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I believe that people will find it difficult to characterise a number of measures announced yesterday as fair. On tax credits, the Chancellor said that the Government were going to start to taper away tax credits from household incomes of over £40,000, but that is already true now. In the following year the threshold goes down to £30,000. As we always said during the election-when it was denied-people on incomes as low £15,000 will
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be affected. Look at table A.5 on page 64 of the Red Book: it is there; it is all set out. It shows that cuts in entitlement to tax credits go far further than the right hon. Gentleman set out yesterday.

I think that the Liberals will have some difficulty in characterising these things as "progressive cuts". I understand that the leader of the Liberal Democrats points to the table published in the Red Book, which makes it look as if people at the top end are bearing a fair share of the reductions and tax increases, but it shows that only because the Government have published a table showing measures yet to be introduced, including our national insurance increases. The top decile will be paying more because of measures that I, not the Chancellor, introduced. It is slightly disingenuous of the Prime Minister to give the impression, as he did at the end of Question Time, that what the Conservatives are doing is redistributive and fair. That is not the case.

Mr Edward Timpson (Crewe and Nantwich) (Con): The shadow Chancellor has told us that he supports the rise in CGT. Does he also support the rise in the personal allowance by £1,000, the re-linking of pensions to earnings and the freezing of council tax? If he does, why were they not in his last Budget?

Mr Darling: Our policy, as the hon. Gentleman will know, was to restore the earnings link from 2012. I can see that bringing that forward to a year in which earnings are likely to be very low had a political attraction. I think that was the subject of exchanges at Prime Minister's Question Time, and it will not have the cash effect that is thought. As for personal allowances, I am in favour of taking people out of tax if at all possible, but the same people who are being taken out of tax will be paying increased VAT.

Chris Leslie (Nottingham East) (Lab/Co-op): Further to the intervention of the hon. Member for Crewe and Nantwich (Mr Timpson), will my right hon. Friend expose the nonsense of the supposed council tax freeze announced by the Government and the small amount of money given to local authorities at the 2.5% level? Is not the rug being pulled from under local government through swingeing cuts to grants? How on earth are local authorities supposed to plan ahead and make their budgets? Surely they will not be able to do that until they see the spending review.

Mr Darling: I noticed that the spin on Tuesday morning was that council tax was to be frozen in England next year. By the time of the speech, however, the Chancellor was saying that if local authorities did certain things, he would see what he could do to help them, which is not quite the same.

Let me put some questions to the Secretary of State for Business, Innovation and Skills. On the Chancellor's proposed levy on the banks, will the Secretary of State tell us precisely what the French and German Governments propose to do? I, too, had discussions with my French and German counterparts, but it was not always clear that they were proposing to do precisely what we might have done. Things have clearly developed, and I would like to know what those developments are.

The Chancellor announced measures to help development outside London and the south-east. He mentioned regional funds and other help, so will the
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Business Secretary give us further details? The Chancellor also mentioned that he wanted to change the approach to pensions tax relief. He made the point that the Labour Government had had a number of discussions; legislation went through on the nod, I think, just before Dissolution. Does the Chancellor's alternative mean reduced annual allowances? My recollection is that that would affect far more people than we proposed to affect, and is therefore less progressive?

People are right to be concerned about the overall thrust of the Budget in relation to the effect on growth and jobs. Yes, we need to get borrowing down-we all know that-but we must do it in a way that is sensible and will result in us coming through all the problems and being able to grow and secure jobs in the future. The Budget also fails the fairness test. Over the next few weeks and months, we will consider yesterday's announcement and, equally importantly, the cuts to departmental spending. The Business Secretary's Department is not protected. Perhaps he will say what the effect of a reduction of a quarter in his budget would be, given that he is responsible for science, universities and business support.

We will return to those big questions. Like all Budgets, this one will be judged in the fullness of time. We are coming through a difficult period, and the action taken by the Labour Government was totally justified. We must be careful not to derail that effort and end up undoing all the work done over the past few years.

