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8.45 pm

Our proposal would have an advantage in addition to that of practicality: it would save some money. We can argue about what we should do with the money—whether some of it should go towards public works, some towards other tax cuts and some towards reducing the level of borrowing—but we are by no means alone in believing that the cut should be brought forward. In “Progress” magazine in March, in an article entitled, interestingly enough, “April 2009, make or break month for Labour”—Labour Members can work out for themselves whether it was a make or break month for them—the right hon. Member for North Tyneside (Mr. Byers) wrote:

Speaking in the House on 31 March, the hon. Member for Chorley (Mr. Hoyle) said:

It is clear that both Members believe that the time has come to return VAT to its previous rate.

For the reasons I have given, we will vote against clause 9. We want VAT to return to its previous rate of 17.5 per cent. on 1 December. We thought that the policy was bad when it was introduced in the last pre-Budget report, and the facts that have emerged since then have reinforced our view that we cannot afford it. We think that, in continuing to pursue their policy in the face of our warnings, the position of the Liberal Democrats and, indeed, the position of their own Back Benchers, the Government are making a mistake. The sooner they recognise it and stop pursuing a failed policy, the better it will be for the United Kingdom.

Several hon. Members rose

The First Deputy Chairman: Order. For the avoidance of doubt, I should inform hon. Members that I am indeed treating this as a clause stand part debate.

Mr. Syms: I congratulate the hon. Member for Taunton (Mr. Browne) on tabling an amendment that gives us an opportunity to discuss a very important issue.

It is clear that economic conditions have been very turbulent over the past 12 months. In terms of public policy, the Government were in a difficult position in the pre-Budget report. They had to decide what to do, and what to do quickly. A VAT cut is one of the main things that could be done quickly. However, a bigger cut over a short period might have been better than a cut of only 2.5 per cent. over a long period. That would have really pulled money out of people’s pockets, and made them feel that they were getting a bargain. A cut of several billion over three months might have had more impact.

My hon. Friend the Member for South-West Hertfordshire (Mr. Gauke) quoted John Maynard Keynes. It is clear that anyone who wants to move the economy on cannot become involved in electrification schemes and railways and so forth. As we know, given our planning process, those things take a long time. My
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preference is for a middle view. The report suggested in the amendment would be useful, because it would enable us to judge what the Government did in the light of the alternatives.

If we really want people to spend money, we give lower-paid people a voucher with an end date so that they can buy goods in a store. Alternatively, we give local authorities money that they can use to provide grants for environmental improvements to homes—which we know will be a major challenge—so that small business can become involved. Clearly, things have changed very rapidly. The Government made a decision in the pre-Budget report, and to some extent they are stuck with it. Therefore, it would be useful to have a report, particularly as 1 April 2010 is likely to be at the start of a general election campaign. We would have a document that we could discuss with great interest.

I suspect that the cut will, of course, make a difference to UK economic growth, but I am not sure whether that impact is really worth the £12 billion or £13 billion. I am also unsure whether it will have much effect on the competitiveness of small and medium-sized businesses. We have heard in the debate that there are costs. There are certainly costs to local authorities and to many businesses in this manoeuvre. On the disposable income of low-income households, as such households have a higher propensity to spend what income they have, there may be some modest positive impact on them, but I suspect there are other means and policy instruments that could have been used to put money into people’s pockets.

The amendment has allowed us to debate this matter and if the Government produced a report, I rather suspect it would be useful in April 2010. However, as we have moved on and the overall financial situation has deteriorated, one would also have to assess other things, such as the £12 billion or £13 billion cut in VAT revenue. That will leave a long-term debt legacy in terms of interest and compound interest, and there is also the opportunity cost of what else could have been achieved in the medium term while leaving a legacy of some sort, such as insulated homes or improvements in the overall economy.

The Government were in a difficult fix in the autumn. They faced an unfolding situation. There was clearly an imperative to take a particular decision: to try to put money into the economy. They made a choice, but I do not think it was a very good one; there are better steps that could have been taken. The amendment of the hon. Member for Taunton is a useful one for the Committee to consider, and I hope he is brave enough to press it to a Division.

John Howell: The amendment asks us to consider having

a number of areas. I want to concentrate on the impacts on “UK economic growth” and

It is crucial to strike the right balance between what is of value to the economy as a whole and what is of value to the competitiveness of individual businesses. On the latter, a fundamental issue is the cost of administering what will, by the end of this period, be two changes in
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VAT. Business has consistently seen the VAT cut as having no positive impact on their sales. The Federation of Small Businesses conducted a survey of 5,000 of its members, and 97 per cent. said it had had no impact at all in terms of boosting trade. There has been a big cost impact, however. I see that in my own constituency, where a number of small retailers are very unhappy. They are part of the fragile and vulnerable small business situation that we described earlier today. As a result, there are large numbers of empty properties in many towns—although there are perhaps some signs of shops being attracted back.

