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Much has been said about the way in which we might try to encourage the economy to overcome the downturn. I agree with my right hon. and learned Friend the Member for Rushcliffe: I think that that is going to take much longer than the Treasurys heroic idea of one year, then we will be out of it. The Treasury have forgotten the failures of their own system of forecasting. If we look at successive Red Books over the past few years, we will see a table of endless adjustments of previous projections of tax receipts and, indeed, borrowing, which shows that Treasury forecasting has entered an era of inaccuracy. The Chancellor would be unwise to
dismiss many of the commentators who have commented on the likely severity of the downturn. There is a human trait that the House of Commons needs to address, as it is easy to get caught up in the technicalities of economics and monetary and fiscal policy, and forget the fear factor and the lack of confidence among members of the public. Why have retail sales declined? Unemployment has fully to bite in this recession. There are about 25 million people who are still in employment, but many of them are frightened of what might happen. They are genuinely uncertain about the future, and they are frightened when they hear that Government borrowing will rise to £118 billion. They know that that is a big number, and that somebody will have to pay for it. While there is that uncertainty, they will not spend.
Most people gain confidence from knowing that the price of their housetheir single biggest assethas some kind of value. Only today in the Tea Room, however, we saw a headline saying that houses in London are to be sold with a further £100,000 off their asking price. When people read that, they do not look beyond the headlinethey know that it is a frightening time, so they are cautious with their money. That is why I am concerned that the pre-Budget report has done nothing whatsoever to get the fundamental housing market going. There have been comments on the subject of social housing, but the Government should recognise that there may be an opportunity, particularly for first-time and young buyers, to get into the housing market. Measures could be taken including, for example, a further rise in the stamp duty threshold to £500,000. The number of mortgages for new lending has effectively dropped to an all-time low. Estate agents are lucky if they sell one house a week. Those are all factors that affect not just the housing market and peoples confidence but the construction industry. If there was some movement, perhaps that would restore confidence in the economy.
The cut in VAT is but a temporary stimulus at a time at which prices are already falling. The real disappointment in the pre-Budget report is that no other options on fiscal stimulus were discussed. We have simply been told that the policy is 2.5 per cent. off VAT.
I should have declared my business interests at the outset of the debate. One of the problems that businesses face is the cut in industrial buildings allowance, which was the price for the fall in corporation tax. However, if a business is not making a profit, such measures are irrelevant. What are the Government doing to maintain and stimulate industrial investment? There is effectively nothing in the pre-Budget report that deals with that.
My right hon. and learned Friend the Member for Rushcliffe has discussed big-ticket items. Maybe there was a case for selective reductions in VAT, because companies will either consider the reduction in VAT as a benefit to their cash flow and keep some of it or use some of the money to reduce prices on one or two things. The 2.5 per cent. cut across the board for a limited period of time must be paid for by a substantial increase in borrowing, which estimates indicate will cost this country by 2014 the equivalent of increasing the basic rate of tax by 2.5p. That is not necessarily the best way to stimulate the economy.
We should have had a thorough debate about the long-term alternatives to get the economy going. Unless the Chancellor of the Exchequer addresses monetary policy and at least gets normal service resumed, we will not know whether the Government have done too much or too little with fiscal policy. If there are too many variables, one does not know whether ones policy ideas will work.
Particularly from the standpoint of north-west England, I urge the Chancellor to reflect on major defence contracts when he considers his public expenditure optionsI imagine that every penny of Government spending is currently under review. The aerospace industry in north-west England accounts for some 40,000 jobs. Many of the constituents of the right hon. Member for Bolton, West (Ruth Kelly) are involved in the aerospace industry, so she understands, and the same is true of the hon. Member for Ellesmere Port and Neston (Andrew Miller). I urge the Chancellor to make certain that projects such as Eurofighter are at least maintained both for their military importance and for their importance to the economy.
The public in this country will not easily forgive what the Government have done. My right hon. and learned Friend the Member for Rushcliffe left the economy travelling in the right direction. The profligate spending by the former Chancellor, who is now the Prime Minister, has left us ill equipped to deal with a downturn in the economy. One of the things that worries me about the Chancellors attitude of throwing bell, book and candle at the problem now is that none of us knows precisely what will happen in the future. This recession is uncharted waters, and I wonder what is left in the locker, if there are further shocks. I hope that the Chancellor will review alternative fiscal stimuli, because industry may need such help. The most important thing is to maintain people in employment, which is the cheapest and best way to maintain economic activity, but I am not certain whether the Chancellors VAT cut will do that.
Following the intervention by my right hon. Friend the Member for Sheffield, Brightside (Mr. Blunkett), I have been surprised by the way in which the official Opposition have derided the notion that the problems started in north America. The world has changed, and we now live in a world of instant communications where events spread very quickly. That applies to not only banking and commerce, but to many aspects of our society, and global events that begin with a pinprick will spread around the world very quickly in other areas, too. Anyone who has read anything about chaos theory will understand what I mean. That is why it is so importantno one from the Opposition has mentioned thisthat my right hon. Friends the Chancellor and the Prime Minister get on the global stage and argue Britains corner and Europes corner. If we do not do so, we will let down our country extremely badly.
