Clause 3 — Rate of value added tax

Bill Presented — Shared Parenting Orders Bill – in the House of Commons at 4:32 pm on 13th July 2010.

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Photo of Nigel Evans Nigel Evans First Deputy Chairman of Ways and Means

With this it will be convenient to discuss the following: amendment 54, page 2, line 7, leave out '20' and insert '18'.

Amendment 22, page 2, line 8, at end insert-

'(2) Subsection (1) shall apply until 4 January 2012.'.

Amendment 14, page 2, line 9, leave out subsection (2).

Amendment 1, page 2, line 12, after 'made', insert

'on or after a specified date'.

Amendment 41, page 2, line 13, at end insert

'unless the report referred to in subsection (6) has not been completed, in which case the date shall be 4 January 2012.'.

Amendment 2, page 2, line 15, after 'imported', insert

'on or after a specified date'.

Amendment 42, page 2, line 15, at end insert

'unless the report referred to in subsection (6) has not been completed, in which case the date shall be 4 January 2012.'.

Amendment 3, clause 3, in page 2, line 17, at end add-

'(6) In subsections (3) and (4) above "a specified date" means a date specified by the Treasury by an order made by Statutory Instrument, which may not be made until-

(a) an impact assessment of the effect of this section and Schedule 2 has been laid before the House of Commons; and

(b) a draft of the order has been laid before, and approved by resolution of, the House of Commons.'.

Amendment 23, page 2, line 17, at end add-

'(6) The rate of value added tax shall remain at 17.5 per cent. on children's prams, cots, toys, high chairs, babies bottles, nappies, children's sanitary products and teething-related goods.'.

Amendment 25, page 2, line 17, at end add-

'(6) The Chancellor of the Exchequer must, prior to the introduction of the change to the rate of VAT specified in subsection (1) above on the date specified in subsections (3) and (4) above, compile and lay before the House of Commons a report containing an assessment of the impact of the increase in VAT on-

(a) the disposable income of low-income households,

(b) people with physical and mental disabilities,

(c) the competiveness of the UK Retail Sector,

(d) the competiveness of the UK construction industry,

(e) the NHS, and

(f) local government.'.

Amendment 40, page 2, line 17, at end add-

'(6) Before 4 January 2011 the Treasury shall lay a report before the House of Commons on the scope of the standard rate of VAT.'.

Amendment 43, page 2, line 17, at end add-

'(6) The Treasury shall prepare a report into the impact of the rise provided for by subsection (1) on-

(a) pensioners;

(b) children and child poverty;

(c) inequality;

(d) the bottom quintile of households by income;

(e) charities, and

(f) the informal economy, in the United Kingdom and lay it before the House of Commons.'.

Amendment 46, page 2, line 17, at end add-

'(6) The Treasury shall prepare a report into the impact of the increase in VAT rate provided for by subsection (1) on pensioners in the United Kingdom in 2010-11 and 2011-12; this report shall be prepared and laid before the House of Commons prior to the Commons Committee stage of any further Finance Bill that is brought before the House in the current Parliamentary session and shall propose ways in which the pensioner population of the United Kingdom can be assisted in meeting the additional costs imposed on them by the rise provided for in subsection (1).'.

Amendment 55, page 2, line 17, at end add-

'(6) Subsection (1) shall apply until 4 January 2013.'.

Clause stand part.

Schedule 2 stand part.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I shall speak to amendments 13 and 14, tabled by me and my hon. Friends. Amendment 14 is a probing amendment. I have no particular problem with a reduction in the VAT rate relating to the restrictions in the value of imported goods, but I am seeking to probe to ensure that the necessary changes will definitely be in place so that businesses are not charged more than they should be when the provision comes into force. When the Conservatives were in opposition, they quite rightly used to berate the Government for the size and complexity of the tax code. They would pile up Tolley's tax guides as evidence that it was complicated, so I want to make sure that they have dotted the i's and crossed the t's on this particular change.

One might imagine that importing something into this country would be reasonably straightforward, and that a modest change to the VAT rate would be simple to make. If something is imported by air or sea, however, it requires a certificate. It can be done under the single administrative document; it can be manually processed with an SAD authenticated copy 8; it can have a trader input computerised process with a weekly VAT certificate issued by the customs computer under report TW-AH or TW-BH; and it can have a post-entry correction form C18. Removal from a customs warehouse would require a form C259, and an excise or customs warehouse requires a duty payment form W5, W6 or W20-and so on and so forth.

Of course, VAT is far from simple even on imports from the EC. The VAT territory of the European Community in respect of Denmark excludes the Faroes and Greenland-and there is much more of this to come. For Germany, Busingen and the isle of Heligoland are excepted; while for Italy, there are the communes of Livigno and Campione d'Italia, and the Italian waters of Lake Lugano. Portugal includes the Azores and Madeira. Spain includes the Balearic islands, but excludes Ceuta and Melilla. The United Kingdom includes the Isle of Man. Then there are the overseas French départements and Mount Athos in Greece.

I am merely trying to explain the extraordinary complexities that will have to be addressed in advance to ensure that this modest VAT reduction can be implemented and that businesses can operate fully and safely. Other Members may have identified other weaknesses in the reduction, but I will allow them to make their own cases.

As I said on Second Reading, the real damage done by this Finance Bill relates to the Government's determination to raise the standard rate of VAT from 17.5% to 20%. Amendment 13 seeks to delete that VAT increase-an increase that is wrong precisely because it directly contradicts the stated intention of both the coalition parties, which say that they want to create a fairer society. I think that, on balance, the Liberal Democrats were right when, before the election, they warned of the Conservatives' "VAT bombshell". It is no less threatening and fateful today. Looking at the serried ranks of five Liberal Democrats who are sitting here, I wonder whether this is the time for them to stick with principle, and perhaps forgo the possibility of having a ministerial Mondeo one day.

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Photo of Angus MacNeil Angus MacNeil Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Constitutional Reform), Shadow SNP Spokesperson (Scotland)

My hon. Friend made a good point about the Liberal Democrats' "VAT bombshell" warnings. Those warnings were, of course, issued when the pre-Budget report had forecast a deficit of £177 billion. By the time of the Budget, however, the deficit was only £149 billion. With a lower deficit, the Liberal Democrats wanted more VAT to plug the gap. Can my hon. Friend explain their thinking?

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Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I would be here for some time if I were to explain the convoluted thinking of the Liberal Democrats, but my hon. Friend has made an extremely important point. Early forecasts of the deficit were high and later forecasts were lower, almost certainly as a consequence of the fiscal stimulus that took place at the time. I think that the Liberal Democrats are wrong to embark on an increase now. I shall explain some of the other economic consequences later, but just in case anyone thinks that I am being unbalanced and that I am going to let Labour off the hook, I think the very fact that the original plan had worked made it difficult to understand why Labour should allow the United Kingdom to be one of only two countries in the G20 to withdraw a fiscal stimulus package in 2010.

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Photo of Jo Swinson Jo Swinson Liberal Democrat, East Dunbartonshire

May I complete the picture presented by Mr MacNeil? While it is certainly true that the overall deficit has fallen somewhat, the structural deficit-the bit that we really need to worry about-is in fact £12 billion higher than was anticipated. Incidentally, that is about the same amount that will be raised by the VAT increase.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

The hon. Lady is right about the size of the structural deficit. I have never disputed that. She is also right to suggest that the VAT increase will provide some £12 billion to £13 billion more for the Exchequer. That, too, is a matter of recorded fact. However, it does not justify a short-term, fixed attempt to tackle the deficit, leaving little flexibility. Indeed, the case that she makes-that there is a great deal of uncertainty, and things change-probably justifies our original intention to go for a medium-term deficit consolidation strategy in the first place.

While, as I conceded on Second Reading, it is possible that, in cash terms at least, wealthier people will pay more VAT, it is equally clear that the poorest 10% will pay considerably more of their cash to the Government as a percentage of disposable income-three times more-than the richest 10%. All that is due to choices made by the Government. They have previously argued, and I am sure will argue again this evening, that the increase was unavoidable. However, there was nothing unavoidable about putting up VAT, nothing unavoidable about an accelerated attack on the structural deficit, nothing unavoidable about a deficit consolidation plan over a fixed term, nothing unavoidable about taking £32 billion more in public service cuts on top of the cuts bequeathed by the Labour party, and nothing unavoidable about £40 billion a year of extra fiscal tightening in addition to the £57 billion or so planned in the final year by the Labour party. So this coalition Government could have avoided raising the VAT bill for the poorest families to over £31 a week.

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

Will the hon. Gentleman elaborate on the fact that the income tax threshold has been raised by £1,000, taking almost 1 million people out of income tax? That is, of course, a regressive tax, whereas VAT is charged on about 50% of consumer goods. Is not the effect on the poorest families in this country therefore mitigated?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

Obviously income tax is paid on income and VAT is paid on all spending, including by people who do not earn and who therefore will not benefit one jot from the income tax change.

Photo of Angus MacNeil Angus MacNeil Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Constitutional Reform), Shadow SNP Spokesperson (Scotland)

Given the Liberal Democrats' arguments on deficits and structural deficits, and the subjectivity of those arguments, should they and their Conservative allies and friends not have a sunset clause for this VAT rise to ensure that when the deficit reaches a certain point they will hit reverse gear and think of pensioners and the low paid, rather than of expediency in government?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I would be very supportive of a sunset clause if this measure were a serious attempt to tackle the structural deficit and get the accounts on to a balanced basis thereafter. There may well be later amendments that posit that view, and we will see whether they are pressed to a Division.

This change was a political decision and we have the opportunity this evening to reverse it and to demand again a credible medium-term deficit consolidation strategy, not one that simply puts up VAT, with all the social and economic consequences. We should think about the impact that the increase will have on families-not just hard-pressed families who are working, but those who will see unemployment benefits reduced in real terms, whose tax credits may be cut or squeezed, and whose housing benefit, particularly in areas where rented housing is expensive, will come under real pressure. That is the part of society that will suffer most from this VAT rise. According to Shelter, almost half of local housing allowance claimants are already making up a shortfall of almost £100 a month to pay their rent. It is those people at the bottom, who are working hard on modest means and are already struggling to make ends meet, who will be hit hardest by this additional VAT rise.

There are, of course, many other reasons to oppose the rise. Mike Bailey, the head of indirect tax at PricewaterhouseCoopers, and Marc Welby, the VAT partner at BDO, both point out that some businesses are exempt from VAT, such as banks, charities and certain public sector businesses, and they will be hit by not being able to recoup extra VAT costs on expenditures, for example on accountancy and legal fees. So this is an additional charge on certain key businesses and on charities.

David Smith, chairman of the Shadow Monetary Policy Committee, a group of independent economists, said that the move would increase unemployment by 235,000 over the next decade and reduce GDP by 1.4% over the same period. GDP forecasts have already been downgraded in the last Office for Budget Responsibility report. I am desperately hoping that that is wrong and the Government are right, but I fear the worst, and we may see a detrimental impact on GDP growth as a consequence of the rise. It is also warned that the job losses will put a permanent dent in the living standards of many in this country.

Peter Jenkins of the Charity Tax Group, representing more than 400 leading charities, said that the VAT increase was disastrous for charities, resulting in a bill of £150 million for irrecoverable VAT at a time when the Government-I understand why they are doing this-are asking the charitable sector to take on some or many of the roles currently undertaken by public bodies, local authorities and the state generally. When the Government are trying to encourage the transfer of responsibility and work from the public sector to the charitable sector, it seems extraordinary that with the VAT rise they will at a stroke place the charitable sector with an additional £150 million bill.

Photo of John Pugh John Pugh Liberal Democrat, Southport 4:45 pm, 13th July 2010

The hon. Gentleman is making a big thing about VAT being 20%. It has been 17.5% for as long as he and I have been in Parliament, and it has been accepted by hon. Members that priority is sometimes given- [ Interruption. ] Well, except for when it was reduced for a very short period and put back up again. In 2007, Labour Members gave priority to cutting income tax. Can the hon. Gentleman refresh our memories on his record in calling for a reduction in VAT when it was 17.5%, because presumably, it must have had some of the pernicious effects he is talking about now?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I will be delighted to search back in Hansard and give the hon. Gentleman chapter and verse on what I have done in relation to VAT. The bottom line is that we have a 2.5% rise now, designed as a political choice to tackle a deficit over a fixed term, that is the wrong strategy to begin with. However, this is symptomatic of that strategy and emblematic of the problem, and as I shall come on to say, in the end it will lead to the poorest in the country paying the highest price for the political choices that this coalition is making.

Photo of John Pugh John Pugh Liberal Democrat, Southport

Is the hon. Gentleman saying that 17.5% would not have made a difference-that it was not regressive and would not have hit exactly the same groups? If it was regressive, why did he not do something about it?

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I would have been absolutely delighted to be in government and to have a progressive tax system that helped ordinary people and stimulated business growth, as we in my party have done in the Scottish Government. We have reduced business rates to grow local businesses, and frozen the council tax for three full years to help local people. However, we are now faced with the consequences of a coalition agreement that will see the VAT rise hit the poorest the hardest. On balance, the record of my party in government in Scotland will be viewed far more favourably than the VAT increase introduced by the Liberals and the Tories in this Westminster coalition. However, I am being distracted from my amendment; that is the Liberals' fault, as well.

I was making the serious point that this is an additional £150 million bombshell tax on charities, but there is also the additional cost to the public sector generally. The health service alone in Scotland will now have to find £26 million from its budget in order to pay the VAT bill. At a time when all of us, presumably, want to protect the front line-the prison service and the police in England, Wales and Northern Ireland; the teachers; the nurses; the social workers: indeed, every public body and all the people who do the work-this Government, backed by the Liberals, are forcing those public bodies to pay that hard-earned cash to the Treasury instead of ensuring continued investment in and payment to the front line. That is a ridiculous position to find ourselves in.

In economic terms, this makes no sense. The British Retail Consortium described the rise as "disappointing". I said on Second Reading that that was something of an understatement. It went on to say:

"We didn't want a VAT increase. It'll hit jobs."

Simon Newark of UHY Hacker Young warned that the rise could push up prices on the high street by about 2%, which could have a significant impact on inflation. He went on to warn:

"Higher inflation could trigger interest rises, risking the spectre of the double dip recession."

Others were warning that the rise in VAT will exacerbate cash-flow problems.

I said at the beginning of my remarks that the poorest will be hit three times harder than the richest. Some estimates have suggested that those earning under £14,200 will be hit six times harder than those at the top of the pay scale, earning more than £49,700. I concede that that estimate may be at the far end of the scale, but the point is that this VAT rise is going to hit those on low and modest earnings, and without earnings, extremely hard.

Is it not the case that this VAT rise also increases the incentive for people to operate in the shadow or cash economy, where income tax and national insurance contributions are not paid, and exacerbates the yield issue for the Government?

Photo of Michael Weir Michael Weir Shadow SNP Spokesperson (Business), Shadow SNP Spokesperson (Energy and Climate Change)

Does my hon. Friend recognise that there is also a disparity in the areas that will be worst hit? In rural areas, where most of the goods come in by road, the increase in VAT on fuel will hit disproportionately hard and will have an even bigger impact on people on low incomes or no income.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

It is actually worse than that. Goods of all sorts tend to be dearer in rural areas to begin with, the VAT is added to that price and so more VAT, in cash terms, is paid on the purchase, or the sale, of the same item in a rural part of the country than in a competitive city centre.

Then we must consider the fuel situation, which is extraordinary because VAT is paid on top of duty. This Government are keeping the three duty rises of the previous Government, and each duty rise will also have additional VAT at 20% on top flowing its way to the Exchequer. My hon. Friend Mr MacNeil, like all my hon. Friends, is right to say that in remote and rural areas, in particular, this is an umpteen-level whammy, as the VAT goes on top of every single duty rise for every single good delivered to those areas.

