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The Conservative party has an obligation to be straight with voters and with the House. The shadow Business Secretary can ooze warm reassurance with the best of them, but one has only to look at the shadow Chancellor to see that it is only a short way from guile to guilt. The Leader of the Opposition described the Government’s record as being written in red ink. When will he show us the colour of his party’s money? So far, all the public have been offered is counterfeit currency. The Conservatives have pledged to prioritise cutting Government debt ahead of tax cuts and to restrain Government spending,
but the Opposition will not come clean about the huge cuts that would be needed if they were to achieve their ambitions. They have given headline-grabbing examples such as regional assembly abolition and senior public servant pay restraint, but those savings would barely register on the spending Richter scale. More ominously, they propose cutting tax credits for middle-income families and the pay of nurses and teachers. Those people are at the economy’s centre of gravity: squeeze them and we squeeze the whole economy, as well as damaging vital public services.
Mr. Philip Hammond: I am listening carefully to the right hon. Gentleman. He knows that the figures that the Chancellor set out in his Budget last week, after taking into account the increases in benefits and debt service costs, equate to a minus 2.3 per cent. rate of growth in departmental expenditure budgets—a 2.3 per cent. real-terms cut in departmental expenditure budgets. The right hon. Member for Neath (Mr. Hain) may have an inside track, however, so does he know where the Government will allocate those unprecedented cuts in departmental budgets?
Mr. Hain: One thing that is absolutely clear is that if the hon. Gentleman ever got his hands on the Chief Secretary to the Treasury’s job, the cuts would be savage—way beyond the efficiency savings and restraint that will have to be implemented.
The Tories talk a good fight on debt, but, on public spending, would they revert to Margaret Thatcher’s policy and abandon Labour’s pledge to restore the link between the basic state pension and earnings? Would they reduce the pension credit that helps the poorest pensioners? Would they raise the age at which people qualify for free prescriptions? Would they bring in charges for public services, such as visits to the doctor, or lift the ceiling on student fees in universities and colleges? Would they scrap teaching assistants in schools? On debt, if the Tories were to match their rhetoric with their actions, the cuts for low and middle-income Britain would have to be savage.
The lobby group Reform has proposed a £30 billion cut in Government spending next year to give the Tories’ plans a flying start, and £30 billion, by the way, corresponds to 2 per cent. of GDP—exactly the amount by which the Tories cut Government borrowing in their 1981 Budget, which saw unemployment soar above 3 million and stay there for four years. So, perhaps it is not such a far-fetched figure if we want to divine the Tories’ true intentions.
Let us look at Reform’s list: a 10 per cent. pay cut for all doctors and NHS managers, with £1 billion saved; scrapping winter fuel payments for pensioners and ending free TV licences for the over-75s, with another £3 billion saved; abolishing universal child benefit and targeting it on low-income families, saving £7 billion; and raising the interest rate on student loans to market rates, with another £1 billion saved. Pretty soon, we will be talking serious money, and the group has not even started scrapping pay deals for local government workers or cutting public sector pensions, as the Conservatives have promised.
The media have given the Tories a really easy ride, so the Conservative leader will not say where they will cut public spending, and they will not come clean on taxes.
So, let us look at their record in office for a few clues. The first Budget of Margaret Thatcher’s Administration saw Geoffrey Howe almost double VAT from 8 to 15 per cent. to pay for income tax cuts. The first Budget of John Major’s Government saw Norman Lamont raise VAT again, to 17.5 per cent. to pay for the poll tax. Can the shadow Chancellor deny that he is considering raising VAT to 20 per cent. if they win next time to cut Government debt and pay for the cuts in inheritance and income taxes that he has promised? Can he rule out dropping zero rating for food, fares and children’s clothing?
