Government: Convergence Programme

Lord Clinton-Davis Excerpts

Thursday 12th May 2011 Lords Chamber

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, I welcome this opportunity to debate the information that will be provided to the European Commission under Section 5 of the European Communities (Amendment) Act 1993. I also welcome the chance to exchange views on two closely related topics: the UK’s National Reform Programme 2011, the NRP; and the Government’s response to the Lords EU Select Committee’s 5th report. On behalf of the House, I thank my noble friend Lord Roper, my noble friend Lady O’Cathain, as the sub-committee chair, and the whole committee for putting forward these two reports for debate. I assure noble Lords at the outset that the Government look favourably, in principle, on both the committee’s recommendations.

While it might not be possible to synchronise the national reform programme and the convergence programme, since they are intrinsically different documents and therefore produced according to markedly different internal procedures, we will give careful consideration to debating the NRP alongside the convergence programme again in future years. I also note that the timing of the Budget announcement meant that it was not possible to hold this debate in advance of the spring European Council, in line with the committee’s recommendation.

I now turn to the main matter in hand. Each year the Government report to the Commission on the UK’s economic and budgetary position and our main economic policy measures in line with our commitments under the stability and growth pact. By sharing information from the Budget with our European partners, we can help to maintain an appropriate and effective level of economic policy co-ordination and contribute to stability and growth across the economic union.

European economies have suffered considerably in recent years. The financial crisis, bank bailouts and rising national debts and deficits have all left their legacy. As a continent, we have had to learn the hard way that in an open, global marketplace, no economy exists in isolation. The frailties of economic policy in one country can all too easily be exported to other nations and imbalances are seldom constrained by national borders or jurisdictions. That is why it is in all our interests to improve co-ordination of economic policy-making to tackle those imbalances and to increase the resilience and strength of the European Union as a whole. Our position on EU economic governance could not be clearer. We need better macro-economic surveillance and fiscal frameworks because sustainable economic growth across Europe is vital to the success of the British economy. Even though we are not part of the single currency we cannot consign ourselves to being bystanders in this debate. A strong and stable eurozone is firmly in the UK’s own economic interests. The EU is our largest single trading partner with more than 50 per cent of our exports going to other member states and a long history of shared success and prosperity.

However, just as our success has been and is shared, so are our problems. Therefore, we must act to ensure that the EU has the right warning mechanisms to identify future economic crises with a common set of rules in place and tough measures applied to those who step out of line. These rules exist in the form of the stability and growth pact but in over a decade of monetary union the sanctions it contains have never been used. That is why Britain has welcomed the EU’s recent proposals: to strengthen European economic governance; to encourage greater fiscal responsibility across member states; to address the macroeconomic imbalances that have built up between member states; and to ensure that in the future Europe is able to absorb future shocks.

I should like to reassure the House that the UK is not subject to sanctions under the stability and growth pact. The treaty is clear that they apply only to euro area countries. Moreover, the UK protocol to the treaty, negotiated at Maastricht, clarifies that we are exempt from any extension of sanctions, such as those proposed by the European Commission that are currently under discussion. We fully support the Commission’s moves to ensure greater fiscal responsibility across the euro area and its endorsement of the UK’s domestic consolidation plan. The plan that is enshrined in our convergence programme is one that will tackle our record deficit. Even though noble Lords will be familiar with what follows, I should summarise what constitutes our convergence programme. It is a plan with expenditure falling as a share of income in each and every year of this Parliament, and national debt falling as a proportion of GDP by 2014-2015. That is the right approach, and we need only to look across the Channel to see that this is the case.

Britain has a higher budget deficit than both Portugal and Greece. Last year, we had a similar level of national debt to Ireland. Yet our market interest rates for 10-year sovereign debt are a fraction of those of these three countries. In Greece they stand at more than 15 per cent, in Portugal more than 9 per cent and in Ireland they have increased to more than 10 per cent. In stark contrast, Britain’s market interest rates have fallen to below 3.5 per cent and our triple-A credit rating has been secured.

[Lord Clinton-Davis]

Do experts not forecast that the rate will go up to 5 per cent quite soon?

