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Mr. Tim Boswell (Daventry): Preferably before the election.
If the Government had announced that, in future, they would consider separating major tax changes announced in the Budget from the detailed technical refinements that annually augment the Finance Bill, that might have assuaged some of our concerns for the future. It is because they have failed to do so that we on the Liberal Democrat Benches are left feeling extremely wary. We genuinely regret such a failure, because, despite our genuine willingness to scrutinise the Bill in the spirit of constructive criticism, the Government are preventing us from doing so.
Ministers may be tired after the election, desperate for the recess and dreaming of their Tuscan holiday or their Dordogne retreat, but if the statute book is left riddled with errors, it will haunt their Red Boxes when they return. I urge the Economic Secretary to the Treasury at the very least to give an undertaking that the manic attempt to legislate even faster than the Government's predecessors--the sort of post-election Prozac trip that they seem to be on--will not be repeated.
What of the contents of the Finance Bill and the related Budget? Frankly, the details that have come out in the past few weeks show that the Bill is disastrous--disastrous for the companies whose investment plans will be hit by the taxes; disastrous for the public services whose budgets will be slashed by the spending total; and disastrous for our economy, whose recovery will be unbalanced by the macro-economic framework.
I say that with genuine sadness and disappointment. At 3.45 pm on 2 July, it was difficult not to be impressed by the sight of the Chancellor standing up to address the House. After 18 years of Conservative chicanery, it was not difficult to hope sincerely that we were about to hear something different, radical, innovative. Instead, we had a Budget--and now a Finance Bill--designed for political considerations, not economic ones, and aimed at fulfilling a political project and building a war chest for the next election, not at directing the economy and meeting our society's needs. That is why Liberal Democrat Members will vote against the Second Reading.
Today is, of course, an historic day, with the Bank of England raising rates independently of the Government for the first time since the second world war. The Liberal Democrats greatly welcome that development and it is essential that, at this early stage, Ministers openly and publicly endorse the Bank's decisions and the aim of low inflation.
Mr. Quentin Davies (Grantham and Stamford):
This is the second time that the Bank has raised interest rates independently.
Mr. Davey:
The hon. Gentleman, who made that comment from a sedentary position, is wrong. The Chancellor directed the previous rise following the election. This is the first time that interest rates have been raised independently.
It is right that Ministers should welcome the rises, because they, along with the right hon. and learned Member for Rushcliffe (Mr. Clarke), are to blame for them. The former Chancellor must share the blame, for if he had raised interest rates well before the election, as the Bank then proposed and as my hon. Friend the Member for Gordon (Mr. Bruce) had suggested, the consumer boom, which is threatening to get out completely of hand, would be much milder.
The right hon. and learned Member for Rushcliffe has made great play of how he got it right and Eddie got it wrong, but I am afraid that history and events are increasingly on the Governor's side, as past economic growth figures are adjusted upwards, showing that the economy was growing faster than previously thought.
Likewise, the Government are not without responsibility. A tight fiscal policy skewed to hit the consumer might have helped to tame sterling and reduce the need for higher interest rates. Instead, we have a tight policy that is skewed on business and the public services.
The right hon. and learned Member for Rushcliffe and the Chancellor can of, course, take joint responsibility for so much of today's economic policy, particularly the Government's spending plans. It is quite astonishing that an incoming Government should be so willing to accept the overall spending totals of their predecessors--not just for one year but for two years. At times, it is like a throwback to the 1950s and 1960s, when Conservative
and Labour spokesmen on the economy last agreed so firmly on economic policy. The consensus between Rab Butler and Hugh Gaitskell at that time led to the term "Butskellism" being coined. Since Clarke is so closely parroted by Brown, perhaps we should have a new "-ism" in British political vocabulary. I suggest the term "Clownism".
Some would say that Clownism is particularly appropriate given the ridiculous and somewhat laughable plans for public spending of both the former and the present Chancellors. Such spending plans are increasingly seen as totally incredible by the City and other commentators. Let us take Goldman Sachs, where I believe Ministers have a friend or two. Its Budget analysis says:
When Liberal Democrats dared to point out the arithmetical fact that the totals for 1998-99 show a real-terms cut of more than £5 billion, we were described by an anonymous Labour spokesman as "economically illiterate". Yet, judging by the Prime Minister's answer to my right hon. Friend the Member for Yeovil (Mr. Ashdown) yesterday, it is the Prime Minister who is economically illiterate. If he really does not understand the effect of inflation on the purchasing power of money, I would urge the Chancellor and his friends to explain the concept to him at the earliest opportunity.
I know that the Chancellor and the Chief Secretary to the Treasury understand the concept. Indeed, in an intervention on my hon. Friend the Member for Gordon earlier this week, the Chief Secretary to the Treasury said:
What the House really needs to know is where the cuts will be made and how they will tally with Labour's election promises. For example, in order to make the cut of more than £125 million in its budget, the Home Office would have to axe 6,250 police officers. Is that what Ministers have in mind? If so, what has happened to their manifesto promise to
There is all this pain on spending, yet taxes are being hiked so much by the Bill. Significant increases in company taxation, which the Bill introduces, are always an easy way to raise funds. It is the equivalent of cutting capital expenditure in the public sector. No one notices at first because the trouble sets in down the track.
Firms will complain, but the effect overall is fairly marginal--except for that one marginally profitable investment decision which now will not go ahead, or that one firm whose increased tax liability takes it over the edge into bankruptcy, or that marginal employee, to whom some firm, somewhere, would have given work, but now will not. Whether it is the £5 billion raised from the privatised utilities or the next £3 billion raised from corporate tax changes, the effects will be damaging to investment and jobs. It is simply staggering that Ministers are trying to claim that that will not be so.
