Economy, Pensions and Welfare

Part of Debate on the Address – in the House of Commons at 6:57 pm on 15th December 2008.

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Photo of Michael Meacher Michael Meacher Labour, Oldham West and Royton 6:57 pm, 15th December 2008

Like most other speakers, I want to concentrate on the recession and how we should be dealing with it. Let me say at the outset that I strongly support the Government's fiscal stimulus. When I listened to the shadow Chancellor, I heard nothing that persuaded me to change my mind about the fact that the Tories are making a very big mistake if they believe that showering the banks with billions of pounds of public subsidy at taxpayers' expense is compatible with treating the situation of the rest of the population in the real economy as a no-go area, with retrenchment and massive public expenditure cuts.

Having said that, I believe that the means that have been chosen to deliver the fiscal stimulus need re-examining. Let me explain why. First, the Government are obviously right to try to increase demand by trying to get the banks to lend more credit and putting money directly into people's pockets, but we seem to be getting the worst of both worlds. The Chancellor keeps urging the banks to pass on lower interest rates and to lend more credit, but it is just exhortation without any sanctions. There are no targets for lending in exchange for the billions of pounds of taxpayers' money that the banks have received, and no penalties for falling short. I regret that my right hon. Friend the Secretary of State for Work and Pensions has left the Chamber. In his statement about welfare reform, conditionality was all the rage, but when it comes to the banks, in a much bigger economic forum, conditionality appears to go out of the window. That is a mistake.

The Government have also tried to put money into people's hands directly through the 2.5 per cent. VAT cut. The trouble is that it is extremely costly in terms of lost revenue and it is disproportionately less effective. The deadweight cost of £12.5 billion in increasing demand is extremely high in the context of retail discounts, which have already been given, of 20 or 30 per cent. A far better way of trying to get money spent is to give to all people on the standard rate or below non-cashable vouchers for domestic goods and services that expire in, say, three or six months. They would have little option but to spend those vouchers. That would have been a much better idea.

The second area where the fiscal stimulus could be managed differently and rather better concerns the question of affordability, about which there has been some discussion today. The Tory argument is that the level of public borrowing is extremely high, which it is, and that we therefore cannot afford the fiscal stimulus. There are two ripostes to that argument. First, the Leader of the Opposition has made it quite clear several times that he is fully in support of the automatic stabilisers, which give benefits to people when they lose their jobs, and that they should apply in the normal way during the recession. Those stabilisers, of course, account for the vast majority of the increase in borrowing. If we look at the Treasury figures, we see that the Budget deficit will rise from 3 to 7 per cent. of GDP precisely because of the automatic stabilisers. All that the Government have done is add a further 1 per cent. To say that we can afford 7 per cent. of GDP but we cannot afford 8 per cent., which appears to be argument of the Leader of the Opposition, is totally unconvincing.

There is another answer to the central dilemma of alleged affordability that I fear neither Front-Bench team seems ready to contemplate. To be fair, the Chancellor did impose a higher tax rate in the pre-Budget report: 5 per cent. more for those earning more than £150,000, starting in 2011. I regard that as welcome, but it is little more than window dressing. The money raised will be only about £670 million, the rise applies to only 1.3 per cent. of taxpayers and the money will not start rolling in until 2011, whereas we need the money now.

That approach would have potential if it were used more widely, however, and I shall give two or three examples. First, companies are currently given their CO2 pollution allowances free. After the EU Council last weekend, they will be required to buy permits by auction; even if they bought just 10 per cent. of those permits, the Government would raise up to £20 billion to £30 billion a year. Shell and BP alone this year made windfall profits calculated at more than £20 billion, and they are expected to make a further unearned profit of £9 billion over the next four years from being given those permits for free. They should be made to pay for them in full.

Secondly, an extremely interesting report was written recently by the celebrated tax accountant specialist, Richard Murphy, called "The Missing Billions". It details precisely how the Treasury loses more than £13 billion a year from tax avoidance by super-rich individuals, plus a further £12 billion from tax avoidance by the 700 largest corporations. These are all official figures. In addition, the Treasury estimates that a further £8 billion is lost from artificial tax restriction measures, such as switching to another family member, an offshore company, a trust or a tax haven. On top of that, tax evasion, which is of course illegal, is reckoned to lose the country about £10 billion a year. If even half that total of £43 billion a year could be clawed back by a strengthened and better-resourced Revenue and Customs, the fiscal stimulus would not need to depend at all on unfunded tax cuts or increased borrowing.

I have one more example. It is easy to be accused of sloganising, but this example is for real. The Inland Revenue shows that those paid more than £100,000 a year—roughly 2 per cent. of the population—now receive no less than £8 billion a year in reliefs and allowances. Pension tax relief alone costs the nation £36 billion a year, and higher rate taxpayers get more than half of that. If those subsidies to the richest 2 to 3 per cent. of the population—and after all, they are the ones who need it least—were significantly pared down in the current extraordinary circumstances, that could certainly generate another £10 billion to £15 billion a year for the Exchequer. Finally, it is estimated that if the iniquitous non-dom rule were done away with, another £5 billion or so would be available to the Treasury. For all those reasons, the fiscal stimulus is not only affordable, but it could be extended substantially if we needed to do that—and we may well—without any increase whatsoever in borrowing or unfunded tax cuts.

The third way in which I believe the fiscal stimulus could be better managed concerns public expenditure. We know that the PBR indicates a proposed cut of £37 billion for the years 2011 to 2014. Instead of expanding public expenditure programmes as a potent stimulant of economic activity, it is proposed that public expenditure be reduced to staunch the ballooning Budget deficit caused by bank recapitalisation and unfunded tax cuts.

What is really needed is a carefully targeted increase in spending in sectors of the economy that are threatened by sharp decline or even meltdown, particularly construction and housing. It could be paid for by increased taxes, national insurance contributions and reduced benefit payments that come from higher employment, by the tax surcharge on the super-rich and corporate tax avoiders that is clearly needed at the moment, and by an increase in the minimum deposits that the commercial banks are obliged to hold with the Bank of England, which could then be lent directly to the Government for new spending programmes. There are many options that I hope the Chancellor will look at—

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