UK Convergence Programme

Lord Davies of Oldham Excerpts

Monday 24th April 2017 Lords Chamber

[The Commercial Secretary to the Treasury (Baroness Neville-Rolfe) (Con)]

My Lords, the major political events of the past few weeks have been the calling of a general election and the triggering by the UK of Article 50 of the Lisbon treaty, giving notice of our withdrawal from the EU. Given that background, today’s debate, which stems from arrangements and rules in essence designed to ensure economic convergence among EU member states, might at first glance look a little odd. But the oddity, if it exists, is on the surface only, and there is good reason for submitting the 2016-17 convergence programme before us. Most importantly, there is the fact that, until we leave the EU, we have all the rights and obligations of a member state. Of course, we continue to exercise our rights of membership in this period, and the document before us, which explains UK economic policy, especially in relation to maintaining stability and bringing down the deficit, is one such obligation.

In practice, drafting the paper was relatively straightforward, since it is based on the Spring Budget report and the OBR’s most recent Economic and Fiscal Outlook. I am sure that noble Lords who have examined it will have seen much familiar content.

I should draw to the attention of noble Lords one detailed but vital point. It is the Government’s assessment of the UK’s economic and budgetary position, and not the convergence programme itself, that requires the approval of the House. There is one further point which I should stress now. It is that, as the UK is outside the eurozone, we cannot be subject to any sanctions under the EU fiscal rules encompassed in the stability and growth pact of which the convergence programme forms part.

It may be helpful to the House if I provide a brief overview of the information that we have set out in the UK’s convergence programme, even though much of this will be familiar. Perhaps the most pleasing point is that in March 2017 we were in a better position economically than many—indeed, most—had predicted. The IMF recently revised up its 2017 growth forecast for the UK by 0.5 percentage points and growth in the second half of 2016 was stronger than the OBR anticipated in the Autumn Statement. In fact, last year the UK grew faster than most other advanced major economies, with near record employment, too. The deficit has also been reduced. Overall public sector net borrowing as a percentage of GDP is predicted to fall from 3.8% last year to 2.6% this year. It is then forecast to be 2.9% in 2017-18 and to fall thereafter to 0.7% in 2021-22—its lowest level in two decades.

As a consequence of all this, we are forecast to meet the EU’s 3% stability and growth pact target this year, for the first time in almost a decade. Accordingly, the UK will cease to be subject to the EU’s excessive deficit procedure. Although we are leaving the EU, this is good news. We are within sight of bringing to a halt the increase in the national debt as a proportion of GDP. Nevertheless, at nearly 90% of GDP, the Government believe our debt level is too high. That is why they set out fiscal rules that combine the flexibility to support the economy if necessary in the near term with a long-term objective of returning the public finances to a sustainable position.

The OBR forecasts that business investment will remain subdued as we begin the period of negotiation with our EU friends and partners. It continues to judge that, in the medium term, growth will slow due to weaker growth in consumer demand as a consequence of a rise in inflation. Accordingly, putting the public finances in good order will remain vital for the foreseeable future, all the more so given that the deficit remains too high and that there is a range of risks in the global economy. That is why we are getting ourselves into a position of readiness to handle difficulties of any kind that might come our way.

Our fiscal rules, which enable us to do that, strike the right balance between reducing the deficit, maintaining flexibility and investing for the long term. Our Autumn Statement and Spring Budget set out our plans to build on recent economic growth and our strong employment record, and indeed to raise productivity, which has been disappointingly weak over a long period. We are taking action to improve skills, to give more children the chance to go to a good school, to support the care system and the NHS, to drive innovation and to invest in infrastructure and digital. We have consulted on a Green Paper about an industrial strategy aimed at delivering a high-skilled, productive, competitive economy that benefits people in all parts of the UK. Sound public finances are an absolute necessity to make this happen and to provide the level of public services we all wish to see. That is essentially what the convergence process is about.

