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"There's some pain in this Budget for the poorest families, but we recognise the government has done what it can to protect the most vulnerable.
Our calls for child tax credits to be redirected away from more wealthy families to the poorest have been heard-an action we highly commend."
Huw Irranca-Davies: I do not doubt the right hon. Gentleman's motives during his journey over the years and the past few weeks, but does he give credence to the fact that there is an alternative that could minimise the risk to his communities and mine? It is not to do with rejecting an agenda of cuts, efficiencies or reprioritisation; it is to do with timing. It is not just me saying that, or the "dupes" on the Labour Benches. Paul Krugman, "Danny" Blanchflower, Will Hutton and many other economists are saying, "Minimise the risk; just delay, and make the decisions at the right time."
Vince Cable: I think that the gentlemen to whom the hon. Gentleman refers are mostly talking about competitive deflation in the world economy, which is, of course, absolutely disastrous. The Chancellor referred in his speech yesterday to the fact that other countries that are in surplus have to do the opposite of what we are doing in terms of fiscal consolidation. The Chancellor made that very clear in relation to action to be taken by the Chinese and action that should be taken by countries such as Germany. Of course we understand the wider context.
Let me return to the criticisms about value added tax. The shadow Chancellor put the question in a personal way when he asked why I was supporting the increase in value added tax. The three of us-the shadow Chancellor, the Chancellor and myself-went around the television studios during the election campaign; we were the three Chancellors, a bit like "The Three Tenors". We had our several encounters and each of us was asked time and again, "What do you think about value added tax?" As I recall, all three of us gave an identical answer: "We have no plans to increase value added tax, but we have not ruled it out." The reason why we are now having to confront the matter is that there is a bigger structural deficit than was appreciated and action had to be taken. That could have been a tax measure, or it could have been a spending cut. Is that what Labour Members are saying? Do they want more cuts in spending? Do they want another tax? What do they want?
Vince Cable: Anybody who read my comments on tax policy over the past year would, I think, hardly imagine that there was a surprise or a bombshell, because I said on many occasions that if taxes had to be increased, it made much more sense to tax expenditure than income or corporate income or employment. That was my view, and I expressed it on many occasions.
Andrew George (St Ives) (LD): I wish to associate myself with many of the measures that we as Liberal Democrats can take pleasure from in the Budget, including the increases in personal allowance and in pensions. On VAT, to what extent does my right hon. Friend accept that we could have explored alternatives, including increasing capital gains tax still further or increasing the bank levy to ensure that the balance of tax increases was more proportionate?
Vince Cable: The Government did look at the possibility of raising capital gains tax further. They did serious analysis and the conclusion was that it would not raise any more revenue. That was the problem. It certainly would not have raised anything remotely like £10 billion. That is why we cannot evade this issue.
Let me turn to the central concern about value added tax, which is expressed on both sides of the House: the worry about regressiveness. I checked back on what independent analysts were saying about value added tax and its income distribution effects. It is worth looking at the work of the Institute for Fiscal Studies, which has conducted a distributional analysis based on expenditure. It came to the conclusion-this is its word, not mine-that value added tax was fairly "progressive" because of the exemptions that are given for zero rating, as food, children's clothing and other essentials are key items in the expenditure patterns of poorer people. [Interruption.] The top 10% of the population pay three times as much in value added tax as the bottom 10%. [Interruption.]
Opposition Members are expressing righteous indignation about what they regard as regressive measures. Let me tell them which is the most regressive tax: it is council tax. Do they remember what happened to council tax under the Labour Government? On average, it went
up 70%. Taking into account rebates, for the poorest 10% of the population it rose by 93%. It is the most regressive tax of all, yet they lecture us in this sanctimonious way about regressive taxation. They have no basis for doing that.
Finally, let me turn to the crucial issue of growth, which the shadow Chancellor raised. He is right that growth does not happen automatically; of course it does not. How do we proceed from the austerity that has to happen-from cuts in public spending-to growth in business investment and net exports, which we want to see? That is a genuinely important question, to which there are no simple answers. The perfectly fair point has been made that there are risks involved here, just as there are risks, which we judge to be bigger, in doing nothing, so let me try to answer this question seriously. If we are going to get growth, it will come partly through demand and partly through supply. How do we sustain demand? Essentially, we do so through monetary policy. That is what happened under the last Government. The reason why the economy kept on going through the recession was not Government fiscal stimulus. That was trivial, and it has now been withdrawn anyway. It was not for that reason; it was because we had very low interest rates, the expansion of money through quantitative easing and, of course, a big devaluation.
Those factors drove the economy in terms of demand and they will continue to do so. There is a reason for believing that that is what will happen: the Governor of the Bank of England called for this Budget and has now got it, and he has every reason to understand the need for monetary policy to support recovery.
"economic activity is weaker than in the pre-Budget forecast...this reflects Budget measures which restrain government spending and real household disposable income, holding back consumer demand."
