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6.45 pm

Mr. John Redwood (Wokingham) (Con): I am a director of one company and a director and a shareholder of another company, and have declared that in the Register of Members’ Interests.

The Budget judgment before us, which we must think about in this Second Reading debate, is the Government’s judgment that they need to increase spending at a rapid rate, that they need to make some modest—as they see it—increases in tax revenue, not in the immediate year but in subsequent years, by raising rates for the rich, and that they need to bridge the rest of the gap by very substantial borrowing.

In the opening exchanges, we heard different positions being set up. I am firmly of the view that the Government are running undue risk with the huge gap between spending and revenue not just in the current year but in the years ahead, particularly in the subsequent year, about which the Budget makes a judgment. I would like to see that gap smaller, and I would wish to achieve that by controlling expenditure rather more than we are witnessing under this Government.

This is not primarily a debate about public spending. I have set out at least 17 ways that I immediately see of making reductions, some very big and some quite modest but illustrative. The culture in government needs to be changed so that more is delivered for considerably less. That is not difficult, because the inefficiencies are so gross and the overstaffing on the administrative side is so enormous: The Guardian jobs pages show us that there is no idea of imposing any kind of control on staff numbers and gaining proper value for money for taxpayers.

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That is what I would address, but first let us look at the situation in the Government’s terms. They have invited us to support a Finance Bill based on two worrying propositions—first that they should spend that much, which I do not think they should, and secondly, that they should raise so little, given the amount of spending that they wish to do. In their own terms, if they wish to do all that spending and, unlike me, think that every pound of that is providing value and is much sought after by taxpayers, they should be prepared to be honest with the House and say, “That’s the bill, and we need to raise more in taxes, not next year, the year after or when there may be another Government in place. We need to be honest with the public and raise some more money in taxes this year to meet all those spending bills.”

So why, then, do the Government not do that? Obviously, because there is a general election coming up and they know as well as any other elected politician that increasing taxes is very unpopular. As their cover story, they claim that their spending is reflationary, and that it will be good news for jobs and for the economy if this year—by coincidence, a pre-election year—they spend so much more than they raise in taxes.

The economic effects of forcing savings from people are similar to the economic effects of taking taxes from them. If the Government are serious about borrowing all that money from individuals or from companies in the United Kingdom private sector, it has more or less the same effect as if that sum were taken off in tax, because for every pound that they borrow from the UK private sector for this so-called reflationary spending, the private sector has £1 less, so it cannot provide the jobs or buy the goods that it would otherwise use that money to do. It is, instead, providing it to the Government. In their own terms, their argument for under-financing their huge expenditure by such a big margin is unlikely to work.

That is not the only thing that the Government have done in their desperate and belated attempt to turn around the massive recession that their policies, allied to problems throughout the world, have undoubtedly created for Britain. I am strongly of the view that it was policies made in Britain that made the banking crisis so bad here, and that the manic and deliberately perverse monetary policy that the Government and the authorities followed first created a bubble, then created a crash, and is now desperately trying to find a way to reflate and inflate from the crash site rather late in the day.

Monetary policy is an extremely powerful weapon, however, so the heavy lifting to try to turn the economy around will be done not by the Budget, because it will not be nearly as reflationary as the Government suggest, but by having interest rates at almost zero and by gradually nursing the banking system back to strength. I am not a gloom-monger who says that we are going into a 10-year depression and never going to come out of it; monetary policy is very powerful. The reason we are in crash mode is that the monetary authorities got their monetary policy completely wrong by being far too tight in 2007 and at the beginning of 2008. They are now trying to produce a much looser monetary policy, which started last autumn, and in due course that will definitely have a beneficial impact. It will start to lift some of the gloom, slow the rate of decline and in due course, if other things do not get in the way, turn things around from their current very bad position.

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I do not believe that the Budget will turn the economy, but nor am I saying that it will always get worse at the current rate, because that argument would be quite obviously untrue and rather foolish. We all live in this country, we want it to do well, we wish to see more of our constituents with jobs and more businesses to flourish, and we wish monetary policy well. We are more worried about the impact of the Budget, because its tax measures will undermine competitiveness, enterprise and job creation at the margin—or in some cases more than at the margin—and that is not what the Government should be doing with a taxing Budget at this stage in a violent and unpleasant cycle.

