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Mr. Philip Hammond (Runnymede and Weybridge) (Con): On that specific technical point, has the hon. Gentleman noticed that the order that we are debating has an end date of 30 November 2009? The Government are relying on other legislation, not yet laid before the House, to extend the VAT reduction until 31 December.
Dr. Cable: I hope that that is a sign that the Government have an open mind about when the boom is due to occur. That is a helpful intervention, and it points to some of the inconsistencies involved.
I have a final point to make about consumer impact. One particular sector concerned about how the tax change will feed through is road hauliers, who can of course get relief from value added tax but who will be paying increased duty on their fuel. The issue is of particular concern to hauliers operating in rural areas, and the retailers who depend on them for their supply. I wonder whether the Government have thought about the cost implications of the fact that the combination of changes to VAT and to vehicle excise duty will particularly affect rural distribution. That is of concern to many of my colleagues and to people in other parts of the country.
Stephen Williams (Bristol, West) (LD): On the subject of costs to business, I wonder what estimate the Government made of the cost to small businesses, most of which will account for VAT quarterly. They will have suffered VAT at 17.5 per cent., but will recover it, in the fullness of time, at 15 per cent., so they will suffer a cash-flow disadvantage in the short term. They will also face real costs as they reconfigure their accounting and invoicing systems and reprint all their marketing materials. So they face real cash-flow costs and an actual cost when the change is implemented.
Dr. Cable: My colleague eloquently made a point about the administrative costs of the change, particularly for small business—a point that I wanted to make in slightly more detail. As he rightly points out, in this country, 2 million companies are registered for VAT, and many of them will have the kind of practical problems that he describes, which clearly were not anticipated in the Treasury.
The Government acknowledge that the compliance costs of the measure will be £300 million. Of that, £90 million is simply the cost of conversion; it is £50 million to cut the VAT and another £45 million to convert it back again. We are talking about an enormous administrative cost, particularly to small business, in terms of managerial time and practical problems of conversion. That will substantially reduce much of the benefits. My hon. Friend mentioned some of the problems, and I shall cite a couple more from my constituency. A local garage, Broad Lane Garage, wrote to me, without any prompting from me, to say:
“This imposed change has caused us, as a small business, great inconvenience and some expense...we have had bookings cancelled...The change to our systems has taken several telephone conversations and will ultimately require someone to come into the office out of their normal working hours to make the necessary alterations to our computer system”.
The company asked me to use all my efforts to communicate those views to the Government. If necessary, it will organise a petition for me, without my having asked for it.
A computer software company described some of the specific, practical problems that a company is likely to have as it works through the transition. A business man in Twickenham said:
“This VAT change is a potential disaster for businesses like mine. We run an IT company and we have just 4 days to get all our customer systems changed over. All our cash flow comes in from standing order mandates...Re-signing customer payment authorities is always difficult and the government have now given all business people particularly SMEs a real problem...If my customers take the opportunity to stop their payment mandates while they wait for us to issue new invoices with the VAT adjustment...it will be catastrophic for us and a good profitable technology business will be sacrificed for no good reason at all.”
I suspect that there are many arguments of that kind being aired in companies around the country.
The final criticism that I want to make is about the Government’s claim that the VAT cut is the fairest approach. There are very simple ways of testing the proposition that a tax change is fair. The Institute for Fiscal Studies will run through different tax changes to demonstrate their impact on different income groups. It has done that and points out that the impact of the VAT change on the richest 10 per cent. of the population will be to make them 1.6 per cent. better off, and the impact on the poorest 10 per cent. will be to make them only 0.6 per cent. better off. Obviously, most of the commodities most used by people in low-income groups, notably food, children’s clothes and energy, at least at a lower rate, are exempt.
My final point—this partly refers to the intervention from the hon. Member for Warwick and Leamington (Mr. Plaskitt)—concerns the alternative that we would advance. As I said at the outset, we do not believe that the Government should do nothing; there is a case for a fiscal stimulus. There are two elements to our answer. First, there are tax changes that are desirable. We have argued for a progressive change in the income tax system, cutting taxes for people at the bottom end of the income scale and raising them at the top by changing the system of allowances. That would have a differential effect on spending. It would be tax-neutral; it would not affect the deficit or public debt. However, it would provide a stimulus to the economy.
The Institute of Directors has surfaced as an improbable ally, saying that
“an income tax cut would have put significant cash directly into pay packets, ensuring that people noticed and providing a more effective stimulus.”
The argument that one should use the income tax mechanism rather than VAT has broad support in that sense.
Mr. Frank Field (Birkenhead) (Lab): May I just ask whether the institute supported the idea of raising taxes on the rich?
Dr. Cable: I do not think it did, so the right hon. Gentleman could accuse me of quoting selectively; I did on that occasion.
