I beg to move,
That this House
has considered the matter of the Pre-Budget Report.
On behalf of many hon. Members on both sides of the House, I begin by thanking you, Mr. Speaker, for taking the exceptional step of granting this emergency debate. You have protected the interests of Members on both sides of the Chamber who want to hold the Government to account.
The public would have found it extraordinary if the House of Commons had not properly considered the huge tax measures put forward by the Chancellor on Monday, or indeed the tax measures concealed by the Chancellor on Monday. Those measures are being debated by families across the country who fear their impact, and it is astonishing that the Government did not want them debated in the House of Commons.
The only explanation is that the Prime Minister is running away from the argument, because he knows that he is losing the argument. This Budget started to unravel from the moment it was delivered. The doubling of the national debt shocked the entire country. [Interruption.] Labour MPs may not be shocked, but the country is shocked to realise that the Government have taken it to the edge of bankruptcy. Within minutes of the report being published, it became clear that the national insurance rises would, contrary to the Chancellor's claims, hit people on modest incomes. The small print of the Budget book shows that the Chancellor had been less than candid about the stealthy duty rises on alcohol and petrol. Then we discovered the £100 billion black hole in the tax revenues with no explanation of how it will be filled.
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I will give way in a second, but it is not as though Labour Members wanted the debate in the first place. Let me explain what happened to the Budget, and then I will take the hon. Gentleman's intervention.
The next morning, the OECD undermined the borrowing projections, when it issued growth forecasts for the UK that were different from the Chancellor's and said that Britain would have the worst recession and highest percentage rise in unemployment in the G7. Yesterday lunchtime, the Institute for Fiscal Studies pointed out that the new top rate would raise, in its words, "virtually nothing". The Governor of the Bank of England told the Treasury Select Committee yesterday that the Government should be focusing on fixing the banking system. Meanwhile, retailers are up in arms about the huge costs and logistical nightmare imposed by the temporary VAT cut. Last night, the Chancellor U-turned on the proposed hike in whisky duty, which he had announced only 24 hours earlier. Finally, it has been revealed in an official Treasury document signed off by a Treasury Minister that there is a secret tax bombshell to increase VAT to 18.5 per cent.
Only two days ago, the UK Labour Government made a proposal that would have amounted to the biggest annual rise in taxation on the Scotch whisky industry in almost four decades. We are about to hear—perhaps—a clunking U-turn, recognising that that is a reckless and dangerous road to go down. If the Chancellor had the interests of the Scottish economy at heart, why would he have even made that proposal in the first place?
My hon. Friend is absolutely right. The details are here in the Treasury document that this Government published, and let me assure my hon. Friend that the Government are going to hear about it every single day between now and the next general election.
If hon. Members will allow me, I shall make some progress and take some interventions later. I am aware that many Members want to speak in the debate, and that Front-Bench speeches have a time limit. Therefore, I shall proceed. [Interruption.] Well, I shall take some interventions later if Mr. Hall can think of some better ones.
Now, let us be clear. We know about the secret plan for VAT; it is totally— [Interruption.]
Order. The hon. Gentleman is not going to give way.
It has totally destroyed the public's trust in the Government's motives, confirming what everyone suspects—that Labour's temporary giveaways now will be dwarfed by permanent tax rises later. Normally, it takes a week or so for the Prime Minister's Budgets to come unstuck; this one has completely fallen apart in just 48 hours.
Let us start with the debt figures, because I think that the reaction of the country was a sharp—
Order. It is the hon. Gentleman's privilege to give way to who he wants to give way to. [Interruption.] Order.
I thank my hon. Friend for giving way, but does he agree that one of the most alarming aspects of the pre-Budget report is that the tax increases that have been mentioned so far will raise only a small fraction for the black hole that has been created in our public finances, and that many more tax increases are coming down the line?
My hon. Friend is absolutely right. A £100 billion black hole has been created by fiddling the growth figures between the Budget earlier this year and the pre-Budget report now. We know that at least part of the Government's plan is to fill that hole with the 18.5 per cent. VAT rate.
The hon. Gentleman seems to have forgotten that the national debt doubled when John Major was in power, and that the Labour party brought it down. In the early 1990s, net borrowing was at 7.4 per cent., 7.7 per cent. and 6.2 per cent. Last year, under Labour, it was at 2.6 per cent., and the Library brief shows that net borrowing will not rise to anywhere near as high as it was under the Conservatives in the early '90s, so what is he complaining about?
I am glad that I took that intervention, because it enables me to say that the budget deficit next year will be the highest on record—higher than when Denis Healey went to the International Monetary Fund—and the national debt, at 58 per cent., is the highest on record. Let me remind the hon. Gentleman that this Government inherited a golden economic legacy from the previous Conservative Government; but this Government are bequeathing to their successors a complete basket case of an economy.
The debt figures are truly shocking, as the hon. Gentleman has just reminded us: the national debt is set to double to £1 trillion, and there is that record 8 per cent. deficit. We used to think of Britain as a low-tax, low-debt economy that was one of the most successful in the world, but now we must get used to seeing Britain as the rest of the world does: as a high-tax, high-debt country that cannot get a grip on its public finances.
Let us turn to table B10 on page 198. [Interruption.] It is probably not in the Whips' handout, but if Government Members were to read the report, they would see that for the first time in living memory the Treasury forecast does not even try to pretend that the current budget will come back into surplus in the medium term. The Chancellor's assertion on Monday that it was all okay, because, by
"2015-16, we will again be borrowing only to invest,"—[ Hansard, 24 November 2008; Vol. 483, c. 493.]
was greeted with total derision in the Chamber. He was 100 per cent. wrong about the borrowing forecasts that he made just eight months ago, and now he wants us to take him seriously when he gives us borrowing forecasts for seven years' time. That is not in the next Parliament but in the Parliament after next. They are ridiculous, fantasy figures from a Government who have completely lost the ability to manage taxpayers' money and control public expenditure.
"tax cuts before the election lead to...rises just after."
That is exactly what he is planning: temporary tax giveaways and lifetime rises in tax afterwards.
The growth forecasts that the Chancellor has produced are more optimistic than the Bank of England's, more optimistic than the IMF's and more optimistic than the OECD forecasts that were published yesterday. The OECD said:
"The downturn is expected to be severe in economies most vulnerable to the financial crisis or to sharp house price falls. These include Hungary, Iceland, Ireland, Luxembourg...Turkey and the UK."
That is not exactly great company for a country that used to be the envy of Europe. If the OECD's growth forecasts are right, that will automatically add £10 billion to the Government's borrowing forecast in 2010 alone.
I am grateful. As the hon. Gentleman knows, I always relish a good debate about finance matters. His party's position seems to be that the UK economy has problems, and that those problems were caused by the Prime Minister; the hon. Gentleman disagrees with Labour policies to address those problems; and after the problems are sorted out the Tories hope to be in government and to cut taxes. What would his party do differently to address those economic problems? Is he, like the rest of the country, relying on our Prime Minister, as I am, to sort out the economic problems?
Order. May I appeal for calm? It is not a good thing, shouting across the Chamber at the top of our voices. Do remember that there are people out in the country who have difficulties and want to hear the case that is being put before the House.
Thank you very much, Mr. Speaker.
Let me turn to the fiscal rules, which were supposed to safeguard prudence and prevent all this from happening. Even the Chancellor struggled to keep a straight face when he told the House on Monday that he was replacing the fiscal rules with a "new temporary operating rule"—no rules, no framework, no independent oversight of the kind that our office for budget responsibility would provide. As the chief European economist of a major investment bank put it today:
"The UK has no serious medium-term fiscal framework: the fiscal rules have been abandoned, with nothing to take their place."
Yesterday, the Institute for Fiscal Studies predicted that if the Government had persevered with the golden rule, they would now be on course to miss it by a mere £296 billion. The bond markets have passed their own verdict on the Chancellor's new temporary operating rule, through the credit default swaps on British Government debt—the cost of insuring someone against the consequences of the British Government's failing to honour their debts. The cost used to be about the same as that of insuring German Government debt, but it is now almost three times as high. Indeed, the markets today take the view that holding the debt of the British Government is riskier than holding the debt of British Petroleum.
I am grateful to the hon. Gentleman. In view of what he has just said about the fiscal rules and borrowing, is he seriously telling the House and the country that the problems of America, Europe and Asia are down to the changes that have taken place in Britain over recent months? Has he completely lost his marbles, or does he really believe his own rhetoric—that changes in our economy have been responsible for the financial crisis across the world?
I am saying that the Government did not fix the roof when the sun was shining. I am saying that we entered this recession with the worst budget deficit and the highest levels of personal debt in the developed world. I am saying that our housing boom was double that of America, and that that is why independent groups such as the International Monetary Fund say that we will have the worst recession of any developed economy. I know that Mr. Blunkett wants to get back into the Cabinet, having resigned from it twice—indeed, that is the best way to get into the Prime Minister's current Cabinet—but the truth is that I have listed what the Government of whom he was a part have done to the economy in the past 10 years.
It is not just the appalling debt figures—
Does my hon. Friend agree that the great British public are thinking that the Government have maxed out the national credit card, and now—instead of doing something sensible, such as trying to pay off the debt—are taking out another enormous loan? Is it not the case that Britain is doing that, but not America?
I am going to make some progress— [Interruption.] I have taken a lot of interventions; we shall see whether the Chancellor takes anything like as many.
I turn to the tax changes in the Budget. First, there are the VAT changes—let me start with the temporary VAT reduction, before coming to the permanent VAT rise. The Government do not seem to realise that the stimulating effect of a temporary reduction when prices in shops are already falling is more than outweighed by the cost of a permanent rise in taxes on the incomes of those whom they expect to go shopping. This is what the senior tax partner at Grant Thornton said after the Chancellor spoke on Monday:
"It's the wrong time to cut VAT, as it's an inefficient use of taxpayers' money when you have a trade deficit. And it's an odd thing to do when inflation is falling and some fear we are heading for deflation."—
[ Interruption.] Labour Members do not like what the senior tax partner at Grant Thornton says. How about this, from President Sarkozy of France? He asked yesterday why
"Should we use up our available room for manoeuvre on reducing prices when prices are already falling?"
The German Chancellor has also ruled out a temporary reduction in VAT— [Interruption.] I am being asked whether we will vote against it, but the Government are not giving anyone a chance to vote on the reduction before it comes into force on Monday. It is only because we called for an emergency debate that we are even discussing it in the House of Commons.
Far from rushing to support the move, retailers have been quick to point out the administrative nightmare of re-ticketing prices, reprinting catalogues and price lists and reprogramming cash tills, which will cost them tens of millions of pounds— [Interruption.] They talk about prices, and that brings me to the permanent VAT rise—
Order. The hon. Gentleman is not giving way.
We heard the exchanges at Prime Minister's questions; perhaps the Chancellor could answer what the Prime Minister refused to answer when he spoke from the Dispatch Box. First, why did one of his Ministers—the Financial Secretary, who is over there—sign off on the order—
The right hon. Gentleman shakes his head, but his name is on the document:
"Signed by the responsible Minister:
Stephen Timms...24th November 2008".
The document clearly states that the standard rate, having returned to 17.5 per cent. on
The second thing that I would like the Chancellor to confirm or deny is that the Government were considering further increases in VAT—specifically, a rise to a 20 per cent. rate of VAT in 2012. We will put in our freedom of information request, but I would be most grateful if the Chancellor confirmed that rise as well.
On the subject of the so-called VAT reduction, is my hon. Friend aware that, far from reducing the VAT bills of small retailers and businesses with turnovers of less than £200,000—businesses that pay under the flat-rate VAT scheme—the Government are actually increasing those bills, by not reflecting the adjustment correctly to take into account the reduced VAT input tax? The margins of many thousands of businesses will be reduced as a result of this so-called tax cut.
I will make more progress, because many Members want to speak. Unfortunately, we have only three hours to debate this issue, although we would be happy to debate it all afternoon.
I turn to the national insurance changes. The Chancellor made the claim that only those on incomes of more than £40,000 will be worse off than they are today as a result of the national insurance increase. I am glad to say that the Institute for Fiscal Studies comprehensively demolished that claim yesterday; it said that it was not true. What is true is that anyone earning more than £19,000 will pay more tax than they do now as a result of Monday's Budget.
I will make a little progress, if my hon. Friend will allow me.
The Government tried to distract attention from that tax raid on the incomes and jobs of middle Britain with their top-rate tax changes. I am sure that everybody remembers what the Prime Minister said to the Treasury Committee last year when he was trying to justify the abolition of the 10p rate:
"I believe that over time very few people will want to change this two rate...system of income tax."
It turns out that one of those very few people was the Prime Minister himself, a year later. He has actually created five rates of income tax. If we include the adverse changes to personal allowances and national insurance, there are now three new higher bands of income tax—46.5 per cent., 52.8 per cent., and a new top rate of 59.8 per cent. That is not a simplification of the tax system.
I shall make some progress, if hon. Members will allow me. They may want to hear this, because they are concerned about it. It remains the case that more than 500,000 of the lowest-paid people in this country have lost out as a result of the abolition of the 10p tax band, and their loss was not compensated for on Monday. That is the truth. The Government are giving £20 billion in temporary tax giveaways, and taking back £40 billion in permanent tax rises—giveaways for Christmas, tax rises for life. That is not a stimulus, it is a tax bombshell. It will make the recession worse because it will make the recovery more difficult.
