Ways and Means

Part of the debate – in the House of Commons at 6:58 pm on 13th December 1994.

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Photo of Mike O'Brien Mike O'Brien , North Warwickshire 6:58 pm, 13th December 1994

It was increased at that time because of the Chancellor's error of judgment in trying to pursue the policy of increasing VAT to 17.5 per cent. He could not even convince his own Back Benchers. The rise need not have occurred at that time.

I understand that the minutes of the meeting before the one last week between the Chancellor and the Governor will be published in two weeks. At that time, the Governor foresaw difficulty in the economy and its capacity, and pointed out that it might be necessary to raise interest rates at some stage. However, the rush and the feverish phone calls before the vote and almost immediately after it to bring the meeting forward were caused exclusively by the Chancellor's misjudgment. That is why people are paying higher interest rates.

The recoveries in Canada, Australia and the USA started before our recovery. The USA is already hitting inflation problems despite interest rate rises and despite the fact that the recession there was not as bad as ours. The economy is ill prepared for recovery and the Bank of England has accepted that. The Governor said as much in giving evidence to the Select Committee on the Treasury and Civil Service.

The Governor voiced concern about a lack of capacity in the economy and pointed to survey evidence of business men who feel that they must be operating above normal capacity. That must be taken into account. He said that delivery times were direct evidence that capacity problems might be on the horizon; that the situation had to be closely monitored; and that it was a matter of feeling our way towards our capacity limits. The Governor was clearly concerned and warned that, if there were pre-election tax cuts next year, he would have to consider or perhaps demand interest rate rises. Conservative Members should be careful about thinking ahead and saying to themselves, "Perhaps the Chancellor has tax cuts up his sleeve to be announced just before the election," because the Governor gave fair warning that he would ask for interest rises to compensate for such cuts.

The Chancellor decided to damp down the recovery, and it seems that his objective was to prevent us from hitting the capacity buffers too soon. That was another reason for him pressing ahead with his tax rises. He realises that the economic news is not as good as it appears, that there are tangible dangers on the horizon, and that he may not be able to deliver tax cuts to his Back Benchers in the next Budget. He tried to damp down the recovery in this and the previous Budget, and the new tax increases on cigarettes, car fuel and alcohol have two main purposes. The first is to protect the Chancellor's battered reputation and the second is to slow down the economy to respond to weaknesses that have been caused by the failure of Government policy over the past 15 years.

The tax cuts are unjustified, and the way in which the Chancellor decided to raise money is open to question. Perhaps he can justify tax increases on cigarettes and petrol and perhaps even on wine, but the increase on beer and whisky is worrying. The Treasury and Civil Service Select Committee recently published a report about problems in the brewing industry. Although it did not advocate a reduction in duty, it warned of the serious problems caused by imports from abroad. The Chancellor's tax gift to smugglers could have been avoided. Even if he felt that there was no margin for error in the Budget, he could at least have recognised that the increase in the tax on beer and whisky would cost jobs and increase smuggling crimes.

There was some leeway, and the damage that the Chancellor has caused to an important sector of the economy and the effect of his measures on law and order could be considerable. To say that we will be more effective against smugglers while cutting Customs and Excise staff beggars belief. If those people were not made redundant but were employed in intelligence gathering, the Government's policy would be much more credible. The one Tory who got it right was the vice-chairman of the party, John Maples, who said: The Conservatives have let voters down, they have been in government too long, are complacent and have lost a sense of direction. They fail to fulfil promises, are clumsy at implementing policy and 'shoot themselves in the foot'. Shooting himself in the foot was precisely what the Chancellor did in his Budget. The Budget and the mini-Budget are not about Britain's future, but about attempting to salvage the Chancellor's reputation and the election prospects of the Conservative party. The price of that salvage operation will be paid by families who will have to meet the extra taxes that the Government will impose in the next year and by home owners who, because of restrictions in benefit, not only feel insecure about losing their jobs but fear that they will lose their homes as well. A price will also be paid by industry, which has been ignored for much too long by the Government.

Although they do not yet realise it, the real victims of the Budget, the mini-Budget and the Budget that preceded them are Conservative Members who will for ever be tagged with promising no tax rises and then voting for them, who promised prosperity but were prepared cynically to undermine it, and who hope to win the next election, but will lose it.