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1.41 pm
Dr. Vincent Cable (Twickenham) (LD): As I did when I responded to the pre-Budget report, I shall start by acknowledging the positive things about the economy and the Budget.
There has been greater economic stability than before 1997; the employment and unemployment statistics are enviable; inflation is low; and the relationship between debt and gross domestic product is fundamentally healthy. All those things are positive. However, the Chancellor's finest hour came in his first week in office in 1997, when he made the Bank of England independent. Many of the problems now evident have been building up ever since. The big decision in this Budget was not to tackle them until after the general election.
Let me list some of the problems that we face. First, there is growing evidence of a very serious imbalance in the economy, based on very high levels of consumer debt
and inflated house prices. That has exposed many families to financial disaster if interest rates rise and house prices fall.I raised this matter with the Chancellor six months ago on the Floor of the House. He rather derided the matter as some personal eccentricity of mine but, as he may have been too busy to see it, let me point out what the Monetary Policy Committee said only this morning. In its minutes issued today, it notes that household financial positions could well become unsustainable and so increase the probability of an eventual abrupt adjustment process.
The problem stems from a remarkable boom in house prices, which even the International Monetary Fund says has led to an overvaluation of between 30 and 35 per cent. The Chancellor mentioned the very useful reports from Miles and Barker. I welcome the practical suggestions that they make. I was amused that, after decades of Liberal Democrats promoting the idea of site value taxation, the notion at last seems to have taken root on the Treasury Bench. However, the technical improvements that Barker and Miles point to do not even begin to address the problem of the speculative bubble that lies behind the housing market, which supports household debt worth a trillion pounds. That bubble could well collapse, with disastrous consequences.
The other side of the imbalance is what is happening to the productive sector of the economy. The Chancellor talked about his projections for manufacturing investment, but he failed to mention that it had fallen by a third over the past three years. His 200-year history of the British economy did not point out that there was an all-time record trade deficit of £4.6 billion in January.
My second point has to do specifically with the Budget. I disagree with the Leader of the Opposition: I do not believe that there is a fiscal crisis, but there is a fiscal deficit problem that needs to be addressed. The Chancellor slipped into his speech an acknowledgement that the fiscal deficit will be £6 billion higher than estimated in the pre-Budget report. He has gone some way towards acknowledging what we believe: that the growth in public spending must slow down until it is comparable to the growth of the British economy as a whole. My party does not favour the extreme measures apparently adopted by the Conservatives.
The Chancellor listed the submissions from the Conservatives, but it was interesting that he did not mention their proposal on local government finance, which would raise council tax by 10 per cent. I suspect that he did not mention it because nowhere in his Budget speech did he give his own estimate of what council tax rises are likely to be next year. That is a matter of absolutely critical importance, because it lies at the heart of our disagreement with the Government about taxation policy. The disagreement is not about the aggregate level of taxation, but about its fairness. The Chancellor has a legitimate record of concern for social justice, but he should be most ashamed that the bottom 20 per cent. of the population, in terms of income, pay a higher percentage of their income in tax than the top 20 per cent.
The major reason for that disparity is the system of council taxation, which the Government inherited from the previous Conservative Government but which they
have done nothing fundamentally to reform. I hope—and sense—that our argument for local income tax is beginning to win the day. A Government spokesman said only the other day that the Government recognised that local income tax was a "realistic option" and a "strong, sustainable source" of funding for local services. We repeat our belief that ability to pay must underpin all direct taxation. It does not underpin local income tax. We know that the Prime Minister is hostile to the reform, and the Chancellor has wisely kept mum about it.The Chancellor introduced some welcome top-ups for older pensioners—an idea that we have promoted consistently over the years, as it targets help on those who need it most. However, he will apply it not in its own right, but as a sticking plaster for the injustice created by local income tax.
Another disagreement in terms of tax policy, which the Chancellor did not touch on today, has to do with marginal rates of tax. We accept that very high earners—people earning more than £100,000 a year—should pay a marginal tax rate of 50 per cent. The Government have condemned that proposal, but they have never acknowledged that their own proposals incorporate marginal tax rates of 50 per cent. or more for several key groups. As a result of the change in provision for students, people earning more than £35,000 a year, when they pay their graduate tax, will be paying a marginal rate of 50 per cent.
