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A family that spent £100 a week on food or drink a year ago has to find an extra £1,000 this year for the same items. There are some positive consequences.
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Apparently, more people are growing their own vegetables—one in three of us according to a survey in The Daily Telegraph, with nearly half motivated by cost. But there are some not so positive consequences. Bargain hunters are moving away from fresh foods and resorting to cheaper options. Frozen fish sales are up 11 per cent. on a year ago. A survey of citizens advice bureaux in England and Wales suggests that a growing number of people are having difficulty in paying for, and are seeking help with, essential household bills.

John Barrett (Edinburgh, West) (LD): Does the hon. Gentleman agree that among the most vulnerable groups—those who are hit hardest—are disabled people, who have higher energy costs and often higher food costs as well? Inequality among the most vulnerable has widened.

Mr. Hammond: The hon. Gentleman is absolutely right and I shall say something about that in a moment.

Ctizens advice bureaux reported a sharp increase in the number of mortgage arrears problems, which were up 35 per cent. in the first two months of 2008, compared with the same period in 2007. They also report a continuing increase in problems relating to basic essentials, such as gas, electricity, water, telephone and council tax debts. The CAB’s briefing reports that the combination of big increases in household bills, especially fuel, and rising housing costs is putting additional pressure on people’s finances when they are already stretched to the limit. Bureaux reported that they had dealt with 215,000 new debt problems in the first two months of 2008 alone and the report goes on to list examples that all have one thing in common: people on low or fixed incomes who are living at the margin of economic viability. For many people, the surge in living costs is turning a situation that is just manageable into one that is not.

We have tabled this motion to give the House an opportunity to debate the soaring cost of living and the Government’s lack of room for manoeuvre in responding to it. The first part of the motion expresses the House’s deep concern at the rapidly rising cost of living. To be candid, there are two reasons for that concern. The first, as the CAB report demonstrates, is a compassionate concern because inflation hits hardest those with the least bargaining power: pensioners on fixed incomes, the lowest paid in the most marginal jobs and people with long-term disabilities who are living on benefits. When an economic shock strikes, those groups, by definition, will be the least able to cope with it and the least likely to have any savings cushion. All of us in Parliament must voice their concerns and fears because they have little bargaining power themselves.

There is, however, a more calculating economic reason for the rising cost of living. Rapidly rising inflation also affects those with more bargaining power in the employment marketplace. Their response to the rapidly rising cost of living poses the genuine threat to our future economic stability, hence the second part of the motion, which acknowledges the dangers of a wage-price spiral.

As the economy slows and earnings stagnate while prices rise inexorably, the average family is already £400 a year worse off than it was a year ago. The current official retail prices index inflation is 4.3 per cent. a year, but the expectation of future inflation is as important as the level today in determining the behavioural responses to it. Every hon. Member knows from discussions
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with constituents that people’s perception of price increases and their expectations of future inflation are far higher than the official data suggest—unsurprisingly, in view of the figures that I have cited.

Mounting evidence shows that rising prices are feeding into higher wage demands and settlements. Pay rises in the energy, water, chemicals and engineering sectors in the quarter to April were at or above current inflation. The recent Shell tanker drivers’ settlement has subsequently added a further turn of the ratchet. The Incomes Data Services data, which were published this morning, show how many private sector settlements now include RPI linking, reigniting memories of the disastrous flirtation with indexation in the 1970s.

Yesterday’s announcement of a vote for industrial action by local authority workers rejecting a 2.45 per cent. pay offer underlines the scale of the challenge that the Chancellor will face as he repeats his exhortation for pay rises to be kept in line with the Government’s 2 per cent. inflation target, even as inflation looks set to reach double that figure. The prospect of a summer of discontent looms and Conservative Members wait with interest to see how a Labour Government, desperate for cash from the unions to save the Labour party from bankruptcy, will deal with the new militancy on wages on top of the already aggressive demands for further competitiveness-eroding employment legislation.

Last week, the Governor of the Bank of England gave a frank appraisal of the threat to Britain’s economy from the rising cost of living. With consumer prices index inflation up from 1.8 per cent. to 3.3 per cent. in the past nine months and a raft of further price increases to feed through, the Governor warned of the dangers of a wage response, which would mean that the jump in food and oil prices was embedded in our economy through an old-fashioned wage-price spiral, with wage earners trying to compensate themselves for rising prices, thus ensuring the further erosion of the value of their wages.

Let me take the opportunity to say from the Dispatch Box that the Governor of the Bank of England is right. Given that growth is slowing significantly below the Treasury’s Budget estimate, if the inflationary pressure that has surged through into the index in the past months is reflected in future wage rises, Britain risks revisiting the 1970s, with entrenched inflation and stagnant growth—stagflation in all its horror. By warning of his determination to stick to the Chancellor’s inflation target, the Governor is effectively throwing down the gauntlet to the unions, with the clear threat, “Go for the inflation-matching wage rises and I will bust you with growth-killing and unemployment-creating interest rate increases.” They should listen to the Governor of the Bank of England.

