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Clause 9 — extension of reduced standard rate and anti-avoidance provision

Surface Water and Highway Drainage Charges (Exemption) Bill – in the House of Commons at 7:15 pm on 12th May 2009.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 7:15 pm, 12th May 2009

I beg to move amendment 8, page 4, line 2, at end insert—

'(1A) The Chancellor of the Exchequer must, not later than 1 April 2010, compile and lay before the House of Commons a report containing an assessment of the impact of the temporary VAT rate reduction on—

(a) UK economic growth,

(b) the competitiveness of small and medium-sized businesses, and

(c) the disposable income of low-income households, for the period during which the rate reduction had effect.

(1B) A Minister of the Crown must, not later than 1 May 2010, make a motion in the House of Commons in relation to the report.'.

I am grateful for the opportunity to speak on a subject that most people would regard as a central feature of our debate on the Finance Bill—the Government's decision to use a reduction in VAT as a way of injecting extra money into the economy and trying to deal with the recession. Members will be familiar with many of the arguments, but before I make some slightly more general comments, I shall just explain the amendments that I tabled.

Amendment 7, which has not been selected, but which appears on the amendment paper—I hope I am not out of order, Mrs. Heal, if I briefly mention it, because it illustrates the direction in which I am seeking to move Government policy—seeks to bring forward the day on which the VAT reduction from 17.5 to 15 per cent. ceased to apply to the date on which the Bill receives Royal Assent, which we believe is the earliest conceivable date on which that temporary reduction could be ended. The amendment was not accepted, for entirely understandable reasons to do with revenue implications, but it nevertheless remains our intention to try to encourage or force the Government to bring forward that measure to the earliest possible date.

Amendment 8 is much more wide-ranging and benign, and provides an opportunity to review the success or otherwise of the Government's policy. Inevitably, such a review could take place only after the effects of the policy had been experienced, so it is not as immediate as the change proposed in amendment 7 or, indeed, a proposal to reject the clause as a whole. However, it provides a useful opportunity to discuss the Government's strategy as a whole. Many right hon. and hon. Members will be familiar with that strategy.

The Government are running a massive deficit—£175 billion this financial year, and £173 billion in the next financial year, if their assumptions are correct—so there is a legitimate debate to be had about the extent to which the Government can afford to borrow more to stimulate the economy. My party's view is that there is merit in fiscal stimulus—trying to inject an extra boost into the economy will help us to get through the recession quicker, and the best way we can address our public finance deficit is to get the economy growing again. After that, we will have to ask questions about additional tax revenue, and about savings in the public sector. The immediate task, however, is to get through the recession and out the other end, growing strongly again. Some sort of fiscal stimulus, in my party's view, is the right way forward, if it is affordable.

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Photo of Nicholas Soames Nicholas Soames Conservative, Mid Sussex 7:45 pm, 12th May 2009

Without wanting to make a point about it, I agree about the need for fiscal stimulus. Before every Budget, I survey almost every business in my constituency and this year, for the first time, that survey received an extremely high response rate. Everyone who responded on the VAT cut was extremely critical of it. Does the hon. Gentleman acknowledge that that change is not one that commands universal support across the country and that it was not the right thing to do?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I not only acknowledge but completely agree with that.

The starting point for us, for the Government and for others was whether it was possible to afford some sort of fiscal stimulus. The answer, in our view, was yes, although it would be limited in scope because of the state of the public finances. The question that then arose was what form that fiscal stimulus should take. The Government's view, as I understand it, was that a VAT cut would be a good way to go, partly because it could be introduced speedily—no doubt the Minister will put the Government's case; I do not with to misrepresent it, but I will explain my view. They thought a VAT cut would incentivise people to spend money, which would provide the sort of stimulus they believed would be advantageous in the short term. They also believed it would be beneficial for individual consumers. I remember their making the case when it was introduced that it would save money for typical households, and we were given examples of those savings. However, when some retailers did not pass on the VAT reduction, the Government then made the case that it helped the margins of those retailers. I accept that there was a degree of truth in the Government's position, even though to some extent they were having their cake and eating it: when the VAT cut was passed on, it would help consumers, and when it was not, it would help retailers and businesses.

That, as I understand it, was the Government's case for the VAT cut. It is not a case that my party finds compelling, and that view is shared by many hon. Members, including Government Members. There are numerous reasons for that but, first, the Government unfortunately cut VAT in the run-up to Christmas, when retailers were heavily discounting their products. Many companies were introducing cuts of 20, 25, 30 or 35 per cent. and, in that context, the 2.5 per cent. reduction was rather modest. It may have led to a small extra saving for consumers, but it was unlikely to provoke them to make a purchase that they would not otherwise have made. The cuts introduced by the retailers themselves were substantially greater than the VAT cut.

There was the serious issue, too, of the administrative burdens placed on businesses as a result of the VAT cut. A number of businesses sought to reprice their goods, and if they were priced in a catalogue that had already been printed or if a similar approach had been taken, that presented even greater problems. I went into a shop in my constituency where the company introduced the discount, but did not mark it on the price that appeared on the product, as that would have resulted in extra burdens. I remember buying a birthday card for someone for £2, and I paid with two £1 coins. I was given 4p change because the shop had kept the marked price as £2, but I was given a discount, to reflect the temporary VAT reduction, which I had not anticipated. Up to a point, I appreciated it, but I did not necessarily feel incentivised to buy another card once I knew that another 4p was there for the taking. I suppose I had 4p more to spend on other goods and services, but I am not sure that the effect on the economy as a whole, even if everyone received that benefit, was as great as the Government hoped.

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Photo of Lembit Öpik Lembit Öpik Liberal Democrat, Montgomeryshire

I very much agree with my hon. Friend's point, but is there not another marketing consideration? Something that had cost £11.99 should cost about £11.73 after the VAT cut but, as we all know, the price points are heavily determined by marketing considerations—the prices tend to end with "99" and so on. Does my hon. Friend agree that the benefit of the VAT cut will almost inevitably gravitate back to the companies and businesses as they revert to the standard pricing points? No one can pretend that £11.73 is a natural pricing point or that it has any marketing advantage.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I take my hon. Friend's point. Many retailers round their prices to a sensible point and then discount a penny to make them look more attractive. A lot of the margins might be greater than the VAT reduction, so the reduction might not have been felt in the way envisaged by the Government. With small items—I just gave the example of a birthday card—the saving to the consumer is small. With big items such as a new car, the saving would be greater. However, it is worth mentioning that car retailers were so desperate to turn over more of their products that the discounts by and large were bigger than the VAT reduction that was meant to incentivise consumers.

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Photo of Robert Syms Robert Syms Conservative, Poole

The hon. Gentleman has talked about costs to small businesses, but there are also the costs to local authorities, which charge for a range of services such as car parking spaces. Some such charges have VAT implications. That created costs for local government, which had to reduce lots of charges to be able to comply quickly with what the Government wanted.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

That is an entirely fair point. Parking charges are a good example, which leads on from the point made by my hon. Friend Lembit Öpik. By and large, parking charges are rounded to a sensible hourly rate. A reduction of 2 per cent. would mean that instead of paying £1.50 an hour, a person would pay—somebody else should do the maths—£1.47 or whatever. People might prefer to pay £1.50 rather than £1.47 or have difficulty in paying the precise amount. Many local authorities would think it easier to stick at £1.50, so in such cases the benefit was not passed on to the consumer.

No doubt opposition parties of all colours in the authority would then criticise the administrating party for not passing on the VAT cut to consumers, even though it would have been administratively burdensome for the authority to do so. The money would be absorbed by the local authority, so I suppose that the Government would argue that the local authority would have more money to spend on other services. However, I am not sure that the money flowed through the system as neatly as the Government would have wished.

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport)

The hon. Gentleman and I both have constituencies in the south-west, where the biggest industry is tourism. He mentioned small and medium-sized businesses. There are 200,000 such businesses involved in tourism and I have not found one that has embraced the change that we are discussing. It has actually cost them more—they have had to change their online basket systems and the pricings and so forth. They would relish the opportunity to have the measure thrown out as soon as possible.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

The hon. Gentleman makes a good point. To follow on from that made by Mr. Soames, I should say that my experience—other Members' experiences may be different—is that there are two reactions to the reduction. One is hostility, which Mr. Ellwood described; the other is indifference. I have not met anyone who feels zealous enthusiasm for the Government's policy. Some regard it as making no difference whatever to their business or the assumptions that they make; others regard it as burdensome and troublesome and, if they went to great lengths to accommodate the reduction, are not looking forward to having to put the rate back up again.

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Photo of Bob Spink Bob Spink Independent, Castle Point

Local authorities, of course, could reduce the council tax as a result of having collected more money from parking charges and so on. Does the hon. Gentleman have any idea which tax his party would reduce to balance out the 2.5 per cent. VAT increase that it wants? Alternatively, would it use the additional money to cut borrowing?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I do not want to incur Mrs. Heal's wrath, so I will not extend the debate to local government finance. However, in due course I shall discuss possible alternatives to the VAT cut, because that is very much within the scope of amendment 8.

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport)

Another aspect of the issue, to which the hon. Gentleman may come, is the date itself. The VAT change is unpopular, but most people are enjoying a drink on new year's eve, and no small or medium-sized business, particularly in the tourism industry—pubs and so forth—wants to start changing tills when Big Ben is striking midnight.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

The hon. Gentleman makes an entirely legitimate point, which I have heard him make in other debates. The Minister needs to engage with it. New year's eve may well be the worst possible date of the year to pick—365 options, and the Government pick the worst one of the lot. Clearly, there are cost implications in pushing the date backwards— [Interruption.] I accept that the hon. Gentleman was not making a point about cost, but a practical one about businesses that trade beyond midnight into the new year and how they would manage to adjust.

