The Financial Secretary to the Treasury (Mr. Stephen Timms): Over the past year, major shocks have hit the economies of every country in the world, and the economic and fiscal climate is exceptionally challenging, but the macro-economic framework that we put in place in 1997 means that we face these shocks from a strong foundation. Our priority is to support the economyto support families and businessesthrough these difficult times. We are navigating a path to get Britain through this in the best possible shape, and to do it in a way that is fair to everyone. Therefore, in the pre-Budget report, my right hon. Friend the Chancellor set out measures to help businesses and home owners, and to boost peoples incomes now.
We are acting by putting money into the economy now so that we come out of this situation sooner and stronger. We have set out how, once the economy is growing again, we will deal with the public finance problems caused by the credit crunch in a way that, again, is fair to everybody. We are acting now, unlike the Opposition, who would turn their backs on families and businesses at just the time they need support most. We are acting, because if we do not act now it will cost moreit will cost more to the economy, more to the public finances and more to society.
Mr. Philip Hammond: Would the Minister tell the House about the 18.5 per cent .VAT proposal, because his signature was on the document that was published? The Chancellor said that many proposals were considered, so can the Minister tell us whether regulatory impact assessments were prepared for all sorts of other VAT level proposals? Was his signature appended to them all?
Mr. Timms: I am delighted that the hon. Gentleman has given me the opportunity to set the record straight on the Floor of the House. The Chancellor has made it clear repeatedly that he considered, as any Chancellor would, a large number of options about every aspect of tax and spending, as the House would expect. I ask the hon. Gentleman to look at the incorrect impact assessment that appeared on the website, because if he were to do so, he would see that I had not, in fact, signed that document. The Leader of the Opposition said that I had signed it, but my name had been typed in a sort of italic, slightly floral typeface under the following phrase:
Signed by the responsible Minister .
My right hon. Friend the Member for Birkenhead (Mr. Field) rightly drew attention to todays unemployment figures, because they underline just how vital these measures are and how vital a stimulus now is. If the Conservatives, when in government, had introduced a fiscal stimulus of similar scale at the same point in the previous economic downturn, it would have saved some 300,000 jobsbut they did not. They did nothing; they let the recession run its course, as some of them are arguing should happen again now. The nation remembers the enduring damage that was the result: businesses needlessly destroyed, jobs unnecessarily lost and people remaining workless today as a direct consequence of the failings then.
Mr. Graham Stuart: Will the Minister answer the point made by the hon. Member for Wolverhampton, South-West (Rob Marris) about why the House did not debate a proposal of such importance before it was implemented?
Our actions will be different from those of the Opposition when in government. We will bring forward £3 billion of capital investment from 2010-11 to this year and next to increase capacity in the rail network, with new carriages, and in the motorway network; to improve social housing and build new homes; to renew primary and secondary schools; and to increase energy efficiency. It will put people to work, it will renovate infrastructure and it will support jobs in key industries. It will also help to put money into the economy in the coming months.
However, to prevent the recession from deepening, we need to do more to put money into the economy immediately. There is a widespread international consensus that a fiscal stimulus to help the economy is the right thing to do. It is backed by parties of both left and right on every continent, by the major countries of the world, by the international institutions such as the IMFwhose chief executive has been very forthright on the subjectby the business groups such as the CBI and the Institute of Directors, the Bank of England and many more.
Kelvin Hopkins (Luton, North) (Lab): I agree with the idea of a fiscal stimulus, although I would go further and make it bigger. I am puzzled, however, by why the Government have chosen to put money into reducing VAT. That £12.5 billion could have been put directly into the pockets of state pensioners and of families with children, and directly into infrastructure investment that would create jobs now. Would not that have been a much more efficient way to counter the recession?
Mr. Timms: We have done every one of the things that my hon. Friend has just listed, including, for example, the £60 payment to pensioners in the new year. We considered a wide range of options for the character of the stimulus. We wanted a measure that would help everyone, including millions of households that pay no direct tax at all. I point out to the hon. Member for Twickenham (Dr. Cable) that changing income tax would not help at all, because some people, such as pensioners, do not pay it. We wanted a much needed extra injection of spending into the economy right now. An effective stimulus needs also to be temporary.
This statutory instrument provides the much-needed stimulus by reducing the standard rate of VAT for just over a year with effect from 1 December. This temporary reduction is equivalent to the Government giving back some £12.5 billion to consumers to boost the economy. The Treasury forecast of the impact makes the cautious assumption that around half of the extra money will be put back into the economy while the rest is saved or spent on other goods.