The hon. Member for Tatton (Mr. Osborne) and I have two things in common. First, we are both Cheshire Members, and I hope that he will reflect on what I say towards the end of my remarks, because some of his
constituents work for companies in my constituency. Secondly, we both took a holiday in Corfu, but I shall not develop that point. Mine was a considerably cheaper version.
I am also concerned to hear the surprisethe shock, horrorbased on the idea that my right hon. Friend the Chancellor did not look at dozens of ideas, and did not ask civil servants, officials and colleagues to present alternative propositions to him. Of course he did. We would be here lambasting him if there were evidence that he had not examined dozens and dozens of ideas placed in front of him.
My right hon. Friend the Chancellor was quite right to contemplate all the papers that were put in front of him, and I agree with him that the conclusion that he reached will probably have the greatest impact on the lower-paid families whom many of us represent. It is important for them in terms of their capacity to help stimulate the economy and in terms of their immediate needs, and we should support people that way.
My next point is about industry. The right hon. Member for Fylde (Mr. Jack) made a point about aerospace, and I totally concur. It is vital that those large projects continue. The case that he explored is vital from the point of view of national defence and because of the importance of that aspect of manufacturing to the economy in the north-west.
I also represent a manufacturing constituency that is dominated by petrochemicals and vehicles. The vehicle industrys position is different from the last time that we faced an economic downturn, because we are now in a global economya point that I made at the outset. Vehicles, like any other product and commodity, are now global products. The Vauxhall Astra, which is made in my constituency, is also made in several other countries, and its components are made globallyas far afield as Australia.
We need to ensure that in finding a solution, we think globally, and I welcome the fact that Lord Mandelson has made a real commitmentsome people describe it as a conversionto manufacturing. He is meeting the Society of Motor Manufacturers and Traders, and that will be an important discussion. It has been well trailed that the SMMT will press for support through the European Investment Bank to ensure that proper support mechanisms are in place for industries such as the vehicle industry, which is so important to our economy, particularly in the north-west. I urge my right hon. Friend the Chancellor to give every possible line of support to the ongoing discussions, because, if in the worst case scenario, General Motors or Ford goes into chapter 11 bankruptcy, the consequences in Europe will be dire indeednot against the background of rubbish products, but against the background of high-quality products that have a future market and deserve protection.
Finally, I should say that I have been somewhat surprised. Given that the Tories demanded this debate, I thought that we would hear some great alternative solutions from them. What I want to find out from the wind-ups is whether the Opposition are in favour of tax
cuts now to boost the economy. Will they vote against the £60 payment to pensioners and the increases in child benefit and tax credit? [Interruption.] Of course they will have time. Let us hear their views.
Does the hon. Member for Tatton think that the recession is good for the health, as his partys health spokesman does? Those are the questions that the nation wants answered. If they are to be a credible Opposition, they cannot just pontificatethey have to come out with policies that mean something to the hard-pressed people we represent.
Mr. Philip Hammond (Runnymede and Weybridge) (Con): Through you, Madam Deputy Speaker, I thank Mr. Speaker once again for asserting the right of Parliament to debate this Budgetfor that is what it isbefore its principal element comes into force next Monday. This is the debate that the Government did not want to have.
We have heard from the Conservative Benches a reflection of the anger and bewilderment felt in the country and expressed in the media at how Labour has failed once again in its stewardship of our national financesmortgaging our futures and those of our children and grandchildren to try to secure their own. The Government are frittering away the golden legacy that they inherited from my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) in 1997.
The Government borrowed through the good years, when more prudent nations were piling up surpluses, and they ran a structural deficit when they should have been paying off debt. They have sheltered behind a bogus set of fiscal rules that failed to constrain reckless borrowing in the good times and was promptly junked when the going got tough. As recently as May this year, the Prime Minister was extolling the sustainable investment rulethat debt should not exceed 40 per cent. of GDP. On Monday, without a hint of an apology, the Chancellor told us that debt will now reach 58 per cent. of GDP, casually admitting that the Government will have doubled our national debt to £1 trillion. That is one third higher in real terms than our national debt when we had just finished fighting the second world war.
Over eight years, the Government have repeatedly projected a return to fiscal balance a few years down the line, and they have repeatedly been wrong. On Monday, they did so again in the pre-Budget report, learning nothing and forgetting everything. The Government project a short and shallow recession while the weight of expert opinion sees a longer and deeper one. The Government claim that Britain is well prepared, but all the evidence from the OECD, the International Monetary Fund and the European Union is that the recession here will be worse than that of any comparable economy. They forecast a rapid return to above-trend growth in 2011 on the basis of no evidence whatever. To gloss over the black hole in their numbers, and ignoring the warning from the right hon. Member for Bolton, West (Ruth Kelly) that revenues will be slow to recover, they assume
in the pre-Budget report a fantasy acceleration of growth in Government revenue from 2.8 per cent. a year to 4.1 per cent. a year. That is £20 billion a year in revenue conjured out of nowhere by the manipulation of the figures.
