Value Added Tax

Consolidated Fund Bill – in the House of Commons at 2:35 pm on 17th December 2008.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury) 2:35 pm, 17th December 2008

I beg to move,

That an humble Address be presented to Her Majesty, praying that the Value Added Tax (Change of Rate) Order 2008 (S.I., 2008, No. 3020), dated 24 November 2008, a copy of which was laid before this House on 24 November, in the previous Session of Parliament, be annulled.

Let me move on from the end of term spirit to a very serious issue, which is the motion to annul statutory instrument No. 3020 relating to value added tax. There are two reasons to be concerned about the VAT change, and we want to register that fact from the Opposition Benches. Some people do not believe that there should be a fiscal stimulus or think that it would be damaging; I expect the Conservatives to make that case in due course. My approach and that of my colleagues is somewhat different: we have no objection to the principle of a fiscal stimulus, but we think that this is a bad one that is not likely to be effective even on its own terms.

Perhaps I should start with the Chancellor's own language in the pre-Budget report, when he declared:

"I have decided that the best and the fairest approach is a measure which will help everyone"—[ Hansard, 24 November 2008; Vol. 495, c. 483.]

and said that he proposed to give back some £12.5 billion to consumers. Our view is that that is not the best and fairest approach, that it will not help everyone, and that it certainly will not give £12.5 billion back to consumers. That is not to say that it is completely hopeless. There is a case for providing a fiscal stimulus through this measure that does not rely on "best" or "fairest" or consumer stimulus. It is a somewhat mechanical approach. What will happen—we can already see it happening—is that this measure will be absorbed in increased retail margins for everything from small shops to Sainsbury's, Asda and Tesco. Of course, that is putting money into the economy; no doubt if Tesco earns a little bit more profit as a result, that will be reflected in its share price and feed through into pension funds. If the Government had been honest with us and said, "Actually, this has got nothing to do with helping the consumer—it's all about putting £12.5 billion into the economy in the quickest way we can think of, and it's marginally better than dropping money from helicopters", we would find it difficult to quarrel with the logic. However, they have not done that—they have grossly overstated their case, and so we need to have a look at it and at its weaknesses.

The policy makes extraordinarily optimistic assumptions about the course of the economy. It assumes, as was said in the pre-Budget report, that we expect a recovery in 13 months from now. Because of that very optimistic view of the course of the British economy, this measure could have some perverse and negative consequences that were clearly not thought through in the Treasury. As we approach the end of next year, most people will have to look forward to an increase in VAT that may be greater than a return to 17.5 per cent.—to reopen the whole issue of what the Government really intended—as well as an increase in income tax, although it is called national insurance. Most rational consumers will calculate that they face a reduction in real income and adjust their budgets and spending patterns accordingly.

There is another, more subtle effect at work. Most economic forecasters now expect that next year we will see something that we have not seen for decades, possibly generations—namely deflation, whereby prices fall as they did in the 1930s and at various times in the 19th century. That is now factored into the assumptions of some of the money markets, so the Americans talk about it quite openly.

In a deflationary world, prices fall. When consumers see prices falling, they hold back from spending, so the VAT cut has the perverse effect of encouraging deflationary expectations. That encourages people to spend less, rather than more. Those are two possible perverse consequences of the measure. I am not predicting that that would happen, but before we glibly assume that the VAT cut is simply an injection of consumer spending, I am pointing out factors that could work in the opposite direction.

Secondly, on the impact of consumer behaviour, we need to take into account the fact that we are talking about a very small change. Mr. Steinbrück, the German Finance Minister who has often been quoted in the Chamber in the past few weeks, chose a singularly unhelpful example: he asked, rhetorically, whether people would respond to a change in the price of a DVD from £39.90 to £39.10. That is quite a good example, and I can give others: one that I have quoted in the past is the £5 off the £220 flat-screen TV from China. There is also the example of 60p off a £25 meal. One can question how much that is likely to influence the behaviour of a rational consumer.

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Photo of James Plaskitt James Plaskitt Labour, Warwick and Leamington

Will the hon. Gentleman explain why he is opposed to giving a typical household in his constituency a tax break of £300 next year? That is what the VAT reduction does.

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HM Government has historically not been too keen on tax cuts either.

Submitted by Ben Hoskin

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I shall go on to explain that we would provide the tax cut in a better, fairer and more effective way. My colleagues and I are not opposed to cutting taxes for our constituents; we just think that the tax cut could be done more intelligently and in a more targeted way.

There is another cost factor related to the smallness of the cuts. Many shops are discounting aggressively. In an environment in which shops are cutting prices by 20, 25 or 30 per cent., the effect of the change in VAT is invisible and therefore likely to have very little impact. Before I leave that point, there are a couple of issues that I would like the Government to address. The first is a very specific but important point raised by the British Retail Consortium, which has been thinking ahead and worrying about the effect that the change will have at the end of next year. It has said:

"Retailers are extremely concerned at the Government's intention to end the temporary VAT reduction on 31 December 2009. This would fall in the middle of the post-Christmas sales, one of the most important times of year for the retail industry...We believe that Government should reconsider the end date with a view to extending it by at least a month."

Whatever general arguments we make about the retailing impact, that is a specific technical point that I hope the Government will have taken on board. Of course, the change that the British Retail Consortium suggests would not affect the overall arithmetic.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

On that specific technical point, has the hon. Gentleman noticed that the order that we are debating has an end date of 30 November 2009? The Government are relying on other legislation, not yet laid before the House, to extend the VAT reduction until 31 December.

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Well done for being helpful.

Submitted by Ben Hoskin

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I hope that that is a sign that the Government have an open mind about when the boom is due to occur. That is a helpful intervention, and it points to some of the inconsistencies involved.

I have a final point to make about consumer impact. One particular sector concerned about how the tax change will feed through is road hauliers, who can of course get relief from value added tax but who will be paying increased duty on their fuel. The issue is of particular concern to hauliers operating in rural areas, and the retailers who depend on them for their supply. I wonder whether the Government have thought about the cost implications of the fact that the combination of changes to VAT and to vehicle excise duty will particularly affect rural distribution. That is of concern to many of my colleagues and to people in other parts of the country.

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Photo of Stephen Williams Stephen Williams Shadow Secretary of State (Innovation, Universities and Skills)

On the subject of costs to business, I wonder what estimate the Government made of the cost to small businesses, most of which will account for VAT quarterly. They will have suffered VAT at 17.5 per cent., but will recover it, in the fullness of time, at 15 per cent., so they will suffer a cash-flow disadvantage in the short term. They will also face real costs as they reconfigure their accounting and invoicing systems and reprint all their marketing materials. So they face real cash-flow costs and an actual cost when the change is implemented.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

My colleague eloquently made a point about the administrative costs of the change, particularly for small business—a point that I wanted to make in slightly more detail. As he rightly points out, in this country, 2 million companies are registered for VAT, and many of them will have the kind of practical problems that he describes, which clearly were not anticipated in the Treasury.

The Government acknowledge that the compliance costs of the measure will be £300 million. Of that, £90 million is simply the cost of conversion; it is £50 million to cut the VAT and another £45 million to convert it back again. We are talking about an enormous administrative cost, particularly to small business, in terms of managerial time and practical problems of conversion. That will substantially reduce much of the benefits. My hon. Friend mentioned some of the problems, and I shall cite a couple more from my constituency. A local garage, Broad Lane Garage, wrote to me, without any prompting from me, to say:

"This imposed change has caused us, as a small business, great inconvenience and some expense...we have had bookings cancelled...The change to our systems has taken several telephone conversations and will ultimately require someone to come into the office out of their normal working hours to make the necessary alterations to our computer system".

The company asked me to use all my efforts to communicate those views to the Government. If necessary, it will organise a petition for me, without my having asked for it.