We will support the Government when they do the right thing on pay restraint, as my right hon. Friend the Leader of the Opposition said yesterday. However, after two years of stagnant real wage increases, let us be clear about what the Chancellor is demanding. As with taxes, so with wage policy—let us have an end to stealth and a new openness; an explanation of policies, tough or tender, up front and without spin. I put it to the Chief Secretary that the Chancellor is demanding a cut in living standards—is not that the essence of a demand
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for below inflation wage settlements? Is not the legacy of the Prime Minister’s 10 years in the Treasury falling living standards for British workers? Yes, inflation has to be controlled, so that Britain can maintain its competitiveness and be in a position to respond when the upturn comes. That means difficult times ahead. The truth is that the Government are in no position to help out and soften the blow of this painful adjustment to economic reality.

Rob Marris (Wolverhampton, South-West) (Lab): Obviously our country faces great challenges, and the hon. Gentleman is right: people are hurting. He talks about openness of policy, so could he tell the House the extent to which he thinks any Government can alleviate the sorts of difficulties that our country faces, and what his party’s policies are to address them? The Conservative party motion puts forward no policies, whereas the Government amendment sets out four of the steps that the Government have taken to try to address the issues. If we are to have open debate and openness about policies, for which the hon. Gentleman calls, could he tell us his party’s policies?

Mr. Hammond: The hon. Gentleman asks what the solutions to the problems that we face are. He is right in one sense: there are no easy or quick solutions and no magic wands. The essence of our argument against the Government is that we have entered this downturn—and it is a downturn—uniquely ill prepared to deal with it. The Prime Minister did not fix the roof while the sun was shining, and the British people will pay the price for the lack of preparedness of the British economy.

Michael Jabez Foster (Hastings and Rye) (Lab): What the hon. Gentleman says is exactly what he and his hon. Friends keep saying. What particular cuts would have been made by a Conservative Government in the past 10 years? What expenditure would not have been incurred, to make the savings that would have achieved his objective? [ Interruption. ]

Mr. Hammond: My hon. Friends behind me are throwing out a few suggestions: the refurbishment of the Ministry of Defence headquarters, identity cards and money wasted on computer systems that never work. If the hon. Gentleman thinks back, he will remember that my party’s manifesto at the last election set out some clear proposals for cutting costs and waste in government. However, we want to look to the future and talk about the policies that we need to adopt to prevent a repetition of this situation, so that we never return to this position again, by setting out a long-term policy to share the proceeds of economic growth, so that in future we do not borrow through a boom and leave ourselves unable to respond to the kind of situation that the Government now face.

Mr. Graham Stuart (Beverley and Holderness) (Con): The incoming new Labour Government promised my constituents, particularly the low-paid and those living in isolated rural areas, that they would be wise spenders, not big spenders. Those people feel absolutely let down by a Government who were supposed to be there to look after the least well-off, when it is the least well-off who are paying the highest price for that Government’s failure.

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Mr. Hammond: My hon. Friend expresses eloquently the concerns of his constituents and those of many other of my hon. Friends’ constituents.

Daniel Kawczynski (Shrewsbury and Atcham) (Con): Does my hon. Friend also share my concern about the sheer levels of national debt that the socialists have incurred over the past 10 years? We now owe more than £700 billion, which has obviously put them in a straitjacket, which means that they cannot inject liquidity into the economy when we face a recession.

Mr. Hammond: My hon. Friend is right. I will return to that issue in a moment, because that is the essential point. Although we agree with the Government about the need to avoid a wage/price spiral and the need for wage restraint, they have put themselves into a position in which they simply do not have the tools available to respond to the pressure that families and businesses are feeling.

Mr. Don Touhig (Islwyn) (Lab/Co-op): Will the hon. Gentleman give way?

Mr. Hammond: I will in a moment, but I want to make a little progress.

The Government have no room for manoeuvre, because they did not act prudently during what the Governor of the Bank of England called the NICE years. Fiscal policy is now alarmingly loose and monetary policy very tight in response—the classic hallmarks of a basket-case economy. Yet the Government still seem to be displaying just the tiniest bit of self-satisfied complacency. In their amendment to the motion, the Prime Minister invites the House to note that


But what matters to people now is that interest rates are the highest in the G7, unemployment is rising and the inflation rate is double what the Government inherited 11 years ago. Their amendment boasts about the measures that they are taking to support families and business, including increased tax allowances and winter fuel payments, yet those are the very measures that the Chancellor was forced to concede to buy off the rebellion on his own Back Benches over the 10p tax rate.

Interestingly, the amendment describes the extra winter fuel payments and increased tax allowances as measures that the Government

At first they said that they could not reopen the Budget, but then they did. Then they said they had no money, but when the political chips were down, they found some. Then they told us they would not announce until the pre-Budget report whether the additional winter fuel payments and increased tax allowances would be ongoing. Now they have done so, in this amendment. When the Chief Secretary to the Treasury responds to the debate, will she confirm that this is a policy announcement, and that the extra winter fuel payments and increased tax allowances are measures that the Government will continue to take to support families and individuals? And if that is the case, will she tell us what the cost will be for next year and the year after?

