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“Everybody welcomes increases in public spending, but they are only worth having provided...they are affordable over the cycle and that the higher spending in the long run does not end up lowering the long-run growth rate...Control of public spending is very difficult to manage and easy to lose. It takes only a small flicker over the business cycle...and public spending becomes extremely difficult to control.
The problem is that Labour is in a state of complete denial about the existence of cycles. The Government say that they have put an end to boom and bust and that somehow they are not in a business cycle.”—[ Official Report, 27 March 2000; Vol. 347, c. 96.]
What I find so interesting about those remarks is not that I said them, but that I could have read them out for any Labour Budget, more or less over the past decade, and they are as applicable now as they were when I made them in 2000.
Of course, we have not just had a small flicker over the cycle; we have had a massive boom in spending, and we are now faced with an unprecedented squeeze. The question we have to address is whether this Finance Bill goes remotely far enough towards providing it. The Government are still, if the truth be told, in a state of denial about the scale of that needed squeeze and its origins. When, only a few days ago in the Treasury Committee, I asked the Chancellor whether he could confirm that the Red Book announces Labour plans to cut public expenditure in real terms, he seemed in a state of denial about it. He would not answer the question. But the Red Book does indeed confirm real-terms cuts in public expenditure over the planning period if Labour is elected. Still, the Red Book fails to provide the information directly; it requires quite a bit of addition to obtain the total managed expenditure line for the forward years, but it is in the Red Book. The Government have announced cuts in real terms in public spending.
Just to be clear, this Budget and the Finance Bill are not making cuts in previously announced Labour increases; the Red Book is announcing real-terms cuts after taking
account of inflation. This is a profound shift in Government economic policy. In fact, I now think it is the biggest U-turn in fiscal policy since the IMF imposed cuts in 1976.
Mr. Newmark: Does my hon. Friend share my concern that these real cuts, about which in many ways the Government seem to be in denial, will not focus on areas where we could save billions of pounds of taxpayers’ money, such as ID cards, which the Government seem keen on pursuing, but may well eat into the front-line services that the Government continue to accuse us of cutting into?
Mr. Tyrie: That is a very interesting point. I had no idea that my hon. Friend was going to raise it, but if he turns to page 35 of the Red Book, if he has one to hand, he will see bar chart 2.2, in which he will find a row of four white bars—empty. Those empty bars represent a series of spending measures—possibly—or tax rises that are required to balance the cyclically adjusted current Budget, which the Government are not prepared to talk about or provide any flesh for. Indeed, those are the very numbers with which a number of Labour Members have been challenging the Conservatives to come forward as part of this debate.
Mr. Newmark: My hon. Friend is probably reflecting the point I was going to make. I appreciate that we are not allowed to use visual aids, Madam Deputy Speaker, but the empty bars, which anyone can see in the Red Book, perhaps reflect the empty detail with which the Government are pursuing the future cuts that they keep accusing us of—should they ever be re-elected, which I doubt.
Mr. Tyrie: The truth is that all the tough stuff is not in this Finance Bill; it has all been put by until after the election, on the grounds that if by some miracle a Labour Government are handling it, they will worry about it when it comes; otherwise they will leave it for some other poor party to sort out, which will be us, I fear. It is very much a repetition of what we had in the period 1974 to 1979.
The cuts in public expenditure implied by what I have just described, the rises in taxation, and the rise in the debt service burden, and the pain that all three will cause, are not wholly Labour’s fault, but they are largely Labour’s fault. That is quite simply because Labour ran a huge deficit through the boom phase of the cycle. That makes the bust far more painful than it need have been. That is the grim reality behind another statistic, hidden in the Red Book, about which there has already been quite a bit of debate this afternoon: nearly 80 per cent. of the deficit is structural, according to the Government’s own figures. That is to say, on the Government’s own estimate, as the economy recovers, only 20 per cent. of the deficit will be filled as spare capacity in the economy is taken up. The remainder will have to be accounted for by measures that the Government put in place, and which have turned out, over the cycle, to be unaffordable.
What the country desperately needed from the Budget and its measures was honesty about the scale of the crisis. If the Chancellor had been prepared to admit that the Government underestimated the dangers of coming out with the “end to boom and bust” rhetoric; if he had been straightforward about the size of the
structural deficit to which I alluded; and if he had been straightforward about the real-terms cuts in public expenditure that he believes are necessary but was not prepared to talk about after the Budget, he would have begun to rebuild public trust in economic policy. We badly need a dose of the truth if we are to restore public confidence. Without that, there will be no lasting recovery.
