Charter for Budget Responsibility

Stewart Hosie Excerpts

Wednesday 20th July 2016 Commons Chamber

[Mr Gauke]

I do not think the hon. Gentleman gives the Government the credit we are due for what we are doing on infrastructure. I understand the argument that we need to do more to improve our infrastructure, but let us remember what we have done: more than a quarter of a trillion pounds has been invested in infrastructure since 2010, the average annual investment in the last Parliament was 17% higher than in the preceding one and we have set out plans to invest more than £100 billion in infrastructure by the end of this Parliament.

We are taking measures on infrastructure, but we must put those in context. We also have to ensure that we have sound public finances. The immediate response to the shock of leaving the European Union has to be to work closely with the Bank of England as it carries out its role of providing stability and confidence in our economy. Monetary policy should be the first means of response to an economic shock such as this. We will use the summer period ahead to assess the situation, based on the economic data, and come the autumn we will report back to the House, setting out how we will respond on spending and taxation.

Let me be clear with the House: we continue to believe in fiscal responsibility. This country should not, as it did in the earlier part of this century, make itself vulnerable to economic shocks by letting public spending get out of control. As the Chancellor has made clear—and, indeed, as the previous Chancellor, my right hon. Friend the Member for Tatton (Mr Osborne), made clear—our target to reach a surplus by 2019-20 should not be sought in the economic circumstances we now face.

As hon. Members know, our fiscal plans to reach a surplus always came with a clear caveat: if our economic circumstances were to alter significantly and the independent Office for Budget Responsibility were to forecast less than 1% real growth on a rolling four quarter on four quarter basis, that target would be reviewed. With expert forecasters suggesting that we are highly likely to see that risk to our growth crystallise in the time ahead, we have announced that we will no longer seek to bring the budget into balance by 2019-20. As the Chancellor has said to the House, that does not mean that we can go forward without a clear framework for achieving fiscal balance over an appropriate timeframe. We will address that issue in the autumn statement.

I hear the argument that we should go for growth, but fiscal responsibility does not preclude our achieving economic growth. As has been pointed out in this debate, the UK has grown pretty well as strongly as any other major western economy over the past six years, even though we have undertaken a period of getting the public finances under control. The idea that there is a straightforward tension between economic growth and fiscal responsibility simply is not true. Indeed, it is by pursuing a policy of fiscal stability that we have maintained the confidence not just of the markets, as a consequence of which our gilt rates are lower than they would otherwise be, but of the general public, who know that in the end, if we keep borrowing and keep borrowing and keep borrowing, they will have to pick up the tab.

[Stewart Hosie (Dundee East) (SNP)]

For the sake of completeness, the Chief Secretary will probably want to thank the central Bank for its quantitative easing programme—flooding the market with money by buying Government gilts—because that is a substantial reason for the very low yields the market is seeing.

[Mr Gauke]

I understand the point that the hon. Gentleman is making about gilt yields, but none the less the Government’s credibility because of our determination to address the public finances—with a degree of pragmatism on timing that I fully acknowledge—has helped to ensure that the UK has not been drawn into a sovereign debt crisis or indeed anything like one. That is a significant achievement for this country.

--- Later in debate ---

[Stewart Hosie (Dundee East) (SNP)]

I am glad that the Minister mentioned short-term turbulence as a result of the Brexit decision—the Chancellor has already spoken about that. The Minister is a pragmatic politician, so if that short-term turbulence turns into medium or long-term problems in two, five or 10 years—not least because of the absence of trade deals with the world’s biggest trading bloc—I hope that he will turn on the pragmatic tap even more strongly than he has perhaps tried to do in the Treasury so far.

This debate is about the fiscal charter, so I will run through a small bit of history and make some other comments. When the coalition Government first introduced the charter for budget responsibility, the fiscal mandate was for a cyclically adjusted current budget to be balanced by the fifth year of a forward-looking forecast period—that was similar to the plan laid out by the Labour shadow Chancellor earlier. As the Library has helpfully pointed out—it has helped a great deal with this debate—that plan was shortened to the third year of the forecast period in the December 2014 charter update. That also focused on the current balance, which is the difference between Government revenue and current, rather than capital, expenditure. Focusing on the current Budget was designed, at least on paper, to protect public sector capital investment, which is important.

A number of speakers have mentioned capital investment today, but the real problem is that capital expenditure forecasts, and real capital investment, have been rising and falling over the past few years like a yo-yo. There is concern that the National Infrastructure Commission was designed not so much to facilitate investment and drive it on, but rather to delay some of it further—but I digress.