What the Chancellor should have done on Monday was take radical action on monetary policy to get credit flowing again. That is what we have been arguing for weeks. Mervyn King said to the Select Committee yesterday:
"I am in no doubt that the single most pressing challenge to domestic economic policy is to get the banking system...lending in any normal sense. That is more important than anything else at present."
The CBI says:
"Getting the credit markets working properly is much more important than the fiscal boost."
The Chancellor told us in October that the purpose of the bank recapitalisation was to restart lending to the real economy. On that test, even he must agree that it has failed. It may have rescued the banks and the bankers, but it has not rescued the economy. The country has lost count of the number of times we have been told that the Government were summoning the banks to a crisis summit, ordering them to lend to small businesses and forcing them to pass on rate cuts. That may have secured newspaper headlines, but it has not helped businesses to get the credit they need. Now is the time for more direct action.
I am not giving way at the moment.
The Government should establish a new state institution that will directly underwrite lending from the banks to British businesses. They should do so for a commercial insurance fee, passed on by the banks, that would fully protect the taxpayer. Businesses want credit and credit insurance. They are prepared to pay a fair price for it, and the problem at the moment is that they cannot get any credit or insurance. That would not increase Government borrowing. Instead, it would be more like the secured guarantees for a fee that the Bank of England has already put in place for inter-bank lending, which we supported. The idea is supported by all the major business organisations. That is the kind of radical policy action that we urge the Government to undertake—not fiddling around with temporary VAT changes, but getting to the heart of the credit crunch and solving Britain's credit problems. That is what would help get the British economy back on track and stop the terrible rise in unemployment now taking place, again, under a Labour Government.
The Government did not want this debate because they did not want to face the truth. They mistook a housing bubble for stability, they went on a spending spree and called it prudence and they boasted over and over again that they had abolished boom and bust. As a result, they neither saw the boom, nor prepared for the bust. Now, their emergency Budget is unravelling, their secret tax bombshell is revealed and their scorched earth policy is leading this country's economy to ruin. They have run out of money, and the sooner that they are run out of office, the better.
I very much welcome the opportunity to debate the pre-Budget report, and having listened to the shadow Chancellor for the last 20 minutes, I wish the debate could go on for several hours because we might find out if the Conservatives have any policies to deal with what is happening to the economy.
I understand, Mr. Speaker, that you have indicated—
This is a three-hour debate—end of story.
I was about to say, Mr. Speaker, that I normally like to give way to Members as generously as possible, as the House will know, but you have indicated that you want the Front Benchers to keep their remarks to about 20 minutes or so. I will give way, but the House will understand that I will not be able to give way to everyone.
I should like to start by making two points about VAT. First, the order to implement the VAT reduction was laid on Monday. It is, of course, open to Members to pray against it, as the Liberal Democrats have done. If they want to vote against the reduction, that is a decision for them, and it is open for others to do so as well. As they will be aware, it is perfectly possible for the House to debate the matters.
On a point of order, Mr. Speaker. The Chancellor has just suggested that we have an opportunity to vote on this issue. Could the Speaker confirm that that is the case, and tell us when that will happen?
It is a matter for debate. The hon. Gentleman should listen to the Chancellor and see what he can pick up.
I will give way to hon. Members on both sides of the House, but first I should like to address the important matter of VAT. The shadow Chancellor asked me to address a particular question about the impact assessment that referred to a higher rate of VAT, which was lodged on the website of Her Majesty's Revenue and Customs, and which has been the subject of a lot of newspaper reports. I want to deal with that, head on.
First, as the Prime Minister said earlier at Prime Minister's questions, in the run-up to the pre-Budget report, I considered—as any Chancellor would—a large number of options about just about every aspect of tax and spending, as the House would expect. As I had to raise money in order to ensure that our borrowing is reduced in the medium term, I concluded that the best and fairest way to do it would be to increase national insurance contributions by 0.5 per cent., as I announced on Monday. I also said that while VAT would come down to 15 per cent., it would return to its 17.5 per cent. rate at the end of 2009. That is the Government's position, and that remains the Government's position.
When I saw press reports this morning that an impact assessment containing a reference to 18.5 per cent. of VAT had been put on a website and been signed by my right hon. Friend the Financial Secretary, I asked the permanent secretary at the Treasury to find out what had happened, as the House would expect. What I found was this: the Financial Secretary had not, in fact, signed that document. It transpires that someone within either the Treasury or Her Majesty's Revenue and Customs had typed the Financial Secretary's name alongside an impact assessment that he did not know about, he had not seen and he had never authorised. [ Interruption. ] The shadow Chancellor asked me for an explanation, and the House is entitled to it. That is it. In other words, the Government's policy is and remains that VAT will fall to 15 per cent. at the beginning of next week. It will then rise to 17.5 per cent. In other words, our policy is exactly as I set out in the pre-Budget report on Monday.
The Chancellor has explained how the document ended up on the website. What we want to know is how it was prepared in the first place. We want to know how many Budget options there was a draft order and regulatory impact assessment for. Would he also confirm that the Treasury was considering a 20 per cent. rate in 2012?
The shadow Chancellor asked me for an explanation as to why the Financial Secretary signed it, and I have given that. As I said to the hon. Gentleman, like any Chancellor, I considered a wide range of options, and I decided that the fair way to raise money would be through the national insurance system, with a rise of 0.5 per cent.
The debate today gives us an opportunity to set out, as the shadow Chancellor said on Monday, a clear choice. I believe that, faced with today's extraordinary economic circumstances, there is a choice between supporting people, business and the economy, as countries across the world are now doing, and walking away, saying that we will do absolutely nothing and letting the recession run its course. We have been there before, in the 1980s and 1990s, and we will never return to those days again. The Government and I are determined to do everything that we can to support people and businesses during these extraordinary times, which are affecting this country and every country in the world.
But surely creating a bureaucratic nightmare for many small businesses through the VAT reduction does not target help on the poorest in the country. At the same time, the Government are threatening to pay for that by putting a tax on jobs in the future, when we want to keep employment, in order to recover from the downturn that the Government have forced upon us. That is surely not the way to tackle the poorest in our society.
I believe that cutting VAT, from which everyone can potentially benefit quickly, and the measures that I have implemented to reduce the amount of income tax that the lower paid pay, to increase child benefit and increase the amount of money going to pensioners will all benefit people in this country, as well as the economy as a whole. To stand back and do nothing—that is what we saw in the 1980s and the 1990s, when I think that the hon. Gentleman would have taken a different view—and thereby allow a recession to be deeper and longer would be more painful for the whole of the country, including the people whom he represents. I am not prepared to follow that course.
In a moment.
The Conservative party is now virtually isolated in its belief that Government should do absolutely nothing to help. All over the world—in the United States, France, Germany, Italy, Japan, China, Spain, Mexico and South Korea—Governments are coming to the view that they ought to be helping their economies at a time when they are all being affected by the fallout that started, as the Americans themselves say, in the American sub-prime market last year.
Before I give way, let me plant something in the shadow Chancellor's mind, as he referred to the Institute for Fiscal Studies so often in his speech. When Robert Chote, the director of the IFS, briefed people yesterday, he concluded his remarks by saying:
"on balance the risk of acting may be less than the risk of refusing to".
The hon. Gentleman should remember that.
I am grateful to the Chancellor for giving way. My constituents will be pleased to hear what he has said about not increasing VAT above 17.5 per cent. after we start to out of this recession. Would he acknowledge, however, that Britain subsidises a number of EU countries and that our membership costs us many hundreds of thousands of jobs, and probably up to about £50 billion? Is it not time to start clawing that back?
I just do not agree with the hon. Gentleman. Frankly, to cut ourselves off from the European Union at this time, or indeed any time would be absolute madness. He may have left the Conservative party, but a lot of his former colleagues share his view and I totally oppose it.
I am grateful to the Chancellor. Given that the banking package has so far unfortunately not succeeded in loosening the credit that is so needed for anything to work in our economy, will he look again at that £487 billion package and renegotiate it, so that it is better value for the taxpayer and starts to work for the banks?
I will return to that point shortly, but may I just say that I believe that the steps that we took to recapitalise the banks were absolutely essential, because if we had not taken them, we might have been faced with the collapse of the banking system, as the Governor of the Bank of England has said. Secondly, we will have legally binding agreements with the Royal Bank of Scotland Group and with Lloyds TSB and Halifax Bank of Scotland, if that merger goes ahead, which will require them to maintain a level of lending. The right hon. Gentleman will no doubt welcome the statement by the RBS Group and NatWest at the weekend, in which they made it quite clear that they are ready and able to treat their business customers in a way that people will accept.
At last! Which dictum does the Chancellor feel is most relevant to the current slowdown: the old dictum that unemployment is a price worth paying or the new dictum that the recession should run its course?
We on the Labour Benches are quite clear: people elect their Governments to ensure that they help them—to help people, businesses and the whole economy—during times of difficulty. For my part, I am not prepared—nor, I suspect, are my hon. Friends—to repeat the mistakes that we saw in this country 10, 20 or 30 years ago.
I will give way shortly, but I want to make some progress.
On Monday afternoon, the shadow Chancellor said that we were heading in the same direction as Japan. I pointed out to him that I had had the benefit of a conversation with the Finance Minister of Japan just recently, who said that one of the reasons the Japanese economy had problems for so long was that the Japanese hesitated and delayed before doing something to help support it. We are not prepared to repeat those mistakes, whether they were made in this country or in Japan in the 1990s. The hon. Gentleman's advice is completely wrong once again. When we look at what is happening in other parts of the world and at what actions other countries are taking, we can see that all over the world, all countries recognise that they have a duty to support their economies at this time. It is only the Conservative party that seems to be taking a completely opposite stance.
I will give way in a moment, but I am going to mention Europe, which I know distresses a lot of Opposition Members. [ Interruption. ] They are all sitting down now, Mr. Speaker. Despite what the shadow Chancellor said, right across Europe, including on our doorstep, namely France and Germany, Governments have taken action to stimulate their economies. That is important to consider because it is our biggest trading partner. The European Commission has today called for fiscal stimulus. It has called for a reduction in VAT, for capital expenditure and support for small business, as well as for the European Investment Bank to take action—all the things that we are doing in this country. So yet again, that example reveals the isolation of the Conservative party.
The Chancellor of the Exchequer says on page 191 of his pre-Budget report that the contingent liabilities will be disclosed. Does he accept that his figure on page 198, which has already been referred to, is actually £1,258 billion, if one includes the Maastricht arrangements, and that if we add the contingent liabilities, we arrive, at a conservative estimate, at a figure of £2,400 billion? That would mean 120 per cent. of national income, not the figure of 57 per cent. to which he has referred.
I do not think that Maastricht has that much to do with it, although I know that Maastricht has something to do with just about everything that the hon. Gentleman ever raises.
What I find puzzling is why, against the background that I have set out and the determination of countries across the world to take action, the Conservative party should take the position that was set out today by the shadow Chancellor. On
"what the government ought to be doing is actually cutting taxes...giving a fiscal stimulus to the economy,"
Yet, only a few months later, he has changed his mind. Indeed, the chairman of the CBI said on Monday that
"this fiscal stimulus is going to cost the Government less than doing nothing because of the impact on unemployment".
Perhaps the Conservatives should remember what happened in the 1980s and 1990s.
In one moment.
It would be wrong to argue that the Conservatives did nothing about unemployment in the 1980s and 1990s. They did: they changed the way that it was calculated 31 times. We put up with unemployment that had risen to 3 million. At the same time, the number of people on incapacity benefit rose. I remind the House that there are many people— [ Interruption. ] Yes, I do remember it. I remember what happened in the 1980s and 1990s, when, if I remember rightly, the shadow Chancellor was spending his time rather differently from the many people who were on the dole. Yes, there were two different pictures of Britain in the 1990s and people will remember that. I am not prepared to see the high economic and social costs of abandoning people to their fate, which is what the Conservative party argued then and what it is arguing now.
As one who remembers both of those recessions and was a Member at the time, may I say to the Chancellor that in the interests of the country I wish him well and hope his prescription succeeds—I genuinely mean that—but if we are not moving out of recession when he said he felt we would be and if his measures have not worked, will he resign?
Does my right hon. Friend agree that on the basis of the contributions we have heard from Conservative Members today, they have added nothing of any positive value to this debate at all? They are talking the UK down, just as certain Members talked the pound down. Will my right hon. Friend guarantee to the House that he will not be thrown off course by the "do-nothing" and "don't-care" party sitting on the Conservative Benches?
I am grateful to my right hon. Friend. From today's revealing debates, it appears that the Conservative party position now is that in order to get out of the recession, we need credit insurance. Is my right hon. Friend aware of any other current Conservative party policy to address the recession that the world is in?
First, I know that both the shadow Chancellor and the Leader of the Opposition have made much of saying that radical monetary action is necessary. I believe that such action is necessary, but those policies—to reduce interest rates, for example—are only part of the solution. As many have said, when interest rates come down, one would normally expect the impact of that to be transmitted directly into the wider economy and we would all benefit. Part of the current problem, however, as the Governor of the Bank of England, the International Monetary Fund and the OECD have said, is that these are not normal times and the normal way in which the effects of the central bank's interest rates are translated straight into the wider economy is simply not happening. That is why I believe that, yes, it is important to have appropriate monetary policy, which has to be decided by the independent Bank of England, but that it has to be supported by Government action to support the economy as well. In other words, fiscal policy has to support monetary policy.