My right hon. and hon. Friends are naturally very concerned that the Government will not be able to borrow all the money that they need in the next few months to bridge the gap, and my right hon. and hon. Friends therefore say that either taxes need to be higher or expenditure needs to be lower to secure a tighter Budget. They should bear in mind the fact that the Government are trying to load the dice in favour of their getting away with it for a few months, but that their Budget has a time horizon that stretches only until the next election. It is apparently set within the framework of wanting to get the next three or four years right, but nobody really believes the forecasts, and if we look carefully at the tax measures, we see that they take the form of a Tory tax trap. They are political taxes; they do not seriously try to fill the big void in the public accounts, even after the following election. They are in the Budget for illustration, and probably for spite. They are not there to deal with the colossal black hole in the figures.

Stephen Hammond (Wimbledon) (Con): Although my right hon. Friend describes those taxes as political taxes, their impact on our economy will be worse than that, for several of them will directly impact on the wealth-creating and private sectors that will generate wealth in the future. Although those measures may be Tory tax traps, they have the potential to make an underlying impact on future wealth creation in this country.

Mr. Redwood: I entirely agree, and I said that I would argue that I do not like some tax measures in the Budget, because they will make enterprise, jobs recovery and prosperity more elusive rather than easier to reach. Why, then, are the Government not more worried about the question posed—that the gap is too big and that that will be revealed by their not being able to borrow all the money? There are two reasons. The Government think that they will get away with it for a few months, because they have instructed the Bank of England to buy up to £150 billion of their own debt—debt that they are issuing.

We have this bizarre money-go-round whereby one group of people in the Treasury is desperately trying to issue £175 billion in gilts, or however much it might turn out to be this year, and another bunch of officials in the Bank of England is busily buying in £75 billion, rising to £150 billion if it uses the full permissions and carries on with the programme. I am sure that people in the gilt markets love that; they are pretty clever at these things, and understand that if they sell gilts to the Bank of England at price A and buy back similar gilts at the
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more advantageous price B, they will make a turn, and a living. That money-go-round, apparently, is the height of modern Treasury and Bank of England policy making.

It all means that if the full proposed quantitative easing plan is implemented, the Treasury and the Bank of England will be pretty relaxed about borrowing for the foreseeable future; they will not borrow anything net at all from other people, but will print the money or give it to themselves. They have another reason to be more confident than we might expect: their regulators are also instructing all the commercial banks to buy piles and piles of gilts, just to make sure. In the middle of this dreadful banking crisis and nasty credit crunch, the regulators have decided—now, of all times—to say that the banks need more cash for the amount of business that they are doing. If only they had thought of that rather good idea in 2005 or 2006, we would not have had to go through the whole grisly business of the crunch; there would not have been the “run on the Rock” or the uncertainties about some of the bigger banks. However, to implement the idea now—when the banking system is much weaker and extremely cautious, and the worry is that it will not finance enough transactions in the economy to get things going again—is rather perverse, to put it mildly.

Mr. Dunne: My right hon. Friend is making a powerful point. Does he agree that at the time, voices such as that of the Governor of the Bank of England were making themselves heard? The Governor made it clear that he felt that debt levels were getting out of control and that the banks needed to act. The problem was that the tripartite arrangement set up by the Prime Minister and the Chancellor did not allow that action to take place. No mechanism was in place to enforce such measures.

Mr. Redwood: That is exactly right. The tripartite mechanism was a dreadful failure, and it is the background to the Budget and these measures. The Government need to raise so much revenue now because the banking system went wrong; the banking system went wrong through a combination of foolish judgments by bankers—that is clearly true, as I am sure my hon. Friend will agree—and a catastrophic failure by the regulators, who were paid big salaries to sort out exactly that kind of problem. They were unable to control cash and capital in a way that smoothed the cycle. They were violently “pro-cyclical”, as the technical people now say; they reinforced the damage of the cycle by being far too easy on the banks in the good times and extremely tough on them in the bad times.

