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“what is actually happening is that the Government are very carefully following the doctrines of Milton Friedman and we have, in essence, a monetary response to the crisis, which is absolutely right, provided it is effective and gets money into the economy.”—[ Official Report, 31 March 2009; Vol. 490, c. 815.]
We supported the reductions in interest rates and recognised that addressing a downturn is essentially about monetary policy.
Mr. Syms: My hon. Friend is developing his argument well. Clearly, the VAT cut pales into insignificance compared with quantitative easing, devaluation, interest rate cuts and all the other things that are happening. There must be better ways of spending the money.
Mr. Gauke: My hon. Friend is right. The Government can and should do many things to address a recession. We differ from the Government in that we believe that, in the current circumstances, the benefits from a discretionary fiscal stimulus such as a VAT cut are outweighed by the dangers that it poses to the public finances and the burden that it places on future taxpayers.
Mr. Timms: I am following the hon. Gentleman’s argument closely and with interest. I appreciate that there are separate discussions about whether we can afford a fiscal stimulus and which stimulus we should choose. Does he agree with the shadow Secretary of State for Business, Enterprise and Regulatory Reform that, if we are to have a fiscal stimulus, a VAT cut is the best and most effective measure?
Mr. Gauke: My principal argument is that we cannot afford it. On what constitutes the best fiscal stimulus when one can afford it, there are various arguments for and against, which I shall tackle in my speech. However, the fundamental argument is that we cannot afford it.
I want to reach out in a bipartisan spirit to find another matter about which we and the Government agree. It is that one must recognise the state of the public finances when deciding what stimulus one can have, and that there are limits to Government borrowing, which must guide the policy that one pursues when drawing up pre-Budget report and Budget measures. We clearly agree about that because, despite all the rhetoric in the run-up to the Budget in April from the Prime Minister on his world tour, when he made the case for a bold fiscal stimulus for every country, the UK did not pursue such a policy in the 2009 Budget because the assessment was that we did not have the money. As the Governor of the Bank of England put it to the Treasury Committee—
The First Deputy Chairman: Order. I have allowed some latitude, but the hon. Member is now straying rather wide of the amendment and its intention.
Mr. Gauke: Thank you, Mrs. Heal. I want to argue that we could not afford the VAT cut, which was announced in the pre-Budget report. The public finances are precarious and the Government recognised that they could not afford an additional fiscal stimulus in April. As the Governor of the Bank of England said:
“The fiscal position in the UK is not one that would say, ‘Well, why don’t we engage in another significant round of fiscal expansion?’”
Mr. Timms: May I press the hon. Gentleman a little more? He is now setting out a view that is consistent with the comments of the shadow Business Secretary, but does he agree with his right hon. and learned Friend that, if one has a fiscal stimulus, the VAT cut is the most effective sort of stimulus to introduce?
Mr. Gauke: Again, a little patience from the Financial Secretary would be appreciated. I know that he is keen to move me on from whether a fiscal stimulus was affordable, but I think that the subject should be tackled thoroughly. Given what we know now, who was right about the pre-Budget report 2008? Could we afford that discretionary fiscal stimulus? Hon. Members should remember that, at the time of the pre-Budget report, the Government projected that they would borrow £77.6 billion in 2008-09, and the projected figure for 2009-10 was £118 billion. By the time we reached the Budget—which contains the most up-to-date figures that we have from the Government; some consider them optimistic—the figures for 2008-09 were £90 billion and those for 2009-10 were £175 billion. That is an increase in borrowing over the two years of almost £70 billion.
Even in November, we were concerned about the risks of the VAT cut to the public finances. We were not alone—in a debate in the House on 17 December, the right hon. Member for Birkenhead (Mr. Field) expressed his concerns about the Government’s ability to raise debt. Were we right to be worried about public finances? Absolutely. Given the decline in them and the difficulties in selling Government gilts since then, our case has become stronger. Our opposition to the VAT cut sent a much clearer signal to the markets than the Government could convey of determination to take the state of the public finances seriously.