The broader point is that businesses as a whole—and, in some cases, even individuals—have either found the change burdensome or have not noticed it at all. I doubt whether many people have changed their behaviour as a result of the measure. I take the point made repeatedly by the Government—people might have a little more money to spend and not consciously realise that they are changing their behaviour. They may buy one thing at the end of the week that they might not otherwise have bought because the accrual of all the 4ps saved when buying cards and other bits and pieces might make them think, "I might buy one more birthday card because I am suddenly feeling a bit more affluent." My suspicion, however, is that even at a subconscious level, very few people have acted as the Government would have wished.

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Photo of Lembit Öpik Lembit Öpik Liberal Democrat, Montgomeryshire

Given my hon. Friend's sage and insightful observations, he may be amazed that at today's sitting of the Business and Enterprise Committee, it was claimed that the VAT reduction had increased economic activity by £8,000 million to £9,000 million. What is my hon. Friend's view of that heady claim?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

It would probably be better to hear the Minister's view of that claim; it does not accord with my experiences—or, apparently, those of other Members taking part in our deliberations.

Others may wish to dwell at greater length on the impact on business, but I have sought to make that point. My central point about the public finances—the Government's finances—is the cost of the measure and whether the opportunity cost represents a good decision by the Government. In all our deliberations on the Finance Bill, we have to return to the big elephant in the room: this year, we are running a public sector deficit of £175 billion. That is £480 million every single day, and £20 million every hour; since we started our deliberations this afternoon, close to £100 million has been added to the public debt. The figures are enormous.

There may be some scope for a fiscal stimulus, although, as I have said, it is fairly small. We have to make sure that we get the maximum value from the money being spent. I argue that that money should achieve two objectives. First, it should try to ensure as quickly as possible that the economy starts to grow again; that, after all, is the whole purpose of a fiscal stimulus. Secondly, it would be beneficial if we had something to show for the money afterwards.

It is worth reminding everybody that the cost of the temporary VAT cut—I do not know whether the Government realised that it would be this neat—is almost exactly £1 billion a month. Amendment 7 is not within the prescribed boundaries of our deliberations, but I was keen for it to take effect because that would have saved the taxpayer about £4 billion or £5 billion, depending on the precise date of Royal Assent. The clock is ticking. If we are to try to come up with a more effective way to spend the fiscal stimulus, then every day that passes we have roughly £30 million less to play with than we would have done had we made that decision a day earlier.

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Photo of Stewart Hosie Stewart Hosie Shadow Chief Whip (Commons), Shadow Spokesperson (Treasury) 8:00 pm, 12th May 2009

Would the hon. Gentleman like his proposed assessment to include the Treasury's own forecasts, run through the input-output model, of various options set against the VAT cut, showing how many more jobs might have been saved through direct capital expenditure, and what difference an income tax cut might have made in terms of GDP growth or jobs saved?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

Yes; the hon. Gentleman is very helpful. Although it is tempting—and, I hope legitimate, Mrs. Heal—to have a wide-ranging debate on VAT, it is also useful to dwell on the amendment. That is precisely the sort of consideration that the review should examine.

What strikes me as extraordinary is that a civil servant asked to come up with a £12 billion or £13 billion tax cut could not have come up with one that had less impact on the public consciousness. If the Government were seeking, albeit with borrowed money, to give away that amount of extra money to the taxpayer, they could have taken roughly 3p off the basic rate of tax for a year. They might not have thought that that was the right way to go, or they might have felt that it did not stimulate the economy in the way that they had intended, but every time people got their payslip at the end of the week or month, they would have noticed the sizeable reduction in tax.

The most problematic aspect of the VAT cut, which it would be interesting to examine in a review, is that it did not have the effect of giving people additional confidence: the mental sense that they had additional money in their pockets. Part of the reason for the Government's changes was to try to give people a sense that things were not so bad, that there was a bit more money to spend, that they could go out there and spend it, and that that would be a self-fulfilling prophecy in its impact on the economy. I do not think that that has proved to be the case, although others may disagree. If there were a cut in the basic rate of income tax, people might choose to save the money. The Government would say that cutting VAT means that people get the benefits only if they spend money—they were keen to encourage people to spend, and continue to be so. However, psychologically, it did not have the impact that it could have had as regards people feeling that they had more money to spend, even if they did in practice because the 4p's were accruing here, there and everywhere as they made different purchases.

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Photo of Nicholas Soames Nicholas Soames Conservative, Mid Sussex

The basis of the hon. Gentleman's argument, which he is making very powerfully, is whether the VAT cut was or was not a good thing to do. Does he know whether the Government consulted retailers and those who represent them on what the burdens would be, and whether retailers, who know much more than the Government about selling things, believed that the VAT cut would make a substantial difference to the Government's prospects and to theirs?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I am not aware of what consultation took place among retailers. I hope that the Minister is more aware of that than me, but from what I have seen there was little or no consultation. The Government felt a need to act swiftly, and perhaps they were right in that analysis. They grasped at the temporary VAT cut from 17.5 to 15 per cent. as being the best way to go—there seemed to be very little evidence for it, and amendment 8 would be a good way of starting to examine whether they made the right decision—and introduced it swiftly as part of an attempt by the Prime Minister, principally, to show that he had a grip on the economic situation. He wanted to show that the situation was bad, but that he was taking the decisive action necessary to get us through the recession as speedily as possible. I do not get the sense that alternatives were considered in as much detail as they could have been, nor that the adverse impacts of the Government's policy were considered in sufficient detail. No doubt the Minister will enlighten us about that.

I am not sure that the behavioural impact was fully assessed. Some people may behave in a way that the Government had not intended. I suspect that if the date on which the VAT reduction ceased had been brought nearer to today, some people who were motivated to spend differently because of the VAT reduction—for example, to buy a big-ticket item such as a car—would have tried to make such purchases just before the rate went back up to 17.5 per cent. again. Interestingly, the effect of the stimulus might have been brought forward if the reduction had been for a shorter period. Had it not stretched for the full 13-month period, the monthly cost of the reduction might have been a bit higher, but the overall cost might have been lower. That is a theory, but it is the sort of area that such a report could usefully examine.

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

The hon. Gentleman says that the assessment should be done before 1 April 2010. Does he agree that it could be done very quickly, and that if it included an assessment that showed that direct capital expenditure would protect or preserve tens of thousands more jobs in the remaining period than the VAT cut, that might be something that those of us who believe in fiscal stimulus could yet coalesce around in the teeth of recession and in light of tomorrow's unemployment figures?

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

The hon. Gentleman makes a good point. I accept that the date in the amendment is arbitrary; I was trying to take account of the typical time scale of such reviews. There is a degree of urgency—very much so—in terms of the economy, and he mentioned unemployment. Of course, the review would be retrospective were it to take place on the date that the amendment envisages, but there would still be some benefit, because we do not know whether the Government may in time seek to use such a device again. It would inform future decisions instead of dealing with the here and now. I take his point that the here and now is an important priority, and we will no doubt focus on that in discussing the clause as a whole.

The hon. Gentleman takes me neatly on to what the money could alternatively be spent on, which is an entirely relevant consideration. There are, essentially, two schools of thought: that which says that there is no scope for a fiscal stimulus and that which says that there is. My party is of the second school, and while I do not wish to caricature anybody's arguments, I understand that we are in the same school as the Labour party and the Scottish National party. By and large, Conservative Front Benchers—although we heard a dissenting view a few moments ago—do not believe that there is scope for a fiscal stimulus beyond the automatic stabilisers that one would get at a time when the economy was shrinking. Having said, "The Government's policy is to have a fiscal stimulus, and after all they are the Government: they are in power and enacting this policy", we can move beyond that and ask how the money would better be spent. The sum involved is generally estimated to be £12 billion to £13 billion, although the more popular the Government's policy is, the more effective it is, and the greater the cost.

We should ask whether this is the best way to spend £12 billion or £13 billion, and whether it is doing two things. First, is it increasing demand and getting us through the recession more quickly than if the stimulus had not been put in place and the extra borrowing had not accrued? Secondly, will we have something to show for that large amount of public spending once it is finished? My party drew up a list, a package, when we were envisaging better ways to spend the entire £12 billion or £13 billion. As I said, with every day that passes that money ebbs away, but nevertheless I shall run briefly through some of the matters that we were talking about.

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The First Deputy Chairman:

Order. I hope that the hon. Gentleman will contain his comments to the amendment that is tabled in his name, rather than the wider package of reforms that he was about to discuss.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

Thank you, Mrs. Heal, for that very helpful guidance. The point that I was trying to make—I certainly do not wish to make it at excessive length—was that amendment 8 asks the Government to consider the impact of the VAT reduction on

"UK economic growth...the competitiveness of small and medium-sized businesses, and...the disposable income of low-income households".

My contention is that the benefits in those three areas and more widely would have been greater had the Government gone down the path of spending the money on a range of programmes. I shall not list those programmes, but they would have been designed to encourage our country towards greater environmental sustainability.

We argued, and continue to argue even though the amount of money that we are arguing about gets smaller every day, that the money could have been spent on, for example, home insulation programmes, buying new rolling stock for trains or electrifying some train lines. That would have provided an opportunity for greater employment. It would have been a stimulus, but once we reached the end of the package, as the Government now envisage doing with the VAT reduction at the end of this calendar year, we would have had a lot of insulated houses, electrified train lines and new rolling stock.