The previous mandate used a measure of the budget balance adjusted for the economic cycle to allow the flexibility to run a deficit during recessions and a surplus during booms. The fiscal mandate was accompanied by a supplementary debt target. Originally that was for public sector net debt to fall as a share of GDP in 2015-16, but that was moved to 2016-17 in the December 2014 update. That target, of course, was not met—one of a number of broken promises by the Government in the previous Parliament, in which debt, deficit and borrowing targets all failed to be delivered as promised in 2010.

That brings us to the current charter for budget responsibility and the fiscal mandate. The charter sets out the OBR’s role, how it performs its duties, and the required content of its publications. It lays out the Government’s fiscal mandate, supplementary debt target, and essentially the cap on welfare spending. The OBR assesses and reports on progress against those targets in the economic and fiscal outlook. Just in case anyone has forgotten, the current fiscal mandate target is for the public sector’s overall budget—public sector net borrowing—to be in surplus by 2019-20. Once a surplus has been reached, the target is for a surplus to be achieved every year. Frankly, that is impossible if we are to manage the economy in a sensible way. The other target is the supplementary debt target, where until 2019-20 the fiscal mandate will be supplemented with a target for public sector net debt to fall as a percentage of GDP in each year. Those targets, as the Chief Secretary said, will apply unless the OBR assesses there has been a significant negative shock. That is, in effect, where we are today.

If annual real growth in the economy is less than 1%, the OBR will judge there to have been a significant economic or negative shock and the economy will be out of what it calls “normal times”. If the OBR judges that a negative shock has occurred or will occur, fiscal targets will be suspended. That is the nub of the problem with these rules. If the OBR looks backwards over a 12-month period before confirming that growth was less than 1%, that might mean that changes to monetary or fiscal policy may not be delivered or enacted as quickly as they should have been to minimise the problems of a slowing economy. Likewise, if the future forecasts are overly optimistic—quite a common phenomenon in this place—necessary changes to fiscal or monetary policy required to protect jobs and growth might be delayed longer than they should be. In essence, the charter and the rules are a policy for inertia, rather than a policy for action.

Part of the charter requirements are that, should the rules be suspended, the Treasury must set out a plan to return the budget to surplus, including temporary fiscal targets. That plan must be approved by a vote in the House of Commons. One of the last acts of the previous Chancellor was to appear to suggest a suspension of the rules. I think he said—the Chief Secretary can correct me if I am paraphrasing this incorrectly—that the automatic stabilisers would be allowed to function and that corporation tax would be subject, potentially, to deep cuts. If that was the plan, it was not very detailed. I have not yet heard of any temporary targets and Parliament has not yet voted. We are about to go into recess and there is no vote on the horizon. I think that that tells us all that the charter is not fit for purpose and that the rules in place for when promised targets fail are not even remotely being adhered to. It would be better, I think, not simply to suspend the charter, but to rip it up and start again. I am rather less concerned with a plan and a charter to deliver an arbitrary surplus. More important is a plan to deliver real economic growth.

It is worth pointing out that over the past six decades or more, budget deficits have been the norm. Surpluses have been very rare. Since 1955-56, the UK’s public sector budget has been in surplus for only eight years. The last surplus was 15 years ago. The OBR suggested that the UK was set to return to surplus by the end of the decade, but that now looks unachievable—another broken promise. There is, however, a bigger problem than a surplus rule, which the OBR described, in civil service code, as

“ambitious relative to the fiscal performance of past governments”.

I will translate that, Mr Deputy Speaker: it means the Government will not meet their targets. The bigger problem is that it is designed to suck consumption out of the economy before recovery is secured. The scale of that, even as recently as the 2016 Red Book, is breathtaking: not just cutting £10 billion a year more than is necessary to run a balanced economy, but by 2020-21 cutting spending by £50 billion a year more than is necessary to run a balanced current budget.

We know where the cost of this austerity falls: it falls on the poorest in society. How do we know that? The Government have told us. As the cuts and tax rises have risen, so has the ratio of cuts to tax rises, placing the burden of austerity and an arbitrary fiscal target squarely on the backs of the poorest.

This mandate is now collapsing around the Government’s feet, along with the much-vaunted and never-delivered long-term economic plan—a plan that is a bit like a unicorn: everybody knows what it looks like but no one has ever actually seen it. [Laughter.] I used that in a previous speech, but I did not get a laugh that time. It has been said that fiscal rules can be applied in other ways, but the previous Chancellor and, I presume, the current one believe that the current level of public sector debt is too high and that running a budget surplus is the only reliable way to reduce it.

