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I am particularly disappointed by the Bill’s complete lack of activity on savings policy. It contains a rather complicated provision on individual savings accounts and something that I benefit from as someone who is now over 50, but it really is miniscule, footling stuff. Savers have been hit very hard by the consequences of the events of the past year or so; there have been very low interest rates and very low dividends. Of course, many savers are pensioners, who do not want to have to rely on pension credit for their welfare, well-being and survival; they want to have the dignity of relying on their own incomes. Thus, it would have been good to see the Government doing more, as they suggested they would, to help savers in this Budget. I wish to discuss the VAT scheme in a moment, but I should say that
helping savers is one very good example of a way in which that £12.5 billion could have been better spent. We can discuss whether it was right to have a fiscal stimulus, but that was the wrong fiscal stimulus, and the money would have been better spent helping pensioners and savers.
I do not think that, technically, the enterprise finance guarantee scheme is covered by the Finance Bill, so I shall simply say that I am looking forward to my Committee’s study of the scheme—I believe that we are taking evidence from the banks on 2 June—and gently remind the Financial Secretary that I am waiting for an answer to a question that I asked in February. I have just tabled a reminder parliamentary question today, although I am sure that the lack of a reply was an oversight and was not deliberate, and I look forward to getting an answer about the take-up of the scheme. There are still issues relating to credit in the overall economy that this Bill could have perhaps done more to address.
Let us briefly consider the VAT reduction. I am clear about the fact that I would not have done it. Leaving to one side the argument about whether to have the fiscal stimulus, this was a bad way to spend £12.5 billion. There are big questions about the timing of the ending of the VAT reduction—in the middle of the week during the sales period just after Christmas is a ridiculous time to end it. I pressed the Chief Secretary on this point at the beginning of the debate, but I regret to say that she was not flexible. I was chastised by the hon. Member for Edmonton (Mr. Love) for being hypocritical in some way—I am sure that he did not use that word, because it would be unparliamentary for him to do so, but he said something of that kind. What I am saying is that it would have been much better if the VAT reduction money had been spent in other ways and that I would end the reduction much sooner and use the money saved in other ways. Realistically, the Government are not going to do that, for reasons of realpolitik, so I point out that if they were to give the reduction another three or four weeks—the other alternative—that would help the retail industry considerably. As I say, I would end the reduction now and spend the money differently.
My Committee heard evidence from the small business community about the great cost that the VAT reduction has imposed on it. The reduction has been a problem for small businesses, which have had to invest in new software packages and will have to do so again at the end of the year, when the rate goes back up again. The reduction has not benefited small businesses—quite the opposite; it has been a problem. Many big retailers have also encountered problems with it. I am not talking about the Tescos of this world, which have computerised systems and can adapt easily. Such businesses are not the kind of businesses that need help from a VAT reduction; although such businesses are expanding rapidly into other markets, a large proportion of their products are still VAT exempt. It is not the Tescos of this world that we need to help, but the smaller businesses, and they have not been helped by the VAT reduction.
I would have spent the money on helping savers; on cutting corporate tax for small businesses, as my party suggests; on cutting payroll taxes for small companies—of course, this Government are planning to increase those taxes—on deferring small business VAT bills in a more
comprehensive way than the Government have suggested; or on funding prompt payment by local authorities. The Government have a 10-day target on that, and I believe that my local authorities are meeting it. I am pleased about that, and I congratulate Worcestershire county council and Wychavon district council on what they are doing. I do not know what assessment the Government have made of the effectiveness of the target, but it is an expensive thing. I would also have spent the money to pay for the relaxation of void business rates, which should have been included in this Bill. I also might have used it to provide some sort of employment subsidy. I was very struck by the argument by a former Minister, Lord Digby Jones, that we should help when businesses, especially those with highly skilled workers, face a short-term drop in demand—such as in manufacturing businesses in the west midlands in the automotive sector—so that those workers are not lost to other less skilled jobs. With an employment subsidy, those businesses could keep the staff on. Baroness Thatcher’s Government did that, so I would have thought that this Government could do so.