Of course, the effects do not just stop and start at rural areas, because bits of the local economy are also affected, particularly small service companies. Retailers and restaurants may find themselves between a rock and a hard place. As Stephen Law, president of the insolvency trade group R3, said, those businesses will

"struggle to work out what will damage their bottom line more: taking on the extra tax burden or suffering an inevitable fall in consumer demand if they pass the tax on."

When we think about the consequences and how that can damage what may already be fragile companies on local high streets, we can begin to see the very real damage that may be caused.

We can see that damage before we consider the law of unintended consequences. I thought that The Scotsman on 4 July was right in its article headed "Cowboy builders set to return as VAT rises". It stated:

"Stuart Brodie, head of tax at Grant Thornton in Scotland, said not only would the VAT increase fuel the black market but past trends showed it would also reduce the government's tax take."

The article quoted him as saying:

"You generally see that if you cut the tax rate, you up the tax intake as it's less attractive for businesses to avoid it and vice versa".

According to the article, he added that

"the VAT rise would act as a disincentive for many legitimate builders at the lower end of the market to grow their businesses as it would be more cost effective for them to do less work and keep turnover below the £68,000 VAT registration threshold."

He also said:

"You are putting an automatic collar on their ability to grow their business".

This is happening at a time when we need those small businesses. In Scotland 90% of people are employed by the smallest businesses. We need everyone in the small and medium-sized enterprises sector to be growing, taking on, employing and paying all the tax they possibly can.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

The hon. Gentleman has been speaking for slightly more than 20 minutes, telling us where VAT falls and where it does not fall, and what effects an increase may have. His amendment seeks to strike out the increase completely, thereby putting a £13 billion hole in the Chancellor's Budget. I am waiting patiently to find out what the hon. Gentleman's suggestion is as to where that £13 billion will come from.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I explained at the beginning of my speech that the whole approach of a fixed-term deficit consolidation plan was wrong. I explained the same thing to the Labour party when it was in power. I want to see a medium-term deficit consolidation plan which, over the first 12 to 15 years, will give us £50 billion of savings on Trident and its replacement-an approach in which the Liberals believed only a few short weeks ago. We have a very credible alternative plan. The amendments and the new schedules were tabled to the Fiscal Responsibility Bill, and I am sure that the hon. Gentleman remembers that debate extremely well.

My party disagrees with the approach that is being taken. This rise is the most damaging bit of the approach, because not only is it socially and economically wrong, but it disproportionately affects the poorest families. I shall quote briefly from the Save the Children report, because it sums this up best. The report states:

"Families living in poverty already pay a premium for goods and services. They are more likely to have prepayment meters, live in an area without...cash machines and have pay-as-you-go mobile phones" and so on, and says that there is already

"a 'poverty premium' of more than £1,000 a year. Any increases in taxes that affect those on low incomes, particularly VAT, would disadvantage low income families even further."

That report is extremely well put together and incredibly credible, and I support it entirely. Its assessment of the damage that will be caused is right.

It cannot be right that the very poorest in society, who are already paying a poverty premium, should be forced to take on the bulk of the cost of a fixed-term deficit consolidation plan. In particular, the £13 billion a year take in VAT is socially irresponsible and economically damaging and, most of all, hurts those at the bottom of the pile. We will be delighted, if it is possible later today, to press amendment 13 to a vote.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

It is a pleasure to follow Stewart Hosie. I want to support amendments 40, 41 to 43 and 46, tabled in my name and those of my right hon. and hon. Friends, as well as to discuss clause stand part.

This is a vital debate. The debate on clause 3 touches on the core of the Budget that the Chancellor presented to the House some two weeks ago. The tax measures that sit at the heart of the Budget and that are the subject of this clause all flow from the decisions and the fiscal judgment that the Chancellor took when he presented the Budget to us. This clause is the automatic consequence of the fiscal mandate that the Chancellor set out for us a few weeks ago and, in particular, of his ambition dramatically to accelerate the time period in which we will eliminate the structural deficit in this country in order to bring forward by just one year the date at which debt as a proportion of our GDP begins to fall.

The price of accelerating that moment is, of course, £40 billion of extra tax rises and spending cuts. That has left the Chancellor-we might get a chance to discuss this in a clause stand part debate later-reliant on Office for Budget Responsibility forecasts, which are optimistic. To give Sir Alan Budd his due, even he says that there is only a 40% chance of his forecast coming to pass next year.

In the Budget debates over the course of the last couple of weeks, we heard that the Chancellor is now pinning all his bets on an increase in business investment and in export growth. We have achieved that before, but only once since the Library started collecting figures on the subject in 1966. Of course, the Chancellor is relying on that happy coincidence of business investment growth and export growth in every one of the next three or four years. It is fair to say that most people would not quite bet on such an outcome coming to pass, but rather than seeking to stimulate domestic demand and to create better conditions for business investment in the UK domestic economy, the Chancellor has instead chosen to give consumption the biggest whack possible and to introduce a consumption tax. Indeed, the hit to our growth is so severe that buried in the tables at the back of the Red Book we learn that an extra £9 billion of tax increases are required simply to make good the loss of growth and the loss of jobs.

Photo of John Pugh John Pugh Liberal Democrat, Southport

I know that the right hon. Gentleman is a man of enormous candour and frankness and we also know that the previous Chancellor wished to raise VAT to 19% but was overruled by the then Prime Minister. Which side did the right hon. Gentleman take in that argument? Did he think that the previous Chancellor was correct or did he think that the Prime Minister was correct? What advice did he offer?

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury 5:00 pm, 13th July 2010

The hon. Gentleman knows that the Chancellor is a member of the Cabinet and, as in all Cabinets-I am sure this is true of the Cabinet today-the then Chancellor was subject to the collective responsibility that we all shared. The judgment that he reached was his final judgment, and that was the judgment that he presented in the March Budget.

I want to touch on three aspects of the debate. If I may, I will start with amendments 41 to 43, the purpose of which is quite straightforward: they seek to make good the fact that there is no mandate for the clause. I do not think that either Government party could truly claim to have solicited from voters any ringing endorsement for clause 3. If anything, in their hearts, they could assume that the public voted against the subject of the clause. Today's debate is important for Parliament and for the public, and I certainly hope that we will not be subjected again to the spectacle of the Government Chief Whip, who is not in his place, seeking to force a closure motion on a Finance Bill debate. Over the centuries, nothing has prevented Parliament from debating the wisdom of the Executive's attempts to tax the people of the country, and it would be unfortunate, particularly for the Conservative party, which prides itself on being a party of tradition, if the Chief Whip were single-handedly to put one of our most cherished traditions in the bin.

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Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. May I comfort the right hon. Gentleman by saying that a temporary Chair cannot accept a closure motion in Committee?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I am greatly reassured by that, Mr Hood, as I was worried that the Chief Whip would again, later this evening, detect a certain exuberance or failing of stamina among some of those in his pastoral care.

The first group of amendments has a very simple purpose. As the clause is a measure with no mandate, it is surely important for hon. and right hon. Members present not just to vote for it in the dark. Surely, we have a responsibility, as legislators, to ensure that we genuinely understand the impact of the VAT increase on the people whom we are here to represent. It is perfectly possible that even when that clarity has been acquired, the Government will say that they want to press ahead with the measure come what may, but we should study how different groups will be hurt by the VAT increase. Amendments 41 to 43 ask the Treasury to prepare a report on the impact of the rise in the standard rate of VAT on pensioners, children and child poverty, inequality, the bottom 20% of households by income, charities, the informal economy and the black market. Under the amendments, if those reports are not completed, the increase in the standard rate of VAT would not occur until 4 January 2012.

The purpose of the amendments is perfectly straightforward. We know that there are more Finance Bills in the pipeline, some of which might arrive in the House fairly soon after the summer recess, but the House will want to be able to press the Government-from both sides, I hope-on the need to include in future Finance Bills measures to compensate those who have been hit particularly hard by the increase in VAT should it arrive successfully on the statute books this afternoon. The reports are enormously important because the public were denied a debate, during the election, about what protections should be put in place. Indeed, they could be forgiven for believing that no party intended to increase VAT.

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Photo of George Freeman George Freeman Conservative, Mid Norfolk

The right hon. Gentleman has said that the Government do not have any mandate to change the VAT rate, but did not he give us a mandate when he left a note saying that he was sorry to tell us that there was no money left? He never said that during the general election campaign.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

For the hon. Gentleman to begin quoting private correspondence, even that written in bad taste and in jest, is particularly inappropriate in a Finance Bill debate on a £19 billion tax increase of which his constituents will pay part. If that is the strength of his contribution this afternoon, I think that they will be disappointed. I was about to say that the Deputy Prime Minister was among those who gave the public the impression that there was not a plan to increase VAT. He said on 8 April:

"Our plans do not require a rise in VAT. The Tory plans do. Their tax promises on marriage and jobs may sound appealing"- appealing to him, I think he meant-

"But they come with a secret VAT bombshell close behind."

There was, of course, a nice poster to go with the quotation, which we talked about last week. I was one of those who were lucky enough to get a copy of the poster before the Deputy Prime Minister took it off his website last Tuesday night-it is good to note that at least they were not all in the bar. The poster was clear. It said:

"Tory VAT bombshell. You'd pay £389 more a year in VAT under the Conservatives."

The Deputy Prime Minister's assertion, however, that no rise in VAT was needed in the Liberal Democrat plans found its echo in words from Mr Osborne, who is at ECOFIN today. He told The Times on 10 April:

"We have no plans to increase VAT."

Photo of Jo Swinson Jo Swinson Liberal Democrat, East Dunbartonshire

The right hon. Gentleman is talking about the election campaign and what was said about VAT. Does he accept that during the televised Chancellors' debate the Labour, Conservative and Liberal Democrat spokespeople refused to rule out any future rise in VAT, and the then Labour Chancellor, we learn from Lord Mandelson's memoirs, was planning to raise VAT to 19% in any event?

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I know that the hon. Lady is not trying to run away from this debate, because she has been writing to colleagues in Scotland and including in her letters the immortal sentence, "The increase in VAT did not feature in any of my election publicity." She would have to accept therefore that the impression given by both the Deputy Prime Minister and the Chancellor in the words that I have just read out would conjure up in the minds of voters the idea that there was no plan for a hike in VAT.

The point that I am making this afternoon is that because that illusion was created, rightly or wrongly, by the Conservative and Liberal Democrat parties, the public did not get a chance to think about the kind of protections that would be needed. That is why the amendments call for reports to be laid before the House of Commons.

Photo of Anne McGuire Anne McGuire Labour, Stirling

I congratulate my right hon. Friend on illustrating the unequivocal nature of the comments made by the leaders of the Conservative and Liberal Democrat parties about any potential increase in VAT. Does that not make it clear that this House deserves the impact study for which the amendments call? The Conservatives and Liberal Democrats were not wishy-washy about it; they were unequivocal all the way through. We deserve the impact study that my right hon. Friend calls for.

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

My right hon. Friend puts it rather well. My point is that, because individuals did not rule things out categorically in the Chancellors' debate and other debates, Jo Swinson should accept that the impression was given that a rise in VAT was not imminent. Politics aside, I hope that she accepts that the public were not given much incentive to ask us, if a VAT increase did come down the tracks fairly quickly after the election, what protections we would put in place. That is why the amendments are so important; they seek to solicit from the Government a detailed study of the impacts of the VAT rise so that in future Finance Bills we can ensure that, where needed, people are protected from the egregious consequences of this change.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives

It would have been nice if the Labour Government had undertaken impact studies of abolishing the 10p tax rate, for example. I understand that the Labour party has now learned to love Baron Mandelson, whose memoirs are now published for all to see. It is clear from them that the shadow Chancellor had been contemplating increasing VAT to 18% or 19% in advance of the general election. Baron Mandelson acknowledges that this was a hard choice, one that he was impressed by. In those circumstances, does the shadow Chief Secretary accept that sometimes it is better to leave the hard choices until after an election, and perhaps that was in the back of the minds of the now Prime Minister and Chancellor?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

That is a very subtle argument. I think I just about followed the hon. Gentleman step by step and link by link, but cutting to the chase I hope the point we can agree on is that the public were not given much incentive to ask of us, at hustings or elsewhere, "If there were VAT increases, what would you do to protect different groups?" Given the fact that we all know there are future finance Bills to come, possibly in short order, it is important that we try to understand the real impact of the VAT increase, especially on the groups I have listed in my amendment, so that we can ask the Government to bring in protection for them.

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Photo of Angus MacNeil Angus MacNeil Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Constitutional Reform), Shadow SNP Spokesperson (Scotland)

In the light of what is reported to be in Baron Mandelson's memoirs, may I check that the right hon. Gentleman is planning to support amendment 13 and that he is still against a rise in VAT from 17.5 to 20% and will vote to ensure that we keep VAT at 17.5%?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

If the hon. Gentleman will forgive me, I will reveal my hand on our voting strategy slightly later on in the debate.

The point is clear. We are seeking from the Government a number of protections to ensure that the people we think will be hit by VAT are not hit by it. If our amendments are not successful, we shall of course oppose the clause.

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Photo of Angus MacNeil Angus MacNeil Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Constitutional Reform), Shadow SNP Spokesperson (Scotland)

We have just heard Liberal Democrats say that before a vote we should tell the public about the difficult choices. Will we know about the difficult choice the Labour party is making before the vote tonight? What are Labour Members planning to do? Will they support amendment 13 or not?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I am now tempted to keep the hon. Gentleman in suspense for a little longer. I hope he will bear with me.

I was making the point that if the Committee does not agree to support the amendments and does not agree that we should make reports and study the impact, it will be tantamount to our saying that we do not care how VAT will hit different groups, but I know that there are people in the Government, and Members in the House, who do care. They worry about the impact of VAT because they, like Labour Members, came into politics to try to make this country a fairer and more prosperous place to live in. The reports we are asking for are all the more urgent because evidence has emerged over the last couple of weeks from the Government and elsewhere that VAT increases are both unfair and regressive.

There was the now infamous graph on page 66 of the Red Book, to which the Economic Secretary referred in questions earlier this afternoon. The graph purported to show that the Budget was fine-the very model of progressive politics. Only after interrogation did it emerge that the picture looked half decent only because it incorporated Labour measures and did not include the full extent of the welfare cuts that await the country in years to come; indeed, just a third of those welfare cuts were put into the picture, so unsurprisingly, it was flattering.

The best arguments for the reports we are asking for were made not by the Economic Secretary or by me, but by the Prime Minister and the Deputy Prime Minister. During the election the Prime Minister said that he could "absolutely promise" that VAT is regressive. He said that

"you could try, as you say, put it on VAT, sales tax, but again if you look at the effect of sales tax, it's very regressive, it hits the poorest the hardest. It does, I absolutely promise you."

That is what the Prime Minister said at one of his popular Cameron-direct events in Exeter in May.

The Deputy Prime Minister echoed that view, and also said that raising VAT would be regressive and penalise the poor. On "Today" on 7 April he said,

"you clearly cannot write Budgets in the future"- echoing the point made by the hon. Member for East Dunbartonshire-

"but what you can say is that the only way you can avoid a huge hike in VAT, which let's remember is a regressive tax, is by making sure that you take some of the decisions that we've done".

I am not quite sure what those decisions were.

Of course, there are also the comments by Simon Hughes, who is not with us this afternoon but has been very eloquent on this subject in public and in private. He told "The Daily Politics" on 15 June:

"I hope we don't have a VAT increase because it is the most regressive form of tax, it penalises the poor at the same rate as the rich".

