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Thursday, 28 November, 2002, 16:46 GMT
Pre-Budget report: Did the chancellor get it right?

  Click here to watch the forum.

  • Click here to read the transcript


    Chancellor Gordon Brown has signalled a big rise in government borrowing as he told MPs he was downgrading his hopes for UK economic growth.

    Delivering his pre-Budget report, he said borrowing would rise to 20bn in 2002/03 against a forecast of 11bn.

    The government is borrowing in order to pay for big increases on spending on schools and hospitals.

    New tax and national insurance incentives to improve childcare are to be considered and there will be new measures aimed at helping small and medium-sized businesses.

    And, in what was seen as a clear reference to the firefighters' dispute, the chancellor said he would "tolerate nothing" that would put Britain's hard-won economic stability at risk.

    Has the Chancellor got it right? How will you be affected by the pre-Budget report?

    Treasury committee member Dr Nick Palmer answered your questions in a LIVE interactive forum.



    Transcript


    Newshost:

    Hello and welcome to this BBC Interactive forum with me, Andrew Verity. The Chancellor, Gordon Brown has been defending the big rise in public borrowing he announced in his pre-budget statement yesterday. He says the extra 9 billion he was borrowing this year would not jeopardise the country's economic stability but giving into inflationary public sector pay demands would.

    You've been sending us questions and comments on the Chancellor's report and here to answer them is Labour MP, Dr Nick Palmer, who is a member of the Treasury Select Committee.

    The first question comes from John Simpson, Colchester: Gordon Brown has been proud to be seen as the "prudent" Chancellor. Surely the first rule of financial prudence is, don't buy what you can't afford. Borrowing vast sums of money just before a period of economic uncertainty is surely not prudent. Does the Chancellor find himself forced into this credit cul-de-sac because he knows that any spending restraint on the famous "schools and hospitals" will result in a collapse of all the Labour Government stands for?


    Dr Nick Palmer:

    No, what chancellors ever since the 1930s have aimed to do is to save up in fat years and borrow in lean years. The reason for that was because of what was found in the 1930s that if you tighten up public expenditure at a time when the economy is going down, you make the situation worse.

    So what Gordon Brown did - and he was quite strongly criticised for it initially - was in the first years he repaid a lot of government debt so as to give us a really strong basis for difficult times as and when they arose. We've got a difficult time at the moment. I don't think there's any country in the world that isn't affected by it. But we have the lowest debt ratio - that's government spending related to national product - in the western world and that means that we're able to borrow without endangering our overall situation, in fact it's important to do so.


    Newshost:

    Mark Leabon, Northampton: I was under the impression that in times of growth the country should be paying debt off. I was also under the impression that most borrowing is done in times of recession. As the Chancellor is still forecasting growth, why does he need to borrow such a huge amount?


    Dr Nick Palmer:

    Well, forecasting under trend growth. The thing is that economies grow a little bit every year. The trend growth for the British economy is at the moment 2% a year. The reason for that is that all over the country at any given moment, people are introducing new machinery, finding slightly better ways of working and so on.

    If you only grow by let's say 1.6%, as we're predicting this year, whereas the underlying growth is 2%, that means that you actually have a gap - in effect you've got a recession compared with what you'd expect and then you need to deficit spending to catch up. In the same way if you're accelerating past the natural growth rate - if suddenly you put on a burst of speed and went up by 4% then we'd need to reign it in to avoid getting inflation.


    Newshost:

    Michael, UK: Once again smoke and mirrors are being used by Mr Brown. He said that he would be putting the pensions up by 2, but he already told us that in last year's budget and we've already received our letters from the Pensions Department. So why is he telling us the same thing over again, is this yet just another case of double accounting?


    Dr Nick Palmer:

    I was there during the statement and the new announcement about pensions was the amount of the pensioner tax credit. I think formally the Chancellor's required to confirm what the increase in pension is going to be. What was new in this statement was that we actually got figures for the tax credit which is the first time that anyone will be rewarded for saving in their retirement. Up to now, frankly, you've generally been penalised if you save for your retirement because you get less income support than if you haven't saved.

    The idea of the pensioners' tax credit is that if you've got an income of less than 200 a week, if you're a couple, then you will get a top up on the savings which you've put aside yourself. If that's successful we really hope that we'll be able develop it so that people actually feel it makes sense to save up for their old age rather than blow it on whatever they feel like and then live on income support when they get old.


    Newshost:

    The trouble is Nick is though that loads of people understand the basic state pension but how many of your constituents actually understand the new pension credit?


    Dr Nick Palmer:

    To some extent that's up to MPs like me, I think. We have to go to our constituents, especially in sheltered accommodation - areas where there are a lot of pensioners and talk to them. I think it's important we don't treat pensioners as if they were daft just because they're old. Lots of pensioners are extremely fit and extremely bright and it's perfectly possible to fill out a very basic form which just says, what's your current income basically and what's your total capital and see if you're eligible. Obviously there will be some who have difficulty and that is a snag, we have to accept that. But it's up to us to help.