A computer software company described some of the specific, practical problems that a company is likely to have as it works through the transition. A business man in Twickenham said:

"This VAT change is a potential disaster for businesses like mine. We run an IT company and we have just 4 days to get all our customer systems changed over. All our cash flow comes in from standing order mandates...Re-signing customer payment authorities is always difficult and the government have now given all business people particularly SMEs a real problem...If my customers take the opportunity to stop their payment mandates while they wait for us to issue new invoices with the VAT adjustment...it will be catastrophic for us and a good profitable technology business will be sacrificed for no good reason at all."

I suspect that there are many arguments of that kind being aired in companies around the country.

The final criticism that I want to make is about the Government's claim that the VAT cut is the fairest approach. There are very simple ways of testing the proposition that a tax change is fair. The Institute for Fiscal Studies will run through different tax changes to demonstrate their impact on different income groups. It has done that and points out that the impact of the VAT change on the richest 10 per cent. of the population will be to make them 1.6 per cent. better off, and the impact on the poorest 10 per cent. will be to make them only 0.6 per cent. better off. Obviously, most of the commodities most used by people in low-income groups, notably food, children's clothes and energy, at least at a lower rate, are exempt.

My final point—this partly refers to the intervention from Mr. Plaskitt—concerns the alternative that we would advance. As I said at the outset, we do not believe that the Government should do nothing; there is a case for a fiscal stimulus. There are two elements to our answer. First, there are tax changes that are desirable. We have argued for a progressive change in the income tax system, cutting taxes for people at the bottom end of the income scale and raising them at the top by changing the system of allowances. That would have a differential effect on spending. It would be tax-neutral; it would not affect the deficit or public debt. However, it would provide a stimulus to the economy.

The Institute of Directors has surfaced as an improbable ally, saying that

"an income tax cut would have put significant cash directly into pay packets, ensuring that people noticed and providing a more effective stimulus."

The argument that one should use the income tax mechanism rather than VAT has broad support in that sense.

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Photo of Frank Field Frank Field Labour, Birkenhead

May I just ask whether the institute supported the idea of raising taxes on the rich?

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This is to your credit, Frank Field: you're asking a...

Submitted by Ben Hoskin Continue reading

Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

I do not think it did, so the right hon. Gentleman could accuse me of quoting selectively; I did on that occasion.

Tax is one mechanism. The other mechanism that provides a much more direct fiscal stimulus is the use of public investment. We welcome the bringing forward of public works projects, but I noted in an earlier intervention in the Chamber that the overall effect of the Government's proposals in relation to capital spending is to reduce Government public investment over the next few years, which is not the kind of support that will be needed in what I fear will be a prolonged recession. We ought to be discussing in more detail the kind of measures that can be undertaken in relation to social housing, which is currently frozen because of the difficulties in housing associations, to which I referred in Prime Minister's questions; the opportunity to roll out much more effectively a programme of home insulation, which is happening at a snail's pace; investments in public transport, and others.

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Photo of James Plaskitt James Plaskitt Labour, Warwick and Leamington

I thank the hon. Gentleman for taking a further intervention. Does he not see a problem with fairness in his argument? Half of pensioner households already do not pay income tax. The VAT reduction is worth £150 a year to them. Why is he against a £150 tax break for pensioner households?

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury)

Clearly, supplementary measures are needed to deal with pensioners and people who are not in the tax bracket. I was referring to an overall package that would be a good deal fairer than the one proposed by the Government, and more effective in the long term because it would be built into people's expectations.

I finish by continuing a point that I made on Monday. The argument about how to stimulate the economy is moving on very fast. We are talking about cuts in interest rates and about fiscal policy. The Americans are already talking about quantitative easing, which is printing money—that is, dropping money from helicopters. That is the kind of environment that we are getting into. When we reconvene in the new year, I expect that the debate will have moved on to more dramatic and potentially dangerous departures in policy. Although the statutory instrument will undoubtedly inject some demand into the economy, it is seriously defective and we intend to vote against it.

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Photo of Frank Field Frank Field Labour, Birkenhead 2:51 pm, 17th December 2008

I am delighted to follow Dr. Cable. I want, if anything, to add a sense of urgency to the case that he deployed. As we were reminded, we rise tomorrow for the Christmas recess, and when we return the economic landscape will have changed even more than it has in the past few weeks, and will have changed much for the worse.

Our debate today should concentrate on the most effective way the Government could spend any extra money that they might consider spending, so that many of the firms that currently employ our constituents have a chance of getting credit and opening after Christmas. Unless we radically change the credit lifelines to many firms, a considerable number of our constituents will not have firms to go back to after Christmas.

The sense of urgency that I hope we will demonstrate in the debate comes from the statistics that we already have. We know, for example, that in the worst slump in 100 years, national income—GDP—fell by 5 per cent. We know that probably the most accurate estimate shows GDP already falling at a rate of 4 per cent. and escalating. One hopes that the Government are right, that this is just a temporary blip, and that things will change. I fear not. I fear we may be entering a period of the most severe economic chaos that anyone alive can remember, and we need to judge whether the VAT increase is in any way appropriate as the stimulus to counter that downward trend.

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Photo of Tim Boswell Tim Boswell Conservative, Daventry

Does the right hon. Gentleman agree that the real viciousness of extreme deflationary conditions is not so much the statistical decline in GDP, which he is right to emphasise, as the entirely disproportionate increase in unemployment that is already becoming evident and is likely to accelerate in the coming year?

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Photo of Frank Field Frank Field Labour, Birkenhead

That is my next point. I am grateful that I gave way, not because it is not always a pleasure to do so, but because my hon. Friend Mr. Mullin told me that I spoke about a VAT increase, when we are, of course, debating a VAT decrease. Given the crazy economic world we are in, it may well have been an increase, rather than a decrease. I am immensely grateful to him for that.

The data published today on unemployment show just how serious the situation is. If we turn to the appendices in the pre-Budget report and look at the set of statistics to which the Government have nailed their colours—levels of unemployment at the end of next year—we know that with the benefit count passing the million mark today and the International Labour Organisation rate coming up towards 2 million, sadly those thresholds will be crossed much earlier than the Government hope and that the pre-Budget report suggests. I believe the Government have very limited room for manoeuvre in a reflationary package, so I again question whether the VAT decrease is the appropriate policy response. For those reasons I shall vote against the Government today.

There are two huge pressures limiting the Government's room for manoeuvre, the first of which is the sheer size of the debt that they hope to raise in the gilt markets. I am less optimistic than most people about the Government's ability to raise that debt. Long-term interest rates will certainly be pushed up, which will damage economic recovery as a result of seeking that level of debt, and we may have the horrendous scenario in which the Government cannot sell their gilts. Then, we are in a new ball game. The Bank of England will clearly be instructed to buy those debts, and again the outcome at which the hon. Member for Twickenham hinted will be upon us—the printing presses will be rolling to pay for that, with all the consequences if one major country operates that policy in isolation from others.

What the Government can do is restricted by debt. Unlike most people, I believe that we face a threat of inflation. I do not understand how the Bank of England keeps talking about deflation. Oil prices in the spot market are rising substantially. We know about the fall of sterling in normal circumstances, and we may say that these are not normal circumstances. The fall in the value of sterling already would put 2 percentage points on inflation. It is an illusory luxury to believe that somehow next year the economy will be faced with a negative rate of inflation, rather than a real inflationary threat. That will certainly put a stop to a Government strategy of wishing the Bank of England to cut interest rates.

Given the limited resources at the Government's disposal, is a reduction in VAT the most effective way of trying to mitigate the economic hurricane that is already beginning to affect our constituents and will affect many more after Christmas?

I disagree with the policy of increasing public works advocated by the hon. Member for Twickenham. I am always delighted to see my right hon. Friend the Financial Secretary on the Treasury Bench, but never more so than now, because I want to suggest that public works, sadly, have a far more limited role to play in recovery than one might think. The biggest public works programme is the Olympics. In the two and a half years since the Olympic programme was announced, with huge investments from taxpayers and lottery players, the London borough of Newham, part of which my right hon. Friend represents, has issued more than 50,000 new national insurance numbers to non-British workers.