[Lord Sassoon]

My Lords, we are debating the convergence programme and the national reform programme. What is critical about the convergence programme is that we discipline ourselves in the way that eurozone countries are required to discipline themselves, and that the best test of the basic disciplines that we are putting in place is our relative interest rate. Of course, the Government do not forecast where absolute interest rates will go. However, a critical test of the credibility of our policy is the relative interest rate that the UK enjoys. I am pleased that it is at a very low level.

I turn now to growth, which is critical to the convergence programme. The independent Office for Budget Responsibility has forecast growth in each year of this Parliament, starting with growth of 1.7 per cent for the current year. This is in spite of the rise in world commodity prices and higher than expected inflation, which in turn has a bearing on interest rates, as the noble Lord suggested. The OBR points out that this effect,

“creates scope for slightly stronger growth in later years”,

than previously forecast. Therefore, while it expects real GDP growth of 2.5 per cent next year, it forecasts that that will then rise to 2.9 per cent in 2013 and 2014, and 2.8 per cent in 2015. The European Commission has published its own economic forecasts. These show that the UK will grow more strongly in the coming year than Spain, Italy, France, the average for the eurozone and the average for the EU.

That brings me to the other document that we are here to debate today: the UK’s national reform programme for 2011. The NRP reports on the structural reform agenda that the Government are taking forward. It paints a comprehensive picture, with which noble Lords will be familiar, of the progress that we are making across the UK. I will summarise its main features and stress that the document has a particular focus on the measures taken by the devolved Administrations and on the ways in which civil society stakeholders are helping the Government to deliver the reform agenda. Most importantly, the NRP sets out the Government’s Plan for Growth, which my right honourable friend the Chancellor of the Exchequer set out in the other place as part of this year’s Budget.

The plan has four ambitions at its heart: that Britain will have the most competitive tax system in the G20; that it will be the best place in Europe to start, finance and grow a business; that it will be have more balanced economy, by encouraging exports and investment; and that it will have a more educated workforce that is the most flexible in Europe. These objectives form the basis of the information that we will submit to the Commission. I will touch briefly on each in turn.

I turn first to taxation. Britain used to have the third-lowest corporate tax rate in Europe. We now have the sixth highest. At the same time, our tax code has become so complex that it is now the longest in the world. This is something that we have to address. Our taxes should be fair, predictable, simple to understand and easy to comply with. They should also be efficient and support growth. Therefore, in April, our corporation tax was reduced not just by 1 per cent, as we announced last June, but by 2 per cent, and will continue to fall by 1 per cent in each of the next three years, thus taking our corporate tax rate down to 23 per cent. That rate, in relation to other European countries, is 11 per cent lower than France and 7 per cent lower than Germany, and will give us the lowest corporate tax rate in the G7. That is alongside our decision to introduce a highly competitive tax rate on profits derived from patents and our fundamental reform of the complex rules for controlled foreign companies making them more territorial.

As I have said, it is also the Government’s ambition for Britain to become the best place in Europe to start, finance and grow a business. In the past decade alone, countries such as Germany, Denmark, and Finland have all overtaken us in the international rankings of competitiveness. In the Government’s Plan for Growth and, hence, in the NRP, we have taken action to abolish £350 million worth of specific regulations; to implement, in full, the recommendations on health and safety laws made by my noble friend Lord Young of Graffham; and to impose a moratorium exempting businesses employing fewer than 10 people, and all genuine start-ups, from new domestic regulation for the next three years. That will free the private sector from the unnecessary burdens that have been holding them back.

The Government’s third ambition for growth is to encourage investment and exports as a route to a more balanced economy. In the Plan for Growth we set out specific measures to help a wide range of businesses. In life sciences, we will radically reduce the time it takes to get approval for clinical trials. In our digital and creative industries, we will improve the intellectual property regime, and in manufacturing we are also taking forward important reforms.

Over the past decade, manufacturing as a share of our economy has fallen by almost a half, yet under this Government we are already seeing a reversal of this trend. Manufacturing, as a sector, has been growing at a record rate. To help that continue the Government are creating new export credits to help smaller businesses, launching Britain’s first technology and innovation centre for high-value manufacturing, and funding a further nine university centres for innovative manufacturing. This will help ensure that we have a more balanced economy with growth across a broader range of sectors and places. Lastly, we want to create a better educated workforce that is the most flexible in Europe.

