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I want to close on a few simple considerations. The Governments idea of watering the economy with a fiscal stimulus is misconceived and will have the
consequences that my hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) mentioned. I feel that it is the wrong approach. In a world in which the choices are difficult and the situation is direwe acknowledge those factsit would be better to concentrate on solutions that are specific to business and that are specifically about the availability of credit for those businesses.
Mr. John Randall (Uxbridge) (Con): I begin by declaring an interest as a director of my family retail business, which has been in existence since my great-grandfather started it in 1888. The present times are more difficult than ever before, and I have to take the day-to-day decisions in the business, because, when life gets a bit difficult, those decisions end up being taken at the top.
My heart sank when I saw the leaks during the weekend before the pre-Budget report was announced. I could not understand why on earth the Government were going to reduce VAT by 2.5 per cent. I actually thought that there must be more to it; I could not believe that they would be so crass as to reduce VAT by that amount. If they wanted to make an impact and give an impetus to consumer sales, they would have had to reduce it by considerably more, which would have involved huge expense and been completely unaffordable.
I will tell the Minister what the effect of this measure has been on countless retailersevery retailerthroughout the country. When it was announced on the Monday, I immediately phoned the shop in Uxbridge and told my staff that we would implement the VAT reduction from the next day. That was effectively a week early, because no one would come into the shop otherwiseno one would buy anything that they believed was going to be cheaper the following week. We also had lots of orders that had been placed, and we had to make the decision to take a hit on those as well. Of course, the reduction is not 2.5 per cent. In real terms, it is 2.13 per cent. Consumers trying to do the mental arithmetic have soon realised that this makes hardly any difference to the price of most items.
So, retailers have immediately had to take a hit. We have already heard about how they have had to put in the required software and change labelling. We decided not to do that, however, and we are still taking the appropriate amount off at the till. That is cheaper and more efficient, and I must admit that I am also making the political point to our customers, because they can then see how little they are actually getting. I have tried to be as neutral about this as possible, however. I might care about this place, but I care very much about the 30 people whom I employprobably more than about anything else with regard to that business. I have asked them whether anyone has come in and bought anything because it has been reduced by 2.13 per cent., and, of course, that is obviously not the case. Perhaps the Minister will tell me what personal purchases he has made, that he would not otherwise have made, because of the VAT reduction. If he is an honest manI know that he ishe will say that it has not made a blind bit of difference to him.
So, this measure has been a disaster from the retailers point of view. Consumers are already getting huge discounts, which are biting into margins. That is very likely to cause the demise of many retailers. A very
sensible accountant of mine has told me, many a time, that turnover is vanity, and profit is sanity. It is all very well trying to reduce prices to get people to come in, but we have not had many people coming in.
In relation to the compliance costs, why does the Minister think that it will be £5 million cheaper to re-price next year than this year? Is it because there are going to be fewer shops about? And why is familiarisation going to be so much cheaper? The hon. Member for Twickenham (Dr. Cable) made a point about the timing of all this. What is the worst time of year to put prices up? My hon. Friend the Member for Runnymede and Weybridge (Mr. Hammond) said that the provision would last until 1 December next year, and that there might be some change then. But who on earth is going to put their prices up at the busiest time of the year, or afterwards when the sales are on? Retailers are going to take a hit again at that time.
What is the point of all this? I agree with my party and those on my Front Bench that this is not the time to be borrowing like mad, although I understand that others take a different view. I cannot go and borrow lots of money to help my business; first because I think it would be wrong and, secondly, because the banks would not let me. So why are the Government doing this? If I am being kind, I will say that it was something that they could do quickly, but actually I think that it was a gimmick and it sounded good. When he was Chancellor, the Prime Minister loved to finish his speeches with a gimmick, and he has obviously passed that on. Had the measure not been leaked, I think that the Opposition might have thought that it was a wonderful idea, for about five seconds until we worked out what it was really all about. It is a gimmick.
I would not mind at all if the Minister were to say that he had changed his mind, and that he was going to put the VAT rate back to 17.5 per cent. and leave it there. I would even make a pledge to the consumers of Uxbridge that I would keep my prices at the 15 per cent. level because the current VAT change will not help them at all. I urge the Minister to look at this. When those at the Treasury make changes, do they ever ask real retailers and real people what they want, or do they sit down and come up with these incredibly ridiculous schemes? I was delighted to see that the Treasury did not bother working out the impacts on all the groups listedand I am not going to go through them, as I would be attacked for being politically incorrect.
To be honest, the whole VAT change is a gimmick that will not help, but will actually have a worse effect on retailers and poor employers. As the right hon. Member for Birkenhead (Mr. Field) said, after Christmas lots of people will be in big trouble. People will ask, What did the Government do? and the answer will be that they took prices down by 2.13 per cent. when they were already reduced. I have to say that that is a disaster.