Let us consider whether a VAT cut is the best way in which to use the £12.5 billion that the Government said in November that it would cost. I have said that I do not believe that we could afford it, but there is a range of views about whether a VAT cut was the best method of using that money. I am not persuaded by Liberal Democrat proposals that the money should have been spent on a public works programme. The hon. Member for Taunton rightly did not have an opportunity to discuss the Liberal Democrat proposal in detail. However, I remember examining it, and it seemed to consist principally of improvements to rail services relevant to Liberal Democrat seats—strikingly so.
Let me cite that great Liberal—I do not know whether the hon. Member for Taunton is from the same tradition—John Maynard Keynes. In 1942, he wrote:
“Organised public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date) to be the most serviceable instrument for the prevention of the trade cycle.”
Mr. Jeremy Browne: I appreciate the hon. Gentleman’s joke, but I fear that it may not be accurate. I beg your brief indulgence, Mrs. Heal, to say that our proposal was to electrify the great western and midland main lines and begin the Liverpool light rail network. Although my party is winning more and more seats in all parts of the country, it is probably unfair to say that those measures would specifically benefit Liberal Democrat constituencies.
The First Deputy Chairman: Order. I have been generous to hon. Members. Perhaps we can now adhere a little more closely to the amendment.
Mr. Gauke: I anticipate that you would not want me to dwell on a response to that, Mrs. Heal, but I have seen a document that had a number of proposals for the west country, including one for a line from Eastleigh to Romsey, which was particularly egregious.
The reaction to the VAT cut internationally has not exactly been enthusiastic. Nicolas Sarkozy has said:
“Cutting VAT by two points doesn’t incite people to buy if they are scared about their future.”
Christine Lagarde, the French Finance Minister, said:
“as far as we’re concerned...we’re not certain that when prices go down a VAT reduction is that effective.”
Peer Steinbrueck, the German Finance Minister, said:
“We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? All this will do is raise Britain’s debt to a level that will take a whole generation to work off.”
Carsten Schneider, the German Social Democratic budget spokesman, said:
“I think the sales tax cut is counter-productive.”
Oliver Blanchard, the chief economist of the International Monetary Fund, said:
“Temporarily cutting VAT, a measure that was adopted in Great Britain, does not seem to me to be a good idea...2 per cent. less is not perceived by consumers as a real incentive to spend.”
8.30 pm
Mr. Brooks Newmark (Braintree) (Con): Not to be too cynical, does my hon. Friend feel that perhaps the Germans, the French and the Dutch were all terrified that the 2.5 per cent. cut in VAT would suddenly draw business away from France, Germany and Holland? Does he think that that was their motive in making those comments?
Mr. Gauke: No, I do not. My hon. Friend puts forward an interesting theory—it is one that I am sure the Government would like to endorse—but I do not think that that was the reason that those whom I have quoted thought that the cut was a daft idea.
Mr. Jeremy Browne: Does the hon. Gentleman think that the Government could take the approach of announcing—or letting it be known—that they intend to increase VAT to 20 per cent. in order to address the Budget shortfall and that that may have enough of an impact to create a stimulus in demand, when people realise that the differential will be 5 per cent., not just 2.5 per cent.?
Mr. Gauke: That is an interesting idea. Although it would be unfair, I am tempted to say that the Minister—or at least what went out in his name—rather contributed to that perception when there was a suggestion that VAT may rise yet further. However, the Government have not stated that that is their intention. There may well be a stimulation in demand when people get in before the reversion to 17.5 per cent.
John Robertson (Glasgow, North-West) (Lab): It’s called Christmas.
Mr. Gauke: Indeed, although I take it that the hon. Gentleman will not be claiming credit for any stimulation in demand in December from the subsequent increase in VAT.
