any of those things work.

[Ed Balls]

I agree with the right hon. and learned Gentleman. I am not going to pick over past debates, but when he led his party through the Lobby opposing Bank of England independence, well, that was then; and when he advocated Britain joining the single currency in 2003, well, that was then. We probably agree on other things these days.

Let me take the right hon. and learned Gentleman to the most recent OBR forecasts. He makes an important point about trend, and in 2010 the OBR forecast that the underlying growth in our economy—trend growth—would in this Parliament, in 2014, be 2.1%, but in its most recent document it has revised down the underlying trend in 2014 from 2.1% to 1.7%, so, despite the reforms he talks about, we have been going backwards in terms of trend growth and productivity.

On the other hand, if we can raise through reform—I will come to this in a moment—the underlying trend growth of the economy, we can turn this around. These are not my numbers; they are the OBR numbers. The numbers show that if we were able to increase the underlying trend growth of the economy by just 1%, so it was 1% higher by 2019, which is the equivalent of about 0.2%—

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[Ed Balls]

The hon. Gentleman did not mention the quote from the TaxPayers Alliance, which also said it was a complete gimmick. That simply exposes the fact that the Chancellor has failed to meet his targets. Now let me come on to our fiscal position—

[Mr Kenneth Clarke]

rose—

[Ed Balls]

I will give way to the former Chancellor one more time.

[Mr Clarke]

The shadow Chancellor is very generous, and I assure him that this is my last intervention. I am afraid I am not quite following this rambling textual analysis, so let me take him back to where I thought we were near to agreeing. He agrees that we were right to stick to our spending reductions and that further fiscal consolidation of the kind the Chancellor is describing is required. The shadow Chancellor’s case appears to be that he has some great plans that will increase our underlying growth rate in future, on top of those the Government already have. Is he going to set out these startling new plans in the remainder of his speech?

[Ed Balls]

I will do so. Let me just say, for the interest of the former Chancellor, because it was not like this in his day or when I was in the Treasury, that our trend rate of growth in 2014—1.17%—puts us 19th out of 34 countries in the OECD. We have a lower underlying trend than Chile, Israel, South Korea, Australia, Mexico and Poland—and the list goes on. The right hon. and learned Gentleman is completely right: we have to find a way to strengthen the underlying growth of the economy.

Let me come on to Labour’s position. We will cut the deficit every year. We will get the current budget into surplus. We will get the national debt falling as soon as possible in the next Parliament, fully consistent with this fiscal charter. How fast we can do this will depend on what happens to growth, wages, the housing benefit bill and events around the world. But our approach will be very different from that of the Conservatives, on the following fronts. We believe, unlike the one-club Chancellor, that three different things need to be done to properly and fairly balance the books in the next Parliament.

First, as we have said, because we will cut the deficit every year, there will be sensible spending cuts in non-protected areas. We will cut the winter allowance, taking it away from the richest 5% of pensioners. We will cap child benefit at 1% for two years, and our zero-based review is examining every pound the Government spend in order to find savings. Secondly, we will make different and fairer choices, including reversing this Government’s £3 billion-a-year top-rate tax cut for people earning more than £150,000. Thirdly, our plan will deliver the rising living standards and stronger—

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[Mr Kenneth Clarke (Rushcliffe) (Con)]

That last speech clarified the fact that the shadow Chancellor admits that fiscal consolidation of the kind we are describing will be necessary for whoever comes into office after May and that getting back to a balanced economy depends on continuing efforts to improve the underlying growth rate of the economy. He was not able to produce any specific ideas at all. The only things on to which I could latch were that he was going to put up the minimum wage and restore the completely pointless 50% tax rate on the very highest earners. If he thinks that that is an economic growth plan to stimulate our underlying trend in growth to the levels of Chile and Mexico, he is showing the same levels of competence that he displayed when he was the main economic adviser to the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown) in the previous Government.

What we are talking about and what I hope we will get agreement on—I hope that the reality of this will dawn on the Labour party as a whole eventually—is that the essential pre-condition of any economic policy that will get this country back to healthy balanced growth is fiscal consolidation by eliminating the deficit, controlling the overall level of debt and, at the top of the cycle, running a surplus on the budget to get the stock of debt back to a manageable level. That is a message that the present Chancellor has been trying to get across in the four years that it has taken to get us to the position that we are in at the moment, which is much more successful than that of almost every other western democracy in similar troubles. If the Labour party has really taken that on board, at least it is beginning to be fit for office. But as far as I can see, it has no other policy.

