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Dr. Cable: Let me correct the right hon. and learned Gentleman; perhaps I was not clear enough in my speech. Fiscal stimulus comes from two sources: first, from the fact that people on low incomes spend a
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significantly higher percentage of their income than those on high incomes; and secondly, from public investment, which is over and above any redistribution in the tax system.

Mr. Clarke: I would like to hear how much extra public investment the hon. Gentleman is talking about. Some of the public investment has just been pork barrel—although I have to say that I am grateful for the current proposals for dualling the A46. His tax proposals are marginally stimulating if he is right that some people who pay high tax save more and others on lower tax would spend slightly more, but he was not putting that forward as a fiscal stimulus, and he was prudent not to do so.

Many people will dilate on the appalling scale of the fiscal gap that is exposed now that we have up-to-date figures. If the Government had been a trading organisation, they would have been obliged a long time ago to update the ridiculous Budget forecasts that they put out a few months ago. The Prime Minister should be ashamed of himself for getting all his Ministers to repeat the 38 per cent. figure for debt to GDP ratio, which has not even kept up with the Office for National Statistics—it is a completely political figure. The comparisons with other countries are made on a completely different basis from the Maastricht-based accounting system on which the Europeans approach this matter. On the basis of figures used by any other country, we are already at about 60 per cent. debt to GDP ratio.

What is worse is that everything shows that the situation is deteriorating. We are not talking about how to pay for the VAT reduction, which is what the public have been told. We are faced with paying for years and years of having run mounting deficits when the current Prime Minister was Chancellor. We are also faced with the rapidly deteriorating position that the recession is beginning to cause, which will get worse as it goes on. The judgment about risk is quite clear.

Everyone knows that my preference for fiscal stimulus, if we could afford it, would be a VAT reduction, but I do not have time to argue that case. All possible approaches have upsides and downsides, but VAT reductions have a bigger impact on big ticket items such as cars, furniture and carpets, particularly when we approach the magic period in which the temporary VAT reduction is about to go up again. I have no doubt that had the Chancellor been allowed to print the figure that the Treasury wanted to print, to try to make the future more credible—it was going to put VAT up to 20 per cent. by the time we got to 2012—that would have given an even bigger stimulus to spending. Neither do I doubt that taxes will go up substantially when we get there.

As usual, I have used all my time, and have not been able to go into detail, so I shall conclude. At the heart of this issue is the condition of the banks. All democratic politicians will spend the next two years denouncing bankers, who have behaved badly in the past, but they are not on some sort of strike for malicious reasons. Instead of getting them in just to shout at them, we need to get them in to explain why the first package has not worked. The recapitalisation is too expensive—far more than anyone else’s—and so are the loan guarantees. The shape of the package needs to be fixed. That is what needs to be done now.

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3.12 pm

Mr. Geoffrey Robinson (Coventry, North-West) (Lab): It is a pleasure to follow the former Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke), although I cannot I agree with everything he said. He started off well by setting a grave tone for the debate, because there is a danger that we in the House—and, indeed, the country—underestimate exactly the size of the problem that confronts us as a result of this international crisis.

Perhaps remarkably, I was in the Labour party’s research department in 1967 when we had the financial crisis of devaluation, which I remember well, and I was in the House in 1976 when the International Monetary Fund came in. I remember even more vividly, however, the recession of the early 1980s and what it did to the west midlands, which was nothing to laugh at. It devastated the manufacturing base in my constituency. The 1990s were not much better. The hon. Member for Twickenham (Dr. Cable), with his usual omniscience in these matters, which accompanies his gift for prescience, pointed out that borrowing as a percentage of GDP in the early 1990s was about where we are now. That is probably a good parallel. Although the right hon. and learned Member for Rushcliffe did a lot to correct that in his years in the chancellorship, he did not bring it back into balance.

The current situation is graver than those events, and we must have unprecedented measures that are commensurate with it. We are looking at an unprecedented level of borrowing and an unprecedented combination of the credit crunch, the banking failure and a prospective economic downturn.

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

Mr. Robinson: I shall give way in a short while. Let me just finish this point.

Mr. Frank Field: Is it not a fact that Labour Members and some Opposition Members feel that the Government should make every sensible move that they can to prevent this downturn from becoming a rout? I want to ask about one aspect of the Budget—making proper compensation for the 10p tax losers, which the Government have not done. Should they need to create further stimulus, they should single that group out for special attention.

Mr. Robinson: I am grateful to my right hon. Friend for his comments. He will recall that I opposed the move when it was first announced, before it was implemented. One of the silliest things that the Government have done has been to persevere with it. We should all acknowledge that my right hon. Friend the Chancellor has put things right. He has undertaken to correct the matter, and I am pretty sure that he will, but that should absolutely be a priority.

