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13 July 2010 : Column 815

Finance Bill

[2nd Allocated Day]

Further considered in Committee (Progress reported 12 July)

[Mr Nigel Evans in the Chair]

Clause 3

Rate of value added tax

4.32 pm

Stewart Hosie (Dundee East) (SNP): I beg to move amendment 13, page 2, line 7, leave out subsection (1).

The First Deputy Chairman of Ways and Means (Mr Nigel Evans): With this it will be convenient to discuss the following: amendment 54, page 2, line 7, leave out '20' and insert '18'.

Amendment 22, page 2, line 8, at end insert-

'(2) Subsection (1) shall apply until 4 January 2012.'.

Amendment 14, page 2, line 9, leave out subsection (2).

Amendment 1, page 2, line 12, after 'made', insert

Amendment 41, page 2, line 13, at end insert

Amendment 2, page 2, line 15, after 'imported', insert

Amendment 42, page 2, line 15, at end insert

Amendment 3, clause 3, in page 2, line 17, at end add-

'(6) In subsections (3) and (4) above "a specified date" means a date specified by the Treasury by an order made by Statutory Instrument, which may not be made until-

(a) an impact assessment of the effect of this section and Schedule 2 has been laid before the House of Commons; and

(b) a draft of the order has been laid before, and approved by resolution of, the House of Commons.'.

Amendment 23, page 2, line 17, at end add-

'(6) The rate of value added tax shall remain at 17.5 per cent. on children's prams, cots, toys, high chairs, babies bottles, nappies, children's sanitary products and teething-related goods.'.

Amendment 25, page 2, line 17, at end add-

'(6) The Chancellor of the Exchequer must, prior to the introduction of the change to the rate of VAT specified in subsection (1) above on the date specified in subsections (3) and (4) above, compile and lay before the House of Commons a report containing an assessment of the impact of the increase in VAT on-

(a) the disposable income of low-income households,

(b) people with physical and mental disabilities,

(c) the competiveness of the UK Retail Sector,

(d) the competiveness of the UK construction industry,

(e) the NHS, and

(f) local government.'.

Amendment 40, page 2, line 17, at end add-

'(6) Before 4 January 2011 the Treasury shall lay a report before the House of Commons on the scope of the standard rate of VAT.'.

13 July 2010 : Column 816

Amendment 43, page 2, line 17, at end add-

'(6) The Treasury shall prepare a report into the impact of the rise provided for by subsection (1) on-

(a) pensioners;

(b) children and child poverty;

(c) inequality;

(d) the bottom quintile of households by income;

(e) charities, and

(f) the informal economy,

in the United Kingdom and lay it before the House of Commons.'.

Amendment 46, page 2, line 17, at end add-

'(6) The Treasury shall prepare a report into the impact of the increase in VAT rate provided for by subsection (1) on pensioners in the United Kingdom in 2010-11 and 2011-12; this report shall be prepared and laid before the House of Commons prior to the Commons Committee stage of any further Finance Bill that is brought before the House in the current Parliamentary session and shall propose ways in which the pensioner population of the United Kingdom can be assisted in meeting the additional costs imposed on them by the rise provided for in subsection (1).'.

Amendment 55, page 2, line 17, at end add-

'(6) Subsection (1) shall apply until 4 January 2013.'.

Clause stand part.

Schedule 2 stand part.

Stewart Hosie: I shall speak to amendments 13 and 14, tabled by me and my hon. Friends. Amendment 14 is a probing amendment. I have no particular problem with a reduction in the VAT rate relating to the restrictions in the value of imported goods, but I am seeking to probe to ensure that the necessary changes will definitely be in place so that businesses are not charged more than they should be when the provision comes into force. When the Conservatives were in opposition, they quite rightly used to berate the Government for the size and complexity of the tax code. They would pile up Tolley's tax guides as evidence that it was complicated, so I want to make sure that they have dotted the i's and crossed the t's on this particular change.

One might imagine that importing something into this country would be reasonably straightforward, and that a modest change to the VAT rate would be simple to make. If something is imported by air or sea, however, it requires a certificate. It can be done under the single administrative document; it can be manually processed with an SAD authenticated copy 8; it can have a trader input computerised process with a weekly VAT certificate issued by the customs computer under report TW-AH or TW-BH; and it can have a post-entry correction form C18. Removal from a customs warehouse would require a form C259, and an excise or customs warehouse requires a duty payment form W5, W6 or W20-and so on and so forth.

Of course, VAT is far from simple even on imports from the EC. The VAT territory of the European Community in respect of Denmark excludes the Faroes and Greenland-and there is much more of this to come. For Germany, Busingen and the isle of Heligoland are excepted; while for Italy, there are the communes of Livigno and Campione d'Italia, and the Italian waters of Lake Lugano. Portugal includes the Azores and Madeira. Spain includes the Balearic islands, but excludes Ceuta and Melilla. The United Kingdom includes the Isle of Man. Then there are the overseas French départements and Mount Athos in Greece.

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I am merely trying to explain the extraordinary complexities that will have to be addressed in advance to ensure that this modest VAT reduction can be implemented and that businesses can operate fully and safely. Other Members may have identified other weaknesses in the reduction, but I will allow them to make their own cases.

As I said on Second Reading, the real damage done by this Finance Bill relates to the Government's determination to raise the standard rate of VAT from 17.5% to 20%. Amendment 13 seeks to delete that VAT increase-an increase that is wrong precisely because it directly contradicts the stated intention of both the coalition parties, which say that they want to create a fairer society. I think that, on balance, the Liberal Democrats were right when, before the election, they warned of the Conservatives' "VAT bombshell". It is no less threatening and fateful today. Looking at the serried ranks of five Liberal Democrats who are sitting here, I wonder whether this is the time for them to stick with principle, and perhaps forgo the possibility of having a ministerial Mondeo one day.

Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP): My hon. Friend made a good point about the Liberal Democrats' "VAT bombshell" warnings. Those warnings were, of course, issued when the pre-Budget report had forecast a deficit of £177 billion. By the time of the Budget, however, the deficit was only £149 billion. With a lower deficit, the Liberal Democrats wanted more VAT to plug the gap. Can my hon. Friend explain their thinking?

Stewart Hosie: I would be here for some time if I were to explain the convoluted thinking of the Liberal Democrats, but my hon. Friend has made an extremely important point. Early forecasts of the deficit were high and later forecasts were lower, almost certainly as a consequence of the fiscal stimulus that took place at the time. I think that the Liberal Democrats are wrong to embark on an increase now. I shall explain some of the other economic consequences later, but just in case anyone thinks that I am being unbalanced and that I am going to let Labour off the hook, I think the very fact that the original plan had worked made it difficult to understand why Labour should allow the United Kingdom to be one of only two countries in the G20 to withdraw a fiscal stimulus package in 2010.

Jo Swinson (East Dunbartonshire) (LD): May I complete the picture presented by the hon. Member for Na h-Eileanan an Iar (Mr MacNeil)? While it is certainly true that the overall deficit has fallen somewhat, the structural deficit-the bit that we really need to worry about-is in fact £12 billion higher than was anticipated. Incidentally, that is about the same amount that will be raised by the VAT increase.

Stewart Hosie: The hon. Lady is right about the size of the structural deficit. I have never disputed that. She is also right to suggest that the VAT increase will provide some £12 billion to £13 billion more for the Exchequer. That, too, is a matter of recorded fact. However, it does not justify a short-term, fixed attempt to tackle the deficit, leaving little flexibility. Indeed,
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the case that she makes-that there is a great deal of uncertainty, and things change-probably justifies our original intention to go for a medium-term deficit consolidation strategy in the first place.

While, as I conceded on Second Reading, it is possible that, in cash terms at least, wealthier people will pay more VAT, it is equally clear that the poorest 10% will pay considerably more of their cash to the Government as a percentage of disposable income-three times more-than the richest 10%. All that is due to choices made by the Government. They have previously argued, and I am sure will argue again this evening, that the increase was unavoidable. However, there was nothing unavoidable about putting up VAT, nothing unavoidable about an accelerated attack on the structural deficit, nothing unavoidable about a deficit consolidation plan over a fixed term, nothing unavoidable about taking £32 billion more in public service cuts on top of the cuts bequeathed by the Labour party, and nothing unavoidable about £40 billion a year of extra fiscal tightening in addition to the £57 billion or so planned in the final year by the Labour party. So this coalition Government could have avoided raising the VAT bill for the poorest families to over £31 a week.

Alec Shelbrooke (Elmet and Rothwell) (Con): Will the hon. Gentleman elaborate on the fact that the income tax threshold has been raised by £1,000, taking almost 1 million people out of income tax? That is, of course, a regressive tax, whereas VAT is charged on about 50% of consumer goods. Is not the effect on the poorest families in this country therefore mitigated?

Stewart Hosie: Obviously income tax is paid on income and VAT is paid on all spending, including by people who do not earn and who therefore will not benefit one jot from the income tax change.

Mr MacNeil: Given the Liberal Democrats' arguments on deficits and structural deficits, and the subjectivity of those arguments, should they and their Conservative allies and friends not have a sunset clause for this VAT rise to ensure that when the deficit reaches a certain point they will hit reverse gear and think of pensioners and the low paid, rather than of expediency in government?

Stewart Hosie: I would be very supportive of a sunset clause if this measure were a serious attempt to tackle the structural deficit and get the accounts on to a balanced basis thereafter. There may well be later amendments that posit that view, and we will see whether they are pressed to a Division.

This change was a political decision and we have the opportunity this evening to reverse it and to demand again a credible medium-term deficit consolidation strategy, not one that simply puts up VAT, with all the social and economic consequences. We should think about the impact that the increase will have on families-not just hard-pressed families who are working, but those who will see unemployment benefits reduced in real terms, whose tax credits may be cut or squeezed, and whose housing benefit, particularly in areas where rented housing is expensive, will come under real pressure. That is the part of society that will suffer most from this VAT rise. According to Shelter, almost half of local housing allowance claimants are already making up a shortfall
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of almost £100 a month to pay their rent. It is those people at the bottom, who are working hard on modest means and are already struggling to make ends meet, who will be hit hardest by this additional VAT rise.

There are, of course, many other reasons to oppose the rise. Mike Bailey, the head of indirect tax at PricewaterhouseCoopers, and Marc Welby, the VAT partner at BDO, both point out that some businesses are exempt from VAT, such as banks, charities and certain public sector businesses, and they will be hit by not being able to recoup extra VAT costs on expenditures, for example on accountancy and legal fees. So this is an additional charge on certain key businesses and on charities.

David Smith, chairman of the Shadow Monetary Policy Committee, a group of independent economists, said that the move would increase unemployment by 235,000 over the next decade and reduce GDP by 1.4% over the same period. GDP forecasts have already been downgraded in the last Office for Budget Responsibility report. I am desperately hoping that that is wrong and the Government are right, but I fear the worst, and we may see a detrimental impact on GDP growth as a consequence of the rise. It is also warned that the job losses will put a permanent dent in the living standards of many in this country.

Peter Jenkins of the Charity Tax Group, representing more than 400 leading charities, said that the VAT increase was disastrous for charities, resulting in a bill of £150 million for irrecoverable VAT at a time when the Government-I understand why they are doing this-are asking the charitable sector to take on some or many of the roles currently undertaken by public bodies, local authorities and the state generally. When the Government are trying to encourage the transfer of responsibility and work from the public sector to the charitable sector, it seems extraordinary that with the VAT rise they will at a stroke place the charitable sector with an additional £150 million bill.