That was not on the point I was speaking about. I know that the hon. Lady is a new Member, but I am sorry that she felt the need to read out her question in the way that she did. Nevertheless, there is a very simple answer on page 94 of the Red Book. It is a technical point made by Sir Colin Budd, who drew up this part. These issues are not comparable. Had the Labour plans been implemented, interest rates would have been higher than they now are, which would have dragged down the rate of growth and pushed up the level of unemployment beyond what it is. That is the distinction he makes. He also refers to the fact that there is a basic confusion. I noticed that the Chancellor
did not repeat the point in his speech, but it was raised yesterday. That explains the hon. Lady's genuine misunderstanding.
In addition to issues about how to stimulate demand, there is an issue about how to get business investment moving-how to get supply, and an understanding of the supply side of the economy. A lot of the Budget's stronger points were about that issue. The Budget was about creating a tax environment within which business is confident to invest. It is about doing the things that my Department is now starting to do in conjunction with the Cabinet Office, such as looking at the 20,000-plus additional regulations that were built in by the last Government and which are shackling small business. It is about addressing the issue of bank credit that was lamentably neglected by our predecessors, and investing in things like apprenticeships, which we have started to do even within our few weeks in office.
Geoffrey Clifton-Brown: On investment, will my right hon. Friend say a little more about the Chancellor's words yesterday on enlarging the enterprise finance guarantee scheme, which would help 2,000 small businesses? Some 90% of our economy is made up of small and medium-sized businesses. I have had two meetings with business representatives since the election, and they all tell me that one of the major problems is bank lending to good, viable businesses-particularly those that are exporting around the world. I am sure that those are precisely the sort of businesses that my right hon. Friend had in mind as those which will give us the private sector growth that we require.
Vince Cable: The hon. Gentleman is right, and it is the problem of credit supply to the small and medium-sized business sector that has the greatest potential to disrupt the recovery. That is why the Chancellor included in yesterday's Budget the finance guarantee, and why we now have to work on why banks that were rescued by the taxpayers do not lend to the good companies that the hon. Gentleman describes, which are solvent, have good order books and will contribute to recovery. That is a major task that the Government now have to undertake.
Mrs Louise Ellman (Liverpool, Riverside) (Lab/Co-op): The right hon. Gentleman talks about the importance of investment and about being fair to regions. The Northwest Regional Development Agency has played a critical role in setting up investment funds for businesses in the north-west and was key in setting up the centre of scientific excellence at Daresbury, which has been responsible for retaining skills in the north-west and for developing science-based businesses. Why does he want to abolish it?
Vince Cable: I have met the Northwest Regional Development Agency and I have suggested to it that under the new structures that will be created-the local enterprise partnerships, and local businesses working with their local councils-it will have an opportunity to bid for status in order to carry forward useful projects that support development on the ground. There will be a change-those RDAs are going to be restructured-but there is a role for that kind of innovation locally.
The shadow Chancellor talked at some length about the need for growth. He is right that we need growth, but it has to be sustainable. We had a decade of what seemed at the time, at least to some Labour Members, to be strong economic growth. I am sure that hon. Members will remember, as I do, all those Budgets in which the then Chancellor told us that we had achieved the highest rate of growth since the Hanoverians-I think it was even the Roman empire on one occasion-and talked about a boom in employment. But the house was built on sand and it was all a mirage. It was not sustainable. It was based on levels of personal debt and Government borrowing that could not be sustained; it was also based on a housing market that could not be sustained and on a fragile banking system. We have to restore growth, but it has to be sustainable. That is what the Budget was about.
The Business Secretary speaks with great authority and I noticed that the House listened to him with great care. I was particularly interested in the justification he gave for the reversal of his position on cuts. I listened to the two points he made on that with great care, but I was not convinced. First, he said that after the election, he was asked to get a briefing from senior officials. He then went on, in a way that I thought was not totally honest and that was certainly a form of elision, to talk about the situations facing this country and countries in the euro.
The then Opposition parties were offered briefings before the election. I assume the Lib Dems were briefed on the situation facing this country regarding the sovereign debt and other such matters, so it can hardly have been a surprise to the right hon. Gentleman to find that the circumstances were as they were. I find rather surprising the suggestion that he was surprised to discover-after the election, during the period when he was negotiating entrance into office for himself and his colleagues-that the situation was suddenly much worse than he had previously understood it to be.
There was a deliberate elision of the sovereign debt crisis being faced by Greece and Spain and the situation in the United Kingdom. The truth is that in Greece there is a 4% decline in gross domestic product-there is a collapse in output-and that in Spain more than 20% of people are effectively unemployed. Those two economies probably cannot sustain the debt they have incurred, but that does not in any way apply to the UK. I would be surprised if the Governor of the Bank of England had told the right hon. Gentleman, in what would have been a blinding revelation in the middle of the negotiations to enter into the coalition, that some kind of sovereign debt crisis was operating in the United Kingdom, given that the Bank of England's quarterly bulletin, published the other day, refers to an increase in the flow of investments into UK bonds.
