Budget Resolutions and Economic Situation — Capital Gains Tax (Rates)

Part of Ways and Means – in the House of Commons at 2:37 pm on 24th June 2010.

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Photo of Mark Field Mark Field Conservative, Cities of London and Westminster 2:37 pm, 24th June 2010

I congratulate my hon. Friend Karen Bradley on her charming maiden speech. She spoke with great passion about her constituency, although I felt slightly guilty when she lamented the fact that there were no railway stations in it. There are 32 tube stations in my constituency, along with no fewer than three of the four railway stations on the Monopoly board. Perhaps we can swap a few between Cities of London and Westminster and Staffordshire Moorlands before the world is too much older.

The first Budget of any new Administration is always a momentous event. It inevitably sets the seal for much of what will follow economically. This is a groundbreaking and very brave Budget, which has expressly changed the terms of trade. In his speech, the Chancellor made a robust case for the nation to have a future that would be underwritten by the success of business and enterprise.

It is only the third time in more than three decades that such a Budget has been delivered. In the infinitely more clement economic weather of 1997, the then Chancellor, Mr Brown, while ostensibly sticking to his predecessor's spending plans, announced fatefully his intention to restrict private pension tax breaks. At a stroke, the culture of personal savings was undermined, and a distinct shift from individual responsibility to collective state provision was flagged up. It has, perhaps, taken a full 13 years for us to appreciate the true implications of what many then regarded as a technical manoeuvre born largely from a need to secure an easily available pool of cash to spend on pet projects, a state of affairs that was necessitated by the making of an orthodox manifesto pledge.

In the emergency Budget of 1979, the incoming Conservative Government signalled a desire to unleash the power of the free market from the state's grip, and to promote free trade after a characteristic spell of Labour mismanagement. Indeed, in the run-up to the general election this year, it became the pastime of many political commentators to draw comparisons between that momentous 1979 election and the political and economic landscape that faces us today. Yet, of course, that simplistic analysis ignored the significant differences between the two episodes. When the Conservative Government took control of the public purse in the final year of the 1970s, our nation had been subject to monetarist policies for two and half years courtesy of the IMF. In essence the very toughest decisions on public spending had already been made at that time.

In contrast, this year, while there was a superficial acceptance that the best of economic times was over, the sheer gravity of our economic problems has been too lightly skated over during the campaign skirmishes. Indeed, it served the expedient interests of all three main political parties to confine any economic discussion to a somewhat fatuous battle over public spending cuts of £6 billion; a sum of money that we borrow, not spend, every fortnight.

The public were willing to embrace change in 1979. Today, I fear that the electorate have been less willing to accept the seriousness of the national economic situation. The breathless relentless media coverage over the past two years charting stock market swings, house price crashes and global turbulence has convinced many that the worst is already behind us when, really, the reckoning has yet to begin.

I have felt that the past couple of years have been uncompromisingly ugly-we have seen that in many of the speeches from Opposition Members today-for those of us who support capitalism, free markets and open trade. Once again I am delighted that this Budget starts to make the case for empowering people, the smaller state and individual responsibility.

The election is now of course behind us. I remain concerned that our coalition Government do in all fairness lack the critical and explicit mandate to make some of the very tough economic decisions that are required as a matter of urgency to get the public finances back on track, for this Parliament-indeed probably for the entire decade-stands to be dominated domestically by the need to take a firm grip of the public finances.

This year's public budget deficit of some £155 billion represents 11 per cent. of GDP and means that we continue to borrow fully £1 in every £4 that we spend. This colossal living beyond our means is made up of consumption rather than investment in any meaningful sense of the word. Correcting that imbalance will necessitate diminished living standards for the generation of taxpayers yet to enter the workplace. In a large measure, that means that we have to take an axe to public spending, and that has of course been a remarkably rare event.

I am delighted by the generally positive media response to the Budget, but I should point out to my hon. Friends that the pain of the tax rises accounts for only 23 per cent. of the overall measures. Details of the adjustments to public expenditure will be hammered home in the months to come and will become fully apparent only in 2011-12. That is when the real logistic and political tests will come.

There is much to learn from history about those very few previous episodes when we have needed to make a substantial cut in public spending. The single most significant period of efficiencies and reductions in public spending came in the aftermath of the first world war and, perhaps significantly, was also in a time of peacetime coalition between the Liberals and Conservatives under Lloyd George. The wartime economy at that juncture was characterised by huge unprecedented state control, so much so that when the conflict came to an end, there was a massive upswing in the economy as pent-up demand, wartime savings and the removal of wartime controls caused a boom. However, the first peacetime Budget in 1919 actually led to a budget deficit of 6 per cent. of GDP after the then Chancellor concentrated on building homes fit for heroes and embarking on an ambitious social programme rather than balancing books.