The truth is that there never was any substance to the so-called fiscal rules. They collapsed at the first sound of fiscal gunfire. There never was much substance behind “prudence with a purpose”—remember that phrase? The plan in 1997 was probably always for a spending binge at the first opportunity. There never was much substance behind “spending to invest”—remember that phrase? The cuts in capital spending announced in the Budget, and the implications for the Finance Bill, tell their own story on that.
There is no substance to the fig leaf of the so-called temporary operating rule. I hope that you will permit me to quote from the Treasury Committee report produced this morning, Madam Deputy Speaker, since it is flagged as a relevant document to the debate. It is a Committee on which I sit, and the report is unanimous. It is worth the House’s hearing what the Committee said about the temporary operating rule in paragraph 56:
“We do not see how the Temporary Operating Rule acts as any kind of constraint at all on the current fiscal decisions made by the Chancellor, and we struggle to imagine any course of action he might have taken in this year’s Budget that would have been inconsistent with it...It is clear to us that the only real financial discipline that is currently imposed on the Chancellor is the opinion of the gilt market on the sustainability of the public finances.”
That says it all. We are back to the bad old days, in which we are up against the buffers of what we can get away with in the markets, all the time. That is no way to run long-term economic policy.
Fiscal rules, prudence and spending to invest were all largely rhetoric, and they were largely from the realm of gesture politics. We can see that now. Unfortunately, the spending binge was all too real, as is the bust now following it. As the dust settles, we will see that Labour Members may have learned the language of capitalism when they were was last in opposition, but they never understood—that includes the Prime Minister—what it really means to regulate and run a successful market economy.
4.4 pm
Stewart Hosie (Dundee, East) (SNP): It is instructive to go back to the debate on the Finance Bill last year. At that point we had the forecasts from the 2008 Budget, which even at that stage demonstrated how little room for manoeuvre the Government had. They forecast a £43 billion deficit last year. The Chancellor actually had to borrow £90 billion. They forecast a national debt approaching £600 billion. The forecast now is for £1.6 trillion. They reported public finance initiative liabilities to 2030-32 of £189 billion. That figure is now £200 billion. They reported a colossal £87 billion deficit in the trade in goods. That is now rising to a £93 billion deficit in the trade in goods. Even with sterling weakened—15 per cent. down against the euro and 25 per cent. down against the dollar since last summer—the overall balance of trade deficit remains at £44 billion, unchanged from the year before, and is forecast to rise by 10 per cent. to £49.5 billion in 2009.
Those forecasts did not inform the Finance Bill. Since the pre-Budget report last winter, we have found out that the Government were out by £12 billion on last year’s borrowing, out by £140 billion on the three-year borrowing forecast, and out by £400 billion on the medium-term national debt forecast in five months. That is an extraordinary set of figures. It is clear that there is likely to be a glaring black hole in the public accounts, not least because the revenue yield, which is intended to fund, at least in part, some of the spending commitments in the Finance Bill, is based on growth forecasts believed by no one, except, perhaps, members of the Treasury ministerial team—and I am not sure whether even the more sensible Ministers in the Treasury team take the prediction of 3.5 per cent. seriously.
There is little in the Bill or in the Chief Secretary’s opening speech that would convince me that the Government understand, first, that cutting public expenditure in the teeth of a recession risks prolonging it and making it worse, and secondly, that a longer and deeper recession will make the job of balancing the books even more difficult in the medium and long term.
Mr. Newmark: Does the hon. Gentleman share my concern, which I raised with my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond), that the Government, as the hon. Gentleman correctly said, have come up with some fantastical growth projections, saying that growth will be negative only this year—at, say, 3.5 per cent.—up 1.25 per cent. next year and perhaps 3.5 per cent. the next year? If the growth is not that great, a sensitivity analysis would show that tax revenues will drop. If tax revenues drop because the Government do not achieve their growth forecasts, they will have an even bigger black hole to deal with.
Stewart Hosie: That is absolutely right, but even on a more vulgar analysis, a 1 per cent. shortfall in growth probably equates to close to £15 billion in GDP, about 40 per cent. of which would be tax. The revenue yield could be massively down, on even a vulgar analysis of those figures.