The idea that increasing public sector investment programmes will lead to a significant increase in the employment of British workers, sadly, is a fallacy. That raises long-term questions about what our schools are doing if they are producing people who cannot get or hold down those jobs, but that is a debate for another day. I do not believe that using moneys to increase public investment is a viable or effective option for the Government to pursue to prevent an horrendous scenario engulfing all too many of our constituents.

There is, however, one thing that the Government can do, and before Christmas: reallocate the money that would be lost on reducing VAT and use it to try to extend, even more effectively, credit lines to firms that will not open after Christmas if they do not get credit lines before it. The situation is that serious.

The Government are taking some measures, and I rejoice in that fact. However, it is clear, from reports of employers in our own constituencies and from what is happening to world trade, that something most alarming is happening. I shall state again a fact that I cited in the debate on Monday: the rates for shipping and for transporting goods—to China, for example, which we hope will still be an engine for getting us out of this slump or recession—are one tenth of what they were last year.

That is not because the Chinese economy is seizing up, although it may well do, but because people who have goods that they wish to sell in the export market are worried about whether they will be paid—in other words, about whether the bills of exchange will be honoured. In that context, we should concentrate all our attention on ensuring that we extend the lifeline to those firms, and we could do that before Christmas. For that reason, and the others that I have briefly tried to marshal, the Government should take that course with the money that they plan to allocate to reducing VAT.

Like the hon. Member for Twickenham, who moved the prayer against this order, I believe that cuts in VAT are like spitting in the face of an economic hurricane. They will have no effect whatever, given that firms are already cutting prices by up to 50 per cent. in an attempt to survive. I beg the Government to reconsider. Nobody doubts their genuine intention to try to protect as many of our constituents as possible from the awful consequences that are beginning to unfold before our very eyes and from the horrendous unemployment that we will see after Christmas, and that has already begun. We cannot stop that, but we could mitigate it. Many of the firms in our constituencies that will not open after Christmas unless they get credit could get it if the Government used the money more effectively.

We Members have secure employment, at least until the general election. I hope that we will act this afternoon to try to protect the jobs of the people involved and give them something like the sense of security that we have as Members of Parliament. We should, if need be in the Division Lobby, persuade the Government that the billions to be used for reducing VAT could be far better used to make sure that emergency credit lines are extended to firms that will otherwise fold and add enormously to the unemployment totals in the new year.

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

I now have to announce the result of a Division deferred from a previous day. On the motion relating to the Christmas adjournment, the Ayes were 266 and the Noes were 214, so the Question was agreed to.

[The Division list is published at the end of today's debates.]

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury 3:03 pm, 17th December 2008

In our response to the pre-Budget report statement, in the emergency debate that followed and in many other forums, we Conservatives have made it clear that we oppose the Government's so-called fiscal stimulus package, which involves borrowing yet more billions to deliver the temporary VAT cut that we are debating today. We will therefore vote against the order, although as Dr. Cable said, our reasons for doing so are different from his.

There seems to be a disconcerting and growing gap between the economic scene as viewed by the Prime Minister and the picture that greets everybody else. The Prime Minister denies any responsibility for the problems facing the country; he claims credit for Britain's being "well placed" to meet them. He is apparently blind to the mounting evidence that his solutions, far from having saved the world, are not working. Instead of recognising the policy failures that led us to our situation today and addressing the real problem that faces our economy now—the seizure of the credit system—he has chosen to embark on a reckless exercise that will increase debt through yet more borrowing to fund the temporary VAT cut, which just about everybody except him agrees will be the least effective stimulus to the economy. It is the Prime Minister all over: unaffordable and ineffective.

The view from within the Downing street bunker seems to go something like this. Due to circumstances entirely beyond its control, a Britain in which boom and bust has been abolished is the completely innocent victim of a foreign-inspired recession. But thanks to the Prime Minister's prescience in borrowing and squandering vast amounts of money in the years of economic growth, Britain faces the recession with the largest budget deficit and the most unbalanced economy of any developed country. According to the Prime Minister, those conditions make us uniquely well prepared to weather the economic storm.

Having already "saved" the world banking system, the Prime Minister naturally considered carefully the challenges that this foreign recession presented to the British economy and decreed that his rather dusty textbook dictated a dose of Keynesian fiscal stimulus to get the country back on track. According to him, his prescription was instantly endorsed by the entire leadership of the free world, assembled for the specific purpose of receiving his guidance. With that reassurance behind him, he returned home and used his well known and unique powers of empathy with the British people to conclude that the best way to stimulate them was to offer them a short-term cut in VAT with the promise of a massive increase in taxation just as the economy is struggling to break out of the recession and resume growth.

The reality of the situation that we face is rather less rosy. The Prime Minister has lectured our neighbours for a decade about the superiority of his management system, but his chickens are coming home to roost. This recession is not—as he would have us believe—an external shock to an otherwise fit, lean and healthy economy momentarily blown off course by a foreign disturbance, but rather a warning symptom of the underlying sickness of an economy that has become bloated on record levels of public and private debt.

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Photo of Tim Boswell Tim Boswell Conservative, Daventry

On the assumption that, as we have often been told, left talks to left, is it not particularly remarkable that Herr Steinbrück of the Social Democrats described the Prime Minister's whole exercise as "crass Keynesianism" that, in his words, will take a whole generation to pay off?

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

My hon. Friend is absolutely right; unsurprisingly, perhaps, I shall come to Mr. Steinbrück in a moment.

Far from being well prepared, Britain is uniquely vulnerable to the reality of a bust that has followed the illusion of a boom. Unlike their neighbours and competitors, which used the good years to pay down Government debt, our Government went on borrowing, so that we are entering the recession with a huge structural deficit. On top of that structural deficit, we are going to pile the additional borrowing that the automatic stabilisers naturally deliver in a recession. We shall get to more than £100 billion of borrowing next year, even before the Prime Minister's proposed fiscal stimulus is added. That will double our national debt to £1 trillion. That leaves us not well prepared, but, in the words of Alan Greenspan, more vulnerable than any other major economy.

In the words of the Minister for the Olympics just two days ago, Britain now faces

"a recession deeper than any that we have known"

—deeper than those of the 1980s and 1990s. That is the prediction of a senior member of the Prime Minister's Government. People do not need to go to Germany, as my hon. Friend Mr. Boswell suggests, for a verdict. They do not need to go to Brussels, to the European Central Bank or even to the currency markets, which are sending a pretty clear signal. They do not need to listen to the Opposition to get a verdict on the Prime Minister's policy; they can hear it openly and publicly expressed by one of his own senior Ministers.

Leaving that Minister aside for the moment, the Prime Minister seems mainly to be basing the justification for his policy initiative on the endorsement he claims to have from foreign observers. He says that everybody except those on the Conservative Front Bench supports his plan for a fiscal stimulus funded by yet more borrowing, so I have been looking at what various people have actually said about the Prime Minister's proposals, and I have discovered that, on his definition, the Conservative Front Bench has turned into rather a broad church. Indeed, it welcomes the German SPD Foreign Minister who said:

"Just because all the lemmings have chosen the same path, it doesn't automatically make that path the right one".

For political balance, he would be joined on our Front Bench by the CDU budget spokesman, who says:

"The tremendous amount of debt being offered by Britain shows a complete failure of Labour policy."

Next along would be the president of the European Central Bank, who explained that fiscal policies need to ensure the longer-term sustainability of public finances, implying for some countries that there is no leeway for fiscal loosening. He says:

"You have unfortunately countries that have already no room for manoeuvring. In those particular cases fiscal activism, instead of having a positive impact on the economy, could harm confidence".