Instead, I am afraid that we are going to spend £12 billion or £13 billion and have precisely nothing to show for it except, arguably, some small, incremental, hard-to-measure benefits to some organisations. I fear that the review envisaged in amendment 8 would still not get us to the bottom of precisely what those benefits are. That is not £13 billion of public money spent wisely, especially as that money was not available. Borrowing was increased, by this year's figures, from £162 billion to £175 billion, but we do not have longer-term assets such as I have described to show for it. The Government talk about investment when they really mean spending, but under our plans there genuinely would have been investment as well as spending. They would have stimulated the economy in the short term while providing a longer-term legacy.

For all those reasons, amendment 8 requests a comprehensive review, and the debate gives us an opportunity to consider when the temporary VAT reduction should cease. The Government need to answer the question of Mr. Ellwood—it was on a practicality, but an important one—about whether it is wise to finish it at the end of December. The Government also need to address the wider points about whether the end could be brought forward and the revenue savings realised earlier.

I hope that many hon. Members will contribute to the debate and that the Financial Secretary will accept the concerns that have been expressed in all quarters. I hope that he will take on board also the complete lack of enthusiasm of anybody in his party for debating this issue and defending Government policy. Perhaps, in the intelligent way for which he is well known, he will seek to arrive at a solution that is beneficial to the taxpayer and the economy as a whole.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

This is an important debate, and I share the view of Mr. Browne that it is a pity that there are not more Labour Members here to debate what was, after all, the flagship policy of the pre-Budget report of 2008. Perhaps this subject cannot drag them away from the various plotting enclaves in which they are currently gathered.

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

Can the hon. Gentleman tell us why there is no Conservative amendment on this subject? Given the strength of feeling on the Conservative Benches, I would have thought that there would be some proposals, but there is nothing.

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Photo of David Gauke David Gauke Shadow Minister (Treasury) 8:15 pm, 12th May 2009

If the right hon. Gentleman will be a little patient, he will receive the full reason why there is no Conservative amendment, but he will find that there is still a dividing line between us.

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Photo of Tobias Ellwood Tobias Ellwood Shadow Minister (Culture, Media and Sport)

Does my hon. Friend agree that we tried very hard in the debate on the Bill last week to get the Financial Secretary to recognise that this was an unpopular move, and that the best thing that could happen would be for the date of the VAT change to be moved? Does he agree that the response, body language and message that we got back suggested that in absolutely no way were the Government willing to listen? What would be the point of tabling an amendment if that is how we are treated in the Chamber?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to my hon. Friend. I was going to address that point later, and I will come back to it, but given the enthusiasm in all parts of the Committee for me to address it now, I shall do so.

Clause 9 will move the date at which we revert to 17.5 per cent. VAT back from 1 December to 1 January. If the clause does not stand part of the Bill, that date will remain 1 December. I shall elaborate on what that means, and I hope that the concerns that my hon. Friend raises, and the Minister's concern that there is no Conservative amendment on this point, will be addressed. The Liberal Democrats tabled an amendment to bring the date forward, but it was not selectable, as is customary in these circumstances. However, we have an opportunity to do what we can to deal with the matter as quickly as possible.

I return to my points in a more methodical way. The hon. Member for Taunton was absolutely right to ask his two questions—first, whether in November 2008 we could afford the fiscal stimulus that consisted of the VAT cut; and, secondly, if we could afford a discretionary fiscal stimulus, whether that was the right way to go about it.

It is worth my being precise about where there is a difference between the Government and the Opposition, because there is a tendency to point to dividing lines and caricature our positions, and the differences between us can be exaggerated. First, we recognise that there is a place for automatic stabilisers. We recognise that tax revenues will reduce in the course of a recession and that expenditure will increase on certain things, particularly benefits. We have not argued that our fiscal policy should be such that we do not allow the automatic stabilisers to apply. The difference between the Opposition and the Government is about the discretionary fiscal stimulus, not the automatic stabilisers.

Secondly, let us not exaggerate the significance of fiscal policy in addressing a recession. It is not the sole, nor even the principal, means of addressing a downturn. If I may, I shall quote what Dr. Cable, who is highly regarded in these matters, said in the debate on 31 March. I did not say that he is rightly highly regarded, but he is highly regarded.

He stated that,

"what is actually happening is that the Government are very carefully following the doctrines of Milton Friedman and we have, in essence, a monetary response to the crisis, which is absolutely right, provided it is effective and gets money into the economy."—[ Hansard, 31 March 2009; Vol. 490, c. 815.]

We supported the reductions in interest rates and recognised that addressing a downturn is essentially about monetary policy.

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Photo of Robert Syms Robert Syms Conservative, Poole

My hon. Friend is developing his argument well. Clearly, the VAT cut pales into insignificance compared with quantitative easing, devaluation, interest rate cuts and all the other things that are happening. There must be better ways of spending the money.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

My hon. Friend is right. The Government can and should do many things to address a recession. We differ from the Government in that we believe that, in the current circumstances, the benefits from a discretionary fiscal stimulus such as a VAT cut are outweighed by the dangers that it poses to the public finances and the burden that it places on future taxpayers.

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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 following the hon. Gentleman's argument closely and with interest. I appreciate that there are separate discussions about whether we can afford a fiscal stimulus and which stimulus we should choose. Does he agree with the shadow Secretary of State for Business, Enterprise and Regulatory Reform that, if we are to have a fiscal stimulus, a VAT cut is the best and most effective measure?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

My principal argument is that we cannot afford it. On what constitutes the best fiscal stimulus when one can afford it, there are various arguments for and against, which I shall tackle in my speech. However, the fundamental argument is that we cannot afford it.

I want to reach out in a bipartisan spirit to find another matter about which we and the Government agree. It is that one must recognise the state of the public finances when deciding what stimulus one can have, and that there are limits to Government borrowing, which must guide the policy that one pursues when drawing up pre-Budget report and Budget measures. We clearly agree about that because, despite all the rhetoric in the run-up to the Budget in April from the Prime Minister on his world tour, when he made the case for a bold fiscal stimulus for every country, the UK did not pursue such a policy in the 2009 Budget because the assessment was that we did not have the money. As the Governor of the Bank of England put it to the Treasury Committee

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The First Deputy Chairman:

Order. I have allowed some latitude, but the hon. Member is now straying rather wide of the amendment and its intention.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Thank you, Mrs. Heal. I want to argue that we could not afford the VAT cut, which was announced in the pre-Budget report. The public finances are precarious and the Government recognised that they could not afford an additional fiscal stimulus in April. As the Governor of the Bank of England said:

"The fiscal position in the UK is not one that would say, 'Well, why don't we engage in another significant round of fiscal expansion?'"

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

May I press the hon. Gentleman a little more? He is now setting out a view that is consistent with the comments of the shadow Business Secretary, but does he agree with his right hon. and learned Friend that, if one has a fiscal stimulus, the VAT cut is the most effective sort of stimulus to introduce?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Again, a little patience from the Financial Secretary would be appreciated. I know that he is keen to move me on from whether a fiscal stimulus was affordable, but I think that the subject should be tackled thoroughly. Given what we know now, who was right about the pre-Budget report 2008? Could we afford that discretionary fiscal stimulus? Hon. Members should remember that, at the time of the pre-Budget report, the Government projected that they would borrow £77.6 billion in 2008-09, and the projected figure for 2009-10 was £118 billion. By the time we reached the Budget—which contains the most up-to-date figures that we have from the Government; some consider them optimistic—the figures for 2008-09 were £90 billion and those for 2009-10 were £175 billion. That is an increase in borrowing over the two years of almost £70 billion.

Even in November, we were concerned about the risks of the VAT cut to the public finances. We were not alone—in a debate in the House on 17 December, Mr. Field expressed his concerns about the Government's ability to raise debt. Were we right to be worried about public finances? Absolutely. Given the decline in them and the difficulties in selling Government gilts since then, our case has become stronger. Our opposition to the VAT cut sent a much clearer signal to the markets than the Government could convey of determination to take the state of the public finances seriously.

Let us consider whether a VAT cut is the best way in which to use the £12.5 billion that the Government said in November that it would cost. I have said that I do not believe that we could afford it, but there is a range of views about whether a VAT cut was the best method of using that money. I am not persuaded by Liberal Democrat proposals that the money should have been spent on a public works programme. The hon. Member for Taunton rightly did not have an opportunity to discuss the Liberal Democrat proposal in detail. However, I remember examining it, and it seemed to consist principally of improvements to rail services relevant to Liberal Democrat seats—strikingly so.

Let me cite that great Liberal—I do not know whether the hon. Member for Taunton is from the same tradition—John Maynard Keynes. In 1942, he wrote:

"Organised public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date) to be the most serviceable instrument for the prevention of the trade cycle."

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

I appreciate the hon. Gentleman's joke, but I fear that it may not be accurate. I beg your brief indulgence, Mrs. Heal, to say that our proposal was to electrify the great western and midland main lines and begin the Liverpool light rail network. Although my party is winning more and more seats in all parts of the country, it is probably unfair to say that those measures would specifically benefit Liberal Democrat constituencies.

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The First Deputy Chairman:

Order. I have been generous to hon. Members. Perhaps we can now adhere a little more closely to the amendment.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I anticipate that you would not want me to dwell on a response to that, Mrs. Heal, but I have seen a document that had a number of proposals for the west country, including one for a line from Eastleigh to Romsey, which was particularly egregious.

