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2.36 pm

Denzil Davies (Llanelli) (Lab): Unlike the right hon. Member for Hitchin and Harpenden (Mr. Lilley), I welcome the Budget. I congratulate the Chancellor on his eighth Budget and, more importantly, on a remarkable seven to eight years of stability in the British economy, with good rates of growth and low inflation and unemployment. Before I turn to the Budget itself, I should like to refer to the Chancellor's announcement about the Barker report on the supply of land for building. I was not going to mention it, but I changed my mind when the hon. Member for Twickenham (Dr. Cable) said that the Liberal Democrats favoured site value taxation. As a Minister I introduced such taxation.

Rob Marris (Wolverhampton, South-West) (Lab): It was development land tax.

Denzil Davies: My hon. Friend is right—we did not call it site value taxation but development land tax. If my right hon. Friend the Chief Secretary to the Treasury and, indeed, the hon. Member for Twickenham wish to have the benefit of my experience, I am prepared to pass it on—obviously, in private.

To return to the Budget, my right hon. Friend the Chancellor announced that next year the growth rate would increase to 3 to 3.5 per cent. He also announced—the right hon. and learned Member for Folkestone and Hythe (Mr. Howard) made something of this—that borrowing on the Maastricht criteria would be 3.4 per cent. this year, but would go down in future years. I have not seen this year's Red Book, but previous Red Books suggest that despite the reasonable growth that we have experienced in Britain—it is better than most countries, with the possible exception of the United States—the yield from the two main taxes, VAT on goods and income tax on wages and employment, does not appear to have met the Treasury's expectations. That may change in the next few years with increased growth, but I suspect that it will not. I believe that the United States has the same problem. There are many causes, including what the Chancellor described as the new global economic challenge. Some people call that globalisation, some globalism and others global capitalism. However, goods and money can travel quickly and almost unhindered around the globe, and developing countries can speedily acquire technology, expertise and skills that in the past were the preserve of the western democratic countries.

I recently tabled a question requesting from the Treasury the figures for the yield from import VAT in the past three years—the VAT charged on imported goods. The figures were quite surprising. For 2000–01 the yield was £17 billion. For the next year, 2001–02, the yield was £16.194 billion. For 2002–03 the yield was £15. 523 billion. I thought the figures might be the wrong way

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round. Clearly, the reduction in yield cannot be due to the increase in the volume of imports. There probably has been an increase in the volume of imports—our trade deficit seems to imply that. The reduction in yield might be because of the strength of the pound. Over that period, the pound being relatively strong, the price of imports was reduced.

I suggest that another reason may be the pressure of globalisation. Because countries, especially in the far east, are trying to acquire a greater share of the UK domestic market, they are prepared to reduce their prices, and in fact prices are lower. Of course, if the prices of imported goods go down, the amount of VAT at 17.5 per cent. also goes down. [Interruption.] Does the right hon. Member for Charnwood (Mr. Dorrell) wish to intervene?

Mr. Dorrell : I am grateful to the right hon. Gentleman. I was simply saying—to myself, mainly—"What's wrong with that?"

Denzil Davies: It is not a question of wrong or right. It is a statement of fairly clear fact that if prices go down—including the price of domestic goods, because if domestic manufacturers have to compete with lower-priced imported goods, they have to try to reduce their prices—that must reduce the yield from VAT, unless the volume is sufficient to carry that reduction and VAT stays at 17.5 per cent. That is not a great or a grand point, or even a philosophical point.

Having been surprised by the answer to that question, I tried a similar question to the Inland Revenue in relation to yield from wages and income tax, but all I got was a reference to a website somewhere. I am not sure where the website is; I still cannot find it. I understand that if one looks at the yield from income tax over the past two or three years, and if one subtracts from that yield last year's increase in national insurance, the same phenomenon appears. Despite the growth in the economy, the yield from income tax is not as great as the Treasury hoped. That may well be putting pressure on public expenditure. Unless other taxes are found to make up for it, we are likely to have a greater deficit on the public accounts.

It could be said that globalisation has the effect of depressing wages, and if wages are depressed, the income tax yield is depressed, and another tax or taxes will have to be found. If the House will bear with me, I shall give a constituency example that, in a minuscule way, reflects my argument. I have a car component factory in Llanelli. It has been there for a long time and is under pressure, as most car component factories are. It has had to announce the outsourcing—that is the vogue word—of some 90 jobs to eastern Europe or, probably, to Asia.

We hope that we can save the jobs, but given the fairly buoyant state of the economy, I would expect—especially with the unemployment figures announced today—that a majority of those 90 workers will find other employment, possibly locally, if their jobs go. In my experience, the wages they will be paid in their new employment are likely to be lower than the wages that

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they now receive from the car component factory. So again, presumably, they will pay a little less in income tax. For some of them, their wages may be driven down so far that if they are family men or women they may have to claim working tax credit, or top-ups as they are called on the other side of the Atlantic. That must involve some kind of public expenditure. If they do not get jobs at all, they will have to be paid jobseeker's allowance, unemployment benefit, or whatever income support is called these days. Again, on a small scale, because of outsourcing and the pressures of globalisation, wages are going down and, as a result, the yield from income tax is falling.