In a moment.
I agree that it is important to get banks to start lending again. The recapitalisation process is part of that and our agreements with some of the banks will also help, but we need to go further. That is why I said on Monday that the Government are ready and willing to hold banks to account. The banks have got to understand that just as in the good times they are falling over themselves to get customers from businesses and individuals, so in these difficult times they owe it to their customers to treat them fairly and reasonably. If the Royal Bank of Scotland Group can help its customers, I think that other banks must do so as well. I made it clear on Monday that if that does not happen, we are ready to take further action to ensure that bank lending resumes.
I will give way to a fellow Keynesian in just a moment.
It is also important that the Government do more, which is why I extended the small firms loan guarantee scheme, which will provide another £1 billion for small and medium-sized businesses—it was opposed by the Conservatives. Our current credit guarantee scheme underwrites lending, and I am surprised that the shadow Chancellor should now try to adopt a policy he opposed as one of his own. We are taking steps to help small businesses and we will continue to do so.
We can all agree on the importance of monetary policy. Nobody wrote with greater authority or greater length on the subject than John Maynard Keynes. We need not argue about that, but the point is that when the bank rate goes down to 1 per cent., 0.5 per cent. or even zero per cent., as the Governor of the Bank of England was suggesting only yesterday, monetary policy enormously weakens. Anyone using that weapon alone is in a very serious situation. That is why the liquidity of the banks is now the crucial issue and the next most crucial and closely related issue is how we are to avoid mass unemployment in the years ahead.
As the Prime Minister said to the hon. Gentleman earlier, we largely agree with what he is saying, but his problem is that his Front Benchers do not agree with it. As to bank lending, the hon. Gentleman is quite right. A combination of low interest rates and the measures I announced on Monday to help the economy must be accompanied by two further actions. First, we need to do everything we can to get bank lending resumed, particularly to the small business sector, which is crucial. Secondly, the other thing that will help, and this is something that the Conservative party simply cannot accept, is that if other countries across the world stimulate their economies, there will be a far better chance of mitigating some of the worst effects of the slowdown so that our economies can start to grow far more quickly than they otherwise would.
May I reassure my right hon. Friend that the memories of people across Lancashire whose minds were scarred by the complete destruction of manufacturing throughout the '80s are intact and what happened has not been forgotten or forgiven. Will he reassure me and those people in Lancashire that when it comes to procurement—and this Government procure a great deal—the Government will support British jobs in manufacturing?
I was elected as a new Labour MP with a business background. Up to now, I would not have supported intervention in the banks on the scale that may be necessary, but I believe that the overwhelming majority of my constituents support my right hon. Friend's stance that the money given to the banks must be passed on and that national banking managements must tell their branches to resume lending to companies that need it.
Let me make a bit of progress.
It is not just that the Conservative party does not accept the case for helping and simply walks away instead; it is also that its position on borrowing is completely confused. The Leader of the Opposition said only a couple of weeks ago:
"Borrowing goes up. That is inevitable and you have to allow it to happen".
"to increase borrowing to deal with an economic downturn is a perfectly sensible thing to do."
He was absolutely right on that point, if not on any other.
What I would say to the hon. and learned Gentleman is that because interest rates are lower, the Government will benefit from it. I will also say something else to him: if we do not do anything, as we saw in the early 1990s when debt actually doubled, the cost to the Government and to every individual man, woman and child in the country will be far higher. That is why I believe that Government should intervene in order to help.
I am grateful to the Chancellor for giving way. He was talking about trying to get the banks to do more. Will he confirm that this afternoon Northern Rock, which he owns, increased its interest rate on a one-year fixed mortgage from 3.99 per cent. to 4.19 per cent.?
As the House will know, part of our business plan for Northern Rock—which, of course, had to be approved under the state aid rules of Europe—provides that it must reduce the number of people to whom it lends in order for the business to survive in the longer term. I must say that that was a bit rich coming from the shadow Chancellor, who opposed our nationalisation of Northern Rock and who would have done absolutely nothing to save the bank.
The shadow Chancellor claimed that our accounts and the figures that I gave on Monday were not right. They were right. We have set out a clear plan for how we will support the economy now: how we will help businesses and people, and, in the medium term, how we will raise the funds that are necessary for borrowing to be brought back down to a current balance by 2015. Unlike the Conservative party, we have set out a plan—a plan to help Britain now and to ensure that we have sustainable finances in the future.
I will say to the hon. Lady that Europe is very important.
I think it right for me to say a word about spirits. I refer to the spirits that we drink, rather than the ones that we might imagine. I said on Monday that I wanted to ensure that the level of taxation on alcohol and cigarettes remained the same, so that broadly speaking the reduction in VAT would be cancelled out by a change in duty. I think that, in relation to spirits, what we announced on Monday did not achieve that, so I am tabling a further order today to ensure that the duty on spirits is charged at a slightly lower rate. I think that that will hugely benefit the spirits industry wherever it is.
In the pre-Budget report, the Chancellor referred to increasing fuel duty on petrol and increasing national insurance. Those two measures alone will damage people who live in rural areas such as the Vale of York, and will push up the cost of delivering public services in those areas. How can the Chancellor say that he wants to help people when he is damaging those living in rural areas in that way?
The most damaging thing that we could do to rural areas would be to allow a situation to develop in which a recession became longer and deeper than it would be otherwise. I believe that the measures we have announced will help not just people—because of the reductions in income tax, the fact that we have been able to increase the amount going to pensions and pension credit, and the fact that we have been able to bring child benefit forward to January—but businesses. We have helped businesses in relation to loans, and we have helped the construction industry by supporting house building. All those measures will make a substantial difference to the country.
The one point on which I agreed with the shadow Chancellor when he spoke on Monday afternoon was this. The country does have a choice. The choice is between a Government who are ready to help people and businesses to ensure that we get through this and can seize the huge opportunities that we have for the future, and a Conservative Government who would simply walk away and abandon people and businesses.
The shadow Chancellor made much of this afternoon's debate, but he had absolutely nothing to announce that would help this country and the people of this country. I believe that the measures I announced on Monday—a wide range of measures—will help people. We will continue, as a Government, to do everything we can to help our economy, to help businesses and to help people.
I believe that the people of this country, just like those in the House, will reject the postures of Conservative Members. They have no serious proposition to present, they do not know what their policies are, they are inconsistent and they are incoherent. I believe that the approach set out by our Government is the right approach, and we will see it through.
I welcome the debate, and congratulate the Conservative shadow Chancellor, Mr. Osborne, on securing it. A three-hour debate does not really do justice to the magnitude of the problem, but we are grateful to you, Mr. Speaker, for agreeing to it.
The hon. Member for Tatton made several key points with which I agree. I agree that the figures for the economy and the public finances are poor, but at the same time they are optimistic—very optimistic. It is worth noting that Mr. Robert Chote of the Institute for Fiscal Studies, whom the Chancellor has already called in aid, observed yesterday that what is being hidden here was not so much a tax bombshell—although there may be one of those—as a drastic cut in public investment over the period to 2012-13. That makes complete nonsense of the Government's claim to be borrowing to invest.
The hon. Gentleman will notice that page 200 of the pre-Budget Report contains a line that sounds fairly innocuous:
"The uncertainty surrounding economic prospects in turn implies greater than usual risks surrounding the public finance projections."
Does he agree that that is Treasury-speak for a very serious warning about the optimistic forecasts in relation to the length and depth of the recession that the Chancellor made on Monday?
The hon. Gentleman is right, and I shall develop that point further in a few moments.
The second point on which I agree with the hon. Member for Tatton—a point, indeed, that the Liberal Democrats have been making trenchantly—is that the banking crisis is almost certainly more important in terms of its impact on the economy, and we need to divert a good deal of attention to that problem. However, I disagree fundamentally with the hon. Gentleman's belief that there is no need for a fiscal stimulus. I think that that is absolutely wrong.
The Conservatives—I shall say more about this later—are presenting themselves as the party of change which identifies with the change on the other side of the Atlantic, but while we sit here debating the issue, the incoming Obama Administration are discussing a fiscal stimulus that is 20 to 25 times bigger than what the British Government propose. It is also two to three times as much in relation to the American economy, and—in answer to the shadow Chief Secretary, Mr. Hammond—it starts from a point at which the Americans' debt position in relation to GDP is worse than ours. Nevertheless, they have to apply it.
I think that the emphasis is on helping low-income families—and I welcomed the right hon. Gentleman's contribution to the debate in the form of a letter in this morning's Guardian—but the emphasis is also on public investment. I shall say more about that shortly as well.
I must make some progress first.
Before we discuss the issues in detail, I want to refer to the terms of the overall debate. I think that the public outside the House are becoming increasingly disenchanted with hearing on the one hand the argument that this is all the fault of the Prime Minister, and on the other hand the argument that it is all the fault of the American sub-prime market and "nothing to do with us, guv". The obvious explanation is that there are policy failures here, and an international crisis at the same time. Both those factors apply, and any reasonable debate must start from that assumption.
Let me return to the first point: the numbers, which have already been read out. The hon. Member for Tatton was correct in saying that the forecast that the Government are using to predict a recovery in 2010, with growth of 1.5 to 2 per cent., is wildly optimistic in comparison with the figures given by all the other main public bodies. The figures given by the International Monetary Fund, the European Commission and the OECD are significantly lower, as are those given by the National Institute of Economic and Social Research. Interestingly enough, the only two bodies that are forecasting the kind of growth in which the Government believe are the investment banks. They are the institutions which, for the past decade, have been gambling with their investors' money in a reckless, over-optimistic manner, and they are the people on whom the Government are relying for advice.
The truth is that the growth of the economy in the next two years is almost certain to be negative or virtually negligible, and the advice of the key independent agencies is that planning must be based on that assumption.
Of course it is. However, I want to move on from ascribing blame to establishing how we should deal with it. To do that, we must take stock of where we are with the public finances. What is very striking from the numbers is that the profile of public borrowing on which the Government are embarking is almost identical to that of the early 1990s. I guess that both the Conservatives and Labour are embarrassed about that and do not want to draw too much attention to it. In 1992-93 and the following year, public borrowing amounted to 7.7 per cent. of GDP, and the current Government are planning 8 per cent. and 7 per cent., which is almost identical. The problem for the Government is that, for several reasons, this is almost certainly too optimistic. Their growth forecasts are optimistic, and they are assuming massive efficiency gains that no one in Government believes in, and, crucially, they are assuming severe control of public expenditure for the foreseeable future: 1.4 per cent. annual growth in public spending. If anybody believes that, they should look at a reference, buried away on page 210 of the PBR, to public sector pension costs. I am talking about not public sector pension liabilities, which is a big issue, but actual cash spending, which is, of course, a non-discretionary item—the Government cannot do anything about it unless they legislate. The reference shows an increase in public sector pensions from £1.2 billion in 2006-07 to £3 billion this year and £4 billion next year, but three years ago the Government were estimating it at only £600 million. That is completely out of control, and it will squeeze other key elements in public service delivery.
Lord Oakeshott, my colleague in the other place, raised this in the Lords yesterday, and our colleagues in the Lords moved a motion recently to try to set up a public service pensions commission based on Lord Turner's recommendation that this difficult issue should be properly examined. We could not understand why not only the Government but the Conservatives voted against the proposition. They want to keep this in the long grass, but it is a crucial issue that must be addressed.
In terms of contributions and commitments, the costs are simply unsustainable on the current basis. Although Members are, of course, beneficiaries, we will have to look at this issue, because otherwise elements of public spending will be drastically squeezed to pay for it.
I will come to that later, but according to the IFS the new top rate of tax will yield zero revenue.
On fiscal judgment, if the fiscal deficit were as low as the Government and the hon. Gentleman suggest, I could see the case for this, but is he not aware that we are in fact down to borrow £157 billion this year, before the deep recession hits, which is more than 10 per cent. of national income? That is why some of us think that this is too risky.
Let me take that last phrase; is it therefore too risky to embark upon a fiscal stimulus? That is the key issue, and I wish to move on to it. The Conservatives have clearly taken the view that it is too risky; they believe that it is either too dangerous to have a fiscal expansion, or that that will be ineffective. I fundamentally disagree, because it is one of the fundamental duties of Government in times of war and slump to sustain the economy. The Government inevitably are, and have to be, the investor of last resort to keep economies going and ultimately to reduce the level of borrowing, which rises if economies get into a downward spiral. That is a fundamental duty.
The Chancellor had a very good line in his response on Monday, which we all laughed at. It was about past Labour Chancellors, but if he knew a little more about Labour history, he would remember that the really tragic case was not Denis Healey, James Callaghan or Sir Stafford Cripps, but it was a man called Philip Snowden, and his boss, Ramsay MacDonald. They came into office, rather as the Conservatives now hope to do, in a slump situation with the hopes of the nation behind them, and they looked at the public accounts and said, "This is awful. We have to cut back and balance the Budget." Millions of people suffered as a consequence. That is, I think, the course that Mr. Redwood and his colleagues want us to embark upon.
Surely the hon. Gentleman is not asserting that there is no risk in borrowing on this scale against the background of the accumulated debt that is having to be tackled? Does he not accept that if we find it impossible to fund this debt, we will be in appalling trouble? The chances are that interest rates will be driven up by the Government's need to raise them in order to pass on their bonds, and we will face a serious risk to the value of sterling with further problems arising from that. Surely he is not saying there is not a very considerable risk. There must be a balanced judgment at least. The idea that we have to spend this money is utterly reckless, which is rather out of character for the hon. Gentleman.
