Pre-Budget Report 2006

My Lords, the Chancellor is guided by the data on that. On the current assessment it will end in early 2007. Because of particular issues about labour market data, the Treasury needs to see that through to make a final determination. There is nothing wrong in that, as labour market data is quite complex; in some respects—such as on migration—it is problematic, as the noble Baroness, Lady Noakes, pointed out. To clarify, by moving the end of the cycle to 2006-07 we would actually miss out two years, which together have an average current surplus, so I do not see how the Government can be accused of seeking to fiddle the figures on that basis. As for changing the cycle, when we debated this a year ago, there was, if I may say so, a certain amount of gloating from Members on the opposition Benches about the Chancellor having to reduce the growth forecasts. The extension of the cycle was a consequence of the reduction of the forecast for growth, because it is longer before you get back through trend. If, in fact, growth has been stronger in 2006 than anticipated, it is entirely reasonable that we will get back to trend growth sooner, so the end of the cycle changes. The definition of borrowing and the decision whether a PFI project is on- or off-balance sheet are made independently of the Government. The reason for the increase in net debt is that the figures for PFI contracts that should be on-balance sheet are now included in the net debt figures. We debated that issue before and have addressed it. The issue of Network Rail is, if I may say so, an old chestnut. It has been looked at independently and a judgment made that, considering the risks involved, it should not be on the Government's balance sheet. The Government did not make that decision; the ONS and the NAO considered the issue. The noble Lord, Lord MacGregor, and others said that taxes, especially business taxes, are too high. Since 1997, the Government have cut the main corporation tax from 33 to 30 per cent, the lowest ever UK rate of corporation tax. The structure of the UK tax system favours jobs and competitiveness. The UK tax-to-GDP ratio is substantially below its peak of 38.8 per cent in the early 1980s, when we had a Conservative Government. Indeed, the recent report from PricewaterhouseCoopers and the World Bank placed the UK very favourably in terms of ease of paying business taxes; and the latest OECD figures for 2004 show that taxes on corporate income in the UK are below the average for the OECD and the EU 15 and EU 25. In terms of the approach to taxation, the proposals for HMRC to improve its relationship and processes with big business, in particular, for clearances, should be widely welcomed. The noble Lord, Lord MacGregor, referred to highly leveraged debt and hedge funds. The FSA, the Bank of England and HMT keep an eye on these things and are wary of the risks that they entail, although they bring liquidity to markets and encourage innovation in some respects. Corporate balance sheets are stronger than they have been for a considerable time. If we look at the sector in aggregate, the data show that they are strong. I am pleased that the noble Lord broadly welcomed the Eddington report and the Barker report. My noble friend Lord Peston made the point that we have had lots of these reports before and that nothing much changes. The difference this time is that the strength of the UK economy and the framework in place enable the Government to deal with those issues and take forward those long-term possibilities. The noble Lord, Lord MacGregor, mentioned productivity. Although historically, UK productivity has been lower than in other major economies, ONS data show signs of catch-up between the UK and its main industrial competitors. Since 1995, the output-per-worker gap with Germany has closed; the gap with France has roughly halved; and the UK now leads Japan by about 11 percentage points. So progress has been made on productivity. My noble friend Lord Barnett asked about the Government's position on the euro. I suspect that he knows that the Government's position has not changed. Our position on membership of the single currency was set out by the Chancellor in his Statement to the House of Commons in October 1997 and again in his Statement on the five tests in June 2003. The determining factor underpinning any government decision on membership of the single currency is the national economic interest and whether the economic case for joining is clear and unambiguous. The Chancellor announced in the 2006 Budget that the Government do not propose a euro assessment to be initiated at the time of this Budget, and the Treasury will again review the situation at Budget time next year. The question of what the process and the question would be if we held a referendum is an interesting point, but I suspect that we would not ask people to give their views specifically on the five tests. My noble friend Lord Barnett talked about the green budget and the effect of taxes. Are taxes meant to change behaviour or are they meant to raise revenue? One has to look at the Government’s approach to climate change as a whole. The climate change levy was introduced at the same time as cuts in national insurance contributions for employers were made, so taxation was switched to something that was bad in an attempt to improve energy efficiency and to relieve costs on employment. That was one example. The Government are involved in a range of processes, such as the emissions trading scheme, the climate change levy to deal with energy efficiency and a range of taxes to seek to change behaviour. The noble Lord asked what was happening to assist pensioners with gas and electricity costs. I have nothing on that to hand, but I