The Tories have cultivated the image of “compassionate Conservatism”. We heard that phrase first from George Bush, and we know how destructive his policies were. At Davos, the Conservative leader promised “capitalism with a conscience”, but it would be with a guilty conscience. Two days before the Budget, a Financial Times editorial noted that tightening fiscal policy now might deepen the recession and worsen the subsequent fiscal outcome—what it termed “futile masochism”. Yet, what does the Leader of the Opposition want? He wants exactly such spending restraint. And when does he want it? Now. That is what he said in his reply to the Budget. By driving the economy into depression, the Cameron cuts would shrink tax revenues and swell social security bills. The outcome would be the opposite of what he has promised, meaning even higher Government borrowing, yet more national debt and mass misery for millions sacrificed on the altar of right-wing Tory dogma.
Despite that, the media in general and, sadly, the BBC in particular have dutifully followed the Leader of the Opposition like lapdogs. They treat all Government borrowing as bad, irrespective of circumstances, and hardly bother to examine the terrible consequences for jobs and living standards of the Tory alternative. It is as if the whole economic debate were being filtered through a single, false prism of debt, and that is quite absurd.
Yes, this Budget is a tough one, but it contains the seeds of hope. The Conservative alternative would not simply be tough, it would be disastrous, sowing the seeds of abject despair for millions and driving Britain backwards.
6.6 pm
Dr. Vincent Cable (Twickenham) (LD): We are dealing in this debate with two overlapping crises, both of them very serious. First, there is the slump, which is causing large-scale unemployment and requires activism at Government level, not just through fiscal policy but, certainly, including it; and, secondly, there is the looming and truly enormous problem of the budget deficit, which is on a scale—revealed last week—that we cannot treat as anything other than critical. I regret that the right hon. Member for Neath (Mr. Hain), many of whose early comments I agreed with, did not take sufficient account of the seriousness of that problem and of the choices that we will all have to face because of it.
I shall begin with the unemployment situation, which is where the debate started. Then, I shall proceed to wider economic matters, leading to my conclusion. We face the reality of unemployment increasing by 100,000 a month, and the prospect, on a fairly conservative forecast, that one in 10 of the labour force will be out of work by the end of the year. The situation will be
concentrated in certain areas. This lunchtime I had a meeting with construction industry representatives, and they think that 500,000 of their employees will be out of work by the end of this year. That will bear particularly heavily on young people. I—like colleagues from all parts of the House, I am sure—was recently in discussions with local universities, and, in the wake of the milk round, many estimate that, this year, one in two of their graduates will not have jobs to go to. A lot of pain will be concentrated among them, as well as among less well educated young people.
It is fair to say that the Budget contained a series of measures that, in themselves, were perfectly desirable and sensible, such as attempts to stimulate the economy and, therefore, employment in different ways. The problem with many of the specific measures, however, was their extremely small impact. I shall touch on two measures. There is the proposal for investment allowances, which are eminently sensible, a response to requests from the business community and welcome in themselves. There was also a useful advance on trade credit insurance, but the problem is that it comes very late in the day—three months after the French introduced a similar scheme—and trade insurers now tell us that they will not implement the top-ups under the scheme. They are not satisfied with the data—the annual accounts of companies—that are available to them, so there is continued credit restriction in that field.
The problem with the Budget, faced with rising unemployment and the need to do something about it, can be summed up by what the Government did on social housing. With a bit of a fanfare, they announced £100 million for council housing, but, when we break that down, it means 600 to 700 houses throughout Britain, or two per constituency. One might say that that argument is unfair, because the announcement comes on top of the pre-Budget report, which, if fully implemented, would probably give us 6,000 to 7,000 houses throughout Britain; however, given the scale of the problem, the contraction of the construction industry and the 1.7 million people on home waiting lists, we are talking about small drops in large oceans.
We recognise the financial constraints that the Government are operating under, and that if resources were to be channelled into job creation schemes, it would have to be done by stopping something else. We have therefore argued that the Government should stop the cut in value added tax. We understand why they did it—they were in a panic in the autumn and had to do something quickly—but it soon became apparent that it was not working. It was not feeding through into employment—a lot of it was ending up absorbed in retail margins. Now, we can reflect on that evidence, stop the cut and redirect that funding into focused programmes. Social housing would be the most important area, and it could be done quickly because the institutions are already available. Amplifying the home insulation programme would provide environmental benefits, as well as jobs and the creation of an asset.