Of course, the former Chancellor, whose views are always respected here, is making the correct point that there is a balance to be struck and there is risk, and the cost of Government borrowing in the gilts market is a key consideration. However, the fact is that in emergency situations, Governments have a responsibility. That is most obviously the case in war. Nobody expected that Mr. Churchill would stand up and say, "Sorry, we can't keep on fighting on the beaches because there is growing worry in the gilts market about the rising cost of ammunition." In emergency situations, Governments have to act, and although this is not war, it is an economic emergency and it requires drastic action.
What we have from the Chancellor is a proposal to spend more than the total cost of funding the second world war and rebuilding Britain afterwards, and that, it seems, is still delivering an inadequate—to borrow the hon. Gentleman's word—fiscal stimulus. Is he therefore suggesting that we should throw caution to the wind and borrow a lot more than the Chancellor proposes to deliver the kind of stimulus he says the country needs?
I am not throwing caution to the wind. Indeed, our proposals for tax cuts for the lower paid were fully funded, and in that sense—
Can I just press on?
In that sense, our proposals underline what the Conservative party has acknowledged on funding. The first thing that has to happen, which I do not think the Conservatives are recommending, is that public investment must be maintained, or preferably increased. What is so worrying about the IFS analysis that came out yesterday is that the Government are proposing a cut of 16 per cent. in public investment over the next three years. How on earth is this supposed to stimulate the economy and maintain infrastructure so that it can handle the increased demand when the economy recovers? That makes absolutely no sense.
Let me just take a couple of examples of how this is working through. Housing is the obvious area. The Government make a great deal of the fact that they propose to bring forward £800 million of expenditure on social housing. We want to see more expenditure on housing; it is highly appropriate in this context, and that kind of money would buy about 6,000 houses in the current economic environment. However, the Government said two years ago that they had a plan for social housing costing £8 billion. What happened to it? Where did it go? The truth is that it is stuck, as many of the housing associations are on the brink of bankruptcy because they entered into strange deals with developers at the peak of the market to build shared housing and they cannot progress on that, and the Treasury is quibbling with the housing associations about the funding formula, so nothing is happening. There is, therefore, a wholly inadequate response in terms of public investment. What the Government can and should be doing by way of stimulus is making sure that this public investment does happen.
Can I take the hon. Gentleman back to the issue of pension costs? It is true that pension costs in the public sector will go up a good deal because they are index-linked and this year the retail prices index is high. However, is he seriously saying he would want to review or change that, because when all is said and done, these pensioners have earned their pensions and they are entitled to the increase?
I am now beginning to understand why Conservative Members are so scared of the issue, but it has to be faced, both in terms of contributions and entitlements; otherwise, it is fundamentally unsustainable. It is no good Members bouncing up and down here in the Chamber to talk about the long-term pension liabilities of the public sector unless they are willing to address the issue.
Let me move on in my discussion of what the fiscal stimulus actually means. One of the key elements of stimulus is public investment and the other is taxation. The Government have announced this VAT cut. The Liberal Democrats have made it clear that we regard this as not the best way of cutting taxation. There is an interesting little note in the impact assessment suggesting that business will have to pay £50 million to adjust to the change in prices, and then have to pay another £50 million when they change back again in 18 months.
Is my hon. Friend getting the same reports that I am getting from the construction industry? It expects to lay off hundreds, if not thousands, of people early in the new year when the current house building programme comes to an end. Does he agree that this is an opportunity to use a recession to create infrastructure at a more affordable price than would be the case if we were to wait until the economy started to recover?
If the Government were really serious about VAT reform, they would be considering the VAT on home improvements, which is one of the obvious areas that could change the picture.
The Liberal Democrats believe that there should be a significant, but permanent tax cut for low-paid workers; we have suggested the equivalent of £16 billion to £18 billion, which is in the ballpark of the Government's tax proposals. We propose that that should be paid for by people higher up the income scale. Of course, the Government have put forward what they regard as a redistributive element—the new top rate of tax, which will be 45p in the pound. I have taken an intervention that suggested that that will raise a lot of money, so I shall repeat that the Institute for Fiscal Studies says it will raise no revenue. We should know that, because for many years when we had a similar proposal, the Government told us that it would raise no money. They are now putting this forward, apparently aware of the consequences of their own arguments. It will raise no money for the following reason: why would people with a high income pay a 45 per cent. marginal rate of tax on it when they could convert it into capital and pay 18 per cent., as any tax accountant would tell them to do? Why would they not persuade their employer to give them relief from higher income tax and put it into a pension pot that, again, will accrue relief from the higher rate tax of 45 per cent? Those are the obvious measures that any Government who are serious about income distribution need to address.
The hon. Gentleman is making an excellent speech. Does he agree that the IFS has got it wrong when it says that the 45 per cent. rate will raise next to nothing? It argues that the rate will lead to a greater number of people leaving the country and/or using avoidance schemes. Those arguments were precisely the ones used in relation to non-domiciles, but there has not been a queue of people leaving the country, and there has been no apparent, substantial increase in the use of avoidance schemes. Is the IFS not making a misleading point?
Back Benchers are getting a bit desperate over this. The truth is that even if there were no behavioural effects, the Government would raise £600 million, which is a 20th of what they need to make from their tax cut. This measure is pure tokenism and has no economic significance.
My hon. Friend is making a clear case to show that, at the top end of the scale, those on high incomes are able to get around tax changes, whereas for those at the bottom end, council tax and the like are increasing by more than inflation. The pre-Budget report has made an assumption that council tax will increase by 4.5 per cent., but these people probably are not even claiming their council tax benefit and this money comes out of their net income. Do not changes need to be made to help those on the lowest incomes?
Absolutely. I am hoping that Mr. Field will have an opportunity to make his point, because I know that the fact that the Government have not yet fully committed themselves to permanent compensation for those very lowest earners is something that concerns him.
I wish to make progress and deal with the bigger question, in quantitative terms, about what is happening in the banking system. The Chair of the Treasury Committee, John McFall, made a very effective intervention in Prime Minister's questions, reminding us of what the Governor of the Bank of England said yesterday. The Governor said that in relation to the funds that the banks already have—he was not talking about long-term commitments—they are acting in a way that, individually, makes perfect sense. The banks are conserving capital, they are hanging on and they are keeping the Government out of their affairs. They are preparing for the days when they can go back to paying dividends and bonuses. From their own self-interested, short-term point of view, their approach is entirely rational, but collectively it is suicidal. The Governor made that point very clear.
Of course, there are many ways in which we can move on the flow of bank lending—we broadly support the proposal made by the Conservative shadow spokesman, and we have advocated it from these Benches—but before we talk about new institutions, why not focus on the money that is already there? That is the money that the Government have committed, much of which has not yet been taken up, and the guarantees that the Government have offered, which also have not been fully taken up. The Government cannot just walk away from this pathetic decision not to put their own representatives on the boards of the companies that are semi-nationalised. They should be on those boards and they should be setting the strategy of the banks.
I am listening with great interest to what the hon. Gentleman has to say, but he is wrong on this point. One of the conditions of the recapitalisation of the Royal Bank of Scotland Group is that the Government would nominate three directors. If the merger of HBOS and Lloyds goes ahead, we will have two directors there as well. His point on that has been met.
In that case, I apologise for getting it wrong. I hope that the Government will do what they did with Northern Rock: publish the terms of reference of these directors to tell them the strategy that they will be required to follow. That is essential to getting the economy going.
A year or so ago, I made myself rather notorious in this place by pointing out that within a few weeks the Government had descended from order to chaos. Within the past few days, a similar transformation has taken place, from hope to despair and anger in the country. Unless we get a more effective response to this crisis, from both major parties, that anger and despair will continue.
Order. Before I call the next speaker, may I remind the House that Mr. Speaker has placed a 10-minute limit on all Back-Bench speeches? That starts from now.
It is a pleasure to address the House this afternoon, and I for one welcome the opportunity to debate the pre-Budget report. It is an incredibly significant economic and financial statement not only in its own terms, but because it has redrawn the financial and economic dividing lines between the two major political parties, perhaps for years to come.
This afternoon, the Conservative spokesman made an interesting proposal on setting up a new state institution. I intend to discuss in due course how we deal with the resumption of inter-bank lending, but on the fiscal stimulus, the Conservatives have made an historic mistake. I say that because since the middle of September the terms of the debate have changed fundamentally, with the collapse of Lehman Brothers and the systemic risk to the banking system. Not only is the recession potentially severe, but the outlook has deteriorated very sharply, so we must contemplate using all the economic and financial levers at our disposal. That includes using monetary policy to its full effect, wherever possible; using financial policy where that is possible; and using a fiscal stimulus. That is necessary to stave off not only what is now an inevitable recession, but the prospect of a global slump.
I shall start by discussing the macro-economic stance. Each week that goes by, the economic news seems to become worse. The speed at which this country, like every other major developed country, is entering recession seems to be gathering pace, whether we are talking about the rapid and significant increase in our unemployment, the dramatic fall in inflation and commodity prices or the further downturn in net mortgage lending, which we heard about yesterday. It is becoming widely accepted that our global financial system has experienced its most severe instability since the first world war. The Opposition would be right to suggest that monetary policy should take the strain if this were a typical downturn—a downturn generated by a failure of domestic economic policy or a downturn in domestic demand—with fiscal policy taking a subordinate but supportive role, but this is not a typical economic downturn.
The right hon. Lady recognises the robust way in which the Government have acted, but surely it is not enough just to have rescued the banks; it is necessary to repair them too. In reality, they are not in a position to lend until those bad debts are taken off their balance sheets, and a "bad bank" needs to be created to do that. Time needs to be taken to create a new bank—perhaps a "post bank"—that would be able to lend effectively in the economy and get economic growth going again.
I intend to discuss how to try to get banks lending to each other again in due course. Creating a "bad bank" to deal with toxic assets is not necessarily the right way forward, partly because it is incredibly difficult to value those assets appropriately and the Government end up taking all the very worst of the debt without appreciating its true value. Of course, everything ought to remain an option as we go through these difficult times.
The Opposition have failed to appreciate a fact that was the essential point of my right hon. Friend the Chancellor's statement. In a global credit crunch the impact of monetary policy is at best uncertain and at worst negligible. Evidence mounts day by day, week by week, and even though the 1.5 per cent. interest rate cut was passed on to people with tracker mortgages, credit conditions remain incredibly tight. That is the case for mortgage holders but more particularly for small and medium-sized enterprises. There is evidence that good going concerns are being refused credit, that the availability of credit is shrinking and that the price of terms that have already been agreed has also increased.
Although the 1.5 per cent. cut has been passed on to those with tracker mortgages, the spread between inter-bank lending rates and base rates remains stubbornly high and there is no immediate sign that it will be reduced. In such circumstances, it would be hugely unwise to rely on monetary policy as the way out of the recession. Of course, monetary policy might help somewhat and if there are further deep cuts in interest rates they might act as a stimulus, but we should not bank on those measures as the only stimulus.
In precisely such credit constraint conditions, fiscal policy becomes ever more potent. I am glad that the Opposition have at least come to realise the importance of using the automatic stabilisers—a term that is now entering common currency—as tax receipts fall during a recession and benefit payments rise. It is incredibly important that the automatic stabilisers are used not to provide a fiscal stimulus—they do not do so—but to prevent fiscal policy from tightening and exacerbating any potential recession.
All credible economic commentators around the world seem to concur that a fiscal stimulus is needed, rather than just a use of the automatic stabilisers. In fact, the Bank of England, which published its quarterly inflation report yesterday, assumed as its central prediction that output would start to pick up from the middle of next year. The Bank of England, far from making the Government's case look somehow out-of-step and over-optimistic, also expects growth to resume from the middle of next year. However, it did not take into account the potential impact of any fiscal stimulus. The report states that
"the slowdown may be less pronounced if...there is a stronger stimulus from fiscal policy."
It is not just the Bank of England. The Institute for Fiscal Studies welcomed the fiscal stimulus this morning, as did the CBI. Abroad, we are backed in our resolution by the IMF and by most credible economists and commentators. The argument against the use of fiscal policy usually rests on the following facts. First, people think that it takes too long to implement and if not carefully designed can end up turning a fledgling recovery into an unsustainable boom. Secondly, some people argue that if taxes are cut in the short term people will not necessarily spend the extra money because they think that taxes will rise in the medium term. Thirdly, people think that a fiscal boost could add to inflationary pressure. The likelihood of inflationary pressure being a problem seems entirely remote and should not keep many people awake at night.
Let me turn to the first two potential problems. Will the cut in VAT and bringing forward spending take too long to implement? Absolutely not. As we know, the cut in VAT has been turned on to take effect almost immediately and is clearly temporary, so VAT will rise in the future. The beauty of the VAT reduction is that unlike direct income tax cuts it can be implemented virtually straight away and can clearly be seen to be temporary. Given the potential severity of the downturn, it does not seem at all plausible that the measure could end up stoking a domestically generated boom. I find it extraordinary, incidentally, that the Liberal Democrats are arguing that a permanent funded tax cut could ever act as a temporary fiscal stimulus, but I leave that to their spokesman to explain in the future.