If Ministers foolishly think that I would want to take risks with banks in a way that might bring them down, I should like to disabuse them; I want my country to do well, and I know that it needs strong and stable banks. However, the banks do not have to be instructed today to put so much extra cash into gilts, when we need them to lend a bit more and see business over the worst of the crisis. We now know, I trust, that the Government and the Bank of England are standing behind the banks. People have no reason to take their deposits out because they know that the lender of last resort is there. The Government stand behind the banks, so there is no need for the dramatic requirement for so much more in gilts.
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We must assume that the only reason for what is happening is that the Government and the Bank of England think that it would be handy to have another enforced buyer in the market at a time when so much gilt-edged security is being issued.

Some of the pension regulations achieve something similar from the now-rather-mature pension funds, thanks to the fact that the Government’s taxation on pension funds has led to most private sector schemes being closed. When a scheme moves from being active and growing to being closed, the regulators normally say that the scheme must hold much more in fixed income, rather than in growing assets or claims on such assets. That also serves the Government’s book rather well. Paradoxically, the effective wrecking of private sector pension funds in the past 11 or 12 years, through higher taxes and regulation, is now creating a demand for the very borrowing that the Government need to see themselves through to the election.

Let me turn specifically to the tax measures in the Budget. The Government belong to the school of thought that says, “Make us a bit more chaste—but not yet,” and takes the view that we can raise more revenue by putting rates up. I have already dealt with the first folly. We need to start to control spending much more immediately because of the longer-term strain on the accounts, but we also need to challenge the assumption that putting rates up in such conditions, or even in the conditions that will prevail in a year or so, will necessarily raise more revenue. The Treasury should be asked to do rather more work on what happens when there are increases and decreases in the rates on entrepreneurs and on people who earn significant salaries.

I remember that the Labour party was full of grief when a Conservative Government dared, in two stages, to lower the top rate of tax on earned income from 83 per cent. to 40 per cent. Labour said that the Conservatives were letting the rich off scot-free, that it was a disgrace, and that they were helping their rich friends. The net result of that big change was to make us competitive again in a world where, when we had those very penal rates, people thought that we were a complete joke and not a place to come and do business. As a result of those changes, two important things happened. First, the rich paid a lot more tax. I think that that is rather good news. I would like the rich to pay a lot more tax, but the way to achieve that is to impose realistic, not penal, tax rates on them. Secondly, and even better from the Labour point of view, the rich paid a bigger proportion of tax. Not only did the economy start to grow faster, but the rich had to pay more.

Mr. Newmark: There is a third lesson in what my right hon. Friend is talking about. The Laffer curve shows that when taxes are lower it is not just that the rich are paying a higher proportion of tax but that far more is collected from the country as a whole. That is what is important about lowering taxation.

Mr. Redwood: That is an extremely important and powerful point, which brings me to my next case study—the Republic of Ireland.

The Republic of Ireland has made some mistakes on monetary policy and control in the past few years, and it has had an equally bad, or perhaps even worse, version of the credit crunch. It was made worse partly by the Irish joining the euro, which meant that they did
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not have the flexibility on the exchange rate that the United Kingdom, mercifully, still has. However, what one cannot take away from Ireland is its phenomenal success in turning a country well below the European average in terms of income per head and general prosperity into one well ahead of the European average.

The prime reason for that was not EU subsidies—those were quite small and mainly went into agriculture, which did not do that well—but the low tax rates that the Irish bravely set. By setting very low rates on income and corporate profits, they issued a huge invitation. Many Irish people who had gone abroad to seek their living because they did not like the high tax rates decided to go back to their home country, and many businesses decided that Ireland was the right place to set up business within the European Union as a whole. Because the Irish had the courage to set those low rates, there was an explosion in tax revenues, which meant that they could spend more on public services, and an explosion in jobs and profitability.

In this Budget, the Government are inviting a future Government, perhaps, to go in exactly the opposite direction. They are saying that it is right to raise the marginal tax rate from 40 per cent. to 50 per cent. on higher-earning people, to change the tax arrangements on personal allowances in an adverse way, and to tamper with the pension reliefs which were put in place some time ago and which people thought indicated a stable framework for long-term saving. Pensions are, by definition, very long-term investment and savings projects, and it is very disruptive to make such changes. Taken together, those three things will clearly have a disincentive effect.

