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That is not exactly great company for a country that used to be the envy of Europe. If the OECD’s growth forecasts are right, that will automatically add £10 billion to the Government’s borrowing forecast in 2010 alone.
Mr. Osborne: I shall give way to the hon. Member for Wolverhampton, South-West.
Rob Marris (Wolverhampton, South-West) (Lab): I am grateful. As the hon. Gentleman knows, I always relish a good debate about finance matters. His party’s position seems to be that the UK economy has problems, and that those problems were caused by the Prime Minister; the hon. Gentleman disagrees with Labour policies to address those problems; and after the problems are sorted out the Tories hope to be in government and to cut taxes. What would his party do differently to address those economic problems? Is he, like the rest of the country, relying on our Prime Minister, as I am, to sort out the economic problems?
Mr. Osborne: It is going to be the next Conservative Government who sort out the economic mess. Now— [Interruption.]
Mr. Speaker: Order. May I appeal for calm? It is not a good thing, shouting across the Chamber at the top of our voices. Do remember that there are people out in the country who have difficulties and want to hear the case that is being put before the House.
Mr. Osborne: Thank you very much, Mr. Speaker.
Let me turn to the fiscal rules, which were supposed to safeguard prudence and prevent all this from happening. Even the Chancellor struggled to keep a straight face when he told the House on Monday that he was replacing the fiscal rules with a “new temporary operating rule”—no rules, no framework, no independent oversight of the kind that our office for budget responsibility would provide. As the chief European economist of a major investment bank put it today:
“The UK has no serious medium-term fiscal framework: the fiscal rules have been abandoned, with nothing to take their place.”
Yesterday, the Institute for Fiscal Studies predicted that if the Government had persevered with the golden rule, they would now be on course to miss it by a mere £296 billion. The bond markets have passed their own verdict on the Chancellor’s new temporary operating rule, through the credit default swaps on British Government debt—the cost of insuring someone against the consequences of the British Government’s failing to honour their debts. The cost used to be about the same as that of insuring German Government debt, but it is now almost three times as high. Indeed, the markets today take the view that holding the debt of the British Government is riskier than holding the debt of British Petroleum.
Mr. David Blunkett (Sheffield, Brightside) (Lab):
I am grateful to the hon. Gentleman. In view of what he has just said about the fiscal rules and borrowing, is he seriously telling the House and the country that the problems of America, Europe and Asia are down to the
changes that have taken place in Britain over recent months? Has he completely lost his marbles, or does he really believe his own rhetoric—that changes in our economy have been responsible for the financial crisis across the world?
Mr. Osborne: I am saying that the Government did not fix the roof when the sun was shining. I am saying that we entered this recession with the worst budget deficit and the highest levels of personal debt in the developed world. I am saying that our housing boom was double that of America, and that that is why independent groups such as the International Monetary Fund say that we will have the worst recession of any developed economy. I know that the right hon. Member for Sheffield, Brightside (Mr. Blunkett) wants to get back into the Cabinet, having resigned from it twice—indeed, that is the best way to get into the Prime Minister’s current Cabinet—but the truth is that I have listed what the Government of whom he was a part have done to the economy in the past 10 years.
It is not just the appalling debt figures—
Mr. Oliver Heald (North-East Hertfordshire) (Con): Will my hon. Friend give way?
Mr. Osborne: I shall give way to my hon. Friend and then make some progress.
Mr. Heald: Does my hon. Friend agree that the great British public are thinking that the Government have maxed out the national credit card, and now—instead of doing something sensible, such as trying to pay off the debt—are taking out another enormous loan? Is it not the case that Britain is doing that, but not America?
Mr. Osborne: My hon. Friend is absolutely right. The Government have borrowed and borrowed on the national credit card—£34,000 for every single family represented by Members in this House. That is a complete disgrace.