I mentioned the 50 per cent. tax increase. It is a political device, used as a political dividing line by the Prime Minister and Chancellor. We are rightly not committing to repealing it as an early priority, because our first priority must be the taxes on everyone—the ordinary, hard-working families—such as the national insurance contribution tax hike that is coming in 2011. That is the right policy. We have said that the 50 per cent. tax must take its place in the queue of tax reductions that we would like to make as a future Conservative Government, but that does not mean that we cannot damn that tax increase for the extraordinary damage that it is doing. The Government just do not understand the impact that it will have on the international community and mobile entrepreneurs.
A fascinating article, “Wringing the Rich”, in The Sunday Times this week described that damage clearly. It said:
“The worry is not so much the impact of the tax itself, but the signal it sends out. Entrepreneurs are not welcome anymore”.
Whether the Government like it or not, that is how it sounds to business. The Government may not even have meant that—in fact, they meant it as a political device in UK politics—but that is its impact. Miles Templeman of the Institute of Directors has said:
“The increase will have a damaging impact on the wider economy and undermine the UK’s attractiveness as a place to invest.”
Chris Sanger, UK head of tax policy at Ernst & Young, has said:
“The key risk here is that such extreme rates will deter entrepreneurs and the most successful wealth creators from coming to the UK and encourage those here to leave.”
Those are people we cannot afford to lose. If there is one provision in this Bill that is offensive, wrong-headed and ill-judged it is the package of the 50 per cent. tax rate and the changes to pension contributions and thresholds. It will create a bizarre range of marginal rates on higher rate taxpayers that could and should have been avoided—and it will probably not even raise any money.
This was an entirely foreseeable recession. Only the scale might perhaps have surprised us. This Bill does many of the wrong things to address the problems that the recession has created, and does not do many of the
right things that it could and should have done. My right hon. Friend the Leader of the Opposition has referred to the new age of austerity. We will hear a lot more of that in the next year or so, because it is what we now face as a result of the mistakes by this Government—not the problems created by the US sub-prime markets. The Government are not being straight with voters about how they will sort out the problem, but the voters have seen through that. The voters have worked out that if they do not have to pay for it until 2011, there is probably a catch. They are not to be taken for fools.
I said that the Bill was characterised by four Ds—distraction, by using the rich as an alternative target; deceit, by pretending that ordinary people will not have to pay the tax bill for this Government’s failures; delay, by putting hard choices off until after the election; and a deficit that is out of control. I shall conclude with three further Ds—this is a dishonest Budget from a discredited Government facing defeat, to which the Budget and this Bill will contribute mightily.
5.8 pm
Mr. Andrew Love (Edmonton) (Lab/Co-op): Much—indeed, almost all—of the comment in the press at the time of the Budget, and much of this debate, has been about the assumptions and forecasts it contained. I wish to respond to some of that comment and I start from the premise that forecasting is more an art than a science. I know that econometrics is the place to be at the moment, and many different mathematical formulae are used, but the reality is that art plays a much larger part than science.
That is particularly the case at present, because we live in a period of exceptional uncertainty. If I may comment on a point that was made earlier, we are no longer in a period characterised by the chairman of the Federal Reserve as the “great moderation”. We all remember those times—they lasted for quite a long period—when the so-called fluctuations in the trade cycle were reduced and when it was thought that economic management of the economy was more effective than it is. All that was cast aside completely in 2007, when we had the unprecedented external shock from the sub-prime fiasco in the USA. The first thing that we must be clear about is that the recession that this Budget reflects is international in both scale and origin.
My first question on the Budget projections is how far into the future is it reasonable for a Budget to forecast. Indeed, the hon. Member for Taunton (Mr. Browne) commented that Budget books occasionally give long-term public expenditure projections. Without wishing to hurt the feelings of all the economists who crunch the numbers in the Treasury, I submit that some of the projections that go more than two or three years into the future are almost worthless. Indeed, I shall go on to talk about whether it is appropriate to forecast two years ahead. Although that was done in the Budget—and it has received a lot of criticism—very few of all the other forecasters, including the IMF, forecast for that period.