I will spare the House yet another speech on why the windfall tax is wrong in principle and what damage will be wreaked by the abolition of the advance corporation tax credit, except to say that it is astonishing that Labour Ministers, in defending the two largest tax rises of the Budget, have continually referred to occasions when previous Conservative Governments have used the same devices. That justification by reference to Conservative policies worries me. Is it another example of Clownism?
We would have liked to see some smaller tax measures in the Budget specifically to undo some of the more recent Conservative tax legislation. The first is the phasing out of tax relief for profit-related pay. While it was certainly true that the relief was being widely abused and needed substantial reform, the previous Government threw the baby out with the bath water when it pushed through complete abolition. I urge Ministers to consider ways to identify genuine schemes that deserve the relief. Many employees earning modest incomes in companies such as The John Lewis Partnership are being badly hit by the withdrawal of the relief.
Distinguishing the good from the bad may be beyond even the craftiest of Treasury mandarins, but there are relatively painless alternatives, such as reintroducing the relief capped at a lower ceiling of, say, £1,000. That would help many people.
The second tax measure that Liberal Democrats would dearly like to see implemented in the Bill is a reduction in VAT on energy-saving materials. To us, it seems ludicrous to tax environmentally friendly products more heavily than the actual use of energy. While my colleagues from the previous Parliament tell me that the reduction might cause a few red faces on the Government Benches, the green tinge that the measure would add might more than offset such embarrassment.
The third tax measure that we would ask Ministers to reflect on is insurance tax. The Finance Act 1997 created a damaging anomaly under which insurance policies sold by some businesses, such as travel agents, are taxed at 17.5 per cent., but policies sold by others, such as independent insurance brokers, are taxed at only 4 per cent. As was widely predicted, that has naturally hit the profits of many small travel agents. It cannot be right that the tax system deliberately hinders one type of business vis-a-vis another. If we do not want to see yet another
range of small, independent businesses disappear from our high streets, the Minister should incorporate that minor change in the Bill.
I also urge Ministers to look afresh at business taxation, taking a wide definition of business taxation and including the uniform business rate and the way in which the self-employed are taxed. Liberal Democrats are keen to see the replacement of the UBR with a fairer tax based on land values or, in the interim, a major change in the way in which the UBR is levied, including the valuation system that underpins it; the impact on smaller firms; and the incentive impacts for business and, in particular, retail location.
We should like to see the reform of national insurance contributions for the self-employed. Why do the smallest of our firms have to pay class II national insurance contributions? It is a poll tax against small firm creation. The administrative nightmare caused by class II contributions, coupled with their disincentive effects, surely rates them as a plausible candidate for abolition.
Ministers may be becoming wary of announcing reviews, but I strongly urge them to do so for business taxation. Given the swingeing increases they have announced for business in the Bill, a review would be doubly appropriate. Indeed, I argue that the Bill's tax rises for business constitute one of the two key weaknesses in the Budget strategy--the other being the inflation tax on our public services.
When the Chancellor decided on his macro-economic strategy, he must surely have considered the impact on investment of his corporate tax plans. When he painted a picture of strong consumer growth, coupled with a slightly faltering manufacturing sector, and when he talked so much of the need for investment and stability, why did he produce tax proposals that will take so much from the corporate sector and so little from consumers?
The Budget was not just one of the fabled double whammies--it was a triple whammy on business. Before the Budget, exporters were hit by the high pound and the Budget did nothing to correct that. In the Budget, firms were hit by the taxman. After the Budget, firms are to be hit by the Bank as it forces rates higher than would have been needed if the Chancellor had taken action to slow down the consumer boom. A stable, sustainable climate for investment is not built by hitting firms with a triple whammy of a soaring pound, a hike in tax and higher interest rates.
The Government have made a serious miscalculation with that policy mix. Whether it was done for political purposes or not, loading the measures to slow down the economy on to the business sector and our public services is incredibly ill-advised. Indeed, the mistakes in the macro-economic framework are the fatal flaw of the Budget. The Liberal Democrats welcome the tightening of fiscal policy and the debt reduction strategy, but the targets are ill-chosen because the public sector and businesses are not the ones fuelling the boom.
"In our forecasts we assume that the pressures to increase public spending are sufficiently great for the Chancellor to be forced to breach the control total this year and next. Specifically, we assume that the control total overshoots by £2 billion this year and£8½ billion in 1998/9."
People do not believe the Government's Red Book. Who can blame them? Who can blame the teenage scribblers for not believing the Government? I cannot remember any Labour politician during the election campaign calling for massive cuts in public spending, yet the Red Book says just that. Higher inflation forecasts have made nonsense of the cash planning totals of the right hon. and learned Member for Rushcliffe, yet the Labour Chancellor is determined to stick by them--pure Clownism.
"the health budget will increase in real terms by 2.24 per cent. next year".--[Official Report, 7 July 1997; Vol. 297, c. 658.]
We welcome that modest increase, but we should like to know the real-terms figures for all other areas of spending, such as the police, pensioners and social services. The fact is that there will be savage real-terms cuts across the board at a time when most public services are already at breaking point.
"get more officers back on the beat"?
Will the implied £35 million real cut in planned overseas aid for next year be implemented or will Labour Ministers keep their manifesto pledge to
"reverse the decline in UK aid spending"?
Which is it to be? The reality of Clownism, as practised by the new Treasury team, will inevitably be cuts in all Departments or massive overshooting on public spending totals and public sector borrowing.
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