There is a cost involved in decreasing VAT and then increasing it again in terms not only of cash, but time. For those who run small businesses—especially those who have to adjust to these changes in VAT—that is perhaps the most precious commodity of all. The question of where to put in the effort and to use the expertise is crucial, but it is very difficult to cost. That is particularly difficult for a small business that sells tens of thousands of products, and perhaps has only one or two people running it.

The impact assessment for the Finance Bill listed a number of actions that business would have to take to implement the temporary VAT cut, including familiarisation; re-pricing; carrying out the extra bookkeeping checks involved; dealing with potential extra accountancy costs; and, of course, making systems changes and upgrades. It estimated that the total compliance costs for business would be about £300 million.

I was particularly worried by the paragraphs that followed, in which it was acknowledged that in deciding how to respond to those changes, businesses were likely to have to take lot of other costs into account. Such costs would arise from consulting advisers or, potentially, from renegotiating the terms of any contracts that are inclusive of VAT. Although the assessment recognised that those costs were likely, they were somehow dismissed as being commercial decisions—as if the other changes it had costed were not commercial decisions. Even the impact assessment recognises that costs that have not been properly analysed are involved, and that they are not part of the costings in the assessment. Thus, it is very difficult to make a judgment on this matter, and that has not been a particularly helpful part of the Government’s assessment of that part of the activity.

On the costs on the ground, as I have mentioned, the FSB survey has shown that there is no sign of the VAT cut working, but it is worth examining whether it is working at the bigger picture level and whether the model behind it was applicable. Without an understanding of that, the assessment required by the amendment would be difficult to achieve. One of the worrying features about the underlying model was that it was a simple supply and demand model of consumption, which would perhaps have been suitable to use in an economy that was doing well, but in one that contained a large marginal element, it ignored the complexities involved. The policy and the modelling that must have taken place in order to introduce this adjustment—the VAT cut and then the raise forward—assuming that any modelling was undertaken, was flawed from the beginning.


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The Financial Secretary and I have already crossed swords in the debate over whether or not the VAT cut has worked. At that time, he repeated the view of a report by the Centre for Business and Economic Research:

He went on to endorse the report’s view that the cut was

That is clutching at straws. The view has been based on the volume of retail sales, and there are problems with that approach. The Government cannot have it both ways. If they are going to put a lot of emphasis and reliance on that report, logically they must accept the criticism it makes of raising VAT again in January 2010. It states that that

If they are going to rely on the report for one thing, they must rely on it for the other—although that is not a favourable situation.

I have great difficulty in trying to assess whether the VAT cut has worked. It is one of those questions that are illogical in terms of their resolution, because we can make no direct comparison with the counter-argument as to what would have happened without the cut. The need for that was recognised in the evidence given by the Governor of the Bank of England to the Treasury Committee, in which he acknowledged that the real problem was that

We do not know how quickly spending would have changed if the VAT cut had not been made. That is the fundamental flaw in claims that the VAT cut has worked, as the Governor pointed out.

9 pm

In the absence of a direct comparator, we need some form of proxy to represent it. A simple increase in sales is not enough. Traditionally, we have looked at whether sales of VAT-able goods have increased more than sales of non-VAT-able. The key proxies are generally non-food sales with VAT versus food sales without VAT. The difference should be surprisingly large if we are to claim any proof that the VAT cut has worked. Because those measures are proxies and the model is simple, it is not possible to distinguish on the basis of volumes, or even values, other factors that have already been mentioned, such as discounts, or to take account of postponed purchases or lower interest rates that may also affect the outcome. So there is no proof there that the VAT cut has worked.

Alison Seabeck: I am not as expert as the hon. Gentleman, but his argument about the proxies—spending on VAT-able and non-VAT-able goods—is flawed. If there is additional money in families’ pockets because they have saved money on VAT-able goods, sales of non-VAT-able goods could rise because they have more money to spend on food and other products. I am not sure that the hon. Gentleman’s argument makes sense.

John Howell: I have some sympathy with that view, and it reinforces the difficulty of using proxies in such matters. The assumption is that because VAT has been reduced, people will go out and buy more VAT-able
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items. That assumption contains fallacies, and I am not sure that the distinction is very clear. But that is part of the difficulty of using proxies in situations where we do not have a proper counter-factual—what would have happened if what is being examined had not occurred. One can make a best guess and even do some modelling, but there is nothing to actually compare, which is why proxies are used. I agree that it is a difficult issue, but that is why claims that the VAT cut has worked are unsubstantiated and probably far from the mark.

I have already mentioned the comments from the report that the Financial Secretary is always keen to quote on such occasions about the impact of the date of the change. I wonder whether Ministers actually go shopping any more. Do they realise that Christmas and new year sales occur? That is not a hint of a present from the Financial Secretary, as I am sure that that would need to be declared somewhere. The arguments on the timing have already been made, and I have made my points about the difficulties of assessing the impact of the VAT cut.

Mr. Newmark: I am delighted to be able to make a few points on clause 9. I shall focus on three main areas—many of these points have been much discussed in today’s debate—the first of which is the amount of the reduction, which is 2.5 per cent., and the importance of that figure; the second is the issue of the date when the rate reduction ceases; and the third is the cost of the 2.5 per cent. reduction in VAT.