The views expressed by the Prime Minister, the Deputy Prime Minister and the deputy leader of the Liberal Democrats have all echoed the opinion that has been offered to us in the House by a range of experts. The National Institute of Economic and Social Research said in its report of 21 June that VAT rises do more harm than other tax rises would. The Institute for Fiscal Studies said that a VAT rise will have a bigger impact on those with least money. I think it said that the poorest 10% of households would lose twice as much as a percentage of their income as the richest 10%. Even the Treasury's own figures, released in answer to a parliamentary question earlier in the year, show that the poorest households are affected three times as much as the richest by changes in VAT.

So the leadership of the new Government was very clear about the impact of VAT rises, and given this silence during the election and the risks of the proposed clause 3, I think the House needs to know what the truth really is, and we need to know what measures we should be demanding on behalf of our constituents in future Finance Bills to soften the blow.

Amendment 46 seeks to focus this debate on one group of people in particular, but before I address that I give way.

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Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover 5:15 pm, 13th July 2010

I should like to press the right hon. Gentleman on the plans that Baron Mandelson referred to. If the shadow Chancellor had got his way, the shadow Chief Secretary would have been implementing those plans. Can the shadow Chief Secretary confirm to the House whether he called for such a report to be produced as part of the preparatory measures for the March Budget?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I know the hon. Member is new to the House, but the report to which he refers is called the Budget, and in chapter 6 of the March 2010 Budget the plan that the Chancellor decided on is set out very clearly. He said that the deficit should be halved over the next four years and that that would require £57 billion-worth of discretionary action. That would require £19 billion of tax increases, of which broadly half came through an increase in the national insurance rate, some of which the Conservative party has kept. About £18 billion of savings would come through reducing capital expenditure as a share of our economy, from the 3.5% which it hit in order to fight back against the recession, down to about 1.25% of GDP in a couple of years' time. That is, by the way, still twice the level that we inherited back in 1996-97. And on top of that £18 billion in winding down capital spending, we then set out very clearly £20 billion of savings to current expenditure. The hon. Member will recall that £4.5 billion of savings were to be achieved by holding down public sector pay, of which £1 billion would be gained through reform of public sector pensions by 2012, £5 billion by cuts to a range of lower-priority programmes across Government, and about £11 billion of savings were to be gained by revolutionising the way that Whitehall conducts its business. So there is a very clear plan set out in chapter 6 of that Budget-it is only 20 pages; I recommend it to the hon. Member if he has not read it. But why not have the debate now?

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Photo of David Burrowes David Burrowes Conservative, Enfield, Southgate

Not being so new to the House, I am aware, obviously, of the reports today in The Times revealing that the shadow Chancellor was wishing to increase VAT to 18%. Can the right hon. Gentleman confirm, in relation to the pre-Budget report stage in November, whether, if the shadow Chancellor had had his way to increase VAT to that level, a report such as the one that is proposed in amendment 46 would have come to pass?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

Happily, the question is hypothetical, because the then Chancellor reached a decision on the right package of measures needed to halve the deficit over the next four years. The hon. Gentleman's problem is that the Conservative party concluded that it needed to bring forward by a year the date at which debt as a proportion of GDP needs to start to fall. Therefore, another £40 billion in tax rises and spending cuts are needed. The only way to secure that is to take an enormous risk by whacking domestic consumption with a regressive tax. So he must contend with a question of economics and one of fairness. [ Interruption. ] He says from a sedentary position that it is a question of leadership, but the art of fairness is integral to the effective leadership of this country. That is what his constituents would expect, and it is why I hope that he will support me in these amendments to carry out a study of the impact of the new tax, so that we can understand how to remedy the problem in the next Finance Bill.

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Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

Unlike Government Members, I plan to ask about the amendment, rather than talking about reports in The Times today. Will my right hon. Friend confirm that the measures proposed by the former Chancellor of the Exchequer in the Budget in March would have reduced the incomes of the top 10% of earners by 7% and those of the bottom 10% of earners by 0%, compared with the Budget proposed by the current Chancellor that reduces the income of the top 10% by 0.7% but the bottom 10% by 2.6%? So the work that-

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

My hon. Friend was making an important point, and she is absolutely right. We also said very clearly that more than half of the £19 billion in taxes that we proposed to raise-a measure not completely different from the figure that the Government are seeking to raise-should be paid for by the top 2% of earners. I have not yet seen a similar analysis produced by the Government.

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Photo of Anne McGuire Anne McGuire Labour, Stirling

Would my right hon. Friend care to put on the record how many times a Labour Government increased VAT? Would he like to remind the House that a Labour Government reduced VAT on two occasions: first, when we came to power, when we reduced it on utility bills; and secondly, when we did so as part of our fiscal easing during the current recession?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

Again, my right hon. Friend is absolutely right. One reason why we have always approached VAT in the manner that she has described is that we know that, as a flat tax, it is regressive.

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Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

Does the shadow Chief Secretary recall that, on the day of the Budget, the Government also published their paper, "Tax policy making: a new approach", which said at paragraph 3.10:

"There is a common consensus that Parliament should have a stronger and more effective role in scrutinising tax legislation?"

At paragraph 3.13, it said that the Government

"will introduce a tailored Tax Impact Assessment, in place of the current regulatory Impact Assessment used elsewhere in government."

At paragraph 3.17, it said:

"the Government will consider greater use of sunset clauses or a trigger for an evaluation in legislation."

On that basis, should the Government not accept a number of amendments that the right hon. Gentleman is speaking to? I will certainly support amendment 13, although he may want to keep his counsel on that. For consistency's sake, should the Government not accept some of these amendments if the policy statement that they issued on the day of the Budget is to mean anything?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I am grateful to the hon. Gentleman, who has exposed my utter lack of originality. This position is not uniquely adopted by Opposition Members. Indeed, part of the inspiration for our amendments is the amendment tabled to the Budget resolutions by Andrew George. There is a consensus that, over the years to come, we want the institutions that help to govern our macro-economic policy to be as strong and robust as possible. That is why the shadow Chancellor has welcomed the initiative of the Office for Budget Responsibility, but put on the record our ambition to ensure that it is truly as independent as possible. That is why it is important that there is no question about its conduct, the publication of its reports and the synchronisation of its reports with Prime Minister's Question Time and so on. We want Parliament to take the lead role in appointing the OBR's new leadership, and we want also to ensure that financial, tax and economic policy is conducted as transparently as possible. That was the instinct behind the creation of the code for fiscal stability many years ago, and we need to carry on the work of reform so that we truly strengthen the role of this House in holding economic policy to account.

The purpose of clause 6 is to seek to protect a group of people who are very important to all Members-our pensioners and retired citizens. Ultimately, the reason why Labour decided to raise national insurance instead of VAT was a concern for fairness, and we knew in particular that those on fixed incomes, such as pensions, would struggle most when faced with sharply rising prices. Today, I am afraid, we hear that pensioners could face an £8 billion VAT bill during the course of this Parliament.

When the Budget was presented, we heard a little about the protections that were already being put in place, but on closer inspection it turns out that pensioners will be hit by different changes each and every year. Amendment 46 would therefore require the Treasury to prepare a report on the impact of the increase in standard rate VAT before any further Finance Bill were brought before the House in the current Session. In that way, right hon. and hon. Members would be able to insist upon proper remedies for pensioners to protect them from VAT.

It is worth setting out what the Library has published. The overall effect of the Government's proposed VAT hike is that the revenue raised will increase from between £2.8 billion to £2.9 billion in the current financial year to £12.1 billion, £12.5 billion, £12.9 billion and £13.5 billion over the course of this Parliament. Using the Office for National Statistics' study of pensioners' share of spending, the Library estimates that this year-so, before pensions rise in April-Britain's pensioners will pay £422 million of extra VAT. That figure will then rise to £1.8 billion, £1.9 billion, £2 billion and £2 billion by the end of the Parliament. I think the House will agree that that is a serious hit on pensioners' fixed incomes.

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Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

As the right hon. Gentleman points out with his customary candour, I am new to the House. Will he therefore help by pointing me in the direction of such a report when the 10p rate was abolished?

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

My hon. Friend, from a sedentary position, is absolutely right. The Library produced exactly the kind of report that I have just set out, and- [ Interruption. ] In the spirit of candour with which the question was asked, I note that there were serious mistakes with the way in which the 10p rate was changed, and my right hon. Friend Mr Brown, the former Prime Minister, has been very open about that. That is precisely why we need to learn lessons about the way in which tax policy and economic policy is conducted.

Generally the rule is, the more transparency, the better, so I hope that the hon. Gentleman will support our amendments, because the transparency at which he hints reveals a further problem in 2011. The Library states that in 2008 the typical household in the retired category spent £353.70 a week, and that the amount would rise to £358 after the VAT increase. That represents a rise in the VAT bill of about £4.30 a week. However, the rise per week in the basic state pension-delivered by the triple lock that was so trumpeted-is less than the increased shopping bill that pensioners will pay.

I should also like to make a point about the following year, 2012, because the Chancellor did not present matters very clearly when he announced the Budget.

Analysis shows that the Treasury's switch to using the lower-rising consumer prices index instead of the retail prices index to measure price rises means that pensioners' income will fall behind VAT-fuelled price rises in 2012. According to table C2 on page 84 of the Red Book, in 2012 RPI will be 3.2%, average earnings growth will be 2.3%, and CPI will be 1.9%. We can therefore assume that under the triple lock system, the pension increase will be only 2.5%-lower than VAT-fuelled RPI, which will be 3.2%. The increase in pensions will appear to fall behind the increase in prices.

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Photo of Jacob Rees-Mogg Jacob Rees-Mogg Conservative, North East Somerset 5:30 pm, 13th July 2010

I wonder whether the right hon. Gentleman has paid attention to the report by the Office for National Statistics which says that CPI includes a higher proportion of the VAT increase than RPI because the CPI basket contains more goods on which VAT is paid.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

That may or may not be the case. My point is that the Treasury has decided, without really publicising the fact, to switch the way that it measures price rises. A great fanfare was attached to the notion of the triple lock and raising pensions by prices, by average earnings or by 2.5%, whichever was higher. Somehow missing from that presentation, however, was an acknowledgment that RPI would be higher than any three of those measures in 2012, with the price being paid by Britain's pensioners.

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

A moment ago, the right hon. Gentleman described the effect that the increase in VAT would have on the increase in pensions. Does that include the freeze on council tax that this Government are bringing in, following huge rises in previous years, with rises in pensions being relatively small?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I think that once local authorities are confronted with 25% to 40% budget cuts later this year and we face, as Age UK has warned, the possible collapse of the social care system, we will see whether the freeze in council tax is truly delivered.

Even towards the end of this Parliament, the hits to pensioners will just keep coming. The Library assesses that by 2013, pensioners could face cuts to disability living allowance benefits totalling an extraordinary £350 million a year. That is alongside cuts to housing benefit and the lower uprating of public service pensions and other benefits, which are now also linked to the lower-rising CPI rather than RPI. I accept that reforms to DLA are not yet clear, but we have to accept that Britain's pensioners face a new risk that has not yet been explained to this House. One million people of pension age are on DLA-they represent 34% of DLA recipients of all ages-so it is a risk that we in this House should demand we understand before changes are made.

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Photo of Wayne David Wayne David Shadow Minister (Wales)

Does my right hon. Friend accept that senior citizens will also be badly hit by the disproportionate effect on them of the reductions in public services?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

Precisely. That is the point that Age UK made in its response to the Budget. It issued a stark warning that thousands of older people's lives would be at risk from even a 25% cut in local authority budgets; now we are warned by the Chief Secretary, with a casual disregard for the seriousness of the situation, that there could be cuts of 40%.

Looking around here this afternoon, I can see many right hon. and hon. Members who came into politics to champion the cause of fairness and who work extremely hard on behalf of pensioners in this country and in their own communities. I very much respect the campaign work that has been conducted by Members in all parts of the House, not just those from my own party. It is a cause that has been championed, in particular, by those on the Lib Dem Benches.

I have not presented to the House any definitive statement on how pensioners will be hit by VAT. I have not conducted some kind of distributional impact analysis using a Treasury dynamic model of the interrelationship between the basic state pension and the pension credit uprating, but I think the Government should. If they are relaxed about the matter and truly believe that they have compensated pensioners fully for the rise in prices for which they are legislating, they should put the matter beyond doubt. They should show the House and the public beyond that the very people to whom we owe so much are protected from a measure that they did not vote for and that threatens the standard of life that they worked so hard and long to secure.

The final amendments that I should like to speak to are amendments 40 and 44, which are probing amendments. We want to give the Government the opportunity this afternoon to put on record their intention to rule out the removal of zero-rating VAT status on any further items. Amendment 40 would require the Treasury to lay a report on the scope of the standard rate-

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Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. May I advise the right hon. Gentleman that amendment 44 has not been selected?

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I am grateful, Mr Hood. I will therefore confine my remarks to amendment 40, which asks the Treasury to lay a report on the scope of the standard rate before the Commons before the rise takes effect on 4 January 2011. The reason for our concern is that in the past, the Deputy Prime Minister has said that it is more liberal to tax people on their income than on their work. That automatically raises questions about whether the scope of VAT as currently set out by the Government is set to widen and widen.

We have a few assurances on the record. We learned from those on the Treasury Bench this afternoon that Ministers will not extend VAT to hardback books or newspapers, which is very welcome, but there are of course a range of goods that are currently zero-rated, including food, clothing, footwear, transport, talking books for the blind and the disabled, sewerage and water, building construction, protected buildings, caravans and houseboats, drugs, medicines and aid for the disabled, tax-free shops and some charitable contributions. We should like to hear more from the Government about whether there are any plans, either now or later on in the Parliament, to withdraw what is currently zero-rated. We want to give them the opportunity to put that beyond doubt.

This is an important debate. The VAT increase is a measure without a mandate and there is therefore an obligation on Members to ensure that the people who need to be protected are protected by the votes that are taken this afternoon.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives

I rise to address this group of amendments, or at least the two in my name. May I seek your advice, Mr Hood, about whether I can move amendment 55 and refer to amendment 54?

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Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. We are considering the amendments in this group, but the hon. Gentleman is not in a position to move his amendment now. However, he can discuss the amendments that we are considering.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives

I am grateful to you, Mr Hood, for your guidance.

I should like to concentrate my brief remarks in this debate on amendment 55, which is in my name. It is similar to amendment 22, tabled by Chris Leslie, which introduces the concept of a sunset clause. I am particularly grateful to Mark Durkan for highlighting the approach taken by the Treasury in bringing forward tax policy, and particularly for his reference to paragraph 3.17 of the Treasury document, which states that

"the Government will consider greater use of sunset clauses or a trigger for an evaluation in legislation."

I welcome the Government's approach in that respect.

This is an emergency Budget with emergency measures being brought forward, one of the most dramatic of which, and the one that has perhaps been the focus of more significant debate than any other, is on VAT. In those circumstances, it is reasonable to argue that an emergency measure should be subject to some time-limiting once the emergency can be considered to have passed. I have made my assessment on the basis of no special ability beyond that of anyone else in the Chamber-although perhaps the hon. Member for Nottingham East has greater insight into how long emergencies last. My amendment 55 would provide for a two-year emergency period. I think it a reasonable assumption that the provision should at least contain a sunset clause, so that the Government can assess the impact of the measure on the economy, and recognise that it is an emergency measure brought forward in an emergency Budget in an emergency situation, and that we should have a knife and a time after which the situation can be reviewed.