And the EU Commission—an unlikely joiner of our Front Bench—says:

"It is clear that not all Member States are in the same position. Those that took advantage of the good times to achieve more sustainable public finance positions... have more room for manoeuvre now...For those Member States, in particular those outside the euro area, which are facing significant imbalances, budgetary policy should essentially aim at correcting such imbalances."

I do not think that there could be a clearer or more specifically targeted reference to the UK without naming it directly.

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While I was going to critise him for being party political, it is quite an enjoyable read.

Submitted by Ben Hoskin

Photo of Graham Stuart Graham Stuart Conservative, Beverley and Holderness

My hon. Friend will remember that the last time we had a Labour Government we needed to be bailed out by the International Monetary Fund, such was the deterioration in the economic reputation of this country under Labour at that time. Does he fear that with the increasing spreads on insurance of UK Government debt, that this Labour Government could be threatening our very ability to stand as an independent nation?

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

The immediate threat is to our ability to borrow in the markets, as Mr. Field said. I was reminded by someone at IBM a few weeks ago that in the 1970s a serious scheme was being put together that would have had IBM borrowing in the markets, because it was able to do so, and then lending at a margin to the British Government, who could not do so. It is now the case that a significant number of companies are able to borrow on more favourable terms than the UK Government.

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Photo of Frank Field Frank Field Labour, Birkenhead

Might I remind the hon. Gentleman that he has been speaking for longer than Dr. Cable spoke in moving the motion, and during that time we learned why the Liberal Democrats disagreed with the Government's strategy and what they would do? Might I suggest that Mr. Hammond finds some time to tell us what the Opposition would do in these circumstances?

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

I am grateful to the right hon. Gentleman for his helpful suggestion, but with your permission, Madam Deputy Speaker, unless Mr. Speaker is minded to place a time limit on contributions to the debate, I will make my point in my own way. Unlike the hon. Member for Twickenham, who essentially agrees with the concept of a fiscal stimulus, but disagrees with the way in which the Government are proposing to deliver it, we have a fundamental disagreement with the Government's approach and I am seeking to explain why.

We are considering the temporary VAT cut because the Prime Minister has boxed himself into a corner. Having proclaimed his recapitalisation of the banking system not merely as successful in Britain, but as the instrument of world salvation, he has an understandable difficulty in acknowledging the small technical problem that it is not working. Banks may have been saved from collapse, but the test of the success of the taxpayers' intervention is whether credit has begun to flow in a normal, sensible and measured way through the veins of the economy—and it has not. Businesses large and small cannot borrow, the housing market is at a standstill, car sales have fallen off a cliff as consumer confidence is shattered, unemployment is soaring, business failures are accelerating and home repossessions are climbing ominously.

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Photo of Douglas Hogg Douglas Hogg Conservative, Sleaford and North Hykeham

My hon. Friend says that the Prime Minister has boxed himself in, and I agree with that, but he has done so in one particular way. He cannot rely on the fiscal stimulus because of the level of debt that he has created. Had he not created that level of debt, he would have been able to pursue his fiscal stimulus.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

My right hon. and learned Friend is absolutely right, and the Prime Minister has boxed himself in in another way. He is now unable to recognise that the banking recapitalisation has not delivered the intended outcome. Urgent attention to the banking and credit system is what is actually required to get Britain back on track and to save the sort of businesses that the right hon. Member for Birkenhead was talking about.

The Prime Minister is unable to acknowledge that his banking rescue package now itself needs rescuing, and desperate to maintain momentum, he has produced this fiscal stimulus, not on the basis of a clear analysis of its impact on the British economy, but on the basis that some economists and politicians in other countries recommend such a measure in the very different circumstances of their own economies. He is spending more money that he has not got, piling up yet more burdens for future generations and placing the economic recovery at more risk. It seems that action has become an end in itself—hyperactivity as Government policy.

Our position is that Britain cannot afford this extra borrowing, and its problems will not be solved by this temporary VAT cut. What Britain needs is carefully thought out measures that address the real problem, which is the lack of credit in the economy because of the failure of the bank recapitalisation programme. It needs measures such as our national loan guarantee scheme, which would get banks lending to businesses again, and sustainable measures to deliver permanent tax cuts through restraint in public spending increases once the recession is over. What we have from the Government is a package that has stimulated no one, but will cost everyone.

The hon. Member for Twickenham correctly pointed out that shops in the high street are offering 10, 20, 30 or 40 per cent. discounts, and that this small VAT change is unlikely to have any significant impact. I have just been handed some figures from the CBI survey of retailers, which has come out today, and they show a ninth consecutive month of falling sales. Those figures cover the first fortnight of the Christmas trading period, including the first 10 days of the Government's VAT cut. A net balance of 55 per cent. of firms say that their trading is worse than expected, and the trading record is the weakest recorded since the survey began in 1983. Although the VAT cut will not deliver the Government's hoped-for benefits, tax increases for everyone earning over £20,000 by 2011 will deliver a disincentive to spend and a disincentive to resuming consumer confidence in the economy.

This policy is not an economic recovery package, but a political survival plan. To quote the German Finance Minister again:

"the speed at which proposals are put together under pressure that don't even pass an economic test is breathtaking and depressing".

If it is breathtaking and depressing for someone who will not have to pick up any of the bill, how much more breathtaking and depressing is it for British taxpayers? He continues:

"All this will do is raise Britain's debt to a level that will take a whole generation to work off".

I could not have put it better myself.

The Prime Minister dismisses the German Foreign Minister as playing politics, but that is precisely our charge against the Prime Minister. He is ignoring the long-term economic best interest of Britain for his own short-term political gain. Everything is politics: the 18.5 per cent. VAT rate that he was going to levy on us after 2011 was suppressed and kept secret at the last moment, leaving a black hole in the PBR, so we are left guessing where and how the burden will fall when the recovery comes.

We face a recession born of a credit crisis. The Prime Minister's banking recapitalisation has failed to stop the rot. Businesses and consumers are sliding closer and closer to the precipice, but he refuses to act where action is needed. We have put forward a detailed package of proposals that would tackle the real problems. We have even produced a draft Bill to establish the national loan guarantee scheme, but instead of taking up our ideas to make the bank bail-out work, he has turned his back on the consensus that existed when it was announced and instead pursues a mechanical, textbook-led approach that is simply not affordable or appropriate and which will not be effective in his Britain, where consumers are over-borrowed and starved of credit, facing certain tax increases in two years' time, fearful for their jobs and seeing the value of their assets shrinking.

We will not support today's ill-conceived measure or the billions of pounds of extra borrowing and future taxes that it will entail. I urge my right hon. and hon. Friends to vote against the order in the Lobby this afternoon. I also hope that those on the Labour Benches who for whatever reason reject the Prime Minister's package—they might not agree with our analysis—will join the right hon. Member for Birkenhead and find the courage of their convictions when we vote this afternoon.

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Several hon. Members:

rose —

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Photo of Sylvia Heal Sylvia Heal Deputy Speaker

Order. May I remind hon. Members that this debate has to conclude at 5 minutes past 4 and that within that time it will include a contribution from the Minister? I therefore hope that hon. Members hoping to catch my eye will exercise some self-discipline.

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Photo of Tim Boswell Tim Boswell Conservative, Daventry 3:21 pm, 17th December 2008

Thank you, Madam Deputy Speaker, I shall do my best.

I greatly welcome the contributions that have been made so far, which include contributions from those on the Conservative and the Liberal Democrat Front Benches, with their slightly different perspectives on the solution. Without wishing to put him in an invidious position, I also include the contribution made by Mr. Field, who offers both his frank and trenchant analysis and his readiness to consider alternative solutions, which will impress us all. It happens, coincidentally, that on this occasion I agree with almost every word that he said about what should be done.