Tom Levitt (High Peak) (Lab) rose—
Gordon Banks (Ochil and South Perthshire) (Lab) rose—
Ms Dari Taylor (Stockton, South) (Lab) rose—
Mr. Osborne: I am going to make some progress— [Interruption.] I have taken a lot of interventions; we shall see whether the Chancellor takes anything like as many.
I turn to the tax changes in the Budget. First, there are the VAT changes—let me start with the temporary VAT reduction, before coming to the permanent VAT rise. The Government do not seem to realise that the stimulating effect of a temporary reduction when prices in shops are already falling is more than outweighed by the cost of a permanent rise in taxes on the incomes of those whom they expect to go shopping. This is what the senior tax partner at Grant Thornton said after the Chancellor spoke on Monday:
“It’s the wrong time to cut VAT, as it’s an inefficient use of taxpayers’ money when you have a trade deficit. And it’s an odd thing to do when inflation is falling and some fear we are heading for deflation.”—
[ Interruption.] Labour Members do not like what the senior tax partner at Grant Thornton says. How about this, from President Sarkozy of France? He asked yesterday why
“Should we use up our available room for manoeuvre on reducing prices when prices are already falling?”
The German Chancellor has also ruled out a temporary reduction in VAT— [Interruption.] I am being asked whether we will vote against it, but the Government are not giving anyone a chance to vote on the reduction before it comes into force on Monday. It is only because we called for an emergency debate that we are even discussing it in the House of Commons.
Far from rushing to support the move, retailers have been quick to point out the administrative nightmare of re-ticketing prices, reprinting catalogues and price lists and reprogramming cash tills, which will cost them tens of millions of pounds— [Interruption.] They talk about prices, and that brings me to the permanent VAT rise—
Mr. Speaker: Order. The hon. Gentleman is not giving way.
Mr. Osborne: We heard the exchanges at Prime Minister’s questions; perhaps the Chancellor could answer what the Prime Minister refused to answer when he spoke from the Dispatch Box. First, why did one of his Ministers—the Financial Secretary, who is over there—sign off on the order—
The Financial Secretary to the Treasury (Mr. Stephen Timms) indicated dissent.
Mr. Osborne: The right hon. Gentleman shakes his head, but his name is on the document:
“Signed by the responsible Minister:
Stephen Timms...24th November 2008”.
The document clearly states that the standard rate, having returned to 17.5 per cent. on 1 January 2010, will subsequently increase to 18.5 per cent. in 2011-12. Why did the Minister sign off that document, or does he not read what he signs? He can intervene on me now if he likes.
The second thing that I would like the Chancellor to confirm or deny is that the Government were considering further increases in VAT—specifically, a rise to a 20 per cent. rate of VAT in 2012. We will put in our freedom of information request, but I would be most grateful if the Chancellor confirmed that rise as well.
Mr. Osborne: I give way to my hon. Friend the Member for Ludlow (Mr. Dunne).
Mr. Philip Dunne (Ludlow) (Con): On the subject of the so-called VAT reduction, is my hon. Friend aware that, far from reducing the VAT bills of small retailers and businesses with turnovers of less than £200,000—businesses that pay under the flat-rate VAT scheme—the Government are actually increasing those bills, by not reflecting the adjustment correctly to take into account the reduced VAT input tax? The margins of many thousands of businesses will be reduced as a result of this so-called tax cut.
Mr. Osborne: My hon. Friend makes an extremely powerful point.
Mr. Osborne: I will make more progress, because many Members want to speak. Unfortunately, we have only three hours to debate this issue, although we would be happy to debate it all afternoon.
I turn to the national insurance changes. The Chancellor made the claim that only those on incomes of more than £40,000 will be worse off than they are today as a result of the national insurance increase. I am glad to say that the Institute for Fiscal Studies comprehensively demolished that claim yesterday; it said that it was not true. What is true is that anyone earning more than £19,000 will pay more tax than they do now as a result of Monday’s Budget.
Anne Milton (Guildford) (Con): Will my hon. Friend give way?
