Charter for Budget Responsibility and Welfare Cap

Richard Fuller Excerpts

Monday 10th January 2022 Commons Chamber

[Mr Clarke]

The Bank of England has obviously helped to underpin our wider response to the crisis that we face. Clearly, it does have a bearing on the relevant significance of debt, but it would be simply irresponsible to leave ourselves exposed in the manner in which we risk being if we fail to constrain the borrowing, which risks otherwise becoming an unacceptable burden and which would leave us very vulnerable. A 1% rise in interest rates would cost the Exchequer £22.8 billion in 2025-26. That is a meaningful level of exposure and one which we want to take action to address.

[Richard Fuller (North East Bedfordshire) (Con)]

To help the Minister, would he not also point out that, under this Government, the Bank of England has reduced the proportion of new debt issuances, which are attached to rising inflation rates? So at least, due to the actions of the Bank of England over the past two or three years, that exposure has declined.

[Mr Clarke]

My hon. Friend is absolutely right. We are certainly not saying that we are in an untenable situation, but we are saying that it is important to meet our fiscal rules and to get debt falling as a percentage of GDP. As Conservatives, we believe that and we have won elections four times in the past 12 years on that basis. It is important that we continue to uphold that.

[Mr Clarke]

I think it remains the case that we need to make sure that our debt-to-GDP ratio is more sustainable than it is at present, and I do not think colleagues would significantly demur from that. I take the point that, obviously, there is an interaction—some of these interactions are of a relatively circular nature—between the Bank and Exchequer, but none the less, it is important that we control our public debt. Indeed, we were able to respond to the pandemic as comprehensively as we did precisely because of the fiscal space created since 2010. The fact that we faced two once-in-a-generation shocks in just over a decade highlights why we must have the buffers to provide support when it is needed most and why we must act to rebuild those buffers, so that we are ready for any future shocks. In its most recent “Fiscal risks report”—not an easy one to splutter out—the OBR said:

“In the absence of perfect foresight, fiscal space may be the single most valuable risk management tool”

that we have.

The third and final reason we need to keep our debt under control is simple: our public finances are the legacy we leave for future generations, and the decisions we take now will have a material impact on the lives and livelihoods of our grandchildren. They will help or hinder their future ability to tackle long-term challenges, from climate change to an ageing population, or indeed to seize the opportunities that lie ahead.

The charter for budget responsibility contains new fiscal rules to guide us back to fiscal sustainability in a fair and responsible way. The rules will ensure that we get debt down over the medium term. They will allow us to deliver a significant uplift in capital investment, in turn driving economic prosperity, but without burdening future generations with borrowing to fund our day-to-day spending. The new rules require that underlying public sector net debt, excluding the impact of the Bank of England, must as a percentage of GDP be falling. The current budget must be in balance, which means that everyday spending must be paid for through taxation. Both rules must be met by the third year of every forecast period, giving us the flexibility to respond to events in the near term, such as omicron, while credibly keeping the public finances under control.

Finally, a third rule will ensure that public sector net investment does not exceed 3% of GDP on average over the forecast period. This rule will allow the Government to deliver on our ambitious plans for investment over this Parliament, with the highest sustained levels of PSNI as a proportion of GDP since the late 1970s. With this rule, we are delivering on plans to invest more than £600 billion in gross public sector investment over this Parliament to spread prosperity across the UK. The £4.8 billion levelling-up fund is part of that. An unprecedented investment package of £5.7 billion for eight English city regions to transform their local transport networks is also part of it. On top of these commitments, the UK Infrastructure Bank is now open for business and is expected to support more than £40 billion of infrastructure investment. Crucially, the rule also mitigates the risk of increasing debt to an unsustainable level. Our fiscally responsible approach supports growth while keeping debt under control.

Combined, these rules will guide responsible decision making. The International Monetary Fund has noted that

“Countries that have followed a debt rule have typically managed to reverse a jump in debt...significantly faster than other countries”,

and it recently assessed that the

“new fiscal rules have anchored fiscal policy well”.

Thanks to our support for the economy and early responsible decisions to strengthen our public finances, in its October forecast, the independent Office for Budget Responsibility confirmed that the rules were met. The current budget is in surplus and underlying debt is forecast to fall in the current target year, 2024-25. The rules will guide fiscal policy for at least this Parliament and will be reviewed at the start of each Parliament to ensure they reflect the economic context and mean that we can deliver for the British people.