The Government are suggesting that the recession will end this year. Notwithstanding the fact that only a few weeks ago, at the time of the Budget, the OECD and Ernst & Young said that there would still be negative growth in 2010, the Government, all of whose major forecasts have been smashed over the past 12 months, are still labouring under the pretence that growth will be 1.25 per cent. next year and 3.5 per cent. the year after that, which I find extraordinary.
Since the OECD and the Ernst & Young forecasts, we have had the European Commission publication this week. It has downgraded its UK forecasts again to minus 3.8 per cent. this year, and a return to growth late in 2010, not by the 1.25 per cent. forecast by the Government, but by 0.1 per cent., if I have read the reports correctly. That would indicate a very long recovery—a shaky recovery. It will not be smooth or steep. It will be long and difficult, yet none of the plans in the Bill seem to take cognisance of any expert opinion at all.
We know that the backdrop to the Bill is the massive rise in unemployment, which is important for our constituents. In February, a record month, 138,000
people were added to the register, and 177,000 in a quarter. That is, in effect, 2,000 people a day added to the unemployment register under Labour in this recession, in the past three months for which figures have been published.
Although there were measures in the Budget speech that may help to create jobs in the future, not least the Chancellor’s support for carbon capture and storage, there is not one word in the Finance Bill about carbon capture and storage or carbon sequestration, because, as with so many things, decisions will be taken in the future and implementation will take place years into the future.
The Bill does contain almost 20 retrospective measures, however. I do not intend to go through them today, because there will be time enough for that later, but all of them will have to be probed thoroughly. Some efforts to tackle tax evasion and avoidance may be necessary and welcome, but I am always sceptical on a point of principle about retrospective measures, and they will have to be examined very carefully, indeed.
The Bill also contains confirmation of the further rise in fuel duty, and it is interesting that the national policy chairman of the Federation of Small Businesses describes it in this way:
“Small businesses are the engine room of the economy, but they have been choked by the Budget with increases in fuel and alcohol duty incurring extra costs and little to help small firms struggling with cashflow.”
It is instructive that the FSB describes the Budget increases as choking. It is quite extraordinary that the fuel duty increases are viewed that way, even at this time.
Mr. Newmark: To flesh out that point with real numbers, is the hon. Gentleman aware that the previous two fuel duty increases alone cost businesses £533 million—£533 million that small businesses today can little afford?
Stewart Hosie: That is absolutely right. Returning to last year’s Budget and the Finance Bill that followed, I think that the measures introduced only last year took £2.5 billion out of business. I suspect that the £500 million to which the hon. Gentleman referred made a large contribution to that £2.5 billion from business—at a time when it needed the money to invest as we went into the recession a year or so ago.
The Chancellor also said in this year’s Budget statement:
“I will continue to monitor oil prices, but I expect that fuel duty will increase by 2p per litre in September, and then by 1p a litre above indexation each April for the next four years.”—[ Official Report, 22 April 2009; Vol. 491, c. 244.]
I was pleased that the Road Haulage Association contacted me today. It said:
“At this challenging time, the last thing the haulage industry in Scotland needs is an increase in costs.”
It went on to say, and this, I am sure, will please the hon. Member for Runnymede and Weybridge (Mr. Hammond), who spoke about the issue earlier:
“The case for a regulator is as strong now as it ever was—there may have been a short lull in fuel price turbulence but this won’t last. There are already signs that prices are on their way up again. At this desperate time for Scottish road hauliers—with numerous firms going bust—what is needed is a mechanism to ensure a
measure of financial stability in these trying economic times. It must be remembered that fuel accounts for over 30 per cent. of a haulier’s operating costs.”
The price of oil is relatively stable at $50 a barrel and the price at the pump is relatively stable at 95p a litre, but it is likely that those prices will rise as the world comes out of recession or, indeed, if there are supply-side shocks. The oil price could rise dramatically, so the time is right now, when there is relative stability, to introduce the mechanism and smooth out the price spikes when they occur. I was delighted when the Conservative Front-Bench team U-turned last year and adopted the fair fuel stabiliser proposal. I remind them of what I said then: I do not care whether it is called a fair fuel stabiliser, a fuel duty regulator or what a previous Labour Transport Minister called it; I want to build a coalition around a sensible mechanism to deliver fairness and stability. We have the opportunity to push it forward again this year.