4.45 pm

Dr John Pugh (Southport) (LD): The hon. Gentleman is making a big thing about VAT being 20%. It has been 17.5% for as long as he and I have been in Parliament, and it has been accepted by hon. Members that priority is sometimes given- [ Interruption. ] Well, except for when it was reduced for a very short period and put back up again. In 2007, Labour Members gave priority to cutting income tax. Can the hon. Gentleman refresh our memories on his record in calling for a reduction in VAT when it was 17.5%, because presumably, it must have had some of the pernicious effects he is talking about now?

Stewart Hosie: I will be delighted to search back in Hansard and give the hon. Gentleman chapter and verse on what I have done in relation to VAT. The bottom line is that we have a 2.5% rise now, designed as a political choice to tackle a deficit over a fixed term, that is the wrong strategy to begin with. However, this is symptomatic of that strategy and emblematic of the problem, and as I shall come on to say, in the end it will lead to the poorest in the country paying the highest price for the political choices that this coalition is making.

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Dr Pugh: Is the hon. Gentleman saying that 17.5% would not have made a difference-that it was not regressive and would not have hit exactly the same groups? If it was regressive, why did he not do something about it?

Stewart Hosie: I would have been absolutely delighted to be in government and to have a progressive tax system that helped ordinary people and stimulated business growth, as we in my party have done in the Scottish Government. We have reduced business rates to grow local businesses, and frozen the council tax for three full years to help local people. However, we are now faced with the consequences of a coalition agreement that will see the VAT rise hit the poorest the hardest. On balance, the record of my party in government in Scotland will be viewed far more favourably than the VAT increase introduced by the Liberals and the Tories in this Westminster coalition. However, I am being distracted from my amendment; that is the Liberals' fault, as well.

I was making the serious point that this is an additional £150 million bombshell tax on charities, but there is also the additional cost to the public sector generally. The health service alone in Scotland will now have to find £26 million from its budget in order to pay the VAT bill. At a time when all of us, presumably, want to protect the front line-the prison service and the police in England, Wales and Northern Ireland; the teachers; the nurses; the social workers: indeed, every public body and all the people who do the work-this Government, backed by the Liberals, are forcing those public bodies to pay that hard-earned cash to the Treasury instead of ensuring continued investment in and payment to the front line. That is a ridiculous position to find ourselves in.

In economic terms, this makes no sense. The British Retail Consortium described the rise as "disappointing". I said on Second Reading that that was something of an understatement. It went on to say:

Simon Newark of UHY Hacker Young warned that the rise could push up prices on the high street by about 2%, which could have a significant impact on inflation. He went on to warn:

Others were warning that the rise in VAT will exacerbate cash-flow problems.

I said at the beginning of my remarks that the poorest will be hit three times harder than the richest. Some estimates have suggested that those earning under £14,200 will be hit six times harder than those at the top of the pay scale, earning more than £49,700. I concede that that estimate may be at the far end of the scale, but the point is that this VAT rise is going to hit those on low and modest earnings, and without earnings, extremely hard.

Is it not the case that this VAT rise also increases the incentive for people to operate in the shadow or cash economy, where income tax and national insurance contributions are not paid, and exacerbates the yield issue for the Government?

Mr Mike Weir (Angus) (SNP): Does my hon. Friend recognise that there is also a disparity in the areas that will be worst hit? In rural areas, where most of the
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goods come in by road, the increase in VAT on fuel will hit disproportionately hard and will have an even bigger impact on people on low incomes or no income.

Stewart Hosie: It is actually worse than that. Goods of all sorts tend to be dearer in rural areas to begin with, the VAT is added to that price and so more VAT, in cash terms, is paid on the purchase, or the sale, of the same item in a rural part of the country than in a competitive city centre.

Then we must consider the fuel situation, which is extraordinary because VAT is paid on top of duty. This Government are keeping the three duty rises of the previous Government, and each duty rise will also have additional VAT at 20% on top flowing its way to the Exchequer. My hon. Friend the Member for Na h-Eileanan an Iar (Mr MacNeil), like all my hon. Friends, is right to say that in remote and rural areas, in particular, this is an umpteen-level whammy, as the VAT goes on top of every single duty rise for every single good delivered to those areas.

Of course, the effects do not just stop and start at rural areas, because bits of the local economy are also affected, particularly small service companies. Retailers and restaurants may find themselves between a rock and a hard place. As Stephen Law, president of the insolvency trade group R3, said, those businesses will

When we think about the consequences and how that can damage what may already be fragile companies on local high streets, we can begin to see the very real damage that may be caused.

We can see that damage before we consider the law of unintended consequences. I thought that The Scotsman on 4 July was right in its article headed "Cowboy builders set to return as VAT rises". It stated:

The article quoted him as saying:

According to the article, he added that

He also said:

This is happening at a time when we need those small businesses. In Scotland 90% of people are employed by the smallest businesses. We need everyone in the small and medium-sized enterprises sector to be growing, taking on, employing and paying all the tax they possibly can.

Stephen Williams (Bristol West) (LD): The hon. Gentleman has been speaking for slightly more than 20 minutes, telling us where VAT falls and where it does not fall, and what effects an increase may have. His
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amendment seeks to strike out the increase completely, thereby putting a £13 billion hole in the Chancellor's Budget. I am waiting patiently to find out what the hon. Gentleman's suggestion is as to where that £13 billion will come from.

Stewart Hosie: I explained at the beginning of my speech that the whole approach of a fixed-term deficit consolidation plan was wrong. I explained the same thing to the Labour party when it was in power. I want to see a medium-term deficit consolidation plan which, over the first 12 to 15 years, will give us £50 billion of savings on Trident and its replacement-an approach in which the Liberals believed only a few short weeks ago. We have a very credible alternative plan. The amendments and the new schedules were tabled to the Fiscal Responsibility Bill, and I am sure that the hon. Gentleman remembers that debate extremely well.

My party disagrees with the approach that is being taken. This rise is the most damaging bit of the approach, because not only is it socially and economically wrong, but it disproportionately affects the poorest families. I shall quote briefly from the Save the Children report, because it sums this up best. The report states:

and so on, and says that there is already

That report is extremely well put together and incredibly credible, and I support it entirely. Its assessment of the damage that will be caused is right.

It cannot be right that the very poorest in society, who are already paying a poverty premium, should be forced to take on the bulk of the cost of a fixed-term deficit consolidation plan. In particular, the £13 billion a year take in VAT is socially irresponsible and economically damaging and, most of all, hurts those at the bottom of the pile. We will be delighted, if it is possible later today, to press amendment 13 to a vote.

Mr Liam Byrne (Birmingham, Hodge Hill) (Lab): It is a pleasure to follow the hon. Member for Dundee East (Stewart Hosie). I want to support amendments 40, 41 to 43 and 46, tabled in my name and those of my right hon. and hon. Friends, as well as to discuss clause stand part.

This is a vital debate. The debate on clause 3 touches on the core of the Budget that the Chancellor presented to the House some two weeks ago. The tax measures that sit at the heart of the Budget and that are the subject of this clause all flow from the decisions and the fiscal judgment that the Chancellor took when he presented the Budget to us. This clause is the automatic consequence of the fiscal mandate that the Chancellor set out for us a few weeks ago and, in particular, of his ambition dramatically to accelerate the time period in which we will eliminate the structural deficit in this country in order to bring forward by just one year the date at which debt as a proportion of our GDP begins to fall.

The price of accelerating that moment is, of course, £40 billion of extra tax rises and spending cuts. That has left the Chancellor-we might get a chance to
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discuss this in a clause stand part debate later-reliant on Office for Budget Responsibility forecasts, which are optimistic. To give Sir Alan Budd his due, even he says that there is only a 40% chance of his forecast coming to pass next year.

In the Budget debates over the course of the last couple of weeks, we heard that the Chancellor is now pinning all his bets on an increase in business investment and in export growth. We have achieved that before, but only once since the Library started collecting figures on the subject in 1966. Of course, the Chancellor is relying on that happy coincidence of business investment growth and export growth in every one of the next three or four years. It is fair to say that most people would not quite bet on such an outcome coming to pass, but rather than seeking to stimulate domestic demand and to create better conditions for business investment in the UK domestic economy, the Chancellor has instead chosen to give consumption the biggest whack possible and to introduce a consumption tax. Indeed, the hit to our growth is so severe that buried in the tables at the back of the Red Book we learn that an extra £9 billion of tax increases are required simply to make good the loss of growth and the loss of jobs.

Dr Pugh: I know that the right hon. Gentleman is a man of enormous candour and frankness and we also know that the previous Chancellor wished to raise VAT to 19% but was overruled by the then Prime Minister. Which side did the right hon. Gentleman take in that argument? Did he think that the previous Chancellor was correct or did he think that the Prime Minister was correct? What advice did he offer?

5 pm

Mr Byrne: The hon. Gentleman knows that the Chancellor is a member of the Cabinet and, as in all Cabinets-I am sure this is true of the Cabinet today-the then Chancellor was subject to the collective responsibility that we all shared. The judgment that he reached was his final judgment, and that was the judgment that he presented in the March Budget.

I want to touch on three aspects of the debate. If I may, I will start with amendments 41 to 43, the purpose of which is quite straightforward: they seek to make good the fact that there is no mandate for the clause. I do not think that either Government party could truly claim to have solicited from voters any ringing endorsement for clause 3. If anything, in their hearts, they could assume that the public voted against the subject of the clause. Today's debate is important for Parliament and for the public, and I certainly hope that we will not be subjected again to the spectacle of the Government Chief Whip, who is not in his place, seeking to force a closure motion on a Finance Bill debate. Over the centuries, nothing has prevented Parliament from debating the wisdom of the Executive's attempts to tax the people of the country, and it would be unfortunate, particularly for the Conservative party, which prides itself on being a party of tradition, if the Chief Whip were single-handedly to put one of our most cherished traditions in the bin.

The Temporary Chair (Mr Jim Hood): Order. May I comfort the right hon. Gentleman by saying that a temporary Chair cannot accept a closure motion in Committee?

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Mr Byrne: I am greatly reassured by that, Mr Hood, as I was worried that the Chief Whip would again, later this evening, detect a certain exuberance or failing of stamina among some of those in his pastoral care.

The first group of amendments has a very simple purpose. As the clause is a measure with no mandate, it is surely important for hon. and right hon. Members present not just to vote for it in the dark. Surely, we have a responsibility, as legislators, to ensure that we genuinely understand the impact of the VAT increase on the people whom we are here to represent. It is perfectly possible that even when that clarity has been acquired, the Government will say that they want to press ahead with the measure come what may, but we should study how different groups will be hurt by the VAT increase. Amendments 41 to 43 ask the Treasury to prepare a report on the impact of the rise in the standard rate of VAT on pensioners, children and child poverty, inequality, the bottom 20% of households by income, charities, the informal economy and the black market. Under the amendments, if those reports are not completed, the increase in the standard rate of VAT would not occur until 4 January 2012.

The purpose of the amendments is perfectly straightforward. We know that there are more Finance Bills in the pipeline, some of which might arrive in the House fairly soon after the summer recess, but the House will want to be able to press the Government-from both sides, I hope-on the need to include in future Finance Bills measures to compensate those who have been hit particularly hard by the increase in VAT should it arrive successfully on the statute books this afternoon. The reports are enormously important because the public were denied a debate, during the election, about what protections should be put in place. Indeed, they could be forgiven for believing that no party intended to increase VAT.

George Freeman (Mid Norfolk) (Con): The right hon. Gentleman has said that the Government do not have any mandate to change the VAT rate, but did not he give us a mandate when he left a note saying that he was sorry to tell us that there was no money left? He never said that during the general election campaign.

