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I had the pleasure of serving on the Treasury Committee alongside the hon. Member for Edmonton (Mr. Love). He chose to defend as gallantly as he could the Governments forecasting record, and tried to make a reasonable job of discussing arithmetical averages, but let me describe my recollections of studying the Treasurys performance. In each of the four Budgets and pre-Budget reports that I reviewed as part of that Committees work, the then Chancellor had to appear before the Committee to try to defend his forecasts and explain why they were not so unreasonable in the circumstances compared with the forecasts he had made on his previous visit to the Committee. On each occasion, that was a very hollow claim. It was clear that the Treasury models were not giving rise to accurate forecasts for either GDP
growth or, more particularly, public borrowing. That has been exposed not merely within months, weeks or days, but even within hours, of the Chancellor sitting down following his Budget speech.
The Chancellor said that in the current year GDP growth would be negative 3.5 per cent., but barely an hour later the International Monetary Fund estimated it would be negative 4.1 per cent. A week later, the European Union estimated that it would be negative 3.8 per cent., and this week we have had reports from the National Institute of Economic and Social Research that its estimate is negative 4.3 per cent. Two days after the Chancellor sat down, the first estimate of first-quarter GDP growth came out from the Office for National Statistics. The underlying assumption in the Chancellors forecasts had been that the figure for the first quarter was negative 1.5 per cent., but the ONS estimate was negative 1.9 per cent. That is a 27 per cent. difference. It is barely credible that the Treasury did not have some sight of the underlying information available to the ONS in preparing its forecasts, and that suggests either a lack of understanding about the data in the economy at the time or an astonishing lack of competence. I hope for the sake of any incoming Government that the Treasury is not so incompetent that it can make such a significant error within such a short period and have such a lack of understanding.
Mr. Newmark: Might we not add this as a third problem with the Government: they do not recognise the magnitude of the problem that they face? That is why they are always short-selling what the statistics and real facts are in relation to the situation the country is in.
Mr. Dunne: I am grateful for that intervention, as it takes me nicely to the issue of the magnitude of the problem. The NIESR says that there is a real possibility that GDP will fall more this year than in 1931, stating:
The pace of decline to date shows a remarkable resemblance to that of the depression of the early 1930s.
That is bad enough, but if the governing party and those responsible for managing the economy acknowledged that we face such a dire GDP situation and that the scale of the problem in general is so great, we Conservative Members would have some sympathy. As we all know, however, there is very little recognition on the part of the Prime Minister and his Treasury team that we are in such a situation, even though it is evident to all independent commentators that that is the case. It therefore becomes increasingly challenging for the Government to find their way out of this problem.
The impact of the poor forecasting can be seen in the Red Book estimates and projections for public sector net borrowing as a proportion of GDP. As the hon. Member for Edmonton said, projecting several years ahead is prone to considerable statistical error, but the Red Book makes a stab at it and comes up with a figure of 5.5 per cent. for 2013. That is based on the highly optimistic, rather than realistic, forecasts that the Chancellor set out in his Budget speech. The variance between the 5.5 per cent. cited in the Red Book and what the NIESR says is more than 50 per cent. The NIESR forecasts that public sector net borrowing will be 8.6 per cent. of GDP in 2013-14. There will be a significant shortfall in Government funding should the economy not grow as
the Chancellor has forecast. If it does grow as he has forecast, some estimates have identified that there will be a black hole of more than £40 billionI believe that the figure is £45 billionin the Governments finances. If the growth is as poor as independent commentators are suggesting and the debt as a proportion of GDP is as I have just indicated it might be, even that figure will be a significant underestimate.
There is a colossal hole at the heart of this Governments public finances that can be met, in the short term, only through public borrowing. As the right hon. Member for Birkenhead (Mr. Field) bravely said, there is a significant question mark over this Governments ability to fund the debt with which they have saddled this country. The credit rating agencies have put the UKs triple A rating under review. All the Governments borrowing forecasts are predicated on the assumption that that rating will remain. Should it be reduced to a double A rating, for example, that would, in itself, have a significant impact on the cost of funding existing Government debt and would raise significantly the cost of the future Government debt that we need to raise to meet these enormous borrowing figures. I urge the Financial Secretary to give some indication as to the thought process that the Government have gone through and the cost involved should that unfortunate reduction in rating ariseof course, none of us wishes that to happen.