It is alarming to see that Britain’s working age population has lower skills than the same demographic in France and Germany, which is perhaps the biggest problem facing our economy in the future. That is why the Government are committed to funding new university technical colleges, which we were discussing a few minutes ago in this House, to provide 11 to 19 year olds with vocational training that is among the best in the world.

However, that alone will not solve the problem. In Austria, Germany and Switzerland around one in four employers offers apprenticeships, while in England fewer than one in 10 employers do so, which has got to change. That is why we are providing funding for another 40,000 apprenticeships for the young and the unemployed, which will deliver a total of 250,000 more apprenticeships over the next four years as a direct result of the Government’s policies. That will help to ensure that all parts of the country have access to a better educated workforce. In brief summary, that is the content of the two major documents in front of us.

Submitting the NRP and CP to the European Commission is an essential step in the new European semester process but it is far from the end of the road on the process. The Commission will now examine both documents in detail and will shortly come forward with proposals for recommendations based on its analysis. These recommendations will be agreed by heads of state and Governments at the European Council on 28 June.

The Government support the multilateral surveillance of member states’ economies. The role of the European Council is particularly important since it allows for a genuine peer review process at the highest levels and enables member states to take account of the advice addressed to them when formulating future policy. Member states will reflect progress against the recommendations issued to them in their next national reform and stability and convergence programmes. However, it is important to note that the EU’s advice is just that, merely a set of recommendations, and it will be up to the Government, not Brussels, to decide whether and to what extent they should be implemented in the UK. No matter what they decide, as I pointed out earlier, our opt-out from the single currency means that the UK cannot be subjected to any sanctions.

To conclude, our budget, our growth and our spending plans are wholly consistent with the EU’s objectives under the stability and growth pact and under the Europe 2020 strategy. So the Budget document, along with the forecast produced by the independent OBR, forms the basis of the UK’s convergence programme. I have taken up a lot of the time of the House, so I hesitate to stress that in what I have said and what the documents contain, there is no information on the convergence programme. It is drawn entirely from material that has already been presented to Parliament and is in the public domain. The national reform programme also draws on a range of material, including the Budget and the Government’s Plan for Growth, and contains no new information. These documents restate the Government’s plans to deal with the economic problems they inherited and set the UK’s economy on a path towards sustainable growth. It is clearly important that we do not have to include additional information. If we did have to do so, it would show that our own domestic plans were deficient.

The Government are clear that their plans for the economy should be presented to Parliament before they are seen by the EU. That is exactly what we have done. I hope, therefore, that your Lordships will support these Motions, which I commend to the House.

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[Lord Clinton-Davis]

The noble Baroness, Lady Valentine, asked a lot of highly relevant questions. I hope that the Minister will be able to answer them.

I start by paying tribute to the sub-committee’s chairman, the noble Baroness, Lady O’Cathain. She is a guiding example in what a chairman should adopt. She chaired the sub-committee with skill and charm, and has enabled the sub-committee to work with undoubted success. Part of that success has been to enable all members of the committee to have their say. I thank the noble Baroness very much.

Charm, of course, is not always disarming. The noble Lord, Lord Sassoon, has demonstrated that today. I have a high regard for him, as he well knows, but he is something of an optimist, where pessimism is not the right answer but something between optimism and pessimism would not be averse.

To quote the former press secretary of President Eisenhower:

“One day I sat thinking, almost in despair; a hand fell on my shoulder and a voice said reassuringly: ‘Cheer up, things could get worse’. So I cheered up and, sure enough, things got worse”.

I think the same of the present Government’s policy: things will certainly get much worse. The Minister failed to see that as a possibility in any way. For example, their comments about unemployment are dealt with in paragraph 3 on page 2 of the report, which says,

“getting the unemployed back to work … the Commission calls for Member States to design benefits to reward return to work”—

by—

“linking training and job search … to benefits”—

and by increasing the—

“coherence between the level of income taxes … and unemployment benefits”.

