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Fiscal Responsibility Bill

I was going to come to that point when I dealt with the interventions of the noble Lord, Lord Newby. I had already written on my notepad that this was clearly a matter into which I should look, and that I will owe a letter to the noble Lord. I will of course send a letter to all noble Lords who participated in the debate. To my shame, this is not a project on which I have been required to focus a great deal of time over the past 12 months, so I need to become more familiar with the issues. I thank the noble Lord, Lord Hodgson, for his intervention. Parliament is being given a new role in both setting and monitoring the Government's fiscal plans. In particular, Parliament must approve fiscal plans before they become law. This is a significant evolution of the extent to which the Government are to be held to account for their medium-term fiscal policy. I listened with great interest to the speech of the noble Lord, Lord Lawson of Blaby. His contribution towards encouraging Governments to set out with greater clarity their medium-term thinking is commendable: we have learnt and benefited greatly from the pioneering work in this sphere done by the noble Lord himself and by the noble and learned Lord, Lord Howe of Aberavon. We build upon that and seek to improve it, and to embody such requirements in law. A number of noble Lords raised the question of selecting the pace of consolidation. This is a very difficult assessment. The Government's judgment is that tightening fiscal policy too quickly in 2011 would present risks. The Government’s judgment is that the economy will be better able to support a more rapid tightening in 2011-12. The projected tightening will be a significant consolidation and, as I said, will represent the sharpest average annual reduction in the budget deficit of any G7 country over the next four years. As the Chancellor made clear in the other place, if growth proves to be stronger than we are forecasting—here I answer a point raised by the noble Lord, Lord Northbrook, in his thoughtful contribution—the first priority must be to get structural borrowing down even further. This is allowed for in the Bill, which sets fiscal ceilings but not floors. The legislation sets targets that the Government judge appropriate, but is drafted to allow overachievement. The ceilings are hard and binding. They are designed to provide certainty that the Government will deliver their consolidation plans, which are based on cautious assumptions. As was debated in the other place, flexibility is important. It is worth noting that, subject to making progress in reducing borrowing every year, there is flexibility over the profile by which the deficit is halved by 2013-14. For example, if growth is lower and the impact of the automatic stabilisers is greater, there is the flexibility to accommodate this, as long as progress continues on reducing borrowing. That answers a point raised in the helpful contribution from my noble friend Lord Lea of Crondall, whose economic observations I support, although I could not possibly go as far as he did in his comments about the activities of bankers, many of whom are close personal friends as a result of my intimate engagement with them over the past 12 months. In the event of significant and sustained economic shocks, such as those that we have faced over the past 18 months, the Chancellor would have to consider carefully what path of fiscal policy was appropriate for the economy. This would happen in the round, considered alongside other changes that affect the level of borrowing. Given the importance of these consolidation targets, the Bill has been designed so that any decision to depart from them would require new legislation. The Government would have to come back to Parliament if it were necessary to amend the targets set in the Bill. Transparency is essential as an element in promoting wider understanding of the Government's objectives and as part of their fundamental democratic accountability. The Bill strengthens transparency. Parliament will take an active interest in the various reports produced in accordance with the Bill. That will stimulate debate and understanding. To the extent that the Government deviate from the path that has been set, noble Lords should not underestimate the shame, embarrassment and humiliation that would result. There are undoubted and very real sanctions in the Bill that would hit the pride of men and women of great standing. The noble Baroness, Lady Noakes, and the noble Lord, Lord MacGregor of Pulham Market, asked what the point of legislating was. I hope that I answered that in my opening address, and again in these comments. Parliament’s role is being enhanced. In particular, Parliament must approve fiscal plans before they become law. This gives Parliament an oversight that it has previously not enjoyed. The IMF has set out that the strengthening of frameworks, including through fiscal responsibility laws, should support the global financial and fiscal adjustment that is necessary. I note the support of my noble friend Lord Desai for the value that will arise from the Bill. The noble Lord, Lord Lawson of Blaby, made the point, to which I have already referred, that consolidation needs to start earlier. However, the Government's judgment is that the economy will be able to support much more rapid tightening in 2010-11, as GDP is forecast to accelerate from 1.5 per cent in 2010 to 3.75 per cent in 2011-12. There will be greater space for the MPC to use interest rates to manage any potential disinflationary impact. I note and appreciate the positive comments from the noble Lord, Lord Skidelsky, on the issue of timing. The noble Lord, Lord Lawson, also asked why the UK has one of the worst fiscal positions of any developed economy. It is a perfectly reasonable question. The UK entered the downturn with a starting point of very low public debt—well below the G7 average. That was a consequence of effective economic management, before we found ourselves confronting a two-standard deviation global circumstance—the first year for 60 years in which global economic growth contracted. Governments across the world, along with institutions such as the IMF and the OECD, recognise that it is right to allow fiscal policy to support the economy in such difficult times. Global economic developments have had a profound impact on all countries, including the United Kingdom. However, our current estimate is that the UK's borrowing requirement will still be below the G7 average as a percentage of GDP at the end of the crisis period. The noble Lord, Lord Skidelsky, asked why we were not simply going back to the old rules from which we had departed. He asked what was happening to the old rules. The noble Lord, Lord Newby, has now christened a new set of rules the Skidelsky rules, which one must look at very carefully because, as I listened to the noble Lord, they had a certain appeal. The old fiscal rules were right for the time, and the Government met them. However, with unprecedented levels of economic uncertainty, the temporary operating rule was right for its time, too. Now the priority is to get public finances on a sustainable path and undertake fiscal consolidation. I have already answered the question from the noble Lord, Lord Lea, about the operation of the automatic stabilisers. The noble Lords, Lord Hodgson, Lord Lawson of Blaby and Lord MacGregor of Pulham Market, and the noble Baroness, Lady Noakes, all observed that the law was not enforceable and did not have consequences. The most powerful consequence is the one of embarrassment for being called to account in Parliament, in a context in which Parliament will have much greater responsibility for fiscal matters than in the past. The noble Lord, Lord Hodgson, talked about whole of government accounts. As I said, the Government are apparently committed to the principle of transparency, in which this Bill plays a part, and they fully support the publication of whole of government accounts. These will provide Parliament with enhanced information about all government income, expenditure, liabilities and cash flow. Something that I did not know but can now advise the House is that whole of government accounts will be published for 2009-10 once central Government have moved to the International Financial Reporting Standards and once the necessary legislation is in place. I hope that that gives some comfort to the noble Lords, Lord Hodgson and Lord Newby. The noble Lord, Lord Ryder of Wensum, in a somewhat political speech—in which I thought he was doing extremely well until he was knocked off balance by my noble friend Lord Peston, although he very quickly regained that balance—asked why the old fiscal rules were not in legislation. The old fiscal rules are effectively embodied within these rules. Their abandonment was on a temporary basis, which is not to say that at some point my right honourable friend the Chancellor of the Exchequer might not seek to refer to them formally in his policy thinking. I am afraid that the noble Lord, Lord Northbrook, was simply incorrect in suggesting that Nigeria is the only other country with a Fiscal Responsibility Bill. I am told that a tax break was enshrined in the German constitution in June 2009 and that a similar debt break is in place in Switzerland. In the US, the legislative fiscal framework between 1990 and 2002 provided by the Budget Enforcement Act—a piece of legislation to which I think the noble Lord referred by name—is credited with contributing to successful fiscal consolidation over that period.