The reaction to the VAT cut internationally has not exactly been enthusiastic. Nicolas Sarkozy has said:

"Cutting VAT by two points doesn't incite people to buy if they are scared about their future."

Christine Lagarde, the French Finance Minister, said:

"as far as we're concerned...we're not certain that when prices go down a VAT reduction is that effective."

Peer Steinbrueck, the German Finance Minister, said:

"We have no idea how much of that stores will pass on to customers. Are you really going to buy a DVD player because it now costs £39.10 instead of £39.90? All this will do is raise Britain's debt to a level that will take a whole generation to work off."

Carsten Schneider, the German Social Democratic budget spokesman, said:

"I think the sales tax cut is counter-productive."

Oliver Blanchard, the chief economist of the International Monetary Fund, said:

"Temporarily cutting VAT, a measure that was adopted in Great Britain, does not seem to me to be a good idea...2 per cent. less is not perceived by consumers as a real incentive to spend."

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons) 8:30 pm, 12th May 2009

Not to be too cynical, does my hon. Friend feel that perhaps the Germans, the French and the Dutch were all terrified that the 2.5 per cent. cut in VAT would suddenly draw business away from France, Germany and Holland? Does he think that that was their motive in making those comments?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

No, I do not. My hon. Friend puts forward an interesting theory—it is one that I am sure the Government would like to endorse—but I do not think that that was the reason that those whom I have quoted thought that the cut was a daft idea.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury)

Does the hon. Gentleman think that the Government could take the approach of announcing—or letting it be known—that they intend to increase VAT to 20 per cent. in order to address the Budget shortfall and that that may have enough of an impact to create a stimulus in demand, when people realise that the differential will be 5 per cent., not just 2.5 per cent.?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

That is an interesting idea. Although it would be unfair, I am tempted to say that the Minister—or at least what went out in his name—rather contributed to that perception when there was a suggestion that VAT may rise yet further. However, the Government have not stated that that is their intention. There may well be a stimulation in demand when people get in before the reversion to 17.5 per cent.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Indeed, although I take it that the hon. Gentleman will not be claiming credit for any stimulation in demand in December from the subsequent increase in VAT.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

To follow up with a more serious point, I would be interested to know from the Minister, given that the Government track our borders assiduously, whether he noticed a flow of individuals coming from France, Germany or Holland into this country as a result of the 2.5 per cent. cut in VAT, which would thereby have increased retail sales to German, French and Dutch customers, or does he not have that information?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Again, I am grateful to my hon. Friend. I am sure that the Minister will have taken that question on board and will be able to provide us with some answers. The same question goes for the Republic of Ireland, although the devaluation of the pound over that period may have also played a part.

A number of countries engaged in a fiscal stimulus, because they were in a stronger position and could afford to do so, but they did not go down the route of the VAT cut. There are also some practical points to be made about VAT, some of which were raised in the quotations that I have cited. First, at a time of sharp discounting of goods—that was certainly the circumstance last November and last December—the 2.5 per cent. reduction in VAT could have been lost. That point was made by a number of commentators. In particular, when Justin King, the chief executive officer of Sainsbury's, appeared on "Question Time" on 27 November, he said:

"If we walk down the high street today you'll see 20 per cent. off, 30 per cent. off, 50 per cent. off, so really in that context it's a drop in the ocean."

That is one of the problems with the VAT cut.

The second problem is one of practical difficulties. There were practical difficulties with the sudden decrease in VAT at a time when shops were certainly hoping to be busy. There had to be re-pricing with very little notice and we know that that caused difficulties. In some cases the VAT cut was not necessarily passed on. In other cases, people were sitting in shops with calculators deducting the necessary amount, which also created difficulties. There were real costs involved in changing the system so quickly. Retailers were not exactly overjoyed at being faced with what was, after all, a tax cut. There are other technical difficulties involved. For example, those businesses operating under the flat-rate arrangements will not have felt the benefits of the change. There were significant practical difficulties.

At the big picture level, what was the test that the Government set themselves by reducing VAT? At the end of November, their argument was, "Thanks to the measures that we are introducing in the pre-Budget report, the recession is going to end earlier than it would otherwise do. It is now going to end in the second half of 2009." Sadly, that is not going to be the case, although there are clearly some encouraging signs, and we hope that they will continue.

The Government now accept that recovery will not happen until the end of the year. The test that they set themselves was to use the VAT measure to bring the recovery forward. They have had to downgrade their growth forecast for 2009 from the contraction of 1 per cent. of GDP predicted in the pre-Budget report to a contraction of 3.5 per cent. as set out in the Budget. Even that figure is optimistic compared with the projections of the likes of the International Monetary Fund.

I am sure that the Minister will refer to the Centre for Economics and Business Research and to Doug McWilliams' comments; he does so every time I debate this matter with him. Doug McWilliams has supported the VAT cut; indeed, he recommended that policy proposal in November. Having recommended it, he has subsequently looked at it again and concluded that he was right all along. His assessment states that retail sales over the December to February period were £2.1 billion higher than they would otherwise have been. We do not necessarily accept that, however. We need to disentangle the impact of the VAT cut from the effect of the very substantial cuts in interest rates over the same period, alongside the policy of discounting that shops were adopting, as we heard from Justin King. Even then, the Government's figures show that, in the period from December to February, the policy was costing the taxpayer something in the region of £3 billion.

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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 now looked at the CEBR report. I wonder whether he has read the sentence in it that states:

"The data also shows that the acceleration in retail sales volume was not achieved through fire sales and fierce discounting on the high street."

That exactly addresses one of the concerns that he and others have raised.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I have seen that comment, but I come back to the point that it is very difficult to disentangle all the various factors involved. The fall in interest rates at that time will have had a substantial effect on sales, as we have seen.

Having read the CEBR report, does the Minister agree with its view, which differs from that of the Government, on the actual cost of the VAT policy? The report cites a figure of £11 billion, rather than £12.5 billion. I would be grateful if the Minister updated the Committee on the Treasury's assessment of that cost, and told us by how much he thinks sales will increase. To what extent is the Government's view consistent with that of the CEBR?

That brings me to the heart of amendment 8, which deals with the need to look again at this matter and for the Treasury to prepare a report and to evaluate the various consequences of the policy. There is a need to assess the policy in greater detail. There is clearly a debate to be had, and the Government will always argue that the policy has been successful. Most of us would argue that the fall in interest rates had a greater impact on retail sales, and the growth in the economy is certainly disappointing compared with what the Government were hoping for when they announced their policy. I am not, however, convinced that the Treasury is the right body to review this, which I say in the context of last month's Budget, whose numbers have been heavily criticised. I will not go through all the detail, but the growth forecasts for 2009 and, more particularly for 2011 and 2012, seem to be out of line with those of most independent forecasters. The Government's reputation for making projections of the public finances has been very poor, and we have seen those projections substantially revised.

The point I am making is that there is a need for a body independent of the Treasury to make an assessment of projections for growth and for the public finances. We propose an "Office of Budget Responsibility", and there may well be a case for referring this sort of review to a body that is at arm's length from the Treasury in order to assess whether the right approach is being put forward. I raise this particular caveat over the Liberal Democrat amendment, but there is much to be said for looking again at a policy that has not, I fear, by any means provided the best use of £12.5 billion of taxpayers' money.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I welcome the hon. Lady to the debate and I give way to her.

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Photo of Alison Seabeck Alison Seabeck Chair, South West Regional Select Committee

I do not want to be impatient or churlish because you have been approaching this issue in a spirit of generosity, actually, but on two occasions you have—

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The First Deputy Chairman:

Order.

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Photo of Alison Seabeck Alison Seabeck Chair, South West Regional Select Committee

I am sorry, Mrs. Heal; I mean the hon. Gentleman. He said that he would at some stage tell us what the Opposition would have done to fill the gap if we had not reduced VAT in the way we did. We have not yet quite got there, however, and I am wondering whether we are going to.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am grateful to the hon. Lady, but I am not sure whether it is a question of filling the gap, as it more a matter of reducing it. There we go, but she brings me on to the next point I wanted to make, so I am grateful for her intervention.

What clause 9 principally does—I realise that I am venturing into a stand part debate, Mrs. Heal, but I am assuming that we are addressing the amendment at the same time—is to delay the implementation of the return to VAT at 17.5 per cent. from 1 December to 1 January. The reason for doing so is that the Government introduced their VAT change through a statutory instrument, which provided the authority to make that change only for 12 months. The Government now wish to add on an extra month, but to be fair to them, it was always their intention to do so. For the various reasons I have set out, however, we think it would be beneficial not to move the date on from 1 December to 1 January, but to stick with 1 December.

There are a number of reasons for doing that, so let me first address the point raised by my hon. Friend Mr. Ellwood about the difficulty of changing the VAT rate in the new year. It will be difficult for institutions in operation at the time when the VAT rate is changed, but perhaps even more significant is the fact that this will be in the middle of the post-Christmas sales. I should say the January sales, but it seems odd to have 1 January being in the middle and I am sure that you, Mrs. Heal, follow my point that there is a lot of activity going on in stores at the time of these sales. The representations we have received certainly suggest that retailers do not want the change to come in at this date. Whether it is the worst time of year, as Mr. Browne suggests, I am not sure, but it is certainly one of the worst dates and we believe there is an argument for changing it.

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Photo of Bob Spink Bob Spink Independent, Castle Point

Is there not a case for pushing the date back rather than bringing it forward—perhaps to 1 June, which might have electoral as well as commercial benefits?