I hope that I can indulge the House for a moment and take hon. Members back down memory lane. In the early 1970s, in the days when VAT was being conceived, I happened to be the head of the economics section at the Conservative research department and was, as it were, party to some of those initial discussions. Without going into the details of those discussions, I can tell hon. Members that two things were clear in principle: first, that any tax should have a broad coverage at a relatively modest rate; and secondly, that the rate should enjoy a degree of stability, which meant that we could not keep chopping and changing it.

That was essentially a wise judgment and, in fairness to Governments since, that practice has continued. Since that period, there have been virtually a handful of changes in the VAT rate, until now, when we are, in effect, committing ourselves to two changes in one year. The measure should be called the Value Added Tax (Changes of Rate) Order—one change down and one change either back to the existing level or, as is more likely, in view of what we have been told by accident, upwards from that level.

Let me make another point in parentheses. The history of the '70s, which was not very happy for Labour Governments, as has already been adverted to, shows a regular recourse to the fiscal regulator. Taxes were increased or decreased by 10 per cent. at a time by order. Those changes were designed to stimulate or curtail growth in the economy, but their effects were always well below the expected level of efficiency. That, I fear, will be the fate of today's measure.

My other point goes to the politics of the thing. My political mentor, the late Iain Macleod, who sadly died before the introduction of VAT, always used to say, in his generous way, that he was not inclined to shoot even a one-legged Santa Claus, which is both a seasonal and, I hope, a material political reference. Of course it is difficult to cast oneself as the person who wants to say no to a proposal to cut taxes. The question is whether that proposal will help the economy. Is it the most effective way of stimulating the economy to deal with the consequences that the right hon. Member for Birkenhead was so right to mention or not? That is the real test of the measure.

I want to say a couple of things about the detail of the order, because I was so impressed by representations that I received this week from a constituent—I have his permission to quote from his letter to me. His representations encapsulate in detail exactly the kinds of problems that will arise. Andrew Overton runs a company in my constituency called Overview Mapping Ltd, which provides vehicle tracking solutions for big fleets of vehicles and employs some 15 employees. In fairness, I do not wish to give all the details of the company's commercial situation, but it is fairly easy to derive from its turnover, the amount of tax revenue that Mr. Overton is already paying and the scale of his business.

Mr. Overton quotes me a figure for the decline in new sales for his business from pre-existing levels—that is, pre-credit crunch levels. In general terms, new sales have fallen by an order of magnitude, going from a rapid expansion to a virtual standstill. That will give the House some indication of where Mr. Overton stands. My concern, which he illustrated to me in figures, is about the likely cost of the change. His business model relies on monthly direct debit payments, on about 3,000 monthly collections. They are collected by a firm called Eazipay Ltd and processed for him. In effect, Mr. Overton acts as a conduit for VAT.

Let us look at Mr. Overton's costs. The cost of one man-week of time to effect the changes is £500. The cost of amending 3,000 direct debits, at a standard charge from Eazipay of £1.50 a throw, is £4,500. The cost of accounts software changes, at one man-week, is £500 and the cost of sending letters to all customers is £500. The total cost is £6,000. That is backwards for the business, not forwards. We need to reflect on that.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

May I add another example to the very good one that the hon. Gentleman has just given? I visited Cotleigh brewery in my constituency, which is incurring considerable costs not only because of the VAT reduction, but because duty on beer is increasing to offset the VAT reduction. At the end of 2009, Cotleigh brewery will incur further costs in readjusting everything. The proposal is causing serious problems for businesses throughout the country.

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Photo of Tim Boswell Tim Boswell Conservative, Daventry

I am grateful to the hon. Gentleman. It is entirely right that the House should consider all such evidence.

I have quoted that example in my constituency, but I want to draw a slightly wider conclusion. Like most other businesses, that entrepreneur in my constituency uses Sage software. He has received a letter from his accountancy support office that says:

"You certainly aren't unique and we have had some customers dissatisfied with the fact we cannot update recurring invoices...the time scale we had to work with (7 days) to produce a utility meant that we were not able to accommodate all elements...for an automated...change. When we change back in January 2010 we will be able to plan better and create a utility that converts everything".

That is about notice, but Mr. Overton is concerned about direct on-costs to his business. If the proposal is about the Government helping his business, God help us all if they turn the other way.

I want to close on a few simple considerations. The Government's idea of watering the economy with a fiscal stimulus is misconceived and will have the consequences that my hon. Friend Mr. Hammond mentioned. I feel that it is the wrong approach. In a world in which the choices are difficult and the situation is dire—we acknowledge those facts—it would be better to concentrate on solutions that are specific to business and that are specifically about the availability of credit for those businesses.

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Photo of John Randall John Randall Conservative, Uxbridge 3:28 pm, 17th December 2008

I begin by declaring an interest as a director of my family retail business, which has been in existence since my great-grandfather started it in 1888. The present times are more difficult than ever before, and I have to take the day-to-day decisions in the business, because, when life gets a bit difficult, those decisions end up being taken at the top.

My heart sank when I saw the leaks during the weekend before the pre-Budget report was announced. I could not understand why on earth the Government were going to reduce VAT by 2.5 per cent. I actually thought that there must be more to it; I could not believe that they would be so crass as to reduce VAT by that amount. If they wanted to make an impact and give an impetus to consumer sales, they would have had to reduce it by considerably more, which would have involved huge expense and been completely unaffordable.

I will tell the Minister what the effect of this measure has been on countless retailers—every retailer—throughout the country. When it was announced on the Monday, I immediately phoned the shop in Uxbridge and told my staff that we would implement the VAT reduction from the next day. That was effectively a week early, because no one would come into the shop otherwise—no one would buy anything that they believed was going to be cheaper the following week. We also had lots of orders that had been placed, and we had to make the decision to take a hit on those as well. Of course, the reduction is not 2.5 per cent. In real terms, it is 2.13 per cent. Consumers trying to do the mental arithmetic have soon realised that this makes hardly any difference to the price of most items.

So, retailers have immediately had to take a hit. We have already heard about how they have had to put in the required software and change labelling. We decided not to do that, however, and we are still taking the appropriate amount off at the till. That is cheaper and more efficient, and I must admit that I am also making the political point to our customers, because they can then see how little they are actually getting. I have tried to be as neutral about this as possible, however. I might care about this place, but I care very much about the 30 people whom I employ—probably more than about anything else with regard to that business. I have asked them whether anyone has come in and bought anything because it has been reduced by 2.13 per cent., and, of course, that is obviously not the case. Perhaps the Minister will tell me what personal purchases he has made, that he would not otherwise have made, because of the VAT reduction. If he is an honest man—I know that he is—he will say that it has not made a blind bit of difference to him.

So, this measure has been a disaster from the retailer's point of view. Consumers are already getting huge discounts, which are biting into margins. That is very likely to cause the demise of many retailers. A very sensible accountant of mine has told me, many a time, that turnover is vanity, and profit is sanity. It is all very well trying to reduce prices to get people to come in, but we have not had many people coming in.

In relation to the compliance costs, why does the Minister think that it will be £5 million cheaper to re-price next year than this year? Is it because there are going to be fewer shops about? And why is familiarisation going to be so much cheaper? Dr. Cable made a point about the timing of all this. What is the worst time of year to put prices up? My hon. Friend Mr. Hammond said that the provision would last until 1 December next year, and that there might be some change then. But who on earth is going to put their prices up at the busiest time of the year, or afterwards when the sales are on? Retailers are going to take a hit again at that time.

What is the point of all this? I agree with my party and those on my Front Bench that this is not the time to be borrowing like mad, although I understand that others take a different view. I cannot go and borrow lots of money to help my business; first because I think it would be wrong and, secondly, because the banks would not let me. So why are the Government doing this? If I am being kind, I will say that it was something that they could do quickly, but actually I think that it was a gimmick and it sounded good. When he was Chancellor, the Prime Minister loved to finish his speeches with a gimmick, and he has obviously passed that on. Had the measure not been leaked, I think that the Opposition might have thought that it was a wonderful idea, for about five seconds until we worked out what it was really all about. It is a gimmick.