Mr. Newmark: The problem is that this leads to a vicious cycle and we may even see another failed gilt auction. If the Government reached a point where they could not even raise debt on the public markets, we truly would be in a very bad situation.
Mr. Dunne: My hon. Friend is a considerable expert on raising funds through the bond markets and speaks with some authority. I hesitate to join any call for a debt default, and I am the last person to want gilt auctions not to succeed. It was positive to hear that the Treasury Committee was given some encouraging signals from the Debt Management Office today, and I am interested to learn whether the Financial Secretary wishes to give us any colour on thatI rather doubt that he will. An event such as my hon. Friend outlines would clearly be catastrophic; if we are not able to fund our public debt through gilt instruments, we are exactly back to the situation that this country was in after the previous period of a prolonged Labour Administration, when we had to knock on the door of the International Monetary Fund.
Mr. Stewart Jackson: My hon. Friend is making very good points. He will know that if the 5 March announcement of an increase in quantitative easing been made under the previous Conservative Government, we would have heard outraged voices from the then Labour Opposition about the debauching of the currency and of the economy. Does he deprecate the fact that to this day we have still not had a proper and full debate in Government time on the specific issue of quantitative easing?
My hon. Friend makes a powerful point. It is the most significant and rapid collapse in the public finances, and the most significant about-turn in Government
action to try to revive the economy, that we have seen in our political lifetimes. It is astonishing that the Government have not been prepared to stand up and debate in this House why the quantitative easing measures that they have proposed, and are implementing through the Bank of England, are the right approach to take. Those measures are referred to, as it were, in parentheses alongside other debates about the economy, but we have not had a significant debate on quantitative easing, and that is highly surprising. I wonder why not.
I shall touch on three specific measures in the Budget. The first is pensions. The reasoned amendment highlights the inconsistency of the Governments approach to pensions, as evidenced by the measures in the Bill. The Government took a relatively mature approach to the self-evident looming pension crisis. The introduction of the new regime on A-day only three years ago was detailed and considered. It followed detailed and prolonged industry consultation over the previous 18 months by Lord Turner, who has now been promotedif that is the right wordto chair the FSA. The Turner review was a reaction to a demographic challenge and medical improvements. The problems in the pension industry had been compounded by the impact of the previous Chancellors assault on pensions in 1997, and the consequent collapse in savings, which all contributed to the time bomb in pension provision in this country.
The Turner proposals were adopted more or less wholesale by the Government as a start in encouraging greater self-responsibility for pension provision, but the measures in the Bill demonstrate a significant reverse in that approach. I wonder to what extent the Chancellor has consulted Lord Turner, let alone industry experts. It seems that the Treasury recognises that it has not thought through the full implications of what is proposed in the Budget, because it was also announced that a consultation would be held
on the best way to implement this reform, to ensure that the different categories of pension scheme used by individuals are treated fairly.
Peter Luff: Does my hon. Friend notice any inconsistency with the Chief Secretarys position in her opening remarks, when discussing a possible extension of the VAT reduction period? She said that certainty was needed, but is that not also crucial for pensions? People are making long-term decisions, and the extraordinary uncertainty that has been created by the Governments handling of the situation must be of grave concern.
As I said, four or five years ago the Government adopted a mature approach to the issue of pensions. They wanted to put in place something that was, if possible, the result of political consensuswhich was broadly givenand was accepted by the industry, so that the new regime would endure and would not be tinkered with. Individuals need that certainty even more than institutions, because they need to make a commitment to a long-term pension investment over decades. They should not be messed around from Budget to Budget by finickety little changes. The measures in the Budget are not finickety little changes: they are a significant reverse in the Governments whole approach.
The language that the Treasury used is extremely revealing, talking as it does of fairness between schemes. One consequence of the measure to restrict income tax relief for higher-rate taxpayers is to focus attention on the increasing disparity between final salary and defined contribution schemes. There are, of course, fewer beneficiaries of final salary schemes than there were when the Government took office. The figures that I have do not go back quite that far, but in 2000, 18,100 defined benefit schemes were open to subscription. By 2007, that had declined to a mere 2,370 schemes still open for members. The number of members in those defined benefit schemes declined over that period from 8.6 million to 6.2 million, meaning that nearly 2.5 million fewer people were on defined benefit or final salary schemes.