To conclude, following the House’s approval of the economic and budgetary assessment that forms the basis of the convergence programme, the Government will submit it to the Council of the European Union and to the European Commission. Doing so also provides the EU with a useful framework for co-ordinating fiscal policies. A degree of fiscal policy co-ordination across countries can be beneficial to ensure a stable global economy, which is of course in our own interest. The UK has always taken part in international mechanisms for policy co-ordination, such as the G7, G20 and OECD. Although we are leaving the EU, we will continue to have a deep interest in the economic stability and prosperity of our European friends and neighbours. We will also continue to play our part in this process while we remain an EU member, and we will play our part in other international policy co-ordination processes once we have left the EU. The Government are committed to ensuring that we act in full accordance with Section 5 of the European Communities (Amendment) Act 1993, and I ask this House to approve the economic and budgetary assessment that forms the basis of the convergence programme. I beg to move.

[Lord Davies of Oldham (Lab)]

My Lords, the Minister made the best fist of a pretty thin case. First, it is somewhat absurd that we are debating and seeking to put through a Motion on the issue of convergence just at the point when the Government have set their sails in the opposite direction, away from any convergence as far as their direct relationship with the European Community is concerned. At least the Minister in the other place, when pressed on this particular obvious sailing point, said, “Well, I don’t really think the issues of convergence affected government policy a great deal”. It is quite clear that the Government have had their own agenda for the economy and have pursued it with considerable rigour, at particular cost to sections of our population—and, I might add, to the economy as a whole. But the issue of convergence certainly did not rank particularly highly in that agenda and the Government, I imagine, can therefore begin their approach to the question of Brexit untrammelled with any regrets that no British Government will have to face up to this issue in the future.

The Government are making much at this stage of economic growth over the last year and a half, with the prediction that it might last a little longer. That is against a background where their record on economic growth was close to catastrophic. They presided over the slowest recovery from a recession in more than 100 years and followed the worst policies for getting the country back on to an even keel. What has this meant? Their target was 2015, which was two years ago. They were meant to hit their target in 2015 but we now have a revision under a new Chancellor, who has slightly more elastic concepts on how rigorous an onslaught should be pursued on the debt position. He is saying that it may be the early 2020s but has not made too great an assurance about that. What would your Lordships say normally to anybody who had promised that they would bend every sinew to producing a position where they got out of debt in five years, and then after seven years said, “We haven’t made it—in fact, we are only half way there and we don’t think we’ll be able to do it for another five years anyway”? It suggests that there is a slight flaw in the Government’s thinking on how well they have done with the economy over the last few years.

The other dimension of it is quite clear: the absence of growth has reduced significantly the receipts to the Exchequer and made the Government’s onslaught on public expenditure even more savage. The Government boast about the fact that they have been conducting their position on public expenditure with a real sense of fairness. Tell that to the disabled. Tell that to the families where children are entering poverty in numbers that we have not seen for two decades. Tell that to the people who are seeing benefits for those in work cut at the levels which they are by this Government. That is to say nothing about what I hope the Government recognise is a crisis in the health service, or about the problems we have with regard to welfare and in particular with care for the aged. It says nothing about the real problems of so many in our community, who depend upon government handouts not because they are idle and have brought things upon themselves but because they live in a society, and an economy, in which it is difficult for them to earn sufficient to sustain their living standards. Yet the Government are busy eroding any support which they enjoy.

Let us turn as well to the question that the Government always emphasise as such a significant achievement: levels of employment. What kind of employment is it? It is no coincidence that when the Minister says that we have made painfully little progress—I am not sure whether she used quite that adverb but she was generous enough to concede that progress on productivity has been limited in recent years—it is a direct reflection of the employment conditions of so many of our people. Far from them being engaged in enterprises alongside employers who are seeking to promote the work, to engage the workers constructively and perhaps even from time to time to listen to them on how work could be done better, we have the exact antithesis. We have people on zero-hours contracts with no commitment to the company at all, apart from the hope that they will be able each week to sustain enough hours in work to keep their living standards.