[Kelvin Hopkins (Luton North) (Lab)]

The former Chancellor may remember that, in the 1920s, similar policies were followed and that, at the end of the 1920s, the debt was larger and we had a decade of unemployment and poverty. After the second world war precisely the opposite policy was adopted, and we had rapid growth, full employment and the debt came down.

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[Mr Clarke]

No two crises are the same. The causes of the problems in the 1920s were quite different. The steps taken to stimulate demand then were too late. We have been running a deficit throughout these difficult times. We are not going into surplus until the next Parliament. As I have said, the circumstances in which the United Kingdom found itself trading are much more difficult than anybody predicted in 2010, but the idea that what we have done so far resembles anything that was done by the less successful Government in the 1930s is absolute nonsense. The idea that we are going back to the 1930s is also nonsense. The Labour Front Bench has just accepted that what has been proposed by the Chancellor is an essential pre-condition to any lasting success for the benefit of our children.

There are all kinds of other things, but I have no time to go into them. The structural changes that we, like many other Europeans with damaged economies, have got to go in for, and that we are going in for, include: bank regulation; skills training; education reform; and stimulating modern technological industry and businesses in this country. All of those are absolutely essential and include sensible infrastructure spending, which we are sustaining. Unless we get the deficit under control, we have no prospect of getting back to the kind of levels of growth to which we used to aspire. In fact, the debts we are running are rather easier to sustain with interest rates down to a 300 year-low. Once we go back to ordinary levels of interest, all those countries that have failed to tackle their underlying problems of fiscal discipline will find themselves in terrible, terrible trouble. This is a challenge for every western democracy, and it is a difficult message to get across in a democracy. The Greeks may be the latest population in danger of being seduced into not doing difficult things and living on other people’s money. That is very dangerous indeed. The next time that we have another crisis will be difficult because, with the present level of debt, we will have so little in reserve to draw upon to help us through.

The last Labour Government completely failed to foresee what happened, and I think that even now they do not quite understand where they went wrong. They ran a massive surplus during the dotcom bubble, because they stuck to my fiscal figures, and found their tax revenues were inflated for a time. Then, when the next South Sea bubble came around and we had the credit bubble and the credit crunch, they were still—at the top of crazy levels of growth—running a fiscal deficit. They borrowed, but claimed they did not have a deficit. Well, they did not have much of one in 2006, but once the crazy tax revenues from the City collapsed, they were left high and dry, with the full extent of their irresponsibility exposed. They had failed to regulate the mad borrowing and lending in the City of London just as the Americans had failed in Wall Street. It was free money, which their last Chancellor indulged in, and when the bubble burst they were caught.

[Mr George Osborne]

The former Chancellor is making a strong speech. He might remember that the Labour Government increased the trend growth rate—a decision that at the time was in the hands of the Treasury, rather than an independent OBR. That led them to spend more money and run a structural deficit—the highest, according to the IMF—during that period. Now, we have come full circle and the shadow Chancellor, who was an economic adviser at the time, is proposing exactly the same assumption to underlie his economic policy, so that he can spend and borrow more.

[Mr Clarke]

I entirely agree. The shadow Chancellor has done just the same today. In his way of looking at things, the future trend rate of growth will be what he says the future trend rate of growth has to be to justify his plans. I used to envy the Ministers in China, who did not have to worry about a national statistical office: what the Minister said the growth rate was now was what the statisticians told him his growth rate was.

[Ed Balls]

Will the right hon. and learned Gentleman give way?

[Mr Clarke]

I really do not have time, but the right hon. Gentleman gave way a lot to me, so I will give way to him.

[Ed Balls]

I am sure the former Chancellor knows that decisions on the trend rate of growth in previous Parliaments were not made by the Treasury; they were audited by the National Audit Office. They are now a matter for the OBR, not for the Treasury, but he agrees with me that that is what we should do.

[Mr Clarke]

A lot of people did not—I did not—foresee the full extent of the catastrophic crash that resulted from the combination of problems in both the regulation of banks and the credit markets and in fiscal policy that occurred under what, with hindsight, were the most irresponsible Government we have had since the war. I will not mention the invasion of Iraq—another matter they presided over.

Everybody has to have their targets and ambitions. My stated target when I was Chancellor was to balance the budget over the cycle, which is really where we are going back to and which I think is essential prudence. I also said we should not spend more than 40% of GDP—Conservatives before me had allowed spending to get above that. The Maastricht criteria were quite useful—the right hon. Member for Kirkcaldy and Cowdenbeath used to agree with them—but we have to have targets, and the new ones, in a more globalised economy, cannot return to where we were. The Chancellor has to respond to events, but I congratulate my right hon. Friend on what he has achieved so far, and what he will achieve if he sticks to the charter.