The Treasury Bench has argued that high levels of debt are too risky and too damaging for the UK, leave the UK vulnerable to future economic shocks and squeeze out other public spending through high debt interest payments. At face value that is fine, but there are other credible and fiscally responsible ways in which the deficit can come down and debt can fall as a share of GDP.

[James Cartlidge]

The hon. Gentleman is making a detailed and, in his own way, cogent argument, but—[Laughter.] It was meant to be a compliment. The key word, however, is “investment”, and my view is that investment needs to come primarily from the private sector. He talks about the benefits of getting debt down. Surely one of the key benefits is the confidence it builds in the economy among those big international companies that we want to invest in the UK.

[Stewart Hosie]

I agree that confidence will come from a reduction in debt as a share of GDP and a real reduction in the deficit, and I have no aversion whatsoever to genuine, substantial private sector investment. Unfortunately, in the current climate, because of the Brexit decision, there is a bit of a hiatus—substantial investment is being put on hold and might be lost. Trust me, in the competitive international world, every other country in Europe will be saying, “See that £10 billion you were putting into the UK—bring it here.” They will be saying that in Germany and France, and when we are independent, we will be saying it in Scotland too. This is when the UK Government should be stepping in to make sure that any gap in essential investment is filled.

On the alternatives, others have pointed out that the UK can run deficits and allow the ratio of debt to GDP to drift down over time, arguing that the value of debt can be eroded through economic growth. We have not heard a lot about growth. For many years, the mantra from the Government was: growth alone will not solve the problem. I happen to agree, but there has been no plan for growth at all. Instead, we have had almost a fetish and obsession with austerity and cutting debt, irrespective of the growth consequences.

[Jeremy Quin]

The hon. Gentleman says he has not heard enough about growth. I will give him some stats. The IMF says that UK growth will be greater than that of Germany and France. They might well try to lure expenditure in their direction, but our growth is still exceeding that of our European partners.

[Stewart Hosie]

Growth in the UK exceeds that in other countries sometimes. It is higher than G7 averages sometimes; other times it is not. The most up-to-date forecast is for a likely cut in growth to 0.8% next year. That would be lamentable and unforgivable if it is avoidable.

My biggest problem with the charter is that the poor pay the price for this obsession with cuts. The fiscal charter was not delivered in isolation; it was delivered with a welfare cap limiting how much could be spent by Government on certain social security benefits over the rolling five-year forecast period. Performance is then assessed by the OBR, which reports at each autumn statement on whether the relevant welfare spending has met or exceeded the level of the cap. It is highly likely, as we have seen and heard and as the Government have effectively conceded, that the OBR will tell us that the cap has been breached and will continue to be so for the rest of the Parliament.

We have, therefore, a fiscal mandate designed to suck consumption out of the economy; a fiscal mandate driving £50 billion a year more in cuts by the end of the Parliament than is necessary to run a balanced current budget; a mandate that, in essence, delivers inertia and might delay the necessary fiscal and monetary policy steps required to maintain growth; and a fiscal mandate that is ripped up if it fails, without a new plan—which would be necessary—put in its place. That fiscal mandate, in essence, is simply not worth having, so we will vote for the Labour party’s motion today. I would say to the Government, however, that they should suspend the fiscal charter, go for growth and build consensus on a charter or a mandate that has the confidence of politicians, the markets and the public.

[James Cartlidge (South Suffolk) (Con)]

It is a pleasure to be called to speak in this timely debate. Although the Chamber is not as full as it could be, this is an incredibly fundamental debate on the key issue of the moment.

I start by congratulating the Front-Bench team on their promotions, including my hon. Friend the Member for Battersea (Jane Ellison) as the new Financial Secretary and my right hon. Friend the Member for South West Hertfordshire (Mr Gauke) as Chief Secretary. I attended a school in Hertfordshire and represent a Suffolk constituency, while he represents a Hertfordshire constituency and was educated in Suffolk. The East Anglian Daily Times was particularly excited by his promotion as a son of Ipswich. I congratulate both of my colleagues again.

I am proud of this Government’s economic record. As the Prime Minister said when she opened a fantastic performance at Prime Minister’s questions today, we have record employment once again, we have an 11-year low in unemployment at 4.9%, and we know that the deficit has been cut by two thirds—an incredibly significant achievement that cannot be underestimated. I was reassured by the Prime Minister when she said that we still aim to live within our means. That was her key point when asked about austerity by the Leader of the Opposition. I was reassured, too, by my right hon. Friend the Chief Secretary when he said that the Government are still committed to fiscal discipline, which is so important.