Tax is one mechanism. The other mechanism that provides a much more direct fiscal stimulus is the use of public investment. We welcome the bringing forward of public works projects, but I noted in an earlier intervention in the Chamber that the overall effect of the Government’s proposals in relation to capital spending is to reduce
Government public investment over the next few years, which is not the kind of support that will be needed in what I fear will be a prolonged recession. We ought to be discussing in more detail the kind of measures that can be undertaken in relation to social housing, which is currently frozen because of the difficulties in housing associations, to which I referred in Prime Minister’s questions; the opportunity to roll out much more effectively a programme of home insulation, which is happening at a snail’s pace; investments in public transport, and others.
Mr. Plaskitt: I thank the hon. Gentleman for taking a further intervention. Does he not see a problem with fairness in his argument? Half of pensioner households already do not pay income tax. The VAT reduction is worth £150 a year to them. Why is he against a £150 tax break for pensioner households?
Dr. Cable: Clearly, supplementary measures are needed to deal with pensioners and people who are not in the tax bracket. I was referring to an overall package that would be a good deal fairer than the one proposed by the Government, and more effective in the long term because it would be built into people’s expectations.
I finish by continuing a point that I made on Monday. The argument about how to stimulate the economy is moving on very fast. We are talking about cuts in interest rates and about fiscal policy. The Americans are already talking about quantitative easing, which is printing money—that is, dropping money from helicopters. That is the kind of environment that we are getting into. When we reconvene in the new year, I expect that the debate will have moved on to more dramatic and potentially dangerous departures in policy. Although the statutory instrument will undoubtedly inject some demand into the economy, it is seriously defective and we intend to vote against it.
2.51 pm
Mr. Frank Field (Birkenhead) (Lab): I am delighted to follow the hon. Member for Twickenham (Dr. Cable). I want, if anything, to add a sense of urgency to the case that he deployed. As we were reminded, we rise tomorrow for the Christmas recess, and when we return the economic landscape will have changed even more than it has in the past few weeks, and will have changed much for the worse.
Our debate today should concentrate on the most effective way the Government could spend any extra money that they might consider spending, so that many of the firms that currently employ our constituents have a chance of getting credit and opening after Christmas. Unless we radically change the credit lifelines to many firms, a considerable number of our constituents will not have firms to go back to after Christmas.
The sense of urgency that I hope we will demonstrate in the debate comes from the statistics that we already have. We know, for example, that in the worst slump in 100 years, national income—GDP—fell by 5 per cent. We know that probably the most accurate estimate shows GDP already falling at a rate of 4 per cent. and escalating. One hopes that the Government are right, that this is just a temporary blip, and that things will
change. I fear not. I fear we may be entering a period of the most severe economic chaos that anyone alive can remember, and we need to judge whether the VAT increase is in any way appropriate as the stimulus to counter that downward trend.
Mr. Tim Boswell (Daventry) (Con): Does the right hon. Gentleman agree that the real viciousness of extreme deflationary conditions is not so much the statistical decline in GDP, which he is right to emphasise, as the entirely disproportionate increase in unemployment that is already becoming evident and is likely to accelerate in the coming year?
Mr. Field: That is my next point. I am grateful that I gave way, not because it is not always a pleasure to do so, but because my hon. Friend the Member for Sunderland, South (Mr. Mullin) told me that I spoke about a VAT increase, when we are, of course, debating a VAT decrease. Given the crazy economic world we are in, it may well have been an increase, rather than a decrease. I am immensely grateful to him for that.
The data published today on unemployment show just how serious the situation is. If we turn to the appendices in the pre-Budget report and look at the set of statistics to which the Government have nailed their colours—levels of unemployment at the end of next year—we know that with the benefit count passing the million mark today and the International Labour Organisation rate coming up towards 2 million, sadly those thresholds will be crossed much earlier than the Government hope and that the pre-Budget report suggests. I believe the Government have very limited room for manoeuvre in a reflationary package, so I again question whether the VAT decrease is the appropriate policy response. For those reasons I shall vote against the Government today.
There are two huge pressures limiting the Government’s room for manoeuvre, the first of which is the sheer size of the debt that they hope to raise in the gilt markets. I am less optimistic than most people about the Government’s ability to raise that debt. Long-term interest rates will certainly be pushed up, which will damage economic recovery as a result of seeking that level of debt, and we may have the horrendous scenario in which the Government cannot sell their gilts. Then, we are in a new ball game. The Bank of England will clearly be instructed to buy those debts, and again the outcome at which the hon. Member for Twickenham hinted will be upon us—the printing presses will be rolling to pay for that, with all the consequences if one major country operates that policy in isolation from others.
What the Government can do is restricted by debt. Unlike most people, I believe that we face a threat of inflation. I do not understand how the Bank of England keeps talking about deflation. Oil prices in the spot market are rising substantially. We know about the fall of sterling in normal circumstances, and we may say that these are not normal circumstances. The fall in the value of sterling already would put 2 percentage points on inflation. It is an illusory luxury to believe that somehow next year the economy will be faced with a negative rate of inflation, rather than a real inflationary threat. That will certainly put a stop to a Government strategy of wishing the Bank of England to cut interest rates.
