Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 6:45 pm on 14th April 2003.

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Photo of Matthew Taylor Matthew Taylor Liberal Democrat Spokesperson (Treasury) 6:45 pm, 14th April 2003

This year's Budget has been more predictable than most in many ways. The Chancellor was constrained by his financial difficulties from making some of the grand gestures that he sought to make in the past. However, the predictable aspects of the Budget are worth examining, although one aspect was far from predictable.

The first and most predictable feature of the Budget was that the Chancellor would recite all the economic successes, as he sees them, and not touch on any of the gathering clouds around the economy. Above all, it was predictable that he would contrast growth figures in the British economy with figures for some of the major economies in the European Union. It is true that growth here has been higher, although we have had high levels of consumption. As a result, in the service sectors—especially the sectors related to the high levels of consumption—we see employment not only high but rising.

The problem with the argument that the Chancellor advances—full of confidence—that all is well in the economy is, as the right hon. Gentleman used to say when he was in opposition, that the best measure of the future strength of an economy is not consumption but investment. If we are not making the investment today, we cannot earn the money for future consumption.

It is not only that the growth in consumption has been built on past success; the situation is worse than that. Current growth in consumption and the growth in the economy is built not on past success in investment but on borrowing. Above all, it is built on private sector borrowing that has been fuelled by the growth in the value of house prices and massive levels of equity withdrawal. That consumption has been running at levels far beyond the growth in the underlying economy.

Nobody—not the Bank of England, not independent financial experts and not even the Chancellor—believes that such consumption fed by growth in house prices and more borrowing at rates above the underlying growth in the economy can continue for ever. We all know that there is a limit to how high house prices can go relative to incomes. We all know also that there is only so much that people can afford to borrow before the cost of borrowing exceeds the ability to pay for it.

We can all guess when that will happen. A fall in growth in the housing market has been predicted almost continuously over the past couple of years. That has been assumed by the Bank of England, mortgage lenders and the Government. However, without that growth the Chancellor would not be presenting good growth figures for the economy overall in his Budget. The underlying investment figures are worse than those of any of our major economic competitors. They are worse even than those of the economies of France and Germany, with which the Chancellor likes to contrast his record. They are not slightly worse but far worse than the economies of France, Germany, Italy, Japan and America. That raises the question of how far the economy is successful. It tells us one thing clearly: the Chancellor has failed on the measure of success that he set himself when in opposition—the measure of investment. He has failed not because the overall economic circumstances are bad—inflation is low, unemployment is low—but for other reasons. We must look at his policies: the red tape, the tax complications, the grinding down, the difficulties added and the layers of bureaucracy in the business system.

The record is not only that the Chancellor has failed so far, that the investment has not happened to pay for future consumption and, perhaps most important, the taxes that the Chancellor depends on to make the welcome investment in health and education, but that he makes his figures add up only by assuming that the growth in borrowing, the withdrawal of equity, will continue. Everyone else is predicting that the housing market will at best flatten and may dip—we are already seeing signs of a dip in central London, which most people believe may spread. In the Red Book, the Chancellor is pinning his assumptions in respect of tax revenues to pay for his spending plans and of the growth in the economy on continued growth in equity withdrawal. He may be right, but it is extraordinary, if predictable, optimism.

There is a second predictable element to the Budget. The Budget is not neutral on the issue of red tape and tax complication—far from it, it adds to tax complication and to red tape. It was predictable because the Chancellor sincerely believes that that is the best way to manage the economy. One does not have to read many of his Budget statements to realise that that is a fundamental theme—stable macro policy but targeted micro policy, and by targeted he means the Government trying to guess the winners. There is a tax credit here, a tax break there, a bit of scope here, a bit of spending here, there and everywhere.

It is typified by the tax break to promote the British film industry, which was supposedly targeted on encouraging the production of more films in the UK. That lasted only a couple of years, because it did not encourage the production of great movies in this country. It encouraged the production of movies deliberately designed to lose money. They were never released for the British public to see. Worse than that, it was yet another tax loophole. Small businesses, the directors and the producers who have great ideas for new British movies, did not make use of it. The people who made use of it were the big production companies and big TV companies. Suddenly, we saw the reclassification of soap operas as films. Film production went through the roof. Nothing changed in the real world. The Government spent a lot of money. It was entirely wasted and then they withdrew the tax break.

In every single Budget so far, the Chancellor has added to the red tape and those tax complications and to the employment of tax accountants but done nothing to help businesses at the small end: people who cannot afford to pay for expensive tax advice, who work every hour of every day to try to make their businesses a success and who find themselves having to wade through ever more tax documents, complications, credit forms, allowances and all the rest of the paraphernalia of a Chancellor who believes in such micro-management. I do not believe that it works and, looking at the investment figures, the evidence is that it does not work.

The third predictable element of the Budget was a lack of action on fairness in the tax system. We know what the reason is. We know why it is that, on the latest figures released on Friday—official Government figures—the poorest fifth of households pay 41.7 per cent. of their incomes in tax whereas the richest fifth of households pay 34.2 per cent. of their incomes in tax. It is not a progressive tax system but a regressive tax system. Tax breaks are given to those who can afford to employ tax accountants to find them, but those on lower incomes are hit by a tax system that has been wound up to their cost.

Why is that? I am sure that it is not what the Chancellor intended. He did not come into politics to achieve a tax system of that sort, with less tax for those who are wealthy and more tax for those who are poor. It comes down to the promise made in 1997 that there would be no changes in income tax, although there was one change, of course, which made it worse: he cut income tax by 1 per cent. before the general election. He increased it indirectly by increasing national insurance afterwards. He forgot to mention that in the general election campaign. Instead, he used indirect taxes, the so-called stealth taxes—every little way that he could to add some money that would not hit the income tax headlines.

All those little changes, each and every one, little by little across the tax system, the breaks here, the additions there, the indirect tax increases, the cuts and new allowances for those wealthy enough to find their way through the system, added to the injustice of the tax system. They made it worse and meant that the poor paid even more while the rich paid even less.

The Chancellor did not mention at all the biggest and most regressive tax change, but we all know that it is happening. It is strange that he missed it because I am sure that his constituents are writing about it as much as those anywhere else in the country. It is the stealth tax rise taking place in every council chamber across the country, the council tax increases forced on councils by the Chancellor's decision, while increasing the burdens on councils—nationally agreed pay rises, pension requirements, new requirements on services, all of which are perfectly valid in their own right—not to fund adequately through the Government grant system the amounts needed to meet those Government-decided requirements. Why did the Chancellor do that? He did so because it meant that he did not need to announce the £2 billion increase in council tax this year. He could transfer the blame to councils.

The Chancellor does not mind if they are Labour councils. The truth is that Conservative, Liberal Democrat and Labour councils are all sharing the burden and the pain. One can find examples across the country. The average increase in council tax this year is four times inflation.

People ask, "Where is this money going? How is it that council tax is rising? Where is the improvement?" In many cases, there are no improvements. In fact, many councils are having to cut services at the same time as increasing council tax. That has been forced on those councils by the grant.

I am not saying that councils are perfect. I am sure that there are examples across the board of councils perhaps making wrong decisions. I could easily list some Labour and Conservative councils that have done so. I am sure that some Liberal Democrat councils would be fired back at me but—we all know this because we represent areas run by our own parties; it is happening across the board—the Chancellor has taken a £2 billion stealth tax grab through the council tax and hoped that someone else would get the blame.