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

The hon. Gentleman is right that a case can be made for moving it back, but that would have an effect on the Exchequer and, to be fair, I have been making the case that we do not have the spare money. As I have said, we oppose that because we do not think there is room in the budget, and we are therefore not persuaded of the case for moving it back to June or February or any other time.

Our proposal would have an advantage in addition to that of practicality: it would save some money. We can argue about what we should do with the money—whether some of it should go towards public works, some towards other tax cuts and some towards reducing the level of borrowing—but we are by no means alone in believing that the cut should be brought forward. In "Progress" magazine in March, in an article entitled, interestingly enough, "April 2009, make or break month for Labour"—Labour Members can work out for themselves whether it was a make or break month for them—Mr. Byers wrote:

"I supported the V.A.T. cut in December. It was exactly the right thing to do at the time and it has been supported by many independent commentators since. However, I do now question whether it has run its course both in terms of its overall benefit to the economy and in relation to the political return that comes to the government."

Speaking in the House on 31 March, Mr. Hoyle said:

"I believe it is time to bring forward the end date of the VAT reduction."—[ Hansard, 31 March 2009; Vol. 490, c. 845.]

It is clear that both Members believe that the time has come to return VAT to its previous rate.

For the reasons I have given, we will vote against clause 9. We want VAT to return to its previous rate of 17.5 per cent. on 1 December. We thought that the policy was bad when it was introduced in the last pre-Budget report, and the facts that have emerged since then have reinforced our view that we cannot afford it. We think that, in continuing to pursue their policy in the face of our warnings, the position of the Liberal Democrats and, indeed, the position of their own Back Benchers, the Government are making a mistake. The sooner they recognise it and stop pursuing a failed policy, the better it will be for the United Kingdom.

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Several hon. Members:

rose —

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The First Deputy Chairman:

Order. For the avoidance of doubt, I should inform hon. Members that I am indeed treating this as a clause stand part debate.

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Photo of Robert Syms Robert Syms Conservative, Poole

I congratulate Mr. Browne on tabling an amendment that gives us an opportunity to discuss a very important issue.

It is clear that economic conditions have been very turbulent over the past 12 months. In terms of public policy, the Government were in a difficult position in the pre-Budget report. They had to decide what to do, and what to do quickly. A VAT cut is one of the main things that could be done quickly. However, a bigger cut over a short period might have been better than a cut of only 2.5 per cent. over a long period. That would have really pulled money out of people's pockets, and made them feel that they were getting a bargain. A cut of several billion over three months might have had more impact.

My hon. Friend Mr. Gauke quoted John Maynard Keynes. It is clear that anyone who wants to move the economy on cannot become involved in electrification schemes and railways and so forth. As we know, given our planning process, those things take a long time. My preference is for a middle view. The report suggested in the amendment would be useful, because it would enable us to judge what the Government did in the light of the alternatives.

If we really want people to spend money, we give lower-paid people a voucher with an end date so that they can buy goods in a store. Alternatively, we give local authorities money that they can use to provide grants for environmental improvements to homes—which we know will be a major challenge—so that small business can become involved. Clearly, things have changed very rapidly. The Government made a decision in the pre-Budget report, and to some extent they are stuck with it. Therefore, it would be useful to have a report, particularly as 1 April 2010 is likely to be at the start of a general election campaign. We would have a document that we could discuss with great interest.

I suspect that the cut will, of course, make a difference to UK economic growth, but I am not sure whether that impact is really worth the £12 billion or £13 billion. I am also unsure whether it will have much effect on the competitiveness of small and medium-sized businesses. We have heard in the debate that there are costs. There are certainly costs to local authorities and to many businesses in this manoeuvre. On the disposable income of low-income households, as such households have a higher propensity to spend what income they have, there may be some modest positive impact on them, but I suspect there are other means and policy instruments that could have been used to put money into people's pockets.

The amendment has allowed us to debate this matter and if the Government produced a report, I rather suspect it would be useful in April 2010. However, as we have moved on and the overall financial situation has deteriorated, one would also have to assess other things, such as the £12 billion or £13 billion cut in VAT revenue. That will leave a long-term debt legacy in terms of interest and compound interest, and there is also the opportunity cost of what else could have been achieved in the medium term while leaving a legacy of some sort, such as insulated homes or improvements in the overall economy.

The Government were in a difficult fix in the autumn. They faced an unfolding situation. There was clearly an imperative to take a particular decision: to try to put money into the economy. They made a choice, but I do not think it was a very good one; there are better steps that could have been taken. The amendment of the hon. Member for Taunton is a useful one for the Committee to consider, and I hope he is brave enough to press it to a Division.

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Photo of John Howell John Howell Conservative, Henley

The amendment asks us to consider having

"a report containing an assessment of the impact of the temporary VAT rate reduction on" a number of areas. I want to concentrate on the impacts on "UK economic growth" and

"the competitiveness of small and medium-sized businesses".

It is crucial to strike the right balance between what is of value to the economy as a whole and what is of value to the competitiveness of individual businesses. On the latter, a fundamental issue is the cost of administering what will, by the end of this period, be two changes in VAT. Business has consistently seen the VAT cut as having no positive impact on their sales. The Federation of Small Businesses conducted a survey of 5,000 of its members, and 97 per cent. said it had had no impact at all in terms of boosting trade. There has been a big cost impact, however. I see that in my own constituency, where a number of small retailers are very unhappy. They are part of the fragile and vulnerable small business situation that we described earlier today. As a result, there are large numbers of empty properties in many towns—although there are perhaps some signs of shops being attracted back.

There is a cost involved in decreasing VAT and then increasing it again in terms not only of cash, but time. For those who run small businesses—especially those who have to adjust to these changes in VAT—that is perhaps the most precious commodity of all. The question of where to put in the effort and to use the expertise is crucial, but it is very difficult to cost. That is particularly difficult for a small business that sells tens of thousands of products, and perhaps has only one or two people running it.

The impact assessment for the Finance Bill listed a number of actions that business would have to take to implement the temporary VAT cut, including familiarisation; re-pricing; carrying out the extra bookkeeping checks involved; dealing with potential extra accountancy costs; and, of course, making systems changes and upgrades. It estimated that the total compliance costs for business would be about £300 million.

I was particularly worried by the paragraphs that followed, in which it was acknowledged that in deciding how to respond to those changes, businesses were likely to have to take lot of other costs into account. Such costs would arise from consulting advisers or, potentially, from renegotiating the terms of any contracts that are inclusive of VAT. Although the assessment recognised that those costs were likely, they were somehow dismissed as being commercial decisions—as if the other changes it had costed were not commercial decisions. Even the impact assessment recognises that costs that have not been properly analysed are involved, and that they are not part of the costings in the assessment. Thus, it is very difficult to make a judgment on this matter, and that has not been a particularly helpful part of the Government's assessment of that part of the activity.

On the costs on the ground, as I have mentioned, the FSB survey has shown that there is no sign of the VAT cut working, but it is worth examining whether it is working at the bigger picture level and whether the model behind it was applicable. Without an understanding of that, the assessment required by the amendment would be difficult to achieve. One of the worrying features about the underlying model was that it was a simple supply and demand model of consumption, which would perhaps have been suitable to use in an economy that was doing well, but in one that contained a large marginal element, it ignored the complexities involved. The policy and the modelling that must have taken place in order to introduce this adjustment—the VAT cut and then the raise forward—assuming that any modelling was undertaken, was flawed from the beginning.

The Financial Secretary and I have already crossed swords in the debate over whether or not the VAT cut has worked. At that time, he repeated the view of a report by the Centre for Business and Economic Research:

"'The figures are clear; the VAT cut is working. There was an immediate boost to the volume of retail sales after the cut was introduced on 1 December.'"

He went on to endorse the report's view that the cut was

"'good value for the taxpayer'".—[ Hansard, 27 April 2009; Vol. 491, c. 668.]

That is clutching at straws. The view has been based on the volume of retail sales, and there are problems with that approach. The Government cannot have it both ways. If they are going to put a lot of emphasis and reliance on that report, logically they must accept the criticism it makes of raising VAT again in January 2010. It states that that

"threatens to cause a consumer downturn and choke the fragile economic recovery".

If they are going to rely on the report for one thing, they must rely on it for the other—although that is not a favourable situation.

I have great difficulty in trying to assess whether the VAT cut has worked. It is one of those questions that are illogical in terms of their resolution, because we can make no direct comparison with the counter-argument as to what would have happened without the cut. The need for that was recognised in the evidence given by the Governor of the Bank of England to the Treasury Committee, in which he acknowledged that the real problem was that

"It is very hard to know what the counter-factual is."

We do not know how quickly spending would have changed if the VAT cut had not been made. That is the fundamental flaw in claims that the VAT cut has worked, as the Governor pointed out.

In the absence of a direct comparator, we need some form of proxy to represent it. A simple increase in sales is not enough. Traditionally, we have looked at whether sales of VAT-able goods have increased more than sales of non-VAT-able. The key proxies are generally non-food sales with VAT versus food sales without VAT. The difference should be surprisingly large if we are to claim any proof that the VAT cut has worked. Because those measures are proxies and the model is simple, it is not possible to distinguish on the basis of volumes, or even values, other factors that have already been mentioned, such as discounts, or to take account of postponed purchases or lower interest rates that may also affect the outcome. So there is no proof there that the VAT cut has worked.