How on earth has that got any relevance to the present unemployment problems? Of course we ought to adopt the ideas, but they are only part of the solution, not the entire solution.

Unhappily, the current facts indicate a rather different situation. They will, in most of Europe, form a vastly different situation: one of rising unemployment, probably to very high levels which will have serious political, as well as economic, problems. In the final paragraph of this report, the commission addresses part of the problem, but certainly not its entirety. It concentrates its fire on some unnamed member states with inflexible labour laws, but who are they? We do not know. That is hidden from view. The UK Government go to the other end of the spectrum. This situation is entirely wrong. In my view moderation, which calls for a modus vivendi, is the preferred remedy.

What does the second paragraph on page 4 really mean? It is full of verbiage but what does it mean? The situation cannot be approached in the way that the Government are doing. They have to be clear about the position, and that is certainly not the case.

I turn to the United Kingdom National Reform Programme 2011. I depart from the complacency which the noble Lord assumed at the beginning of this debate. I cannot endorse the programme that is advanced. It is long on verbiage and short on experience. Myths replace truths. It is extremist in tone and distorts recent history. It lives in hope, ignoring real problems that exist.

Paragraph 1.3 of the introduction is a repetition of the old canards and a strenuous refusal to recognise the mistakes which the Government are making. Is the Minister entirely convinced that the Government have 100 per cent of the answers? No Government have succeeded so far as that is concerned.

While trying to play a constructive role in the sub-committee, I have real doubts about the present European Commission and, indeed, about our Government: one mirrors the other. Despite significant problems, our economy was growing in 2010 at an annual rate of about 4 per cent. Now all that has changed disastrously, with a collapse of consumer confidence and a refusal on the part of many businesses to invest. None of this is confronted by the Commission or the Government.

The current orthodoxy reflected by the European Commission and others is that demand must be diminished by 1.5 per cent over the next four years. Inflation is likely to increase and personal disposable income is likely to decline. Those are not simply my words but those of many economic experts. All this will be accompanied by an inexorable rise in unemployment. My own view is that when all this happens—I do not say “if”—there will be an enduring political fallout. Ordinary people will, regrettably, be affected. They will be worse off than they were 12 months ago.

Labour certainly made many mistakes when in government but it is quite untrue that Gordon Brown and Alistair Darling left Britain on the brink of bankruptcy. That has been repeated many times by Ministers. However many times it is repeated, it is completely untrue. I hope against hope that Britain and the European Commission will pursue policies both of job creation and growth over a period of years. Wages must not be cut and the taxes of the squeezed middle should be dealt with in a similar way. Of course we cannot ignore the situation, but it has to be handled in a rather different way from that of the present Government. That is a way to disaster. That is my view. Others may have a different view; but that is what I really think. In my submission, all this demands a radically different approach from that of the Government and of the European Commission.

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[Lord Sassoon]

My Lords, we have had an interesting and valuable debate. It got into a new gear towards the end. We were having some very positive and practical suggestions about the content of the documents that we are talking about today and how they should be handled both domestically and in Europe, and then we suddenly went off into hyperspace, thanks to the contribution of the noble Lords, Lord Clinton-Davis and Lord Davies of Oldham. My response, therefore, will be in two parts. I thank all noble Lords for their contributions. I think my noble friend Lady O’Cathain was criticising Europe for a lack of oomph in relation to Lisbon. She certainly got the debate off with plenty of positive oomph but we ended with a lot of tired hot air coming from certain of the Benches.

I start by confirming that we will be reporting to the Commission each year. We are required to report on the UK’s economic and budgetary position, which is part of our commitment under the stability and growth pact. This is, of course, to ensure that we can help to maintain an appropriate level of macroeconomic policy co-ordination, which in itself contributes to stability and growth across the economic union. This is where the debate, particularly in its second half, presents some difficulties. What we get from certain noble Lords on the opposition Benches is all carping and critique but absolutely no alternative. The NRP and convergence programme is clear and comprehensive—not remotely complacent, to use the charge of the noble Lord, Lord Clinton-Davis.