Stewart Hosie (Dundee, East) (SNP):
Let me say from the outset that I support fiscal stimulus, as it has been clear for some time that the problems of recession and deflation were far more likely than problems stemming from inflation. That is quite clear now, and my view is that monetary policy alone will not be sufficient to deal
with the situation. It remains to be seen whether this particular package is the right one and whether it will be sufficient to bring about a stimulus effect, but it is what we have at the moment, so we will need to go with itat least for the time being.
Although I support the present fiscal stimulus and welcome much of what the Government announced in the pre-Budget report, I find it gallingindeed, extremely gallingthat it is portrayed by the Government as their somehow saving the world or leading the leaders of other nations and states around the world. I say that not least because the PBR post-dated the US fiscal stimulus package of $150 billion in February, the Spanish package of $18 billion in April, the October announcement by President Sarkozy of 100,000 subsidised work contracts, the €50 billion package announced in Germany and, indeed, the Japanese package of £235 billion, if my memory serves me correctly, of which £20 billionalmost as much as the total UK packagewas directed at householders with mortgages. Let us have no more of this Government pretending that they have been decisive when they have not, or that they are leading, which they most certainly are not.
If the package had been announced in a full Budget, we would have had four days of debate and a Finance Bill subject to detailed scrutiny in Committee. Alternatives for how to spend 1 per cent. of gross domestic productabout £12.5 billionwould have been varied and very clearly put. I am sure that they would have ranged from cuts in corporation tax to allow businesses that really create jobs to keep more of the money they earn in order to sustain themselves through recession to more direct public investment and everything in between. I am sure that each and every one of those alternatives would have had some merit in its own right and would have been worthy of consideration. We are, however, where we are. We are talking about 1 per cent. of GDP; it is £12.5 billion and it is the largest part of the reflationary package. The bulk of the rest was £5 billion of re-profiled money for direct public investment; it was not new money and it will, of course, lead to a funding shortfall in public expenditure in two or three years time.
My criticism of the VAT proposal was that the Government were not straight with people about it. Had it been played solely as a business measureif businesses could have kept the 2.5 per cent. extra to sustain them through the recession in order to maintain, protect and preserve as many jobs as possiblethere would have been some merit and honesty in it. The idea of selling it on the basis that 2.5 per cent. was coming off the price of goods and going into consumers pockets was simply wrong, not least because of the heavy discounting of 20, 30 or 40 per cent. already taking place. When I bought a present for my daughter in Dundee on Sunday, there was a 70 per cent. discount on it already, so the VAT cut is simply swamped. As I said, had this been played as providing 2.5 per cent. extra to businesses, instead of the pretence that it was going to consumers, we would have been happier with it.
Let me now deal directly with the prayer, and with comments made by the Liberal Democrats and others. In some cases, the cost to businesses that have changed their rate has been enormous. I am told that the average
cost to the smallest businesses is about £2,500. I fear that, if the prayer were successful, they would be required to pay a further £2,500, as VAT levels would have changed twice in the space of a few months. Small businesses would be burdened with a bill not for £2,500 but for £5,000and, in the case cited by the hon. Member for Daventry (Mr. Boswell), a bill not for £6,000 but for £12,000. That would be horrendous.
Stewart Hosie: The VAT changes will need to be accommodated. Some companies will change their marketing collateral, while others will invoke training procedures so that adjustments can be made at the till. Othersalmost allwill have to spend additional money on accountancy to accommodate the way in which the books will be audited. There may not be a real, recognisable cost in terms of, for instance, the production of new brochures, but there will be a cost none the less.
The next issue that I wish to raise was alluded to by the hon. Member for Twickenham (Dr. Cable). When VAT was reduced, the Government compensated for that outrageously with a second increase in duty on Scotch in a single year, and by increasing the duty on fuel. The prayer calls only for the VAT change to be annulled, with no annulment of the increases in duty that were introduced to offset the VAT reduction. That would land the drinks sector, the hospitality sector and those who depend on fuel with an additional charge.
Although I support fiscal stimulus, and although I have criticisms of the way in which the Government have introduced the VAT reduction, it amounts to 1 per cent. of GDP and £12.5 billion of real money for the real economy. I must therefore tell the Liberal Democrats, with regret, that the Scottish National party will not be able to support their attempts today.
Adam Afriyie (Windsor) (Con): There are three words for this VAT reduction: foolish, foolish, foolish. It is foolish in its conception, it is foolish in the way it has been implemented in the House as well as across the economy, and it is foolish because it will not achieve the outcome for which the Government hope. I do not question the Governments motive; I simply question the method by which they are attempting to deliver their aim.
The right hon. Member for Birkenhead (Mr. Field) used the word effective, suggesting that there were probably more effective ways in which £12.5 billion, an enormous sum, could be put into the economy, or put into monetary stimulus, that would actually make a difference. I share that view, but I would put it slightly more strongly. I would say that reducing VAT is categorically the wrong thing to do at this time.