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Photo of Alison Seabeck Alison Seabeck Chair, South West Regional Select Committee 9:00 pm, 12th May 2009

I am not as expert as the hon. Gentleman, but his argument about the proxies—spending on VAT-able and non-VAT-able goods—is flawed. If there is additional money in families' pockets because they have saved money on VAT-able goods, sales of non-VAT-able goods could rise because they have more money to spend on food and other products. I am not sure that the hon. Gentleman's argument makes sense.

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Photo of John Howell John Howell Conservative, Henley

I have some sympathy with that view, and it reinforces the difficulty of using proxies in such matters. The assumption is that because VAT has been reduced, people will go out and buy more VAT-able items. That assumption contains fallacies, and I am not sure that the distinction is very clear. But that is part of the difficulty of using proxies in situations where we do not have a proper counter-factual—what would have happened if what is being examined had not occurred. One can make a best guess and even do some modelling, but there is nothing to actually compare, which is why proxies are used. I agree that it is a difficult issue, but that is why claims that the VAT cut has worked are unsubstantiated and probably far from the mark.

I have already mentioned the comments from the report that the Financial Secretary is always keen to quote on such occasions about the impact of the date of the change. I wonder whether Ministers actually go shopping any more. Do they realise that Christmas and new year sales occur? That is not a hint of a present from the Financial Secretary, as I am sure that that would need to be declared somewhere. The arguments on the timing have already been made, and I have made my points about the difficulties of assessing the impact of the VAT cut.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

I am delighted to be able to make a few points on clause 9. I shall focus on three main areas—many of these points have been much discussed in today's debate—the first of which is the amount of the reduction, which is 2.5 per cent., and the importance of that figure; the second is the issue of the date when the rate reduction ceases; and the third is the cost of the 2.5 per cent. reduction in VAT.

The Financial Secretary to the Treasury makes an interesting point when he says that such a change can be an effective instrument in stimulating demand, but I am curious about how he came up with the 2.5 per cent. figure. What sensitivity analysis did he carry out about the effects of a 2.5 per cent. decrease as opposed to a 5 per cent. or 10 per cent. decrease in trying to drive demand and the volume of trade? The cut is an attempt to kick-start an economy, but in the two or three debates that I have attended on the issue I have heard that the instincts of retailers and consumers were that it would not suddenly drive people to go out and purchase more. When the 2.5 per cent. cut came into effect, did the Financial Secretary rush out and start buying more retail goods? Now that the VAT rate is down to 15 per cent., what has he gone out and bought that he would not have bought at the 17.5 per cent. VAT rate? Perhaps he can tell me how his shopping patterns changed.

It was also interesting to hear the discussions and observations about some of our continental competitors. It was interesting that the French attacked the reduction as a not particularly effective way of stimulating demand. We heard similar criticisms from the Germans and the Dutch, and even from the IMF—I think that it was the IMF chief economist who had no confidence whatsoever in the 2.5 per cent. VAT cut. As I said earlier to my hon. Friend Mr. Gauke, was it some sort of jealousy on the part of our European competitors? Were they suddenly nervous that huge volumes of trade would shift across continental Europe and across the channel, and that the Germans, French and Dutch would suddenly begin moving their trade from Germany, France and Holland into the UK to buy our goods merely because of this 2.5 per cent. cut in VAT? Somehow, I think not. I think that they were making an objective assessment that the 2.5 per cent. was not enough to move the dial with respect to individual buying patterns.

The proof of the pudding can be found in the evidence of experts—that is, the evidence of the people who run some of the big retailers. We have heard Justin King's comments. Retailers are cutting their prices by 15, 20, 30, 40 and sometimes even 50 per cent. to try to drive trade into their shops. As people wander down the street, wondering which shop they should go into, a sign in the window of a shop that says, "2.5 per cent. cut in VAT", across the street from a retailer advertising a 30 per cent. cut in the price of its goods will not drive people in to the shop with the 2.5 per cent. cut.

We should focus on talking to some of the smaller businesses, as I did in Braintree and Witham, two of the towns in my constituency. I did not get a sense from any retailers there that the 2.5 per cent. cut would drive up volumes of business, but those volumes need to be driven up, because I have seen some major retailers in my town centres—particularly in Braintree—simply shutting down and leaving because the business was not there. The 2.5 per cent. that the Government chucked at them to try to drive up trade did not really work, I am afraid.

My next question for the Minister concerns what analysis he, his civil servants and the various people from consultancies who work for him have done. What uplift in the volume of retail trade can be attributed directly to the 2.5 per cent. VAT cut? How has it affected growth in the retail sector? Has it led to a sudden growth in our GDP, a point raised by my hon. Friend John Howell? Those are pertinent questions, but my main interest is to know whether the Minister and his family rushed out and started to buy more as a result of the VAT cut. What goods did he end up buying?

My next question concerns the date on which VAT will return to its original rate. In our previous debate on these matters, my hon. Friend Mr. Ellwood said that the 31 December date was very inconvenient— [ Interruption. ] From a sedentary position, my hon. Friend Mr. Dunne reminds me that he made the same point, and retailers around the country agree. My hon. Friend the Member for Bournemouth, East has observed that 3 January would be more convenient, and better than attempting to get retailers to change their VAT system at a peak time when they are trying to drive up sales.

I am curious to know why the Minister is so keen on the 31 December date. Has he chosen it because it is the end of the calendar year? The end of the year for retailers is usually later, as I suspect that my hon. Friend the Member for Ludlow will explain in more detail when he gets the opportunity.

The 2.5 per cent. cut has not really worked. I have been persuaded by the argument from my hon. Friend the Member for South-West Hertfordshire that it has not been a big success and that we should cut our losses and go back to the 1 December date. That would be better than extending the misery for another 31 days— [ Interruption. ] John Robertson is saying something from a sedentary position. Does he want to make an intervention, or is he just talking to himself? He is clearly talking to himself.

I am not persuaded by the Minister. I hope that he will explain why adding the extra 31 days will be so important. Why has he chosen 31 December as opposed to, say, 3 January? As I and other hon. Members have pointed out, it is probably the worst day of the year to choose to change the rate back up to 17.5 per cent. from 15 per cent.

The third area that I want to spend some time on is the issue of cost. A number of figures have been thrown around, and it is clear that the process could be quite expensive for retailers. It has been estimated that it will have cost them about £90 million to implement the 2.5 per cent. cut, and that it will cost them another £90 million to change the rate back up to 17.5 per cent. Does the Minister have any figures that will help in estimating the cost to retailers of implementing both changes in a fairly short period?

Is £90 million an accurate figure? My hon. Friend the Member for Henley mentioned a much bigger figure—£300 million—for the cost to retailers, simply to meet the costs of compliance, let alone consulting fees and so on. What does the Minister think of that figure? Is it reasonable? It is important to consider the expense for retailers, because it is not only the big retailers who are affected; they can probably handle issues of compliance and implementing systems to deal with the changes. It is the SMEs who struggle to deal with the constant shifting of the goalposts on VAT. It is inconvenient to them. They want to spend their time, not dealing with compliance and other regulatory issues, but improving their trade. The cost of having to hire more people, perhaps half a day extra a week or even a month, is a meaningful amount to them, because, as we all know, retailers work on very thin margins. I am trying to gain an understanding of the costs to retailers. I would be interested to know what homework the Minister has done on that question.

Moving from the cost to retailers to the cost to the Exchequer, a figure of £12.5 billion has been quoted. Is that figure accurate? What does the Minister think? Does he think it is less than £12.5 billion or more—£15 billion? Have patterns of buying changed, thus changing that £12.5 billion figure, which is constantly bandied around? Clearly, the right hon. Gentleman will be unable to give me an immediate answer on changes in buying patterns, as he has just left the Chamber.

I have asked the Financial Secretary several questions. One is to do with the amount of the VAT reduction—2.5 per cent. Why not 5 per cent.? The second is to do with the date of the change. Why has 31 December been chosen—perhaps one of the most inconvenient dates in the calendar year? Why not 3 January? What is his real objection to the suggestion made by my hon. Friend the Member for South-West Hertfordshire, that the Government should stick with 1 December? My third question is to do with the costs. We have heard several figures, including £90 million for the costs of implementation, doubling to £180 million when the rate is shifted back; and my hon. Friend the Member for Henley talked about £300 million in costs. What does the Financial Secretary think of that figure?

In the words of my right hon. Friend Mr. Cameron, it certainly appears that the Prime Minister's VAT cut was an expensive failure. That is why the Conservatives propose keeping to the date of 1 December.

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Photo of Bob Spink Bob Spink Independent, Castle Point 9:15 pm, 12th May 2009

This debate is about whether one is a tax cutter or not. I am a tax cutter, unlike the official Opposition, who support the Liberals' amendment. I oppose the amendment because I am an unashamed tax cutter. I honestly believe that cutting tax is the best way to stimulate economic growth. I believe that people should keep more of their own money to spend themselves, because they can spend it better than the Government can spend it on their behalf.

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

That argument is peculiar, because when the VAT cut is put through the input-output model, one finds that direct capital investment saves or creates twice as many jobs as the VAT cut. The hon. Gentleman is technically wrong about the cut stimulating economic growth. It was not the most effective measure. The same amount in direct capital expenditure would have been more effective.

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Photo of Bob Spink Bob Spink Independent, Castle Point

The hon. Gentleman disagrees with some well respected Conservative Front Benchers, who felt that cutting VAT was the best fiscal stimulus possible and said so quite openly.

When the Minister winds up, will he say what he thinks the consequences for public finances and jobs would be if the fiscal stimulus were not given? I think that that would be extremely risky. It would be playing politics with people's jobs.