Mr Byrne: For the hon. Gentleman to begin quoting private correspondence, even that written in bad taste and in jest, is particularly inappropriate in a Finance Bill debate on a £19 billion tax increase of which his constituents will pay part. If that is the strength of his contribution this afternoon, I think that they will be disappointed. I was about to say that the Deputy Prime Minister was among those who gave the public the impression that there was not a plan to increase VAT. He said on 8 April:

appealing to him, I think he meant-

There was, of course, a nice poster to go with the quotation, which we talked about last week. I was one of those who were lucky enough to get a copy of the poster before the Deputy Prime Minister took it off his website last Tuesday night-it is good to note that at least they were not all in the bar. The poster was clear. It said:

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The Deputy Prime Minister's assertion, however, that no rise in VAT was needed in the Liberal Democrat plans found its echo in words from the right hon. Member for Tatton (Mr Osborne), who is at ECOFIN today. He told The Times on 10 April:

Jo Swinson: The right hon. Gentleman is talking about the election campaign and what was said about VAT. Does he accept that during the televised Chancellors' debate the Labour, Conservative and Liberal Democrat spokespeople refused to rule out any future rise in VAT, and the then Labour Chancellor, we learn from Lord Mandelson's memoirs, was planning to raise VAT to 19% in any event?

Mr Byrne: I know that the hon. Lady is not trying to run away from this debate, because she has been writing to colleagues in Scotland and including in her letters the immortal sentence, "The increase in VAT did not feature in any of my election publicity." She would have to accept therefore that the impression given by both the Deputy Prime Minister and the Chancellor in the words that I have just read out would conjure up in the minds of voters the idea that there was no plan for a hike in VAT.

The point that I am making this afternoon is that because that illusion was created, rightly or wrongly, by the Conservative and Liberal Democrat parties, the public did not get a chance to think about the kind of protections that would be needed. That is why the amendments call for reports to be laid before the House of Commons.

Mrs Anne McGuire (Stirling) (Lab): I congratulate my right hon. Friend on illustrating the unequivocal nature of the comments made by the leaders of the Conservative and Liberal Democrat parties about any potential increase in VAT. Does that not make it clear that this House deserves the impact study for which the amendments call? The Conservatives and Liberal Democrats were not wishy-washy about it; they were unequivocal all the way through. We deserve the impact study that my right hon. Friend calls for.

Mr Byrne: My right hon. Friend puts it rather well. My point is that, because individuals did not rule things out categorically in the Chancellors' debate and other debates, the hon. Member for East Dunbartonshire (Jo Swinson) should accept that the impression was given that a rise in VAT was not imminent. Politics aside, I hope that she accepts that the public were not given much incentive to ask us, if a VAT increase did come down the tracks fairly quickly after the election, what protections we would put in place. That is why the amendments are so important; they seek to solicit from the Government a detailed study of the impacts of the VAT rise so that in future Finance Bills we can ensure that, where needed, people are protected from the egregious consequences of this change.

Andrew George (St Ives) (LD): It would have been nice if the Labour Government had undertaken impact studies of abolishing the 10p tax rate, for example. I
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understand that the Labour party has now learned to love Baron Mandelson, whose memoirs are now published for all to see. It is clear from them that the shadow Chancellor had been contemplating increasing VAT to 18% or 19% in advance of the general election. Baron Mandelson acknowledges that this was a hard choice, one that he was impressed by. In those circumstances, does the shadow Chief Secretary accept that sometimes it is better to leave the hard choices until after an election, and perhaps that was in the back of the minds of the now Prime Minister and Chancellor?

Mr Byrne: That is a very subtle argument. I think I just about followed the hon. Gentleman step by step and link by link, but cutting to the chase I hope the point we can agree on is that the public were not given much incentive to ask of us, at hustings or elsewhere, "If there were VAT increases, what would you do to protect different groups?" Given the fact that we all know there are future finance Bills to come, possibly in short order, it is important that we try to understand the real impact of the VAT increase, especially on the groups I have listed in my amendment, so that we can ask the Government to bring in protection for them.

Mr MacNeil: In the light of what is reported to be in Baron Mandelson's memoirs, may I check that the right hon. Gentleman is planning to support amendment 13 and that he is still against a rise in VAT from 17.5 to 20% and will vote to ensure that we keep VAT at 17.5%?

Mr Byrne: If the hon. Gentleman will forgive me, I will reveal my hand on our voting strategy slightly later on in the debate.

The point is clear. We are seeking from the Government a number of protections to ensure that the people we think will be hit by VAT are not hit by it. If our amendments are not successful, we shall of course oppose the clause.

Mr MacNeil: We have just heard Liberal Democrats say that before a vote we should tell the public about the difficult choices. Will we know about the difficult choice the Labour party is making before the vote tonight? What are Labour Members planning to do? Will they support amendment 13 or not?

Mr Byrne: I am now tempted to keep the hon. Gentleman in suspense for a little longer. I hope he will bear with me.

I was making the point that if the Committee does not agree to support the amendments and does not agree that we should make reports and study the impact, it will be tantamount to our saying that we do not care how VAT will hit different groups, but I know that there are people in the Government, and Members in the House, who do care. They worry about the impact of VAT because they, like Labour Members, came into politics to try to make this country a fairer and more prosperous place to live in. The reports we are asking for are all the more urgent because evidence has emerged over the last couple of weeks from the Government and elsewhere that VAT increases are both unfair and regressive.

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There was the now infamous graph on page 66 of the Red Book, to which the Economic Secretary referred in questions earlier this afternoon. The graph purported to show that the Budget was fine-the very model of progressive politics. Only after interrogation did it emerge that the picture looked half decent only because it incorporated Labour measures and did not include the full extent of the welfare cuts that await the country in years to come; indeed, just a third of those welfare cuts were put into the picture, so unsurprisingly, it was flattering.

The best arguments for the reports we are asking for were made not by the Economic Secretary or by me, but by the Prime Minister and the Deputy Prime Minister. During the election the Prime Minister said that he could "absolutely promise" that VAT is regressive. He said that

That is what the Prime Minister said at one of his popular Cameron-direct events in Exeter in May.

5.15 pm

The Deputy Prime Minister echoed that view, and also said that raising VAT would be regressive and penalise the poor. On "Today" on 7 April he said,

echoing the point made by the hon. Member for East Dunbartonshire-

I am not quite sure what those decisions were.

Of course, there are also the comments by the hon. Member for Bermondsey and Old Southwark (Simon Hughes), who is not with us this afternoon but has been very eloquent on this subject in public and in private. He told "The Daily Politics" on 15 June:

The views expressed by the Prime Minister, the Deputy Prime Minister and the deputy leader of the Liberal Democrats have all echoed the opinion that has been offered to us in the House by a range of experts. The National Institute of Economic and Social Research said in its report of 21 June that VAT rises do more harm than other tax rises would. The Institute for Fiscal Studies said that a VAT rise will have a bigger impact on those with least money. I think it said that the poorest 10% of households would lose twice as much as a percentage of their income as the richest 10%. Even the Treasury's own figures, released in answer to a parliamentary question earlier in the year, show that the poorest households are affected three times as much as the richest by changes in VAT.

So the leadership of the new Government was very clear about the impact of VAT rises, and given this silence during the election and the risks of the proposed clause 3, I think the House needs to know what the truth really is, and we need to know what measures we should be demanding on behalf of our constituents in future Finance Bills to soften the blow.

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Amendment 46 seeks to focus this debate on one group of people in particular, but before I address that I give way.

Charlie Elphicke (Dover) (Con): I should like to press the right hon. Gentleman on the plans that Baron Mandelson referred to. If the shadow Chancellor had got his way, the shadow Chief Secretary would have been implementing those plans. Can the shadow Chief Secretary confirm to the House whether he called for such a report to be produced as part of the preparatory measures for the March Budget?

Mr Byrne: I know the hon. Member is new to the House, but the report to which he refers is called the Budget, and in chapter 6 of the March 2010 Budget the plan that the Chancellor decided on is set out very clearly. He said that the deficit should be halved over the next four years and that that would require £57 billion-worth of discretionary action. That would require £19 billion of tax increases, of which broadly half came through an increase in the national insurance rate, some of which the Conservative party has kept. About £18 billion of savings would come through reducing capital expenditure as a share of our economy, from the 3.5% which it hit in order to fight back against the recession, down to about 1.25% of GDP in a couple of years' time. That is, by the way, still twice the level that we inherited back in 1996-97. And on top of that £18 billion in winding down capital spending, we then set out very clearly £20 billion of savings to current expenditure. The hon. Member will recall that £4.5 billion of savings were to be achieved by holding down public sector pay, of which £1 billion would be gained through reform of public sector pensions by 2012, £5 billion by cuts to a range of lower-priority programmes across Government, and about £11 billion of savings were to be gained by revolutionising the way that Whitehall conducts its business. So there is a very clear plan set out in chapter 6 of that Budget-it is only 20 pages; I recommend it to the hon. Member if he has not read it. But why not have the debate now?

Mr David Burrowes (Enfield, Southgate) (Con): Not being so new to the House, I am aware, obviously, of the reports today in The Times revealing that the shadow Chancellor was wishing to increase VAT to 18%. Can the right hon. Gentleman confirm, in relation to the pre-Budget report stage in November, whether, if the shadow Chancellor had had his way to increase VAT to that level, a report such as the one that is proposed in amendment 46 would have come to pass?

Mr Byrne: Happily, the question is hypothetical, because the then Chancellor reached a decision on the right package of measures needed to halve the deficit over the next four years. The hon. Gentleman's problem is that the Conservative party concluded that it needed to bring forward by a year the date at which debt as a proportion of GDP needs to start to fall. Therefore, another £40 billion in tax rises and spending cuts are needed. The only way to secure that is to take an enormous risk by whacking domestic consumption with a regressive tax. So he must contend with a question of economics and one of fairness. [ Interruption. ] He says from a sedentary position that it is a question of leadership, but the art of fairness is integral to the effective leadership
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of this country. That is what his constituents would expect, and it is why I hope that he will support me in these amendments to carry out a study of the impact of the new tax, so that we can understand how to remedy the problem in the next Finance Bill.

Rachel Reeves (Leeds West) (Lab): Unlike Government Members, I plan to ask about the amendment, rather than talking about reports in The Times today. Will my right hon. Friend confirm that the measures proposed by the former Chancellor of the Exchequer in the Budget in March would have reduced the incomes of the top 10% of earners by 7% and those of the bottom 10% of earners by 0%, compared with the Budget proposed by the current Chancellor that reduces the income of the top 10% by 0.7% but the bottom 10% by 2.6%? So the work that-

The Temporary Chair (Mr Jim Hood): Order. The intervention is too long.

Mr Byrne: My hon. Friend was making an important point, and she is absolutely right. We also said very clearly that more than half of the £19 billion in taxes that we proposed to raise-a measure not completely different from the figure that the Government are seeking to raise-should be paid for by the top 2% of earners. I have not yet seen a similar analysis produced by the Government.

Mrs McGuire: Would my right hon. Friend care to put on the record how many times a Labour Government increased VAT? Would he like to remind the House that a Labour Government reduced VAT on two occasions: first, when we came to power, when we reduced it on utility bills; and secondly, when we did so as part of our fiscal easing during the current recession?

Mr Byrne: Again, my right hon. Friend is absolutely right. One reason why we have always approached VAT in the manner that she has described is that we know that, as a flat tax, it is regressive.