[Lord Clinton-Davis]

I meant the Minister rather than the Government as a whole.

[Lord Sassoon]

It would be nice to know what on earth the Opposition have to offer and we could then have a meaningful debate about the alternatives. Only this morning, one of Gordon Brown’s close former Treasury and Downing Street advisers, Mr Dan Corry, wrote an article in the City A.M. newspaper, headed:

“Balls must offer alternative instead of carping”.

I would insert the names of a couple of noble Lords for “Balls”.

The article states:

“Balls and Miliband … should spend time developing and articulating what Labour’s economic strategy for growth is, and why it can work. That is the real task ahead and they need to get to it”.

I very much address those remarks to the noble Lord, Lord Davies of Oldham, and it would be much easier if next time we had a debate when we knew the alternative.

What underpins the plans is a,

“strong and credible multi-year fiscal deficit reduction plan … essential to ensure debt sustainability”.

Those are not my words but the words of the IMF in September last year, and that is what we are talking about this afternoon. Of course there are issues on which we are not remotely complacent as a Government. We have said all along that the recovery will be choppy and difficult. Yes, we recognise that inflation will be high this year but it is forecast by independent forecasters at the OBR and elsewhere to be coming down very significantly in 2012. We could trade all sorts of critiques about our plans all night, but one of the latest commentators with immense credibility on this, the US Treasury Secretary, said only recently that he was impressed with the basic strategy that had been adopted. He said that if we do not act with force to stabilise confidence, we will be confined to a much worse outcome economically. When asked whether we were going too fast, the US Treasury answered, “I don’t think so”.

We could spend a long time going over the substance of the Government’s basic economic strategy but I would merely say that the debate confirms that we certainly have a very clear strategy. It is at the heart of the documents we are discussing today. As I say, it would be nice in due course for the Opposition to come forward with something of an alternative if they think that our plans are not appropriate for the economy.

In the rest of the debate, many constructive points were made. I will first address issues to do with consultation, the way in which the document was presented and how it might evolve. A number of useful policy and other issues were raised; I may have time to address a few of them. Similarly, a group of points was raised concerning the handling in Europe of the NRP and the convergence programme, and how the process will go forward. I will take the points broadly in those groupings.

I turn first to the nature of the process that led to the document. My noble friend Lady O’Cathain and the noble Lord, Lord Haskel, asked about consultation and the inclusiveness of the process. Certainly I can confirm that as we drew up the growth plan that underpins the document, we consulted all those parts of society that my noble friend mentioned—NGOs, the private sector, civil society partners, local authorities and so on—and we will continue to engage in this process as we consult on the next iteration of the Government's growth plans.

As far as concerns the nature of the document, the noble Lord, Lord Haskel, was suitably challenging and positive about the way in which the NRP and Europe 2020 should be presented. It would be great if the enthusiasm that he shows for making this a more popular document in which a wider set of people was interested could be fulfilled. However, we should not be overambitious in this area. I very much take to heart some of his suggestions about the way in which the document could be structured. We are, in particular when it comes to setting out the bottlenecks, following a template that Europe sets for us. The noble Lord suggested that the document should show what has changed from year to year. I agree with him. This is the first full NRP under Europe 2020, and I am sure that future documents will chart progress from year to year.

The noble Lord has very high standards and perhaps was a little uncharitable about some of the themes that were not in the document, such as the impact on people. Our aim was to give the document more colour, flavour, appeal and interest to a broader readership. Noble Lords will know that there are a number of boxes throughout the document that give practical studies of the way in which some of the reform ideas can operate, whether through colleges, major companies, small businesses or voluntary organisations. I take the noble Lord's point, but we worked hard to make sure that the document contained illustrations from a broad section of society of how the themes in the NRP should operate.

I turn now to one or two specific policy areas to which attention was drawn. The noble Baroness, Lady Valentine, referred in particular to employment and labour law. This theme was touched on by the noble Lord, Lord Clinton-Davis. I should like to assure the noble Baroness that as we go forward with our reform work, employment law will be at the heart of it. As my right honourable friend the Chancellor said only yesterday at the Institute of Directors conference, the Government will publish a detailed timetable for the wholesale review of employment law in this country. It will include plans to review the unlimited penalties currently applied in discrimination employment tribunals, to simplify the administration of the national minimum wage, to review the TUPE regulations and to reform the consultation period for collective redundancies. The Government of course recognise that some of these issues may be controversial but, as we go forward with a challenging reform programme, it is essential and necessary that we leave no stone unturned, including in the area of employment law.