Is it the case, as the Opposition sometimes seem to argue, that people would just pocket the reduction in taxes and not spend the money to produce the desired stimulus? I find that hard to believe given that households across the income spectrum are credit constrained. That is what is happening with the global credit crunch. When people have more money in their pockets to spend, they tend to spend it. The Government have made a fairly conservative estimate, saying that about half will be spent and half will be saved. However, even if half that money is saved it will be because people are paying back their debts, and that will place them in a stronger position to spend in the future.
The Government forecast that the reduction in the impact of the recession will be about half a percentage point. It is easy to underestimate that effect. That reduction will keep a much larger number of people in their jobs throughout this downturn than would otherwise have been the case. It will keep more small businesses afloat, many of which would have gone bust during the economic downturn.
Of course, all that is likely to be far more powerful if countries act together rather than independently. When people spend their money on fiscal boosts, some of it will clearly go on imports from other countries. If everybody acts together, the impact of a fiscal stimulus is likely to be far more powerful. For that reason, we should welcome the fact that Japan, Germany, Spain, South Korea and China have announced or are planning a significant stimulus package. In particular, we should welcome the move announced yesterday by the United States. The injection of $800 billion into the US economy should have a pronounced effect not just on them but on us.
What happens to the public finances over the medium term is obviously important when it comes to the UK's position. I noted that Mr. Osborne talked about the seven-year figures as fantasy figures. I cannot agree with that. What is the alternative? When a global credit crunch causes permanent deterioration in and damage to the output of the economy and when one cannot foresee how quickly corporate profitability will increase in the future—it will clearly remain low in the medium term—it is right that we should take our time before public finances are brought back to balance. The alternative, which would be to bring them back to balance much more quickly, would risk tightening fiscal policy at a time when another shock might come along in the system and make it worse.
On the question of receipts that probably will not come back—they certainly will not do so in the near future—in financial services, such activity represents one third of the total receipts of the sector, which will probably not come back at all. Does my right hon. Friend agree that that represents a structural problem for us to overcome?
It does. As my hon. Friend knows, that would mean that whatever the Government decided to do as a fiscal stimulus, either spending would have to be restrained or taxes would have to go up in the future. Given that we can use the fiscal stimulus, it is likely that we will pay back less in the future by ensuring that the economy does not suffer some of the permanent damage that might otherwise be inflicted.
I appreciate my right hon. Friend's points on monetary policy, particularly if those people who have access to the best trackers also racked up the biggest credit card bills in good times and therefore pass the reduction down by paying the debts. In that instance, in uncertain times, monetary policy has a limited effect. With respect to fiscal policy and Government spending and actions, does my right hon. Friend agree that it is important that the levers that we pull work? For instance, social landlords should build social housing.
I completely agree that we need to ensure that what we say in public is translated in practice into real action.
That brings me on to inter-bank lending. As my right hon. Friend the Chairman of the Treasury Committee has pointed out so forcefully, there is a risk that what is right for any single bank in isolation is not right for the banking system. I urge the Chancellor to consider very seriously the proposals laid out in the Crosby report yesterday.
Any proposal, whether it is for a new state institution or is a Crosby proposal, will have to pass some fundamental tests. Do we really want the market in mortgage-backed securities to be resurrected at a time when the mortgage-backed security market has dried up? Would it potentially bias one form of lending against another? How does it fit with the credit guarantee schemes and will it make them more likely to work, or will it crowd out those proposals?
We should act together to try to get the banks to start lending to each other. We are in serious times that demand serious solutions. I urge my right hon. Friend the Chancellor to take any action that he thinks is appropriate.
I am afraid that in this country we are probably facing the longest and deepest recession of my lifetime. I entirely share the sentiments of my hon. Friend Sir Patrick Cormack; I hope that my forecast, along with all the other more gloomy forecasts, is wrong, because I do not wish to see the levels of unemployment, housing repossessions and business failures that we will see if we do indeed have the worst recession since the second world war. It is a very real risk, however, and there is no doubt that the global financial and banking crisis is the worst of its kind for at least 80 years. It has been made worse in this country, and we are more exposed than most developed countries, largely because of the mismanagement of the public finances and the failure to retain a sufficiency by way of firepower in the public finances. That is largely down to the former Chancellor—the present Prime Minister—and the complete failure of the regulatory system that he put in place when he took office.
Prior to the 2007 election in Scotland, which Labour lost, Labour people ran around with scare stories about how there would be £5,000 of debt per household in Scotland. The Government's own figures for the end of that period show a figure of £48,000 in debt per household. Does the right hon. and learned Gentleman think that the Chancellor and the Government should apologise?
Yes, I do. The scale of the debt should dominate the debate, because it is the main substance of the pre-Budget report, so I will turn to it in a moment.
I am not going to go back to past recessions, although the Government always refer to the two that we had previously, which we shared to a certain extent with the rest of the globe and which, I remind them, we successfully exited. Obviously we looked at the usual monetary and fiscal weapons; indeed, we used them in a new way. We used monetary policy to target inflation, because they were inflationary recessions, and we went for sound fiscal policy to restore confidence in the public finances and provide the background of stability that was required to get back to growth in the economy. Of course we looked at all the options, including fiscal stimulus. However, I remind the House of my right hon. Friend Lord Howe's Budget in 1981. When he imposed very stiff increases in taxation and reductions in public spending in order to get back to fiscal stability, he was berated by all the so-called Keynesians—it was a bit of an insult to John Maynard Keynes—for doing so, but it was successful. I will not dilate on my own Budget of 1993, but I also had a fiscal problem, to a modest extent—it was not as bad as the one faced by Geoffrey Howe—and I did the same thing. Fiscal stimulus can be considered, but there are often good reasons for rejecting it.
As someone who berated the 1981 Budget well before the 364 signatories to the famous letter, I said that a Budget that I described as intellectually and economically illiterate would destroy the base of British industry, and that was true—the west midlands has never recovered. The 1981 Budget is the reason why now, with the collapse of our financial industry, we do not have a proper industrial base.
My hon. Friend was the most distinguished of those very strong critics in 1981. I did not agree with him then, and I do not now. I agree that our industrial base was destroyed, but I put that down to the excessive strength of sterling before 1981, which destroyed our competitive position. However, we can debate that hereafter.
Fiscal stimulus was not used on either of those occasions. It was ruled out as an option—
Will the right hon. and learned Gentleman give way?
No, I cannot, because I have a time limit; I am sorry.
Fiscal stimulus was not used on either of those occasions, and we successfully recovered from a recession—and the current Government benefited from that. The long track of figures that the Chancellor recited today were part of the process of getting the level of public debt back under control and getting the budget surplus steadily reduced so that the new Government could merely say that they would stick to the Major Government's figures. They then found that they were restored to balance in fairly rapid order; indeed, they began to accumulate very large Budget surpluses once we had the dotcom boom.
This crisis is different—it is at heart a banking and a credit crisis. I agree with the several speakers who have said in interventions or speeches that that is the main point that we must keep our eye on. Unless and until we get back to the normal functioning of the banking system, we will not have restored the British economy to health. Although it is very important to debate the public finances and the tax and spending proposals, as we are today, because they are part of the picture, to some extent we are addressing a symptom, not the root cause.
I want to emphasise that the big gap in Government policy, which was not really referred to in the PBR and was only hinted at by the Chancellor in his speech, is that they still have not produced a credible package to get the banking system functioning properly again—by which I mean resuming lending on a sound and commercial basis to households and businesses that can properly afford to take on the debt under a proper system of risk management. We are a million miles from that at the moment, and for as long as we remain so we will not have recovery; indeed, we are only at the beginning of recession that will almost certainly worsen well into 2009.
I cannot give way because I have a time limit and other Members want to speak; I apologise.
Of course we all agree that monetary policy should be used as far as it can be. We are now in a position where the further reduction of bank rates is inevitable. I think that the Bank of England is the one institution that has handled itself pretty well, both before and during this crisis. I exclude it from most of the blame for the catastrophic folly that led up to the beginnings of the current problems. The trouble now—I actually agree with Ruth Kelly on this—is that monetary policy, in its classic sense, is not working and will not work for some time. The levers are not connected to the system. The availability of credit and the price that one has to pay for it does not bear much relation to the Bank of England's base rate. At some point that will click into gear again, but it could be some way off, so we have to look to fiscal policy.
My views have been quite well reported. Of course I accept that in these circumstances anybody will consider the prospects for fiscal stimulus. It is important, across the globe, that the surplus countries go in for very substantial fiscal stimulus. However, everybody has to consider whether the pressing problems of the forthcoming recession justify a degree of risk, and they do justify a degree of risk if fiscal stimulus will work. The key judgment is whether the state of the public finances makes the risk totally unacceptable.
I agree with Dr. Cable that there needs to be a balance, but it is a key judgment call. He seems instinctively to rush in saying, "Regardless of the quite appalling state of affairs that is revealed in the pre-Budget report, we still have to add another £20 billion to what is already there." I come to the opposite conclusion. We only have to begin at last to get some up-to-date figures, and to see what is revealed, on a very optimistic basis, in the pre-Budget report, to realise that another £20 billion is not available for fiscal stimulus. I thought that that was where the Liberals stood. Only a fortnight ago, we had an exchange in the previous debate where the hon. Gentleman ruled out fiscal stimulus.
Well, I tackled the hon. Gentleman on his tax proposals, and they were redistributive tax proposals whereby the rich were going to pay for tax cuts for the poor. I think that, rather like in the case of the Government, that is more electoral than economic in its objectives; that is debatable. In any event, he ruled out fiscal stimulus and has suddenly become a convert to it.
Let me correct the right hon. and learned Gentleman; perhaps I was not clear enough in my speech. Fiscal stimulus comes from two sources: first, from the fact that people on low incomes spend a significantly higher percentage of their income than those on high incomes; and secondly, from public investment, which is over and above any redistribution in the tax system.
I would like to hear how much extra public investment the hon. Gentleman is talking about. Some of the public investment has just been pork barrel—although I have to say that I am grateful for the current proposals for dualling the A46. His tax proposals are marginally stimulating if he is right that some people who pay high tax save more and others on lower tax would spend slightly more, but he was not putting that forward as a fiscal stimulus, and he was prudent not to do so.
Many people will dilate on the appalling scale of the fiscal gap that is exposed now that we have up-to-date figures. If the Government had been a trading organisation, they would have been obliged a long time ago to update the ridiculous Budget forecasts that they put out a few months ago. The Prime Minister should be ashamed of himself for getting all his Ministers to repeat the 38 per cent. figure for debt to GDP ratio, which has not even kept up with the Office for National Statistics—it is a completely political figure. The comparisons with other countries are made on a completely different basis from the Maastricht-based accounting system on which the Europeans approach this matter. On the basis of figures used by any other country, we are already at about 60 per cent. debt to GDP ratio.
What is worse is that everything shows that the situation is deteriorating. We are not talking about how to pay for the VAT reduction, which is what the public have been told. We are faced with paying for years and years of having run mounting deficits when the current Prime Minister was Chancellor. We are also faced with the rapidly deteriorating position that the recession is beginning to cause, which will get worse as it goes on. The judgment about risk is quite clear.
Everyone knows that my preference for fiscal stimulus, if we could afford it, would be a VAT reduction, but I do not have time to argue that case. All possible approaches have upsides and downsides, but VAT reductions have a bigger impact on big ticket items such as cars, furniture and carpets, particularly when we approach the magic period in which the temporary VAT reduction is about to go up again. I have no doubt that had the Chancellor been allowed to print the figure that the Treasury wanted to print, to try to make the future more credible—it was going to put VAT up to 20 per cent. by the time we got to 2012—that would have given an even bigger stimulus to spending. Neither do I doubt that taxes will go up substantially when we get there.
As usual, I have used all my time, and have not been able to go into detail, so I shall conclude. At the heart of this issue is the condition of the banks. All democratic politicians will spend the next two years denouncing bankers, who have behaved badly in the past, but they are not on some sort of strike for malicious reasons. Instead of getting them in just to shout at them, we need to get them in to explain why the first package has not worked. The recapitalisation is too expensive—far more than anyone else's—and so are the loan guarantees. The shape of the package needs to be fixed. That is what needs to be done now.
It is a pleasure to follow the former Chancellor, Mr. Clarke, although I cannot I agree with everything he said. He started off well by setting a grave tone for the debate, because there is a danger that we in the House—and, indeed, the country—underestimate exactly the size of the problem that confronts us as a result of this international crisis.
Perhaps remarkably, I was in the Labour party's research department in 1967 when we had the financial crisis of devaluation, which I remember well, and I was in the House in 1976 when the International Monetary Fund came in. I remember even more vividly, however, the recession of the early 1980s and what it did to the west midlands, which was nothing to laugh at. It devastated the manufacturing base in my constituency. The 1990s were not much better. Dr. Cable, with his usual omniscience in these matters, which accompanies his gift for prescience, pointed out that borrowing as a percentage of GDP in the early 1990s was about where we are now. That is probably a good parallel. Although the right hon. and learned Member for Rushcliffe did a lot to correct that in his years in the chancellorship, he did not bring it back into balance.
The current situation is graver than those events, and we must have unprecedented measures that are commensurate with it. We are looking at an unprecedented level of borrowing and an unprecedented combination of the credit crunch, the banking failure and a prospective economic downturn.
Is it not a fact that Labour Members and some Opposition Members feel that the Government should make every sensible move that they can to prevent this downturn from becoming a rout? I want to ask about one aspect of the Budget—making proper compensation for the 10p tax losers, which the Government have not done. Should they need to create further stimulus, they should single that group out for special attention.