Mark Durkan (Foyle) (SDLP): Does the shadow Chief Secretary recall that, on the day of the Budget, the Government also published their paper, "Tax policy making: a new approach", which said at paragraph 3.10:

At paragraph 3.13, it said that the Government

At paragraph 3.17, it said:

On that basis, should the Government not accept a number of amendments that the right hon. Gentleman is speaking to? I will certainly support amendment 13, although he may want to keep his counsel on that. For consistency's sake, should the Government not accept some of these amendments if the policy statement that they issued on the day of the Budget is to mean anything?

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Mr Byrne: I am grateful to the hon. Gentleman, who has exposed my utter lack of originality. This position is not uniquely adopted by Opposition Members. Indeed, part of the inspiration for our amendments is the amendment tabled to the Budget resolutions by the hon. Member for St Ives (Andrew George). There is a consensus that, over the years to come, we want the institutions that help to govern our macro-economic policy to be as strong and robust as possible. That is why the shadow Chancellor has welcomed the initiative of the Office for Budget Responsibility, but put on the record our ambition to ensure that it is truly as independent as possible. That is why it is important that there is no question about its conduct, the publication of its reports and the synchronisation of its reports with Prime Minister's Question Time and so on. We want Parliament to take the lead role in appointing the OBR's new leadership, and we want also to ensure that financial, tax and economic policy is conducted as transparently as possible. That was the instinct behind the creation of the code for fiscal stability many years ago, and we need to carry on the work of reform so that we truly strengthen the role of this House in holding economic policy to account.

The purpose of clause 6 is to seek to protect a group of people who are very important to all Members-our pensioners and retired citizens. Ultimately, the reason why Labour decided to raise national insurance instead of VAT was a concern for fairness, and we knew in particular that those on fixed incomes, such as pensions, would struggle most when faced with sharply rising prices. Today, I am afraid, we hear that pensioners could face an £8 billion VAT bill during the course of this Parliament.

When the Budget was presented, we heard a little about the protections that were already being put in place, but on closer inspection it turns out that pensioners will be hit by different changes each and every year. Amendment 46 would therefore require the Treasury to prepare a report on the impact of the increase in standard rate VAT before any further Finance Bill were brought before the House in the current Session. In that way, right hon. and hon. Members would be able to insist upon proper remedies for pensioners to protect them from VAT.

It is worth setting out what the Library has published. The overall effect of the Government's proposed VAT hike is that the revenue raised will increase from between £2.8 billion to £2.9 billion in the current financial year to £12.1 billion, £12.5 billion, £12.9 billion and £13.5 billion over the course of this Parliament. Using the Office for National Statistics' study of pensioners' share of spending, the Library estimates that this year-so, before pensions rise in April-Britain's pensioners will pay £422 million of extra VAT. That figure will then rise to £1.8 billion, £1.9 billion, £2 billion and £2 billion by the end of the Parliament. I think the House will agree that that is a serious hit on pensioners' fixed incomes.

Charlie Elphicke: As the right hon. Gentleman points out with his customary candour, I am new to the House. Will he therefore help by pointing me in the direction of such a report when the 10p rate was abolished?

Mr Byrne rose-

Mr Tom Watson (West Bromwich East) (Lab): The Library.

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Mr Byrne: My hon. Friend, from a sedentary position, is absolutely right. The Library produced exactly the kind of report that I have just set out, and- [ Interruption. ] In the spirit of candour with which the question was asked, I note that there were serious mistakes with the way in which the 10p rate was changed, and my right hon. Friend the Member for Kirkcaldy and Cowdenbeath (Mr Brown), the former Prime Minister, has been very open about that. That is precisely why we need to learn lessons about the way in which tax policy and economic policy is conducted.

Generally the rule is, the more transparency, the better, so I hope that the hon. Gentleman will support our amendments, because the transparency at which he hints reveals a further problem in 2011. The Library states that in 2008 the typical household in the retired category spent £353.70 a week, and that the amount would rise to £358 after the VAT increase. That represents a rise in the VAT bill of about £4.30 a week. However, the rise per week in the basic state pension-delivered by the triple lock that was so trumpeted-is less than the increased shopping bill that pensioners will pay.

I should also like to make a point about the following year, 2012, because the Chancellor did not present matters very clearly when he announced the Budget.

Analysis shows that the Treasury's switch to using the lower-rising consumer prices index instead of the retail prices index to measure price rises means that pensioners' income will fall behind VAT-fuelled price rises in 2012. According to table C2 on page 84 of the Red Book, in 2012 RPI will be 3.2%, average earnings growth will be 2.3%, and CPI will be 1.9%. We can therefore assume that under the triple lock system, the pension increase will be only 2.5%-lower than VAT-fuelled RPI, which will be 3.2%. The increase in pensions will appear to fall behind the increase in prices.

5.30 pm

Jacob Rees-Mogg (North East Somerset) (Con): I wonder whether the right hon. Gentleman has paid attention to the report by the Office for National Statistics which says that CPI includes a higher proportion of the VAT increase than RPI because the CPI basket contains more goods on which VAT is paid.

Mr Byrne: That may or may not be the case. My point is that the Treasury has decided, without really publicising the fact, to switch the way that it measures price rises. A great fanfare was attached to the notion of the triple lock and raising pensions by prices, by average earnings or by 2.5%, whichever was higher. Somehow missing from that presentation, however, was an acknowledgment that RPI would be higher than any three of those measures in 2012, with the price being paid by Britain's pensioners.

Alec Shelbrooke: A moment ago, the right hon. Gentleman described the effect that the increase in VAT would have on the increase in pensions. Does that include the freeze on council tax that this Government are bringing in, following huge rises in previous years, with rises in pensions being relatively small?

Mr Byrne: I think that once local authorities are confronted with 25% to 40% budget cuts later this year and we face, as Age UK has warned, the possible collapse of the social care system, we will see whether the freeze in council tax is truly delivered.

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Even towards the end of this Parliament, the hits to pensioners will just keep coming. The Library assesses that by 2013, pensioners could face cuts to disability living allowance benefits totalling an extraordinary £350 million a year. That is alongside cuts to housing benefit and the lower uprating of public service pensions and other benefits, which are now also linked to the lower-rising CPI rather than RPI. I accept that reforms to DLA are not yet clear, but we have to accept that Britain's pensioners face a new risk that has not yet been explained to this House. One million people of pension age are on DLA-they represent 34% of DLA recipients of all ages-so it is a risk that we in this House should demand we understand before changes are made.

Mr Wayne David (Caerphilly) (Lab): Does my right hon. Friend accept that senior citizens will also be badly hit by the disproportionate effect on them of the reductions in public services?

Mr Byrne: Precisely. That is the point that Age UK made in its response to the Budget. It issued a stark warning that thousands of older people's lives would be at risk from even a 25% cut in local authority budgets; now we are warned by the Chief Secretary, with a casual disregard for the seriousness of the situation, that there could be cuts of 40%.

Looking around here this afternoon, I can see many right hon. and hon. Members who came into politics to champion the cause of fairness and who work extremely hard on behalf of pensioners in this country and in their own communities. I very much respect the campaign work that has been conducted by Members in all parts of the House, not just those from my own party. It is a cause that has been championed, in particular, by those on the Lib Dem Benches.

I have not presented to the House any definitive statement on how pensioners will be hit by VAT. I have not conducted some kind of distributional impact analysis using a Treasury dynamic model of the interrelationship between the basic state pension and the pension credit uprating, but I think the Government should. If they are relaxed about the matter and truly believe that they have compensated pensioners fully for the rise in prices for which they are legislating, they should put the matter beyond doubt. They should show the House and the public beyond that the very people to whom we owe so much are protected from a measure that they did not vote for and that threatens the standard of life that they worked so hard and long to secure.

The final amendments that I should like to speak to are amendments 40 and 44, which are probing amendments. We want to give the Government the opportunity this afternoon to put on record their intention to rule out the removal of zero-rating VAT status on any further items. Amendment 40 would require the Treasury to lay a report on the scope of the standard rate-

The Temporary Chair (Mr Jim Hood): Order. May I advise the right hon. Gentleman that amendment 44 has not been selected?

Mr Byrne: I am grateful, Mr Hood. I will therefore confine my remarks to amendment 40, which asks the Treasury to lay a report on the scope of the standard
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rate before the Commons before the rise takes effect on 4 January 2011. The reason for our concern is that in the past, the Deputy Prime Minister has said that it is more liberal to tax people on their income than on their work. That automatically raises questions about whether the scope of VAT as currently set out by the Government is set to widen and widen.

We have a few assurances on the record. We learned from those on the Treasury Bench this afternoon that Ministers will not extend VAT to hardback books or newspapers, which is very welcome, but there are of course a range of goods that are currently zero-rated, including food, clothing, footwear, transport, talking books for the blind and the disabled, sewerage and water, building construction, protected buildings, caravans and houseboats, drugs, medicines and aid for the disabled, tax-free shops and some charitable contributions. We should like to hear more from the Government about whether there are any plans, either now or later on in the Parliament, to withdraw what is currently zero-rated. We want to give them the opportunity to put that beyond doubt.

This is an important debate. The VAT increase is a measure without a mandate and there is therefore an obligation on Members to ensure that the people who need to be protected are protected by the votes that are taken this afternoon.

Andrew George: I rise to address this group of amendments, or at least the two in my name. May I seek your advice, Mr Hood, about whether I can move amendment 55 and refer to amendment 54?

The Temporary Chair: Order. We are considering the amendments in this group, but the hon. Gentleman is not in a position to move his amendment now. However, he can discuss the amendments that we are considering.

Andrew George: I am grateful to you, Mr Hood, for your guidance.

I should like to concentrate my brief remarks in this debate on amendment 55, which is in my name. It is similar to amendment 22, tabled by the hon. Member for Nottingham East (Chris Leslie), which introduces the concept of a sunset clause. I am particularly grateful to the hon. Member for Foyle (Mark Durkan) for highlighting the approach taken by the Treasury in bringing forward tax policy, and particularly for his reference to paragraph 3.17 of the Treasury document, which states that

I welcome the Government's approach in that respect.

This is an emergency Budget with emergency measures being brought forward, one of the most dramatic of which, and the one that has perhaps been the focus of more significant debate than any other, is on VAT. In those circumstances, it is reasonable to argue that an emergency measure should be subject to some time-limiting once the emergency can be considered to have passed. I have made my assessment on the basis of no special ability beyond that of anyone else in the Chamber-although perhaps the hon. Member for Nottingham East has greater insight into how long emergencies last.
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My amendment 55 would provide for a two-year emergency period. I think it a reasonable assumption that the provision should at least contain a sunset clause, so that the Government can assess the impact of the measure on the economy, and recognise that it is an emergency measure brought forward in an emergency Budget in an emergency situation, and that we should have a knife and a time after which the situation can be reviewed.

Mark Durkan: Does the hon. Gentleman recognise that the two-year period, which he is taking as his rule of thumb for an emergency, just happens to be the same period covered by the questionable tables the Government have issued in the Red Book to try to assure people of the equitable impact of the Budget measures?

Andrew George: I suppose the use of the adjective "questionable" is a matter for debate, and no doubt Treasury Ministers would wish to contradict it. I do not feel as qualified as the hon. Gentleman to comment on this subject. However, I try to take the best available evidence, which includes Treasury assessments. I am sure that the shadow Chief Secretary would acknowledge that the Treasury is a sound source for some of these judgments.