Mr. Ellwood:
The hon. Gentleman says that he believes that forecasts for up to two or three years should perhaps be disregarded. Would he go so far as to say that forecasts for six months should also be disregarded,
bearing in mind that the Chancellor said at the Dispatch Box six months ago that the economy would be on the mend in June of this year?
Mr. Love: It is interesting that the hon. Gentleman should say that. I want to come on to the forecasts made in the Budget. I submit that they are reasonable in current circumstances. That is what I am trying to challenge in this debate.
Mr. Ellwood: The hon. Gentleman says that the forecasts are reasonable considering the times. However, it was two hours after the Chancellor sat down that the IMF disagreed with the growth forecasts for this year, saying that they would not be minus 3.5 per cent., as the Government claimed, but minus 4.1 per cent. That was just two hours later, not six months later.
Mr. Love: I am very pleased that the hon. Gentleman has mentioned the IMF, because that is the comparison that I want to make. That was a godsend to the media, who were out to trash the Budget. The fact that the IMF published the figures on the same day meant that the automatic assumption of most of the media comment was that the IMF figures were right and the Treasury figures were wrong. The reality is that the Treasury has a much better record of forecasting the British economy than the IMF.
Let me come to the specific points made by the hon. Member for Bournemouth, East (Mr. Ellwood). The Budget book suggests that there is a recession of 3.5 per cent. in the current year. The average of all recent forecasts suggests a negative of 3.7 per cent. The representative of the Scottish National party, the hon. Member for Dundee, East (Stewart Hosie), said earlier that the OECD had today suggested 3.7 per cent. The IMF is at 4.1 per cent. If we take the average as reasonably accurate in the circumstances—I accept that forecasts for this year can be taken to be reasonably accurate—the Treasury is closer to the reality.
Mr. Dunne: The hon. Gentleman is making a reasonable stab at arguing that arithmetic averages are likely to pray in favour of the Treasury’s position. However, surely he must recognise that only two days after the Chancellor made his predictions for this year, the Office for National Statistics published its figures for the first three months of this year, which showed that the Treasury’s projections were out by more than 25 per cent. The economy failed by 1.9 per cent. as opposed to the 1.5 per cent. that the Chancellor had identified two days before.
Mr. Love: If the hon. Gentleman will be kind enough to give me a few seconds to develop my argument, I will come to that point.
The Budget projection for 2010 of 1Â1/4 per cent. growth was widely ridiculed in the media and compared with the IMF projection of, I believe, negative 0.3 or 0.4 per cent.; according to the IMF, we will still be in recession. If we take the average of all recent forecasts, growth does return to the economy; it is something like 0.3 or 0.4 per cent, which is a good deal closer to what the Treasury is suggesting, although of course still significantly less. That is one reason why the epithet “optimistic” has been used, which was very much at the centre of our debate in the Treasury Committee.
If we then project forward a further year—I would hesitate to take with any great accuracy a projection made that far into the future—the average of forecasts is roughly 2Â1/4 to 2Â1/2 per cent. growth. As the Budget figures suggest, the Treasury selects 3Â1/2 per cent. I would raise questions about how accurate any such forecasts could be, but let me say why I think that, although the Treasury is veering towards the optimistic side, it may not be an unreasonable forecast.
The first reason is that in previous recessions, such as those of the early ’80s or the early ’90s, when the recession bottomed out there was spare capacity in the economy, which made it possible for recovery to occur relatively quickly and at an above-trend growth rate. The Treasury has therefore assumed that we will have a relatively faster bounce-back from the end of the recession. Secondly, we have an extraordinary stimulus in the economy—not just the automatic stabilisers, not just the activities of the Bank of England, but a significant depreciation in the value of sterling, which should open opportunities to re-phase our economy to export more into the future.