Outsourcing in manufacturing is nothing new. We have seen it over the years. We are now seeing outsourcing in the service sector as well. It would be dishonest of me to pretend that there is an easy answer to the problems. I was surprised when my right hon. Friend the Secretary of State for Trade and Industry, and the Leader of the House, my right hon. Friend the Member for Neath (Mr. Hain), whose constituency is not far from mine, seemed to say that outsourcing was good for the British economy. Somehow, the argument is that outsourcing enables us to create better quality jobs. What is to stop those better quality jobs in turn being outsourced, I do not know. However, it seems to be the general view that outsourcing is good for the British economy.

I have some candidates for outsourcing, but I shall not go through the whole list. I am sure there are some economic think-tanks around Whitehall that could easily be outsourced, to the benefit of the British economy. I am probably the only Member left in the House who does not believe that central bankers have contributed much to the lower rate of inflation. I believe that that has been caused by globalisation, which has driven down prices and interest rates. The Chancellor was rightly waxing lyrical about the amount of money saved because of debt interest. That has gone down because inflation has gone down. My view is that inflation has gone down towards the realms of deflation because of the global economy.

Be that as it may, there are those of us who do not believe that central bankers have made much contribution. Perhaps we could outsource the Monetary Policy Committee. I am sure the Indians could do the job very well. They are good mathematicians, which means that they could probably be good economists, and they speak English well. We must be careful when we argue that outsourcing is good for the British economy.

The economic and political establishments in Britain are united in the view that globalisation is a universal absolute good and that we must all worship at its altar. Curiously, in that most capitalist of countries, the United States, the view seems to be changing. I know one should not take the views of the United States from primary elections, but it is remarkable how much attention has been visited upon the problems of outsourcing in the primary presidential elections and, I suspect the same will be true in the presidential election in November. US politicians are clearly concerned about outsourcing. It is not just those at the bottom of the wage chain who are concerned. A poll published in The Wall Street Journal recently showed that most concern in the US at outsourcing was felt by people who

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earned $100,000 or more every year. So outsourcing is gradually moving up the wage chain, and that will present a serious problem.

The classical economic theorists in the United States, as in Britain, say that globalisation is an absolute good and we must not question it in any way. They give a number of reasons why it is good. First, they tell us that globalisation creates more jobs: it certainly has not so far in the United States, as far as I can see. There is a terrible scramble going on in the Bush Administration, aided by the most right-wing chairman of the Federal Reserve the United States has had for some time, with taxes being cut, a huge budget deficit and interest rates at 1 per cent.—in fact, if we take inflation into account, minus 1 per cent.; a huge effort is being made and no jobs, certainly in the private sector, are being created.

People wonder why. The answer, of course, is that jobs are being created in China and various other places. When it is pointed out that the United States has an enormous trade deficit, the classical economists say, "Well, that's all right. It doesn't matter. The Chinese merely reinvest the money in Treasury paper and lend the money back to the United States, so that the United States can buy more goods from China." Fine. I remember the aftermath of the Yom Kippur war in 1972 or 1973 when all the money that was obtained by the Arab countries from selling oil at $70 a barrel, or whatever it was then, had to be reinvested in London and Washington because the Arabs did not have a currency. They do not have a country, therefore they do not have a currency. But the Chinese have a currency. Well, yes, only the Chinese currency, but one of these days the Chinese will reform their financial system. The Chinese currency will become a proper currency and the Chinese will then decide to use the money to buy their own currency or spend it within their own country, taking it away from Treasury assets. Again, the classical economic theory that somehow this huge trade deficit is good, eventually will not work.

Finally, the economists say, "There is nothing new about globalisation, so what is all the fuss about? It is the 20th century that is the aberration." Of course there was globalisation before the first world war. Goods could move freely, perhaps even more freely than now; money could move freely; and certainly persons could move more freely—although not with the speed with which goods, persons and money move today. Yes, indeed there was globalisation before the first world war and for centuries previously, but the real difference is that that globalisation was our globalisation. Western countries were in charge of it. Western empires controlled it. When America became a strong country, America controlled it. The difference with today's globalisation is that it ain't ours. There are new kids on the block, and they are growing and learning fast. The biggest capitalist country on earth is now extremely worried.

Was it Trotsky who said, "You cannot have socialism in one country"? [Interruption.] I am told by my hon. Friend the Member for Middlesbrough (Sir Stuart Bell) that it was Lenin. Perhaps we cannot have socialism in one country. We have globalisation, global capitalism, and the United States, the most capitalistic country of all. It will come to western Europe as well. The Liberals tell us that if we join the euro, somehow everything will

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be fine and we will get all the investment into Europe. Europe has not started to feel the real pressures that come from globalisation.


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