1.14 pm

The Secretary of State for Business, Innovation and Skills (Vince Cable): This is the first opportunity that I have had to debate with the shadow Chancellor from this side of the Dispatch Box. May I start by paying tribute to him? I have always said publicly, and am happy to continue to do so, that in many respects he was one of the people who emerged from the wreckage of the previous Government with an enhanced reputation. He did so for two reasons. First, he inherited an enormous banking crisis that was in part the result of the naivety and negligence of the treatment of banking before he became Chancellor. He dealt with it decisively in the autumn of 2008, through liquidity and part nationalisation, and I reassert that he deserves credit for that. Secondly, he has at his core a strong element of honesty and integrity, which occasionally involves him blurting out the truth. There was the famous occasion when he came back from a holiday in the Hebrides and uttered the blasphemous four-letter word "cuts" for the first time, much to the annoyance of his next-door neighbour in Downing street.

The question to which the Government have wanted an answer is this: why were we left £50 billion of cut commitments without any explanation of what they were going to be? On 12 June, the shadow Chancellor gave us an insight into what had been going on. He said:

It was not just the appetite of his then next-door neighbour, who is now being blamed for everything, that was limited. I think that there was a limited appetite
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here and there, and as a result we have been left with the responsibility of spelling out what those painful cuts are.

There is another comment which is not a direct quote of the shadow Chancellor, and he might not even have said it, but let me give it to the House, as I think it reflects quite well on him. He is said to have made an insightful observation on the nature of sovereign debt crises. Apparently, he told the Cabinet, "The ice seems solid the moment before it cracks." That captures beautifully the dilemma that the Government now face with a sovereign debt crisis in the background. I wish to return to that issue, but first I will briefly answer the technical points that he threw in at the end of his speech.

As I understand it, the French-German proposal is a balance sheet levy similar to what is happening here. The proposals relating to regional rebalancing, which are an important part of the Government's proposals, have two elements: £5,000 relief from employer national insurance contributions for new companies with up to 10 employees outside the east, the south-east and London, and a fund that will be distributed on the basis of bids received for good projects, especially those with a high-technology and environmental component. The details on that will emerge in due course.

Angela Smith (Penistone and Stocksbridge) (Lab): Why, if the Government are so keen on rebalancing the economy regionally, did they turn down the loan to Sheffield Forgemasters?

Vince Cable: The hon. Lady knows the reason; it has been explained several times. A lot of questions had to be asked about the affordability, value for money and risk of that project. What was a very highly geared project promised extraordinary rates of return to the private promoter. We looked carefully at all the evidence, and the project clearly had positive aspects, but we decided that in the circumstances of a Government with highly constrained public finances, we could not support it.

Angela Smith: Will the right hon. Gentleman give way?

Vince Cable: I have answered the question; I do not want to pursue it.

Were the private promoters able to take the project forward, we would be delighted, because as a commercial project it has many attractions. However, the Government could not commit large amounts of money to such a project.

The shadow Chancellor made a series of challenges, which I will take systematically. He asked why we, and I personally, have endorsed austerity policies and especially quick cuts; he asked about the issues around fairness and value added tax, with which I will deal; and he asked about the important economic question of how we get growth emerging from a period of austerity, and I will try to answer that. First, however, let me explain why I changed my mind-for I did change my mind-about the necessity for early action on the budget deficit. Let me describe the sequence of events, because I think that it is quite important.

As the shadow Chancellor knows, because he was still Chancellor then, when the election took place there was, in the background, a major sovereign debt crisis in
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Europe. The day after the election, when there was a hung Parliament, the then Prime Minister suggested to me, I think for reasons for courtesy, that I talk to some senior officials in the Government and the governor of the central bank about the existing situation, in order to obtain their assessments of what was going on. I did so. The leader of my party talked to the governor, and I have talked to him since.

The advice that I received, uncompromising and unequivocal, was that the incoming Government, whoever they were-we did not know who they would be at the time-would have to act immediately and decisively on the budget deficit, because there was a serious threat to this country. I took that advice, but was left with a nagging question. The former Chancellor was presumably receiving the same advice. What would he have done? Was he proposing to disregard it? The line of policy that he is developing now suggests that he would have liked to disregard it, but was he going to do so, or was he going to be responsible, accept the advice and act on it? Because he is a responsible and serious man, I think he would have accepted it.