    Newshost:

    Philip Shewan, London: When is the Government going to wake up and see that there is an absolutely massive housing crisis in the south east? I cannot afford to live and work here, neither can thousands and thousands of others. We need urgent and drastic new house building measures right now.


    Dr Nick Palmer:

    You wouldn't find that in a pre-budget statement but there's no doubt that there is a drastic crisis in affordable housing and, if you like, it's the flipside of the enormous boom in house values which property owners are very happy about. But especially in London and the south east but also the country generally, if you've got a house, it's good news, the value has gone up 20% - 30% in the last year. If you're trying to buy a house for the first time, it's a real problem.

    Now there are two things you can do about that: one is to try to encourage the whole property market to come off the boil. We heard the Governor of the Bank of England talking to the Treasury Select Committee this week and they were predicting that the house price rise will slow to zero in the next year or two. That will help but it won't actually bring the prices down, it will merely mean that they stop accelerating away.

    The other thing that we have to do is simply have more housing because there is a basic supply and demand issue. If we all insist on having a house with a big garden, we will concrete over the country and there still won't be room. So what the Government's done is its changed the recommended density of housing so that when there's a new development, the houses will be built a bit closer together or you get more blocks of flats and the percentage of those new homes to be affordable, is to go up. So it's a combination of those two that we hope will help but it can't be done overnight.


    Newshost:

    William Cowper, Croydon: Do you think the fact that Gordon Brown was able to raise borrowing and was not constrained by the Stability Pact, which all eurozone countries are, strengthens the case for not joining the euro?


    Dr Nick Palmer:

    The statement showed that we're still completely compatible with the euro, so we wouldn't have a problem with the Stability Pact and the changes that have been made to the Stability Pact to help countries with a low level of debt would actually help us because as I say, we have one of the lowest levels in Europe.

    The main reason why a lot of people feel increasingly that we do need to join the euro is that investment in Britain has been going down compared with France and Germany. We do seem to be falling behind there and the reason for that does seem to be that more and more companies want to be in the big market rather than what is now the fringe market. I think we probably will need to join but the Treasury is looking at whether this is the right moment or not and then we'll have a referendum.


    Newshost:

    You've got an interesting new appointment there at the Bank of England in Mervyn King who is reputed to be a euro sceptic. Sucheen Patel, London asks: How has the Bank of England independence shaped government policy?


    Dr Nick Palmer:

    I think the main effect of Bank of England independence has been to depoliticise the whole interest rate debate and that's enabled Britain to have lower interest rates than it otherwise would because interest rates, we have to admit, are in practice set by what the global markets expect. Embarrassing though it is to admit, for a politician, I have to say they have more confidence in the professional bankers at the Bank of England than they do in politicians of any party.


    Newshost:

    Even a euro-sceptic one?


    Dr Nick Palmer:

    Even a euro-sceptic one. I think the primary criterion for the choice of a new governor was not whether he is pro-euro or anti-euro or sceptic but whether he's seen as somebody who will keep inflation in a solid grip.


    Newshost:

    Jon, London: As the economic conditions are at the present time at best unstable and tax revenues are likely fall or stagnate over the short term, should the Government impose a public sector pay freeze or restrict public sector wage rises to the rate of inflation until the economic environment improves?


    Dr Nick Palmer:

    I think it actually varies with the individual sector because there are some areas, like the health service where we simply need decent pay rises to attract the people to get waiting lists down and get the service better. There are other areas where there's a big waiting list for people to actually join the service and there the case for a big pay rise is very much lower.


    Newshost:

    What do you think of the case, talking of the housing crisis in London, for people like teachers in London, for example, or council workers who say, their London weighting should be raised in line with policemen's, for example?


    Dr Nick Palmer:

    I think there's obviously a case for it because I'm a Nottingham MP but I know that we do get people moving up from London because the cost of living is lower in Nottingham. I can see there is a strong case for improvement in London weighting. Basically it comes down to looking hard-headedly at London schools, at the difficulty in getting sufficient teachers and then deciding whether they need to put up the London weighting to attract more.


    Newshost:

    But you don't necessarily think that public sector pay rises for those key workers are going to be inflationary?


    Dr Nick Palmer:

    They're not per se inflationary if the alternative is that you can't recruit good people. Like in any private business, basically you have to set pay at the level that you can recruit people who do a really good job and that's probably not the case for London teachers at the moment, I think they are struggling.

    So I think there is a strong case there - the case is weaker for some of the other public services where there's less of a shortage but you have to look at each individually. The firefighters if you like - I think support for the firefighters is based on sympathy for firefighters because they're brave people rather than there's a shortage because there is actually a big waiting list to get into the fire service.


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