The situation is unprecedented. It is a failure across all fronts of Government and private sector activity, as well as internationally. The depth of it is unprecedented, and it is right to use all the levers of government to correct it, which is precisely what the Government are striving to do. The restraint on public expenditure to which the hon. Member for Twickenham rightly drew attention is important. We cannot exempt public sector
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investment from that. As we come out of this recession, no area of Government expenditure will be exempt from severe restraint. We must prioritise, particularly in relation to investment.

I am pleased to agree with several right hon. and hon. Members that social housing should be an unqualified priority. We need to take the same approach with housing associations. They have their difficulties, but they are prepared to advance money—I speak for the large social housing organisation, Orbit Group, which has its headquarters in my constituency. Housing associations can spend their share of the £8.7 billion programme, but they will need some subsidy, because the homes will be built for rent, not for purchase. The cash flow profile for rent is less advantageous than it is for purchasing, but we hope to recoup that when the houses come up for purchase. The associations that I have spoken to are prepared to share with the Government the profit on eventual sales, when the houses come up for purchase, so that the Government can recoup some of the subsidy that they have had to invest. I urge my right hon. Friend the Chancellor, or one of the Treasury team, to engage in a serious dialogue and to pull forward that advanced investment as part of the £8.7 billion. That should be an unqualified priority.

Mr. Cash: The hon. Gentleman talks about new investment, but that money has to be found. As my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) has pointed out, there is a vast amount of as yet undisclosed borrowing. Does the hon. Gentleman agree that the contingent liabilities to which I referred in my earlier exchanges with the Chancellor represent a horrendous picture? Not only are we running at £1 trillion, as disclosed by the net public sector borrowing, but when we add in the Maastricht arrangements that my right hon. and learned Friend mentioned, we get up to £1,258 billion. We then have to add public sector pensions, Network Rail, the whole issue of the banking arrangements, including those for Bradford & Bingley, and nuclear decommissioning, so we end up with a figure that is about twice the amount that has been disclosed. In other words, we will not find the investment, because the money simply is not there. We are talking about £2.5 trillion.

Mr. Robinson: I think that I shall content myself with the answer that the Chancellor gave to the hon. Gentleman. The numbers that we are dealing with are challenging enough without our having to indulge in the apocalyptic visions in which the hon. Gentleman is such a specialist.

The Government are giving the right help to families, children and pensioners in the general field of social housing, and for the associations in particular, and through the £8 billion package for small businesses. That makes the Opposition’s position all the more incomprehensible. They refuse to face the situation that we are in. We understand that they are anxious to oppose, as that is their job, and to make their party political points as cheaply as they do. That is part of opposition, and that is accepted, but it is not acceptable or understandable that they content themselves with doing just that and with the need to get the banks lending again, although that is vital. That is not a position to take. The Opposition will be credible, acceptable and convincing to the country only when they come up with their own package to address the situation.

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Mr. Jim Cunningham (Coventry, South) (Lab): I am sure that my hon. Friend recalls that he and I went through the 1970s and, particularly, the 1980s and the 1990s, under the previous Conservative Government. Does he not remember what happened to the west midlands at that time, when manufacturing and a whole range of services were devastated? We inherited a debt, and people were paying 50p in the pound as a result of that Government’s legacy. The Conservatives have now failed either to confirm their previous policies or to give us new ones.

Mr. Robinson: I could not agree more with my hon. Friend, who is a fellow Coventry Member. I think that he was in industry at that time, coping directly with those who were being hit by all that. I was in the House, and every day I attended and found that another factory had gone under. It was the most terrifying situation. That was happening because, at precisely the point at which we entered that recession, Government expenditure was cut, thereby doubling the recession’s effect. I entirely agree with Opposition Members who have made that point. We did not have 3 million unemployed; after the fiddling of the figures on incapacity benefit, we were looking at more than 4 million unemployed. That was the reality of the recession that the Government of that time quite unnecessarily put us into.

Given the scale of the problem today, we need a cohesive and coherent national effort to confront it. When we get through the party battles that will no doubt be fought in the House over the coming months about the Government’s package, we must not lose sight of the fact that we have a mountain to climb. That will require an effort from everyone. It is in that context that I look at the increase in the top rate of income tax. I believe that the country will respond to the difficulties, because we always have. We faced the war. People say that this is not a wartime situation, but the scale of the problem involved in eliminating this debt is similar in many respects. People will respond if they believe that the burdens being shared are being fairly distributed. It is in that context that we are asking the best-off to make a bigger contribution. I can see no objection to that, when we know that we face several, perhaps many, years of severe restraint—certainly for the medium term—on living standards and public expenditure, as well as the prospect of unemployment for many, and even repossession.

Mr. Graham Stuart: Will the hon. Gentleman give way?

Mr. Robinson: No, I have given way many times. I am sure that the hon. Gentleman agrees that it would not be fair on other Members if I did so again.