We now know, because the figures are becoming clear, that in the current financial year, when, as the shadow Chancellor said, the economy was fragile, he was introducing a fiscal tightening of £23 billion. The new Government have introduced a tightening of £6 billion. The last Government did not announce that fiscal tightening-it emerged in the small print from the Institute for Fiscal Studies-but the shadow Chancellor did it, and he clearly did it with good reason. The problem was that it was never clear what the Government were doing, it was done in a very chaotic way, and some Ministers-including Lord Mandelson, my predecessor-plainly wanted to support the Chancellor and to act in the public interest, and got on with those cuts. When I entered the Department, people such as further education lecturers and scientists were being made redundant as a result of the measures that had already been initiated by the Government in response to the crisis that they knew existed.

Chris Leslie: The right hon. Gentleman may well have had his damascene conversion, for who knows what reasons, but does he not owe an apology to the millions of people who thought when they voted Liberal Democrat that they were voting for a pro-growth strategy and against these massive cuts? Should he not apologise to his own electors?

Vince Cable: No; we are trying to deal with the problem that the hon. Gentleman and his colleagues left behind.

Mr Darling: Since the right hon. Gentleman referred directly to me and to advice and discussions that I may have had, let me say to him that there has never been any argument in the House about the fact that we needed to reduce borrowing. The discussion was always about when the reduction should start-before the election, he and I were on the same side on that-and about the extent to which, and the speed at which, it should take place.

As for Greece and the sovereign debt crisis, I am sure that the right hon. Gentleman will also have been advised that the real problem was that the rest of the
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eurogroup took far too long to do what was necessary to support the Greek Government. Had they done it in February, when the problems first became apparent, some, although not all, of those problems might have been avoided. As it was, they were allowed to become acute. No one is arguing that we did not need to reduce our borrowing, but we were not in the same position as Greece.

Vince Cable: I know that we were not in the same position as Greece. I was not talking about what the Greeks and the eurozone needed to do; I was talking about what we needed to do, and the advice that we received.

There is an evidence base to look at. It is true that, as the shadow Chancellor said in his speech, the cost of borrowing in terms of bond yields was starting to fall under the last Government. That is because markets are driven by expectations, and they expected a change of Government. Since the election, however, and since this action was taken and announced, the cost to the United Kingdom of borrowing, in terms of bond yields, has fallen by 20 basis points. In Greece it has risen by 170 basis points, or 2% in ordinary language. It has risen by 94 points in Ireland, by 95 in Portugal, and by 65 in Spain. Spain is a serious, big country: we are not talking about tiny, peripheral economies. It is a serious country, which was caught up in the financial firestorm that we have had to head off from here. That was the basis on which we made decisions.

Let me now develop that immediate question into the broader issue of the Chancellor's Budget and the magnitude of the task that we had to undertake. There is, of course, a difference between the problem of the deficit and the problem of the debt. There is a public debt problem, which is growing rapidly, but as the Chancellor has pointed out and as I have often pointed out myself, it is not greatly out of line with what is happening in many other countries, or with what has happened historically. The real problem for the United Kingdom is the massive level of public borrowing. That is why markets are important. The deficit in the last financial year was 11% of GDP; in the current financial year, it is 10.5% of GDP. That money-£155 billion-must be borrowed. My views on that, on how it should be dealt with, and on the kind of radicalism that is needed had nothing to do with the formation of the coalition. My views were set out a year ago, when I wrote a pamphlet which did, indeed, bear a strong resemblance to what the Chancellor produced yesterday in terms of scale, scope and speed.

Let me tell the shadow Chancellor why I feel strongly about the need to act in such a decisive way in terms of fiscal policy. There are two reasons. First, I saw the disaster unfolding under the last Government, when they were overtaken by a major financial crisis for which they were not prepared and to which they had massively contributed. Of course there is a global problem-we know that-but its impact has been much more serious in this country than elsewhere. That is because the Government allowed household debt, in relation to income, to rise to the highest level in the developed world; because they acted and planned on the assumption that house prices rise for ever, although we know from the evidence that they go up and down roughly every 17 or 18 years, as they have done for the
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last 300 years; and because they created, encouraged and fostered an almost Icelandic dependence on major international banks, the combined magnitude of whose balance sheets represented 400% of our economy.

