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“The credibility of any attempt to restore the public finances will depend on an acceptance that the structural deficit must be addressed as well as the consequences of the current extraordinary circumstances.”
It is the very large underlying structural deficit that gives me such cause for concern for future Finance Bills and Budgets.
In his last Budget statement as Chancellor, the Prime Minister predicted public sector net borrowing of about 2 per cent. of GDP for the year we have just entered. This year’s Budget revises that figure to about 12 per cent. What a dramatic change! The Chancellor forecast that the UK economy would shrink by 3.5 per cent. this year—I have already alluded to that figure—and that it would grow by 1.25 per cent. next year. The International Monetary Fund says that the figures will be 4.1 per cent. this year and a shrinkage of 0.4 per cent. next year. Even the Government’s own figures undermine their Budget forecasts. Within two days, the Office for National Statistics had revealed a still larger reduction in economic activity for the first quarter of 2009.
On the most optimistic assumption, public debt is going to rise to 80 per cent. of GDP within four years. That terrifying figure is twice as high as what we thought was a sustainable level of public borrowing and public debt. In this year’s Budget, public net debt was expected to be 39 per cent. of GDP this year but it is now put at 59 per cent., increasing to 79 per cent. by 2013-14. I know that that outcome puts Britain only in the middle of the advanced economies in terms of the percentage debt to GDP ratio—an argument often used by the Government. [Interruption.] I will happily repeat it, as I have an unfortunate habit of speaking too fast. As I have already said, I know that this outcome would put Britain only in the middle of the advanced economies in terms of the percentage debt to GDP ratio, but the tragedy is that if we had not had the spending splurge of the last six, seven or eight years, we could have been in a much stronger position.
To employ the phrase of my hon. Friend the shadow Chancellor, if we had indeed fixed the roof when the sun was shining, we could now be in a uniquely strong position to take the world by storm, yet the spending splurge of the last five, six or seven years enfeebled our position. We could and should have been so strong; this Finance Bill should not have had to face the challenges
it seeks to address. We have crippled a golden opportunity. This Government like to take credit for paying off a bit of the national debt: they paid it off when they stuck to Conservative spending plans and it all went wrong when they started following their own.
Mr. Love: As we heard earlier this afternoon, when we were not putting enough away during those times when the sun shone, the Opposition did not suggest doing such a thing either, but we received no response from the Conservative Front-Bench team, so perhaps the hon. Gentleman would like to comment on it.
Peter Luff: I have to say that my recollection is somewhat different. I cannot remember in which Budget the now Prime Minister announced massive increases in expenditure on schools and hospitals, but I can remember thinking that it was a make-or-break moment for the Government. I thought that if it worked—I did not think it would—the history of the following 10 or 15 years might be very different, but that if it all ended in tears, as I thought it would, we Conservatives would be vindicated. I am afraid to say that I now know that we were vindicated; the decisions the Prime Minister announced at that time proved to be the beginning of the obituary of this new Labour Government. I sincerely wish that when the Prime Minister was Chancellor he had not been so imprudent with the money at his disposal—or the money he was borrowing—in funding that splurge.
Let me repeat the phrase “risible optimism”, which was used by The Economist to describe the fundamental premise on which this Finance Bill is based. I have not read the words of Edward Hadas before, and I am not sure whether they appeared in The Daily Telegraph blog or in the main newspaper, but I like his parallel:
“Suppose a triple-A rated company suddenly found that expenses were running at 123 per cent. of revenues. Such a huge loss would cause a financial red alert. Cut back spending, push up revenues, figure out what’s going wrong and prepare for even worse times.”
That is exactly the situation we face as a nation. I know that there are differences in finances, companies and Governments, but the scale of what we face is truly terrifying. As the article makes clear,
“even governments face limits—and the UK authorities seem to be approaching them. They have engaged in pretty much every imaginable risky policy. Huge fiscal deficits are joined by the central bank’s effective zero interest rate and a big experiment in money-printing.”
The article goes on to conclude about the risk of default on sovereign debts that
“the government might decide to spare taxpayers some pain by letting inflation erode the real value of the official debts. The rating agencies do not count such depreciation as a default. If they did, the UK’s triple-A would probably be history already.”
That is a terrifying conclusion.
The most recent estimate that undermines the credibility of the Budget and the Finance Bill came from the European Commission only this week, as it issued its Economic Forecast. It said that
“the UK economy is now clearly experiencing one of its worst recessions in recent history, in the context of the global financial and economic crisis.”
“The unemployment rate is likely to rise progressively to around 10 per cent. ... in late 2010”.
The consensus out there is now pretty clear: the Government are being too optimistic.
To be fair to the Prime Minister—I always like to be fair; it is in my nature—he probably believed his own propaganda and he might actually have believed that he could end boom and bust. It is an extraordinary thought. I read economics at university many years ago and I have forgotten most of it; I was not even particularly good at it at the time.