I ask the Exchequer Secretary to address how the Government will review this proposal. Is it genuinely the Government's intention to keep the VAT rise as a permanent measure? If they do not propose to insist that the 20% rate become a permanent measure, by what means will they and Parliament have the opportunity to review it? Others more articulate than I will be able address the impacts of the VAT rise on families, charities, the building industry, rural motorists and others. However, we have debated those already, and I do not feel it necessary to go through them once more.

Mr MacNeil: Will the hon. Gentleman give way?

Andrew George: I mentioned rural motorists-I strayed mistakenly-so I have a feeling this intervention will be about them. It might be on another issue though.

Mr MacNeil: The hon. Gentleman might be expecting an intervention on the rural fuel derogation that I am expecting to come from the Treasury before 4 January 2011, but alas my intervention is not on that subject. Rather, I would like to know whether the hon. Gentleman, as a Liberal Democrat Member, is serving notice on his Conservative counterparts that the VAT poll tax will end in two years.

Andrew George: It is not up to me, as one Member of Parliament, to serve notice. I do not have the power to change this; I am simply raising issues with Treasury Ministers that I hope they will take into account. I hope they will at least address the emergency nature of the Budget and of the measures being implemented. I would also like them to address the permanency-or non-permanency-of the measures. If they are likely to be permanent, can we at least have an explanation of how that can be justified?

5.45 pm

In seeking to raise not just VAT but so many other issues in the Budget, such as the banking levy and capital gains tax, I have often been cautioned not to disaggregate
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one element of the Budget from the rest, on the grounds that we cannot unpick a Budget because the whole thing will implode, for some reason that I have never entirely understood-perhaps the Exchequer Secretary could explain it to me. However, given how we in this House have to scrutinise such matters, it is inevitable that we should have to pick at particular aspects of the Budget, particularly bearing in mind the fact that this Finance Bill brings forward only limited aspects of the Budget. There will be a further Finance Bill later in the year, while essential measures in the Budget will form part of the comprehensive spending review, so bits of it are all over the place.

If my right hon. and hon. Friends in the Treasury and elsewhere are concerned that the impact of my probing inquiries and questions is effectively to unpick and therefore undermine the Budget, I apologise. However, I would like the Exchequer Secretary to address himself to the issue that I have raised and to the argument of those interrelationships, because at the end of the day-I have made this view clear in my contributions to this debate, and I know that many others across the House share it-of all the measures to restore the public finances, a VAT rise, it seems to me, has to be among the least welcome.

Sammy Wilson (East Antrim) (DUP): Is not the hon. Gentleman's point an illustration of the Government's approach in the Budget? The purpose of the Budget as a whole is to restore confidence, but it will do so only if harsh measures are implemented right across the board. Therefore, trying to unpick any of those harsh measures will undermine that confidence, as well as the objective that the Government have set themselves, which is to satisfy the financial markets. That is the difficulty with the Government's approach: it is all or nothing, because the measures have to be harsh enough to satisfy the financial markets.

Andrew George: I am a novice in Finance Bill debates and have not generally spoken in them in the past-I tend to go off and do international development, DEFRA issues and housing. I therefore do not necessarily feel qualified to make judgments about what type of measures-harsh or otherwise-are likely to have the most satisfactory impact on the markets. Others in the House will perhaps have more experience of how to satisfy the markets. My starting point is an assumption that, in its entirety, the bundle of proposed tax rises and public spending cuts in the Budget is at about the right level. The question that we should be debating is: have we got the measures right within that overall figure? That brings us to whether we have addressed the option of a VAT rise as opposed to, for example, an increase in the banking levy, or a further increase in capital gains tax or corporation tax.

Mrs McGuire: I congratulate the hon. Gentleman on the logic of his case. He has pinned the Government down on their branding of the Budget as an emergency Budget. If it is an emergency Budget, there should be room for manoeuvre and time-limiting. Perhaps the mirror image of this proposal is the reduction in VAT that the previous Government put in place to deal with a particular set of circumstances at an early point in the recession. The hon. Gentleman might be a novice in these matters, as he said earlier, but his logic is impeccable.

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Andrew George: I am grateful to the right hon. Lady for her kind words.

Obviously, it will be up to the Exchequer Secretary to ask the question that I have already asked on this issue. The fact that all political parties were clearly under a degree of political pressure before the general election has been exposed by Lord Mandelson in his diaries, which were published in the last couple of days. We must acknowledge that any rise in VAT is the result of a really tough choice-a last resort, perhaps. One message to come out of this debate must surely be that when political leaders say they will not rule something out, particularly in the lead-up to a general election, the possibility of the measure being brought in after the election is usually rather higher than many members of the public might imagine. On this issue, Labour Members must be struggling to swallow, with all that butter not melting in their mouths.

Mr Byrne: On that point, the hon. Gentleman must surely accept that a pretty comprehensive tax plan was set out in the March Budget. We were seeking to raise an extraordinary amount of money-£19 billion is not small potatoes-and we set out specifically how much would come in through national insurance increases, how much through changing the tax treatment of pension contributions, and how much through putting taxes on incomes up and keeping them up, and taxing certain incomes at the 50p rate. Some of those measures have been kept, but those were not easy decisions to make. They were difficult decisions, but they did bring in £19 billion of income to the Exchequer.

Andrew George: I acknowledge that, but of all the tough decisions that we are talking about, a VAT rise is among the toughest. It is tougher than the ones proposed by the Labour Government in their pre-election Budget. It is a truism that Budgets brought forward just before a general election are rather different from those introduced just after an election, because of the political pressures under which Governments find themselves. That is just human nature-or perhaps political nature. The decent thing for Labour Members to do would be to acknowledge that.

Mr Watson: I have more faith in the hon. Gentleman, and I hope he would have more faith in me. If he were the Chancellor of the Exchequer and he had had to sign a venal deal with the Conservatives, I do not believe he would have introduced this clause. I think there is more to him than that, and the House should give him credit for it, although I know that he has to defend the line. By the way, I would not have introduced this clause either-it is disgusting.

Andrew George: Well, I think we have all heard what the hon. Gentleman has said.

I shall move on to an amendment that I would not wish to move. Amendment 54 was tabled deliberately to encourage a debate on the different levels of VAT rise that might be considered. The thinking behind it is that, if a VAT rise is unavoidable, perhaps it could be done in such a way as to involve a basket of taxes, including the bank levy, capital gains tax and corporation tax. In that way, we might have ended up having to nudge up VAT by 0.5%. When I tabled the amendment, I had not read
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The Times this morning. If I had added the words, "or 19%", I might have been able to persuade the shadow Chancellor to sign my amendment as well. I do not need to rehearse all the arguments behind this proposal, but I hope the House will reflect on it.

I asked a parliamentary question about the anticipated yield from raising VAT by various percentage points, and I received a kind response from the Exchequer Secretary on 8 July, in which he explained that a table in

I have to admit that I had not seen them at that point-

I am surprised that it is as simple as that, because I would have thought that at some point a VAT rise would have an impact on the yield as people purchased less.

I did some quick calculations on this. Actually, I got some assistants who are rather better than I am with these new-fangled devices called fingers to do those calculations. An increase of half a percentage point would yield £2.425 billion in 2011-12, and £2.5 billion in 2012-13. That is clearly way below the Government's estimate of the impact of the VAT rise. The ready reckoner gives figures of £12.125 billion and £12.5 billion, which suggests that it agrees with the Chancellor's estimates. I look forward to hearing the Exchequer Secretary's views on these issues.

The shadow Chief Secretary mentioned impact assessments. As he knows, I raised that issue in a previous amendment at the time of the Budget. A more thoroughgoing impact assessment than has been available thus far would be enormously helpful, and I believe that a Government should carry out such an assessment in any case when a measure is going to have a significant impact on the country as a whole. Given that the increase will not be implemented until 4 January next year, perhaps the Exchequer Secretary will agree to do some further work on this. There is a balance of opinion that suggests that the VAT increase will be more regressive than progressive. That has been debated in the Red Book and by the Institute for Fiscal Studies, as well as by other well-informed, independent organisations. I hope that the Minister will address the issue of impact assessments that the shadow Chief Secretary has quite rightly raised.

Chris Leslie (Nottingham East) (Lab/Co-op): I welcome many of the comments made by the hon. Member for St Ives (Andrew George) in speaking to his amendment 55. As he pointed out, it is not dissimilar to my amendment 22, which also suggests a sunset clause, albeit in this case for one year-essentially mirroring the fact that the previous Administration reduced VAT for the period of the economic downturn as a means of stimulating the economy for that 12-month period. It seemed a reasonable proposition to do the same now.

6 pm

There are so many issues covered in this group of amendments, and I hope hon. Members will look carefully at all of them. Before I move on to discuss some of
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them, I want to deal with amendment 22. The hon. Member for St Ives is right to highlight the fact that the coalition agreement referred to the greater use of sunset clauses in legislation, which would be a healthy thing particularly given the sheer impact such a massive financial change will have on the entire country. We are talking about £12 billion of tax taken from all our constituents, so at the very least we should have the opportunity to have the measure reviewed periodically by the Minister. I think that it would be appropriate to do so after a year, but after two years would be perfectly reasonable. For me, ratcheting up to a permanent 20% VAT rate is entirely unacceptable.

Sammy Wilson: Does the hon. Gentleman accept that there is an impact in Northern Ireland and in particular many of the boom towns around the border with the Irish Republic-Strabane, Newry, Enniskillen and so forth-of differential VAT rates? For an economy that is still not coming out of recession, a permanent increase in VAT will have a dramatic effect on retail jobs and investment for those towns especially.

Chris Leslie: Indeed; I have seen for myself the impact on those border areas. I am not sure that the Treasury, in applying its very blunt instrument approach to changing taxation, has given any serious consideration to these serious issues which will significantly affect communities, the retail industries and so forth.

It is necessary to reflect on whether raising VAT is the most effective way of reducing the deficit. We know that the Government have an arbitrary strategy, which is partly driven by ideology and a desire to reduce public spending as a proportion of our economy per se -disconnected entirely from the deficit and debt. They have set an arbitrary time scale and are doing it so steeply that it will affect not only public services but the taxpayer in a very harmful way.

We should not have a permanent imbalance between regressive and progressive taxation. I hope that when growth eventually returns to the economy, Treasury Ministers, Opposition spokespeople and others might be able to find better and fairer ways of raising revenue. The hon. Member for St Ives referred to the setting of the banking levy at a puny level and to giving corporation tax away to the banks. There are other sources of fairer revenue generation out there. It is not the case that Labour Members are saying no to all measures; there are alternatives, and it is crucial to bear that in mind.

I am particularly worried about the inflationary impact of the proposed change. The Government are taking a big gamble in the choices that they are making. They must be seriously hoping that the economic cycle hits successfully by the time that we move into the next calendar year, because having such a big increase in taxation at that moment could jeopardise our already fragile growth record. More than that, we are already hearing from some members of the Monetary Policy Committee and others their worries and concerns about persistent inflation. VAT changes such as this will certainly do nothing to help.

It would be good practice for Ministers generally to accept, or at least suggest, that reviews should be undertaken periodically. I shall be interested to hear what the Minister says on that point, particularly to his hon. Friend the Member for St Ives. The VAT increase is of such a scale that a re-authorisation
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request of some level should be part and parcel of the measure. Ministers should from time to time have to ask for that.

I would not be surprised if the Government planned to ratchet up taxation early on in the Parliament to such a high degree-more than is necessary to satisfy the markets and so forth-so that in later years they can offer little tax give-aways and sprinkle a little bit of stardust on an unsuspecting electorate who will have forgotten about the VAT change. It is the Opposition's job to remind the general public that they will be paying through the nose for an ideologically oriented change. I therefore hope that hon. Members will see the spirit behind my amendment 22.