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Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

Does the hon. Gentleman recognise that the two-year period, which he is taking as his rule of thumb for an emergency, just happens to be the same period covered by the questionable tables the Government have issued in the Red Book to try to assure people of the equitable impact of the Budget measures?

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Photo of Andrew George Andrew George Liberal Democrat, St Ives

I suppose the use of the adjective "questionable" is a matter for debate, and no doubt Treasury Ministers would wish to contradict it. I do not feel as qualified as the hon. Gentleman to comment on this subject. However, I try to take the best available evidence, which includes Treasury assessments. I am sure that the shadow Chief Secretary would acknowledge that the Treasury is a sound source for some of these judgments.

I ask the Exchequer Secretary to address how the Government will review this proposal. Is it genuinely the Government's intention to keep the VAT rise as a permanent measure? If they do not propose to insist that the 20% rate become a permanent measure, by what means will they and Parliament have the opportunity to review it? Others more articulate than I will be able address the impacts of the VAT rise on families, charities, the building industry, rural motorists and others. However, we have debated those already, and I do not feel it necessary to go through them once more.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives

I mentioned rural motorists-I strayed mistakenly-so I have a feeling this intervention will be about them. It might be on another issue though.

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Photo of Angus MacNeil Angus MacNeil Shadow SNP Spokesperson (Transport), Shadow SNP Spokesperson (Constitutional Reform), Shadow SNP Spokesperson (Scotland)

The hon. Gentleman might be expecting an intervention on the rural fuel derogation that I am expecting to come from the Treasury before 4 January 2011, but alas my intervention is not on that subject. Rather, I would like to know whether the hon. Gentleman, as a Liberal Democrat Member, is serving notice on his Conservative counterparts that the VAT poll tax will end in two years.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives

It is not up to me, as one Member of Parliament, to serve notice. I do not have the power to change this; I am simply raising issues with Treasury Ministers that I hope they will take into account. I hope they will at least address the emergency nature of the Budget and of the measures being implemented. I would also like them to address the permanency-or non-permanency-of the measures. If they are likely to be permanent, can we at least have an explanation of how that can be justified?

In seeking to raise not just VAT but so many other issues in the Budget, such as the banking levy and capital gains tax, I have often been cautioned not to disaggregate one element of the Budget from the rest, on the grounds that we cannot unpick a Budget because the whole thing will implode, for some reason that I have never entirely understood-perhaps the Exchequer Secretary could explain it to me. However, given how we in this House have to scrutinise such matters, it is inevitable that we should have to pick at particular aspects of the Budget, particularly bearing in mind the fact that this Finance Bill brings forward only limited aspects of the Budget. There will be a further Finance Bill later in the year, while essential measures in the Budget will form part of the comprehensive spending review, so bits of it are all over the place.

If my right hon. and hon. Friends in the Treasury and elsewhere are concerned that the impact of my probing inquiries and questions is effectively to unpick and therefore undermine the Budget, I apologise. However, I would like the Exchequer Secretary to address himself to the issue that I have raised and to the argument of those interrelationships, because at the end of the day-I have made this view clear in my contributions to this debate, and I know that many others across the House share it-of all the measures to restore the public finances, a VAT rise, it seems to me, has to be among the least welcome.

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Photo of Sammy Wilson Sammy Wilson Shadow Spokesperson (Education), Shadow DUP Spokesperson (Treasury) 5:45 pm, 13th July 2010

Is not the hon. Gentleman's point an illustration of the Government's approach in the Budget? The purpose of the Budget as a whole is to restore confidence, but it will do so only if harsh measures are implemented right across the board. Therefore, trying to unpick any of those harsh measures will undermine that confidence, as well as the objective that the Government have set themselves, which is to satisfy the financial markets. That is the difficulty with the Government's approach: it is all or nothing, because the measures have to be harsh enough to satisfy the financial markets.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I am a novice in Finance Bill debates and have not generally spoken in them in the past-I tend to go off and do international development, DEFRA issues and housing. I therefore do not necessarily feel qualified to make judgments about what type of measures-harsh or otherwise-are likely to have the most satisfactory impact on the markets. Others in the House will perhaps have more experience of how to satisfy the markets. My starting point is an assumption that, in its entirety, the bundle of proposed tax rises and public spending cuts in the Budget is at about the right level. The question that we should be debating is: have we got the measures right within that overall figure? That brings us to whether we have addressed the option of a VAT rise as opposed to, for example, an increase in the banking levy, or a further increase in capital gains tax or corporation tax.

Photo of Anne McGuire Anne McGuire Labour, Stirling

I congratulate the hon. Gentleman on the logic of his case. He has pinned the Government down on their branding of the Budget as an emergency Budget. If it is an emergency Budget, there should be room for manoeuvre and time-limiting. Perhaps the mirror image of this proposal is the reduction in VAT that the previous Government put in place to deal with a particular set of circumstances at an early point in the recession. The hon. Gentleman might be a novice in these matters, as he said earlier, but his logic is impeccable.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I am grateful to the right hon. Lady for her kind words.

Obviously, it will be up to the Exchequer Secretary to ask the question that I have already asked on this issue. The fact that all political parties were clearly under a degree of political pressure before the general election has been exposed by Lord Mandelson in his diaries, which were published in the last couple of days. We must acknowledge that any rise in VAT is the result of a really tough choice-a last resort, perhaps. One message to come out of this debate must surely be that when political leaders say they will not rule something out, particularly in the lead-up to a general election, the possibility of the measure being brought in after the election is usually rather higher than many members of the public might imagine. On this issue, Labour Members must be struggling to swallow, with all that butter not melting in their mouths.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

On that point, the hon. Gentleman must surely accept that a pretty comprehensive tax plan was set out in the March Budget. We were seeking to raise an extraordinary amount of money-£19 billion is not small potatoes-and we set out specifically how much would come in through national insurance increases, how much through changing the tax treatment of pension contributions, and how much through putting taxes on incomes up and keeping them up, and taxing certain incomes at the 50p rate. Some of those measures have been kept, but those were not easy decisions to make. They were difficult decisions, but they did bring in £19 billion of income to the Exchequer.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I acknowledge that, but of all the tough decisions that we are talking about, a VAT rise is among the toughest. It is tougher than the ones proposed by the Labour Government in their pre-election Budget. It is a truism that Budgets brought forward just before a general election are rather different from those introduced just after an election, because of the political pressures under which Governments find themselves. That is just human nature-or perhaps political nature. The decent thing for Labour Members to do would be to acknowledge that.

Photo of Tom Watson Tom Watson Labour, West Bromwich East

I have more faith in the hon. Gentleman, and I hope he would have more faith in me. If he were the Chancellor of the Exchequer and he had had to sign a venal deal with the Conservatives, I do not believe he would have introduced this clause. I think there is more to him than that, and the House should give him credit for it, although I know that he has to defend the line. By the way, I would not have introduced this clause either-it is disgusting.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

Well, I think we have all heard what the hon. Gentleman has said.

I shall move on to an amendment that I would not wish to move. Amendment 54 was tabled deliberately to encourage a debate on the different levels of VAT rise that might be considered. The thinking behind it is that, if a VAT rise is unavoidable, perhaps it could be done in such a way as to involve a basket of taxes, including the bank levy, capital gains tax and corporation tax. In that way, we might have ended up having to nudge up VAT by 0.5%. When I tabled the amendment, I had not read The Times this morning. If I had added the words, "or 19%", I might have been able to persuade the shadow Chancellor to sign my amendment as well. I do not need to rehearse all the arguments behind this proposal, but I hope the House will reflect on it.

I asked a parliamentary question about the anticipated yield from raising VAT by various percentage points, and I received a kind response from the Exchequer Secretary on 8 July, in which he explained that a table in

"HMRC's published tax ready reckoner tables...released at the time of the Budget,"-

I have to admit that I had not seen them at that point-

"shows the effects of illustrative tax changes, including the effect of changing the standard rate of VAT by 1 percentage point in each of the years 2010-11 to 2012-13. Estimates of the effect of changing the rate by different amounts can be calculated by scaling the effect of a 1 percentage point change accordingly."-[ Hansard, 8 July 2010; Vol. 513, c. 414W.]

I am surprised that it is as simple as that, because I would have thought that at some point a VAT rise would have an impact on the yield as people purchased less.

I did some quick calculations on this. Actually, I got some assistants who are rather better than I am with these new-fangled devices called fingers to do those calculations. An increase of half a percentage point would yield £2.425 billion in 2011-12, and £2.5 billion in 2012-13. That is clearly way below the Government's estimate of the impact of the VAT rise. The ready reckoner gives figures of £12.125 billion and £12.5 billion, which suggests that it agrees with the Chancellor's estimates. I look forward to hearing the Exchequer Secretary's views on these issues.

The shadow Chief Secretary mentioned impact assessments. As he knows, I raised that issue in a previous amendment at the time of the Budget. A more thoroughgoing impact assessment than has been available thus far would be enormously helpful, and I believe that a Government should carry out such an assessment in any case when a measure is going to have a significant impact on the country as a whole. Given that the increase will not be implemented until 4 January next year, perhaps the Exchequer Secretary will agree to do some further work on this. There is a balance of opinion that suggests that the VAT increase will be more regressive than progressive. That has been debated in the Red Book and by the Institute for Fiscal Studies, as well as by other well-informed, independent organisations. I hope that the Minister will address the issue of impact assessments that the shadow Chief Secretary has quite rightly raised.

Photo of Chris Leslie Chris Leslie Labour, Nottingham East

I welcome many of the comments made by Andrew George in speaking to his amendment 55. As he pointed out, it is not dissimilar to my amendment 22, which also suggests a sunset clause, albeit in this case for one year-essentially mirroring the fact that the previous Administration reduced VAT for the period of the economic downturn as a means of stimulating the economy for that 12-month period. It seemed a reasonable proposition to do the same now.

There are so many issues covered in this group of amendments, and I hope hon. Members will look carefully at all of them. Before I move on to discuss some of them, I want to deal with amendment 22. The hon. Member for St Ives is right to highlight the fact that the coalition agreement referred to the greater use of sunset clauses in legislation, which would be a healthy thing particularly given the sheer impact such a massive financial change will have on the entire country. We are talking about £12 billion of tax taken from all our constituents, so at the very least we should have the opportunity to have the measure reviewed periodically by the Minister. I think that it would be appropriate to do so after a year, but after two years would be perfectly reasonable. For me, ratcheting up to a permanent 20% VAT rate is entirely unacceptable.

Photo of Sammy Wilson Sammy Wilson Shadow Spokesperson (Education), Shadow DUP Spokesperson (Treasury) 6:00 pm, 13th July 2010

Does the hon. Gentleman accept that there is an impact in Northern Ireland and in particular many of the boom towns around the border with the Irish Republic-Strabane, Newry, Enniskillen and so forth-of differential VAT rates? For an economy that is still not coming out of recession, a permanent increase in VAT will have a dramatic effect on retail jobs and investment for those towns especially.

Photo of Chris Leslie Chris Leslie Labour, Nottingham East

Indeed; I have seen for myself the impact on those border areas. I am not sure that the Treasury, in applying its very blunt instrument approach to changing taxation, has given any serious consideration to these serious issues which will significantly affect communities, the retail industries and so forth.

It is necessary to reflect on whether raising VAT is the most effective way of reducing the deficit. We know that the Government have an arbitrary strategy, which is partly driven by ideology and a desire to reduce public spending as a proportion of our economy per se -disconnected entirely from the deficit and debt. They have set an arbitrary time scale and are doing it so steeply that it will affect not only public services but the taxpayer in a very harmful way.

We should not have a permanent imbalance between regressive and progressive taxation. I hope that when growth eventually returns to the economy, Treasury Ministers, Opposition spokespeople and others might be able to find better and fairer ways of raising revenue. The hon. Member for St Ives referred to the setting of the banking levy at a puny level and to giving corporation tax away to the banks. There are other sources of fairer revenue generation out there. It is not the case that Labour Members are saying no to all measures; there are alternatives, and it is crucial to bear that in mind.

I am particularly worried about the inflationary impact of the proposed change. The Government are taking a big gamble in the choices that they are making. They must be seriously hoping that the economic cycle hits successfully by the time that we move into the next calendar year, because having such a big increase in taxation at that moment could jeopardise our already fragile growth record. More than that, we are already hearing from some members of the Monetary Policy Committee and others their worries and concerns about persistent inflation. VAT changes such as this will certainly do nothing to help.

It would be good practice for Ministers generally to accept, or at least suggest, that reviews should be undertaken periodically. I shall be interested to hear what the Minister says on that point, particularly to his hon. Friend the Member for St Ives. The VAT increase is of such a scale that a re-authorisation request of some level should be part and parcel of the measure. Ministers should from time to time have to ask for that.

I would not be surprised if the Government planned to ratchet up taxation early on in the Parliament to such a high degree-more than is necessary to satisfy the markets and so forth-so that in later years they can offer little tax give-aways and sprinkle a little bit of stardust on an unsuspecting electorate who will have forgotten about the VAT change. It is the Opposition's job to remind the general public that they will be paying through the nose for an ideologically oriented change. I therefore hope that hon. Members will see the spirit behind my amendment 22.

Photo of Anne McGuire Anne McGuire Labour, Stirling

Does my hon. Friend also agree that the mechanics of raising and reducing value added tax is relatively straightforward, making a sunset clause quite easy to apply? It does not have the complications of other elements of the taxation system. Frankly, the previous Labour Government proved that it was possible to adjust VAT by lowering it and then increasing it at a future date. The mechanics of collection are more straightforward than for other taxes.

Photo of Chris Leslie Chris Leslie Labour, Nottingham East

Absolutely. There is a sense that this ratcheting up might be for ever. Once the so-called emergency period is over, most sane and rational people would say, "Okay, the emergency is passing, so we should reduce sales tax down to some level of normalcy", but I would not expect that from the Treasury. This is the Treasury's opportunity to grab more money from the general public and to stay at that high level. I have heard nothing from the Government to suggest that this is a temporary measure. We therefore have no choice but to table suggestions that sunset clauses are necessary and incredibly important.

Amendment 23 would retain the 17.5% rate on a certain class of goods and not raise it to 20%. I refer in particular to children's equipment-children's prams, cots, toys, high chairs, babies' bottles, children's sanitary products and teething-related goods. I declare an interest: I have a 10-month-old daughter. I am thus realising that while she is, of course, worth every penny, she is also an exceptionally expensive addition to my family. I am not complaining in any way about that, but it has brought home to me the sheer cost on families of raising youngsters.

Believe it or not, the Family and Parenting Institute has said that over a lifetime-up to the age of 21-each youngster can cost a family £200,000 to raise, which is about £800 a month. That is the institute's figure, and although I would not necessarily see its methodology I feel very much as if the expenditure is going in that direction. Even if just half that cost were VAT-able expenditure, over a lifetime the Conservative-Liberal Democrat coalition's change equates to £2,500 of extra tax per child. That is not to be sniffed at; it is a significant amount of money. It is not fair that families with young children should have to bear such a disproportionate burden of the deficit solution. As we know, the phrase "We're all in it together" does not apply to the bankers or the highest paid in society. The burden will hit those in the most difficult circumstances.

Photo of Andrew Bridgen Andrew Bridgen Conservative, North West Leicestershire

Does the hon. Gentleman consider it fair that every child in this country is born with approximately £24,000-worth of debt around their neck as a result of the polices of the previous Government?