Mr. Osborne: I will make a little progress, if my hon. Friend will allow me.
The Government tried to distract attention from that tax raid on the incomes and jobs of middle Britain with their top-rate tax changes. I am sure that everybody remembers what the Prime Minister said to the Treasury Committee last year when he was trying to justify the abolition of the 10p rate:
“I believe that over time very few people will want to change this two rate...system of income tax.”
It turns out that one of those very few people was the Prime Minister himself, a year later. He has actually created five rates of income tax. If we include the adverse changes to personal allowances and national insurance, there are now three new higher bands of income tax—46.5 per cent., 52.8 per cent., and a new top rate of 59.8 per cent. That is not a simplification of the tax system.
Mr. Osborne: I shall make some progress, if hon. Members will allow me. They may want to hear this, because they are concerned about it. It remains the case that more than 500,000 of the lowest-paid people in this country have lost out as a result of the abolition of the 10p tax band, and their loss was not compensated for on Monday. That is the truth. The Government are giving £20 billion in temporary tax giveaways, and taking back £40 billion in permanent tax rises—giveaways for Christmas, tax rises for life. That is not a stimulus, it is a tax bombshell. It will make the recession worse because it will make the recovery more difficult.
What the Chancellor should have done on Monday was take radical action on monetary policy to get credit flowing again. That is what we have been arguing for weeks. Mervyn King said to the Select Committee yesterday:
“I am in no doubt that the single most pressing challenge to domestic economic policy is to get the banking system...lending in any normal sense. That is more important than anything else at present.”
“Getting the credit markets working properly is much more important than the fiscal boost.”
The Chancellor told us in October that the purpose of the bank recapitalisation was to restart lending to the real economy. On that test, even he must agree that it has failed. It may have rescued the banks and the bankers, but it has not rescued the economy. The country has lost count of the number of times we have been told that the Government were summoning the banks to a crisis summit, ordering them to lend to small businesses and forcing them to pass on rate cuts. That may have secured newspaper headlines, but it has not helped businesses to get the credit they need. Now is the time for more direct action.
Mr. Osborne: I am not giving way at the moment.
The Government should establish a new state institution that will directly underwrite lending from the banks to British businesses. They should do so for a commercial insurance fee, passed on by the banks, that would fully protect the taxpayer. Businesses want credit and credit insurance. They are prepared to pay a fair price for it, and the problem at the moment is that they cannot get any credit or insurance. That would not increase Government borrowing. Instead, it would be more like the secured guarantees for a fee that the Bank of England has already put in place for inter-bank lending, which we supported. The idea is supported by all the major business organisations. That is the kind of radical policy action that we urge the Government to undertake—not fiddling around with temporary VAT changes, but getting to the heart of the credit crunch and solving Britain’s credit problems. That is what would help get the British economy back on track and stop the terrible rise in unemployment now taking place, again, under a Labour Government.
The Government did not want this debate because they did not want to face the truth. They mistook a housing bubble for stability, they went on a spending spree and called it prudence and they boasted over and over again that they had abolished boom and bust. As a result, they neither saw the boom, nor prepared for the bust. Now, their emergency Budget is unravelling, their secret tax bombshell is revealed and their scorched earth policy is leading this country’s economy to ruin. They have run out of money, and the sooner that they are run out of office, the better.
1.52 pm
The Chancellor of the Exchequer (Mr. Alistair Darling): I very much welcome the opportunity to debate the pre-Budget report, and having listened to the shadow Chancellor for the last 20 minutes, I wish the debate could go on for several hours because we might find out if the Conservatives have any policies to deal with what is happening to the economy.
I understand, Mr. Speaker, that you have indicated—
Mr. Patrick McLoughlin (West Derbyshire) (Con): On a point of order, Mr. Speaker. The Chancellor has just made a very kind offer. Is there any way in which he can implement it to allow the debate to go on for longer? We would welcome that.
Mr. Speaker: This is a three-hour debate—end of story.
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