Economy: Fiscal Framework

Lord Newby Excerpts

Tuesday 4th June 2013 Lords Chamber

[Lord Barnett]

To ask Her Majesty’s Government what was meant by the reference to “flexibility in the fiscal framework” in the Chancellor of the Exchequer’s speech to the International Monetary Fund in Washington in April.

[Lord Newby]

My Lords, the Government’s fiscal strategy is grounded in the clear, credible and specific consolidation plans and new fiscal framework announced in the June Budget of 2010. The fiscal mandate to achieve a cyclically adjusted current balance by the end of the rolling five-year forecast period has ensured a flexible fiscal response to economic developments by allowing the automatic stabilisers to operate and by protecting the most productive public investment expenditure.

[Lord Barnett]

My Lords, if that was an answer to my Question, I thank the Minister. The Chancellor used to be proud to claim the IMF as a supporter of his policies, but it has now said a number of times, and it is worth repeating, that the Chancellor might revisit his austerity programme. Does that mean that he is or he is not?

[Lord Newby]

My Lords, I know that the noble Lord is a great reader of IMF reports and that he will, therefore, have read the following from its recent report:

“The commitment to a medium-term plan has earned the government credibility … While adhering to the medium-term framework, the government has shown welcome flexibility in its fiscal program”.

We agree.

[Lord Vinson]

My Lords, does the Minister agree that this country currently has to borrow over £50 billion a year to meet its obligations, largely due to our inability to export? That £50 billion comes after selling some of our prime assets like our water companies and utilities which, for some reason, pension funds abroad think better of investing in than our own pension funds do. Leaving that aside, we have a floating pound and the only way that we can actually make ourselves more competitive is to let the pound float down. I hope that the Government and the new governor will encourage this.

[Lord Newby]

My Lords, as the noble Lord said, we have a floating exchange rate. The Government do not set a target for the exchange rate; it responds to economic circumstances, including the decisions taken by the independent Bank of England.

[Lord Peston]

My Lords, given the economic mess that the Government’s policies have got the whole country into…

[Lord Peston]

Oh yes. I hope I do not have to remind the coalition how long it has been in power and it is about time it accepted some degree of responsibility. Some flexibility in the fiscal framework is called for, and the obvious flexibility is to extend the planning horizon—I advise the Government on this with no charge—to the whole length of the business cycle so that we could have some expansionary fiscal policies now, followed, in due course, by further fiscal adjustment. That is the way we ought to be going, and the sooner we have a Government that does it, the better.

[Lord Newby]

My Lords, the Government have pushed back the period during which we are going to eliminate the deficit. The rate at which we are doing it, at about 1% of GDP per annum, is exactly in line with IMF guidance to countries that find themselves in the position that we do.

[Baroness Kramer]

My Lords, I have some sympathy with the noble Lord, Lord Barnett, because he put down his Question before Ed Balls did a U-turn yesterday on the Labour policy that his Question reflects. However, would the Minister not agree that the greatest risk to recovery at the moment is the lack of credit as business returns to its growth phase and will need that credit in order to succeed? What is his assessment of the capacity of the banks to fill that need?

[Lord Newby]

My Lords, the capacity of the banks to fill that need is shown by the latest borrowing figures, which are mixed. Of the 40 banks that are participating in the Funding for Lending scheme, 27 expanded their lending and 13 contracted it. There was a small net contraction—much less than in recent quarters. There is evidence that net lending will expand as the year progresses, as a number of banks—such as Santander, which is winding down its mortgage book—come to the end of programmes.

[Lord Davies of Oldham]

My Lords, in his somewhat oblique Answer to the Question put by my noble friend Lord Barnett, the Minister mentioned the automatic stabilisers. Will the Government commit, in the forthcoming spending review, to the automatic stabilisers being maintained?

[Lord Newby]

Yes, my Lords.

[Lord Higgins]

Does my noble friend agree that the impression that one gets of the IMF’s views on the Chancellor’s policies by reading the press are very different from the impression one gets if one actually reads the IMF reports?

[Lord Newby]

I will say yes to that as well. However, the Government completely agree with the point that the IMF made about the desirability of bringing forward infrastructure expenditure. That is why last year we put in place the infrastructure guarantee programme, which is already bearing fruit with the allocation of £1 billion to the Northern line extension to Battersea, and the recently announced £75 million to be given to Drax power station for its partial conversion to biomass.

[Lord Flight]

My Lords, does the Minister agree that running a deficit of over £100 billion when it was planned as roughly half that sum and creating money to the extent of £380 billion is extremely flexible in terms of policy? Some might even view it as rather excessively Keynesian.

[Lord Newby]

Clearly some do view it as that. It is worth bearing in mind that while we are reducing our deficit to the 3% EU Maastricht target over the period to 2017-18, even the relaxation that the EU has agreed in recent weeks with France, Slovenia, the Netherlands and Spain will get them back to a target of borrowing of less than 3% by 2015 or 2016. It is therefore taking us a lot longer. The Government have agreed to phase down borrowing over a much longer period than is allowed even under the reduced timetable elsewhere in the EU.

[Lord Forsyth of Drumlean]

My Lords, is my noble friend not concerned at the way in which asset prices, particularly housing and shares, are now being inflated as a result of quantitative easing? Will he confirm that this Government will never use inflation as a means to get rid of the debt, because that will result in substantial unemployment, a loss of competitiveness and the road to Carey Street?

[Lord Newby]

My Lords, this Government will make that commitment, which is why the target that we set for the Monetary Policy Committee of the Bank of England has not been relaxed, and will not be relaxed during this Government’s tenure of office.