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The Government have tried to deal with pension tax relief, although that has created a more complicated system. The big loophole that is outstanding is due to the enormous disparity between tax on earned income and tax on capital gains. We have made the point over and over again that we should return to the wise system introduced by Mrs. Thatcher and Nigel Lawson, when
the two were equalised. There is now a yawning gap between the two, and anybody in the City approaching their bosses for a discussion on bonuses will immediately ask, Whats the point of my paying 50 per cent tax on my marginal income when I can convert it into stock and pay 18 per cent. on any capital gains that accrue as a result of the recovery of the stock market? That is obvious, and they probably do not even need an army of tax accountants to help them do it.
I understand, although I was not there, that in the Treasury Committee this morning, Treasury officials conceded that as a result of such continuing tax loopholes, the Government would be able to collect only something in the order of 30 per cent. of the potential revenue from the income tax increase. Even their own estimates take no account whatever of the decline in indirect taxation that will be the result of the change. Our view is that the Government have missed a major opportunity to have a much more broadly based, but more equitable, tax system. They could indeed have a higher tax take from high-income groups, but with an optimum maximum tax rate of probably about 40 per cent, provided that they closed all the loopholes associated with it, whether on pension tax relief or capital gains tax. In that way, they would raise substantially more revenue, which could be used to lift people on low incomes out of income tax altogether. That is our broad approach to the problem.
Mr. Edward Timpson (Crewe and Nantwich) (Con): Is not the tax rise announced in the Budget about which we should be most concerned the rise in national insurance contributions, and the fact that anyone earning £20,000 or more will be worse off as a result?
Dr. Cable: In many ways, that is consistent with what I have said about the need to lift people out of income tax. National insurance on employees is a form of income tax, and we can debate whether we should operate through income tax itself or through national insurance. We certainly want any revenue raised from high-income groups to be used to reduce the tax burden. We have argued that that should be done through income tax, and no doubt the hon. Gentleman would argue that it should be done by reducing national insurance contributions for people on low pay.
It is clear that there will be cuts in public spending in this Budget. That point has been accepted. There have been exchanges at the Dispatch Box about the £5 billion a year additional efficiency savings, and I ask the obvious question why, if the Government knew that there were inefficiencies and that money could be saved, they have tolerated them. If they are genuine efficiency savings, why are they necessary? They are not efficiency savingswe know that they are just a camouflage for real cuts, 60 per cent. of which, incidentally, will be in the national health service. That is clearly part of the plan.
The other big cuts that are coming down the track are in public investment. That suggests to us a need to approach the public spending crisis in a much more thoughtful way. The danger is that Governments of any party will resort to the traditional reflex action when faced with a public expenditure crisis. They first cut money to local government, because there is usually another party running it and it is less painful to central Government. The next step is to cut public investment,
because that loss is usually borne by the private sector. Then there is the salami-slicing approach, whereby they choose a growth rate cut and let it work its way through its system, usually resulting in cuts to front-line services.
That is why we are arguing, rather differently from the right hon. Member for Neath, that we need to examine big chunks of public expenditure, some of which are popular and attractive, that are not sustainable under the present conditions. I should perhaps own up to the fact that I was at the launch of the reform document that he referred to critically. I disagreed with many of the specific proposals in it, but it did a valuable service in getting us away from all the waffle about the need for more austerity and general reductions in spending, and saying, Well, if youre going to make cuts, these are some of the things that you should be looking at. Perhaps, having considered cuts to a lot of the things that he mentioned, we should not pursue them, but it was right for the report to point out the areas on which we need to focus.
Mr. Hain: I am very interested in what the hon. Gentleman is saying. Like many other people in the country, I follow what he says on this subject with a great interest. However, he seems to be opening the door to the Liberal Democrats following exactly the policy of the Conservativesswingeing cuts in some of our most essential areas.
Dr. Cable: I hope that we would not be in that position, but we can avoid that only if we are explicit about these things. I hope that the Conservatives will be equally explicit, and that is the debate that we need to have. There has been some encouraging forward movement in the past few days, such as the suggestion that defence programmes that had not previously been mentioned are suddenly going to be cut, so progress is being made on all sides.
Among the matters that we have highlightedI am sure that there must be other relevant mattersis one that I raised in a previous debate, the future of public sector pensions. I was shot down from all sides, but then the following day I noticed that the Leader of the Opposition took up the same theme. There is a growing consensus that we cannot continue with the existing arrangements. They will have to be dealt with, and it will be difficult and controversial.
We have made similar arguments about tax credits, about which there has been a lot of discussion in the Chamber. I recognise that when they were introduced, they were an enlightened step forward and one of the Prime Ministers genuine creations, and one should not disparage them. They have been extremely complicated and faulty in their administration, but I do not deny the vision behind them. However, a system costing £20 billion that includes people with incomes of up to £50,000 cannot be sustained on its present scale, and we must consider how it can be cut back.