In addition to the rules in this charter, we will go further, becoming one of the first countries to formally consider the broader public sector balance sheet in our management of fiscal policy. The OBR will now forecast broader measures, including public sector net worth, which it says provides a fuller picture of fiscal sustainability and allows for more sophisticated analysis.

The charter also retains the welfare cap in order to keep welfare spending on a sustainable path and to support the other rules in strengthening the public finances. Since the cap was last set at Budget 2020, the covid pandemic has had a significant impact on the medium-term outlook for welfare spending. To reflect that and to align with the updated fiscal framework, the level of the cap is being reset in line with the latest forecast. That leads to an effective increase of £10.5 billion in the cap by 2024-25.

[Richard Fuller]

I would like the Chief Secretary to educate me a little bit, because what I cannot appreciate is the impact of covid on welfare expenditure. In the short term, I can understand why that would be significant, but why does that move forward into the medium term, when one would anticipate that the economy is recovering and we have demand for people to go back into employment?

[Mr Clarke]

The reality is that much of what we have put in place—this has been a £400 billion response—will take time to filter through the economy and out the other side. Clearly we expect some of it to taper away, but there are large parts of the package that we have had to put in place to support lives and livelihoods that will undoubtedly take time to wash through the wider economic settlement. The welfare cap is designed to be an automatic stabiliser, but it is also partly a measure by which we can be held to account as a Government, because this is not like departmental spending; it is more akin to AME spending—it is not something where we can manage it in the usual way. Therefore it is important that by setting this cap, we give ourselves at least a benchmark against which our performance in managing those pressures can be measured by the end of the forecast period. It is vital to ensuring that we have a welfare system that provides fairness and accountability to the taxpayer and the House.

The updated charter delivers on our commitment to budget responsibility in a way that is appropriate to our current circumstances. I understand very well the concerns that hon. Members may have about inflation and rising prices. We have already introduced more measures to put money into people’s pockets—increasing the minimum wage and cutting the universal taper rate. Although we have had to take important steps to protect the NHS and safeguard our economy, my right hon. Friend the Chancellor said in the Budget

“my goal is to reduce taxes. By the end of this Parliament, I want taxes to be going down, not up.”—[Official Report, 27 October 2021; Vol. 702, c. 286.]

We want to reward innovation and hard work, as well as the sacrifices of the British people over the last two years. Our plan for stable public finances in the charter puts us in the best possible place to achieve this goal and to stay true to our Conservative ideals. Tonight, hon. Members have a clear choice—to vote for fiscal responsibility, a credible path back to sound public finances and a stronger economy for the British people, or to let slip the anchors and leave our economy vulnerable and adrift.

The charter balances flexibility to support the economy and our stated manifesto goals in the near term with stronger public finances in the medium to long term. It supports our vision for a stronger economy, levelling up across the UK through significant cash investment, and it safeguards a stable, prosperous future with a strong fiscal legacy for generations to come.

--- Later in debate ---

[Richard Fuller (North East Bedfordshire) (Con)]

One of the primary reasons a Parliament was established was to protect property owners from the excessive claims of the state, and over the last quarter century this is a duty that successive Parliaments have spectacularly failed to fulfil. Encouraged by benign trends and with the irrepressible pressure of the media to spend more and take on more responsibilities, while hampered by a globalisation of capital that has moved the ownership of property offshore and therefore made it harder to tax, the political class in this country and in this Parliament appears to have lost any sense of the responsibility to pay for what they spend.

As speakers have said in this debate already, the UK now has the highest peacetime tax burden since world war two. The UK Government have direct debts of £2.6 trillion. In addition, there are unfunded pension liabilities and other off-balance sheet liabilities that take that total closer to £4.6 trillion, yet speaker after speaker, even in this debate, says, “Spend more, spend more.”

