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Having already “saved” the world banking system, the Prime Minister naturally considered carefully the challenges that this foreign recession presented to the
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British economy and decreed that his rather dusty textbook dictated a dose of Keynesian fiscal stimulus to get the country back on track. According to him, his prescription was instantly endorsed by the entire leadership of the free world, assembled for the specific purpose of receiving his guidance. With that reassurance behind him, he returned home and used his well known and unique powers of empathy with the British people to conclude that the best way to stimulate them was to offer them a short-term cut in VAT with the promise of a massive increase in taxation just as the economy is struggling to break out of the recession and resume growth.

The reality of the situation that we face is rather less rosy. The Prime Minister has lectured our neighbours for a decade about the superiority of his management system, but his chickens are coming home to roost. This recession is not—as he would have us believe—an external shock to an otherwise fit, lean and healthy economy momentarily blown off course by a foreign disturbance, but rather a warning symptom of the underlying sickness of an economy that has become bloated on record levels of public and private debt.

Mr. Boswell: On the assumption that, as we have often been told, left talks to left, is it not particularly remarkable that Herr SteinbrĂ1/4ck of the Social Democrats described the Prime Minister’s whole exercise as “crass Keynesianism” that, in his words, will take a whole generation to pay off?

Mr. Hammond: My hon. Friend is absolutely right; unsurprisingly, perhaps, I shall come to Mr. SteinbrĂ1/4ck in a moment.

Far from being well prepared, Britain is uniquely vulnerable to the reality of a bust that has followed the illusion of a boom. Unlike their neighbours and competitors, which used the good years to pay down Government debt, our Government went on borrowing, so that we are entering the recession with a huge structural deficit. On top of that structural deficit, we are going to pile the additional borrowing that the automatic stabilisers naturally deliver in a recession. We shall get to more than £100 billion of borrowing next year, even before the Prime Minister’s proposed fiscal stimulus is added. That will double our national debt to £1 trillion. That leaves us not well prepared, but, in the words of Alan Greenspan, more vulnerable than any other major economy.

In the words of the Minister for the Olympics just two days ago, Britain now faces

—deeper than those of the 1980s and 1990s. That is the prediction of a senior member of the Prime Minister’s Government. People do not need to go to Germany, as my hon. Friend the Member for Daventry (Mr. Boswell) suggests, for a verdict. They do not need to go to Brussels, to the European Central Bank or even to the currency markets, which are sending a pretty clear signal. They do not need to listen to the Opposition to get a verdict on the Prime Minister’s policy; they can hear it openly and publicly expressed by one of his own senior Ministers.

Leaving that Minister aside for the moment, the Prime Minister seems mainly to be basing the justification for his policy initiative on the endorsement he claims to
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have from foreign observers. He says that everybody except those on the Conservative Front Bench supports his plan for a fiscal stimulus funded by yet more borrowing, so I have been looking at what various people have actually said about the Prime Minister’s proposals, and I have discovered that, on his definition, the Conservative Front Bench has turned into rather a broad church. Indeed, it welcomes the German SPD Foreign Minister who said:

For political balance, he would be joined on our Front Bench by the CDU budget spokesman, who says:

Next along would be the president of the European Central Bank, who explained that fiscal policies need to ensure the longer-term sustainability of public finances, implying for some countries that there is no leeway for fiscal loosening. He says:

And the EU Commission—an unlikely joiner of our Front Bench—says:

I do not think that there could be a clearer or more specifically targeted reference to the UK without naming it directly.

Mr. Graham Stuart (Beverley and Holderness) (Con): My hon. Friend will remember that the last time we had a Labour Government we needed to be bailed out by the International Monetary Fund, such was the deterioration in the economic reputation of this country under Labour at that time. Does he fear that with the increasing spreads on insurance of UK Government debt, that this Labour Government could be threatening our very ability to stand as an independent nation?

Mr. Hammond: The immediate threat is to our ability to borrow in the markets, as the right hon. Member for Birkenhead (Mr. Field) said. I was reminded by someone at IBM a few weeks ago that in the 1970s a serious scheme was being put together that would have had IBM borrowing in the markets, because it was able to do so, and then lending at a margin to the British Government, who could not do so. It is now the case that a significant number of companies are able to borrow on more favourable terms than the UK Government.

Mr. Frank Field: Might I remind the hon. Gentleman that he has been speaking for longer than the hon. Member for Twickenham (Dr. Cable) spoke in moving the motion, and during that time we learned why the Liberal Democrats disagreed with the Government’s strategy and what they would do? Might I suggest that the hon. Member for Runnymede and Weybridge (Mr. Hammond) finds some time to tell us what the Opposition would do in these circumstances?

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Mr. Hammond: I am grateful to the right hon. Gentleman for his helpful suggestion, but with your permission, Madam Deputy Speaker, unless Mr. Speaker is minded to place a time limit on contributions to the debate, I will make my point in my own way. Unlike the hon. Member for Twickenham, who essentially agrees with the concept of a fiscal stimulus, but disagrees with the way in which the Government are proposing to deliver it, we have a fundamental disagreement with the Government’s approach and I am seeking to explain why.

