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8.13 pm

Mr. David Davis (Haltemprice and Howden): I feel privileged to speak, bracketed between the valedictory speeches of several hon. Members who are among the most admired--certainly by me--in the House. It is also a pleasure to follow the hon. Member for Croydon, Central (Mr. Davies), a colleague of mine on the Public Accounts Committee, although he will understand if I disagree with almost everything that he said, as will become apparent in a moment.

I should like to address the Budget in the context of the Government's overall economic strategy--especially that on taxation, spending and borrowing--of the past four years and its long-term implications. The one point on which I agree with the hon. Member for Croydon, Central is that the Budget has had a good press. The public sector financial figures look healthy at first sight. My right hon. Friend the Member for South Norfolk (Mr. MacGregor) mentioned the smoke and mirrors that are involved in that, and it is true that financial and economic commentators like a surplus.

There are two sets of reasons for the surpluses--one good, and one bad. The good reasons reflect the healthy economy, delivered by nearly 20 years of Conservative economic reforms. Cutting tax rates and tax complexity and limiting regulation have been vital to the healthy and dynamic economy that underpins the Budget. In more fundamental terms, however, which the Government will not like, without the great trade union reforms, the great financial market liberalisations, the great privatisations and the dramatic reductions in tax rates under Conservative Governments, the Budget would not have been possible.

The bad reasons for the surpluses reflect the fact that we are simply being charged too much tax. Even the Government now admit that the burden of taxation has increased. We now pay between £25 billion and £35 billion in extra taxes. We must also take into account another £10 million--the cost of extra regulations--not to mention the ferocious complexity of the modern tax and benefits systems. The irony--the paradox--of the Budget is that it is slowly destroying the very things that made it possible.

Despite continually repeating economic platitudes about caution and prudence, the Chancellor and the Government have not learned the key concept of Conservative economic

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arithmetic, which is straightforward enough: lower tax rates lead to higher growth rates; higher growth rates lead to higher tax takes; and higher tax takes allow tax cuts and spending increases--the story of 18 years of Conservative government. That virtuous cycle is the key concept behind Conservative economic policy.

The Government are gradually breaking that virtuous cycle for three reasons: first, their attitude to spending and their inability to manage it; secondly, their obsessive attitude to debt, which we have heard about today and with which I shall deal in a moment; and, thirdly, the high level of waste in government and the associated poor delivery of services.

I shall deal first with spending. Old Labour was characterised by feast, famine and overspending, followed by cuts when the Government ran out of money. The Chancellor knew that the financial markets would punish him for such behaviour. Indeed, his approach to the first few years has been dominated by the overwhelming desire to build up his reputation, at all costs, as cautions, careful and even prudent. He first ran up his war chest by overtaxing, and when he had a surplus he set out his pre-election bonanza. Old Labour represented feast then famine; new Labour represents famine then glut. That may have created the Chancellor's current reputation, but it is the worst possible way to manage public expenditure.

Starving the public sector of cash, followed by throwing money at it in panic will lead to waste and to the public sector failing to reach its targets. Runaway spending will fail to deliver the proper level of improved services. It will destabilise the public finances and, in the longer run, it will be unsustainable.

One of the Chancellor's strangest characteristics in his obsessive pursuit of prudence has been his obsession with public debt. Some of that obsession has been reflected in today's debate. The national debt in Britain is about a third of national income--half the European average--so it is not unmanageable; it is not even high by international standards. It is about half the level that is judged to be sustainable. We are not facing the situation that existed after the Napoleonic wars, when debt was three times as high as national income. We are not even facing the situation when debt was in the high 50s as a percentage of national income, which happened to be when the previous Labour Government were in power. The Chancellor, however, is saddled with Labour's history and reputation for economic incompetence, so, like a reformed alcoholic, he has to be a debt teetotaller and purchase Labour's economic credentials with taxpayers' money.

It is important to understand the purpose of national debt, which acts as a flywheel for the economy. When the economy slows, debt increases to allow the budget to meet increasing welfare payments without increasing taxes. When the economy is going well, debt should grow at a below-average level or a modest proportion should be paid down. Over the whole economic cycle, debt should stay roughly constant as a proportion of national income. The problem of paying down too much debt is that one has to raise too much tax to do it. The Government paid down £34 billion this year. In my judgment, it would have been smarter to have paid off about half that.

The Government's strategy is paradoxical. In the pursuit of their own reputation for financial prudence, they are damaging the financial standing of their citizens. The greatest single immediate effect of the last few years

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of taxation and economic policy has been to drive the savings ratio down from 10 per cent. in 1997 to about 3 or 4 per cent. The hon. Member for Croydon, Central said that that was all the result of changes in economic confidence, but the numbers do not reflect that. There have been changes in economic confidence--up and down--in the past few years, but they have not been reflected in the rate of change in debt.