As my hon. Friend asks, why did we choose VAT rather than other taxes? As we intended, we have already seen retailers pass on the reduction in the lead up to Christmas. I am delighted to hear that Randalls in
Uxbridge implemented the reduction the following day, and others did so just ahead of its introduction, with cheaper goods and services. It is too early of course to make an assessment of the impact, but I did notice that the director of selling operations for John Lewis spoke of
a clear increase in big ticket purchases since the VAT reduction.
Michael Fabricant (Lichfield) (Con): As the Minister will be aware, the managing director of John Lewis, Andy Street, has said that the 2.5 per cent. discount simply meant a delay in high street purchases that was made up the following week. If the Minister had continued the quote from the selling director, it was clear that he was making the same point.
Mr. Timms: But the key point is that a typical family spends £900 per month on VATable goods, and for them, if the reduction is fully passed on, the tax cut means that their spending last month would leave them an additional £20 at the end of this month, and every month to the end of this year, oras my hon. Friend the Member for Warwick and Leamington (Mr. Plaskitt) saidalmost £300 in total. That is a fair way to deliver the stimulus because lower income households spend a larger share of their income on VAT than higher income households. It is particularly helpful for families on a tight budget and it will provide the vital stimulus that we need.
Rob Marris: I shall join the Government in the Lobby tonight, but I am concerned about the increase in excise duty on alcohol, which will adversely affect Marstons brewery in my constituency. I am also concerned about the constitutional propriety of putting up taxes such as excise duty without this Houses voting on them first. What is the constitutional legal position on that?
Mr. Timms: That is a matter for every household to decide. It depends on the situation in which the household finds itself. I am certain that a very large number of people will choose to spend the £20 extra that they will have, on average, at the end of the month, but others will choose to save it and to rebuild their household finances. Of course, it is perfectly appropriate for them to do so.
I want to respond to some of the points that we have heard in the debate. Unsurprisingly, we have heard some comments about Germany, which the hon. Member for Runnymede and Weybridge (Mr. Hammond) mentioned. The key is to look at what the German Government are actually doing. Germany has borrowings that are significantly greater than those of the UK. On 5 November, Germany announced a €32 billion fiscal stimulusa larger stimulus, proportionately, than that in the UK. I refer the hon. Gentleman and others to what the German Chancellor said last week:
We support the view of the
Commission that we need to provide 1.5 per cent. of GDP for the stimulus package to strengthen the economy.
On Monday, the German Economy Minister said that Germany had an obligation to introduce new measures to stimulate its economy. He wants Germany to introduce tax measures totalling €25 billion next year. The chief economist of DekaBank, Ulrich Kater, made the point that reducing VAT would have been more efficient than the methods that have been adopted. In Germany, the key is to look beyond some of the words to see the decisions that are being made.
Dr. Cable: I thank the Minister for giving me 100 seconds to respond to a long and complex debate. I shall not say a great deal about his contribution. He got off to a good start by reminding us about the 1997 fiscal framework and suggested to me that chutzpah is a necessary qualification for being a Treasury Minister, which he has now done twice.
There were two major contributions to the debate, and I just want to respond to the right hon. Member for Birkenhead (Mr. Field) and the Conservative spokesman, who brought up two major issues. First, of course this is all overshadowed by the banking system and the lack of credit, and that is what we have to focus on. I have spoken about that volubly and at length, so I totally agree with that. The subject of what exactly we should do is more controversial. The Conservative proposal for guaranteed credit may have an important role, but, as I pointed out on Monday, if it is to work it effectively means the nationalisation of credit. That, of course, would have major public finance implications that I do not think they have yet thought through.
The other major issue is whether we believe that any fiscal stimulus is necessary. I am perfectly willing to entertain the dangerous idea that the hon. Member for Runnymede and Weybridge (Mr. Hammond) and the right hon. Member for Birkenhead may be right and that such a stimulus may not work. If that is so, however, they should be in Washington, not lecturing us here.
What is being proposed is just the faintest echo of what is happening throughout the western world, and especially in the US. The American Congress and the new US Administration are preparing a stimulus that is about 30 times as big as the British stimulus, in a context of even weaker public finances than ours. If it does not work, the consequences for the western economies will be catastrophic. As I said