Mrs McGuire: Does my hon. Friend also agree that the mechanics of raising and reducing value added tax is relatively straightforward, making a sunset clause quite easy to apply? It does not have the complications of other elements of the taxation system. Frankly, the previous Labour Government proved that it was possible to adjust VAT by lowering it and then increasing it at a future date. The mechanics of collection are more straightforward than for other taxes.

Chris Leslie: Absolutely. There is a sense that this ratcheting up might be for ever. Once the so-called emergency period is over, most sane and rational people would say, "Okay, the emergency is passing, so we should reduce sales tax down to some level of normalcy", but I would not expect that from the Treasury. This is the Treasury's opportunity to grab more money from the general public and to stay at that high level. I have heard nothing from the Government to suggest that this is a temporary measure. We therefore have no choice but to table suggestions that sunset clauses are necessary and incredibly important.

Amendment 23 would retain the 17.5% rate on a certain class of goods and not raise it to 20%. I refer in particular to children's equipment-children's prams, cots, toys, high chairs, babies' bottles, children's sanitary products and teething-related goods. I declare an interest: I have a 10-month-old daughter. I am thus realising that while she is, of course, worth every penny, she is also an exceptionally expensive addition to my family. I am not complaining in any way about that, but it has brought home to me the sheer cost on families of raising youngsters.

Believe it or not, the Family and Parenting Institute has said that over a lifetime-up to the age of 21-each youngster can cost a family £200,000 to raise, which is about £800 a month. That is the institute's figure, and although I would not necessarily see its methodology I feel very much as if the expenditure is going in that direction. Even if just half that cost were VAT-able expenditure, over a lifetime the Conservative-Liberal Democrat coalition's change equates to £2,500 of extra tax per child. That is not to be sniffed at; it is a significant amount of money. It is not fair that families with young children should have to bear such a disproportionate burden of the deficit solution. As we know, the phrase "We're all in it together" does not apply to the bankers or the highest paid in society. The burden will hit those in the most difficult circumstances.

Andrew Bridgen (North West Leicestershire) (Con): Does the hon. Gentleman consider it fair that every
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child in this country is born with approximately £24,000-worth of debt around their neck as a result of the polices of the previous Government?

Chris Leslie: I have heard the hon. Gentleman espouse that rather spurious point before-and no doubt he will do so again. Of course, that is not a debt around their necks like a personal loan or a mortgage. It is part of the way in which we run our national accounts. Of course we will always require a level of borrowing. Perhaps the hon. Gentleman is suggesting that we should avoid the need for any borrowing whatever, but at this point in the cycle, if we are to ensure that our economy succeeds, we must have a borrowing facility. If the hon. Gentleman thinks that that is wrong, that is his own ideological position. However, I think that it would be exceptionally regressive not just to freeze child benefit for three years, withdraw the health in pregnancy grant, restrict the maternity allowance to the first child, remove the baby component of child tax credit, reverse the supplement for children aged one and two and abolish the child trust fund, but to make young people and families with children bear the VAT increase as well.

This is an extremely important and serious issue. Some areas of child-related expenditure are, of course, either zero-rated or rated at a low level. There is a drafting error in my amendment: I had originally included nappies, but on learning that they were classed as children's clothing, I withdrew the amendment. For some reason it has remained in the group, but the Minister will understand the point that I am making. There is a set of items that young families cannot do without, and I believe that alternative forms of revenue could compensate for tax on those. I seriously ask the Minister to consider making such an exemption.

The VAT increase will be very damaging in a more general sense. I worry not only about its inflationary impact, but about its recessionary impact. Given that it is equivalent to an income tax increase of about 3p, there is a serious possibility that we will end up with inflationary pressures and the return of higher interest rates. The hon. Member for Dundee East (Stewart Hosie) quoted Simon Newark of UHY Hacker Young as saying that the increase could push high street prices up by 2%, and that too is a serious issue.

The impact on those at the other end of the age scale -pensioners-is also incredibly worrying. Whether it amounts to £8 billion, less or more, it will be very significant indeed. As well as having to finance the 25% reduction in their grant levels, those in charge of public services will have to fork out for this extra cost. I am particularly worried about the effect on the NHS and local government. Public spending on councils and the police, as well as some elements of spending on education, transport, housing and the construction industry, will not be protected.

The Government's desire to opt for this most regressive of taxation options led certain City commentators, such as Ian Kernohan of Royal London Asset Management, to observe that the increase would hit all income groups particularly hard in the winter months. Although many of our constituents may at this point be oblivious to the approach of the change because other events have been in the news, there is no doubt that a winter of discontent potentially awaits the Government.

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Charities will be hit especially hard, and I am glad that Members have tabled amendments in an attempt to relieve them of some of the burden. So much for the "big society", when so many third sector organisations are expected to bear the strain. The Government are removing public services and placing some of the burden on charities. What a gift that is!

In a wider economic context, the increase undermines much of the economic growth that may well come from the retail sector. We have heard about the particular impact on certain parts of the country near the Borders and elsewhere, but as soon as the Budget was announced, Morgan Stanley's broker analysis recommended selling stocks and shares in general retail, and buying in other areas that were exempt from VAT or in which it was minimal.

Jonathan Edwards (Carmarthen East and Dinefwr) (PC): Does the hon. Gentleman agree that the increase will hit town centres particularly hard, and will drive shoppers towards large outer-market retailers which will be able to absorb the costs?

6.15 pm

Chris Leslie: There could be all sorts of perverse consequences. The ramifications have not been thought through. We know that the change is not necessary. We know that it has been driven by the Government's assumption that they must introduce it. As I have said, I believe that it has been driven first by an ideological desire to be exceptionally hair-shirted and stern with the deficit-unnecessarily, given that the markets would be entirely content with a slightly longer-profile reduction in the deficit, as long as it was being reduced-and secondly by a wish to stack up a bit of revenue for a give-away further down the line.

Whether we are talking about the effect of the VAT increase on the value of certain retail industries-I believe that shares in Halfords fell dramatically as soon as it was announced-and on big ticket sales, or about its effect across the board in terms of social and economic policy and, in particular, on those who can afford it least, it is regressive and regrettable. It should be reviewed after a year or two at the latest, and the Treasury should show leniency to those who can least afford it, especially children and young families.

Stephen Williams: We are still working out how coalition politics work. It is welcome that we have a coalition, but I have been given the task of presenting a Liberal Democrat perspective.

When I arrived in the House five years ago, I had spent 17 years in tax consultancy, both in practice and in industries. I had studied Budgets in their various forms, professionally and politically, for a very long time. I spent the whole of the last Parliament resisting becoming too deeply involved in finance because I wanted to develop other interests, but our leader, the Deputy Prime Minister, has persuaded me that this might be a good opportunity for me to reacquaint myself with my professional past. I hasten to add that I was never a VAT specialist; my specialism was direct rather than indirect taxes.

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Mr Iain Wright (Hartlepool) (Lab): Will the hon. Gentleman assist the Committee by clarifying a point? Is he now the Liberal Democrat spokesman on economic affairs? Is that his present position?

Stephen Williams: Not necessarily. Labour Members are currently having to adjust to being in opposition after 13 years in government. No doubt the parliamentary Labour party will set up Back-Bench committees like the Conservative party's 1922 committee. The Conservatives have a long tradition of establishing Back-Bench committees to examine different aspects of policy so that they can better advise their colleagues in government. We are having to make the same adjustment, and my role is to chair the Back-Bench Liberal Democrat committee that deals with economic matters, including taxation and expenditure.

I am sure you will pleased to hear, Mr Hood, that I am about to deal with the amendments. Amendment 13, tabled by the hon. Member for Dundee East (Stewart Hosie), proposes that there should be no VAT increase at all. As I observed to the hon. Gentleman in an intervention at the beginning of the debate, it behoves those who say that we should not proceed with the increase to say where they will find £13 billion to fill the hole that that would blow in the Chancellor's Budget.

The hon. Gentleman responded to my intervention by saying that he would not proceed with the renewal of Trident, and I have some sympathy with him on those grounds. I think that Trident is a weapons system that the country no longer needs. However, I hold that view on defence and strategy grounds, not on expenditure grounds. In any event, the hon. Gentleman knows-as I know, and everyone in the Chamber knows-that cancelling the renewal of Trident would not save money this year or next year, and would probably save very little in the course of the present Parliament. It certainly would not defray an increase in VAT in this Budget.

Stewart Hosie: First, the entire premise of the fixed-term deficit consolidation strategy is wrong. I have already explained that, as I also did to the hon. Gentleman's colleague, the hon. Member for St Ives (Andrew George), in a previous debate, and to another of his hon. Friends in a debate before that.

On Trident, I was careful to say that over the medium term we would get the savings from the cancellation and the non-replacement. These are political choices. There would be savings almost immediately from cancellation and non-replacement, and savings of some £50 billion over the medium term-and, as I have said, the Liberals did appear at one point in the election to believe in this, before they changed their minds.

Stephen Williams: The fact is that this year any expenditure decisions we may want to make in order to have a long-term impact will not save £13 billion this year or next year. That is what we are facing now: we are facing a real emergency now as to how to tackle the deficit, and the accumulating deficit each year, that the previous Government left to us.

Stewart Hosie: I agree that we are indeed facing a deficit and a debt problem now. There is no question about that, but how to tackle it is a political choice. We are not facing a £13 billion hike in VAT because it is
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unavoidable; we are facing it because the hon. Gentleman and his new pals have decided that that is the route they want to go down. It is a political choice; that is all it is.

Stephen Williams: The hon. Gentleman is absolutely right to say that the construction of a Budget involves a balance of choices; it balances what we do in public expenditure and what we do on taxation. I am very proud that the Liberal Democrat influence on this Budget has led to 800,000 people being taken out of income tax, and child tax credit being raised by £150 a year. Many more measures have also been included in the Budget as a result of the coalition relationship that has been developed.

Alec Shelbrooke: On the proposal to cancel Trident, will my hon. Friend cast some light on what impact that would have on the constituents in the affected areas in terms of job losses?

Stephen Williams: Well, I know that you are probably about to rule that out of order, Mr Hood, but-

The Temporary Chair (Mr Jim Hood): Order. The hon. Gentleman pre-empts me. We are not going down that route. I ask him to speak to the amendment.

Stephen Williams: I am not trying to dodge that question, and I understand that it is a very sensitive issue in specific geographical areas of Scotland.

Many contributions today have referred to the impact on consumers, but we do not necessarily know what that will be, because retailers construct their prices using many factors, not only the VAT rate. How they set their prices has as much to do with fraud at the till, marketing and advertising, for instance. Although there was a VAT reduction two years ago, when we did our Christmas shopping at that time many of us did not notice that it had gone down from 17.5% to 15%, because shopkeepers kept their prices the same, as they were already discounting in order to counter the recession and attract sales. Therefore, it does not necessarily follow that a VAT rise will be automatically passed on to consumers.

Rachel Reeves: Does the hon. Gentleman agree that the reduction in VAT under the Labour Government reduced revenues by just over £12 billion, so we do have quite a good idea of how much money it will bring in? Does he also agree that my constituents, who earn £16,000 on average, did notice the reduction in VAT, and that they will certainly notice the increase in VAT?