Treasury Ministers should tell us rather more about what work they have done. Why do they think that we are so different from Britain in the 1980s, which proved that the way to tax the rich is to make rates competitive? Why are we so different from Ireland in the ’90s and early noughties, which proved that when there are lower rates there are a lot more rich people, and that they are taxed rather more?

It is true that the figures that I have mentioned conceal two different trends. First, competitive rates mean that there are more rich people in the country, so in that sense there is a little trick in my figures. However, it is also the case that the rich people who are already in the country are more motivated to get richer. They make that extra commitment, work those extra hours and set up that new business, because they think it more worth while taking a risk with their money. They put their money to work rather more successfully and often, so, as my hon. Friend the Member for Braintree (Mr. Newmark) rightly reminded us, more activity is generated. I should like the Treasury to explore its rationale with us a little more.

My party is rightly saying that this is a tax trap. We have no wish to posture or go around saying that we want to be a soft touch on the rich at any time, and particularly not at this juncture in our fortunes.

Stephen Hammond: My right hon. Friend is making a very powerful point, and I understand his asking Treasury Ministers to explain their rationale to us. We have already seen huge parts of the Budget unravel, and dare I say to my right hon. Friend that Ministers will not be quite so keen to hear what he is saying? However, surely they must take notice of what the Treasury Committee
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said in its immediate report after the Budget. It used the words “considerable uncertainties” about the yield from the tax rise. The Budget is already unravelling from the Committee’s point of view, and surely the Government must address in this debate what it says.

Mr. Redwood: That is absolutely right. The Treasury Committee has come to a very sensible view and asked the right questions. Private forecasters are now saying that such a tax increase could actually reduce the amount of revenue by driving some rich people out of the country altogether, and making others work less hard or put less money at risk.

Mr. Jeremy Browne: The right hon. Gentleman said that this was a “tax trap”. I do not understand this concept of a trap. The Government come up with tax policies and the principal Opposition party has to decide whether it believes in those policies. If this is a trap, every single tax policy put forward by the Government is a trap. Surely, to follow the logic of his argument, this is a straightforward opportunity to vote on a point of principle. If he believes that the rise is such a disincentive for people to become wealthier, be entrepreneurial and work harder, surely this is an opportunity to vote against the Government. I do not understand why it is a trap.

Mr. Redwood: I am sure that the hon. Gentleman does. He is a better politician than he is leading us to believe with that rather childish intervention.

The Government’s idea was crude and simple—“Let’s put this down for a future year. We don’t actually think it’s going to raise very much revenue.” Perhaps they did not believe it would raise any at all. They saw it as a win-win situation for Labour. If the Conservatives voted it down, Labour would spend the next year going around the country saying, “The only thing the Tories care about is rich people and their marginal tax rate.” If the Tories voted for it, Labour would go around the country saying to people who might otherwise vote Tory, “Look, the Tories are useless. They don’t even stand up for your kind of proposals, and they aren’t really the party of enterprise after all.”

We do not intend to play that game, which has turned out to be a lose-lose for Labour. It has pitted an important part of the business community against the Labour Government, because the business community is not impressed by their reneging on the clear promise that I remember them making at the last general election that they would make no changes to the overall rates of income tax at any level.

The change has also pitted Labour MP against Labour MP. We know that the Blairite faction is extremely unhappy with it. The Blairites thought that the fact that the previous Prime Minister had accepted the Conservative settlement on tax prior to 1997 was a very important part of winning over floating voters in middle Britain whom Labour needed to win over to form a Government again. They believe that it is disruptive and a clear tearing-up of that element of the new Labour settlement that the Government have now decided to go from 40p in the pound to 50p. Indeed, at the margin it is rather higher than that if we take into account the changes to allowances, pensions, national insurance and so forth. Far from being a trap for the Conservatives, it has been another factor in the growing civil war between Blairites and the supporters of the Prime Minister.

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