Mr. Newmark: To follow up with a more serious point, I would be interested to know from the Minister, given that the Government track our borders assiduously, whether he noticed a flow of individuals coming from France, Germany or Holland into this country as a result of the 2.5 per cent. cut in VAT, which would thereby have increased retail sales to German, French and Dutch customers, or does he not have that information?
Mr. Gauke: Again, I am grateful to my hon. Friend. I am sure that the Minister will have taken that question on board and will be able to provide us with some answers. The same question goes for the Republic of Ireland, although the devaluation of the pound over that period may have also played a part.
A number of countries engaged in a fiscal stimulus, because they were in a stronger position and could afford to do so, but they did not go down the route of the VAT cut. There are also some practical points to be made about VAT, some of which were raised in the quotations that I have cited. First, at a time of sharp discounting of goods—that was certainly the circumstance last November and last December—the 2.5 per cent. reduction in VAT could have been lost. That point was made by a number of commentators. In particular, when Justin King, the chief executive officer of Sainsbury’s, appeared on “Question Time” on 27 November, he said:
“If we walk down the high street today you’ll see 20 per cent. off, 30 per cent. off, 50 per cent. off, so really in that context it’s a drop in the ocean.”
That is one of the problems with the VAT cut.
The second problem is one of practical difficulties. There were practical difficulties with the sudden decrease in VAT at a time when shops were certainly hoping to be busy. There had to be re-pricing with very little notice and we know that that caused difficulties. In some cases the VAT cut was not necessarily passed on. In other cases, people were sitting in shops with calculators deducting the necessary amount, which also created difficulties. There were real costs involved in changing the system so quickly. Retailers were not exactly overjoyed at being faced with what was, after all, a tax cut. There are other technical difficulties involved. For example, those businesses operating under the flat-rate arrangements will not have felt the benefits of the change. There were significant practical difficulties.
At the big picture level, what was the test that the Government set themselves by reducing VAT? At the end of November, their argument was, “Thanks to the measures that we are introducing in the pre-Budget report, the recession is going to end earlier than it would otherwise do. It is now going to end in the second half of 2009.” Sadly, that is not going to be the case, although there are clearly some encouraging signs, and we hope that they will continue.
The Government now accept that recovery will not happen until the end of the year. The test that they set themselves was to use the VAT measure to bring the recovery forward. They have had to downgrade their growth forecast for 2009 from the contraction of 1 per cent. of GDP predicted in the pre-Budget report to a contraction of 3.5 per cent. as set out in the Budget. Even that figure is optimistic compared with the projections of the likes of the International Monetary Fund.
I am sure that the Minister will refer to the Centre for Economics and Business Research and to Doug McWilliams’ comments; he does so every time I debate this matter with him. Doug McWilliams has supported the VAT cut; indeed, he recommended that policy proposal in November. Having recommended it, he has subsequently looked at it again and concluded that he was right all along. His assessment states that retail sales over the December to February period were £2.1 billion higher than they would otherwise have been. We do not necessarily accept that, however. We need to disentangle the impact of the VAT cut from the effect of the very substantial cuts in interest rates over the same period, alongside the policy of discounting that shops were adopting, as we heard from Justin King. Even then, the Government’s
figures show that, in the period from December to February, the policy was costing the taxpayer something in the region of £3 billion.
Mr. Timms: I am delighted that the hon. Gentleman has now looked at the CEBR report. I wonder whether he has read the sentence in it that states:
“The data also shows that the acceleration in retail sales volume was not achieved through fire sales and fierce discounting on the high street.”
That exactly addresses one of the concerns that he and others have raised.
Mr. Gauke: I have seen that comment, but I come back to the point that it is very difficult to disentangle all the various factors involved. The fall in interest rates at that time will have had a substantial effect on sales, as we have seen.
Having read the CEBR report, does the Minister agree with its view, which differs from that of the Government, on the actual cost of the VAT policy? The report cites a figure of £11 billion, rather than £12.5 billion. I would be grateful if the Minister updated the Committee on the Treasury’s assessment of that cost, and told us by how much he thinks sales will increase. To what extent is the Government’s view consistent with that of the CEBR?