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Mr. Jeremy Browne (Taunton) (LD): I keep hearing from the Conservatives the mantra that the Government should have fixed the roof when the sun was shining. Will the hon. Gentleman comment on this quote from Michael Portillo, the then shadow Chancellor, in 2000, when the budget surplus was at its height and the sun was shining most strongly? This is what he said:

He did not sound as though he intended to put a lot of money aside for the lean years.

Mr. Hammond: The gentleman in question went on to try his luck, lose and depart from these Benches. The Conservative party, too, has moved on in the past few years. We are always happy when Labour or Liberal Democrat Members offer quotes that merely serve to emphasise the extent to which my right hon. Friend the Member for Witney (Mr. Cameron) has changed the direction of the Conservative party.

Mr. Browne: Will the hon. Gentleman give way?

Mr. Hammond: No, I want to make some progress.

Where did it all go wrong? The Prime Minister must ask himself that question every morning when he wakes up. It went wrong because he swallowed his own line on boom and bust. He started behaving as though the good times—the NICE years—were here for ever, and there were no rainy days to prepare for, and no roof to fix while the sun was shining. He borrowed through a boom, apparently oblivious to the need to prepare for the possibility that it would not be perpetual. Now he can stick “inappropriate pro-cyclical fiscal policy” on his mantelpiece next to “post-neoclassical endogenous growth theory”— [ Interruption. ] I think I said it okay, didn’t I? For seven consecutive years he predicted that the deficit would turn into surplus three years out, and for seven consecutive years that target was rolled forward. He offered jam tomorrow, like putting a carrot in front of the donkey. While competitors and trading partners such as Australia, Sweden, the Czech Republic, Denmark and South Korea used the worldwide boom in trade and economic growth to pay off their public debt—making them well placed to weather the slowdown—he rolled out more, right the way through the good years.

So, as a third of OECD countries face the economic slowdown with their budgets in surplus, Britain, with over 3 per cent. of GDP, has the largest public sector net borrowing requirement of any country in the world bar Hungary, Egypt or Pakistan, making Italy look like a paragon of fiscal virtue.

Mr. Jim Cunningham (Coventry, South) (Lab): We all recognise that we have economic difficulties, but I noticed that when the hon. Gentleman responded to my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) who asked about alternatives, he started to talk very vaguely about ID cards and that sort of thing, and in response to the hon. Member for Taunton (Mr. Browne) he mentioned the manifesto. All that he talked specifically about was cutting waste—an argument
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that is always used. May I remind the hon. Gentleman that in 1997 we inherited a situation in which 50p in every pound went to pay off debt? The hon. Gentleman did not touch on those things. The Conservatives borrowed their way through the ’80s and the ’90s, so what is their solution to the problem now, as it is worldwide?

Mr. Hammond: I am not really sure that I understand the point of that intervention, but I would say this to the hon. Gentleman. We have set out a very clear policy of sharing the proceeds of economic growth and we want it to go forward. It is a rule that will prevent us from getting into the same kind of trouble that the Prime Minister has got this Government into. I shall explain in a few moments, if I may, what I think has gone wrong.

The Prime Minister swallowed his own line on boom and bust. He apparently believed that the good times would never end, and instead of putting something by for the more difficult times that were bound to come, he just went on spending and borrowing right the way through the boom.

Ms Dawn Butler (Brent, South) (Lab) rose—

Mr. Hammond: I want to make some progress.

Britain, with 3 per cent. of GDP as a net borrowing requirement, is going into an economic slow-down in a very serious fiscal position. In 1989-90, the Budget was in surplus as we moved into a period of economic slow-down. Where the Government have led, the consumer has followed, piling up a mountain of debt on the back of asset price inflation, with 175 per cent. of personal disposable income in household borrowing—the highest ratio in the world. The Government cannot help households because they have over-borrowed, and households cannot help themselves as the squeeze tightens because they have over-borrowed as well.

Nigel Griffiths (Edinburgh, South) (Lab): Will the hon. Gentleman give way?

Mr. Hammond: Let me make my point, and then I will.

As well as being unable to help people, the Government are actively reinforcing the inflationary pressures and thus the risk of a wage response. Consumer prices index inflation at constant tax rates is 3.1 per cent., which means that if taxes remained at the rates prevailing at the beginning of this year, inflation would be 0.2 per cent. lower than it is today.

The issue of diesel prices has moved up the political agenda. That is hardly surprising, because the figures show that before tax the UK has lowest diesel prices in the EU, but after tax is added they are the highest. With inflation expectations so important, the Government must look again, as they surely will be forced to do by their own Back Benchers, at the swingeing road tax increases for next year and the year after, which are doubling the road tax for about a million older cars and raising it on the overwhelming majority.

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