Robert Skidelsky
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Queen’s Speech - Debate on the Economy
Robert Skidelsky
Hansard | Monday, November 02, 1998

My Lords,
Since this is my first speech as Opposition Treasury spokesman in your lordships house, I propose to concentrate on Treasury matters.
The government has promised to make 'high and stable levels of growth and employment its 'central economic objective' .
But subject to two constraints,also spelled out in the Queen's Speech: the freedom given to the Bank of England to set interest rates to meet the government's low inflation target, and the government's commitment to 'abide by its fiscal rules'.
These bland phrases express the consensus view that the main contribution macroeconomic policy can make to growth and employment is to ensure a stable environment for business.
It was partly at least because the Labour Party had the reputation of being an inflation prone, high tax, high spend party that the Chancellor imposed the two self-denying ordinances on himself.
Monetary policy is safe because he has given control of interest rates to the Bank ofEngland. And fiscal policy is safe because he has shackled himself to the golden rule.
The Golden Rule states that the net increase in public debt must not exceed government spending on investment'.This means that the current account must balance over the economic cycle. The Chancellor intones this on every ritual occasion. Perhaps he sings it to himself in the bath.
The question is: will he stick to it? Has he stuck to it?
I want to suggest to your lordships that his lapse into virtue was a purely temporary aberration.
Before he came into office he pledged himself to stick for two yrears to the spending plans of his predecessor, Mr. Kenneth Clarke.
He did. And because he inherited a rapidly improving fiscal position and the economy has grown faster than expected, he is now looking forward to a budget surplus for the first time in 10 years. All credit to him for that, though it is a bit rich of him to claim sole credit. He has simply borrowed Mr. Clarke's hair-shirt for a couple of years.
But I want to suggest to you that the Chancellor's lapse into virtue has been a temporary aberration. Two years of virtue is as much as a Labour Chancellor can take. At the first opportunity, last July, Mr. Brown announced £40bn.worth of new spending on health and education over the years 1999-2001 It would be completely affordable, he assured us, because the economy would grow at 2 1/4 per cent a year over that period.
Our Party warned at the time that his three year spending commitment was reckless and based on hopelessly optimistic growth estimates. The Financial Times stated 'Gordon Brown is taking a risk, but one which a British Labour Chancellor could scarcely avoid'. (15 July 98)
This is an astonishing, but I think perfectly accurate, admission that a British Labour Chancellor is driven to take such risks because his Party is always clamouring for higher public spending, whether it is affordable or not.
We were right.A few weeks ago the Chancellor came to the House of Commons to announce that economy will not grow by two per cent next year, but by only one per cent. Of course, he blamed this on the global downturn, following the East Asian crisis. But when Labour's forcecasts were made in July, Asia was already in crisis.
A prudent Chancellor would have waited for his surplus before promising to spend it.
Mr. Brown is not in the least disconcerted by the rapid falsification of his most recent growth estimates. The new assumption is that after the small dip in 1999 the economy will resume its growth at an even faster rate than he previously forecast. That is how he now expects to balance the accounts.
So what is the position? We expect a small budget surplus this year as a result of the Chancellor sticking to Conservative policies. He promises us another one in two years time as a result of sticking to Labour forecasts. (SeeHM Treasury,Pre-Budget Report Nov 1998, p.112)
My Lords, it's worth reminding ourselves that these surpluses do not actually exist until they turn up in the Treasury's coffers. They are predictions based on guesses. The Shadow Chancellor, Mr.Francis Maude, rightly called them 'fantasy forecasts'.
The Chancellor expects the economy to grow faster than most independent forecasters believe.
He seems to believe he has abolished the business cycle single-handedly.
He also entirely discounts the effects of new Labour taxes and regulations on the costs of doing business-notably, the windfall tax, the minimum wage,and the working time directive.
The truth is that he has taken a fearful gamble -and not with his own, but with the taxpayers money. The iron rods with which he bound himself have turned into elastic bands. The gamble may come off -gamblers do win sometimes- but if the downturn is deeper than he estimates his present spending plans will land him seriously in the red.
Using more sombre estimates, National Institute of Economic and Social Research predicts that the Chancellor will fail to meet his Golden Rule by £23bn. over the lifetime of this government (FT 4 Nov 1998)]
My Lords, the whole point of the Golden Rule is to ensure that that over the cycle surpluses and deficits must balance. By committing himself to spend his surplus before he has earned it, he has consumed his deficit before he needs it. The surpluses vanish in the fog, the debt remains.
The gamble is doubly reckless because it jeopardises the credibility the Chancellor has been trying to build up. There will be another opportunity to explain why I don't think Golden Rule is a satisfactory fiscal rule, but at least he should should have made sure he stuck to it so soon after announcing it.
His policy also jeopardises the operational independence of the Bank of England. Our party opposed this because it provided neither for proper ministerial responsibility not for full independence.
As it is the Bank is left to carry the blame for high interest rates, even when they are caused by loose fiscal policy. Ministers promise it independence and then press in public for it to reduce interest rates.
The real danger in the future is that loose fiscal policy will drive interest rates up just at the moment when we need them to come down. The Bank will then be left in a dangerously exposed position.
I want to put a question to the Minister who is winding up this evening. When the Bank was given its mandate to maintain price stability did it request,or secure, any assurances from the Chancellor on fiscal policy?
My Lords, these rather dry technical matters conceal what I believe is a fundamental political reality. The Chancellor has to gamble with the public finances because he has to feed unrealistic expectations about what public spending can achieve.
His prudence and his party's belief in high public spending pull him in opposite directions.
Our party believes in lower taxes, lower spending, and a smaller state. We don't delude ourselves that these are easy goals to achieve, but we made a start and will go further in future. The Labour Party believes in the exact opposite. It exists to spend people's money.
The technical question of how to balance the budget is thus bound up with the philosophical question of how large we want the state to be, and what we want it to do.
We on these benches believe that the more freedom we give people to make their own choices the easier it will be to stick to prudent finance and the better it will be for our economy and our country.
I am proud to join battle in support for that cause.
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