Mr. John Hayes (South Holland and The Deepings) (Con):
I am interested in the hon. Gentlemans approach, with its asymmetrical reduction in public expenditure, but it assumes that public spending is mostly good and that there is no waste or inefficiency across the board. If
it does not make that assumption, focusing on some matters and not on others will leave an immense amount of inefficiency and waste unexamined and untouched.
Dr. Cable: The approach that I suggest is rather superior. It is so easy to hide behind generalised waste. Throughout my fairly long political life, Opposition parties in local government and national Government have campaigned on cutting waste, which is difficult. Perhaps the hon. Gentleman would like to consider his partys history. In the 1927 or 1928 election, its members all campaigned as Conservatives and as waste reduction candidates. We have been here before. It is a way of disguising real choices. My approach may propose impossible dilemmas in some cases, but I believe that it is superior.
Stephen Hammond: The hon. Gentleman speaks about real choices and a thoughtful and non-waffly approach. The Liberal Democrat party has a policy of getting 50 per cent. in higher education, while scrapping top-up fees. Will the hon. Gentleman abolish top-up fees?
Dr. Cable: I have argued that we cannot continue with the commitment to 50 per cent. in higher education. Whatever the arrangements for the fee-paying structure, the numbers are not feasible and all parties must retreat from the commitment to one half of the young population going through higher education. That is simply not sustainable. I will happily add that to my list.
The defence budget is another subject that has opened up interestingly in the past few days. For example, I note that one of Mr. Blairs former colleagues has opened up the future of nuclear deterrent expenditure and there are issues about different weapons systems. We must have that debate.
Mr. David Gauke (South-West Hertfordshire) (Con): On the point that my hon. Friend the Member for Wimbledon (Stephen Hammond) made, it is Liberal Democrat policy to scrap top-up fees. Does that remain the policy? If we are to be credible about reducing the burdens on the state, additional items of expenditure need to be tackled.
Dr. Cable: It is a commitment, but its affordability depends on the number of people who qualify. There is an argument about how that number is fixed, and we will address that. It cannot be done on the basis of unrestricted admission and low standards.
Mr. Frank Field: I am grateful to the hon. Gentleman for allowing me to intervene and I think that the country is grateful to him for starting the debate about how we balance our books. Let us consider the simple arithmetic: the Government estimate that, by 2013-14, we will raise only 38 per cent. of national income through taxI say only, but it is a lot for our constituentsyet we are spending 48 per cent. The review must go way beyond even the hon. Gentlemans list if we are serious about balancing the books and protecting our currency so that perhaps the Government succeed in unloading the shed loads of debt.
In conclusion, I want to refer to the process whereby we pursue matters, as opposed to substance and specific items. In the past, we have said that there needs to be an advance in the discussion of Government budgets and fiscal policy, comparable with that which made the Bank of England independent. For 20 years, Governments in this country and elsewhere struggled with inflation and having an inflation anchor. The concept of independent central banks has been implemented and will be important in the UK as the economy recovers and we get back to inflation. We have nothing comparable for fiscal policy apart from the rules, which have been widely disregarded. Part of the answer, as the Liberal Democrats argued five years ago, is an Ofsted-type system, which has oversight of fiscal rules and their implementation. The Conservatives have devised a variant of that, which is interesting in its slightly different way. However, the House is missing in all that.
It is striking that we will move from the debate to weeks of intensive discussion of tax proposals in infinite detail, but, apart from the Public Accounts Committee, which the hon. Member for Gainsborough (Mr. Leigh) chairs, there is no systematic discussion in the House of public spending, unless it happens retrospectively. We must introduce a process whereby hon. Members hold a mature debate on the subject and preferably approve or disapprove public expenditure. That is currently missing. It is partly a question of debating points and identifying the items, but we must all recognise that we have a responsibility here to start focusing on that debate, which is currently non-existent.
Mr. Tom Clarke (Coatbridge, Chryston and Bellshill) (Lab): It is a pleasure to follow the hon. Member for Twickenham (Dr. Cable). At least there is some consistency in his comments about public expenditure and the commanding heights of the economy. It leads me to conclude that our Government have acted wisely to deal with the banks.
It pains me to criticise the right hon. Member for Maidenhead (Mrs. May) because she presented her case with some charm, if little conviction. There was a time when we had 3 million unemployed under the Conservative Government. We were told then that
the ladys not for turning.
Today, it was a case of the ladys not for telling. We did not hear much more about the Oppositions policies. [Interruption.] Would the hon. Member for Bournemouth, East (Mr. Ellwood) like me to give way, or do Conservative Members intend simply to sit and heckle, as they did disgracefully while my right hon. Friend the Member for Neath (Mr. Hain) was speaking?