I am grateful to my right hon. Friend for his comments. He will recall that I opposed the move when it was first announced, before it was implemented. One of the silliest things that the Government have done has been to persevere with it. We should all acknowledge that my right hon. Friend the Chancellor has put things right. He has undertaken to correct the matter, and I am pretty sure that he will, but that should absolutely be a priority.
The situation is unprecedented. It is a failure across all fronts of Government and private sector activity, as well as internationally. The depth of it is unprecedented, and it is right to use all the levers of government to correct it, which is precisely what the Government are striving to do. The restraint on public expenditure to which the hon. Member for Twickenham rightly drew attention is important. We cannot exempt public sector investment from that. As we come out of this recession, no area of Government expenditure will be exempt from severe restraint. We must prioritise, particularly in relation to investment.
I am pleased to agree with several right hon. and hon. Members that social housing should be an unqualified priority. We need to take the same approach with housing associations. They have their difficulties, but they are prepared to advance money—I speak for the large social housing organisation, Orbit Group, which has its headquarters in my constituency. Housing associations can spend their share of the £8.7 billion programme, but they will need some subsidy, because the homes will be built for rent, not for purchase. The cash flow profile for rent is less advantageous than it is for purchasing, but we hope to recoup that when the houses come up for purchase. The associations that I have spoken to are prepared to share with the Government the profit on eventual sales, when the houses come up for purchase, so that the Government can recoup some of the subsidy that they have had to invest. I urge my right hon. Friend the Chancellor, or one of the Treasury team, to engage in a serious dialogue and to pull forward that advanced investment as part of the £8.7 billion. That should be an unqualified priority.
The hon. Gentleman talks about new investment, but that money has to be found. As my right hon. and learned Friend Mr. Clarke has pointed out, there is a vast amount of as yet undisclosed borrowing. Does the hon. Gentleman agree that the contingent liabilities to which I referred in my earlier exchanges with the Chancellor represent a horrendous picture? Not only are we running at £1 trillion, as disclosed by the net public sector borrowing, but when we add in the Maastricht arrangements that my right hon. and learned Friend mentioned, we get up to £1,258 billion. We then have to add public sector pensions, Network Rail, the whole issue of the banking arrangements, including those for Bradford & Bingley, and nuclear decommissioning, so we end up with a figure that is about twice the amount that has been disclosed. In other words, we will not find the investment, because the money simply is not there. We are talking about £2.5 trillion.
I think that I shall content myself with the answer that the Chancellor gave to the hon. Gentleman. The numbers that we are dealing with are challenging enough without our having to indulge in the apocalyptic visions in which the hon. Gentleman is such a specialist.
The Government are giving the right help to families, children and pensioners in the general field of social housing, and for the associations in particular, and through the £8 billion package for small businesses. That makes the Opposition's position all the more incomprehensible. They refuse to face the situation that we are in. We understand that they are anxious to oppose, as that is their job, and to make their party political points as cheaply as they do. That is part of opposition, and that is accepted, but it is not acceptable or understandable that they content themselves with doing just that and with the need to get the banks lending again, although that is vital. That is not a position to take. The Opposition will be credible, acceptable and convincing to the country only when they come up with their own package to address the situation.
I am sure that my hon. Friend recalls that he and I went through the 1970s and, particularly, the 1980s and the 1990s, under the previous Conservative Government. Does he not remember what happened to the west midlands at that time, when manufacturing and a whole range of services were devastated? We inherited a debt, and people were paying 50p in the pound as a result of that Government's legacy. The Conservatives have now failed either to confirm their previous policies or to give us new ones.
I could not agree more with my hon. Friend, who is a fellow Coventry Member. I think that he was in industry at that time, coping directly with those who were being hit by all that. I was in the House, and every day I attended and found that another factory had gone under. It was the most terrifying situation. That was happening because, at precisely the point at which we entered that recession, Government expenditure was cut, thereby doubling the recession's effect. I entirely agree with Opposition Members who have made that point. We did not have 3 million unemployed; after the fiddling of the figures on incapacity benefit, we were looking at more than 4 million unemployed. That was the reality of the recession that the Government of that time quite unnecessarily put us into.
Given the scale of the problem today, we need a cohesive and coherent national effort to confront it. When we get through the party battles that will no doubt be fought in the House over the coming months about the Government's package, we must not lose sight of the fact that we have a mountain to climb. That will require an effort from everyone. It is in that context that I look at the increase in the top rate of income tax. I believe that the country will respond to the difficulties, because we always have. We faced the war. People say that this is not a wartime situation, but the scale of the problem involved in eliminating this debt is similar in many respects. People will respond if they believe that the burdens being shared are being fairly distributed. It is in that context that we are asking the best-off to make a bigger contribution. I can see no objection to that, when we know that we face several, perhaps many, years of severe restraint—certainly for the medium term—on living standards and public expenditure, as well as the prospect of unemployment for many, and even repossession.
No, I have given way many times. I am sure that the hon. Gentleman agrees that it would not be fair on other Members if I did so again.
The Government are absolutely right in all that they propose. Everyone agrees that getting the banks lending again is a vital part of the solution, but for Lord Lawson yesterday and Opposition Members today to plead that, if only we could get the banks to lend again, all our problems would disappear is implausible and disingenuous. It just is not right. It is important to do that, however, and it seems to be the one thing that the Government, with determination, can do. It is within their power. We own the Royal Bank of Scotland, and we are a major shareholder in HBOS. It is within our power to achieve something with those banks; we do not have to argue with them about it. I am sure that they will agree to it. I am not saying that we should go straight for issuing forceful directions. It is best to go with the grain and to get the directors behind us, so that they share in the national effort. Of course it will mean a restraint on dividends, if they are going to lend more than they might think it prudent or right for each individual bank to do, but we need a coherent, cohesive national effort in which everyone takes part and shares the burdens equally. It is therefore right to introduce an increase in the top rate of tax.
I would like to think that, at some point, the Opposition will give us a believable package of measures that they would like to introduce. If they do not, they will be abandoning their principal role as an Opposition, which is to put up an alternative policy to that of the Government. For the foreseeable future, however, I do not believe that there is an alternative, and I urge everyone to get together and push ahead with the policies that we have. If we are determined enough, if we demonstrate enough leadership, and if we stick with what we have said and urge restraint on public expenditure as we come out of the recession, I believe that we can succeed.
It is a great privilege to follow Mr. Robinson, who speaks with great authority on these matters. I respect everything that he said, and I agree with some of it.
We owe a debt of gratitude to Mr. Speaker for granting us this three-hour debate, which was the maximum time that he could grant us.
We must consider the scale of the Budget measures announced on Monday—which dwarf anything that I have known in real Budgets over 25 years—and the calamitous state of the public finances that was therein revealed. Given the gravity of the economic situation, our constituents would have found it positively incomprehensible if Parliament had not debated the measures that we are discussing for this brief and inadequate period today.
I see that the previous speaker agrees with me.
Is there any Member in the House who would support and justify the Government's refusal to allow a debate on this Budget? There is none, and I hope that hon. Members will make their feelings known to the Leader of the House, who should be pressing on our behalf—
Then I will not give way.
Given the inadequate time allocated for this debate, I shall make just a few brief points. Unless we correctly diagnose the causes of our problems, we will not get the right cure. It is therefore extremely worrying that the Chancellor and the Prime Minister persist in the self-serving delusion that the cause of our problems lies exclusively in the United States of America. It was not America that caused us to have the biggest boom and bust in the housing market. The excessive lending, which exceeded not only that of America but that of the rest of the world, was a British-made problem. The failures of regulation by the regulatory system introduced by this Government were at least as severe as those in America. It was those mistakes, and not sub-prime mortgage lending, that brought down Northern Rock, then Bradford & Bingley and finally HBOS. It was the Government's policy of spending more than we were raising in taxes that led to the deficit in the public finances and the corresponding deficit in the balance of payments, thereby necessitating the huge devaluation in the pound that we have seen recently. I cannot see how any of the measures announced by the Government relate to those fundamental, underlying causes of the problems that we face.
I am interested to hear what the right hon. Gentleman is saying about public spending. I do not know on how many occasions he has made it clear in his constituency that he opposes this Government's investment in public spending. As a Labour Member, I congratulate them on that investment. Of course it has to be paid for, but does the right hon. Gentleman not agree that we should argue the case for higher public spending?
Almost all my constituents who discuss this issue with me tell me clearly that the Government have been spending more than we can afford. They regret that, and of course they would like more spending, if it could be afforded. When it is clearly unaffordable, however, they condemn the Government for that practice; and when that spending leaves us with this kind of problem, which puts my constituents' jobs at risk, they are not going to put doctrines about public expenditure above the security of their employment.
I should like to make some progress, if I may.
The second issue that I want to address is the Government's optimism that the fiscal stimulus, as they call it—increasing expenditure while reducing taxation—will be expansionary. I devoutly hope that it will prove to be expansionary. I hope it will work. However, most people, as well as the Government, believe that its impact is likely to be quite small. Ruth Kelly said that it would reduce the impact of the recession by about 0.5 per cent. of GDP. If the Government are convinced that that expansion will work, and that we face a severe contraction, why have they not done more? If there is a limit on affordability, why did they not double the cut in VAT for half the time? A 5 per cent. cut for six months would probably have had a more stimulatory effect—for the reasons spelled out by my right hon. and learned Friend Mr. Clarke—and we would have known sooner whether that was going to work or whether we would need to switch to other measures.
The hon. Gentleman is right: we are forbidden, under the present laws, to reduce VAT to under 15 per cent. That is absurd, and we should have asked for a waiver from that requirement. We should not allow that to be a restriction at a time of national emergency. However, it is significant that, by the modesty of their package, the Government recognise that even these measures are at, or even above, the maximum that we can afford, and that more might have had a negative effect.
We need to consider in what circumstances a budgetary stimulus or fiscal expansion has a positive effect, and in what circumstances it has a negative effect—the Government clearly fear the latter if they do more. Helpfully, the European Central Bank and the European Commission have studied the research done on all the fiscal—or so-called Keynesian—measures undertaken by different Governments in the past few decades. They come to some striking conclusions. They say that when Governments deliberately increased their borrowing to stimulate the economy, the effect of such expansionary measures was, at best, small. On half the occasions, the effect was the reverse of the Government's aim. My right hon. and learned Friend pointed out that we know from British experience that that is often the case. In 1976, we had what the Keynesians would call a contraction. Under the influence of the IMF, we cut spending and raised taxation. The effect was immediate. As Lord Donoughue said on Monday last week—and he was a member of Callaghan's Cabinet—the economy started recovering the next year, much more rapidly than expected. In 1981, 364 economists said, at what subsequently turned out to be the nadir of the downturn, that the measures that Lord Howe introduced in his Budget would accentuate the downturn because he raised taxes, cut spending and reduced borrowing. In fact, that marked the beginning of a sustained period of rapid growth.
The documents produced by the European Central Bank also show that the opposite has happened. Governments introduced what they thought would be expansionary measures, but they had a contractionary effect—they are called contractionary budget expansions. That is our worry—that the Government have done too much and it will have a contractionary effect. The studies show that such measures are most likely to have the opposite to the Keynesian effect when the Government start with a high level of borrowing—precisely the position we are in. Other countries that have managed their finances prudently and have low borrowing are in a position to take expansionary measures, and I hope that they do so and create markets for us to grow through export-led growth, but we are not in a position to do that on any scale.
The numbers suggest that the debt position is not as alarming as the right hon. Gentleman says. The current public sector net debt is 36.3 per cent. of GDP. In the last year of the Government of which he was a member, it was actually 42.5 per cent. Is he saying that circumstances today are so different from the circumstances that Mr. Clarke inherited, with a fiscal expansion under that Government of 3 per cent. of GDP between 1990 and 1993-94?
I was not trying to make an absurd party political point like the hon. Gentleman: I was quoting the European Central Bank and the European Commission studies of the experience of other countries. They have shown that when other countries have tried to launch a fiscal expansion on the back of a high level of borrowing or deficit—and the hon. Gentleman knows the difference between a deficit and the inherited debt of previous Governments—there is a danger that it actually leads to contraction. Why does it do so? There are three reasons. First, it undermines confidence. People think, "Gosh, the Government's finances are already pretty shot through. If they are going to borrow even more, we had better get out of here."
Will the right hon. Gentleman give way on that point?
The hon. Gentleman has just made one silly party political intervention: he does not get a chance to make a second.
The second reason is the possible effect of the risk premium, even for Government borrowing. My right hon. and learned Friend made the point that the Government now have to pay more to borrow than private companies, and even French banks. The third reason, which is not often mentioned, is the fear among the general public that the additional money they receive from the Government borrowing more will have to be paid back through increased taxes. The public therefore save that money to pay the taxes in future.
I have always found the idea of Ricardo equivalence—that the general public can estimate the likely tax effects of borrowing in the distant future and predict on whom they will fall—very unlikely. But in the present circumstances, when the Government have spelled out that the short-term boost will be followed by specific and immediate increases in taxation, and when we know from what they have been trying to hide that any uncertainty is only that taxes may be even higher than so far revealed, it is all too likely that people will increase their saving to meet their future tax bills, thereby negating the effect of this attempt at expansion. Having said that, I hope that it works.