I would not mind at all if the Minister were to say that he had changed his mind, and that he was going to put the VAT rate back to 17.5 per cent. and leave it there. I would even make a pledge to the consumers of Uxbridge that I would keep my prices at the 15 per cent. level because the current VAT change will not help them at all. I urge the Minister to look at this. When those at the Treasury make changes, do they ever ask real retailers and real people what they want, or do they sit down and come up with these incredibly ridiculous schemes? I was delighted to see that the Treasury did not bother working out the impacts on all the groups listed—and I am not going to go through them, as I would be attacked for being politically incorrect.

To be honest, the whole VAT change is a gimmick that will not help, but will actually have a worse effect on retailers and poor employers. As Mr. Field said, after Christmas lots of people will be in big trouble. People will ask, "What did the Government do?" and the answer will be that they took prices down by 2.13 per cent. when they were already reduced. I have to say that that is a disaster.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury) 3:35 pm, 17th December 2008

Let me say from the outset that I support fiscal stimulus, as it has been clear for some time that the problems of recession and deflation were far more likely than problems stemming from inflation. That is quite clear now, and my view is that monetary policy alone will not be sufficient to deal with the situation. It remains to be seen whether this particular package is the right one and whether it will be sufficient to bring about a stimulus effect, but it is what we have at the moment, so we will need to go with it—at least for the time being.

Although I support the present fiscal stimulus and welcome much of what the Government announced in the pre-Budget report, I find it galling—indeed, extremely galling—that it is portrayed by the Government as their somehow saving the world or leading the leaders of other nations and states around the world. I say that not least because the PBR post-dated the US fiscal stimulus package of $150 billion in February, the Spanish package of $18 billion in April, the October announcement by President Sarkozy of 100,000 subsidised work contracts, the €50 billion package announced in Germany and, indeed, the Japanese package of £235 billion, if my memory serves me correctly, of which £20 billion—almost as much as the total UK package—was directed at householders with mortgages. Let us have no more of this Government pretending that they have been decisive when they have not, or that they are leading, which they most certainly are not.

If the package had been announced in a full Budget, we would have had four days of debate and a Finance Bill subject to detailed scrutiny in Committee. Alternatives for how to spend 1 per cent. of gross domestic product—about £12.5 billion—would have been varied and very clearly put. I am sure that they would have ranged from cuts in corporation tax to allow businesses that really create jobs to keep more of the money they earn in order to sustain themselves through recession to more direct public investment and everything in between. I am sure that each and every one of those alternatives would have had some merit in its own right and would have been worthy of consideration. We are, however, where we are. We are talking about 1 per cent. of GDP; it is £12.5 billion and it is the largest part of the reflationary package. The bulk of the rest was £5 billion of re-profiled money for direct public investment; it was not new money and it will, of course, lead to a funding shortfall in public expenditure in two or three years' time.

My criticism of the VAT proposal was that the Government were not straight with people about it. Had it been played solely as a business measure—if businesses could have kept the 2.5 per cent. extra to sustain them through the recession in order to maintain, protect and preserve as many jobs as possible—there would have been some merit and honesty in it. The idea of selling it on the basis that 2.5 per cent. was coming off the price of goods and going into consumers' pockets was simply wrong, not least because of the heavy discounting of 20, 30 or 40 per cent. already taking place. When I bought a present for my daughter in Dundee on Sunday, there was a 70 per cent. discount on it already, so the VAT cut is simply swamped. As I said, had this been played as providing 2.5 per cent. extra to businesses, instead of the pretence that it was going to consumers, we would have been happier with it.

Let me now deal directly with the prayer, and with comments made by the Liberal Democrats and others. In some cases, the cost to businesses that have changed their rate has been enormous. I am told that the average cost to the smallest businesses is about £2,500. I fear that, if the prayer were successful, they would be required to pay a further £2,500, as VAT levels would have changed twice in the space of a few months. Small businesses would be burdened with a bill not for £2,500 but for £5,000—and, in the case cited by Mr. Boswell, a bill not for £6,000 but for £12,000. That would be horrendous.

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Photo of Frank Field Frank Field Labour, Birkenhead

Is it not true that most firms are now cutting prices, and therefore have not had to make adjustments to take account of the VAT changes?

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury)

The VAT changes will need to be accommodated. Some companies will change their marketing collateral, while others will invoke training procedures so that adjustments can be made at the till. Others—almost all—will have to spend additional money on accountancy to accommodate the way in which the books will be audited. There may not be a real, recognisable cost in terms of, for instance, the production of new brochures, but there will be a cost none the less.

The next issue that I wish to raise was alluded to by Dr. Cable. When VAT was reduced, the Government compensated for that outrageously with a second increase in duty on Scotch in a single year, and by increasing the duty on fuel. The prayer calls only for the VAT change to be annulled, with no annulment of the increases in duty that were introduced to offset the VAT reduction. That would land the drinks sector, the hospitality sector and those who depend on fuel with an additional charge.

Although I support fiscal stimulus, and although I have criticisms of the way in which the Government have introduced the VAT reduction, it amounts to 1 per cent. of GDP and £12.5 billion of real money for the real economy. I must therefore tell the Liberal Democrats, with regret, that the Scottish National party will not be able to support their attempts today.

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Photo of Adam Afriyie Adam Afriyie Shadow Minister (Science and Innovation) 3:42 pm, 17th December 2008

There are three words for this VAT reduction: foolish, foolish, foolish. It is foolish in its conception, it is foolish in the way it has been implemented in the House as well as across the economy, and it is foolish because it will not achieve the outcome for which the Government hope. I do not question the Government's motive; I simply question the method by which they are attempting to deliver their aim.

Mr. Field used the word "effective", suggesting that there were probably more effective ways in which £12.5 billion, an enormous sum, could be put into the economy, or put into monetary stimulus, that would actually make a difference. I share that view, but I would put it slightly more strongly. I would say that reducing VAT is categorically the wrong thing to do at this time.

Let me deal with the first count of foolishness in conception. I think that the reduction was conceived prematurely. The problem that we have is the lack of liquidity. Can people borrow money? Can people renew their mortgages? The answer is no, not at the base rate that has been set. Can businesses continue with their existing overdrafts and loans? The answer is no, certainly not at the current interest rate, and many facilities have been withdrawn. Can people purchase cars? We have seen a 37 per cent. decline in the number of cars purchased in the last quarter. People cannot purchase cars because there is not enough liquidity. There is not enough cash in the system, so the finance houses will not finance new vehicles. That is the problem, and sadly the solution provided by the Government is an incorrect one. They are providing a fiscal stimulus when what is required is more cash flowing through the banking system. It is the Government's banking solution that has not worked.

I believe that the VAT reduction was also born out of panic. It is clear that a massive economic failure is taking place. We can argue about whether it is a world downturn, and of course we acknowledge that it has international aspects; but we are clearly in a worse position than most developed countries to respond to the situation. I believe that the Government were under pressure to do something, and simply grasped at a measure that they hoped to be able to implement quickly. They grasped at the wrong measure, and I suspect that they are beginning to realise that that was a mistake.

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Photo of Hugo Swire Hugo Swire Chair, Speaker's Advisory Committee on Works of Art

I think my hon. Friend is giving the Government too much credit. Does he not agree that this is a very cynical move, knowing, as we now do, that they fully intend not only to raise VAT to the former level but to increase it in the next financial cycle?

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Photo of Adam Afriyie Adam Afriyie Shadow Minister (Science and Innovation)

I was trying to find a ray of light—of hope—or a good motive behind this move, but I fear I was being a little too kind, and I acknowledge my hon. Friend's intervention.

The problem at present is not a demand problem; it is a banking, liquidity and monetary problem. This is worse than crass Keynesianism; it is like burning paper money to try to keep warm when what we need to do is fix the heating system. We need the hot water pumping around the heating system, but that is not what is happening.