David T.C. Davies (Monmouth) (Con): I am listening to the hon. Gentleman with interest. He is outlining certain things that his party would like to do, but he is not saying whether the total amount of borrowing and selling of gilts would be higher or lower if it were in office.
Dr. Cable: As I said, we are suggesting cancelling the VAT cut to provide funding for social investment. There is also an argument for maintaining the flow of public investment through the cycle; that is a separate issue, and we can go on to discuss its implications.
What is absolutely crucial is what is happening in the banking system. The banking system is the elephant in the room. The measures that the Government introduced are of a minuscule proportion by comparison with the scale of lending decisions by the now semi-nationalised banks. Just to remind ourselves—I have often said this in the past—the semi-nationalised Royal Bank of Scotland has a balance sheet one and a half times bigger than the British economy. It follows that any of its lending decisions far outweigh the fiscal stimulus, or whatever the Government call it, that originated in the Budget.
Two worrying aspects of the controversy regarding the banking system arose during Treasury questions today. First, there is a complete lack of clarity about the potential losses resulting from Government intervention in the banking system. We fully supported that intervention, which had to happen. We do not agree with some of the more recent developments, such as the asset protection scheme, but the intervention last October to put fresh capital into the banks was absolutely essential. However, we are now getting wildly different estimates of the potential losses. The Government have said—it was confirmed in Treasury questions—that the estimate was at the top end, in the order of 3 per cent. of GDP, or about £50 billion. The IMF, even with its qualified and reduced numbers, is talking about £130 billion; £85 billion is a large margin of error, by any estimate. We need some thoughtful figures from the Treasury about what the implications of that would be. Who would bear those losses? How much would accrue to the Treasury? How much would it affect its debt and deficit estimates in the years ahead? There is an enormous black hole over and above the deficits and debts that have already been predicted, and we need to think about that.
The second, more immediate worry is the Government’s decision—apparently—to proceed with the rapid sale of Northern Rock. The Chancellor said in Treasury questions that he was not in any hurry, but if that is so, why is Credit Suisse going round the City trying to market it? The Government are clearly planning a sale of the bank. I have no objection in principle to its re-privatisation—we argued from the outset that it was a temporary nationalisation—but to sell it now, in depressed asset markets, is absolutely criminal. It means that the taxpayer will get a very poor return, and there will be very large and unnecessary losses. All the experience that we have learned from other countries that have been through this process, such as Sweden and Israel, is that if Governments show patience and sell off their good banking institutions at the end of a crisis, they can realise many of the losses that they have incurred on the taxpayer’s behalf. The Government must not rush ahead with this sale. Quite apart from the financial aspects, Northern Rock, after a somewhat uncertain start when it thought that its job was simply to run down its books, is now lending—it is one of the few banks that seems willing to do so in otherwise depressed markets. It seems beyond comprehension that they should be considering selling it off when it is doing something useful. I hope that the Chief Secretary will be able to elaborate on what the Chancellor said, because the hints that are coming out are very worrying.
Let me move on to the core issue, which is the scale of the deficit—the 30 per cent. of GDP borrowing requirement and the 10 per cent.-plus of GDP budget deficit going forward. That is bad enough in itself, but we know from the numbers that have emerged that it is unlikely to be reduced in any foreseeable time scale unless we make heroic assumptions about the rate of economic growth. I have debated with the Chief Secretary in the media and elsewhere how implausible some of us think these assumptions are. I think that her view—I do not know if it is the Government’s—is that there will be a bounce-back in the economy in much the same way as happened in the last two recessions under the Conservative Government. However, there is a fundamental difference, because in those two recessions, unlike the present one, the banking system was not burnt out. We are now dealing with wrecked financial institutions, which means that we cannot assume that the economy will return, as it would normally, to that kind of growth rate.