The Government allowed that to happen. Some of us warned about the dangers, and they took no notice: they said that we were scaremongering. But the crisis hit them, and, having experienced it once, we on this side of the House are determined that such a financial crisis should not happen again as a result of sovereign risk. That is why we are decisive, and why we feel that we need to act.

Chris Leslie: If what the right hon. Gentleman says about the banks is true, why has the Budget been quite so lenient with them? Why has it taken only £1 billion from them, when the rest of the country is having to pay £14 billion as a result of the measures in the Red Book? What will his Department do to prevent the banks from passing even that £1 billion on to their customers?

Vince Cable: That was a very strange intervention. It may reflect the fact that the hon. Gentleman-whom I respect a great deal-has rejoined the House following the election, and may not be familiar with the arguments that led up to it. He will know, however, that the last Government were going to phase out their bonus tax. We have reintroduced a stable system of taxation on banks, the incidence of which will increase over time. Of course, many things need to happen to the banking system. We will discuss, as colleagues, how we should deal with such matters as bank lending, on which there is an outrageous record of bank dysfunctionality.

Phil Wilson rose-

Vince Cable: I will take another intervention, but then I must move on.

Phil Wilson: It seems to me that, to rectify the problems, the right hon. Gentleman has signed up his party to a Budget that represents a massive gamble for the country. What happens if it fails? What is plan B?

Vince Cable: The hon. Gentleman says that a gamble is being made. Certainly there is a risk. There are risks in tightening fiscal policy too quickly, but there are also risks in doing nothing, or in doing less. We have had to balance those risks, and we have concluded that we must act.

Since the questions are coming from Labour Members, let me now give the other reason why I feel strongly about the need to act decisively in the way in which the Chancellor acted yesterday. Thirty years ago, as an adviser, I occupied the office that I now occupy as a Minister. It was the end of a Labour Government who had chosen to ignore the build-up to a major financial crisis. As some people will remember, the painful measures-the taxes, welfare cuts and spending cuts-were not taken by choice. They were imposed from outside by the International Monetary Fund. Because I was there at the tail-end of that Government, I saw the consequences, not the least of which were the massive divisions that opened up. People in the Government
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such as Denis Healey, Roy Jenkins and my boss, John Smith, believed that the Government had to be responsible, but there were a lot of others-I sense a growing echo of this feeling on the Opposition Back Benches today-who said, "We don't need to do anything, we can fight the gnomes of Zurich and drive them underground, we can ignore the rest of the world and we do not need to act." It was a disastrous alternative strategy, and the Labour party is in great danger of returning to that territory.

That is why I have come to the same position as the Chancellor of the Exchequer. We come from different political traditions; I do not try to hide that. As it happens, my role models as Chancellor of the Exchequer include Sir Stafford Cripps and Roy Jenkins, because they understood the need for sound public finance and they combined tough action on budgets with fairness. That is the tradition that we have continued.

Let me list some of the measures in this Budget with which I am proud to be associated. There is the lifting of the tax threshold by £1,000, towards the £10,000 mark. There is the action on capital gains tax, which is not just a tax-avoidance measure, but is about fairness. We have acted on public sector pay not just by freezing some salaries but by giving special help to people on low pay in the public sector. We have introduced the bank levy. We have done what the Labour Government failed to do in 12 years and introduced a triple-lock to protect pensioners-the shadow Deputy Leader of the House, the hon. Member for Worsley and Eccles South (Barbara Keeley), could not quite get her head around what the triple-lock is-and in addition supported pensioners through improved pension credit, which is a major cost on the budget going forward. We took action to head off any increase in child benefit, too.

Let me read a comment on child poverty made not by a politician, but by Barnardo's, one of the leading charities. Yesterday it said:

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