Value Added Tax

Part of Consolidated Fund Bill – in the House of Commons at 2:51 pm on 17 December 2008.

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

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.