The noble Lord, Lord Haskel, questioned whether the NRP was thin on green detail—for example, on energy policy. Although I am sure that the noble Lord has seen it, I would point out that there is a section on climate change and energy which details the Government’s key objectives and policy actions in that area. Of course they cannot give the full detail, but the underlying policy documents are referenced in the NRP. More generally, on the question of a transition to the low-carbon economy, the announcement in the Budget of the carbon price floor sets a very challenging underpinning and basis on which investment can be made in the range of energy projects which we need going forward in this country, including, critically, in the low-carbon space.

The NRP sets out for each bottleneck and target the Government’s key objectives and details the policy action being taken forward towards meeting those objectives. As I have described already, we have examples of the way in which stakeholders are implementing these policies. Although the noble Lord, Lord Haskel, may challenge the structure of the document, it is very much responding to the way in which the European Commission would like to see it. We have tried to make it as illustrative as it can be, but of course we will take note of any suggestions as we think about the second and future iterations of it.

My noble friend Lord Newby raised a number of questions, including a very important one about trade and the Doha round. Of course he is right that Europe needs to become one of the key engines of world trade. I can confirm that the Government support concluding the Doha development round this year, but I would also bracket that by saying that there is another important European dimension to this. We want the European Union to build on the success of recent bilateral free trade agreements—that with Korea in particular—and further agreements to be concluded with India, Canada and Singapore this year. I am grateful to my noble friend for drawing attention to that. Europe has an important role to play on both Doha and the bilateral agreements and we will be pressing it forward in both those dimensions.

I turn now to some of the other Europe-wide issues and the process points on the documents. My noble friend Lord Newby asked whether the EU has its own bottlenecks and what is it doing about them. That is absolutely the right question to ask, and it will certainly strengthen my own resolve to make sure that we put the institutions at the heart of Europe on the spot in terms of identifying the bottlenecks in the areas for which they are responsible. Principally that means strengthening and deepening the single market, the free trade issues to which my noble friend drew attention, and reducing regulatory burdens at the EU level. Those are issues that we press vigorously with Europe, but his read-across on the bottleneck theme is an interesting one, although this particular exercise is principally one for individual member states.

On how this is now being addressed, my noble friend Lady O’Cathain asked about the robustness of discussions. They are indeed robust and I hope that, as we get into the key discussions that will take place over the summer, they will continue to be so. There are some interesting differences perhaps of expectation about the nature of the process going forward. I have to say that on balance I am probably more in tune with the way the noble Baroness, Lady Valentine, characterised at the beginning of her speech the nature of the scrutiny process and the expectations we should have of it rather than with my noble friend Lord Newby. What is critical about this is that these issues will be debated at heads of government level, having first been discussed at ECOFIN. Of course we cannot expect leaders to debate all the fine detail, but what is important about this—I take up a point made by my noble friend Lady O’Cathain—is that there is a basis on which national governments can be held to account. Peer group pressure by discussion at heads of government level is very important, and the UK has certainly put down a document that challenges our partners in a number of key respects.

Lastly, my noble friend asked about independent analysis. We would like to see independent analysis of the sort that the Centre for European Reform has been conducting to carry on, but of course it is independent and it is for the centre to come forward with further analysis. We would welcome that.

In conclusion, this has been a full and interesting debate. The UK has laid down an NRP and a CP which are challenging documents in that they show how we are going to reverse the trend that we have seen over the past decade to create an economy that is more balanced and one in which the deficit is brought under control. These are plans that we will drive through and plans on the basis of which we will participate enthusiastically in exerting peer pressure on our member state partners. We will use this process as far as we can to enhance Europe’s fiscal disciplines and to encourage the structural reforms in Europe that are necessary to underpin Europe’s sustained growth.