We are considering the temporary VAT cut because the Prime Minister has boxed himself into a corner. Having proclaimed his recapitalisation of the banking system not merely as successful in Britain, but as the instrument of world salvation, he has an understandable difficulty in acknowledging the small technical problem that it is not working. Banks may have been saved from collapse, but the test of the success of the taxpayers’ intervention is whether credit has begun to flow in a normal, sensible and measured way through the veins of the economy—and it has not. Businesses large and small cannot borrow, the housing market is at a standstill, car sales have fallen off a cliff as consumer confidence is shattered, unemployment is soaring, business failures are accelerating and home repossessions are climbing ominously.

Mr. Douglas Hogg (Sleaford and North Hykeham) (Con): My hon. Friend says that the Prime Minister has boxed himself in, and I agree with that, but he has done so in one particular way. He cannot rely on the fiscal stimulus because of the level of debt that he has created. Had he not created that level of debt, he would have been able to pursue his fiscal stimulus.

Mr. Hammond: My right hon. and learned Friend is absolutely right, and the Prime Minister has boxed himself in in another way. He is now unable to recognise that the banking recapitalisation has not delivered the intended outcome. Urgent attention to the banking and credit system is what is actually required to get Britain back on track and to save the sort of businesses that the right hon. Member for Birkenhead was talking about.

The Prime Minister is unable to acknowledge that his banking rescue package now itself needs rescuing, and desperate to maintain momentum, he has produced this fiscal stimulus, not on the basis of a clear analysis of its impact on the British economy, but on the basis that some economists and politicians in other countries recommend such a measure in the very different circumstances of their own economies. He is spending more money that he has not got, piling up yet more burdens for future generations and placing the economic recovery at more risk. It seems that action has become an end in itself—hyperactivity as Government policy.

Our position is that Britain cannot afford this extra borrowing, and its problems will not be solved by this temporary VAT cut. What Britain needs is carefully thought out measures that address the real problem, which is the lack of credit in the economy because of the failure of the bank recapitalisation programme. It needs measures such as our national loan guarantee scheme, which would get banks lending to businesses again, and sustainable measures to deliver permanent tax cuts through restraint in public spending increases once the recession is over. What we have from the Government is a package that has stimulated no one, but will cost everyone.

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The hon. Member for Twickenham correctly pointed out that shops in the high street are offering 10, 20, 30 or 40 per cent. discounts, and that this small VAT change is unlikely to have any significant impact. I have just been handed some figures from the CBI survey of retailers, which has come out today, and they show a ninth consecutive month of falling sales. Those figures cover the first fortnight of the Christmas trading period, including the first 10 days of the Government’s VAT cut. A net balance of 55 per cent. of firms say that their trading is worse than expected, and the trading record is the weakest recorded since the survey began in 1983. Although the VAT cut will not deliver the Government’s hoped-for benefits, tax increases for everyone earning over £20,000 by 2011 will deliver a disincentive to spend and a disincentive to resuming consumer confidence in the economy.

This policy is not an economic recovery package, but a political survival plan. To quote the German Finance Minister again:

If it is breathtaking and depressing for someone who will not have to pick up any of the bill, how much more breathtaking and depressing is it for British taxpayers? He continues:

I could not have put it better myself.

The Prime Minister dismisses the German Foreign Minister as playing politics, but that is precisely our charge against the Prime Minister. He is ignoring the long-term economic best interest of Britain for his own short-term political gain. Everything is politics: the 18.5 per cent. VAT rate that he was going to levy on us after 2011 was suppressed and kept secret at the last moment, leaving a black hole in the PBR, so we are left guessing where and how the burden will fall when the recovery comes.

We face a recession born of a credit crisis. The Prime Minister’s banking recapitalisation has failed to stop the rot. Businesses and consumers are sliding closer and closer to the precipice, but he refuses to act where action is needed. We have put forward a detailed package of proposals that would tackle the real problems. We have even produced a draft Bill to establish the national loan guarantee scheme, but instead of taking up our ideas to make the bank bail-out work, he has turned his back on the consensus that existed when it was announced and instead pursues a mechanical, textbook-led approach that is simply not affordable or appropriate and which will not be effective in his Britain, where consumers are over-borrowed and starved of credit, facing certain tax increases in two years’ time, fearful for their jobs and seeing the value of their assets shrinking.

We will not support today’s ill-conceived measure or the billions of pounds of extra borrowing and future taxes that it will entail. I urge my right hon. and hon. Friends to vote against the order in the Lobby this afternoon. I also hope that those on the Labour Benches who for whatever reason reject the Prime Minister’s package—they might not agree with our analysis—will join the right hon. Member for Birkenhead and find the courage of their convictions when we vote this afternoon.