Almost all that decline came from the private sector. At the end of 2007, there were only 1.3 million members of private sector defined benefit schemes, whereas in the public sector there are still 4.9 million members in final salary schemes. A further 1.8 million are still in schemes that continue but have been closed to new members. The vast majority of those closed schemes are, of course, in the private sector, with some 1.4 million people still in final salary schemes that are now closed to new members. That illustrates the scale of the decline in pensions presided over by this Government.
I labour this point because the capping measures for high-income earners and the forestalling measures that were referred to earlier in the debate will merely accelerate the trend away from final salary schemes. That will apply mostly in the private sector, leaving the public sector final salary schemes increasingly exposed to public scrutiny and criticism, which I expect has not even occurred to those on the Government Benches. That will expose the increasing lack of fairness. Those who are still entitled to final salary pensions will be protected not only from the mortality risk but from the investment risk, whereas those who are in defined contribution schemes will continue to have to bear both risks in the pensions that are ultimately paid out to them. Decreasing mortality means lower returns for defined contribution schemes, because providers have to assume that we will all live longer.
By taxing contributions at 20 per cent. on the way into the defined contribution schemes of the vast majoritycontributors to such schemes by definition have to pay in a much higher proportion of their salary than those on final salary schemes, particularly in the public sectoras well as taxing income received from pensions on the way out will lead to an increasing disparity between those who defined contribution schemes and those who remain on final salary schemes, who are high earners. We are talking about a relatively small number of people who will be affected, but the fairness issue applies across the final salary scheme membership. This measure will require considerable debate within and between Government and Opposition to ensure that there is fairness in the way that the provision applies to those who are fortunate enough to be in final salary schemes.
The second issue that I want to touch on briefly was mentioned by my hon. Friend the Member for Mid-Worcestershire (Peter Luff), the Chairman of the Business and Enterprise Select Committee, and concerns clause 9 and the extension of reduced standard rate and anti-avoidance provisions for VAT. The Chief Secretary was
present at a meeting yesterday of the British Retail Consortium, held in Portcullis House, at which I was also present. It was quite clear that she was seeking to give the impression to the retailers present that the proposals for the termination in the cut in VAT were not set in stone. At that meeting, and again in the House, she referred to the fact that HMRC is prepared to engage in active discussions with retailers to seek to mitigate any problems that arise. That reverses the intention of the provisions.
The provisions are designed to provide the sort of certainty that my hon. Friend the Member for Mid-Worcestershire described, so that people know where they stand, by deferring the cut-off date from 1 December to 31 Decemberat not inconsiderable cost, as other hon. Members have said. The Chief Secretary has just thrown that into confusion by suggesting that HMRC would be flexible in its interpretation. I am not sure whether that extends to being flexible in its interpretation of when the month of December ends, as many retailers have a month-end that is not coterminous with the calendar month end.
As has been said, on 31 December many retailers will be in the height of the early days of their post-Christmas sale, as such sales now tend to start not on 1 January but on Boxing day or even before that. A great deal of price-changing will therefore be going on in the run-up to the change proposed by the Chancellor. That is entirely characteristic of this Government, who have sought to introduce a measure without thinking it through properly, and without consulting in advance those people who are likely to be most affecteda measure that will have the consequence of creating, as the Government did when they first introduced the VAT cut, a considerable added burden of work and expense for the retailers whom they think they are benefiting.
I urge the Financial Secretary not only to bring clarity to this situation, but before the conclusion of the Committee Stage to engage with the retail industry to try to come up with a sensible compromisea cut-off date that will not engage retailers, at one of the busiest times of the year, in a great deal of extra work for no particular benefit to them. Retailers typically change their prices over a weekend. Major companies can do it all on a computer programme. Small retailers have to go round sticking all the prices on the goods themselves. That is a very labour-intensive process. It is costly for the retailer. They have to do it, typically, at night or on a Sunday, so they are paying overtime. That is not an easy thing to do in the middle of a very busy trading week. If I sound slightly anxious about that, it is because, having been a retailer, I know something about it.