Stephen Williams: I thank the hon. Lady for her intervention, but perhaps she misunderstood the point I was making. Altering the VAT rate obviously has an impact on the wider economy and on Government finances, but claims as to which specific groups of people it would hit in particular are hard to prove in advance of the change. Many of the predictions of price increases-in rural shops in Scotland or elsewhere-may not come to pass, simply because retailers will have to take other considerations into account, such as the effect on their trade. I am sure that we can all think of retailers-such as the Fopp record store in my constituency -which set their prices at standard amounts, such as
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£3, £5, £7 or £10, simply to attract customers through the door. It is unlikely that they will move away from that marketing model.

Mrs McGuire: Does the hon. Gentleman accept as an authoritative commentator on the effects of VAT the Office for National Statistics, which indicated that the impact on the poorest 10% is significantly greater than the impact on the richest 10%? Is that just some piece of frippery to be thrown to one side and not to be acknowledged by a Liberal Democrat party that is somewhat embarrassed to be supporting an increase in VAT?

Stephen Williams: I can assure the right hon. Lady that I would never dismiss a statement by the ONS as a piece of political frippery. What we are trying to deal with in this debate, however, is points put forward by Members, some of which may well be pieces of frippery that we will have to counter in our discussions.

Mr Iain Wright: It is stated on page 66 of the Red Book that

We do know who will be hardest hit, therefore. It will be the poorest in our society, and the hon. Gentleman's Red Book says so.

Stephen Williams: We can debate this until very late tonight-and I am sure we will-but the fact is that we have to make lots of assumptions about what people will actually spend their money on, because VAT is a tax on discretionary expenditure, not on essential expenditure. It was designed to be so. That is why food, children's clothing and many other items to which the hon. Member for Nottingham East (Chris Leslie) has referred are zero-rated or exempt from the scope of VAT.

Charlie Elphicke: May I thank my hon. Friend for the efforts that he and his colleagues have made to increase the personal allowance, as that is an extremely important contribution? People in Dover and Deal whom I represent earn on average £17,000 or £18,000 a year. Does my hon. Friend agree that the effect of the VAT rise is ameliorated for the least well-off, such as those people, by the exemptions for food and children's clothes?

Stephen Williams: My hon. Friend is absolutely correct. The Budget is a balance of proposals that both coalition parties wished to put into the mix, and we have been very careful-our coalition agreement stated this-to protect the poor and vulnerable whatever we do over the next five years.

Mr David: Does the hon. Gentleman acknowledge that the Centre for Retail Research has estimated that the rise in VAT could lead to the loss of 47,000 jobs and 10,000 stores closing?

Stephen Williams: I have not read that study and I thank the hon. Gentleman for bringing it to my attention, but I repeat my earlier point: lots of considerations go into the mix in respect of the economic decisions that
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businesses make, and VAT is not always the sole determinant. When I was a tax adviser we always said to clients that the tax decision does not wag the business dog. Taxation is one of the factors that all businesses will take into account when making decisions-such as who to employ, what to sell and how to pitch their prices-but there are many others.

My hon. Friend the Member for St Ives (Andrew George) said that his amendments were probing amendments intended to generate discussion, and they have certainly achieved that. His amendment 54 was designed to address what the impact of a smaller rise in VAT-to 18%-would be, and he gave us his answer to that. We on the Government Benches should not be afraid of having internal discussions. Although I did not participate in all the Budget debates and Finance Bill debates in the previous Parliament, many of us will fondly remember Rob Marris, who, sadly, lost his Wolverhampton seat at the election. He tabled many friendly probing amendments from the Labour Back Benches, which might sometimes have made his Front-Bench colleagues uncomfortable, but they also made a valuable contribution to debates.

Both my hon. Friend in his amendment 55 and the hon. Member for Nottingham East in his amendment 22 propose sunset clauses so that the rise in VAT-which, at least, it seems they are both contemplating as necessary-would be for a specified period. Every year we have a pre-Budget report, a Budget and a Finance Bill, so I am fairly confident that every year we will return to this topic and there will be an opportunity, as there has been under all Governments, to change the mix of taxes, and each year we will get to vote on the current mix.

Chris Leslie: Would the hon. Gentleman be happy or unhappy if VAT stayed at 20%, perhaps for the full duration of this Parliament?

Stephen Williams: My happiness or unhappiness will be measured in 2015 when we go to the polls-perhaps after the polls-by which time, hopefully, many more people will have been taken out of income tax completely because the threshold will have gone up to £10,000, and capital gains tax will have been made fairer. A mix of proposals has been put forward, so the rise in VAT will be more than compensated for by the other measures both in this Budget, where an important start has been made, and in Budgets to come.

6.30 pm

Nic Dakin (Scunthorpe) (Lab): Does the hon. Gentleman agree that a political choice is being made to raise VAT as a regressive tax, with no political mandate?

Stephen Williams: I am not sure whether the hon. Gentleman was here earlier when the shadow Chief Secretary raised the issue of what was said during the general election. All three parties perhaps ducked the question of whether they would go ahead with an increase in VAT after the election. We all know that when we stand in an election, we do not necessarily want to put unpalatable truths to the electorate. All three Front-Bench spokespersons-the right hon. Member
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for Edinburgh South West (Mr Darling), who is the former Chancellor, the current Chancellor, and my right hon. Friend the Member for Twickenham (Vince Cable), who is now the Secretary of State for Business, Innovation and Skills-said that VAT increases could not be ruled out. Now, of course, we have the revelation that there was a lively debate within the then Labour Cabinet as to whether a VAT increase should be ruled out.

Mr Byrne: I am grateful to the hon. Gentleman, who is being incredibly generous in giving way this afternoon. He will surely accept that, despite internal debates-all parties have them-when our party presented a Budget to this House in March, it reached a conclusion that ruled out an increase in VAT and set out clearly how £19 billion of taxes would be brought in through a different balance of measures. Is the hon. Gentleman seriously saying that he believes that the £8 billion VAT bill that will be paid by pensioners over the course of this Parliament has been fully compensated for in measures set out in the Red Book?

Stephen Williams: I thank the shadow Chief Secretary for his intervention, but an £8 billion bill does not necessarily fall on the poorest pensioners, and I would be very concerned if it fell solely on them. It is absurd to put pensioners into a generalised pot and pretend that VAT is going to hit all of them harshly. I am sure that the Duchess of Devonshire-she may well be a constituent of one of my colleagues-is well able to bear an increase in the rate of VAT on some of her conspicuous and discretionary expenditure.

Dr William McCrea (South Antrim) (DUP) rose -

Stephen Williams: To be fair to all parties, I give way to the hon. Gentleman.

Dr McCrea: I thank the hon. Gentleman for giving way. Perhaps he can be clear about this. When did he and his colleagues become totally convinced that a VAT increase was essential: before the election, on the day of the election-or whenever there was an offer of posts in government?

Stephen Williams: We have discussed many times whether there should have been more candour on the part of all three Front-Bench spokespersons during the election. There was not, and we are where we are. I can only answer for what I said in my own election campaign. Bristol West had many election debates, and this topic and the question of how to deal with the financial crisis came up many times. I never ruled out a rise in VAT because I knew that after the election, a responsible Government-I hoped my party would be part of that, and I am delighted that it is-would probably have to face up to that very difficult decision.

Steve McCabe (Birmingham, Selly Oak) (Lab): The hon. Gentleman said earlier that parties ducked the issue during the election campaign. Presumably, when the Liberal Democrats said:

that was an explicit warning that the hon. Gentleman believed, and which formed part of an election platform. The question is: when did he stop believing that?

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Stephen Williams: With respect, the hon. Gentleman has only just come into the Chamber, and I think I answered that point in responding to the hon. Member for South Antrim (Dr McCrea).

I turn now to the amendments tabled by Opposition Front Benchers. The shadow Chief Secretary said that they were necessary in order to understand the impact of what is proposed, and to provide some clarity. I should point out that VAT has been part of our fiscal furniture since 1973. Labour had 13 years in government to understand the scope and impact of different rates of VAT, and we now know from revelations that have been made that the Labour Government contemplated different rates of VAT, and whether to increase it. Of course, when they were in office they reduced VAT and then put it back up again, so surely they already have a pretty good understanding-perhaps a better understanding than new Ministers-of the scope of VAT.

Mr Byrne: We have never seen VAT at these levels. The hon. Gentleman's own party leader is on the record as saying that he believes that VAT is a regressive tax, and so is the Prime Minister. Surely, before the next Finance Bill, a study should be presented to this House showing what a 20% VAT rate will mean for the people whom we represent, so that we can insist on appropriate remedies from the Government.

Stephen Williams: That intervention, and the right hon. Gentleman's amendment, would have rather more moral force behind them if that had been his party's practice when it was in office. I well remember the Budget of 2006 or perhaps 2007, when the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), as Chancellor, doubled the income tax rate paid by the poorest in society from 10% to 20%. I was among those Liberal Democrats who vigorously pointed that out, and our then leader, my right hon. and learned Friend the Member for North East Fife (Sir Menzies Campbell), was the first Member to point out that the tax charge would fall very heavily on the poorest in society. I remember the whooping from Labour Members because that measure was being put in place to fund a tax cut for the well-off. I remember them cheering the cut in capital gains tax-now, of course, they say they are against it-which was being paid for by the poorest in society. This Government-this Liberal Democrat-Conservative coalition-are protecting the lowest paid in society and taking them out of income tax, rather than increasing the rate they pay.

Amendment 40, tabled by the right hon. Member for Birmingham, Hodge Hill (Mr Byrne), certainly has some merits in terms of looking at the scope of VAT. When I was in opposition I often made a plea, as did colleagues, for a reduced rate of VAT on certain goods and services, such as contraceptives. There was also the important issue of the construction industry and whether it was right that VAT be charged in full on the repair and maintenance of housing stock-most of our housing stock is old-yet be zero-rated on the construction of new dwellings. So we have had these debates before, and it would be a useful exercise in its own right to examine the scope of VAT rates-but not as a delaying tactic against tackling the deficit now.

As I have said in response to many interventions, the Budget is a balance between what we do on expenditure and taxes, and where we choose those taxes to bite and
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fall. This Budget, put together by a coalition, by a new mode of politics, has struck that balance fairly. Some of the decisions within the Budget would be unpalatable on their own, but they are not being taken on their own. The VAT increase is not a measure in isolation, but one we must contemplate in the context of the rest of the Budget. That is why my colleagues and I will resist these amendments if they are pressed to a vote.

Mr David: I will be brief. This morning, I was in the Welsh Assembly in Cardiff bay and I had discussions with Jane Hutt, the Welsh Assembly Government Finance Minister. I was delighted that this afternoon, a statement was made in which the Welsh Assembly Government addressed the situation in which they find themselves in the light of the Budget. Jane Hutt made it clear that the Welsh Assembly Government intend to protect capital investment in Wales, because money is being brought forward from the Assembly Government's reserve fund. The result is that a number of capital projects that had been earmarked for being cut or delayed will now continue. The Welsh Government's economic rationale for taking that approach is that it allows effective support to be given to the construction sector and to the continuing efforts to lead Wales into economic recovery. I welcome that. Of course Labour is still in power in Wales, albeit in partnership. That approach is in stark contrast to what is happening in England, where the economic rationale is profoundly different-indeed, there is no rationale at all.

This debate has been very interesting. A number of hon. Members have made the point that in the run-up to the general election both the Conservative party and the Liberal Democrats made a number of commitments about not having plans to introduce VAT increases. They recognised that VAT was regressive and that it hit the poorest the hardest-the words of the now Deputy Prime Minister. The biscuit was really taken by the poster to which a number of hon. Members have referred. We all remember that; indeed we will never forget it, and neither will the people of this country. I shall read out, by popular demand, what the Liberal Democrats poster said:

They might have added that that would also be true under the Liberals. That sums up clearly the rank hypocrisy of many of the comments that we have heard today, particularly from Liberal Democrats.