Photo of Chris Leslie Chris Leslie Labour, Nottingham East

I have heard the hon. Gentleman espouse that rather spurious point before-and no doubt he will do so again. Of course, that is not a debt around their necks like a personal loan or a mortgage. It is part of the way in which we run our national accounts. Of course we will always require a level of borrowing. Perhaps the hon. Gentleman is suggesting that we should avoid the need for any borrowing whatever, but at this point in the cycle, if we are to ensure that our economy succeeds, we must have a borrowing facility. If the hon. Gentleman thinks that that is wrong, that is his own ideological position. However, I think that it would be exceptionally regressive not just to freeze child benefit for three years, withdraw the health in pregnancy grant, restrict the maternity allowance to the first child, remove the baby component of child tax credit, reverse the supplement for children aged one and two and abolish the child trust fund, but to make young people and families with children bear the VAT increase as well.

This is an extremely important and serious issue. Some areas of child-related expenditure are, of course, either zero-rated or rated at a low level. There is a drafting error in my amendment: I had originally included nappies, but on learning that they were classed as children's clothing, I withdrew the amendment. For some reason it has remained in the group, but the Minister will understand the point that I am making. There is a set of items that young families cannot do without, and I believe that alternative forms of revenue could compensate for tax on those. I seriously ask the Minister to consider making such an exemption.

The VAT increase will be very damaging in a more general sense. I worry not only about its inflationary impact, but about its recessionary impact. Given that it is equivalent to an income tax increase of about 3p, there is a serious possibility that we will end up with inflationary pressures and the return of higher interest rates. Stewart Hosie quoted Simon Newark of UHY Hacker Young as saying that the increase could push high street prices up by 2%, and that too is a serious issue.

The impact on those at the other end of the age scale -pensioners-is also incredibly worrying. Whether it amounts to £8 billion, less or more, it will be very significant indeed. As well as having to finance the 25% reduction in their grant levels, those in charge of public services will have to fork out for this extra cost. I am particularly worried about the effect on the NHS and local government. Public spending on councils and the police, as well as some elements of spending on education, transport, housing and the construction industry, will not be protected.

The Government's desire to opt for this most regressive of taxation options led certain City commentators, such as Ian Kernohan of Royal London Asset Management, to observe that the increase would hit all income groups particularly hard in the winter months. Although many of our constituents may at this point be oblivious to the approach of the change because other events have been in the news, there is no doubt that a winter of discontent potentially awaits the Government.

Charities will be hit especially hard, and I am glad that Members have tabled amendments in an attempt to relieve them of some of the burden. So much for the "big society", when so many third sector organisations are expected to bear the strain. The Government are removing public services and placing some of the burden on charities. What a gift that is!

In a wider economic context, the increase undermines much of the economic growth that may well come from the retail sector. We have heard about the particular impact on certain parts of the country near the Borders and elsewhere, but as soon as the Budget was announced, Morgan Stanley's broker analysis recommended selling stocks and shares in general retail, and buying in other areas that were exempt from VAT or in which it was minimal.

Photo of Chris Leslie Chris Leslie Labour, Nottingham East 6:15 pm, 13th July 2010

There could be all sorts of perverse consequences. The ramifications have not been thought through. We know that the change is not necessary. We know that it has been driven by the Government's assumption that they must introduce it. As I have said, I believe that it has been driven first by an ideological desire to be exceptionally hair-shirted and stern with the deficit-unnecessarily, given that the markets would be entirely content with a slightly longer-profile reduction in the deficit, as long as it was being reduced-and secondly by a wish to stack up a bit of revenue for a give-away further down the line.

Whether we are talking about the effect of the VAT increase on the value of certain retail industries-I believe that shares in Halfords fell dramatically as soon as it was announced-and on big ticket sales, or about its effect across the board in terms of social and economic policy and, in particular, on those who can afford it least, it is regressive and regrettable. It should be reviewed after a year or two at the latest, and the Treasury should show leniency to those who can least afford it, especially children and young families.

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Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

We are still working out how coalition politics work. It is welcome that we have a coalition, but I have been given the task of presenting a Liberal Democrat perspective.

When I arrived in the House five years ago, I had spent 17 years in tax consultancy, both in practice and in industries. I had studied Budgets in their various forms, professionally and politically, for a very long time. I spent the whole of the last Parliament resisting becoming too deeply involved in finance because I wanted to develop other interests, but our leader, the Deputy Prime Minister, has persuaded me that this might be a good opportunity for me to reacquaint myself with my professional past. I hasten to add that I was never a VAT specialist; my specialism was direct rather than indirect taxes.

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Photo of Iain Wright Iain Wright Shadow Minister (14-19 Reform and Apprenticeships)

Will the hon. Gentleman assist the Committee by clarifying a point? Is he now the Liberal Democrat spokesman on economic affairs? Is that his present position?

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Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

Not necessarily. Labour Members are currently having to adjust to being in opposition after 13 years in government. No doubt the parliamentary Labour party will set up Back-Bench committees like the Conservative party's 1922 committee. The Conservatives have a long tradition of establishing Back-Bench committees to examine different aspects of policy so that they can better advise their colleagues in government. We are having to make the same adjustment, and my role is to chair the Back-Bench Liberal Democrat committee that deals with economic matters, including taxation and expenditure.

I am sure you will pleased to hear, Mr Hood, that I am about to deal with the amendments. Amendment 13, tabled by Stewart Hosie, proposes that there should be no VAT increase at all. As I observed to the hon. Gentleman in an intervention at the beginning of the debate, it behoves those who say that we should not proceed with the increase to say where they will find £13 billion to fill the hole that that would blow in the Chancellor's Budget.

The hon. Gentleman responded to my intervention by saying that he would not proceed with the renewal of Trident, and I have some sympathy with him on those grounds. I think that Trident is a weapons system that the country no longer needs. However, I hold that view on defence and strategy grounds, not on expenditure grounds. In any event, the hon. Gentleman knows-as I know, and everyone in the Chamber knows-that cancelling the renewal of Trident would not save money this year or next year, and would probably save very little in the course of the present Parliament. It certainly would not defray an increase in VAT in this Budget.

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Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

First, the entire premise of the fixed-term deficit consolidation strategy is wrong. I have already explained that, as I also did to the hon. Gentleman's colleague, Andrew George, in a previous debate, and to another of his hon. Friends in a debate before that.

On Trident, I was careful to say that over the medium term we would get the savings from the cancellation and the non-replacement. These are political choices. There would be savings almost immediately from cancellation and non-replacement, and savings of some £50 billion over the medium term-and, as I have said, the Liberals did appear at one point in the election to believe in this, before they changed their minds.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

The fact is that this year any expenditure decisions we may want to make in order to have a long-term impact will not save £13 billion this year or next year. That is what we are facing now: we are facing a real emergency now as to how to tackle the deficit, and the accumulating deficit each year, that the previous Government left to us.

Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

I agree that we are indeed facing a deficit and a debt problem now. There is no question about that, but how to tackle it is a political choice. We are not facing a £13 billion hike in VAT because it is unavoidable; we are facing it because the hon. Gentleman and his new pals have decided that that is the route they want to go down. It is a political choice; that is all it is.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

The hon. Gentleman is absolutely right to say that the construction of a Budget involves a balance of choices; it balances what we do in public expenditure and what we do on taxation. I am very proud that the Liberal Democrat influence on this Budget has led to 800,000 people being taken out of income tax, and child tax credit being raised by £150 a year. Many more measures have also been included in the Budget as a result of the coalition relationship that has been developed.

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

On the proposal to cancel Trident, will my hon. Friend cast some light on what impact that would have on the constituents in the affected areas in terms of job losses?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

Well, I know that you are probably about to rule that out of order, Mr Hood, but-

Photo of Jimmy Hood Jimmy Hood Labour, Lanark and Hamilton East

Order. The hon. Gentleman pre-empts me. We are not going down that route. I ask him to speak to the amendment.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I am not trying to dodge that question, and I understand that it is a very sensitive issue in specific geographical areas of Scotland.

Many contributions today have referred to the impact on consumers, but we do not necessarily know what that will be, because retailers construct their prices using many factors, not only the VAT rate. How they set their prices has as much to do with fraud at the till, marketing and advertising, for instance. Although there was a VAT reduction two years ago, when we did our Christmas shopping at that time many of us did not notice that it had gone down from 17.5% to 15%, because shopkeepers kept their prices the same, as they were already discounting in order to counter the recession and attract sales. Therefore, it does not necessarily follow that a VAT rise will be automatically passed on to consumers.

Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

Does the hon. Gentleman agree that the reduction in VAT under the Labour Government reduced revenues by just over £12 billion, so we do have quite a good idea of how much money it will bring in? Does he also agree that my constituents, who earn £16,000 on average, did notice the reduction in VAT, and that they will certainly notice the increase in VAT?

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Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I thank the hon. Lady for her intervention, but perhaps she misunderstood the point I was making. Altering the VAT rate obviously has an impact on the wider economy and on Government finances, but claims as to which specific groups of people it would hit in particular are hard to prove in advance of the change. Many of the predictions of price increases-in rural shops in Scotland or elsewhere-may not come to pass, simply because retailers will have to take other considerations into account, such as the effect on their trade. I am sure that we can all think of retailers-such as the Fopp record store in my constituency -which set their prices at standard amounts, such as £3, £5, £7 or £10, simply to attract customers through the door. It is unlikely that they will move away from that marketing model.

Photo of Anne McGuire Anne McGuire Labour, Stirling

Does the hon. Gentleman accept as an authoritative commentator on the effects of VAT the Office for National Statistics, which indicated that the impact on the poorest 10% is significantly greater than the impact on the richest 10%? Is that just some piece of frippery to be thrown to one side and not to be acknowledged by a Liberal Democrat party that is somewhat embarrassed to be supporting an increase in VAT?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I can assure the right hon. Lady that I would never dismiss a statement by the ONS as a piece of political frippery. What we are trying to deal with in this debate, however, is points put forward by Members, some of which may well be pieces of frippery that we will have to counter in our discussions.

Photo of Iain Wright Iain Wright Shadow Minister (14-19 Reform and Apprenticeships)

It is stated on page 66 of the Red Book that

"Impacts on households from VAT account for around 1.0 per cent of net income, although this is smaller on average for the top 10 per cent of households, and greatest for the bottom 10 per cent of households."

We do know who will be hardest hit, therefore. It will be the poorest in our society, and the hon. Gentleman's Red Book says so.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

We can debate this until very late tonight-and I am sure we will-but the fact is that we have to make lots of assumptions about what people will actually spend their money on, because VAT is a tax on discretionary expenditure, not on essential expenditure. It was designed to be so. That is why food, children's clothing and many other items to which Chris Leslie has referred are zero-rated or exempt from the scope of VAT.

Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

May I thank my hon. Friend for the efforts that he and his colleagues have made to increase the personal allowance, as that is an extremely important contribution? People in Dover and Deal whom I represent earn on average £17,000 or £18,000 a year. Does my hon. Friend agree that the effect of the VAT rise is ameliorated for the least well-off, such as those people, by the exemptions for food and children's clothes?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

My hon. Friend is absolutely correct. The Budget is a balance of proposals that both coalition parties wished to put into the mix, and we have been very careful-our coalition agreement stated this-to protect the poor and vulnerable whatever we do over the next five years.

Photo of Wayne David Wayne David Shadow Minister (Wales)

Does the hon. Gentleman acknowledge that the Centre for Retail Research has estimated that the rise in VAT could lead to the loss of 47,000 jobs and 10,000 stores closing?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I have not read that study and I thank the hon. Gentleman for bringing it to my attention, but I repeat my earlier point: lots of considerations go into the mix in respect of the economic decisions that businesses make, and VAT is not always the sole determinant. When I was a tax adviser we always said to clients that the tax decision does not wag the business dog. Taxation is one of the factors that all businesses will take into account when making decisions-such as who to employ, what to sell and how to pitch their prices-but there are many others.

My hon. Friend Andrew George said that his amendments were probing amendments intended to generate discussion, and they have certainly achieved that. His amendment 54 was designed to address what the impact of a smaller rise in VAT-to 18%-would be, and he gave us his answer to that. We on the Government Benches should not be afraid of having internal discussions. Although I did not participate in all the Budget debates and Finance Bill debates in the previous Parliament, many of us will fondly remember Rob Marris, who, sadly, lost his Wolverhampton seat at the election. He tabled many friendly probing amendments from the Labour Back Benches, which might sometimes have made his Front-Bench colleagues uncomfortable, but they also made a valuable contribution to debates.

Both my hon. Friend in his amendment 55 and the hon. Member for Nottingham East in his amendment 22 propose sunset clauses so that the rise in VAT-which, at least, it seems they are both contemplating as necessary-would be for a specified period. Every year we have a pre-Budget report, a Budget and a Finance Bill, so I am fairly confident that every year we will return to this topic and there will be an opportunity, as there has been under all Governments, to change the mix of taxes, and each year we will get to vote on the current mix.

Photo of Chris Leslie Chris Leslie Labour, Nottingham East

Would the hon. Gentleman be happy or unhappy if VAT stayed at 20%, perhaps for the full duration of this Parliament?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

My happiness or unhappiness will be measured in 2015 when we go to the polls-perhaps after the polls-by which time, hopefully, many more people will have been taken out of income tax completely because the threshold will have gone up to £10,000, and capital gains tax will have been made fairer. A mix of proposals has been put forward, so the rise in VAT will be more than compensated for by the other measures both in this Budget, where an important start has been made, and in Budgets to come.

Photo of Nicholas Dakin Nicholas Dakin Labour, Scunthorpe 6:30 pm, 13th July 2010

Does the hon. Gentleman agree that a political choice is being made to raise VAT as a regressive tax, with no political mandate?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I am not sure whether the hon. Gentleman was here earlier when the shadow Chief Secretary raised the issue of what was said during the general election. All three parties perhaps ducked the question of whether they would go ahead with an increase in VAT after the election. We all know that when we stand in an election, we do not necessarily want to put unpalatable truths to the electorate. All three Front-Bench spokespersons-Mr Darling, who is the former Chancellor, the current Chancellor, and my right hon. Friend Vince Cable, who is now the Secretary of State for Business, Innovation and Skills-said that VAT increases could not be ruled out. Now, of course, we have the revelation that there was a lively debate within the then Labour Cabinet as to whether a VAT increase should be ruled out.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I am grateful to the hon. Gentleman, who is being incredibly generous in giving way this afternoon. He will surely accept that, despite internal debates-all parties have them-when our party presented a Budget to this House in March, it reached a conclusion that ruled out an increase in VAT and set out clearly how £19 billion of taxes would be brought in through a different balance of measures. Is the hon. Gentleman seriously saying that he believes that the £8 billion VAT bill that will be paid by pensioners over the course of this Parliament has been fully compensated for in measures set out in the Red Book?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

I thank the shadow Chief Secretary for his intervention, but an £8 billion bill does not necessarily fall on the poorest pensioners, and I would be very concerned if it fell solely on them. It is absurd to put pensioners into a generalised pot and pretend that VAT is going to hit all of them harshly. I am sure that the Duchess of Devonshire-she may well be a constituent of one of my colleagues-is well able to bear an increase in the rate of VAT on some of her conspicuous and discretionary expenditure.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

To be fair to all parties, I give way to the hon. Gentleman.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

I thank the hon. Gentleman for giving way. Perhaps he can be clear about this. When did he and his colleagues become totally convinced that a VAT increase was essential: before the election, on the day of the election-or whenever there was an offer of posts in government?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

We have discussed many times whether there should have been more candour on the part of all three Front-Bench spokespersons during the election. There was not, and we are where we are. I can only answer for what I said in my own election campaign. Bristol West had many election debates, and this topic and the question of how to deal with the financial crisis came up many times. I never ruled out a rise in VAT because I knew that after the election, a responsible Government-I hoped my party would be part of that, and I am delighted that it is-would probably have to face up to that very difficult decision.