The structure and age of our debt is not in any way comparable to the situation in Greece or elsewhere. I therefore conclude that the meeting which the right hon. Gentleman no doubt had with the Governor and
others came at a very convenient time, and that the abandonment of the policy that he and others had, to their credit, shared-that we should not cut further at this time-was linked more to the political opportunities that were opening up, given the nature of the election, than to the sudden discovery of a change to the situation facing this country that, rather conveniently, occurred 24 hours after the election.
I want to make a number of points about the Budget and the current situation that we are facing. I listened carefully to the analysis by the Business Secretary of how the crisis came about. From the implications that could be read into his speech, it seemed to me that there was a difference of view between him and Conservative members of the Government as to how the situation arose.
For the Conservatives, it is clear that the problem facing the country is almost ideological in nature, being one of government rather than of the markets. They believe that the problem lies with the state, which should be reduced, and not with the markets, which collapsed. I note that the right hon. Gentleman said that the crisis was global in character and that it was brought about by the collapse of the banks, and I want to refer once more to the question of bonds.
The credit rating agencies have been widely publicised for their judgments about the state of the UK economy, but those same agencies were happy to give triple A ratings to Freddie Mac and Fannie Mae, and to some of the other banks and investment firms in the US. It is odd that much of the media now seem to rely on the judgments of those agencies as to the UK's status in the bond markets-but speculating on that would take me away from the narrative thrust I am trying to develop and the points I want to make.
The Business Secretary referred to the collapse of the banks, but I think the judgments made in the Budget reflect a different analysis by the Chancellor. That much is clear from how the burden will fall: of the £40 billion fiscal tightening being proposed, it looks as though £13 billion will be achieved by raising VAT-and I shall return to that point in a second-and £11 billion by an attack on welfare. In contrast, £2 billion is being raised by the banking levy, and I believe that that reveals the priorities of this Conservative-led coalition: £24 billion is to be saved through reducing welfare expenditure and raising VAT, and only £2 billion will come from the banks.
The truth is that, in a constituency like mine, the Budget will hit people very hard. I represent some of the poorest people in the country, as do many other hon. Members. It will not have escaped them that the burden of the changes introduced yesterday will fall particularly heavily on the poorest, and on hard-working people more generally.
The right hon. Gentleman made a case for the rise in VAT, but the Chancellor said on television this morning that he had faced a choice, between raising income tax or VAT, and that he had made a judgment. Personally, I reject the idea that we should impose further fiscal tightening in the current financial year but, be that as it may, the Chancellor made it clear that there was a choice.
The Government's choice-the Business Secretary's fingerprints are on it as much as anyone else's-was to raise VAT rather than income tax. However, about £1 of
every £7 that poor people spend goes on VAT, while for the rich the figure is about £1 in every £25. It is a highly regressive tax, compared with income tax. If a tax is to be increased-and I am not saying that that would be my option-it should not be VAT. The fact that VAT has been raised reveals the Budget's regressive nature and character, and reflects the right-wing agenda being elaborated by this Government.
John Mann (Bassetlaw) (Lab): My hon. Friend has referred to the welfare cuts, including to disability living allowance, that have been outlined although not specified at all. People on DLA-in his area, in mine, and elsewhere in the country-come predominantly from a manual working background. Does he share my concern that it is precisely their inability to do manual work that will be a problem when their allowance is cut? The people involved are not the intellectual office workers of the future.
People in our areas have reason to fear other elements of the Budget, apart from the VAT hike. Public sector pensions are going to be cut, and the Government will accelerate the rise in the pension age. We know that they are going to cut 25% of departmental expenditure, that there is to be a freeze on child benefit, and that there will effectively be cuts in housing benefit. All those proposals will affect the communities we represent.
I remind the House that it was Mrs Thatcher who stole milk from schoolchildren; now, it is this Government who will take money from poorer mothers. Let me list the effects the Budget will have on mothers, especially those in poorer communities, as it seems they are to be targeted.
According to the TUC, the announcements made yesterday show that poorer mothers will lose about £1,200 a year. From April next year, the Sure Start maternity grant will be available for the first child only. The £500 maternity grant available for poorer mothers having their second child is to be withdrawn, and that is a disgrace. The health in pregnancy grant-a universal grant worth £190 that was available to all mothers to promote child and maternal health and engagement with health services-is being abolished.
The baby element of tax credits is also being cut. That was an additional payment of up to £545 a year for families with a child aged less than one who were in receipt of tax credits. The previous Government's introduction of a new toddler tax credit would have provided an extra £200 a year for children aged one or two, but that has been cut too.
As we know, child benefit has been frozen for three years, and that obviously amounts to a cut in real terms. Finally, the child trust fund worth £250 has also gone. That may not affect members of the Cabinet much, given that there are 22 millionaires sitting around that table, but I assure the House that £250 can make a difference to children and families in my area.
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