The markets have not been deceived, and nor should the people be. The cost of insuring British Government debt has increased tenfold, and in the past week it has gone up by 50 per cent., three times the rate for German Government debt. As my hon. Friend the Chancellor observed, thanks to the Governments profligacy
Thanks to the Governments profligacy, the full faith and credit of the United Kingdom is now rated less highly by the markets than the promises of companies such as Nestlé and British Petroleum. Sterling has declined 25 per cent. against the dollarmore than the 1967 pound in your pocket devaluation and more than the 1992 exchange rate mechanism devaluation. And what is the Governments solution? Their big plan, their answer to a recession caused by reckless borrowing and excessive debt, is more reckless borrowing and still greater debt. Their answer is to fund temporary cuts in VAT at a time when prices are falling anyway, and when the Prime Minister and the Governor of the Bank of England are warning against the risks of deflation, followed by increases at the very point when the economy is supposed to be coming out of recession and will need all the encouragement it can get. Borrow now, pay later.
Chris Huhne: I am puzzled by one thing the hon. Gentleman said, given the powerful case that he is making about the problems in the public finances. Why does he think that the bond market, which is far deeper and more liquid than the credit default swap market, has seen a 0.5 per cent. fall in the 10-year bond yield over the past month? Is that market getting it wrong where the credit default swap market is getting it right?
Mr. Hammond: Puzzled and confused seems to be the Liberal Democrat position on many things. There are many other factors driving the corporate bond market, but only one factor drives the sovereign debt credit default market, which is the creditworthiness of the United Kingdom Government.
This tax policy is driven not by the economic cycle, but by the electoral timetablea £20 billion tax cut before the general election financed by a £40 billion tax increase afterwards. That is just the bit of the iceberg we can see. We have heard during the past 24 hours that the Treasurys plan was to use more realistic assumptions, and to announce a tax increase package including an extra £5 billion a year of VAT after 2011 by introducing an 18.5 per cent. rate. Clearly, the Prime Minister, who promised us transparency, did not approve of such candour.
The Chancellor tells us that he considers all options before a Budget, but he did not test the credibility of the House by suggesting that for every one of those options,
a fully worked-up explanatory memorandum is produced and signed on the behalf of a Minister by a civil servant.
The Governments solution is increased taxes for everyone earning over £19,000 a year. We have heard from the delusional tendency on the Government Benches about the delights of a higher top tax rate for high earners, but we have heard from several hon. Members this afternoon that the Institute for Fiscal Studies estimated that the net effect of the new top rate will be approximately zero, meaning, as usual, that middle-income earners will be left to foot the bill as the Government seek to fill their black hole with permanently higher council tax, permanently higher fuel duty, permanently higher alcohol taxes and permanently higher national insurance contributions. There will be a tax on jobs for employees and employers alike.
As my right hon. and learned Friend the Member for Rushcliffe pointed out, all that is to pay for a short-term tax cut that Britain cannot afford, and that will not save us from recession, business failures, soaring job losses and home repossessions. It will not save us because, as my right hon. Friend the Member for Fylde (Mr. Jack) pointed out, the reason people are not spending is not because goods are too expensive to the tune of 2.5 per cent. but because they are over-indebted, worried about their borrowing capacity and their creditworthiness. Their houses are shrinking in value, their jobs are at risk and they do not know whether they will be able to borrow to fund the big-ticket items that they want. The Government say
Mr. Hammond: I will tell you. They say that we will do nothing. They are wrong, and they know that they are wrong. Doing nothing is not an option, but neither is doing just anything and borrowing to pay for it. A temporary tax cut when prices are falling, funded by promises of tax rises in the recovery, is as good as doing nothing. What is needed is a targeted response to the real underlying problem, which is the credit crunch. The CBI and the Governor of the Bank of England agree that getting lending going again is the critical testfar more important than a temporary cut in VAT.
My hon. Friend the shadow Chancellor set out this afternoon a specific proposal for the creation of a state credit insurance institution to guarantee loans to businesses in order to get credit flowing to save jobs and businesses in this Labour recession. We have already announced a raft of targeted measures to help families and businesses and save jobs, including a £2.6 billion package to support employers taking on new staff, a cut in national insurance contributions for the smallest employers, a council tax freeze and, most importantly, an automatic right for smaller and medium-sized businesses to defer their VAT payments by six months. That would pump £10 billion of working capital into the corporate sector of Britain as of right, not after a mountain of form-filling and a delay intermediated by the banks, which is what the Chancellors small firms loan guarantee scheme expansion would involve. That is a coherent package that would not place a tax bombshell under Britains future.
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