Photo of Steve McCabe Steve McCabe Labour, Birmingham, Selly Oak

The hon. Gentleman said earlier that parties ducked the issue during the election campaign. Presumably, when the Liberal Democrats said:

"You'd pay £389 more a year in VAT under the Conservatives", that was an explicit warning that the hon. Gentleman believed, and which formed part of an election platform. The question is: when did he stop believing that?

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

With respect, the hon. Gentleman has only just come into the Chamber, and I think I answered that point in responding to Dr McCrea.

I turn now to the amendments tabled by Opposition Front Benchers. The shadow Chief Secretary said that they were necessary in order to understand the impact of what is proposed, and to provide some clarity. I should point out that VAT has been part of our fiscal furniture since 1973. Labour had 13 years in government to understand the scope and impact of different rates of VAT, and we now know from revelations that have been made that the Labour Government contemplated different rates of VAT, and whether to increase it. Of course, when they were in office they reduced VAT and then put it back up again, so surely they already have a pretty good understanding-perhaps a better understanding than new Ministers-of the scope of VAT.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

We have never seen VAT at these levels. The hon. Gentleman's own party leader is on the record as saying that he believes that VAT is a regressive tax, and so is the Prime Minister. Surely, before the next Finance Bill, a study should be presented to this House showing what a 20% VAT rate will mean for the people whom we represent, so that we can insist on appropriate remedies from the Government.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

That intervention, and the right hon. Gentleman's amendment, would have rather more moral force behind them if that had been his party's practice when it was in office. I well remember the Budget of 2006 or perhaps 2007, when Mr Brown, as Chancellor, doubled the income tax rate paid by the poorest in society from 10% to 20%. I was among those Liberal Democrats who vigorously pointed that out, and our then leader, my right hon. and learned Friend Sir Menzies Campbell, was the first Member to point out that the tax charge would fall very heavily on the poorest in society. I remember the whooping from Labour Members because that measure was being put in place to fund a tax cut for the well-off. I remember them cheering the cut in capital gains tax-now, of course, they say they are against it-which was being paid for by the poorest in society. This Government-this Liberal Democrat-Conservative coalition-are protecting the lowest paid in society and taking them out of income tax, rather than increasing the rate they pay.

Amendment 40, tabled by Mr Byrne, certainly has some merits in terms of looking at the scope of VAT. When I was in opposition I often made a plea, as did colleagues, for a reduced rate of VAT on certain goods and services, such as contraceptives. There was also the important issue of the construction industry and whether it was right that VAT be charged in full on the repair and maintenance of housing stock-most of our housing stock is old-yet be zero-rated on the construction of new dwellings. So we have had these debates before, and it would be a useful exercise in its own right to examine the scope of VAT rates-but not as a delaying tactic against tackling the deficit now.

As I have said in response to many interventions, the Budget is a balance between what we do on expenditure and taxes, and where we choose those taxes to bite and fall. This Budget, put together by a coalition, by a new mode of politics, has struck that balance fairly. Some of the decisions within the Budget would be unpalatable on their own, but they are not being taken on their own. The VAT increase is not a measure in isolation, but one we must contemplate in the context of the rest of the Budget. That is why my colleagues and I will resist these amendments if they are pressed to a vote.

Photo of Wayne David Wayne David Shadow Minister (Wales)

I will be brief. This morning, I was in the Welsh Assembly in Cardiff bay and I had discussions with Jane Hutt, the Welsh Assembly Government Finance Minister. I was delighted that this afternoon, a statement was made in which the Welsh Assembly Government addressed the situation in which they find themselves in the light of the Budget. Jane Hutt made it clear that the Welsh Assembly Government intend to protect capital investment in Wales, because money is being brought forward from the Assembly Government's reserve fund. The result is that a number of capital projects that had been earmarked for being cut or delayed will now continue. The Welsh Government's economic rationale for taking that approach is that it allows effective support to be given to the construction sector and to the continuing efforts to lead Wales into economic recovery. I welcome that. Of course Labour is still in power in Wales, albeit in partnership. That approach is in stark contrast to what is happening in England, where the economic rationale is profoundly different-indeed, there is no rationale at all.

This debate has been very interesting. A number of hon. Members have made the point that in the run-up to the general election both the Conservative party and the Liberal Democrats made a number of commitments about not having plans to introduce VAT increases. They recognised that VAT was regressive and that it hit the poorest the hardest-the words of the now Deputy Prime Minister. The biscuit was really taken by the poster to which a number of hon. Members have referred. We all remember that; indeed we will never forget it, and neither will the people of this country. I shall read out, by popular demand, what the Liberal Democrats poster said:

"Tory VAT bombshell. You'd pay £389 more a year in VAT under the Conservatives".

They might have added that that would also be true under the Liberals. That sums up clearly the rank hypocrisy of many of the comments that we have heard today, particularly from Liberal Democrats.

I wish to reinforce some of the comments that have been made about what the objective studies show, now that the dust has settled somewhat following the Budget. The Institute for Fiscal Studies has said clearly that the Budget, taken in the round, will hit Britain's poorest families six times harder than the richest. The rationale for that has been described by Howard Reed, the director of Landman Economics, who designed the model that is used for this research. He said that

"a lot of public spending is 'pro-poor', with poorer households receiving a greater value of services to meet their extra welfare needs. Because of this, cuts in public spending...will tend to hit the poorest hardest."

That is a very important fact for us to bear in mind during this debate.

It is also significant that Save the Children, in particular, has set out cogently and forcefully

"Why the rise in VAT must be cancelled".

It points out:

"Both the Conservatives and the Liberal Democrats had said in their election manifestos that they wanted to create a fairer society yet one of the first commitments of the new coalition government was to raise the rate of VAT. The 2.5% increase will mean families living in poverty will be put under even more pressure. Save the Children argues that the poorest should not pay the price for the economic crisis."

Photo of Chris Leslie Chris Leslie Labour, Nottingham East

I entirely neglected to report in my earlier comments that the Baby Products Association, which is a bit like Save the Children, has also said that it considers

"that VAT should not be increased for necessary purchases by new parents."

It has also said that it would support VAT remaining

"at 17.5% on essential baby products to keep parenting affordable."

Photo of Wayne David Wayne David Shadow Minister (Wales)

That is a very important point, and it embellishes the one that I have made in general terms. Labour Members are concerned that the fight against child poverty, which needs to continue, will take a backward step. As has been mentioned, we also have concerns about the need to protect our senior citizens. The shadow Chief Secretary to the Treasury outlined clearly how our senior citizens are facing real difficulties from the cumulative effect of a number of measures introduced in the Budget, which hit them hard. I am concerned that when the dust settles again and we see the new plans for disability living allowance, a total of £350 million a year could, by the end of this Parliament, be taken off the benefits available for senior citizens. That is a cause of concern to us all.

There is also a big question mark over the economic worth of this strategy of raising VAT to 20%. A number of studies have questioned the economic validity of the models that have been introduced and the impact on the economy as a whole, and on the retail sector in particular. I refer specifically to recent research commissioned by Kelkoo, an internet comparison site, and carried out by the Centre for Retail Research, which indicated that as many as 47,000 jobs could be lost and almost 10,000 stores right across the country could be closed.

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Photo of Steve McCabe Steve McCabe Labour, Birmingham, Selly Oak 6:45 pm, 13th July 2010

I am conscious that the Government argument is that the VAT rise was an alternative to a national insurance rise, which they characterised as the tax on jobs. Does my hon. Friend share my disappointment that the Chancellor did not take advantage of the reduced rate of VAT that is allowed for labour-intensive industries under existing EU rules? The Government could have reduced the rate for places such as hairdressers and restaurants-low-paid labour-intensive industries-which would have helped these people through a difficult patch. In effect, the Government have done the opposite, and they are going to put these people out of business and cost us the jobs accordingly.

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Photo of Wayne David Wayne David Shadow Minister (Wales)

My hon. Friend makes an interesting point, and it is well worth giving careful scrutiny to his comments. The reduction in VAT under the previous Labour Government undoubtedly had a positive effect in ensuring that spending levels were maintained through the recession. That is widely acknowledged across the international community.

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Photo of Sammy Wilson Sammy Wilson Shadow Spokesperson (Education), Shadow DUP Spokesperson (Treasury)

Does the hon. Gentleman recognise what happened when the previous Government, to whom he belonged at the time, reduced VAT? Rather than target the reduction, as they were exhorted to do at the time, they applied it across the board. They could have targeted the construction industry, for example, so that extensions to homes and so on could have been encouraged. For some reason, both the Labour Government and this coalition Government seem not to be prepared to target VAT changes.

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Photo of Wayne David Wayne David Shadow Minister (Wales)

With all due respect, I say that it is far simpler and more straightforward for an across-the-board, blanket reduction to be introduced. Objective analysis tends to suggest that the kind of approach that the former Labour Government had in ensuring that that reduction in VAT was part of a coherent fiscal stimulus was certainly effective. I also ask the Committee to bear in mind that we are now talking about a VAT increase that takes us a great deal beyond the rates that we were talking about only a few months ago.

In conclusion, this is a profoundly regressive Budget. One of its most negative elements is the VAT increase. There is undoubtedly objective evidence to show that it will hit the poorest and most vulnerable members of society hardest, and at the very least the Government should accept that there is a need for a full-scale study into this, as it applies to children, especially, and to elderly people. I respectfully ask the Government to consider their position carefully.

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

The debate has been going on for some time and many have argued-the shadow Chief Secretary to the Treasury can be mentioned here-that there is not a person in the House who wants to see the poorest in society hit. That is true, and I would be amazed if there was an hon. Member in the House who deliberately set out to target people.

Budgets have to be seen as an overall package, and I have been amazed at how the VAT rise has been picked on as a major catastrophe for the country. Mr David made some interesting points about whether the increase could be phased in for different areas or for different construction industries. That was not done by the previous Government when they raised the rate back to 17.5%. As he said, there was a blanket reduction to 15% and then it all went back up to 17.5%, and those things were not taken into account. The important point that the Committee has to recognise is that although people say this is a political choice, it comes as part of the overall package of the Budget. The overall package of the Budget must not be forgotten; it aimed to try to reduce the risk of interest rates increasing as things come down. That point has been argued across this Chamber many times. Opposition Members disagree on whether interest rates should go up, but there seems to be a lot of evidence that if the deficit was not tackled-

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Photo of Toby Perkins Toby Perkins Labour, Chesterfield

Will the hon. Gentleman acknowledge that over the course of 13 years the previous Labour Government had a fantastic record of keeping interest rates low and that the last time we had sky-high interest rates was when his party was last in power?

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

I acknowledge that the Bank of England kept interest rates low.

Let me move on. The impact of not tackling the budget deficit would be a rise in interest rates and that would affect every one of the poorest families in the country as they tried to cope with rising prices in so many different areas.

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

The hon. Gentleman is being enormously generous and I am following his argument closely. Does he acknowledge that in the months before the election, while its outcome was still uncertain, interest rates in this country were not going up but coming down?

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

If memory serves me, interest rates have now been held at the same level for more than a year-that is obviously a long time before the last election.

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Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

There is more than one type of interest rate. The hon. Gentleman is correct that the overnight rate has stayed at 0.5% for some time now, but I think that my right hon. Friend Mr Byrne is referring to the long-term interest rates, which were falling for at least a month before the election.

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Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Does my hon. Friend agree that interest rates were so low for so long in the early years of the previous Government because of the deflation caused by China and India? Does he also agree that the opinion polls were read by the markets and that that was what caused long-term gilt interest rates to be so low in recent months?

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

Yes, I accept the points that my hon. Friend makes.

The point is that interest rates away from the headline rate-that is, the interbank charging rates-were in real danger of going up. I know that we on the Government Benches are derided when we mention Greece, but the thing that we must recognise about the Greek economy is that the borrowing of money and the interest rates that went up were ultimately fed back into the market because action was not taken.

I listened carefully to the comments made by Stewart Hosie about his amendment. Obviously, he does not want to see VAT raised at all-he wants it left at 17.5%. I was going to make an intervention, but I thought it was worth waiting to see how he expanded his point. I was not sure whether he was commenting on the impact of the Budget on the country overall or just on Scotland. He made an important point when he said that it would have an impact on the health service in Scotland to the tune of £150 million. Of course, the national insurance rise under the previous Government would have had a similar effect.

I want to make a suggestion. The hon. Gentleman asked whether we could find other areas where the money could be found. Chris Leslie also made a point about looking for other sources for the £12 billion to £13 billion involved. If the Scottish National party tabled an amendment to cut the grant to Scotland under the Barnett formula by that £12 billion to £13 billion, that amendment would have support from many Members and would avoid the need for the VAT rise. Perhaps they might want to consider that point in the later stages of this Bill's passage. It is a great disappointment to me that the hon. Member for Dundee East is not here; I am sure that he would have liked to react.

We are borrowing £3 billion a week. It has also been mentioned that the VAT rise will have an impact on charities, but the national insurance rise, which we reversed, would have too. We must return to the fact that we have put together a package of changes. Saying that £8 billion will be taken away from pensioners is not a generous comment because it assumes that that £8 billion will be taken from the poorest pensioners. As has been made clear, that will not necessarily come from the poorest pensioners at all. It could come from all pensioners.

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Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

The hon. Gentleman is now touching on a debate that is at the core of one of the amendments that I tabled. He needs to be able to tell the Committee which pensioners will be worse off as a result of this £8 billion increase. If he does not know, surely it would be right for him to ask the Government to prepare and present a report for the House.

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

I am grateful to the shadow Chief Secretary. Let us consider the other aspects of the Budget, such as the fact that we have ensured that we preserve the free television licence, the fuel payments and the free bus passes-not to mention the triple lock, which he was deriding earlier. This can be checked in Hansard, but from memory I am sure I recall the Chancellor of the Exchequer telling the House quite clearly that a move would take place from the consumer prices index to the retail prices index when he made that announcement. I do not think that it was in the small print-I am sure that the Chancellor stood at the Dispatch Box and made that point quite clear. I am sure that Hansard will back that up and if I am wrong I will acknowledge that to the House, but I am sure that that measure was not snuck out in the small print.

As the shadow Chancellor of the Exchequer was apparently saying before the election, we cannot just borrow more to pay for services. As I have listened to Opposition Members during the debate, I have been struck by the question: which Labour party are we looking at today? Is it the one that wants to spend more or the one that wants to tax more? So far, in the debates about the cutting of the schools budget we have been told that it is all terrible and that we should have carried on spending more and more money, and today we are hearing that we should not increase taxes. That is how we got into this situation. We owe billions every year. Stacking up the net deficit-

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

The hon. Gentleman mentions the banks, and there is no doubt that they had problems, but the fact is that this country was borrowing beyond its GDP during the boom years. Countries such as Sweden put 2% of their GDP aside and Australia paid off its national debt, leaving those countries in a far stronger position to tackle the recession when it came. Everybody accepts that the banking crisis caused problems, but they were exacerbated by the actions of the previous Government.

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Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Is it not the case that the banking crisis was massively exacerbated by a very poor regulatory system?

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

I absolutely agree with my hon. Friend.

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Photo of Tom Blenkinsop Tom Blenkinsop Labour, Middlesbrough South and East Cleveland

Is the hon. Gentleman representing the Conservative party that says that we are all in it together, or is he representing the Conservative party that proposes VAT increases that do not apply to private health care or private education?

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

I am not going to respond to that point, because I do not particularly know the answer and it would be wrong of me to stand in front of the Committee and make it up as I go along. I am not going to do that.