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Photo of Bob Spink Bob Spink Independent, Castle Point

No. The hon. Gentleman walked into the Chamber just two minutes ago, although the debate has been going on for 90 minutes, so I will not give way to him. I think the public finances will be in better shape because of the Government's fiscal stimulus, and I think the Economic Secretary to the Treasury agrees with me. I am simply shocked to see so many Conservative Members arguing against tax cuts; it is counter-intuitive.

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Photo of Bob Spink Bob Spink Independent, Castle Point

No. The hon. Gentleman has just walked into the Chamber.

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Photo of Bob Spink Bob Spink Independent, Castle Point

No, I will not. [Interruption.]

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

Order. It is quite clear that Bob Spink has no intention of giving way at the moment.

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Photo of Bob Spink Bob Spink Independent, Castle Point

I am grateful to you, Sir Michael. Does the Economic Secretary agree that cutting taxes was perhaps the most effective fiscal stimulus, that tax cuts stimulate demand, and that the tax cut is working rather well? Will he therefore put back to 1 June the date of the changeover from 15 to 17.5 per cent.? That would have great benefits, both commercially for businesses, and economically for the Government. He would certainly have this independent MP's support if he went for that strategy.

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Photo of Philip Dunne Philip Dunne Opposition Whip (Commons)

I am grateful to be called to contribute to this debate, Sir Michael. I touched on the VAT cut in my contribution on Second Reading, so it is a pleasure to be able to join in the Committee deliberations from the Back Benches. Much of the debate, and indeed the Liberal Democrat amendment to the clause, is an attempt to estimate the impact of the VAT cut in relation to other stimulus measures that have been introduced. Much has been said this evening about the difficulty of measuring the extent to which the apparent increase in retail transactions is attributable to the VAT cut, as opposed to other things.

I should like to give a bit of colour: now that we are in May, data have been published that tell us what has happened to different categories of retail sales since the VAT cut came into effect. In the first quarter of this year—from January to March—like-for-like sales in the food sector rose by 5.3 per cent., but like-for-like sales in the non-food sector fell by 2.9 per cent. That is according to the Monitor retail sales survey, which is one of the most widely respected retail sales measurements. That pattern was followed again in April, the figures for which came out very recently. In that month, like-for-like sales overall increased by 4.6 per cent. as against last April.

At first sight, that would seem to suggest that the Government's VAT cut had had a positive impact on sales, but I have to inform the Minister that that may well be something of an illusion. The total spent on food during that period has risen by less than food inflation over the same period. That indicates that the volume of food sold over those four months is lower than it was a year ago; it is negative. It is therefore erroneous to suggest that there has been an increase in food sales by volume during the period. As I have already indicated, non-food sales have actually declined during that period, so it would be hard for any statistician to be able to determine that there had been an increase in retail sales as a result of the VAT cut.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

Does my hon. Friend think that that could have to do with the Government's anti-obesity campaign? Does he think that that is the reason for the decline in volume of food sales?

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Photo of Philip Dunne Philip Dunne Opposition Whip (Commons)

As the deputy chairman of the all-party group on diabetes, I take a particular interest in the level of obesity in this country. I suggest to my hon. Friend that although the Government have, in order to keep medical bills down, made some strides to reduce the intake of individuals who consume too much, not enough has yet been done in that regard. A lot more could be done. I do not think that obesity measures are the reason that the volume of food sold has declined.

The figures for April showed an overall increase of nearly 5 per cent., as I have said. That could well be attributed to changing patterns—to changes in the date of Easter, a time when retailers put on special promotions and people like to spend money because they are off work, and, of course, to changes in that favourite in the retail trade, the weather. In 2009, Easter was in April, but in 2008 it was in March so sales were typically lower the month after Easter than they were in Easter month. The weather this April, as hon. Members will remember, was balmily sunny, and many of them will have joined my family—well, they were not actually with my family, but they did the same thing as us—in having Easter lunch outside in the sunshine, which we did not do in 2008. We managed to do it in April 2007, which presaged one of the wettest summers on record, and I hope that that is not a portent for this summer's weather. The weather this April was good, but the weather last April was bad, and those two factors may well account for a large part of the increase in overall sales.

Indeed, Stephen Robertson, the director general of the British Retail Consortium, said as much. He said of the sales figures:

"A sunny Easter that fell in April this year is the key reason why overall sales are up compared with last year when Easter was in March and miserable."

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

Given the Government's huge interest recently in the environment, does my hon. Friend believe that in pursuing their policy they were making a huge bet on global warming driving up sales?

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Photo of Philip Dunne Philip Dunne Opposition Whip (Commons)

My hon. Friend is most inventive in his excuses for the Government trying to account for the cut in VAT by linking it to increases in economic activity. The Government make great claims regarding their green credentials, few of which come to pass and even fewer of which are put into practice in their Budget measures.

I shall try to move beyond mere retail sales to other things that may account for the improvement in economic activity apart from the VAT cut. I shall quote Mr. Robertson again:

"Following a tough winter, there's some pent up demand, but there's no reason to think that customers suddenly feel flush or eager to spend. With unemployment set to grow through the rest of the year, mounting job worries will hold back spending for some time. The historically weak performance of the last 12 months is behind us, but we shouldn't celebrate yet."

I think he is quite right—it is too early to see the green shoots of economic recovery, and certainly too early to put that down to the VAT cut.

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Photo of Brian Binley Brian Binley Conservative, Northampton South

Does my hon. Friend agree that for every job loss, two people are equally worried about the possibility of losing their job, which widens the trend that he is discussing? Does he accept that analysis?

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Photo of Philip Dunne Philip Dunne Opposition Whip (Commons)

My hon. Friend will have seen the unemployment statistics that came out earlier this week, indicating that about 224,000 people joined the unemployment queues over the past three months. That takes the unemployment rate up to 7.9 per cent., which is utterly dire and takes us beyond the unemployment figures that the Government inherited in 1997. There are undoubtedly widespread concerns about unemployment which affect people's spending habits—not just those who have had the misfortune to become unemployed but their relatives, friends and neighbours, who fear for their own position.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

My hon. Friend makes an interesting point. I believe that up to 600,000 young people will leave school and college in June, thereby possibly increasing the unemployment figures by another 500,000 to 600,000. As a result of the VAT cut and the potential pick-up in volume, will the retail trade hire more people to deal with the problem, or have the Government seen no evidence of that coming down the path?

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Photo of Philip Dunne Philip Dunne Opposition Whip (Commons)

My hon. Friend has posed a question for the Financial Secretary, who is now back in his seat; I am sure that his colleagues will brief him so that he can provide a proper answer. My point is that the Government seem set on failing to provide sufficient university places to school leavers this summer. The ranks of the unemployed may well be swollen by young people unable to get into university because the Government have not provided adequate funding.

I move on to consider briefly one or two other factors that may have more significant impact than the VAT cut: I am thinking of the consequences of the reduction in interest rates. In the past 12 months or so, the base rate has declined tenfold from 5 to 0.5 per cent. That will undoubtedly provide a significant increase in disposable income to households that have tracker or variable rate mortgages. The point applies to the disposable income of not only low-income households, as suggested by the Liberal Democrat amendment, but that of all households that benefit from such mortgages. Those who were on fixed-rate mortgages and had the opportunity to reset them in the past 12 months will see some increase—although it will not be as significant, because the banks are clearly making up their margins on mortgages and are not fully passing on the base rate cut. However, I would argue that that cut has had a far more significant impact on disposable incomes and economic activity than the footling VAT cut.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

My hon. Friend makes an excellent point about the shift downwards in interest rates. Many of us have store cards; it would be interesting to know whether stores have passed on the decline in interest rates to consumers. Alternatively, have they kept their rates high? Do the margins that they make on that side more than make up for what they may be losing in trade due to VAT cuts and so on?

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Photo of Philip Dunne Philip Dunne Opposition Whip (Commons)

The retail sector is one of the most innovative in our economy. It would not surprise me at all if customers had the opportunity of significant discounting on the ticket price, particularly of large ticket items, while the back-office finance departments recovered their margins by maintaining significant spreads on store cards and other forms of credit made available to facilitate purchases.

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Photo of Peter Bone Peter Bone Conservative, Wellingborough

I am grateful to my hon. Friend for giving way; he is being exceptionally generous. Before he moves on, I want to put something on the record. A lot of banks are gouging people on interest rates. The interest on the Royal Bank of Scotland Black Card, which has just been introduced, is more than 50 per cent. a year. That bank has certainly not been passing on the cut.

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Photo of Philip Dunne Philip Dunne Opposition Whip (Commons)

The Committee will be astonished at that information, and I am grateful to my hon. Friend for bringing it to our attention.

I should like to make two other brief points to Ministers about the clause. The first is an issue that I raised when the VAT cut was first announced last autumn: the extraordinary impact on the sectors of our economy that have the benefit of flat-rate VAT arrangements. By introducing the measure with such haste, the Government failed to take properly into account the consequences for the many sectors that benefit from such arrangements. Like, I am sure, almost every other hon. Member, I have had constituents writing to me complaining that, far from seeing a reduction in VAT as a result of the 2.5 per cent. general cut, their customers have seen an increase because the Government have failed accurately to calculate changes to the flat-rate arrangements. Many businesses are having to impose on their customers a higher flat-rate charge during this period of the so-called VAT cut than they did previously. That is quite extraordinary, and the Government have failed to provide a proper justification for it at any point. I hope that they will revisit the subject, even at this late stage.