What employers have been doing is worse. There are appalling examples. They have been saying to such people, “Sling your hook”. That phrase comes from dockers in the 19th century who turned up for work with their hook and if not so many were needed or those who were needed were carefully selected, they rest had to sling their hook, go away and receive no remuneration or sustenance of living standards. It is not surprising that the late 19th-century state had to react to that situation in the face of such discontent. The Government may feel that they are not presiding over a period of such discontent at this time. That may partially be because so many of the people who are in that position have no voice. They have no voice because the very vulnerability of the work they do renders them unable to challenge.

What does this all mean? It means that the Government are now engaged upon Brexit, which will dominate all political and economic debate for a considerable period ahead. What is conspicuous about Brexit—I hope the Minister may at least own up to this fact—is that the Government had absolutely no plans to cope with Brexit and had not anticipated that the vote might go that way. If they did anticipate it, they are very culpable for leaving us in this position, where it is quite clear that our negotiating position is a good deal weaker than it ought to be. The Government keep on saying that we are out on a deep, wide ocean and that we can greatly increase our trade with others whom we have neglected in the past. I have not noticed the British economy neglecting markets in the past. Our problem is being able to be sufficiently competitive to win them. We are walking out on the largest market of all. Whenever the Government mention the United States, India or China, do they not realise that trade with those countries adds up to only a fraction of that which we enjoy at present under the framework of the European Community? That is the nature of the risk being taken.

I realise that this is a straightforward Motion today. There is no question of the Opposition not seeing that we make a last gesture towards convergence, which is required of us as long as we are a member of the European Community, which we are at present. Underpinning it all—and this is what this Government have to face up to—is the basic weakness of their economic position. That may not worry Ministers in this House too much because, although they would probably like to continue in office, it is not quite as serious a threat as that to Ministers at the other end who have to retain not just their office but their seat as well. The confidence of Ministers in the other place may be shaken somewhat, and therefore, although I have indicated that the Opposition support this Motion, I offer some warnings as to the future.

[Baroness Neville-Rolfe]

First, I thank the noble Lord, Lord Davies of Oldham, for supporting the Motion and for filling the void in a debate with few participants today. I suspect he will not be surprised to learn that I do not agree with his cynicism. We have our own economic policy of course in this country, and as I tried to explain, the work to bring deficits down is important from both a European Union and a UK point of view, and we have made progress. It has been difficult, not least because of the legacy—the mess—that we inherited on the economic side, but since 2010 our economy has grown by 14.6%: faster than Germany’s and twice as fast as France’s. As I mentioned in my opening remarks, we have had good news recently from the IMF, and indeed the CBI published strong figures today. The deficit has been cut by almost two-thirds from a post-war peak of 8.8% and, as he acknowledged, employment is up, by nearly 2.8 million. The employment rate is at a record high of 74.6%.

This is, in my experience, the envy of other member states in Europe, alongside the small business creation that we have also managed to oversee. Our labour laws are strong, and will remain strong, but they also allow different types of employment which have helped us in this country to grow and to innovate. The rise in employment is not all in lower-paid or unskilled jobs. Three-quarters of the rise is in higher-skilled occupations. Zero-hours contracts have a part to play in a modern, flexible labour market, as we have debated before. They are also a small proportion of the workforce—2.8%. We have invested for the future and are at last tackling productivity in a comprehensive way, something which I am certainly very engaged in.

I do not think there is any point in us arguing about Brexit, but I am clear that our bold and ambitious plan offers this country a great future.

As I stated in my opening remarks, following this debate, and with Parliament’s approval, the Government will inform the Council of the European Union and the European Commission of our assessment of the UK’s medium-term economic and budgetary position. This is a legal requirement under the EU’s stability and growth pact, and the information we present is based entirely on information and documents already presented to Parliament and, in the main, debated. That includes the Budget we set out this spring, which upholds our economic stability, invests in the future and keeps the UK on a clear path to prosperity over the long term. The foundation of all those things lies in our work to improve the national finances, and that is the basis of the convergence programme that we are, this month, presenting to the EU. I am pleased to commend this to the House.