Mr. Syms: Did my hon. Friend want to be Chancellor?
Peter Luff: I am grateful for my hon. Friend’s suggestion, but I do not aspire to that office—certainly not in the next four or five years, anyway!
I do know, however, that it is impossible to end boom and bust. It is part of the capitalist psyche. It is what happens. It is the price that we pay for a free market. It is what delivers the good times. The bad times are essential to blow off the froth and ensure that the good things are delivered.
I do not know how the Prime Minister was able to believe that he could end boom and bust. There have been spectacular busts in the past, such as the South Sea bubble and the Wall street crash, although I accept that the current bust is probably more extreme than we could possibly have expected. The business of the sub-prime mortgages, the poor regulation of banks by both the British and the Americans, and the British over-indebtedness, which has played its own part in contributing to the world economic catastrophe, have combined to make what was always going to be a bust a much sharper bust than it might otherwise have been.
Opening the debate, the Chief Secretary spoke in what I felt were uncharacteristically shrill tones of all the dreadful things that would happen if a Conservative Government came to power, and extolled the virtues of spending money for its own sake. It is the easiest thing in the world to spend money that one does not have. It is easy to say “I would like a better car; I would like a bigger house; I would like nicer clothes; I would like more holidays,” but if I do not have the money to buy those things, I do not have them. The tragedy is that for the last eight years or so, we have been spending money that we do not have on things that we cannot afford. That is why we are in such a difficult position now.
The Government’s response in the Finance Bill is to make changes that, in my view, threaten Britain’s international competitiveness, and that worries me. I am currently engaged in an interesting discussion with the editor of The Mail On Sunday, who criticised my decision to take my Select Committee for what he believed to have been four agreeable days in Dubai. Actually, it was not four agreeable days in Dubai; it was 23 hours in Dubai, a day and a half in Abu Dhabi, and a day and a half in Riyadh and Saudi Arabia.
To see the scale of what is happening even in Dubai, where the froth has blown off the bubble, the even bigger scale of what is happening in Abu Dhabi and the amazing transformation of the Saudi Arabian economy is to understand the scale of the challenge that we face. This is not just happening in India, China and among our other economic competitors such as the United States and countries in mainland Europe; it is happening in Saudi Arabia as well. Five years ago, Saudi Arabia ranked 65th in the World Bank’s list of the best places
in which to do business. Now, as a result of conscious policy making, it ranks 16th. We still rank sixth—we are doing quite well—but Saudi Arabia’s target is to overtake us. It wants to be 10th next year.
The world is changing out there. We cannot arbitrarily increase taxes on entrepreneurs and wealth creators and expect that to be a cost-free option. It will cost us in the battle to maintain our global position. I fear that that is not properly understood. The people to whom I have spoken in banks, businesses and trade associations since the Budget have all said one thing: that approach constitutes a devastating attack on the entrepreneurs and wealth creators, and thus on the country’s long-term prosperity. We need to recognise that. We need to move away from a culture of borrowing and debt which has been encouraged not just by the Government but in the corporate sector and, crucially, in the household sector, and return to a culture built on savings and ownership.
A few days ago, I received a thank-you letter from my godson, to whom I had given £20 as a birthday present.
Mr. Ellwood: In a brown envelope?
Peter Luff: In a rather nice yellow envelope, as I recall, for the birthday card. My godson wrote to me saying “Thank you so much. I am saving up for an iPod.” I thought “What a strange phrase.” I realised that I had not heard the phrase “saving up” for an extremely long time—certainly from the lips of the current Government. But it is a phrase that we should use rather more as a nation. I commend my godson’s wisdom in saving up. I must give him more money to save up for future Christmases and birthdays.
I do not believe that this Finance Bill encourages saving up. That is one of the many things that are wrong with it. Hints were dropped that it might provide such encouragement, but that has not happened. Nevertheless, there are good things in the Bill. I do not want to damn the whole Bill; that would be quite wrong of me. There are clearly good things in the Budget as well. It is a curate’s egg with more bad bits than good bits, but there are good bits. For example, I am delighted that, after much agonising, the trade credit insurance scheme is up and running.
It is one of the characteristics of the Government’s support both in Finance Bills and in the measures announced in Budgets that they produce a great fanfare at an early stage and then take a very long time to introduce their measures, which subsequently help many fewer people than were expected to benefit. The trade credit insurance scheme should have been introduced earlier, but it is there now, and I will not look a gift horse in the mouth—although we are yet to see how effective it will prove to be.
One of the very good things in the Budget is the capital allowances arrangement. I know that the small business community is very pleased that capital allowances for firms that invest more than £50,000 will double to 40 per cent. That is quite an expensive measure—I believe that it is worth £1.64 billion this year—so well done: that is a good thing in the Budget. The Federation of Small Businesses is particularly grateful for the opportunity to defer tax bills, with loss-making companies able to reclaim tax on profits made in the last three years.
