Dr. Gavin Strang (Edinburgh, East) (Lab): The hon. Member for Beckenham (Mrs. Lait) made an interesting speech; the House will hope that her more pessimistic predictions for the global economy do not come to pass.
I am grateful for this opportunity to congratulate the Chancellor of the Exchequer, my right hon. Friend and Edinburgh colleague, on his first Budget. I particularly welcome the increases in child benefit and child tax credit and the winter fuel allowance for 2008-09.
By any standards, the past 10 years of economic management have been a success story. Continued economic growth throughout the decade has been enjoyed alongside 10 years of low inflation and modest interest rates. Thanks to the stable and prospering economy, the number of people in employment in this country has risen steadily to record levels. The number of unemployed is at its lowest for 28 years and in my area that number has fallen by 57 per cent.
It is fair to add that the economic success of the UK in the past decade has not taken place against a background of great global economic stability and tranquillity. After all, during that period there have been a number of shocks to the global economy, such as the dotcom bubble and the Asian financial crisis. All other G7 countries have experienced at least one quarter of negative growth in the past decade.
Currently, the global background is once again somewhat tumultuous. I guess that at this time there is more apprehension about the future of the global economy than at any time since Labour came to power. Hon. Members and those outside no doubt listened more carefully than usual to the Chancellors statement on the outlook for the global economy. There is clearly a big question mark over where the world economy will be in 12 months timeprimarily, of course, because of what has been happening in the US.
In the context of the Budget debate, there is always a huge focus on what we now call the public sector net cash requirement. That is understandable; the Chancellor has direct responsibility for striking the right balance between what the Government spend in any year and what they take into the Exchequer through taxation.
During the Budget debate of two years ago, I raised the question of our balance of trade in goods and services. My question, to which I did not receive an answer, was about the extent to which we should be concerned about our trade deficit. Our balance of trade in goods and services has been negative for many years. We are net exporters of services; the balance of trade in services reached £36 billion in 2007. However, the increase in the negative balance of trade in goods has been even faster; it reached £87 billion last year.
Stewart Hosie (Dundee, East) (SNP): Is the right hon. Gentleman equally concerned that the tables in the Red Book have been changed? It is now almost impossible to do a like-for-like comparison without flicking through to other tables and small references to MTIC adjustment. The total balance of trade is not the £48.75 billion on the table, which would have been the same as for the year before, but £70 billionand that is tucked away somewhere else in the Red Book.
We have a positive balance in respect of services, but the position is different for goods. Even faster than the rise in the positive balance has been the increase in the negative balance of trade in goods, which reached £87 billion last year. In 1998, our overall total goods and services trade deficit was £7 billion. In the past five years, that deficit has increased from more than £30 billion in 2002 to more than £50 billion last year. I see the Exchequer Secretary on the Treasury Bench; I hope that at some point a Treasury Minister will say a few words about the significance of the trade balance in the modern world. I invite her, or any other Minister with the opportunity, to do sothe issue is clearly of considerable interest.
To varying degrees, any one tax has two outcomes: it raises revenue and it influences behaviour. To their credit, in 1997 the Government declared a commitment to shift the burden of taxation away from activities that we want to encourage, such as the creation of employment, to activities that we want to discourage. That is clearly right in principle, and important steps have already been taken in that direction. One of the most significant measures for lifting taxation away from desirable activity was the introduction of the tax credit system in 1999. Through that, the tax system is used to help ensure that
work pays and removes disincentives preventing people entering employment. The tax credit system has been a factor in raising employment throughout the country.
However, I particularly want to focus on the environment, to which a number of hon. Members, including my right hon. Friend the Member for West Dunbartonshire (John McFall), have referred. I am thinking in particular of the need to put in place measures to reduce greenhouse gas emissions. Some years ago, the Government made a start on using the tax system to make our behaviour on these islands more environmentally friendly. The climate change levy was introduced in 2001 and the aggregates levy was introduced in 2002. Vehicle excise duty was restructured to reflect, for the first time, the environmental damage done by different makes of car. Alongside other environmental actions by the Government, those changes made for a promising start. Office for National Statistics figures show that the proportion of tax revenues raised from environmental taxes saw a modest risefrom 9.4 per cent. in 1997 to 9.7 per cent. in 1999.