Dr. Gibson: The hon. Gentleman is painting a gloomy picture, but there are rays of sunshine, are there not? In the insurance industry, for example, he will have seen that Aviva, the parent company of Norwich Union, is boasting that people trust its products and have stuck with them; indeed, savings have increased, and its figures look good at this point. We can be miserable and say that we do not know how things will improve, but that is happening in certain places. Because of good management and good structures, even a FTSE company such as Aviva can survive.
Dr. Cable: That sounds like a very good story, but it does not have anything to do with the revival of economic growth, which is what we are discussing.
There are some positive things in the public sector figures; following the hon. Gentleman’s theme, I will be positive, as perhaps I have been too negative. One very positive statistic, which the Government have not made enough of, is that this year the share of taxation in GDP has fallen to the lowest level for half a century. I do not know whether the Government are aware of this, but they have achieved something that Mrs. Thatcher would have given her right arm for. They have cut the tax burden on the economy to an extraordinarily low level: that may not have been planned for, but it is a real achievement. However, there are two stings in the tail.
First, while the tax burden in the economy has been dramatically cut, expenditure has not. Whereas the tax burden is at the lowest level since 1960, when Harold Macmillan was Prime Minister, expenditure as a share of the economy is now 48 per cent., as opposed to 35 per cent. for tax. That is the highest level since the Falklands war, when we previously had a peak in this respect. Clearly, we will have a symbolic breakthrough when we hit 50 per cent. of GDP as expenditure in the next year or so.
The other major explanation is that it has not been done in a planned way and has happened simply because of the collapse in Government revenue. However, I would say in the Government’s defence that this is a long-standing problem; it did not just happen over the past 10 years. We have an economy that has, over the past quarter of a century, become seriously over-dependent on income from the City of London and from the housing market. Over the past five years, when some of
us have been warning about the vulnerability of the British economy, the Government relied on those two sources alone for half of all the increase in their revenue. Of course, they have now evaporated.
Mr. Frank Field: The hon. Gentleman says that the level of expenditure is at about 48 per cent. Did he see table C7 in the Red Book, which shows that even when the Government hope that the economy will be all singing and dancing again, they only get tax revenue back up to just over 38 per cent., so the structural imbalance that he is talking about is projected forward by the Government?
Dr. Cable: Indeed, and depending on one’s point of view, that is a source of celebration or of enormous anxiety. I believe that it is a source of anxiety, given the difficulties of funding it.
The other reason why this problem is not just a short-term one—it is easy to blame the Government for being complacent, but it goes back much further—is clear from the numbers emerging from the Budget and the Red Book. The underlying weakness of the public finances has been clear for many years. If we go back to the beginning of the 1990s, the net worth of the British Government’s stock of assets was about 80 per cent. of GDP. It then fell to about 20 per cent. in 1997, as the Government essentially kept the deficit down through asset sales. According to the Government’s new projections, the British state will go into negative net worth in two years. In simple, common-sense terms, that means that if all aspects of the British Government were put on the market—all their land, property and equipment—they would have to pay somebody to take them away. That suggests the seriousness of the problem that we face.
The implications of that are serious. Harsh choices will have to be made about both taxation and public spending. We have taken the view that the burden of those hard choices will have to fall on public expenditure. I shall develop that point in a few moments, but in both cases the choices will be very difficult. There will be tax increase proposals, some of which, such as the fuel duty increase, we will not oppose given the extremity of the situation. In such cases, measures need to be taken to protect people who are particularly vulnerable. That is why we will again propose a rural exemption based on the EU rules, to help people in remote rural areas who will be damaged by the situation. None the less, we will not oppose the principle of such increases.
The big tax controversy that has emerged in the debate is the 50 per cent. tax rate. Perhaps I should say that I am exceptionally well qualified to talk about that, having argued both sides of the case in recent years. Having had that experience, I am reasonably well equipped with the arguments. I and my colleagues have no objection in principle to high rates of taxation on very wealthy people to fund a more equitable society. That seems absolutely right. The problem is that such things will stick only if the many tax loopholes are dealt with.
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