I wish to reinforce some of the comments that have been made about what the objective studies show, now that the dust has settled somewhat following the Budget. The Institute for Fiscal Studies has said clearly that the Budget, taken in the round, will hit Britain's poorest families six times harder than the richest. The rationale for that has been described by Howard Reed, the director of Landman Economics, who designed the model that is used for this research. He said that

That is a very important fact for us to bear in mind during this debate.

It is also significant that Save the Children, in particular, has set out cogently and forcefully

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It points out:

Chris Leslie: I entirely neglected to report in my earlier comments that the Baby Products Association, which is a bit like Save the Children, has also said that it considers

It has also said that it would support VAT remaining

Mr David: That is a very important point, and it embellishes the one that I have made in general terms. Labour Members are concerned that the fight against child poverty, which needs to continue, will take a backward step. As has been mentioned, we also have concerns about the need to protect our senior citizens. The shadow Chief Secretary to the Treasury outlined clearly how our senior citizens are facing real difficulties from the cumulative effect of a number of measures introduced in the Budget, which hit them hard. I am concerned that when the dust settles again and we see the new plans for disability living allowance, a total of £350 million a year could, by the end of this Parliament, be taken off the benefits available for senior citizens. That is a cause of concern to us all.

There is also a big question mark over the economic worth of this strategy of raising VAT to 20%. A number of studies have questioned the economic validity of the models that have been introduced and the impact on the economy as a whole, and on the retail sector in particular. I refer specifically to recent research commissioned by Kelkoo, an internet comparison site, and carried out by the Centre for Retail Research, which indicated that as many as 47,000 jobs could be lost and almost 10,000 stores right across the country could be closed.

6.45 pm

Steve McCabe: I am conscious that the Government argument is that the VAT rise was an alternative to a national insurance rise, which they characterised as the tax on jobs. Does my hon. Friend share my disappointment that the Chancellor did not take advantage of the reduced rate of VAT that is allowed for labour-intensive industries under existing EU rules? The Government could have reduced the rate for places such as hairdressers and restaurants-low-paid labour-intensive industries-which would have helped these people through a difficult patch. In effect, the Government have done the opposite, and they are going to put these people out of business and cost us the jobs accordingly.

Mr David: My hon. Friend makes an interesting point, and it is well worth giving careful scrutiny to his comments. The reduction in VAT under the previous Labour Government undoubtedly had a positive effect
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in ensuring that spending levels were maintained through the recession. That is widely acknowledged across the international community.

Sammy Wilson: Does the hon. Gentleman recognise what happened when the previous Government, to whom he belonged at the time, reduced VAT? Rather than target the reduction, as they were exhorted to do at the time, they applied it across the board. They could have targeted the construction industry, for example, so that extensions to homes and so on could have been encouraged. For some reason, both the Labour Government and this coalition Government seem not to be prepared to target VAT changes.

Mr David: With all due respect, I say that it is far simpler and more straightforward for an across-the-board, blanket reduction to be introduced. Objective analysis tends to suggest that the kind of approach that the former Labour Government had in ensuring that that reduction in VAT was part of a coherent fiscal stimulus was certainly effective. I also ask the Committee to bear in mind that we are now talking about a VAT increase that takes us a great deal beyond the rates that we were talking about only a few months ago.

In conclusion, this is a profoundly regressive Budget. One of its most negative elements is the VAT increase. There is undoubtedly objective evidence to show that it will hit the poorest and most vulnerable members of society hardest, and at the very least the Government should accept that there is a need for a full-scale study into this, as it applies to children, especially, and to elderly people. I respectfully ask the Government to consider their position carefully.

Alec Shelbrooke: The debate has been going on for some time and many have argued-the shadow Chief Secretary to the Treasury can be mentioned here-that there is not a person in the House who wants to see the poorest in society hit. That is true, and I would be amazed if there was an hon. Member in the House who deliberately set out to target people.

Budgets have to be seen as an overall package, and I have been amazed at how the VAT rise has been picked on as a major catastrophe for the country. The hon. Member for Caerphilly (Mr David) made some interesting points about whether the increase could be phased in for different areas or for different construction industries. That was not done by the previous Government when they raised the rate back to 17.5%. As he said, there was a blanket reduction to 15% and then it all went back up to 17.5%, and those things were not taken into account. The important point that the Committee has to recognise is that although people say this is a political choice, it comes as part of the overall package of the Budget. The overall package of the Budget must not be forgotten; it aimed to try to reduce the risk of interest rates increasing as things come down. That point has been argued across this Chamber many times. Opposition Members disagree on whether interest rates should go up, but there seems to be a lot of evidence that if the deficit was not tackled-

Toby Perkins (Chesterfield) (Lab): Will the hon. Gentleman give way?

Alec Shelbrooke: I will.

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Toby Perkins: Will the hon. Gentleman acknowledge that over the course of 13 years the previous Labour Government had a fantastic record of keeping interest rates low and that the last time we had sky-high interest rates was when his party was last in power?

Alec Shelbrooke: I acknowledge that the Bank of England kept interest rates low.

Let me move on. The impact of not tackling the budget deficit would be a rise in interest rates and that would affect every one of the poorest families in the country as they tried to cope with rising prices in so many different areas.

Mr Byrne: The hon. Gentleman is being enormously generous and I am following his argument closely. Does he acknowledge that in the months before the election, while its outcome was still uncertain, interest rates in this country were not going up but coming down?

Alec Shelbrooke: If memory serves me, interest rates have now been held at the same level for more than a year-that is obviously a long time before the last election.

Rachel Reeves: There is more than one type of interest rate. The hon. Gentleman is correct that the overnight rate has stayed at 0.5% for some time now, but I think that my right hon. Friend the Member for Birmingham, Hodge Hill (Mr Byrne) is referring to the long-term interest rates, which were falling for at least a month before the election.

Alec Shelbrooke: I shall give way to my hon. Friend the Member for Dover (Charlie Elphicke), too.

Charlie Elphicke: Does my hon. Friend agree that interest rates were so low for so long in the early years of the previous Government because of the deflation caused by China and India? Does he also agree that the opinion polls were read by the markets and that that was what caused long-term gilt interest rates to be so low in recent months?

Alec Shelbrooke: Yes, I accept the points that my hon. Friend makes.

The point is that interest rates away from the headline rate-that is, the interbank charging rates-were in real danger of going up. I know that we on the Government Benches are derided when we mention Greece, but the thing that we must recognise about the Greek economy is that the borrowing of money and the interest rates that went up were ultimately fed back into the market because action was not taken.

I listened carefully to the comments made by the hon. Member for Dundee East (Stewart Hosie) about his amendment. Obviously, he does not want to see VAT raised at all-he wants it left at 17.5%. I was going to make an intervention, but I thought it was worth waiting to see how he expanded his point. I was not sure whether he was commenting on the impact of the Budget on the country overall or just on Scotland. He made an important point when he said that it would have an impact on the health service in Scotland to the
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tune of £150 million. Of course, the national insurance rise under the previous Government would have had a similar effect.

I want to make a suggestion. The hon. Gentleman asked whether we could find other areas where the money could be found. The hon. Member for Nottingham East (Chris Leslie) also made a point about looking for other sources for the £12 billion to £13 billion involved. If the Scottish National party tabled an amendment to cut the grant to Scotland under the Barnett formula by that £12 billion to £13 billion, that amendment would have support from many Members and would avoid the need for the VAT rise. Perhaps they might want to consider that point in the later stages of this Bill's passage. It is a great disappointment to me that the hon. Member for Dundee East is not here; I am sure that he would have liked to react.

We are borrowing £3 billion a week. It has also been mentioned that the VAT rise will have an impact on charities, but the national insurance rise, which we reversed, would have too. We must return to the fact that we have put together a package of changes. Saying that £8 billion will be taken away from pensioners is not a generous comment because it assumes that that £8 billion will be taken from the poorest pensioners. As has been made clear, that will not necessarily come from the poorest pensioners at all. It could come from all pensioners.

Mr Byrne: The hon. Gentleman is now touching on a debate that is at the core of one of the amendments that I tabled. He needs to be able to tell the Committee which pensioners will be worse off as a result of this £8 billion increase. If he does not know, surely it would be right for him to ask the Government to prepare and present a report for the House.

Alec Shelbrooke: I am grateful to the shadow Chief Secretary. Let us consider the other aspects of the Budget, such as the fact that we have ensured that we preserve the free television licence, the fuel payments and the free bus passes-not to mention the triple lock, which he was deriding earlier. This can be checked in Hansard, but from memory I am sure I recall the Chancellor of the Exchequer telling the House quite clearly that a move would take place from the consumer prices index to the retail prices index when he made that announcement. I do not think that it was in the small print-I am sure that the Chancellor stood at the Dispatch Box and made that point quite clear. I am sure that Hansard will back that up and if I am wrong I will acknowledge that to the House, but I am sure that that measure was not snuck out in the small print.

As the shadow Chancellor of the Exchequer was apparently saying before the election, we cannot just borrow more to pay for services. As I have listened to Opposition Members during the debate, I have been struck by the question: which Labour party are we looking at today? Is it the one that wants to spend more or the one that wants to tax more? So far, in the debates about the cutting of the schools budget we have been told that it is all terrible and that we should have carried on spending more and more money, and today we are hearing that we should not increase taxes. That is how we got into this situation. We owe billions every year. Stacking up the net deficit-

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Chris Leslie: It was the banks.

Alec Shelbrooke: The hon. Gentleman mentions the banks, and there is no doubt that they had problems, but the fact is that this country was borrowing beyond its GDP during the boom years. Countries such as Sweden put 2% of their GDP aside and Australia paid off its national debt, leaving those countries in a far stronger position to tackle the recession when it came. Everybody accepts that the banking crisis caused problems, but they were exacerbated by the actions of the previous Government.

Charlie Elphicke: Is it not the case that the banking crisis was massively exacerbated by a very poor regulatory system?

Alec Shelbrooke: I absolutely agree with my hon. Friend.

Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab): Is the hon. Gentleman representing the Conservative party that says that we are all in it together, or is he representing the Conservative party that proposes VAT increases that do not apply to private health care or private education?

Alec Shelbrooke: I am not going to respond to that point, because I do not particularly know the answer and it would be wrong of me to stand in front of the Committee and make it up as I go along. I am not going to do that.

The amendments are fine-I can see the logic in some of them-but they create a mass bureaucracy. As the Chancellor made clear in the Budget statement, he ruled out some approaches because the money saved would be taken up by bureaucracy. To apply VAT at different rates to different aspects would create bureaucracy in enabling it to be understood and that will not do the economy any good in the long run.

Earlier, during Treasury questions, someone mentioned that the percentage GDP debt of a bunch of European countries was more than the percentage debt of this country. If we listened to Opposition Members, we could think that this country was going way out on a limb, above everywhere else. However, the VAT rise takes us to the fifth lowest out of 14 European countries. VAT in Austria is 20%, and in Belgium it is 21%, in Denmark 25%, in Ireland 21%, in Finland 23%, in Greece 23%, in Italy 20%, in Norway 25% and in Sweden 25%. All those countries have much higher rates of VAT.

Mr Iain Wright: I am following the hon. Gentleman's argument closely. Given the basket of European nations that he has named, and in order to tackle the deficit further and faster, does he advocate raising VAT to 22% or 25%?

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