There are good measures in the Bill, therefore, but some measures that I hoped would be included are missing. National non-domestic rates—business rates, as they are colloquially called—are a crucial issue. The Chancellor made a big concession before the Budget in terms of the increase due next year; it is to be phased in, which is very welcome. I hoped that the Budget would address the void rates issue, but it does not do so. I know of people in my constituency who put together a small property portfolio as a pension scheme for their old age. One of them has had to go bankrupt because every property in his portfolio is now empty. The portfolio was supposed to bring in a revenue stream in his old age; instead, it has just brought in void rates bills. Money was supposed to be coming in, but the properties ended up costing him money. As a result, he has gone into personal bankruptcy. The Government should also be taking a much more careful look at the implications of void rates, particularly for retail businesses, but also for manufacturing businesses.
There is one measure that I particularly hoped would be in the Bill. It is only a small measure, but I attach some importance to it as I introduced a private Member’s Bill on the subject: automatic rate relief for small businesses. A few years ago, the Government wisely introduced a small business scheme; it is fairly complicated, but the essence is that small businesses put in an application and then get back half their rates. About a month ago, I was persuaded by a very persuasive Minister to withdraw my Bill because it was very likely that the Budget would contain a similar measure. I was building up to making an attack on the Government—perhaps a rather disconsolate and aggressive one—about their failure to keep their promises, but in fact it is not entirely clear to me that they have finally decided not to keep their promise to me; we still have some measure of hope. Let me explain why I am so sad that this measure is not in the Finance Bill. For small businesses in particular, the odd £100, £500 or £1,000 can make a huge difference to the prospects for survival. We sometimes forget that. For micro-businesses, which I hope will be the macro-businesses of the future, small sums matter.
I have received a number of words of encouragement from the Government in recent days. Although this measure is not in the Bill, as I hoped it would be, the Chancellor has kindly written to me. The letter is dated 27 April, and it says:
“I can confirm that the Government is keen to continue to improve the administration of small business rates relief to make it easy to claim and increase its take up. I have therefore asked my officials to work with CLG officials to see what can be done to improve the take up of the scheme and to report back to me.”
What the Chancellor does not say in that letter, but which I happen to know is the case, is that the Department for Business, Enterprise and Regulatory Reform is also closely involved, in the noble and impressive persona of Baroness Vadera. When she gets her teeth into a matter, she tends to make sure that things get done, so I am optimistic. I am not suggesting that the two very able and charming Ministers sitting on the Government Front Bench at present do not get things done, of course, but the baroness has a certain reputation in Government for outcomes. I was therefore particularly encouraged by a parliamentary answer I received very recently from the Minister for Local Government, who said:
“The Department for Communities and Local Government has had a number of discussions with the Department for Business
Enterprise and Regulatory Reform and Treasury on making small business rate relief automatic.
The Government are keen to explore ways in which we can promote, and improve the administration of, the existing small business rate relief scheme and increase its take up, including through automatic options. CLG officials will work with Treasury officials to see how the take up of the scheme can be improved.”—[ Official Report, 5 May 2009; Vol. 492, c. 140W.]
That goes a little further than the Chancellor’s letter, and I am extremely encouraged by that.
I understand some of the Treasury’s objections, but I believe that I have answers to all them, and I also believe that automaticity, to use a rather ugly word, would be welcome throughout the small business community and the local government world, and would have nothing but positive consequences for this Government and the economic activity of the UK. I therefore hope that, although this measure is not in the Bill as I had hoped, we might hear more about it later.
I have talked sufficiently about the problems of debt and delay in the Budget, but may I emphasise one point? The Government say they are taxing the rich and that that is only fair. Well, we can discuss what rate of taxation on the rich is fair, but it is very important to remember that, on the Government’s own figures, less than half of the £5 billion tax rises announced in the Budget are actually taxes on the rich; the majority of them are on the rest of us. Most of the tax rises that the Government are planning are on average earners; they include tax rises such as those on fuel and alcohol and, crucially, the increase in national insurance contributions announced in the pre-Budget report. The sad thing about the PBR is that the Government have got out of the habit of having debates on it. The PBR has become a surrogate Budget and contains Finance Bill-type measures. We had no debate on the increase in national insurance contributions announced in the PBR last year. There was a statement and Members could make one quick comment afterwards, but there was no debate, I believe, for the second or third year running. I say to Ministers that if there is to be at least one more PBR before the election, I hope that this time we will have a debate on it, because the PBR contains important measures that should and could be scrutinised at the time.
We also know that this Budget and Finance Bill enables reductions in capital spending—again, they will take place after the election—including a very large reduction in the capital budget of the health service. I find that interesting coming from a Government who have criticised the Conservatives for wishing to cut expenditure on sensitive areas of public services.
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