The Financial Secretary to the Treasury makes an interesting point when he says that such a change can be an effective instrument in stimulating demand, but I am curious about how he came up with the 2.5 per cent. figure. What sensitivity analysis did he carry out about the effects of a 2.5 per cent. decrease as opposed to a 5 per cent. or 10 per cent. decrease in trying to drive demand and the volume of trade? The cut is an attempt to kick-start an economy, but in the two or three debates that I have attended on the issue I have heard that the instincts of retailers and consumers were that it would not suddenly drive people to go out and purchase more. When the 2.5 per cent. cut came into effect, did the Financial Secretary rush out and start buying more retail goods? Now that the VAT rate is down to 15 per cent., what has he gone out and bought that he would not have bought at the 17.5 per cent. VAT rate? Perhaps he can tell me how his shopping patterns changed.

It was also interesting to hear the discussions and observations about some of our continental competitors. It was interesting that the French attacked the reduction as a not particularly effective way of stimulating demand. We heard similar criticisms from the Germans and the Dutch, and even from the IMF—I think that it was the IMF chief economist who had no confidence whatsoever in the 2.5 per cent. VAT cut. As I said earlier to my hon. Friend the Member for South-West Hertfordshire (Mr. Gauke), was it some sort of jealousy on the part of our European competitors? Were they suddenly nervous that huge volumes of trade would shift across continental Europe and across the channel, and that the Germans, French and Dutch would suddenly begin moving their trade from Germany, France and Holland into the UK to buy our goods merely because of this 2.5 per cent. cut in VAT? Somehow, I think not. I think that they
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were making an objective assessment that the 2.5 per cent. was not enough to move the dial with respect to individual buying patterns.

The proof of the pudding can be found in the evidence of experts—that is, the evidence of the people who run some of the big retailers. We have heard Justin King’s comments. Retailers are cutting their prices by 15, 20, 30, 40 and sometimes even 50 per cent. to try to drive trade into their shops. As people wander down the street, wondering which shop they should go into, a sign in the window of a shop that says, “2.5 per cent. cut in VAT”, across the street from a retailer advertising a 30 per cent. cut in the price of its goods will not drive people in to the shop with the 2.5 per cent. cut.

We should focus on talking to some of the smaller businesses, as I did in Braintree and Witham, two of the towns in my constituency. I did not get a sense from any retailers there that the 2.5 per cent. cut would drive up volumes of business, but those volumes need to be driven up, because I have seen some major retailers in my town centres—particularly in Braintree—simply shutting down and leaving because the business was not there. The 2.5 per cent. that the Government chucked at them to try to drive up trade did not really work, I am afraid.

My next question for the Minister concerns what analysis he, his civil servants and the various people from consultancies who work for him have done. What uplift in the volume of retail trade can be attributed directly to the 2.5 per cent. VAT cut? How has it affected growth in the retail sector? Has it led to a sudden growth in our GDP, a point raised by my hon. Friend the Member for Henley (John Howell)? Those are pertinent questions, but my main interest is to know whether the Minister and his family rushed out and started to buy more as a result of the VAT cut. What goods did he end up buying?

My next question concerns the date on which VAT will return to its original rate. In our previous debate on these matters, my hon. Friend the Member for Bournemouth, East (Mr. Ellwood) said that the 31 December date was very inconvenient— [ Interruption. ] From a sedentary position, my hon. Friend the Member for Ludlow (Mr. Dunne) reminds me that he made the same point, and retailers around the country agree. My hon. Friend the Member for Bournemouth, East has observed that 3 January would be more convenient, and better than attempting to get retailers to change their VAT system at a peak time when they are trying to drive up sales.

I am curious to know why the Minister is so keen on the 31 December date. Has he chosen it because it is the end of the calendar year? The end of the year for retailers is usually later, as I suspect that my hon. Friend the Member for Ludlow will explain in more detail when he gets the opportunity.

The 2.5 per cent. cut has not really worked. I have been persuaded by the argument from my hon. Friend the Member for South-West Hertfordshire that it has not been a big success and that we should cut our losses and go back to the 1 December date. That would be better than extending the misery for another 31 days— [ Interruption. ] The hon. Member for Glasgow, North-West (John Robertson) is saying something from a sedentary position. Does he want to make an intervention, or is he just talking to himself? He is clearly talking to himself.


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I am not persuaded by the Minister. I hope that he will explain why adding the extra 31 days will be so important. Why has he chosen 31 December as opposed to, say, 3 January? As I and other hon. Members have pointed out, it is probably the worst day of the year to choose to change the rate back up to 17.5 per cent. from 15 per cent.

The third area that I want to spend some time on is the issue of cost. A number of figures have been thrown around, and it is clear that the process could be quite expensive for retailers. It has been estimated that it will have cost them about £90 million to implement the 2.5 per cent. cut, and that it will cost them another £90 million to change the rate back up to 17.5 per cent. Does the Minister have any figures that will help in estimating the cost to retailers of implementing both changes in a fairly short period?


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