Mr. Ellwood: The right hon. Gentleman knows that I have a lot of respect for him, but I am concerned because, as has been said time and again, the debate is about the BudgetLabours Budget. It is not about Conservative plans. If Labour Members want to hear about Conservative plans, they should call the election.
Mr. Clarke: I well understand why the hon. Gentleman does not want to speak about Conservative plans. However, in our democratic assembly, we pay the Leader of the Opposition not only to criticise the Government constructively, but to tell us and the British people the alternatives that he offers. Today, we are again bereft of that.
I want to talk about the Budget and to thank my right hon. Friend the Chancellor for some of the specific measures that are proposed at a time of international crisis. For example, £100 will be added to every disabled childs trust fund, with an additional £200 for the most severely disabled. The great merit of that is that we know that the money will go to disabled children and their families, unlike the £34 million that went to Scotlandwe know not where it is now.
Of course, I want to speak about the downturn, which has dominated our thinking. My right hon. Friend the Member for Neath was rightI am glad that he said itthat even the BBC refers to Labours recession. Only a few weeks ago, the G20 was held in London. Countries such as China, America, France, India, Brazil and many more were represented. Were those representatives there to talk about Labours recession, or did they accept the case for dealing with the global downturn, which means working together and not splitting hairs in the way in which we have done again in todays debate?
The reality, as the Chancellor told us at an earlier stage, is that because of the downturn, 90 million people will fall below the poverty line. We are entitled to deal with that, as well as responding to the views of our constituents. It is no comfort to the British people during this global downturn to look at Germany, Ireland and Iceland, which were being held up as beacons of economic progress, the latter particularly in Scotland. Where are they now? I wish them no ill, but they are facing the realities of the global downturn, and so should we be.
In my constituency people want to know, quite rightly, how the Budget relates to them. They do so in the knowledge that we have had a Conservative Government in most peoples lifetimethat is certainly true for everybody in the Chamber and for most of my constituents. What happened? There were 3 million unemployed and the county of Lanarkshire, including Ravenscraig, Gartcosh and Caterpillar tractors, was devastated. Small firm after small firm seeking to serve what were once great engineering and shipbuilding industries found that their talents, ability and commitment were regarded as a price worth paying. I do not believe that unemployment is ever a price worth paying, and I am glad that such a view is certainly not central among my colleagues on the Front Bench.
My mind went back in the Budget speech to some earlier Budgets, when I had been sitting beside my late friend and constituency neighbour, John Smith. He would say to me that he judged a Budget by how it impacted on an ordinary person in his constituency. That is how we ought to be talking about the important initiatives contained in this years Budget.
On housing, I welcome the extra £500 million in spending, including the extra £100 million for local authorities to build more energy-efficient homes. That is a progressive step. On child benefit, the extra £20 in child tax credit will benefit more than 12,000 families in Coatbridge, Chryston and Bellshill, and I welcome it.
The elderly are pivotal to the policies of this Government, as we seek to take people out of poverty. The winter fuel payment, which has done more than anything else to alleviate fuel poverty in my constituency, is to stay at its new higher rate. However, it is time for the energy companiesthe electricity and gas suppliersto respond to the Governments concerns and the actions that we have taken to remove fuel poverty. There is also statutory redundancy pay in the Budget for those who are unfortunate enough to be made redundant. Extra help will now be available to them, with the payment rising from £350 to £380.
We are being asked in the light of this crisis what strategy our Labour Government have. They have made that clear by their very actions. It was a fellow Welsh MP, as my right hon. Friend the Member for Neath will recall, who asked, Why look in the crystal ball when you can read it in the book? Just as we know about the Oppositions policies, which we witnessed when they were in government, let us look at what was delivered this week, among many other initiatives: investments in our future; £1.64 billion of tax relief for business investment; £600 million of extra money for pensioners; £590 million of help for the unemployed; £400 million for the strategic investment fund for business; and £380 million in measures to combat climate change. That hardly sounds to me like a Government who are doing nothing or one who are simply being told that they are wrong, with no ideas whatever coming forward to deal with the current credit crisis.
Christopher Fraser: On the right hon. Gentlemans point about investment in business, does he accept that the inability to secure such investment is ensuring that businesses lay off staff, creating more unemployment as a result?
Mr. Clarke: The business people whom I meet in my constituency are well informed enough to know that there are problems internationally, as I have said. However, they also know that if, for example, this weekends speech by the Leader of the OppositionI listened for what their policies were; he talked about austeritymeans cuts in public expenditure on housing, education, local government, transport and the rest, it will be the small firms above all that will suffer. Indeed, that was the Conservatives record when they were in office. I will give way if any hon. Gentleman wants to intervene.
Mr. Clarke: Yes, I will, but I am making my speech in my own way. The hon. Gentleman was asked specific questions on Newsnight that he could not answer. I give way so that he might try to answer them now.
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