However, as the Environmental Audit Committee brought out in its recent report, that was followed by a series of cuts and freezes in key environmental taxes. As a consequence, green taxes as a proportion of all tax revenue fell below 1997 levelsto 7.3 per cent. in 2006.
The Government should take credit for our being on track to meet the Kyoto targets, but we must also look at current trends and where they will take us. The Exchequer Secretary will be aware that the trajectory of UK greenhouse gas emissions is not as it should be. Our emissions have been on a plateau, with only the faintest trace of a decline between 2002 and 2006, the latest year for which figures are available. If the UK is going to do its bit to prevent catastrophic climate change, we will have to take far stronger action than we are taking now. The taxation system has an important part to play. I welcome some of the things that the Chancellor announced in that context, but I suspect that we will have to go further still.
Mr. Evans: Does the right hon. Gentleman agree that any green taxes should be revenue-neutral? Green taxes should be for encouraging people to lead more sustainable lives, but a lot of people are suspicious that they are being used as a smokescreen behind which the Government can raise extra revenue.
Dr. Strang: I hear what the hon. Gentleman says. If the tax is put on, it will have an effect, whatever happens. However, the hon. Gentlemans point is valid. Such taxes will be more acceptable to the electorate if they feel that although they are paying more tax for some things, they are paying less for others. We can hardly dispute that such a situation would make green taxes more acceptable.
One of the duties that has been subject to cuts and freezes in recent years has been air passenger duty, andas the Environmental Audit Committee identifiedthe doubling of rates from February last year simply restored most rates to 1997 levels. Aviation is acutely undertaxed. It pays no value added tax, and hardly any aviation fuel is subject to duty. At the same time, aviation is the UKs fastest growing emitter of greenhouse gases.
The announcement by my right hon. Friend the Chancellor in Octobers pre-Budget report that air passenger duty was to be reformed was welcome news. The Treasury
proposes that air passenger duty become a charge per flight rather than a charge per passenger. In its recent report, the Environmental Audit Committee concluded that that will incentivise airlines to fill their flights. The Committee believes that short haul charges must reflect relatively high emissions and the fact that alternative means of travel are available. The Committee also recommends that the Government consider the introduction of an extra band to cover very long haul flights. I welcome my right hon. Friends acknowledgement that he will not only maintain his policy on this tax but expect to secure a very substantial rise in air passenger duty in subsequent years.
Mr. Jack: Did the right hon. Gentleman find anything in the Budget that might encourage expanding areas of aviation, such as the low-cost carriers, to adopt the most modern and least emitting types of aircraft?
Dr. Strang: The proposal to move from taxing flights as opposed to passengers is certainly a positive move. I hear what the right hon. Gentleman says. I am not sure how easy it would be to implement something like that, but we should constantly be looking at other ways of bringing pressure to bear. The inclusion of aviation within the figuresit is excluded at the momentis in itself long overdue.
I want to move on to carbon capture and storage, which has already been mentioned by my right hon. Friend the Member for West Dunbartonshire and others. Electricity generation is the UKs largest single producer of carbon dioxide emissions. Traditionally, our coal-powered stations have been the highest emitters of carbon dioxide, and the move away from coal to gas in electricity generation played a large part in our being on track to meet our Kyoto target. However, coal is still the source of about a third of our electricity, and the House will be aware that new coal plant is planned.
To reduce the carbon footprint of fossil fuel-fired power stations, carbon capture and storageCCStechnologies are being developed to remove the carbon dioxide that is produced and to store it for the long term. With the 2005 pre-Budget report, the Government launched a consultation and a competition for a full-scale demonstration plant, and with the 2007 pre-Budget report came details of the competition and the news that it would apply only to a post-combustion coal plant. That competition is welcome.