The Budget also contained the predictable rise in alcohol duty, but, again, surely now would have been the time for a more sophisticated approach, taxing all drinks fairly rather than looking to the Scotch whisky industry as a cash cow and building on last year’s two damaging rises that amounted to more than 13 per cent. I shall put that point into context, and explain why we need the fair taxation of alcohol, by referring to three drinks with exactly the same alcohol content: a half pint of beer at 4.93 per cent. volume incurs 23.06p in duty; a 125ml glass of wine at 11.2 per cent. volume incurs 26.75 in duty; and a modest 35ml measure of Scotch at 40 per cent. volume incurs 31.7p in duty. I have the speeches from previous debates, and I know that there are European issues in respect of the duty on alcohol. But it strikes me that we need a fairer approach to alcohol duty to prevent the Scotch industry from being seen as a cash cow. Gavin Hewitt, chief executive of the Scotch Whisky Association, said:
“A duty increase during a recession is a real blow and follows last year’s duty rises...the largest since the 1970s. The Government should be supporting all UK businesses, including Scotch whisky distillers, who have the potential to help drive the economy out of recession. Instead, our industry is being weakened by the alcohol duty escalator.”
Rob Marris: Does the hon. Gentleman share my disappointment at the fact that the duty on beer also went up in the Budget, a move that has been incorporated into the Finance Bill? Some 39 pubs in the United Kingdom are closing every week and breweries, such as Marston’s in my constituency, are also affected. Does he support an approach that involves a minimum price for alcohol, given that in large parts of the country a man can have his weekly alcohol intake of 21 units for about £2.30 if he buys chemical cider? If he went into a public house, however, he would get only a pint of beer for about that price.
Stewart Hosie:
My example is “Frosty Jack’s” cider, which costs £3.39 and has 7.5 per cent. alcohol. A bottle holds 22.5 units. For pocket money prices, a man could drink his entire recommended weekly intake from one three-litre bottle of “Frosty Jack’s”. Minimum pricing in shops and supermarkets is an important and sensible policy. I am not sure whether the duty regime is the mechanism through which to tackle the issue, but the
hon. Gentleman has raised a genuine point, which I support. I am sure that he will encourage his colleagues to support the Scottish Government in their drive to address the issue.
In addition, we saw changes to bingo taxation. Bingo is a massively significant sector for many communities. Well run, licensed bingo clubs and halls provide a safe social environment, particularly for women in working class communities. It is deeply unfair that when other forms of gaming—perhaps I should call it “gambling” now—are effectively taxed at 15 per cent., licensed bingo clubs should be singled out for a 22 per cent. rate. I am sure that we will address that issue as the Bill progresses.
What is missing from this Finance Bill is the sting in the Budget’s tail—the £15 billion of cuts, and not least the £500 million of cuts confirmed by the Treasury to the Scottish Government for next year. That is the wrong thing to do in the teeth of a recession. The cut to Scotland will lead directly to the loss of 9,000 jobs and it risks the Scottish Government’s efforts to protect and preserve jobs.
John Robertson (Glasgow, North-West) (Lab) indicated dissent.
Stewart Hosie: The hon. Gentleman, a Parliamentary Private Secretary from the Labour Benches, is chuntering. Perhaps he does not care enough about the direct loss of 9,000 jobs because of cuts made by a UK Labour Government to the Scottish Government. [Interruption.]
Madam Deputy Speaker: Order. The hon. Member for Glasgow, North-West (John Robertson) knows how to conduct himself in a debate.
Stewart Hosie: This is a really important point. We cannot have the Chief Secretary to the Treasury in her opening remarks blaming others for cuts, when this Labour Government are embarking on exactly the same failed measure.
Rob Marris: I am grateful to the hon. Gentleman for his generosity. To try to preserve at least some of those 9,000 jobs, will his party propose using its tax-raising powers? I am thinking of the 3p on income tax.
Stewart Hosie: I am not sure that taking more money out of people’s pockets would be particularly sensible at this point.
The point about the cuts is that the Government rightly backed the fiscal stimulus. Our view is that the recession was so deep that monetary policy was not enough.
We back the fiscal stimulus, in principle, although there are issues about the VAT cut. We have seen the Prime Minister strut the world stage talking about fiscal stimulus, not least with President Obama at the ExCel centre. However, the state of Maryland, population 5 million, will have £2 billion extra in fiscal stimulus to spend in 2010, while in Australia the state of Victoria will have 8 billion Australian dollars over the same period. It seems extraordinary that even following their own rhetoric, this Government are prepared to cut public expenditure, in the teeth of a recession, when all the serious commentators say that we will still be in negative growth next year.
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