Hot on the heels of that boom, however, was a grim slump. Having been one of the world's largest overseas investors before the first world war, Britain became one of the biggest debtors with interest payments taking up some 40 per cent. of all Government expenditure. The value of the pound was depressed, yet the anticipated export boom failed to materialise. Even preceding the slump there had been a public outcry at the Government's extravagance. As the economic gloom descended and tax increased, the outcry against Government waste became a thundering clamour.

It was against that background of public pressure and economic misery that the then Prime Minister Lloyd George appointed Sir Eric Geddes to chair an independent review of Government spending in the bitter year of 1921, the aim being drastically to cut spending by eliminating the waste that had been identified. The Geddes committee was to become the most thorough and rigorous outside investigation of public expenditure ever conducted in Britain. It was also, of course, highly controversial. Its membership consisted of only a single elected MP and five unelected business leaders, and while it was lauded by the world of commerce and Conservatives and taxpayers, it was attacked by the fledgling Labour party and the trade unions.

In the end, Geddes was able to slice some £54 million off Government expenditure. That seems an almost risibly small sum today, but in those days it amounted to a 10% reduction. We should soberly remember that, once ring-fencing is accounted for, departmental cuts of about 25% are likely to be required next year.

Back in the 1920s, a clear message was sent to Ministers, Whitehall and the general public that spending in any form would be very closely scrutinised like never before. The committee's work marked a crucial turning point in rebalancing the public finances from a distorted war basis to a peacetime basis. It is a lesson we need to learn in the months ahead as we go about the work of ensuring that these departmental changes happen.

The committee's success in rapidly achieving its goal was due to a number of factors: it had professional and respected committee members; it enjoyed unstinting political support; it worked to a very swift timetable, which I think we will have to do again this time; there was widespread public support for its aims; and it was willing to compromise on proposals that proved to be politically unfeasible-I think we will find ourselves in that situation again in the months to come. The experience of nine decades also has demonstrated that while securing public expenditure cuts is very politically difficult, it is far from an impossible task, as is often claimed. We undoubtedly need to try to achieve great public support. The experience of the 1920s showed that while voters might agree in general with cuts, they almost never agree with specific cuts that directly affect them. To put it simply, we need to ensure that the cuts are fair, focused and effective.

History also provides important perspectives and pointers to the future. Wisely, the coalition Government have an even more recent precedent in mind. David Wright rightly pointed out that the Canadian model of deficit reduction in the first half of the 1990s took place in an era of great global growth and plenty. We should not underestimate how much easier that made its very painful readjustments, under which a quarter of public sector employees in the country lost their jobs. By contrast, today's reductions in the head count will, to an extent, be tomorrow's unemployment rise.

In Canada in the 1990s, the Government had already levelled with the voters over a period of time. They then proceeded to provide very clear evidence, on a year-by-year basis, of the gains as expenditure was reduced. They also made the moral case that the living standards of future generations of taxpayers should not be diminished to pick up the tab for the consumption and debts of current taxpayers. That is absolutely crucial.

This has been an extremely brave Budget from the Chancellor. The fact is that despite the-at times contrived-anger from Opposition Members, those who are most likely to suffer are middle England voters, who are the very people the Conservative party has relied upon for electoral support. The Budget's promise to be tough but fair is largely borne out, especially in its protection for the poorest and most vulnerable in our society. Indeed, I have been calling for some years now for the removal of the very lowest earners from income tax altogether, and I am very pleased about the steps that have been taken in that regard.

I sound only two notes of caution. First, I believe that the Office for Budget Responsibility unemployment projections have been over-optimistic. Indeed, such has been the unreliability of economic forecasting over recent years, that I think that unemployment will not peak this year, but that it will be higher in both 2011 and 2012. Secondly, I fear that there is a real risk of serious sovereign default in the eurozone, as has been discussed.

I do, in part, accept the Opposition's view that there is a significant element of risk in this Budget, with many of the toughest measures coming in next year when the coldest winds may well be sweeping across the continent. However, for the sake of this nation's economic welfare, I believe this calculated judgment is well worth taking. Given that denial, debt and delay are part of the problem, I cannot see that they will be the solution to this crisis.

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