Secondly, this is a foolish measure in its implementation. I am not one to talk often about parliamentary privilege and parliamentary debate, and to say how important it is that we all get to debate such matters; I am more interested in the outcome. On this occasion, however, the measure has been rushed through the House, and I think that if we had had the time to debate it, a different decision would have been made. As the right hon. Member for Birkenhead said, there are other things we could do with £12.5 billion; on cool, calm reflection, I think that even Government Members would have reflected sensibly and realised that better things could have been done.

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Photo of Rob Marris Rob Marris PPS (Rt Hon Shaun Woodward, Secretary of State), Northern Ireland Office

Does the hon. Gentleman share my constitutional reservations about cutting taxes—and putting up taxes in terms of excise duty on alcohol and fuel—without the measures first being agreed by Parliament?

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Photo of Adam Afriyie Adam Afriyie Shadow Minister (Science and Innovation)

I acknowledge that point, but I do not want to get too much into parliamentary process because I am not sure that that is helpful at this moment. Certainly, my general understanding is that there is a Budget that is debatable, especially in tax matters which are changed once a year. There is clearly a loophole or exception for VAT, but I share that concern.

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Photo of Graham Stuart Graham Stuart Conservative, Beverley and Holderness

I do not quite agree with my hon. Friend on that. The point made by Rob Marris is right: the only protection for our constituents against an over-mighty Executive and their taking decisions on the hop is that those decisions, particularly when they pertain to tax, have to come before this House so that Members, who have to go back to their constituents and hope to be re-elected, can scrutinise those decisions before they are made. The hon. Gentleman is right to say this is a serious issue.

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Photo of Adam Afriyie Adam Afriyie Shadow Minister (Science and Innovation)

That is a well-made point. I was merely observing that there is an exception for VAT, which is why we have the VAT cut on the table today rather than a more measured approach involving our examining more sensible measures in the Budget in the round, as we normally would.

The other reason why this was a foolish implementation that was too aggressive and hasty is simply the amount of notice given to businesses. I declare an interest in that I am a non-executive director of two or three businesses, and it is clear that the stress and cost involved in adjusting accounting procedures and adapting to the way businesses will behave in the short term are onerous. The estimated sum—I cannot remember whose estimate it is—for complying with this VAT change was about £300 million, with possibly a further £300 million next year. That is about 7 or 8 per cent. of the hoped-for benefit from this measure.

Finally, this is a foolish measure because it will not achieve the outcome the Government seek. I ascribe good motives to them: the Government want to boost expenditure in the economy so that growth begins again, but this will not do that.

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Photo of Graham Stuart Graham Stuart Conservative, Beverley and Holderness

I am extremely grateful to my hon. Friend for giving way again; he has been most generous. I wonder whether he agrees with the following point, which I do not think has been raised in the debate so far. Because of the financial incontinence of the Government, such has been the loss of confidence in sterling that even if people are going into the shops to buy imported goods at the supposed 2.5 per cent. reduction, that sum has been far eclipsed by the loss of strength of the pound. That is impacting directly on our constituents' ability to buy such goods to take home for their families.

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Photo of Adam Afriyie Adam Afriyie Shadow Minister (Science and Innovation)

That is another well-made point. I was glad to give way, because I know that my hon. Friend will not have time to make a speech.

This move is foolish because it will not achieve the desired outcome; it does not help the least well-off as much as it helps the wealthy; the duties on spirits and on fuel charges are not reclaimable, so the effect is a net one—if not an increase in tax—for the groups of people involved; and prices are already falling so a 2.1 per cent. reduction will make no difference. I simply say that there are better things to do with £12.5 billion. We need to get the money pumping round the system. Our idea, which I hope the Government will adopt, of a loan guarantee scheme—a credit guarantee scheme—will make a huge difference in pumping that money round the system so that people begin to get mortgages, begin to feel confident and begin to spend money again.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills) 3:50 pm, 17th December 2008

Over the past year, major shocks have hit the economies of every country in the world, and the economic and fiscal climate is exceptionally challenging, but the macro-economic framework that we put in place in 1997 means that we face these shocks from a strong foundation. Our priority is to support the economy—to support families and businesses—through these difficult times. We are navigating a path to get Britain through this in the best possible shape, and to do it in a way that is fair to everyone. Therefore, in the pre-Budget report, my right hon. Friend the Chancellor set out measures to help businesses and home owners, and to boost people's incomes now.

We are acting by putting money into the economy now so that we come out of this situation sooner and stronger. We have set out how, once the economy is growing again, we will deal with the public finance problems caused by the credit crunch in a way that, again, is fair to everybody. We are acting now, unlike the Opposition, who would turn their backs on families and businesses at just the time they need support most. We are acting, because if we do not act now it will cost more—it will cost more to the economy, more to the public finances and more to society.

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Photo of Philip Hammond Philip Hammond Shadow Chief Secretary to the Treasury

Would the Minister tell the House about the 18.5 per cent .VAT proposal, because his signature was on the document that was published? The Chancellor said that many proposals were considered, so can the Minister tell us whether regulatory impact assessments were prepared for all sorts of other VAT level proposals? Was his signature appended to them all?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

I am delighted that the hon. Gentleman has given me the opportunity to set the record straight on the Floor of the House. The Chancellor has made it clear repeatedly that he considered, as any Chancellor would, a large number of options about every aspect of tax and spending, as the House would expect. I ask the hon. Gentleman to look at the incorrect impact assessment that appeared on the website, because if he were to do so, he would see that I had not, in fact, signed that document. The Leader of the Opposition said that I had signed it, but my name had been typed in a sort of italic, slightly floral typeface under the following phrase:

"Signed by the responsible Minister" .

I cannot see how anyone could have mistaken that for my signature, and I am pleased to have had the chance to put that on the record.

My right hon. Friend Mr. Field rightly drew attention to today's unemployment figures, because they underline just how vital these measures are and how vital a stimulus now is. If the Conservatives, when in government, had introduced a fiscal stimulus of similar scale at the same point in the previous economic downturn, it would have saved some 300,000 jobs—but they did not. They did nothing; they let the recession run its course, as some of them are arguing should happen again now. The nation remembers the enduring damage that was the result: businesses needlessly destroyed, jobs unnecessarily lost and people remaining workless today as a direct consequence of the failings then.

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Photo of Graham Stuart Graham Stuart Conservative, Beverley and Holderness

Will the Minister answer the point made by Rob Marris about why the House did not debate a proposal of such importance before it was implemented?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

Parliament has decided, in primary legislation, that a reduction to the VAT rate can be made before debate in Parliament, and that is what we have done.

Our actions will be different from those of the Opposition when in government. We will bring forward £3 billion of capital investment from 2010-11 to this year and next to increase capacity in the rail network, with new carriages, and in the motorway network; to improve social housing and build new homes; to renew primary and secondary schools; and to increase energy efficiency. It will put people to work, it will renovate infrastructure and it will support jobs in key industries. It will also help to put money into the economy in the coming months.

However, to prevent the recession from deepening, we need to do more to put money into the economy immediately. There is a widespread international consensus that a fiscal stimulus to help the economy is the right thing to do. It is backed by parties of both left and right on every continent, by the major countries of the world, by the international institutions such as the IMF—whose chief executive has been very forthright on the subject—by the business groups such as the CBI and the Institute of Directors, the Bank of England and many more.

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Photo of Kelvin Hopkins Kelvin Hopkins Labour, Luton North

I agree with the idea of a fiscal stimulus, although I would go further and make it bigger. I am puzzled, however, by why the Government have chosen to put money into reducing VAT. That £12.5 billion could have been put directly into the pockets of state pensioners and of families with children, and directly into infrastructure investment that would create jobs now. Would not that have been a much more efficient way to counter the recession?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

We have done every one of the things that my hon. Friend has just listed, including, for example, the £60 payment to pensioners in the new year. We considered a wide range of options for the character of the stimulus. We wanted a measure that would help everyone, including millions of households that pay no direct tax at all. I point out to Dr. Cable that changing income tax would not help at all, because some people, such as pensioners, do not pay it. We wanted a much needed extra injection of spending into the economy right now. An effective stimulus needs also to be temporary.