Several hon. Members rose

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Madam Deputy Speaker: Order. May I remind hon. Members that this debate has to conclude at 5 minutes past 4 and that within that time it will include a contribution from the Minister? I therefore hope that hon. Members hoping to catch my eye will exercise some self-discipline.

3.21 pm

Mr. Tim Boswell (Daventry) (Con): Thank you, Madam Deputy Speaker, I shall do my best.

I greatly welcome the contributions that have been made so far, which include contributions from those on the Conservative and the Liberal Democrat Front Benches, with their slightly different perspectives on the solution. Without wishing to put him in an invidious position, I also include the contribution made by the right hon. Member for Birkenhead (Mr. Field), who offers both his frank and trenchant analysis and his readiness to consider alternative solutions, which will impress us all. It happens, coincidentally, that on this occasion I agree with almost every word that he said about what should be done.

I hope that I can indulge the House for a moment and take hon. Members back down memory lane. In the early 1970s, in the days when VAT was being conceived, I happened to be the head of the economics section at the Conservative research department and was, as it were, party to some of those initial discussions. Without going into the details of those discussions, I can tell hon. Members that two things were clear in principle: first, that any tax should have a broad coverage at a relatively modest rate; and secondly, that the rate should enjoy a degree of stability, which meant that we could not keep chopping and changing it.

That was essentially a wise judgment and, in fairness to Governments since, that practice has continued. Since that period, there have been virtually a handful of changes in the VAT rate, until now, when we are, in effect, committing ourselves to two changes in one year. The measure should be called the Value Added Tax (Changes of Rate) Order—one change down and one change either back to the existing level or, as is more likely, in view of what we have been told by accident, upwards from that level.

Let me make another point in parentheses. The history of the ’70s, which was not very happy for Labour Governments, as has already been adverted to, shows a regular recourse to the fiscal regulator. Taxes were increased or decreased by 10 per cent. at a time by order. Those changes were designed to stimulate or curtail growth in the economy, but their effects were always well below the expected level of efficiency. That, I fear, will be the fate of today’s measure.

My other point goes to the politics of the thing. My political mentor, the late Iain Macleod, who sadly died before the introduction of VAT, always used to say, in his generous way, that he was not inclined to shoot even a one-legged Santa Claus, which is both a seasonal and, I hope, a material political reference. Of course it is difficult to cast oneself as the person who wants to say no to a proposal to cut taxes. The question is whether that proposal will help the economy. Is it the most effective way of stimulating the economy to deal with the consequences that the right hon. Member for Birkenhead was so right to mention or not? That is the real test of the measure.

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I want to say a couple of things about the detail of the order, because I was so impressed by representations that I received this week from a constituent—I have his permission to quote from his letter to me. His representations encapsulate in detail exactly the kinds of problems that will arise. Andrew Overton runs a company in my constituency called Overview Mapping Ltd, which provides vehicle tracking solutions for big fleets of vehicles and employs some 15 employees. In fairness, I do not wish to give all the details of the company’s commercial situation, but it is fairly easy to derive from its turnover, the amount of tax revenue that Mr. Overton is already paying and the scale of his business.

Mr. Overton quotes me a figure for the decline in new sales for his business from pre-existing levels—that is, pre-credit crunch levels. In general terms, new sales have fallen by an order of magnitude, going from a rapid expansion to a virtual standstill. That will give the House some indication of where Mr. Overton stands. My concern, which he illustrated to me in figures, is about the likely cost of the change. His business model relies on monthly direct debit payments, on about 3,000 monthly collections. They are collected by a firm called Eazipay Ltd and processed for him. In effect, Mr. Overton acts as a conduit for VAT.

Let us look at Mr. Overton’s costs. The cost of one man-week of time to effect the changes is £500. The cost of amending 3,000 direct debits, at a standard charge from Eazipay of £1.50 a throw, is £4,500. The cost of accounts software changes, at one man-week, is £500 and the cost of sending letters to all customers is £500. The total cost is £6,000. That is backwards for the business, not forwards. We need to reflect on that.

Mr. Jeremy Browne (Taunton) (LD): May I add another example to the very good one that the hon. Gentleman has just given? I visited Cotleigh brewery in my constituency, which is incurring considerable costs not only because of the VAT reduction, but because duty on beer is increasing to offset the VAT reduction. At the end of 2009, Cotleigh brewery will incur further costs in readjusting everything. The proposal is causing serious problems for businesses throughout the country.

Mr. Boswell: I am grateful to the hon. Gentleman. It is entirely right that the House should consider all such evidence.

I have quoted that example in my constituency, but I want to draw a slightly wider conclusion. Like most other businesses, that entrepreneur in my constituency uses Sage software. He has received a letter from his accountancy support office that says:

That is about notice, but Mr. Overton is concerned about direct on-costs to his business. If the proposal is about the Government helping his business, God help us all if they turn the other way.

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