Perhaps the most important reason, and the one that is being challenged in alternative forecasts, is the assumption in the Budget that agreements made at the G20—international action to stimulate economies across the world—will be honoured. I do not know whether that will happen, but I think it is reasonable to assume that other economies will take similar action. They have all announced that they will, and therefore one can assume that, although those Budget projections are on the optimistic side, they are based on fairly good economic analysis.
I shall now discuss the ONS announcement of a contraction of 1.9 per cent. in GDP in the first quarter. The hon. Member for Ludlow (Mr. Dunne), who I know takes a great interest in these matters, will know that those figures were very much initial figures, based on only 50 per cent. of the evidence that will become available. When we asked the Treasury’s economic guru about those figures, he said not only that he expected them to change going forward, as they often do, but that he saw no reason to re-evaluate the projections for this year, and I would accept that at this stage we should not do that.
Therefore, my first point—I have laboured the point because of all the press and other comment that there has been—is that, in my view and I think in that of most independent forecasters and economic commentators, the Budget projections are within the realms of possibility. The idea that they should all be entirely rubbished really must be challenged, and that is what I have sought to do.
Let me come on to the public finances. It is amazing that everyone on the Opposition Benches who has commented today has cast doubt on whether we have an honest appraisal of the problem that we will face with our public finances. This Budget is honest about that. Opposition Members have quoted the figures. When you tell us how terrible the situation is, you do not use alternative figures; you use the Budget figures to do so.
Mr. Hugo Swire (East Devon) (Con):
Will the hon. Gentleman take this opportunity to rubbish the National Institute of Economic and Social Research report that
says that income tax will have to rise by between 8p and 10p in the pound to deal with the economic mess that the Government have got us into?
Mr. Love: I thank the hon. Gentleman for that question. I was going to raise the issue with the hon. Member for Mid-Worcestershire (Peter Luff). The director of the NIESR came before the Treasury Committee. He remains one of the few economists in favour of a second fiscal stimulus. He and his organisation believe that even given the additional public expenditure implications of a second fiscal stimulus, it is the correct thing to do. I have no doubt that the figures in the report from which you quote are accurate, as far as a forecast can be, but you should be aware that if we followed that economist’s policy prescription, the figures would be even higher.
Mr. Deputy Speaker (Sir Alan Haselhurst): Order. May I gently remind the hon. Gentleman that he has been using the word “you” quite a lot, thus implying my involvement, of which there is certainly none?
Mr. Love: I apologise, Mr. Deputy Speaker; when I begin to enjoy myself, I get somewhat carried away. I hope that I will remember to phrase my speech in the correct manner.
I want to discuss the cyclical and structural nature of the public expenditure deficits, because there is an issue involved that we really have to address for the future if we are to get our public expenditure back to a sensible amount. Members have said that the structural element of the deficit is about four fifths of the total deficit. I do not think that anyone has queried that. We have not really debated in the Chamber today—and I suspect that we will not do so before the general election—what proposals we will bring forward to address that structural part of the deficit. We heard earlier from my right hon. Friend the Member for Birkenhead (Mr. Field), who suggested a number of proposals; I will come back to them. A lot of the hardy annuals from both main Opposition parties have suggested that we could look at scrapping identity cards. I have opposed, and will continue to oppose, identity cards for all sorts of reasons, but I would not go so far as to say that there is a significant amount of money to be saved—not an amount that will make a substantial difference to the problem of the deficit. That is part of the problem with some of the suggestions made, mostly, dare I say, by members of Her Majesty’s loyal Opposition. They do not really address the scale of the problem that we face.
Mr. Swire: In an earlier response to me, the hon. Gentleman said that the NIESR was interested in a second fiscal stimulus. That may well be so, but it also said today that if Britain’s national debt were reduced to 40 per cent. of gross domestic product by 2023, to comply with the golden rule of the then Chancellor—now Prime Minister—even bigger tax rises and/or spending cuts would be needed. What is the hon. Gentleman’s view about that statement?
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