Finally, I should like to touch on the point made forcefully by my hon. Friend Mr. Newmark about the date. I also mentioned it in the Second Reading debate. It is quite extraordinary to choose a Thursday to introduce a significant change that will require the re-ticketing of every item, on and off the high street, that is subject to VAT. As my hon. Friend said, the only thing that the proposal has in its favour is that it is the calendar year end. It is not a month end or a week end; in most cases, it is not a financial year end. If the Minister had any familiarity with retailing, he would recognise that most retail financial year ends vary. They will typically fall at the end of January, not the end of December, but they vary according to the calendar. If it is, say, 31 December, it will be the final Saturday of the month closest to that date, not a Thursday.

I ask the Minister to consider something that might be familiar to his Parliamentary Private Secretary and to many of his other colleagues. Has he had any discussions with the retail trade in Scotland about what the impact might be of introducing a significant change requiring a large number of manual amendments to stock price items after close of business on Hogmanay evening? I suspect that that will be extremely inconvenient to retailers in Scotland, who will have to pay substantially more in overtime to their long-suffering staff for coming into work after lights out on Thursday 31 December, when they may well have other things that they would prefer to be doing. I hope that the Financial Secretary will deal with that point directly.

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

Before Christmas, the Government acted promptly with temporary, targeted, timely measures to support the economy and, in the Budget, we set a path for fiscal sustainability over the medium term.

The Liberal Democrat amendment proposes that an evaluation of the impact of the VAT cut be carried out. I can tell the House that on 6 March, with my agreement, HMRC commissioned a study from an independent research organisation, ORC International, whose report will be published, as always with externally commissioned research. The research will look carefully at the compliance costs burden imposed by the change and compare them with the estimates in the public impact assessment. It will also gather data about the commercial effects and the decisions that businesses took in the light of the VAT reduction, including looking next spring at the effects of the rate going back up again to 17.5 per cent. That is important, because it has always been clear, as has rightly been acknowledged during the debate, that part of the stimulus benefit of what we have done will be to encourage purchases ahead of the rate rise.

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Photo of Brooks Newmark Brooks Newmark Opposition Whip (Commons)

I appreciate that. I have asked the Minister a lot of questions, as have other Members. How much will the report that he has commissioned to do the homework that perhaps his own assistants and advisers should be doing cost the taxpayer?

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

I do not have the budget in front of me, but given our debate, I think that the House will welcome the fact that a piece of independent research will be published.

Mr. Browne will accept that definitive answers to the questions raised in the amendment will be elusive, because nobody can absolutely prove what would have happened otherwise. However, the report will certainly provide some useful data to help to draw some conclusions. The assessment that he seeks will be doable when the necessary economic data become available. To assess the impact of the VAT cut, we will need data from the consumer trends survey, breaking down consumption between zero-rated and VAT-able goods. Data for the first quarter of 2010 will be available in July 2010, so the timing will be a little later than his amendment proposes.

In the meantime, of course, ahead of the completion of that research, others have already drawn conclusions about the impact of the VAT cut and will continue to do so, not least in the light of the striking figures on retail sales from the British Retail Consortium to which Mr. Dunne referred. Until that point, I was surprised—or perhaps I was not—that nobody had mentioned them. Today, Stephen Robertson, director general of the BRC, described them as the

"best sales growth for three years".

Helen Dickinson, head of retail at KPMG, said:

"consumers are remaining resilient to the prospects presented by a gloomy economic outlook".

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

Does the Financial Secretary acknowledge that the BRC also stated that the April numbers should be treated with caution because of the weather and Easter?

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

Of course, but they are a data point in a growing and increasingly clear picture about what is happening to retail sales. That is in sharp contrast to what happened to retail sales in the 1990s recession, caused by the policies of the Conservative party, when there was a very different trajectory. In the first quarter of 2009, quarter-on-quarter GDP growth was minus 1.9 per cent., but retail sales growth was plus 0.9 per cent, which is a remarkable phenomenon. How is that remarkable performance to be explained? In part, of course, it is because of the cut in VAT.

Those who argued when the announcement was made that it would have no effect on retail sales were clearly mistaken. John Howell, whose contribution I enjoyed, took the view at the start of his speech that the VAT cut would have no effect. I say to him that if that is his view, he should simply examine the clear evidence from retail sales. To be fair to him, at the end of his speech he said that it was not possible to know whether the VAT cut had succeeded, so I suppose that that is at least progress in the right direction.

We can examine retail sales, and we can examine what Goldman Sachs said a couple of months ago about some earlier figures. It stated:

"With clothing and footwear...making the biggest contribution, it appears that the VAT cut was instrumental in driving this strength."

There is also the more recent report, which I am pleased that Conservative Members have now had the chance to have a look at, by the Centre for Economics and Business Research in the name of an adviser to the Conservative party—or a former adviser, I am not quite sure which—with the title, "Credit where credit's due—the VAT cut is working".

When the VAT cut was introduced, it was roundly condemned by the Opposition parties. But speaking of credit where credit is due, I pay tribute to the Liberal Democrats, who in their amendment at least acknowledge that it is right to look at the evidence before drawing a conclusion. I welcome that progress, and I hope that even the Conservative party might in the end not prove impervious to the evidence that is mounting, and will continue to mount, in the coming months. Today's data are another significant piece of evidence.

To be fair to the Conservative party, the shadow Secretary of State for Business, Enterprise and Regulatory Reform always recognised the likely effectiveness of a VAT cut in boosting the economy. Mr. Gauke declined to dissent from that view, so I take it that he agrees, although he was not able to say so. Certainly the hon. Members for Braintree (Mr. Newmark) and for Poole (Mr. Syms) both endorsed it in their remarks. I hope that in the end, other Opposition Members will come round.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

The point is that all of us on these Benches, and certainly the shadow business Secretary, made it very clear that we could not afford the VAT cut.

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

I hope that that shows the hon. Gentleman's implicit acceptance that the VAT reduction has boosted retail sales, as the shadow business Secretary said that it would. If the hon. Gentleman can confirm that, I will be most grateful.

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Photo of David Gauke David Gauke Shadow Minister (Treasury)

I am explicitly saying that we could not afford it.

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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 sorry that the hon. Gentleman has declined so pointedly to endorse his right hon. and learned Friend's viewpoint, but other Conservative Members agreed with it. I suspect that, over time, it will gain currency on the Conservative Benches, given the evidence that is becoming clearer and clearer.

We can say with certainty that retail sales and the condition of the economy would be worse without the temporary reduction and that it is benefiting all businesses—large and small, VAT-registered or not—by supporting the whole economy and increasing demand to higher levels than would otherwise be experienced. Of course, the VAT cut is especially beneficial to those on low incomes because it is worth 1.6 per cent. of gross income to households in the lowest income decile, compared with 0.5 per cent. to those in the highest decile.

To those who suggest that it would be a good idea if the change took place on 1 December, I emphasise that that date is immediately before the busiest retailing weekend of the year. It would be a much worse date on which to make the change—that was clear from our discussions with the British Retail Consortium. There is not much support for that.

I want specifically to tackle one point, which was raised in today's debate and on Second Reading. Indeed, I was surprised that an amendment had not been tabled about the difficulty for the many businesses that will remain open beyond midnight on 31 December in coping with two different VAT rates in a single trading day. Her Majesty's Revenue and Customs will allow a few hours' grace for businesses such as pubs and clubs, which will serve customers over midnight on 31 December, to enable them to charge the same 15 per cent. for a session that goes beyond midnight into the early hours of 1 January. HMRC will work with businesses on the details, but I think that that will address the concern.

I hope that I have reassured the hon. Member for Taunton that we have taken steps to secure the objectives that his amendment would deliver, in so far as they are achievable, and that he will feel able to withdraw the amendment.

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Photo of Jeremy Browne Jeremy Browne Shadow Minister (Treasury) 9:45 pm, 12th May 2009

Thank you, Sir Michael, for giving me an opportunity to speak at the conclusion of this helpful debate. Many hon. Members will appreciate the modest but none the less welcome concession that the Financial Secretary made at the end of his remarks about the specific arrangements at the end of December and into 1 January. Never let it be said that we do not achieve anything through our endeavours on the Liberal Democrat Benches to put pressure on the Government.

My party has said all along that the VAT reduction has undoubtedly had an impact. It would be odd to maintain that the Government could spend £12 billion to £13 billion to no effect. The question is whether the impact is as profound as the Government wished for that amount of expenditure. We have had a useful discussion about that, but I hoped that the review that I envisaged, or any other review, could draw the matter out.

The timing, which is effectively the stand part dimension of the debate, is relevant. We should consider whether there needs to be an additional stimulus for consumers to go out and buy items in December, of all months. The VAT cut costs roughly £1 billion a month, but, in December, one would expect the cost to be much greater because expenditure is so much higher.

The amendment provided a useful opportunity to debate the subject in the round and, despite being urged by some hon. Members to press it to a Division, I will not. However, I will seek to vote on clause stand part. Therefore, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Question put, That the clause stand part of the Bill.

The Committee proceeded to a Division.

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The Second Deputy Chairman:

I ask the Serjeant at Arms to investigate the delay in the Aye Lobby.

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The Committee having divided: Ayes 318, Noes 194.

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Division number 119 Surface Water and Highway Drainage Charges (Exemption) Bill — Clause 9 — extension of reduced standard rate and anti-avoidance provision

Aye: 318 MPs

No: 194 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

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Question accordingly agreed to.

Clause 9 ordered to stand part of the Bill.

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