The fact that post-combustion CCS should be suitable for retro-fitting existing plants is also an important consideration. However, the winning plant will not be built until 2014, and even then the CCS element need not be fully operational. The response to the potential of CCS should be on a larger scale and of greater urgency. In this context, I should mention last years regrettable decision by BP to abandon its planned CCS project at Peterhead.
As the Environmental Audit Committee pointed out, CCS power stations will cost more to build and run than conventionally built plants and will need ongoing support. That support could be financial, through mechanisms such as feed-in tariffs. It could also come in a regulatory form. The regulations could apply to plants that had been in operation for some years and that, it is to be hoped, should be able to retro-fit if the technology becomes available. In addition, we need to ensure that the new power stations are built with CCS in place, if the technology is sufficiently advanced, or, if it is not, that they are built ready for CCS to be fitted as soon as that technology becomes available.
We do not know what the world economy holds for us in the next year. Clearly, the outlook is uncertain. I believe that the Budget gives us a good opportunity to do the best for this country and ensure that whatever the world economy holds we have the best opportunity of maintaining the stability that we need for our people and industry in this country.
Mr. Michael Jack (Fylde) (Con): It is a pleasure to follow my fellow member of the Select Committee on Environment, Food and Rural Affairs, the right hon. Member for Edinburgh, East (Dr. Strang). I acknowledge his commitment to environmental issues and welcome his remarks on that subject.
The first thing that one does when one listens to a Budget speech is to judge whether the overall impression is going to impress, depress or whatever. It is usually said that if there are great cheers, particularly from the Government Benches, the next day people will adjudge that the speech was not really quite as good as they thoughta bit like a Chinese meal that will be quickly forgotten. The deadly silence with which most of the Chancellors remarks were received on the Labour Benches makes me tremble a little bit and think that perhaps there is something more inside this Budget that I did not spot. A silent Budget is usually one of those that has a longer-lasting effect. I am certain that that last prediction will come true, because it deals with some long-term economic trends.
When it comes to people outsidethe public whom we represent in this Housedigesting what the Chancellor said, the first thing that they will realise is that they have heard it all before. It seems that the old idea of Treasury purdah has departed, as most of the content of the Budget, if not in specifics then certainly in themes, was well trailed by journalists at the BBC and elsewhere who seem to have had privileged access to what was in it. I would ask those on the Treasury Bench at least to give us some measure of excitement and, at a time when the Chancellor is struggling to say anything of great interest, to stop briefing the press and allow future Budgets to contain one or two measures of genuine surprise.
Was there anything in the Budget for my constituents, who would perhaps have sought some comfort from its content in dealing with the things that worry them? They will have heard the Chancellor talk about this countrys low inflation policy. However, I am afraid that although the target may be 2 per cent. on the consumer
prices index, which the Chancellor has selected, inflation is much higher than that in the real world, as the retail prices index is well above 4 per cent. When people get their council tax bill through their door, see their rising cost of living and reflect on their rising uncertainty about their economic prospects, I think that they will find their own situation difficult to reconcile with the Chancellors words of certainty as regards the economy.
Mr. Andrew Smith (Oxford, East) (Lab): Will not the right hon. Gentlemans constituents, especially those on low incomes, welcome the increases in child benefit and in child tax credit, and, from October next year, the very important disregard of child benefit in the calculation of housing benefit and council tax benefit, which will make a real difference to the incomes of many people on low wages?
Mr. Jack: The right hon. Gentleman is right to paint some positive pictures. I am sure that those who are able to access the sources of funds to which he referred will be pleased so to do. However, my postbag is still heavy with correspondence from people who have problems with tax credits. Those people will still face an uphill struggle to ensure that they get that money, and when they review it against the rising costs of the basics in their living standards, they may well find that it is a case of giving with one hand and taking with the other. Those who are lucky enough to see themselves on a rising trend of income will immediately discover that fiscal drag is an issue that has not been addressed in this Budget. Many lower-paid workers will come into the tax bracket before they should, while those who are a little further up the income scale will find themselves paying the higher rate of tax when they might have hoped for some salvation from that. Fiscal drag is again being used by the Treasury to maintain income going into its coffers. The elderly, whom the right hon. Gentleman did not mention, and who might rejoice at the thought of another £50 on the winter fuel allowance, had better be warned that the Red Book tells us that that money is there only for one yearso that is, I suppose, this Budgets special offer.