The Chancellor slipped in a quiet reference to the lifetime cap on pensions. He said that he had increased it a little, but he did not acknowledge that the marginal rate of tax on the pension pots applicable to people such as airline pilots, for example, will be not the horrendous rate of 50 per cent. associated with the Liberal Democrats, but 55 per cent. So much for the Government's concern about high tax rates.
Thirdly, I turn to the issue of tax simplicity. When I first raised this matter, I made an analogy with the gentleman who has earned the nickname "Tinkerman"—Mr. Ranieri at Chelsea. As the Chelsea team is progressing rapidly through the Champions league, I should perhaps look for a less successful analogy, but my point remains valid. The Government and the Chancellor have introduced an endless succession of gizmos, wheezes and gimmicks, and we had more today. They have complicated the tax system, without improving it in any way.
One matter mentioned briefly by the Chancellor was the failure of his attempt to introduce an incentive last year for incorporated businesses. I should be grateful for clarification of the passage in the Red Book that states that the proposed reform will raise an extra £490 million in one year. Effectively, that will penalise all those businesses that, in perfectly good faith, went to the expense and trouble of shifting to incorporation.
Over the years, the Liberal Democrat view on public spending has been clear and transparent. We argued for an increase in investment in public services and for the taxes to pay for that, and we campaigned on that basis at the last general election. The Government have delivered the investment, which we voted for and supported. Unfortunately, they did not deliver it openly and honestly, which has contributed to the general public's cynicism about the tax system.
The Government face tough choices on public spending, and today the Chancellor has hinted where he proposes to make some economies—we fully support the implementation of the Gershon report, which is entirely sensible. What is missing is an indication of the tough choices that must be made. Neither the Government nor the Conservatives can get away with arguing that the only way to rein in public expenditure is to cut waste, and tough choices are needed.
Some Departments—for example, the Department of Trade and Industry and the Department for Environment, Food and Rural Affairs—are grossly overstaffed and, moreover, do far too many things that should be stopped. The Government are introducing low priority proposals that are wasteful. The Chancellor referred to the need to maintain the Home Office budget, and we agree with that. But he did not point out that up to £3 billion will be taken out of the Home Office budget and spent on identity cards. His Department is responsible for introducing the baby bonds scheme, which is a superficially attractive but extremely inefficient, ill-thought-out way to use hundreds of millions of pounds that could be better used on early-years education.
Today, the Chancellor has introduced what sound like radical proposals for civil service relocation—we are totally in favour of the Lyons report. He did not point out, however, that fewer than one in 10 civil servants located in London and the south-east of England will be affected. For example, the Treasury will reduce its London staff from 1,152 to 1,134. Eighteen officials—fewer than one in 100—will be moved, which is not leading by example.
The Iraq war is one important reason why public expenditure has grown faster than expected. The cost of the Iraq war is approaching £3 billion, and it is rising by an extra £200 million a month. It is not appropriate to rehearse the political arguments in this debate, save to point out one crucial point: this country has been to war before in the middle east—in the early 1990s—as part of a genuine multilateral campaign, as a consequence of which the international community paid 80 per cent. of the costs. Because of the Government's approach to the recent conflict, the British taxpayer must pay every single penny.
On the euro, the Chancellor raised his usual annual laugh by kicking the issue ever further into the grass. The euro is obviously the biggest single economic issue confronting this country. A decision must be made sooner or later, and the Chancellor should be honest and state that costs are being incurred as a consequence of not making it. For the past seven years, British manufacturing has traded at a competitive disadvantage of around 30 per cent. as a result of the appreciation of the real exchange rate.
The collapse of Britain's share in foreign direct investment from 27 per cent. in 1998 to 7 per cent. in 2002 is a clear sign that international business is moving to the eurozone. Had we held on to our 1998 share, an extra £80 billion would have been ploughed into productive investment in parts of Britain such as the north-west and Wales. That real cost has been paid as a result of fudging and repeatedly postponing the
decision. The Budget simply avoids the key decisions that must be made for the long-term future of the economy.
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