Let me deal with the first count of foolishness in conception. I think that the reduction was conceived prematurely. The problem that we have is the lack of liquidity. Can people borrow money? Can people renew their mortgages? The answer is no, not at the base rate that has been set. Can businesses continue with their existing overdrafts and loans? The answer is no, certainly not at the current interest rate, and many facilities have been withdrawn. Can people purchase cars? We have
seen a 37 per cent. decline in the number of cars purchased in the last quarter. People cannot purchase cars because there is not enough liquidity. There is not enough cash in the system, so the finance houses will not finance new vehicles. That is the problem, and sadly the solution provided by the Government is an incorrect one. They are providing a fiscal stimulus when what is required is more cash flowing through the banking system. It is the Governments banking solution that has not worked.
I believe that the VAT reduction was also born out of panic. It is clear that a massive economic failure is taking place. We can argue about whether it is a world downturn, and of course we acknowledge that it has international aspects; but we are clearly in a worse position than most developed countries to respond to the situation. I believe that the Government were under pressure to do something, and simply grasped at a measure that they hoped to be able to implement quickly. They grasped at the wrong measure, and I suspect that they are beginning to realise that that was a mistake.
Mr. Hugo Swire (East Devon) (Con): I think my hon. Friend is giving the Government too much credit. Does he not agree that this is a very cynical move, knowing, as we now do, that they fully intend not only to raise VAT to the former level but to increase it in the next financial cycle?
The problem at present is not a demand problem; it is a banking, liquidity and monetary problem. This is worse than crass Keynesianism; it is like burning paper money to try to keep warm when what we need to do is fix the heating system. We need the hot water pumping around the heating system, but that is not what is happening.
Secondly, this is a foolish measure in its implementation. I am not one to talk often about parliamentary privilege and parliamentary debate, and to say how important it is that we all get to debate such matters; I am more interested in the outcome. On this occasion, however, the measure has been rushed through the House, and I think that if we had had the time to debate it, a different decision would have been made. As the right hon. Member for Birkenhead said, there are other things we could do with £12.5 billion; on cool, calm reflection, I think that even Government Members would have reflected sensibly and realised that better things could have been done.
Rob Marris (Wolverhampton, South-West) (Lab): Does the hon. Gentleman share my constitutional reservations about cutting taxesand putting up taxes in terms of excise duty on alcohol and fuelwithout the measures first being agreed by Parliament?
Adam Afriyie: I acknowledge that point, but I do not want to get too much into parliamentary process because I am not sure that that is helpful at this moment. Certainly, my general understanding is that there is a Budget that is debatable, especially in tax matters which are changed once a year. There is clearly a loophole or exception for VAT, but I share that concern.
Mr. Graham Stuart: I do not quite agree with my hon. Friend on that. The point made by the hon. Member for Wolverhampton, South-West (Rob Marris) is right: the only protection for our constituents against an over-mighty Executive and their taking decisions on the hop is that those decisions, particularly when they pertain to tax, have to come before this House so that Members, who have to go back to their constituents and hope to be re-elected, can scrutinise those decisions before they are made. The hon. Gentleman is right to say this is a serious issue.
Adam Afriyie: That is a well-made point. I was merely observing that there is an exception for VAT, which is why we have the VAT cut on the table today rather than a more measured approach involving our examining more sensible measures in the Budget in the round, as we normally would.
The other reason why this was a foolish implementation that was too aggressive and hasty is simply the amount of notice given to businesses. I declare an interest in that I am a non-executive director of two or three businesses, and it is clear that the stress and cost involved in adjusting accounting procedures and adapting to the way businesses will behave in the short term are onerous. The estimated sumI cannot remember whose estimate it isfor complying with this VAT change was about £300 million, with possibly a further £300 million next year. That is about 7 or 8 per cent. of the hoped-for benefit from this measure.
Finally, this is a foolish measure because it will not achieve the outcome the Government seek. I ascribe good motives to them: the Government want to boost expenditure in the economy so that growth begins again, but this will not do that.
Mr. Stuart: I am extremely grateful to my hon. Friend for giving way again; he has been most generous. I wonder whether he agrees with the following point, which I do not think has been raised in the debate so far. Because of the financial incontinence of the Government, such has been the loss of confidence in sterling that even if people are going into the shops to buy imported goods at the supposed 2.5 per cent. reduction, that sum has been far eclipsed by the loss of strength of the pound. That is impacting directly on our constituents ability to buy such goods to take home for their families.
This move is foolish because it will not achieve the desired outcome; it does not help the least well-off as much as it helps the wealthy; the duties on spirits and on fuel charges are not reclaimable, so the effect is a net oneif not an increase in taxfor the groups of people involved; and prices are already falling so a 2.1 per cent. reduction will make no difference. I simply say that there are better things to do with £12.5 billion. We need to get the money pumping round the system. Our idea, which I hope the Government will adopt, of a loan guarantee schemea credit guarantee schemewill make a huge difference in pumping that money round the system so that people begin to get mortgages, begin to feel confident and begin to spend money again.
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