The Government are relying on an increase in taxes, and they will withdraw the personal allowance for people who earn more than £100,000—or £1 for every £2 of extra income. In effect, that will restore a 60 per cent. marginal tax rate for income above £100,000. In the past, that had a negative yield. We got more money when we reduced the top tax rate than when we maintained it. The Government have learned nothing and forgotten everything, and I hope that they will give us more time in the next Session to rub their noses in what is a very dangerous and risky Budget.
Mr. Clarke was right to identify a prime source of the crisis that so many economies are suffering as the banks and banking malpractices. As a Member for Edinburgh, which is of course a major banking centre, I am acutely aware not only of the role of the banks, but of the consequences on jobs, general lending and people's lives.
As a former Minister for construction, I welcome the proposals of my right hon. Friend the Chancellor to draw down spending and ensure that construction projects are started and continued. That will give some relief to what is clearly a hard-pressed sector of our economy.
I am afraid, however, that I cannot take lessons on housing policy from Mr. Lilley. He will remember that, under the regime of which he was a very strong part, 2.5 million houses were hit by negative equity, and that 76,000 were repossessed in 1991. Last year, the repossession total was 18,000, and the present estimate for this year is almost half the Conservative figure. That answers the right hon. Member directly.
The right hon. and learned Member for Rushcliffe was willing to face up to the source of the crisis. It may be unpalatable to his Front-Bench team, but he is wise enough to know that the crisis started in America, and is having a global impact—
My view is that nothing happened in America that did not happen here, and that nothing happened here that did not happen in America. Our worst mistakes were a failure of regulation and our bad public finances. They are the particular features of the crisis here, but should not the hon. Gentleman be cautious about putting forward figures for repossessions and the rest of it? Has it not occurred to him that we might be in this recession's early days, and that 2009 might be very much worse? Does he really believe the Government's reassuring message that we will resume economic growth in the later half of 2009? All their forecasts are based on that projection, but I know of no living person outside the Government who believes that that is credible for one moment.
And nor do I believe that the right hon. and learned Gentleman can compare in any way the scale of what has happened in Britain or elsewhere to what has happened with Fannie Mae or Bear Stearns, or to the collapse of Lehman's or the present crisis at Citibank. Those institutions' power and financial clout are bigger than major economies such as the UK's.
The Conservatives seem reluctant to face up to the fact that in 1997 the UK's GDP per head was the lowest in the G7. People in Britain were poorer and had less to spend than people in America, Japan, Germany, Italy, Canada or France. Now, of course, our GDP per head is the second highest, after the US. In the past decade, the UK has been the only G7 country to escape recession, and in that 10 years it has been the only major industrial economy to increase—from 7.5 per cent. to 8.25 per cent.—its share of global services. While Government borrowing peaked at 7.8 per cent. under the Conservatives, we brought it down to 1.2 per cent., and Labour's highest borrowing in the past decade was in fact lower than the average Conservative borrowing of 3.4 per cent.
The hon. Gentleman makes a point about the growth in our service economy and in our exports of services, but I am sure that, for the sake of balance, he will also concede that there is a deficit of £87 billion in our trade in goods. On his Government's watch—and he used to be an unpaid part of that Government—1 million manufacturing jobs were lost, which led to the suppression of GDP growth by about 0.5 per cent. a year over the past five or six years.
Manufacturing output has of course increased dramatically in the past decade, as we have gone from being a relatively inefficient manufacturing country to a highly efficient one. There has been a marked cut in the numbers of jobs in every major industrial country, but this Government have done more to obviate that than any other Government would, or could, have done.
No, as I am afraid that I am constrained for time. I hope, Mr. Deputy Speaker, that my right hon. Friend manages to catch your eye later.
I turn now to the national debt. Again, at 42.5 per cent., it was higher under the Conservatives, as was pointed out in the earlier helpful intervention. Now, at 37.7 per cent., it is lower than the figure for the US, Japan or the euro area. In the 1990s, two thirds of all public spending went on servicing debt and the costs of unemployment. This Government have freed up £23 billion to invest in public services that used to go on servicing the debt and paying for unemployment. That sum is equivalent to half the schools' budget.
I am extremely grateful, but will he explain to the House what share of Government expenditure will go on servicing the debt when it has been doubled?
That has obviously been made clear in the account: we had the statement and we are having this debate because we recognise the severity of the problem, but we are not going to take lessons from a party that plunged us into two recessions, caused 76,000 people to lose their homes and oversaw a crisis in manufacturing the like of which this country had not seen in history.
On business competitiveness, the Government have taken positive steps to ensure that our economy is strong. At 28 per cent., our corporation tax is the lowest in the G7—it was 33 per cent. under the Conservatives—and that has helped to create 750,000 more businesses, 90 per cent. of which paid 10 per cent. tax, which is one of the lowest rates in the world.
No, I am not giving way again. No one is in any doubt about the scale of the economic problems. Just a few short months ago, when my right hon. Friend the Chancellor warned that the UK economy faced problems not seen for 50 years, the shadow Chancellor got to the TV studios as quick as he could to denounce that. Now we know that my right hon. Friend was looking ahead to the problems that we now face, and so was in a better position to measure them up and take the steps that he announced on Monday.
The House will not have forgotten that in 1997, our poorest senior citizens had just £69 a week to live on—more than £50 a week less than they do now. With that £50, the Government have lifted 1.9 million senior citizens out of poverty. The country has not forgotten that in 1997, spending per pupil was less than £3,000. It is now £5,430. Investment in school buildings, including roofs, more than doubled, and we now have 40,000 more teachers in our schools. In our NHS, we have 130,000 more nurses, doctors and consultants, and Labour's investment in our health service means that 240,000 people are alive today, recovering from cancer and heart disease, who would simply have died had Tory levels of investment continued.
There has been a decade of growth, a decade of cutting public debt, a decade of lowering taxes, a decade of creating 3 million more jobs, and a decade of investing in public services. Dr. Cable made a number of telling points about the decades of failure under previous Governments, but today, the shadow Chancellor showed that, having trawled the record for lessons that the Conservatives could learn, he has found none. As for solutions, he proposes none. He now proposes to do virtually nothing, and that is not an option.
If there was a prize for political irrelevance, the speech of Nigel Griffiths would get the accolade of the year. Significantly, his "All Our Yesterdays" way of looking at the economy managed to ignore one trend of the past few years: the build-up of debt that has left this country in a singularly difficult position when it comes to coping with the current economic downturn. If he wants to be honest about figures, he should not be so selective in those that he uses to make his case.
I do not know whether my right hon. Friend agrees, but I am sure that the speech that Nigel Griffiths gave used to end with the line, "And we have ended boom and bust!"
My hon. Friend makes a point that I missed out in my peroration. I totally agree with him. I wanted to start with the words of the Prime Minister on
"full disclosure of toxic assets"—[ Hansard, 17 November 2008; Vol. 483, c. 22.]
The idea was that that disclosure would be planned for, and revealed, by
If LIBOR and the bank rate are to come into touch with each other and money is to become more affordable, that problem must be addressed. I have not heard anything from the Government to suggest that they are seriously addressing that issue. All that we hear is that the bankers have been called in—the Government are talking to them and trying to persuade them—but nothing happens in the real world to help small businesses desperate for money that they can afford, or to assist medium-sized businesses with their cash flow or, indeed, to help large businesses so that they can carry on the job of raising working capital at an affordable price.
One problem is that the Government themselves do not even follow transparency. In the pre-Budget report, which is a large document, there are no proper figures on Northern Rock or RBS. I cannot get the accounts on those banks from the Vote Office—I have to get them elsewhere—because the Government have no intention whatsoever of revealing their own transactions to the House.
Further to the point made by my right hon. Friend Mr. Redwood, there has not been a single reference to the fact that, only last week, Northern Rock decided to allow its principal securitisation vehicle, Granite, to go under and go into default asset recovery. As a consequence, the Government have sold a share in their own bank worth £3.3 billion, which is much less likely to be recovered, and it will take many years to do so. Where is the transparency on that toxic asset?
My right hon. Friend Mr. Redwood and my hon. Friend Mr. Dunne both make the point that we need a great deal more transparency, and that action is required to address the question of banks' balance sheets. Unless banks have the confidence to lend to one another, normal monetary policy will not be resumed.
Much has been said about the way in which we might try to encourage the economy to overcome the downturn. I agree with my right hon. and learned Friend the Member for Rushcliffe: I think that that is going to take much longer than the Treasury's heroic idea of "one year, then we will be out of it." The Treasury have forgotten the failures of their own system of forecasting. If we look at successive Red Books over the past few years, we will see a table of endless adjustments of previous projections of tax receipts and, indeed, borrowing, which shows that Treasury forecasting has entered an era of inaccuracy. The Chancellor would be unwise to dismiss many of the commentators who have commented on the likely severity of the downturn. There is a human trait that the House of Commons needs to address, as it is easy to get caught up in the technicalities of economics and monetary and fiscal policy, and forget the fear factor and the lack of confidence among members of the public. Why have retail sales declined? Unemployment has fully to bite in this recession. There are about 25 million people who are still in employment, but many of them are frightened of what might happen. They are genuinely uncertain about the future, and they are frightened when they hear that Government borrowing will rise to £118 billion. They know that that is a big number, and that somebody will have to pay for it. While there is that uncertainty, they will not spend.
Most people gain confidence from knowing that the price of their house—their single biggest asset—has some kind of value. Only today in the Tea Room, however, we saw a headline saying that houses in London are to be sold with a further £100,000 off their asking price. When people read that, they do not look beyond the headline—they know that it is a frightening time, so they are cautious with their money. That is why I am concerned that the pre-Budget report has done nothing whatsoever to get the fundamental housing market going. There have been comments on the subject of social housing, but the Government should recognise that there may be an opportunity, particularly for first-time and young buyers, to get into the housing market. Measures could be taken including, for example, a further rise in the stamp duty threshold to £500,000. The number of mortgages for new lending has effectively dropped to an all-time low. Estate agents are lucky if they sell one house a week. Those are all factors that affect not just the housing market and people's confidence but the construction industry. If there was some movement, perhaps that would restore confidence in the economy.
I will not give way, as I have already done so three times.
The cut in VAT is but a temporary stimulus at a time at which prices are already falling. The real disappointment in the pre-Budget report is that no other options on fiscal stimulus were discussed. We have simply been told that the policy is 2.5 per cent. off VAT.
I should have declared my business interests at the outset of the debate. One of the problems that businesses face is the cut in industrial buildings allowance, which was the price for the fall in corporation tax. However, if a business is not making a profit, such measures are irrelevant. What are the Government doing to maintain and stimulate industrial investment? There is effectively nothing in the pre-Budget report that deals with that.
My right hon. and learned Friend the Member for Rushcliffe has discussed big-ticket items. Maybe there was a case for selective reductions in VAT, because companies will either consider the reduction in VAT as a benefit to their cash flow and keep some of it or use some of the money to reduce prices on one or two things. The 2.5 per cent. cut across the board for a limited period of time must be paid for by a substantial increase in borrowing, which estimates indicate will cost this country by 2014 the equivalent of increasing the basic rate of tax by 2.5p. That is not necessarily the best way to stimulate the economy.
We should have had a thorough debate about the long-term alternatives to get the economy going. Unless the Chancellor of the Exchequer addresses monetary policy and at least gets normal service resumed, we will not know whether the Government have done too much or too little with fiscal policy. If there are too many variables, one does not know whether one's policy ideas will work.
Particularly from the standpoint of north-west England, I urge the Chancellor to reflect on major defence contracts when he considers his public expenditure options—I imagine that every penny of Government spending is currently under review. The aerospace industry in north-west England accounts for some 40,000 jobs. Many of the constituents of Ruth Kelly are involved in the aerospace industry, so she understands, and the same is true of Andrew Miller. I urge the Chancellor to make certain that projects such as Eurofighter are at least maintained both for their military importance and for their importance to the economy.
The public in this country will not easily forgive what the Government have done. My right hon. and learned Friend the Member for Rushcliffe left the economy travelling in the right direction. The profligate spending by the former Chancellor, who is now the Prime Minister, has left us ill equipped to deal with a downturn in the economy. One of the things that worries me about the Chancellor's attitude of throwing bell, book and candle at the problem now is that none of us knows precisely what will happen in the future. This recession is uncharted waters, and I wonder what is left in the locker, if there are further shocks. I hope that the Chancellor will review alternative fiscal stimuli, because industry may need such help. The most important thing is to maintain people in employment, which is the cheapest and best way to maintain economic activity, but I am not certain whether the Chancellor's VAT cut will do that.
I will be brief, because the winding-up speeches are due to start at six minutes past 4.
Following the intervention by my right hon. Friend Mr. Blunkett, I have been surprised by the way in which the official Opposition have derided the notion that the problems started in north America. The world has changed, and we now live in a world of instant communications where events spread very quickly. That applies to not only banking and commerce, but to many aspects of our society, and global events that begin with a pinprick will spread around the world very quickly in other areas, too. Anyone who has read anything about chaos theory will understand what I mean. That is why it is so important—no one from the Opposition has mentioned this—that my right hon. Friends the Chancellor and the Prime Minister get on the global stage and argue Britain's corner and Europe's corner. If we do not do so, we will let down our country extremely badly.
Mr. Osborne and I have two things in common. First, we are both Cheshire Members, and I hope that he will reflect on what I say towards the end of my remarks, because some of his constituents work for companies in my constituency. Secondly, we both took a holiday in Corfu, but I shall not develop that point. Mine was a considerably cheaper version.