shall write to him with an early Christmas present. He asked about the Monetary Police Committee (MPC) and the Government’s economic objectives. Output and employment are important factors in the MPC’s monetary policy decision. The minutes of the MPC, which are published within two weeks of its monthly meetings, show the importance of GDP growth and labour market conditions as factors underpinning the committee’s interest rate decisions. The noble Lord, Lord Barnett, and others raised issues about the Government’s forecasts. We should put that into context. Since 1997, the Treasury, on average, has outperformed the independent consensus in both current-year and year-ahead GDP growth forecasts. In comparison with the previous Administration, this Government have a better record of current-year and year-ahead forecasts. The noble Lord asked about trend growth and the reason for the changes. The NAO will audit budget assumptions and has already looked at the change in trend growth and determined that it is reasonable and cautious. The data releases since Budget 2006 relating to inward migration provide new evidence to support an upward revision of the assumed working-age population growth post-2006. That is one of the key features in determining trend growth; others are productivity, hours worked and employment levels. The noble Lord, Lord Northbrook, welcomed the Gowers review, the Barker review, with some reservation, and the Leitch report. He specifically asked about the Gershon savings and the reconciliation of the figures. Workforce reduction figures will never precisely match changes to Civil Service figures reported by the ONS, as the two measure different things over different periods and have different coverage. The ONS figures are broadly consistent, showing a reduction in the size of the Civil Service for the past seven consecutive quarters. A technical notice published on the Cabinet Office website explains the difference between the figures. I draw the noble Lord’s attention to that. The noble Lord suggested that public finances have been deteriorating but borrowing is still projected to fall in each year of the forecast period. The current balance will move into surplus in 2008-09, with the surplus rising to 0.8 per cent of GDP by 2011-12. The Government are meeting their strict fiscal rules over this cycle and are on course to meet the fiscal rules in the next cycle. The noble Lord referred to air passenger duty and asked why it was not introduced when one bought one’s ticket. The structure of the tax is that it operates when people fly and there could not be two systems for charging the tax. It was introduced prospectively to operate from February next year. The noble Lord spoke about the change of the cycle, a point with which I have tried to deal. The noble Lord, Lord Northbrook, and others raised the issue of alternatively secured pensions. The changes made were entirely consistent with the Government’s policy announcement that those provisions were meant to deal with specific circumstances, particularly for those with a religious objection to entering into annuities; so the Government’s position and the changes introduced should have come as no surprise. The noble Lord, Lord Sheldon, talked about an open letter and asked whether there was a difficulty with that because of the inflation figures. Inflation has risen above target in recent months, driven by increases in energy and food prices. The rise in oil prices since early 2003 is the largest sustained oil price shock in 25 years. Oil prices have tripled since early 2003 and doubled since the beginning of 2004. These effects are, however, expected to be temporary, and oil prices are expected to be lower on average in 2007 than in 2006. The MPC has an excellent record on keeping inflation at or around target. Even if an open letter is triggered, that does not mean that the MPC has failed. The short-term relationship between output and inflation is only imperfectly understood, and monetary policy affects output and inflation with variable lags. As a consequence, inflation may temporarily move outside the thresholds that trigger an open letter. The noble Lord, Lord Sheldon, also spoke about the impressive performance of the economy, which is absolutely right, and he reminded us of what the past held. The noble Baroness, Lady Noakes, referred to 57 quarters of growth and said that the Chancellor conveniently forgets that some of those accrued before 1997. That is right but, since 1997, we have avoided the boom and bust of the past—a key feature of the Government’s fiscal and monetary framework. The noble Lord, Lord Sheldon, mentioned air-passenger duty and asked why we could not have an aircraft tax. The noble Lord, Lord Newby, made the same point. There are difficulties with such a tax, partly because there is a risk that people would simply rearrange their fleets so that the more effective ones operated from UK airports. There are also issues about a tax on emissions that could be outwith our international obligations at the moment. There are already pressures to increase load factors for economic reasons that have nothing particularly to do with emissions. The noble Lord, Lord Sheldon, also referred to the current high rate of income tax. He will be aware that we have a manifesto commitment not to change those rates. My noble friend Lord Peston talked about the success of the economy as demonstrated by foreign direct investment, and I agree. Indeed, he talked, as I remarked earlier, about a plethora of reports in the past, but there really is a difference now in that the framework in place and the strength of the economy enable us to make progress in those key areas, which we need in any event for the future. He said thatgreen taxes