Mr. Geraint Davies: Does the right hon. Gentleman accept that debt and borrowing are, in fact, deferred taxation? The money has to be paid in any case, so in paying off a huge chunk of debt--for example, by the spectrum sale--we can save £2 billion of tax or avoid £2 billion of cuts in a given year without breaching the rules of the International Monetary Fund and the European Union. Those rules would be breached under his prescription.

Mr. Davis: I would not breach any of those rules, but I shall deal with the hon. Gentleman's point shortly.

By 1999, the reduction in personal savings was about £25 million and, by 2000, about £35 million. The increase in taxes is also about £25 million to £35 million, depending on when one measures it. Therefore, for every £1 increase in our tax burden at least £1 has come out of savings. The overall aggregate effect of the Chancellor's four-year strategy has been to transfer money from personal savings to the Treasury.

Instead of considering the issue in terms of billions of pounds, which is incomprehensible for most people, let us think of it in terms of the effect on the ordinary family. The level of national debt is about £15,000 per household. The Chancellor is expropriating more than a £1,000 a year from every household--money that would otherwise have gone into savings--and is using it to pay down Government debt, which is subject to the lowest possible rate in comparison with the return that a normal saver would get.

Before I come to the point made by the hon. Member for Croydon, Central, I wish to deal with a technical issue. The reduction in public debt might have a perverse effect that could lead to a shortage of gilts. The Chancellor might think--he almost said so in his speech last week--that the Myers report and the relaxation of the rules on investment solve the problem that that creates. Ironically, the reduced availability of very low-risk investments might, through the management of average risk, lead the financial institutions to cut their exposure to high-risk investments--precisely the opposite of the Chancellor's wishes. I have told the Financial Secretary that I shall write to him about that point, because the issue is too technical for this debate.

Debt reduction is being represented to the public as a virtue. The hon. Member for Croydon, Central, among others, has made that point. I can summarise his argument, because a Treasury press release does just that. It states:

That is the thrust of the argument, but it completely ignores the fact that the tax raised to pay down the debt has the effect of depressing the growth of the whole economy.

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The destructive effect of high taxation on overall economic performance is now well understood, but appears to have been ignored by the Government. Studies based on Warwick university's economic model, by Robert Barro of Harvard university and by David B. Smith of Williams de Broe, whose work has recently been published by Politeia, show that a stark reduction in economic performance is related to increased spending and taxation.

The simplest way to understand that is to consider another model and another country. Through the late 1970s, 1980s and early 1990s, the social democrat model in Sweden went along the route of increasing public expenditure faster than the economy's growth rate. In the 1960s and 1970s, Sweden was the third or fourth richest country in the world. Today, it is the 19th richest, and that is the direct consequence of higher taxation. The studies that I mentioned argue that, if it had maintained a sensible and Conservative policy, its private sector would be three times as large as it is today. Had Sweden gone the low-tax, high-growth route, not only would individuals have been richer, but its expenditure on public services would be much higher than it can conceivably afford today.

Politicians' classic error is that they love to be the distributors of largesse--the apparent benefactors of their fellow citizens. In the Chancellor, that vice has become an addiction. Social engineering is so detailed and complex that it is now social micro-engineering. He and other politicians ignore the fact that their complex and burdensome taxes and regulations destroy initiative; that their largesse brings millions more into dependency-- 2 million in the past three years--and that the destruction of savings and the savings culture undermines the primary instrument of self-help and independence, which is people's investment in their own family's future.

The greatest help that we can give the poor is to provide better jobs and better choices and give them the right to keep more of their money. Those would all be better than the Chancellor's cold charity and would all be delivered by a vibrant low-tax economy. The Government's strategy is tax a lot, spend more than we can afford, pretend prudence by the unnecessary payment of debt and ignore the long-term consequences for growth.

The approach of Conservative Front Benchers is to promise £8 billion of tax cuts, based essentially on the reduction of waste and bureaucracy in government. They rightly intend to focus much of that benefit on cutting taxes on savings. The Government have rubbished that strategy, but I am not too worried by attacks from Treasury Ministers who cannot manage their own spending to within £5 billion and cannot forecast their surpluses to within £20 billion. Indeed, Treasury forecasting is so far off that I am beginning to believe that it is a deliberate attempt to persuade the world that tax cuts are not possible.

In reviewing Conservative policy, I considered the possibility of cutting waste and bureaucracy. The best study that I could find was by Mr. Tim Ambler, a senior research fellow at the London business school. It is due to be published later this year and draws on experience in Britain, New Zealand and elsewhere. It estimates that £30 billion a year could be saved. Although I do not accept all Mr. Ambler's arguments, I certainly believe that it is possible to achieve savings of £20 billion with no

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adverse effects on public services and front-line spending. Indeed, it is possible to achieve that while improving public services.

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