The Chancellor made a lot of reducing corporate taxation in terms of reducing the basic rate of corporation tax from 30 per cent. to 28 per cent. However, he forgot to remind the House that capital allowances are simultaneously being reduced. When those numbers are netted off, we find from the Red Book that there is a £100 million increase in income to the Treasury. By all means let us talk about competitive tax rates, which I welcome, but let us talk about the complete picture: business as a whole will pay more taxes.
Lorely Burt (Solihull) (LD): Does the right hon. Gentleman agree that while larger businesses will experience a small decrease in tax, small and medium-sized businesses will not? They will be greatly disadvantaged.
Mr. Jack: The hon. Lady, who had the pleasure of visiting my constituency not very long ago, makes a telling point. The Chancellor talked about the competitiveness of business, but she has just reminded the House that small and medium-sized enterprises are effectively suffering a tax penalty. To go back to the impression given by the Budget, once the numbers and the total picture have been gone through by financial commentators, people will find that it aint as good as the Chancellor tried to paint it.
Rob Marris: The right hon. Gentleman referred to the fact that the picture is not so good, and to fiscal drag on tax bands. However, on page 113 of the Red Book there is an increase in the personal allowance for those under 65 of about 4 per cent. The starting point for the higher rate of tax has also gone up by about 4 per cent. That does not sound like fiscal drag to me.
Mr. Jack: It may not, but I suggest that the hon. Gentleman, who I know takes a keen interest in these matters, looks again. He will find that the allowance for under-65s has gone up by a total of 210 allowable pounds, which represents about £45, which is roughly speaking a reduction in tax of £1 a week. Set against the cost of living increase that I mentioned earlier, people will not find that a particularly pleasant situation. I hope that the hon. Gentleman has not confused the amount of tax paid with the number of people paying tax, which is what the concept of fiscal drag is meant to address.
While on the state of public finances, the other thing that intrigues me is that if we consider the next financial year, the Red Book last year had a projected borrowing level of £30 billion, but one year later, that figure has now risen to £43 billionan increase of £13 billion. If we consider receipts, we find that they are forecast to rise by £22 billion on last years Budget. We therefore have rising receipts, bearing out what my right hon. Friend the Member for Witney (Mr. Cameron) said from the Dispatch Box: a rising trend in the payment of taxation and a rising trend in the level of Government borrowing. That illustrates keenly the difficult situation that the Treasury finds itself in, hence the overall gloomy tone of the Chancellors remarks. He does not have any fiscal room for manoeuvre.
I turn to three specific areas, the first of which is monetary policy. I am still concerned about the structure of the British economy. In my remarks on the Budget speech last year, I conjectured as to why, of all the western economies, the UK needed higher interest rates to achieve a similar performance with regard to inflationa target of 2 per cent. I query whether we need a national debate, if I may put it that way, on monetary policy. The drivers for inflation are matters that affect peoples consumption at the momentthe cost of food, fuel and energy. Most people have a choice: they can spend on the basics, but their discretionary spending diminishes. We have witnessed that already in the reduction in retail expenditure.
We have a zero-sum game, where money is going round, but is being spent on basics, rather than being part of discretionary spend. In recent times, the response of our monetary policy in trying to keep global inflation down has been to raise interest rates, or marginally to lower them with a potential depressive effect on the economys ability to sustain employment and investment. I mention that because, to me, the most difficult element of the inflationary equation is whether people seek to address inflationary pressures through inflationary pay demands. In the public sector, the Government have already put a cap of 2 per cent. on what they are prepared to have as the norm. I suspect that the figure is between 2.5 per cent. and 4 per cent. in the private sector. I have not heard much from the Monetary Policy Committee or the Treasury about whether there needs to be a revised view of what constitutes inflation in the 21st century.