Pre-Budget Report 2006

My Lords, I draw your Lordships’ attention to an article published in November on economic indicators on foreign direct investment in the UK. With free capital markets, there will be such flows in and out all the time. We are very much indebted to the noble and learned Lord, Lord Howe, for having the courage when he was Chancellor to remove external capital controls. The British economy has benefited from that move. For the firm, there will be benefits from capital diversification and potentially from productivity improvements. Increased competition of that kind may also lead to improvements in the wider economy. From our point of view, what is most interesting is the scale of recent inflows of this kind, which in 2005 were the largest in the world. We also have the largest level in Europe of these investments of such assets viewed as a stock. Worldwide, we are second only to the US. Equally, we have a large outflow and the second largest stock of overseas assets—again, second only to the US. One may argue about some aspects of the meaning of these capital flows in and out, but it clearly does not suggest remotely an economy in which serious foreign investors lack confidence—quite the contrary. I am a natural supporter of the Government, as are my noble friends Lord Barnett and Lord Sheldon, so your Lordships can leave us out, but the best evidence of the enormous success of our economy under the Government is the behaviour of foreign investors when it comes to investing here. On the economy, I shall not repeat at any length the remarks that I made in the debate on the gracious Speech. In essence, we have a successful and stable economy. That is also confirmed, as my noble friend Lord Barnett pointed out, by the independent forecasters, who have no debts or anything to get from the Government. They tell us that, on average, GDP growth is on its long-term trend; CPI inflation is returning to its target value; and public sector net borrowing is within the target range. Those are averages, and different forecasters will disagree, but the general position is satisfactory. On a related point, we continue to be bombarded by reports commissioned by the Government on how we can do better. From my rather cynical standpoint, these reports specialise in reinventing the wheeland stating the obvious. The noble Lord, Lord MacGregor gave us a very good example; I could give him another dozen, going back my whole life ever since I was an economics undergraduate. These reports uniformly fail to answer the basic question. Since nothing of what they say is original, why have the appropriate changes not occurred already? We are not discussing something that was thought of yesterday or the day before—these thoughts go back literally decades. I hope that I misheard the Minister, but I have a feeling that he announced yet another report from some independent body. I stand second to none in my regard for Sir Digby Jones. However, I can remember at least 45 years ago the National Economic Development Council going along exactly those lines and promising us all great improvements from more education, more training and so on. I do not want to put a damper on it, but we have heard all this before. To put it differently, I would rather have action than yet another set of reports. I turn now to the point raised by my noble friend Lord Sheldon. Again, I very much agree with him. The appropriate question is this. What should be our response to climate change? I do not doubt that climate change is occurring. I am not undermining the view of the natural scientists. The Governmentare right to emphasise the need for international co-ordinated action. But if you take my view—namely, that there is not going to be any international co-ordinated action—the central question is: what next? I agree that in many cases it is in our direct economic interest to promote the efficient use of energy. That is obvious. I have not had a chance today to check the figures, but I have a strong feeling that energy input per unit of GDP has been falling continuously for a great many years. It has fallen, both directly and indirectly, as a result of oil price rises, technological advance and, more generally, the market mechanism working to cause firms to economise in energy. As far as I know, it has not occurred as a result of government intervention. What we should not do is to place a burden on British industry—this is the point made by my noble friend Lord Sheldon—which our competitors are not placing on their industries. Perhaps I may also add the technical economic point. It may be optimal to use the tax system to raise the relative cost of some activities, such as those generating carbon emissions. But that does not imply that those tax revenues should add to the total tax burden and, therefore, be spendable. I agree with what the noble Lord, Lord MacGregor, said, in referring to this brilliant concept of motorway access charges, that it is right to have such charges to remove the distortions as a result of congestion, but that that does not tell you that those funds are then available for any purpose whatsoever. That requires a separate argument. I turn now to public expenditure and taxation. In broad terms, it seems to me that the public finances are in reasonably good condition. I agree that we can argue about the dating of the cycle over which the current budget is not in deficit. Your Lordships’ Economic Affairs Committee said that the cycle should be decided by an independent body, as the noble Lord, Lord Northbrook, argued, and not by the Treasury. I stick to that view. But even if we take a different view from the Treasury and say that there has been a current budget deficit, that deficit would still be pretty small, even on the most anti-government approach, and at the same time the sustainable investment rule is being met. So I do not think that we need to get terribly hot under the collar about all of that. What is good is that it is now accepted and understood across the political spectrum that, in the medium to long term, public expenditure has to be paid for. In other words, a higher growth path for government expenditure, given the path of GDP, means either a lower growth path of consumer expenditure or lower investment. Therefore, if you want more expenditure on some things, you are bound to come up with the other point: on what do you want less expenditure? Perhaps I may say somewhat tartly that that applies to Trident as well as to many other things. I have two worries. The first is the question of efficiency gains, which my noble friend Lord Barnett has drawn to our attention. The Public Accounts Committee in the other place said in July that the announcements of efficiency gains have lacked analysis to support the claims that are being made, and it asked for more and better information. Iagree, as I think we all would. The Treasury claims that in 2006 efficiency gains have amounted to some £13 billion. I have searched the Pre-Budget Report in vain for precise details of how that calculation is done and what those gains are. I would like not only to know how the Treasury calculates them, but to see them spelled out by department. ““Efficiency gain”” means either getting more and better services for the same money or getting the same services for less expenditure. In some cases it is one, in some the other. As I say, though, I fail to see a full account of that in the Pre-Budget Report, and the ad hoc examples that are given—this department has done a bit of that, that department has done a bit of something else—are not what is required in a serious analysis of the problem. Thirty years ago, I was one of the first economists to become very unpopular in the Labour Party for arguing that it was at least as vital for the public sector as for the private sector to make efficiency a top priority. Indeed, I went further: since we were committed to the public sector, our responsibility was at least to insist that that sector became more efficient. That was not very much liked when I used to tell my friends on this side of the House that that was how we had to look at it. They thought that there was an easy way out. I would like to see, perhaps in the next Pre-Budget Report from a different Chancellor, a careful, serious account, department by department, of how the efficiency gains are occurring. I think that most noble Lords would agree with that. Wearing a very reactionary hat, I would prefer to see the gains made before the question of how we spend the resulting sums was determined, rather than that the gains were taken for granted and we were simply told how the money was going to be spent. I would not do that in my private life, and I certainly do not think that is how the Government ought to behave. My second and final worry is the PFI. Will my noble friend the Minister clarify the position—not necessarily in his wind-up speech, because we are all getting tired already, but perhaps by writing to us—concerning the payments and repayments over the long term of funds arising from the PFI? Is there a ticking time bomb, as some have alleged, regarding repayment in due course? The Pre-Budget Report refers to an assessment of the lifetime costs of both providing and maintaining the underlying assets and delivering the required level of service, or the running costs. I have to ask: are we confident that all those costs have been budgeted for and that the relevant bodies—at all levels, right down to hospitals and so on—are in a position to meet them? The more difficult question is: are we monitoring the PFI projects to determine whether, ex post facto, the gains that are claimed in terms of efficiency and cheaper finance have actually occurred and been advantageous to the public sector? I shall end as I began. This is unusual for me, because normally I believe that the main badge of honour of a serious economist is to take a totally black view of every topic, but I will say that, in my lifetime’s experience, the economy is in as good shape as it has ever been. More to the point, it is in extremely good hands. I hope and expect it to stay that way.