That brings me to the third specific measure that I wanted to mention, which, I am afraid, also relates to the retail trade in particular although it impacts on many other businessesthe issue of trade credit insurance. I tip my hat to the Financial Secretary for introducing a measure that, while overdue, has been welcomed by the industry and is an important plank in trying to help keep businesses trading.
The use of credit insurance in trade in this country has become increasingly prevalent in recent years, but it is extremely reliant on a very few providers. Three providerstwo large, one smallundertake the vast majority of credit insurance provision in this country. This measure will be of benefit to many companies, but
many othersthankfully, a smaller numberwill not be able to take advantage of it, because although the scheme is estimated by the Government to apply to some 14,000 businesses, it will apply only to those which have lines of credit insurance in place on 1 April.
I am sure that Members will have received representations from businesses trading in their constituencies from whom credit insurance was removed prior to 1 April, as I have done. Some of them are quite significant companies. I am thinking of one that is a supplier to a major high street chain. That chain had its credit insurance lines pulled in the first quarter of this year, which means that hardly any of its principal suppliers are able to supply goods to it. It is still trading, somehow, but the arbitrary 1 April cut-off date means that a number of businesses that are trading adequately will find it increasingly difficult to continue trading if they are not able to get goods on the shelf.
I accept that the Government do not want to put themselves in the position of assessor of credit risk; that is a job for the banks and the credit insurers. However, the Government ought to have listened to some of the voices that said, way back at the beginning of this year or the end of last year, that such a measure was vital to keep businesses trading. Indeed, in January the Secretary of State for Business, Enterprise and Regulatory Reform publicly stressed his concern about what he called the immense financial distress placed on companies as a result of the loss of such cover.
It seems regrettable that despite all the discussions that took place in the first quarter of this year and at the back end of last year, the Government did not think to introduce the measure then. Perhaps that is because it is somewhat close to the national guarantee scheme proposed by Conservative Members, and the Government did not want to be seen to be taking up yet another of our ideas. To emphasise my point, I will quote Jane Milne, business director at the British Retail Consortium, who was present at the meeting yesterday. She described the scheme as
much needed but...too little too late. Matching the trade credit insurance that private insurers are willing to provide is vital to helping fundamentally sound businesses weather the recession. But the unannounced detail confirms this safety net will be denied to companies whose cover was cut before 1 April, meaning the plight of many is being ignored.
For retailers to survive and keep people in work they need to keep shelves stocked with the goods customers want. Insurers began removing cover as the downturn started to bite this time last year. The Governments scheme should apply from then
To conclude, there are measures missing from the Finance Bill that would help to address some of the vital shortcomings in the Governments approach to tackling the economy that I identified at the beginning of my remarks. There are hardly any measures in the Bill to encourage entrepreneurial incentive. There is a modest measure for increased capital allowances, but that really applies only to existing businesses, not to those that are growing significantly, although it might help in some isolated cases. There is very little help in the Bill for small businesses, the lifeblood of our economy, from which all big businesses emerge.
If the Financial Secretary gets out and about, as I imagine that he should, and talks to entrepreneurial clubs and groups of business men up and down the country, he will find that surprisingly large numbers of people responsible for significant businessesbusinesses are increasingly mobile in this global economyare actively considering relocating their centre of operations, or their business in its entirety, to outside the country. That is because they see the approach that the Government are taking, which is not to encourage entrepreneurial activity in this country. That is a great worry for this country, as is the question of how we will be able to weather the recession and retain a strong level of employment in years to come.
Secondly in my concluding remarks, there are very few measures in the Bill to encourage savings, and they are complex. Why was the welcome increase in the individual savings account limit staggered over two six-month periods? It defies any kind of sensible logic. I hope that that, too, will be pressed in Committee. The proposals contain little significant incentive to encourage the take-up of savings.
Thirdly and finally, the Bill betrays a lack of competence at the heart of Government in handling the economy. We have seen what has happened to the public finances over the past 12 months. That tells a story in itself. There is a complete absence of vision on the Governments part as to how they will be able to drive the economy out of the mess that they have driven it into. If they are incapable of vision to get the economy going again, they should go themselves.
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