That brings me to the heart of amendment 8, which deals with the need to look again at this matter and for the Treasury to prepare a report and to evaluate the various consequences of the policy. There is a need to assess the policy in greater detail. There is clearly a debate to be had, and the Government will always argue that the policy has been successful. Most of us would argue that the fall in interest rates had a greater impact on retail sales, and the growth in the economy is certainly disappointing compared with what the Government were hoping for when they announced their policy. I am not, however, convinced that the Treasury is the right body to review this, which I say in the context of last month’s Budget, whose numbers have been heavily criticised. I will not go through all the detail, but the growth forecasts for 2009 and, more particularly for 2011 and 2012, seem to be out of line with those of most independent forecasters. The Government’s reputation for making projections of the public finances has been very poor, and we have seen those projections substantially revised.
The point I am making is that there is a need for a body independent of the Treasury to make an assessment of projections for growth and for the public finances. We propose an “Office of Budget Responsibility”, and there may well be a case for referring this sort of review to a body that is at arm’s length from the Treasury in order to assess whether the right approach is being put forward. I raise this particular caveat over the Liberal Democrat amendment, but there is much to be said for looking again at a policy that has not, I fear, by any means provided the best use of £12.5 billion of taxpayers’ money.
Alison Seabeck (Plymouth, Devonport) (Lab) rose—
Mr. Gauke: I welcome the hon. Lady to the debate and I give way to her.
Alison Seabeck: I do not want to be impatient or churlish because you have been approaching this issue in a spirit of generosity, actually, but on two occasions you have—
The First Deputy Chairman: Order.
Alison Seabeck: I am sorry, Mrs. Heal; I mean the hon. Gentleman. He said that he would at some stage tell us what the Opposition would have done to fill the gap if we had not reduced VAT in the way we did. We have not yet quite got there, however, and I am wondering whether we are going to.
Mr. Gauke: I am grateful to the hon. Lady, but I am not sure whether it is a question of filling the gap, as it more a matter of reducing it. There we go, but she brings me on to the next point I wanted to make, so I am grateful for her intervention.
What clause 9 principally does—I realise that I am venturing into a stand part debate, Mrs. Heal, but I am assuming that we are addressing the amendment at the same time—is to delay the implementation of the return to VAT at 17.5 per cent. from 1 December to 1 January. The reason for doing so is that the Government introduced their VAT change through a statutory instrument, which provided the authority to make that change only for 12 months. The Government now wish to add on an extra month, but to be fair to them, it was always their intention to do so. For the various reasons I have set out, however, we think it would be beneficial not to move the date on from 1 December to 1 January, but to stick with 1 December.
There are a number of reasons for doing that, so let me first address the point raised by my hon. Friend the Member for Bournemouth, East (Mr. Ellwood) about the difficulty of changing the VAT rate in the new year. It will be difficult for institutions in operation at the time when the VAT rate is changed, but perhaps even more significant is the fact that this will be in the middle of the post-Christmas sales. I should say the January sales, but it seems odd to have 1 January being in the middle and I am sure that you, Mrs. Heal, follow my point that there is a lot of activity going on in stores at the time of these sales. The representations we have received certainly suggest that retailers do not want the change to come in at this date. Whether it is the worst time of year, as the hon. Member for Taunton (Mr. Browne) suggests, I am not sure, but it is certainly one of the worst dates and we believe there is an argument for changing it.
Bob Spink: Is there not a case for pushing the date back rather than bringing it forward—perhaps to 1 June, which might have electoral as well as commercial benefits?
Mr. Gauke: The hon. Gentleman is right that a case can be made for moving it back, but that would have an effect on the Exchequer and, to be fair, I have been making the case that we do not have the spare money. As I have said, we oppose that because we do not think there is room in the budget, and we are therefore not persuaded of the case for moving it back to June or February or any other time.
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