The amendments are fine-I can see the logic in some of them-but they create a mass bureaucracy. As the Chancellor made clear in the Budget statement, he ruled out some approaches because the money saved would be taken up by bureaucracy. To apply VAT at different rates to different aspects would create bureaucracy in enabling it to be understood and that will not do the economy any good in the long run.

Earlier, during Treasury questions, someone mentioned that the percentage GDP debt of a bunch of European countries was more than the percentage debt of this country. If we listened to Opposition Members, we could think that this country was going way out on a limb, above everywhere else. However, the VAT rise takes us to the fifth lowest out of 14 European countries. VAT in Austria is 20%, and in Belgium it is 21%, in Denmark 25%, in Ireland 21%, in Finland 23%, in Greece 23%, in Italy 20%, in Norway 25% and in Sweden 25%. All those countries have much higher rates of VAT.

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Photo of Iain Wright Iain Wright Shadow Minister (14-19 Reform and Apprenticeships)

I am following the hon. Gentleman's argument closely. Given the basket of European nations that he has named, and in order to tackle the deficit further and faster, does he advocate raising VAT to 22% or 25%?

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

I am perfectly happy with the balance that has been proposed in the Budget by the Chancellor of the Exchequer, raising VAT to 20% as part of a series of checks and balances in other areas. For example, he is raising the rate of income tax, taking almost 1 million people out of income tax. He is bringing in the triple lock for pensioners and protection for child tax credits, as well as ensuring that the lowest paid in society will not be subjected to a pay freeze. These are all parts of that series of checks and balances. It would be ridiculous to say that we should add another 5% on top of that just because we can. That was not what the Budget was about; it was about trying to tackle the deficit.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives

My hon. Friend talks about balance in the Budget. When he talked about the VAT rates in the basket of other European nations, I do not think that he was suggesting that this should be about pursuing the lowest, or even the highest, common denominator. He will have heard about the Financial Secretary's statement to the British Bankers Association last night on having further levies on banks. If that were possible and if it yielded sufficient income to the Treasury, would my hon. Friend agree that the Treasury could introduce a lower rate of VAT than is currently proposed?

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell 7:00 pm, 13th July 2010

A point made clearly in the debate by a great many people is that each time a Budget comes to the House, the taxation system can be looked at and changed. This Budget tackles today's problems: if deficits fall, revenues are there and the balance comes in, we can look to changing that approach. Looking back into the mists of time, people forget that over the 18 years of the last Conservative Government, taxation was reduced overall, but in the early part, in the late 1970s and early 1980s, taxation had to rise to tackle the deficit. As time moved on and circumstances allowed, overall taxation on people was reduced. The hon. Gentleman makes a sensible point, but we would need to consider matters as each Budget came forward. This is the first Budget of a five-year Parliament, and it set out to tackle a specific issue.

I did some research on this matter, and the Library told me that VAT is applied to only 50% of consumer goods that are bought by the public, so the VAT rise is far less regressive than a rise in income tax, for example-[Hon. Members: "What!"] Absolutely. People have no choice but to pay their taxes, whereas they can make choices about what they pay VAT on. We come back to the question of which pensioners we are talking about. Are we talking about the pensioners who go out and buy cars or those who go out and buy the food on which VAT is not charged?

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Photo of Charlie Elphicke Charlie Elphicke Conservative, Dover

Does my hon. Friend recall how the fuel duty was thrust up as a stealth tax/poll tax on wheels? We all remember that and all the other stealth taxes from previous Labour Governments. Did they say that they were regressive at that time?

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

Absolutely; I agree entirely with my hon. Friend. When the previous Government lowered VAT to 15%, the then Chancellor added 2p to fuel duty to compensate for the 2.5% reduction, but he did not take that 2p back off when he put VAT back up to 17.5%, thereby hitting everybody and, as was pointed out earlier, the goods in shops.

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Photo of John Redwood John Redwood Conservative, Wokingham

Has my hon. Friend heard any explanation from Opposition Members as to why raising VAT from 15% to 17.5% was a brilliant policy, but raising it from 17.5% to 20% is a disastrous policy? I do not quite understand the distinction they are making.

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

My right hon. Friend makes a very important point that I tried to make earlier. It is all very well for the hon. Member for Caerphilly to ask why the VAT rise is not different for different areas-perhaps less for the construction industry-but when it went from 15% to 17.5%, it was a blanket policy that hit everywhere. It is important to ask why that rise was acceptable but this rise is not.

To conclude, we have to bear two things in mind when we consider the amendments. The VAT rise is regrettable. Nobody in the House particularly wanted taxation to rise-that is not why we came into politics, with the exception of Labour Members who seemed to raise it year on year regardless-but the purpose of the Budget is to reduce the overall deficit and to bring security to the economy, to people's jobs and to people's everyday living allowances by keeping interest rates low. Some of the amendments might have value on their own, but, looking at the bigger picture, I do not believe that they would add value or do anything to reduce the deficit that the country now faces.

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Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

Before you finish, Dr McCrea was eager to get in but you missed him. I know that you would not want to be disrespectful to him.

Photo of William McCrea William McCrea Shadow Spokesperson (Justice), Shadow DUP Spokesperson (Home Affairs), Shadow DUP Leader of the House of Commons

Thank you very much. All the facts about VAT were known by the parties before the election a few weeks ago, but the Lib Dems were not convinced of the need to increase VAT then. What does the hon. Gentleman believe changed his colleagues' minds so quickly?

Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

If I had known that was the question, I would not have said anything.

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

As I am a Conservative Member of Parliament, not a Liberal Democrat, I would find it very hard to comment on that. I am sure that they quickly realised, having finally seen the books, the dire state of the economic situation.

Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

I call Gavin Shuker-sorry, Rachel Reeves. I was misinformed; I apologise.

Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

That is okay, Mr Hancock; people often cannot tell us apart.

I rise to support amendments 25 and 43. The impact that the VAT increases in the Bill will have on the most vulnerable in our society-those who are least responsible for the global financial crisis-has been ignored and avoided by the Government, and I wholeheartedly agree that there should be a full analysis of and subsequent report on the extent to which the increase will affect low-income households in particular.

The Government's plans to raise VAT from 17.5% to 20% are highly regressive and entirely unfair. We know that the poorest fifth of Britons pay twice as much of their disposable income in VAT-at 12.1%-as the richest, who pay just 5.9%. Independent estimates from the Institute for Fiscal Studies show that because of this Budget, by 2014-15, the incomes of the bottom 10% of the population will fall by 2.6%, which is equivalent to £5 a week. Given that those in the bottom 10% of income distribution earn on average £190 a week and already struggle to make ends meet, that £5 a week reduction in their incomes will inevitably hit families and pensioners, plunging more of them into poverty. In contrast, those who are fortunate enough to be in the top 10% of income distribution will experience a mere 0.7% fall in their weekly incomes. As their average income is about £1,600 a week, I suspect that a reduction of £11 will be somewhat more manageable to them than the reduction in weekly income will be to those in the poorest decile of income distribution.

I know that I need not spell all this out to the Government, because just a year ago, the Prime Minister said that VAT changes would hit "the poorest hardest", and it is no secret that the Deputy Prime Minister is well aware of just how regressive VAT changes can be. A few months ago, he described what the Government are planning now as a "VAT bombshell". The Government had a choice about how to reduce the Budget deficit and they chose a package of measures that included the VAT rise, which will make it even harder for low-income families to keep their heads above water.

Let me remind the Government that they did have a choice. There is another way of achieving a reduction in the Budget deficit without threatening economic growth and without the unfairness of the most vulnerable in society being hit the hardest. In March, the then Chancellor of the Exchequer introduced a Budget that included £19 billion-worth of tax increases and £38 billion-worth of spending cuts. With those tax increases, those in the bottom 10% of income distribution experienced not the 2.6% reduction in their incomes that will be the effect of this Government's Budget, but a 0% reduction. In contrast, those in the top 10% experienced not a 0.7% reduction in their incomes, as they will under this Budget, but a 6.8% reduction. Instead of following the choices taken by the previous Labour Government, this Government have chosen measures that will hit the poorest in society the hardest.

Photo of John Redwood John Redwood Conservative, Wokingham

Does the hon. Lady not understand that the Government have adopted practically all the proposals of the outgoing Government? The Red Book makes it very clear that the rich will be hit much harder, both as a proportion and in cash terms, than those on low incomes. She has to look at both Budgets together, because they are now both the Budgets of the coalition Government.

Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

I think it is reasonable to look at them separately; one was introduced by a Labour Chancellor and the other by a Conservative Chancellor, and the difference between them is stark, as I hope other hon. Members will agree.

Photo of Helen Goodman Helen Goodman Shadow Secretary of State for Work and Pensions

Is my hon. Friend aware that the distribution figures published in the Red Book do not include housing benefit? The latest information we have is that a million people are going to lose £500 a year in housing benefit. They are not the richest people; they are the poorest people.

Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

My hon. Friend is correct. In addition, the reductions in spending are not included in the Red Book analysis, and they will hit people in poorer, low-income families more than those in the top income decile.

I do not dispute the fact that tax increases and spending cuts were needed in this Parliament, but I know that the impact on the poorest in society could and should have been lessened. We need the amendment so that we can fully understand the extent of the impact. The Red Book shows exactly where the pain and the priority rests. Benefit cuts will reduce the income of the poor and vulnerable by £11 billion. The regressive VAT increase will cost families and pensioners £13 billion. The bank levy will yield £2.4 billion. How ironic that the Government are making the banks and those at the top of the financial institutions, which are largely responsible for the recession, pay just a fraction of what those at the bottom are being made to pay.

Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

I wonder whether the hon. Lady accepts, though, that this Government brought in the bank levy and hers did not.

Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

The hon. Gentleman might also be aware that the Labour Government introduced a tax on bankers' bonuses, which brought in more than the bank levy will bring in. So while I accept what the hon. Gentleman says, Labour intended to tax the banks more than the hon. Gentleman's Government propose to do.

Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

I would like to make a little progress and then I will give way.

It is doubly ironic that the banking analysts now suggest that the cuts in capital gains tax could cancel out the bank levy, leaving some banks better off. HSBC has said:

"On our estimates, the corporation tax cut should neatly offset the levy over time. Put another way, net net the Treasury appears to have cut corporation taxes for UK industry, but not for the banks. Moreover, hedge funds and other financial institutions will not be even covered by the banking levy so they can go about their business as they did before paying no more tax under this Government."

My constituents in Leeds West have average incomes of £16,000 a year. They did not cause the recession; they do not have savings to draw on.

Photo of Rachel Reeves Rachel Reeves Labour, Leeds West

I have already given way to the right hon. Gentleman and I am just winding up now.

My constituents are being asked to make sacrifices that they can ill afford, most especially through the increase in VAT, well beyond the sacrifices that those at the top are being asked to make. I therefore fully support the amendment and ask that the Government undertake a full analysis of the impact and extent that this regressive, unfair and unjust VAT rise will have on those groups who can least afford to pay and least deserve a tax hike.

Photo of Jon Trickett Jon Trickett Labour, Hemsworth

It has been an interesting debate and many of the points that I wanted to make have already been addressed. Alec Shelbrooke made much of the fact that we should judge the VAT rise as part of a package. It is a package that puts money into the pockets of the rich, so it does not surprise me that a Conservative Member should welcome it. He said that income tax was regressive whereas VAT was not. He ought to have consulted the words of his leader, now Prime Minister, who, on 8 May, said of VAT:

"it's very regressive, it hits the poorest the hardest ...VAT is a more regressive tax than income tax or council tax."

I rather think that the hon. Gentleman will be waiting some time for a telephone call when the reshuffle eventually comes, given the way he contradicts his Prime Minister.

It is unfortunate that the spokesman for the Liberal Democrat party is not here. This is an interesting innovation. We have spokespersons for the Government-Ministers and so on-and spokespersons for the Liberal Democrat party, who made a case for the Government's decision to increase VAT. I wonder which Liberal Democrat party they were speaking for-certainly not the party in the country.

A poll the other day-I do not know whether other hon. Members saw it-showed that the overwhelming majority of Liberal Democrat party members did not support the increase in VAT. It is interesting to note that Simon Hughes, the deputy leader of the Liberal Democrats, is not in his place. That may be to do with the fact that he has a different view, probably the view of the Liberal Democrat party rather than that of the Government. He said in June:

"I hope we don't have a VAT increase because it is the most regressive form of tax, it penalises the poor at the same rate as the rich."

The Deputy Prime Minister said in April, just before the election, that VAT "is a regressive tax". The Leader of the Welsh Liberal Democrats, Roger Williams, will not support any increase in VAT because it is a "very regressive tax".

The two parties went into the election saying that there were no plans to increase VAT. The Chancellor, then the shadow Chancellor, said in April this year-not so long ago-that the Conservative tax plans were

"already in place, the plans do not include an increase in VAT."

Photo of Kevan Jones Kevan Jones Shadow Minister (Veterans) 7:15 pm, 13th July 2010

In his research for tonight's debate, did my hon. Friend look at The Times of 10 April when the Chancellor said:

"We have no plans to increase VAT."?

Photo of Jon Trickett Jon Trickett Labour, Hemsworth

We may be quoting the same article. It was not that the shadow Chancellor, as he was then, had said, "Well, I'm not going to comment prior to the election on whether we need to increase VAT or not." He said that the Conservative plans did not require an increase in VAT.

The Liberal Democrats were totally opposed to an increase in VAT and, as far as I can see, the party retains a policy to this day of opposition to it, but the Conservative party has form. I do not know whether everyone in the House has the same length of memory as me, but if we go back to the time before the 1979 election-I was not in the House then, but I was interested in politics-it turns out that the Tories, if they won the election, would inherit a VAT rate of 8%. A document has now been leaked to the press-it is printed in The Independent -that arose from a secret meeting at Sir Geoffrey Howe's home in Lambeth, 12 months before the 1979 election. The document, which was numbered-only about six people had a copy-clearly agreed that the Tories would double VAT from 8 to 15%. Yet for the whole of the period up to that election the Tories denied that they had plans to increase VAT, let alone to double it.

So the Tories have form. They clearly had plans to increase VAT before the last election, just as they did in 1979. All the humbug about the Labour Government planning surreptitiously to raise VAT is precisely that-it is humbug. Labour has never increased VAT; the Tories always increase it. They took it from 8% to where it will be-20%. That is the truth of it, and they have hidden the truth from the public.

Photo of Sandra Osborne Sandra Osborne Labour, Ayr, Carrick and Cumnock

Does my hon. Friend recall that when the Tories doubled VAT in the long distant past some members of the Tory party had the guts to vote against the decision? Does he agree that if the Liberal Democrats had the guts to do so and they were thinking of the poorest in our society, they would vote with our side tonight?

Photo of Jon Trickett Jon Trickett Labour, Hemsworth

My hon. Friend makes a telling point. I shall come back to the Liberal Democrats and the Secretary of State for Business, Innovation and Skills. I am sorry that he is not in his place. It would be interesting to hear him defend what he said. It was put to him by Andrew Marr on the BBC, "How is it that your party fought the election opposed to VAT and now you are in a coalition which is increasing VAT?" It is something that the Tories always do because they want to take money from the poor to give to the rich, which is what VAT effectively does, as we will see. He was asked if he was embarrassed by his party's election posters. We have seen the poster this evening in the House. As reported in the Daily Mail, the Secretary of State responded:

"We were only trying to score a point against the Conservatives, if you like. Okay, well that was in the election. We have now moved past the election."