This statutory instrument provides the much-needed stimulus by reducing the standard rate of VAT for just over a year with effect from 1 December. This temporary reduction is equivalent to the Government giving back some £12.5 billion to consumers to boost the economy. The Treasury forecast of the impact makes the cautious assumption that around half of the extra money will be put back into the economy while the rest is saved or spent on other goods.

As my hon. Friend asks, why did we choose VAT rather than other taxes? As we intended, we have already seen retailers pass on the reduction in the lead up to Christmas. I am delighted to hear that Randalls in Uxbridge implemented the reduction the following day, and others did so just ahead of its introduction, with cheaper goods and services. It is too early of course to make an assessment of the impact, but I did notice that the director of selling operations for John Lewis spoke of

"a clear increase in big ticket purchases since the VAT reduction".

By encouraging spending, this temporary rate change will certainly help stimulate growth.

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Photo of Michael Fabricant Michael Fabricant Opposition Whip (Commons)

As the Minister will be aware, the managing director of John Lewis, Andy Street, has said that the 2.5 per cent. discount simply meant a delay in high street purchases that was made up the following week. If the Minister had continued the quote from the selling director, it was clear that he was making the same point.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

But the key point is that a typical family spends £900 per month on VATable goods, and for them, if the reduction is fully passed on, the tax cut means that their spending last month would leave them an additional £20 at the end of this month, and every month to the end of this year, or—as my hon. Friend Mr. Plaskitt said—almost £300 in total. That is a fair way to deliver the stimulus because lower income households spend a larger share of their income on VAT than higher income households. It is particularly helpful for families on a tight budget and it will provide the vital stimulus that we need.

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Photo of Rob Marris Rob Marris PPS (Rt Hon Shaun Woodward, Secretary of State), Northern Ireland Office

I shall join the Government in the Lobby tonight, but I am concerned about the increase in excise duty on alcohol, which will adversely affect Marston's brewery in my constituency. I am also concerned about the constitutional propriety of putting up taxes such as excise duty without this House's voting on them first. What is the constitutional legal position on that?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

Parliament has decided that it should be permissible to do exactly what we have done. The decision was made by Parliament.

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Photo of Nigel Dodds Nigel Dodds Shadow Spokesperson (Business, Enterprise and Regulatory Reform), Without portfolio, Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Without Portfolio)

Will the Minister confirm that if the motion were to be supported that would effectively impose a tax increase on consumers and households across the country?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

The hon. Gentleman is absolutely right, of course. I think that that would be a very unwelcome move.

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Photo of John Randall John Randall Conservative, Uxbridge

Would the Minister advise my constituents who are particularly worried about their jobs, as well as the constituents of every other right hon. and hon. Member, to spend more or to save?

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

That is a matter for every household to decide. It depends on the situation in which the household finds itself. I am certain that a very large number of people will choose to spend the £20 extra that they will have, on average, at the end of the month, but others will choose to save it and to rebuild their household finances. Of course, it is perfectly appropriate for them to do so.

I want to respond to some of the points that we have heard in the debate. Unsurprisingly, we have heard some comments about Germany, which Mr. Hammond mentioned. The key is to look at what the German Government are actually doing. Germany has borrowings that are significantly greater than those of the UK. On 5 November, Germany announced a €32 billion fiscal stimulus—a larger stimulus, proportionately, than that in the UK. I refer the hon. Gentleman and others to what the German Chancellor said last week:

"We support the view of the"—

European—

"Commission that we need to provide 1.5 per cent. of GDP for the stimulus package to strengthen the economy".

On Monday, the German Economy Minister said that Germany had an obligation to introduce new measures to stimulate its economy. He wants Germany to introduce tax measures totalling €25 billion next year. The chief economist of DekaBank, Ulrich Kater, made the point that reducing VAT would have been more efficient than the methods that have been adopted. In Germany, the key is to look beyond some of the words to see the decisions that are being made.

This move is the right stimulus for families, for businesses and for the UK economy and I commend the order to the House.

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Photo of Vincent Cable Vincent Cable Shadow Chancellor of the Exchequer, Liberal Democrat Spokesperson (Treasury) 4:03 pm, 17th December 2008

I thank the Minister for giving me 100 seconds to respond to a long and complex debate. I shall not say a great deal about his contribution. He got off to a good start by reminding us about the 1997 fiscal framework and suggested to me that chutzpah is a necessary qualification for being a Treasury Minister, which he has now done twice.

There were two major contributions to the debate, and I just want to respond to Mr. Field and the Conservative spokesman, who brought up two major issues. First, of course this is all overshadowed by the banking system and the lack of credit, and that is what we have to focus on. I have spoken about that volubly and at length, so I totally agree with that. The subject of what exactly we should do is more controversial. The Conservative proposal for guaranteed credit may have an important role, but, as I pointed out on Monday, if it is to work it effectively means the nationalisation of credit. That, of course, would have major public finance implications that I do not think they have yet thought through.

The other major issue is whether we believe that any fiscal stimulus is necessary. I am perfectly willing to entertain the dangerous idea that Mr. Hammond and the right hon. Member for Birkenhead may be right and that such a stimulus may not work. If that is so, however, they should be in Washington, not lecturing us here.

What is being proposed is just the faintest echo of what is happening throughout the western world, and especially in the US. The American Congress and the new US Administration are preparing a stimulus that is about 30 times as big as the British stimulus, in a context of even weaker public finances than ours. If it does not work, the consequences for the western economies will be catastrophic. As I said—

One and a half hours having elapsed since the commencement of proceedings on the motion, the Deputy Speaker put the Question (Standing Order No. 16(1)).

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The House divided: Ayes 223, Noes 303.

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Division number 9 Reduction of VAT from 17.5% to 15%

Aye: 223 MPs

No: 303 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Absent: 116 MPs

Absents: A-Z by last name

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Question accordingly negatived.

Photo of Anthony Steen Anthony Steen Conservative, Totnes

On a point of order, Mr. Deputy Speaker. We need your advice and guidance. Today I received an e-mail from a mole—or perhaps I should say a krot, which is Russian for mole—from the UK Border Agency saying that the Government were going to ratify the Council of Europe convention on action against trafficking in human beings. As chairman of the all-party group on the trafficking of women and children, I have not been notified of that. Opposition Members do not know anything about it, and there has been no announcement from the Government.

Is there any point in having a Chamber of the House of Commons if the Home Office forget, or ignore, the fact that there is a House of Commons and there are Members of Parliament, and that we need to know whether ratification is going ahead before the media, other organisations and every Tom, Dick and Harry? It is a terrible abuse of the House that the Home Secretary chooses to announce that this is going ahead—if that is the case—and one hears it from a mole in the UK Border Agency. I should advise you, Mr. Deputy Speaker, that I have left my door unlocked, if the police want to see anything further.

R

I'm glad to see Mr Steen has finally realised what has happened. His own party has been (indeed, still is) complicit in the matter.

Parliament is now completely redundant. Brussels make the laws, national governments rubber stamp them and national authorities enforce them.

Let's save a ton of money by recognising reality & dispensing with this useless Britsih overhead.

Submitted by Ray Warren

Photo of Michael Lord Michael Lord Deputy Speaker (Second Deputy Chairman of Ways and Means)

I have no knowledge of the matter that the hon. Gentleman brings before the House. He will be aware that Mr. Speaker is always most insistent that important matters for the House should be brought to the House. The point that he has made is on the record and the Treasury Front Bench will have heard what he has said.