The Government are absolutely right in all that they propose. Everyone agrees that getting the banks lending again is a vital part of the solution, but for Lord Lawson yesterday and Opposition Members today to plead that, if only we could get the banks to lend again, all our problems would disappear is implausible and disingenuous. It just is not right. It is important to do that, however, and it seems to be the one thing that the Government, with determination, can do. It is within their power. We own the Royal Bank of Scotland, and we are a major shareholder in HBOS. It is within our power to achieve something with those banks; we do not have to argue with them about it. I am sure that they
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will agree to it. I am not saying that we should go straight for issuing forceful directions. It is best to go with the grain and to get the directors behind us, so that they share in the national effort. Of course it will mean a restraint on dividends, if they are going to lend more than they might think it prudent or right for each individual bank to do, but we need a coherent, cohesive national effort in which everyone takes part and shares the burdens equally. It is therefore right to introduce an increase in the top rate of tax.

I would like to think that, at some point, the Opposition will give us a believable package of measures that they would like to introduce. If they do not, they will be abandoning their principal role as an Opposition, which is to put up an alternative policy to that of the Government. For the foreseeable future, however, I do not believe that there is an alternative, and I urge everyone to get together and push ahead with the policies that we have. If we are determined enough, if we demonstrate enough leadership, and if we stick with what we have said and urge restraint on public expenditure as we come out of the recession, I believe that we can succeed.

3.24 pm

Mr. Peter Lilley (Hitchin and Harpenden) (Con): It is a great privilege to follow the hon. Member for Coventry, North-West (Mr. Robinson), who speaks with great authority on these matters. I respect everything that he said, and I agree with some of it.

We owe a debt of gratitude to Mr. Speaker for granting us this three-hour debate, which was the maximum time that he could grant us.

We must consider the scale of the Budget measures announced on Monday—which dwarf anything that I have known in real Budgets over 25 years—and the calamitous state of the public finances that was therein revealed. Given the gravity of the economic situation, our constituents would have found it positively incomprehensible if Parliament had not debated the measures that we are discussing for this brief and inadequate period today.

Mr. Geoffrey Robinson indicated assent.

Mr. Lilley: I see that the previous speaker agrees with me.

Is there any Member in the House who would support and justify the Government’s refusal to allow a debate on this Budget? There is none, and I hope that hon. Members will make their feelings known to the Leader of the House, who should be pressing on our behalf—

Simon Hughes: Will the right hon. Gentleman give way?

Mr. Lilley: Only if the hon. Gentleman is going to do that. Is he going to justify not having a debate?

Simon Hughes indicated dissent.

Mr. Lilley: Then I will not give way.

Given the inadequate time allocated for this debate, I shall make just a few brief points. Unless we correctly diagnose the causes of our problems, we will not get the right cure. It is therefore extremely worrying that the
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Chancellor and the Prime Minister persist in the self-serving delusion that the cause of our problems lies exclusively in the United States of America. It was not America that caused us to have the biggest boom and bust in the housing market. The excessive lending, which exceeded not only that of America but that of the rest of the world, was a British-made problem. The failures of regulation by the regulatory system introduced by this Government were at least as severe as those in America. It was those mistakes, and not sub-prime mortgage lending, that brought down Northern Rock, then Bradford & Bingley and finally HBOS. It was the Government’s policy of spending more than we were raising in taxes that led to the deficit in the public finances and the corresponding deficit in the balance of payments, thereby necessitating the huge devaluation in the pound that we have seen recently. I cannot see how any of the measures announced by the Government relate to those fundamental, underlying causes of the problems that we face.

Mr. David Drew (Stroud) (Lab/Co-op): I am interested to hear what the right hon. Gentleman is saying about public spending. I do not know on how many occasions he has made it clear in his constituency that he opposes this Government’s investment in public spending. As a Labour Member, I congratulate them on that investment. Of course it has to be paid for, but does the right hon. Gentleman not agree that we should argue the case for higher public spending?

Mr. Lilley: Almost all my constituents who discuss this issue with me tell me clearly that the Government have been spending more than we can afford. They regret that, and of course they would like more spending, if it could be afforded. When it is clearly unaffordable, however, they condemn the Government for that practice; and when that spending leaves us with this kind of problem, which puts my constituents’ jobs at risk, they are not going to put doctrines about public expenditure above the security of their employment.

Chris Huhne: Will the right hon. Gentleman give way?

Mr. Lilley: I should like to make some progress, if I may.

The second issue that I want to address is the Government’s optimism that the fiscal stimulus, as they call it—increasing expenditure while reducing taxation—will be expansionary. I devoutly hope that it will prove to be expansionary. I hope it will work. However, most people, as well as the Government, believe that its impact is likely to be quite small. The right hon. Member for Bolton, West (Ruth Kelly) said that it would reduce the impact of the recession by about 0.5 per cent. of GDP. If the Government are convinced that that expansion will work, and that we face a severe contraction, why have they not done more? If there is a limit on affordability, why did they not double the cut in VAT for half the time? A 5 per cent. cut for six months would probably have had a more stimulatory effect—for the reasons spelled out by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke)—and we would have known sooner whether that was going to work or whether we would need to switch to other measures.

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