I am also concerned to hear the surprise—the shock, horror—based on the idea that my right hon. Friend the Chancellor did not look at dozens of ideas, and did not ask civil servants, officials and colleagues to present alternative propositions to him. Of course he did. We would be here lambasting him if there were evidence that he had not examined dozens and dozens of ideas placed in front of him.
No, because I have to sit down at six minutes past.
My right hon. Friend the Chancellor was quite right to contemplate all the papers that were put in front of him, and I agree with him that the conclusion that he reached will probably have the greatest impact on the lower-paid families whom many of us represent. It is important for them in terms of their capacity to help stimulate the economy and in terms of their immediate needs, and we should support people that way.
My next point is about industry. Mr. Jack made a point about aerospace, and I totally concur. It is vital that those large projects continue. The case that he explored is vital from the point of view of national defence and because of the importance of that aspect of manufacturing to the economy in the north-west.
I also represent a manufacturing constituency that is dominated by petrochemicals and vehicles. The vehicle industry's position is different from the last time that we faced an economic downturn, because we are now in a global economy—a point that I made at the outset. Vehicles, like any other product and commodity, are now global products. The Vauxhall Astra, which is made in my constituency, is also made in several other countries, and its components are made globally—as far afield as Australia.
We need to ensure that in finding a solution, we think globally, and I welcome the fact that Lord Mandelson has made a real commitment—some people describe it as a conversion—to manufacturing. He is meeting the Society of Motor Manufacturers and Traders, and that will be an important discussion. It has been well trailed that the SMMT will press for support through the European Investment Bank to ensure that proper support mechanisms are in place for industries such as the vehicle industry, which is so important to our economy, particularly in the north-west. I urge my right hon. Friend the Chancellor to give every possible line of support to the ongoing discussions, because, if in the worst case scenario, General Motors or Ford goes into chapter 11 bankruptcy, the consequences in Europe will be dire indeed—not against the background of rubbish products, but against the background of high-quality products that have a future market and deserve protection.
Finally, I should say that I have been somewhat surprised. Given that the Tories demanded this debate, I thought that we would hear some great alternative solutions from them. What I want to find out from the wind-ups is whether the Opposition are in favour of tax cuts now to boost the economy. Will they vote against the £60 payment to pensioners and the increases in child benefit and tax credit? [Interruption.] Of course they will have time. Let us hear their views.
No, I will not give way.
Does the hon. Member for Tatton think that the recession is good for the health, as his party's health spokesman does? Those are the questions that the nation wants answered. If they are to be a credible Opposition, they cannot just pontificate—they have to come out with policies that mean something to the hard-pressed people we represent.
Through you, Madam Deputy Speaker, I thank Mr. Speaker once again for asserting the right of Parliament to debate this Budget—for that is what it is—before its principal element comes into force next Monday. This is the debate that the Government did not want to have.
We have heard from the Conservative Benches a reflection of the anger and bewilderment felt in the country and expressed in the media at how Labour has failed once again in its stewardship of our national finances—mortgaging our futures and those of our children and grandchildren to try to secure their own. The Government are frittering away the golden legacy that they inherited from my right hon. and learned Friend Mr. Clarke in 1997.
The Government borrowed through the good years, when more prudent nations were piling up surpluses, and they ran a structural deficit when they should have been paying off debt. They have sheltered behind a bogus set of fiscal rules that failed to constrain reckless borrowing in the good times and was promptly junked when the going got tough. As recently as May this year, the Prime Minister was extolling the sustainable investment rule—that debt should not exceed 40 per cent. of GDP. On Monday, without a hint of an apology, the Chancellor told us that debt will now reach 58 per cent. of GDP, casually admitting that the Government will have doubled our national debt to £1 trillion. That is one third higher in real terms than our national debt when we had just finished fighting the second world war.
Over eight years, the Government have repeatedly projected a return to fiscal balance a few years down the line, and they have repeatedly been wrong. On Monday, they did so again in the pre-Budget report, learning nothing and forgetting everything. The Government project a short and shallow recession while the weight of expert opinion sees a longer and deeper one. The Government claim that Britain is well prepared, but all the evidence from the OECD, the International Monetary Fund and the European Union is that the recession here will be worse than that of any comparable economy. They forecast a rapid return to above-trend growth in 2011 on the basis of no evidence whatever. To gloss over the black hole in their numbers, and ignoring the warning from Ruth Kelly that revenues will be slow to recover, they assume in the pre-Budget report a fantasy acceleration of growth in Government revenue from 2.8 per cent. a year to 4.1 per cent. a year. That is £20 billion a year in revenue conjured out of nowhere by the manipulation of the figures.
The markets have not been deceived, and nor should the people be. The cost of insuring British Government debt has increased tenfold, and in the past week it has gone up by 50 per cent., three times the rate for German Government debt. As my hon. Friend the Chancellor observed, thanks to the Government's profligacy—
I am sorry; I am getting ahead of myself.
Thanks to the Government's profligacy, the full faith and credit of the United Kingdom is now rated less highly by the markets than the promises of companies such as Nestlé and British Petroleum. Sterling has declined 25 per cent. against the dollar—more than the 1967 "pound in your pocket" devaluation and more than the 1992 exchange rate mechanism devaluation. And what is the Government's solution? Their big plan, their answer to a recession caused by reckless borrowing and excessive debt, is more reckless borrowing and still greater debt. Their answer is to fund temporary cuts in VAT at a time when prices are falling anyway, and when the Prime Minister and the Governor of the Bank of England are warning against the risks of deflation, followed by increases at the very point when the economy is supposed to be coming out of recession and will need all the encouragement it can get. Borrow now, pay later.
I am puzzled by one thing the hon. Gentleman said, given the powerful case that he is making about the problems in the public finances. Why does he think that the bond market, which is far deeper and more liquid than the credit default swap market, has seen a 0.5 per cent. fall in the 10-year bond yield over the past month? Is that market getting it wrong where the credit default swap market is getting it right?
Puzzled and confused seems to be the Liberal Democrat position on many things. There are many other factors driving the corporate bond market, but only one factor drives the sovereign debt credit default market, which is the creditworthiness of the United Kingdom Government.
This tax policy is driven not by the economic cycle, but by the electoral timetable—a £20 billion tax cut before the general election financed by a £40 billion tax increase afterwards. That is just the bit of the iceberg we can see. We have heard during the past 24 hours that the Treasury's plan was to use more realistic assumptions, and to announce a tax increase package including an extra £5 billion a year of VAT after 2011 by introducing an 18.5 per cent. rate. Clearly, the Prime Minister, who promised us transparency, did not approve of such candour.
I am sorry, but I have not got time.
The Chancellor tells us that he considers all options before a Budget, but he did not test the credibility of the House by suggesting that for every one of those options, a fully worked-up explanatory memorandum is produced and signed on the behalf of a Minister by a civil servant.
The Government's solution is increased taxes for everyone earning over £19,000 a year. We have heard from the delusional tendency on the Government Benches about the delights of a higher top tax rate for high earners, but we have heard from several hon. Members this afternoon that the Institute for Fiscal Studies estimated that the net effect of the new top rate will be approximately zero, meaning, as usual, that middle-income earners will be left to foot the bill as the Government seek to fill their black hole with permanently higher council tax, permanently higher fuel duty, permanently higher alcohol taxes and permanently higher national insurance contributions. There will be a tax on jobs for employees and employers alike.
As my right hon. and learned Friend the Member for Rushcliffe pointed out, all that is to pay for a short-term tax cut that Britain cannot afford, and that will not save us from recession, business failures, soaring job losses and home repossessions. It will not save us because, as my right hon. Friend Mr. Jack pointed out, the reason people are not spending is not because goods are too expensive to the tune of 2.5 per cent. but because they are over-indebted, worried about their borrowing capacity and their creditworthiness. Their houses are shrinking in value, their jobs are at risk and they do not know whether they will be able to borrow to fund the big-ticket items that they want. The Government say—
I will tell you. They say that we will do nothing. They are wrong, and they know that they are wrong. Doing nothing is not an option, but neither is doing just anything and borrowing to pay for it. A temporary tax cut when prices are falling, funded by promises of tax rises in the recovery, is as good as doing nothing. What is needed is a targeted response to the real underlying problem, which is the credit crunch. The CBI and the Governor of the Bank of England agree that getting lending going again is the critical test—far more important than a temporary cut in VAT.
My hon. Friend the shadow Chancellor set out this afternoon a specific proposal for the creation of a state credit insurance institution to guarantee loans to businesses in order to get credit flowing to save jobs and businesses in this Labour recession. We have already announced a raft of targeted measures to help families and businesses and save jobs, including a £2.6 billion package to support employers taking on new staff, a cut in national insurance contributions for the smallest employers, a council tax freeze and, most importantly, an automatic right for smaller and medium-sized businesses to defer their VAT payments by six months. That would pump £10 billion of working capital into the corporate sector of Britain as of right, not after a mountain of form-filling and a delay intermediated by the banks, which is what the Chancellor's small firms loan guarantee scheme expansion would involve. That is a coherent package that would not place a tax bombshell under Britain's future.
The Government have made their choice—short-term tax cuts before an election, followed by a massive tax hike after the election—just as they did in the previous two elections. We have made our choice, too: fiscal prudence with a sustainable path for the growth of public spending and a focus on where the real problem lies, getting credit flowing again, and helping families and businesses in the meantime with properly targeted help.
The Prime Minister said that he had abolished boom and bust, so he did not notice that the boom was based on a bubble and financed by a mountain of unsustainable debt. He deluded himself and the country into mistaking the creation of credit for the creation of wealth. We had the illusion of boom and now we have the reality of a bust. Now that the bubble has burst, his only answer, like a junkie reaching for one last fix, is to borrow still more, but he cannot avoid the truth. This recession was caused by excessive debt and we cannot borrow our way out of debt.
The Prime Minister has planted a tax bombshell under the British people. The clock is ticking, but the British people are not fools. They know that Britain can no longer afford this Government. His fiscal rules are gone, his reputation is shattered, his economic policy is crumbling before our eyes and he no longer has the authority or the credibility to lead Britain through the economic challenges ahead. For years he has lived on borrowed money; now he is living on borrowed time.
We have had a thoughtful debate, once we got past the early bombast from Mr. Osborne. The debate in all parts of the House has broadly been very thoughtful. Hon. Members have talked about the seriousness of the challenges that we face. We have toured the economic history, talking about Budgets from 1993, 1981 and 1967, and we even went back to Snowden. There is a broad consensus in all parts of the House that the events that we have seen in the world economy over the past 12 months have not been seen in any of our lifetimes. This week the biggest bank in the world had to be bailed out by the American Government. That is evidence of the sheer scale of the global problems facing every country in the world.
Extraordinary times require extraordinary measures. Evidence of the extraordinary times is the fact that Mr. Clarke, having long been an opponent of Bank of England independence, brought himself to support the Bank's role in the current events. As Mr. Jack said, there is great uncertainty. People are very worried about the economic events that they see around them. That is why the pre-Budget report is so important.
Two things are clear from this debate. First, there is a big difference. We on the Labour Benches believe that we should act now to support the economy; the Conservative party does not. Secondly, the Conservative party is not prepared to take the tough decisions in the future to bring the public finances back into line after the problems caused by the recession.
We have set out the forecasts. We are increasing debt and increasing borrowing, because that is the right thing to do, as part of the £20 billion fiscal boost announced by the Chancellor, which includes cutting VAT, extra cash for families and pensioners, income tax cuts and speeding up investment to support jobs, as well as extra help for small businesses in particular, which goes considerably further than the measures that the shadow Chancellor has announced.
I want to respond to comments made in the debate.
We had a detailed discussion about the importance of the fiscal boost, which was clearly and well argued for by my right hon. Friend Ruth Kelly, who pointed out the limitations of monetary policy at a time like this. Yes, we need monetary policy and action to support the banks and get them lending again, which is why the action of the Royal Bank of Scotland at the weekend has been welcomed as a step forward, and we do of course need to go further. The hon. Member for Tatton seemed to be calling for radical monetary policy; it sounded to me as if what he was actually calling for was an end to the independence of the Bank of England and for him to set interest rates instead.
We believe that now is an important time to use fiscal policy, as do other countries. In Europe, where major countries' debt levels are higher than ours, fiscal action is being supported. The President of the European Commission said just this morning that he is supporting a £160 billion economic recovery package across Europe. In America, for Republicans and Democrats alike, their debt is higher than ours and their borrowing is higher than ours. Yesterday, President-elect Obama announced a fiscal boost of more than 3 per cent. for the American economy, when he said:
"The consensus is this, that we have to do whatever it takes to get this economy moving again".
Germany, Spain, the US, Australia, Japan, China and other countries across the world are all introducing fiscal boosts for their economies because they know that there is too much at stake for Governments to stand back and allow the recession to take its course. They all know that the nature of the shocks to the financial system, alongside falling inflation, means that monetary policy is not enough. Even the International Monetary Fund has said— [Interruption.]
My understanding of the background to the PBR on this point is that the Treasury wanted to put in credible figures for two or three years ahead to show how all this was going to be paid for before returning to stable policy, but Downing street did not. Is it not the case that more tax increases were originally going to be put in than eventually appeared and that they have been replaced by wholly incredible growth forecasts, supposedly getting us back to 3 per cent. growth by 2012?