Given the limited resources at the Government’s disposal, is a reduction in VAT the most effective way of trying to mitigate the economic hurricane that is already beginning to affect our constituents and will affect many more after Christmas?
I disagree with the policy of increasing public works advocated by the hon. Member for Twickenham. I am always delighted to see my right hon. Friend the Financial Secretary on the Treasury Bench, but never more so than now, because I want to suggest that public works, sadly, have a far more limited role to play in recovery than one might think. The biggest public works programme is the Olympics. In the two and a half years since the Olympic programme was announced, with huge investments from taxpayers and lottery players, the London borough of Newham, part of which my right hon. Friend represents, has issued more than 50,000 new national insurance numbers to non-British workers.
The idea that increasing public sector investment programmes will lead to a significant increase in the employment of British workers, sadly, is a fallacy. That raises long-term questions about what our schools are doing if they are producing people who cannot get or hold down those jobs, but that is a debate for another day. I do not believe that using moneys to increase public investment is a viable or effective option for the Government to pursue to prevent an horrendous scenario engulfing all too many of our constituents.
There is, however, one thing that the Government can do, and before Christmas: reallocate the money that would be lost on reducing VAT and use it to try to extend, even more effectively, credit lines to firms that will not open after Christmas if they do not get credit lines before it. The situation is that serious.
The Government are taking some measures, and I rejoice in that fact. However, it is clear, from reports of employers in our own constituencies and from what is happening to world trade, that something most alarming is happening. I shall state again a fact that I cited in the debate on Monday: the rates for shipping and for transporting goods—to China, for example, which we hope will still be an engine for getting us out of this slump or recession—are one tenth of what they were last year.
That is not because the Chinese economy is seizing up, although it may well do, but because people who have goods that they wish to sell in the export market are worried about whether they will be paid—in other words, about whether the bills of exchange will be honoured. In that context, we should concentrate all our attention on ensuring that we extend the lifeline to those firms, and we could do that before Christmas. For that reason, and the others that I have briefly tried to marshal, the Government should take that course with the money that they plan to allocate to reducing VAT.
Like the hon. Member for Twickenham, who moved the prayer against this order, I believe that cuts in VAT are like spitting in the face of an economic hurricane. They will have no effect whatever, given that firms are already cutting prices by up to 50 per cent. in an attempt to survive. I beg the Government to reconsider. Nobody doubts their genuine intention to try to protect as many of our constituents as possible from the awful consequences that are beginning to unfold before our very eyes and from the horrendous unemployment that we will see after Christmas, and that has already begun.
We cannot stop that, but we could mitigate it. Many of the firms in our constituencies that will not open after Christmas unless they get credit could get it if the Government used the money more effectively.
We Members have secure employment, at least until the general election. I hope that we will act this afternoon to try to protect the jobs of the people involved and give them something like the sense of security that we have as Members of Parliament. We should, if need be in the Division Lobby, persuade the Government that the billions to be used for reducing VAT could be far better used to make sure that emergency credit lines are extended to firms that will otherwise fold and add enormously to the unemployment totals in the new year.
Madam Deputy Speaker (Sylvia Heal): I now have to announce the result of a Division deferred from a previous day. On the motion relating to the Christmas adjournment, the Ayes were 266 and the Noes were 214, so the Question was agreed to.
[The Division list is published at the end of today’s debates.]
3.3 pm
Mr. Philip Hammond (Runnymede and Weybridge) (Con): In our response to the pre-Budget report statement, in the emergency debate that followed and in many other forums, we Conservatives have made it clear that we oppose the Government’s so-called fiscal stimulus package, which involves borrowing yet more billions to deliver the temporary VAT cut that we are debating today. We will therefore vote against the order, although as the hon. Member for Twickenham (Dr. Cable) said, our reasons for doing so are different from his.
There seems to be a disconcerting and growing gap between the economic scene as viewed by the Prime Minister and the picture that greets everybody else. The Prime Minister denies any responsibility for the problems facing the country; he claims credit for Britain’s being “well placed” to meet them. He is apparently blind to the mounting evidence that his solutions, far from having saved the world, are not working. Instead of recognising the policy failures that led us to our situation today and addressing the real problem that faces our economy now—the seizure of the credit system—he has chosen to embark on a reckless exercise that will increase debt through yet more borrowing to fund the temporary VAT cut, which just about everybody except him agrees will be the least effective stimulus to the economy. It is the Prime Minister all over: unaffordable and ineffective.
The view from within the Downing street bunker seems to go something like this. Due to circumstances entirely beyond its control, a Britain in which boom and bust has been abolished is the completely innocent victim of a foreign-inspired recession. But thanks to the Prime Minister’s prescience in borrowing and squandering vast amounts of money in the years of economic growth, Britain faces the recession with the largest budget deficit and the most unbalanced economy of any developed country. According to the Prime Minister, those conditions make us uniquely well prepared to weather the economic storm.
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