should not be a burden on industry. Indeed, the climate change levy, as I said earlier, was accompanied by a reduction in employers’ national insurance contributions, so it is a good example of taxing a bad and relieving tax on a good. He also referred to efficiency gains and inquired how they were calculated. Perhaps I might follow that up with him outside this sitting. Of course I agree with my noble friend that it is as important for the public sector to be efficient as it is for the private sector. He asked about PFI and the risk that not all costs are budgeted for. The process that I outlined a little earlier is that a judgment must be made about where the risk in these contracts lies and whether they should be counted as government expenditure. Until recently, the relevant components of the net debt figures on balance-sheet PFI contracts were not included. They are now, which accounts for some of the changes to the figures before us. The noble Lord commented that the economy is in as good a shape as it has ever been. I agree with that, and with his remark that he hopes it stays that way under the guidance of a Labour Chancellor and a Labour Government. The noble Lord, Lord Newby, said what a good idea it was to make the Bank of England independent. I believe that he claimed some credit for that, but I remind him that what has been successful about the economy is not only making the Bank of England independent for monetary-policy reasons but having that sit alongside the fiscal rules—the golden rule and the sustainable investment rule. They work together to ensure that the economy is successful and has sustained good growth, good employment, low inflation and low interest rates. The noble Lord, Lord Newby, queried whether the growth projections were a little on the high side and questioned the Treasury’s position. I touched onthe Treasury’s record earlier. He asked whether the growth in population is affected by migration. The answer is yes. Net migration increases the UK’s working-age population, which in turn increases the economy’s growth potential. Using working-age population growth as one of the drivers of trend growth projections has long been part of established HMT methodology. The migration projection does not take into account any increase in post-succession migration from A8 and makes no allowance for possible additional migration from Bulgaria and Romania. The noble Lord, Lord Newby, suggested that the golden rule was seriously flawed because it could span more than two Governments. But it is an objective economic analysis based on evidence that drives the golden rule—one would hope that if it were to span two Governments, an incoming Government would see the great sense of the rule in operation under this Labour Government. I do not anticipate that happening for a little while, however—I hope not in my lifetime. It is not right that there has been an unsustainable surge in spending. The rise in the rate of spending may be moderated, but we are still talking about historically high levels of investment in public services. We have talked about air passenger duty and whether that should be a tax on aircraft. The noble Lord, Lord Newby, said that there was a wide range of material and asked whether it could be spread in a more digestible way. All these documents are interlinked and part of a complete story. I would only add that I have to read them all as well for the purposes of this debate. The noble Baroness, Lady Noakes, was less than enthusiastic about the Chancellor’s performance and was critical in a number of areas. She referred to the usual boasting about growth in the economy. Certainly part of that growth was from before 1997, but this Government have made sure that that growth has been sustained. We discussed the timing of the cycle. I said that the NAO would be asked to review this once the final decision was made—when there is a complete picture, particularly of the labour market. We expect the date to be in the current year. The noble Baroness said there was a crisis in NHS funding. That is simply not a fair reflection of the position. She talked again about pensions andthe Chancellor’s alleged raid on pension funds. The Turner report is very clear on this. The short-term effect of the change in ACT on pension funds was small compared to the effect of wider factors, such as poor stock market performance and the increase in pension liabilities due to rising longevity. We have had that debate before. The noble Baroness also talked about taxes hitting business. The latest OECD figures show that taxes on business in the UK are analysed by the OECD as comparing very favourably with our competitors. We talked about welfare dependency. The number of people who might be in that category has decreased by about a million from 1997 to date. The noble Baroness asked about how the so-called third fiscal rule will operate and how that interrelates with the Government’s projections. That is a matter for the CSR, on which we will have more next year. We have had a number of interesting points in this debate. I am sorry if I have not been able to deal with each of them completely in the time available, but there have been quite a number of questions. I will review the record and follow up in writing as appropriate. The Pre-Budget Report drives forward the greater economic mission of our time to meet the global challenge and to unleash the potential ofthe British people, so that the British economy outperforms our competitors and delivers security, prosperity and fairness for all. Having taken long-term decisions to achieve and sustain low inflation and economic stability, we are well placed to face up to the global challenges of the 21st-century economy. On Question, Motion agreed to.