As both the shadow Chancellor and the shadow SNP spokesman have said, we have been looking at this change in the fiscal target as regards a surplus. As they said, the interim fiscal mandate was for the public sector’s overall budget, more correctly known as the public sector net borrowing, to be in surplus by 2019-20 in normal times. That target was to apply unless the OBR assessed that there had been a significant negative shock. Understandably, therefore, there has been a lot of discussion about why this change, putting back the time for meeting this surplus, has come about. I found the Chief Secretary’s explanation reassuring—and the word “reassurance” is key.

My understanding is that when the British people made the decision on Brexit, it was in many ways a shock for the country. Just as the Bank of England Governor came on our television screens to reassure, talking about the steps he would be prepared to take to ensure confidence was maintained in the UK economy, so has the Chancellor of the Exchequer come forward as a reassuring presence, saying that he is prepared to take any necessary steps. I view this as part of an overall package. As the Chief Secretary said, it is of course monetary policy that has the primary responsibility when there are shocks to the economy. We have heard about the possibility even of a cut in the base rate from 0.5% to 0.25%. I see the decision about the surplus as part of the reassurance that the Government are prepared to take steps and react to circumstances.

[Stewart Hosie]

The hon. Gentleman is absolutely right that monetary policy is the first port of call when there is a shock. If it were deemed to be necessary, however, to invoke some kind of fiscal measure—whether it be a stimulus or anything else—does not the hon. Gentleman agree with SNP Members that the rules are so flawed that we have to wait until the autumn before the Government can even get a green light to make fiscal policy changes that might be necessary now?

[James Cartlidge]

I agree on the importance of monetary policy, and once again the hon. Gentleman makes a cogent point in his own way. Fiscal policy has been compared to a blunt instrument. It is not easy for the Government and the Treasury suddenly to make things happen in the way the hon. Gentleman describes. We need to wait on the figures. I understand that there are reports in the media today that the Bank of England’s agents have said it is business as normal out in the country despite Brexit, and I am very reassured by that. Let me be frank: I campaigned to remain. I was concerned about the economic impact of leaving, and I still am concerned. I always felt that the biggest potential impact would be on inward investment, but I think it will take time for us to see whether that is the case.

--- Later in debate ---

[Stewart Hosie]

I welcome the Minister to her place and thank her for what she just said, which was that the Government are prepared to take whatever steps are necessary to stop potential risks crystallising. That is an important thing for her to say on the record. Notwithstanding the fact that she is saying there will be a delay until the autumn and they will look at the numbers properly, may we have an assurance that if those numbers are as bad as they might be, she will not rule out any fiscal measures to stimulate the economy if that is what is required?

[Jane Ellison]

As we have said—the Chief Secretary was clear about this, and I think the point was conceded by the hon. Gentleman—we have already heard from the Governor on monetary policy, and that is really important. Conservative Members have spent the past six years making the strength of the British economy the nation’s No. 1 priority. We will look at what is happening, and it remains our priority to make sure that we continue to chart a course that recognises some of the risks that exist in the current situation, makes sure we can manage them, and looks at the opportunities that are there to be seized. We have heard so little of that in this debate. We have heard a lot of talk from both the Scottish National party and Her Majesty’s Opposition about austerity. As the Prime Minister said at Prime Minister’s questions, the other way of talking about that is to say that it is living within our means. By being prepared to address that really difficult issue of a country living within its means, this Government and the coalition have secured hard-won credibility from which we can now move forward. That credibility is not held in every part of the House. It is not an accident that we are now able to move forward from a position of strength, or that people are prepared to invest in this country; it is because of the difficult decisions that have been taken over many years, the vast majority of which were opposed by those on the Opposition Benches.

Let me take this opportunity to make it very clear that any revisions to our plans will not alter the Government’s clear commitment to this country that we would restore balance to our economy. As the Chancellor has said, we will no longer pursue the target to reach a surplus in 2019-20. Our plans to do so were based on the assumption of a different-looking economic climate. As is regarded internationally as good practice and as we see in fiscal frameworks right across the globe, our fiscal plans had a flexibility built into them, so that we could make revisions in the case of significant alterations to our economic situation. Here in the UK, that means that, if the independent OBR were to forecast four consecutive quarters of less than 1% growth a year, that target would be suspended. Admittedly that risk is perhaps more prevalent now than it once was, but it remains the conviction of this Government that any responsible plan for the long-term good of this country must be centred on a determination to tackle the deficit and reduce our debt.

In the good speech of my hon. Friend the Member for South Suffolk (James Cartlidge), he made a point about intergenerational fairness. There is no greater intergenerational unfairness than bequeathing massive amounts of debt and deficit to those generations yet to come. That remains at the heart of our plans to ensure that the British economy is healthy and able to respond to unexpected shocks.