Since 2009, the Bank of England has been printing money, and notwithstanding the very clear points made by my right hon. Friend the Member for Wokingham (John Redwood), that £895 billion of quantitative easing is a potential debasement of the currency. Even though it may have been moving interest from one hand to the other hand between the Treasury and the Bank of England, there is a long-term understanding from capital markets that if Governments and sovereigns are quite happily able to print their own money, those who wish to lend money in the future will ask for a higher interest rate to cover that risk. UK Governments over the last 30 years have benefited from at least a 30-year decline in the yield curve, and perhaps we have grown used to an expectation that a lender will, in real terms, actually pay for the privilege of funding public expenditure.

To me, this is a very precarious financial situation for the UK Government, so what of our prospects? The right hon. Member for Wolverhampton South East (Mr McFadden) and the hon. Member for Glasgow Central (Alison Thewliss) talked about economic growth somehow being the magic cure, saying that the United Kingdom was doing uniquely poorly and that they had a special plan. But the truth of the matter is that economic growth across all the developed OECD countries has declined from an average of over 3% per annum in the 1970s and ’80s to an average of below 2% in the period since 2000. The relative position of the UK to the OECD is better now than it was in the ’70s and ’80s, so the argument that the UK Government are missing something in their growth strategy that other countries have found is without foundation. I have heard the right hon. Member for Wolverhampton South East make this point before, and it is a neat point. That is why I went to check the figures, and I would encourage him to do likewise.

Geopolitical risks are growing, partly driven by a 50-year strategy to integrate China economically and politically into the democratic system. That is now at least in question, if not in reverse. We should think very carefully about the fact that disengaging China and its productive capacity from the global trading system risks adding to inflationary pressures. Demand from sovereign borrowers among all developed countries has risen from 70% of GDP a few years ago to over 200% of GDP—not just the UK but all developed countries. That is a level not seen since world war two, and it puts pressure on international global liquidity that increases expectations that the 30-year decline in yield curves may well go into reverse.

I am yet to see any evidence that all of us politicians have really learned how to stand up to the constant demands to spend more and involve the Government more as the answer to every single question that the media put to us. I would only hope that we pay more attention to those who have to pay for that rather than to getting the credit for saying that we can solve every problem.

Greater risks, rising interest rates, higher inflation expectations and a political class that has not really focused on the need to pay for things are the context in which we have the Government’s charter for budget responsibility. It is a welcome addition, because it makes changes that start to confront some of those pressures. There is an additional focus on assessing the affordability of public debt. It is rather a surprise that we did not have that as a focus previously. It has also added a cap on investment expenditure of 3% of GDP. I take the good point made by my right hon. Friend the Member for Wokingham that that sounds a bit reminiscent of the European Union plans. However, there does seem to be a problem of Departments bidding to the Treasury based on expectations of the rate of return they are going to make and the Treasury then having to stand back and be a barrier against all those demands on the public purse. The cap on investment expenditure is a prudent addition to make.

The charter adds a new key indicator of public sector net worth. I encourage the Minister to move very quickly to let us have the details on that. New Zealand put this together in the last millennium, so it cannot be that hard to do, although I recognise that it can be misleading as well as insightful.

One thing that is not in the charter is the consequences for breaking fiscal rules. This point was made by the hon. Member for Glasgow Central. It is good to write certain fiscal rules but it is also good for there to be consequences on behalf of taxpayers for Governments who do not meet those rules, and that should be more than just a new rewriting of the rules.

Finally, I want to make a point about long-term trends in the Bank of England. Paragraph 3.20 of the document says:

“The Treasury’s objective in relation to debt management policy is…to minimise, over the long term, the costs of meeting the government’s financing needs, taking into account risk, while ensuring that debt management policy is consistent with the aims of monetary policy.”

I like the phrase “over the long term”, which hides all sorts of problems. I thought I would try to find the long term, so I turned to the January 2020 working paper by the Bank of England, “Eight centuries of global real interest rates,” to see what it might tell us about the Bank’s thinking. I am concerned that the Bank of England has had a view about inflation rates that is a little too benign. The working paper says:

“Against their long term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’…real rates could soon enter permanently negative territory.”

This is the big question I would like the Minister to answer: is it the expectation that we are living, for the foreseeable future, in an era in which we anticipate that interest rates, in real terms, will be negative and declining? Or will that be the long-term trend, but subject to major fluctuations in the short term? People’s livelihoods depend much more crucially on that expectation than on other things we might debate in the near future.