I know, Mr Hancock, that you will tell me that it is unparliamentary for a Member to suggest that another Member has deceived the House, yet the Secretary of State was quite happy to say that he had deceived the public. I do not know whether it is parliamentary language for me to say it, but he himself said that he deceived the public as part of the game. I do not regard politics or elections as a game. I believe you should do as you say, and say as you do. That is how I was brought up in Yorkshire. I thought the Lib Dems aspired to the values of progressive politics. The saintly Vince-as he was then being called-could have said that circumstances had changed, but for him to say that it was perfectly okay to practise a deception on the electorate in the run-up to the election and then to reverse his position afterwards is hardly saintly, to say the least. I am sure that is something that can be said in a parliamentary context.

Photo of Steve Rotheram Steve Rotheram Labour, Liverpool, Walton

Does my hon. Friend agree that the people least able to afford VAT increases, such as people in my constituency, will be disproportionately affected by the proposals?

Photo of Jon Trickett Jon Trickett Labour, Hemsworth

Of course, and I shall come to that point. During my long sojourn on the Back Bench this afternoon, I have had several visits from my hon. Friend Mr Mudie, who is watching me carefully, so I shall try to be as brief as I can.

Several Lib Dem coalition partners made the case that it was now possible to reverse their position. It was said that the package as a whole was fair. It was said that the measures would cut the deficit and that the private sector should be allowed to breathe and grow. Each of those arguments is incorrect.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

With his characteristic Yorkshire approach, the hon. Gentleman says that politicians should do as they say and say as they do. On that basis, will he be encouraging the shadow Chancellor to be honest with the House, and with him, and say that he made proposals to raise VAT to 18% or 19%, not just once but twice? That was his favoured remedy for the difficulties the country faced over the last year.

Photo of Jon Trickett Jon Trickett Labour, Hemsworth

I shall answer that point specifically because I believe in being honest. For the last two years I worked in No. 10 and I can say that all kinds of options were reviewed, but at the end of the day the Government took the collective view that it would not be right to raise VAT. That was the decision they made. The then Chancellor said in the House, when he was making last year's pre-Budget report, that he had looked at the VAT option and rejected it. I remind the House that no Labour Government have ever increased VAT. We stand on our record. The reason was given by my hon. Friend Steve Rotheram, who pointed out how regressive VAT is.

Photo of Clive Efford Clive Efford Labour, Eltham

In answer to the Liberal Democrats, it is not what Governments consider but what they do and what they vote for that counts. The increase in VAT will hurt the poorest in our communities. Furthermore, to return to my hon. Friend's point about the Secretary of State for Business, Innovation and Skills, when the right hon. Gentleman told Andrew Marr that he was making a political point, the corollary is that he knew he was saying something untrue when he opposed the VAT increase during the election.

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A

Oh how things change.

Now that Clive is a member of the opposition I find myself agreeing with him!

If only he had agreed with me when he was in power.....

Submitted by Arnold Tarling

Photo of Jon Trickett Jon Trickett Labour, Hemsworth

I follow my hon. Friend quite a lot of the way, but we have to be careful about suggesting that the Secretary of State knew something was untrue. However, he appeared to say in that interview that he had misled the electorate and that it was perfectly okay for the Lib Dems to do so because after the election a new world would be entered into.

As has been mentioned several times, the Library confirms how regressive-that is, unfair-VAT is. How can the Secretary of State argue in this place and elsewhere that he decided to vote for the Budget as a package because it introduced fairness when the House of Commons Library shows that all serious economists accept that VAT is a regressive tax? It falls twice as heavily on the poorest deciles as on the richest. I wanted to speak briefly about the situation for students, but given the time I simply note the fact that students and others on fixed incomes, such as pensioners, will suffer greatly as a result of the VAT increases they will face.

I have three further points. First, every increase in VAT produces an increase in inflation. If there is to be a proper impact assessment, we must look at the effect of VAT on inflation. Most economists agree that inflation will rise by about 2% as a result of the VAT rise. If the Government increase inflation by 2%, even if there was no other inflation in the economy, they will be in breach of Monetary Policy Committee guidelines. However, we know that there is already inflation in the economy.

An increase in VAT, with the corollary that inflation will rise well above 2%, will lead to interest rate rises, which will begin to squeeze away any recovery in the economy that we all hope is coming. The British Retail Consortium said that there will be job losses, company bankruptcies and unemployment as a direct result of the inflation caused by the VAT rise. Moreover, the fact that demand of up to £13.5 billion will be taken out of the economy as a consequence of the VAT rises will produce further unemployment problems. If the level of aggregate demand is reduced there will inevitably be unemployment. Most economists predict that between 180,000 and 220,000 jobs will probably be lost as a consequence of the VAT rise and the reduction of demand in the economy.

Finally, this VAT rise is wholly unnecessary. It does not contribute in any way to the reduction of the deficit. As we know, the VAT hike will take £13.45 billion by its final year, 2014-15. If the measure was being used to take money out of the economy to help the deficit, one could understand it, but the same Budget hands out money in tax cuts as follows: there will be reductions in corporation tax and in small business profits tax, an increase in the employers' national insurance contribution threshold, increases in personal allowances for income tax, adjustments for basic rate and upper earnings limits and a council tax freeze. All those tax give-aways add up to £12.37 billion-almost the same amount as will be raised through the VAT rise. The truth is that the measure is not in any way about reducing the deficit; it is about tax give-aways to the Tories' friends-the richer people in our society. The VAT rise is exposed for what it is: a regressive tax, taking money from the whole economy to bolster the Tories' friends in business and the 22 millionaires who sit around the Cabinet table. No doubt many people on the wealthier side of the divide in this country are rubbing their hands in glee.

Photo of Owen Smith Owen Smith Labour, Pontypridd

My right hon. Friend the shadow Chief Secretary to the Treasury said at the start of the debate that clause 3 goes right to the heart of the Budget, and I entirely agree. It is also, effectively, a signature measure from this Tory Government, inasmuch as it exemplifies their ability to break the promises they made before the election and is pretty heartless in its targeting, through its regressive measures, of the poorest and the most vulnerable in our society-and all without any sort of mandate, given that they did not put the measure before the people of the country during the election.

Amendment 25, which is in my name, calls for an impact assessment in respect of several key commercial and other sectors of society that will be disproportionately hit by the VAT increase. I do not intend to talk about all six areas, partly because my hon. Friend Rachel Reeves spoke so eloquently about the most important of those sectors-the poorest, the most vulnerable and the people on low incomes in our society. They are the people who will be hardest hit by the increase in VAT, and they are the people who matter most.

I want to address the specific issue in respect of the NHS. Quite often it is thought that the NHS is immune from VAT rises because it can recover VAT on many items, but I think I can show that the NHS-one of those areas that are hugely important to the most vulnerable people in our society and that has a fragile budget-will be hit by the VAT rise. One of the Prime Minister's promises before the election, in addition to promising not to put up VAT-a broken promise-was that he would cut the deficit, not the NHS. In reality, the VAT rise, which will impact on the NHS, is a real-terms, de facto cut in the budgets of the NHS.

Crucially, although the NHS can reclaim VAT in some areas of spending such as direct medical services and what are called contracted-out services, which are dealt with under the contracted-out services provision, not all areas are subject to the contracted-out services provision. The King's Fund calculates that the VAT rise will cost the NHS £250 million to £300 million per annum, and, more specifically, in answer to a parliamentary question tabled at the Scottish Parliament, we heard from Nicola Sturgeon, the Minister responsible for the NHS, that she anticipated the VAT rise costing £25 million per annum, which is clearly in line with the £250 million to £300 million that we can anticipate for the UK as a whole.

That estimate of extra cost is predicated on the fact that the NHS has to pay VAT on purchasing, for example, a new MRI scanner, if it is for clinical purposes-that is, unless it is designed specifically for research purposes. A fully equipped ambulance now costs an NHS trust about £225,000, to which the VAT increase will add £6,000. A CT body scanner, which costs £700,000, will cost £17,500 more. Locum doctors, who are widely used in the NHS, are another service on which the NHS cannot reclaim the VAT. So each NHS trust in the UK will have to pay an additional £75,000-about £3 million across the NHS-for the use of locum services.

Why does that matter? It matters, as I said, because it is a genuine increase in costs for the NHS and it is not accounted for in the current payment to the NHS. Government also often respond to this line of inquiry-

Photo of Nadhim Zahawi Nadhim Zahawi Conservative, Stratford-on-Avon 7:30 pm, 13th July 2010

Did the hon. Gentleman make the same argument when his Government put up VAT?

Photo of Owen Smith Owen Smith Labour, Pontypridd

We have heard this argument a lot today and, yes, VAT, having gone down to 15% as part of the fiscal stimulus, did go back up to the level at which it had sat-17.5%. However, many Labour Members have made it very clear indeed that VAT was not put up-apart from when it returned to a pre-set level having gone down-under any previous Labour Government, where a successive Tory Government, on assuming office, put up VAT. It is the Tories' stock in trade. It is what we expect, and it is what we got.

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Photo of Thomas Docherty Thomas Docherty Labour, Dunfermline and West Fife

Perhaps my hon. Friend is not aware that the current Prime Minister was a special adviser to the Tory Government that last put up VAT. Does he agree that people such as the Prime Minister revel in using VAT as a way of punishing front-line services like the health service?

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Photo of Owen Smith Owen Smith Labour, Pontypridd

The burden of my comments tonight is that the NHS is receiving a cut in its budgets as a result of the VAT increase, so, again, it is a broken promise from the Prime Minister.

VAT is a deeply regressive tax whose impact on the most vulnerable in our society will be seen only when the comprehensive spending review is produced in the autumn. VAT will bite on NHS services in constituencies such as mine of Pontypridd, and right across this country, and we should oppose that wholeheartedly.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

I wish to speak to a number of the amendments, and the ground has been fairly well covered on many of them.

In an intervention I referred to the Treasury document "Tax Policy Making" that was published on the same day as the Budget. The Exchequer Secretary to the Treasury, who was with us and is back with us now, wrote the foreword, in which he said:

"I want a new approach to tax policy making; a more considered approach. Consultation on policy design and scrutiny of draft legislative proposals should be the cornerstones of this" system. Therefore, I am quite sure that he would be comfortable with all the hon. Members, including Andrew George, using the device of a Finance Bill to tease out many of these proposals and their implications.

I quoted from three key paragraphs of that paper on tax policy, which suggested that there should be more effective scrutiny of tax legislation, that a tailored tax impact assessment would replace the current regulatory impact assessment and that the Government would consider greater use of sunset clauses, or a trigger for an evaluation in legislation. Quite a number of the amendments propose sunset clauses, triggers for evaluation or impact assessments. On that basis, I would have thought that Ministers could accept amendments 55 and 22, tabled by the hon. Members for St Ives and for Nottingham East (Chris Leslie), which propose different sunset clauses.

The hon. Member for St Ives chose a two-year period for his sunset clause. I pointed out in an intervention that it just happened that two years was the period that the Government had used for their assessment of the impact of the tax changes on families and households. Two years is also, of course, the period of the public sector pay freeze, so if the public sector pay freeze is part of the emergency period and defines the emergency period of the Budget, surely there is a case to argue that if this is an emergency increase in VAT that has to be undertaken to get revenue in now, to help reduce the deficit, it should similarly be time-limited.

The colleague of Stephen Williams, spoke in a strange way-I do not quite know what this twilight zone rule is whereby the hon. Gentleman speaks not only as a Government MP but in some other role, not as a spokesperson for the party, but as someone who has been told to speak here for the party as Chair of some Back-Bench committee. No doubt when this twilight zone rule is worked out, we shall find out more. He was confident enough that because there would be Finance Bills every year, this measure would be subject to change and review, but that is not what the Chancellor told us in the Budget statement. In referring to the increase in VAT to 20%, he said:

"This single tax measure will by the end of this Parliament generate over £13 billion a year of extra revenues."-[ Hansard, 22 June 2010; Vol. 512, c. 177.]

There is nothing temporary about that, and nothing about being just for the next two years. Clearly, if the Government get this increase, it will be there to infinity and beyond.

Alec Shelbrooke argued that VAT is more progressive than income tax because only 50% of goods are subject to VAT. That is a completely new argument, even for the Tories. Of course, as other hon. Members have said, if people believe that the increase to 20% will reduce the deficit and be benign in its progressive impact, why stop at 20%? Why not continue much higher? That is the nonsense that we are being treated to.

Other amendments seek to make exemptions for children's necessities and other things. In an earlier intervention, my colleague, Sammy Wilson, said that all Governments should make much more selective use of the menu of VAT rates, which they could apply to certain services to help to stimulate construction and other sectors. All of us hoped that the Government would continue that in future, rather than just locking on to the relentless pursuit of keeping VAT high for now and for good.

The hon. Member for St Ives also questioned the difficulty caused by the fact that the Treasury and Whips tell Members that we cannot change part of the Budget because the whole thing is a package. After we heard the Budget statement, we debated a number of resolutions. Some Members voted for some of them and against others, and other Members abstained. Those resolutions are all different, and they must all be taken differently. This proposal comes to us in the form of a Finance Bill. Members have the right to seek amendments on specific measures because of their impact. Labour Front Benchers have tabled amendments that would require clear impact assessments before changes can come into effect. That is logically consistent with what the Government said in their paper, "Tax Policy Making: a new approach", so why should it not happen?

We have all spent the past year reeling from the impact on the credibility of politics and Parliament of the expenses scandal. During the debate, Members on both sides have traded points about the fact that there is a basic dishonesty and self-delusion and self-deception in some of the positions that are being adopted. It does nothing for the credibility of the political process when we can all point out the inconsistencies in one another's position. That just adds to the credibility deficit in the political process, whatever we say about trying to cope with the national deficit.

The Liberal Democrats have been asked about their position several times today. In fairness to the hon. Member for St Ives, who is publicly carrying his doubts, I should say that he has at least participated in the debate-everyone else has absconded-but we need to know, as Dr McCrea asked, when exactly was the moment of conversion. The Liberal Democrats have not undergone the only conversion; we now hear Tory Members seeing many merits in the measures in the Budget that they had previously denounced, rejected and campaigned against. We now have more Government Members on more roads to Damascus than does the Syrian bus fleet. At some point, they will have to tell us what caused that, other than just a conversation with the Governor of the Bank of England.

Jon Trickett referred to the Secretary of State for Business, Innovation and Skills, who, of course, told the House in the Budget debate that what changed him was a conservation he had with the Governor, who used the scary words, "sovereign debt crisis", which changed the right hon. Gentleman's mind. Of course, that is the same Governor of the Bank of England whom the right hon. Gentleman lampooned for a long time for telling us that there was no recession coming, when other people could see it coming and said so. After that magic conversation, policy changed completely.

However parties have got into this position, Parliament, particularly this House, which has a duty in relation to budgetary matters and Finance Bills, has a corporate duty to ensure that we scrutinise policies and assess their impact. The classic example, which was mentioned by Conservative and Liberal Democrat Members, existed in the last Parliament when the then Chancellor abolished the 10p tax rate. Many people said that that would have an adverse impact on the poor, but the then Chancellor said, "No, bunkum. That's not what the Treasury figures show." Many Labour Members were bamboozled into accepting that, simply because they were told that it was part of a package and that, if they voted against it, the whole thing would fall apart. However, those who said that it was wrong and challenged it were right, and they were vindicated and proved to be right. That was Parliament working properly.

Photo of Andrew George Andrew George Liberal Democrat, St Ives 7:45 pm, 13th July 2010

The hon. Gentleman is making a thoughtful contribution to the debate. I think that, in summary, he acknowledges that none of the larger parties ruled out before the election the possibility of a VAT rise. We are here post-election, when we are no longer seeking votes, and we are facing the political reality of having to address the seriousness of the problems with the public finances. I hope that he will accept the fact that the coalition Government involves two very distinct parties and that we have to have that debate publicly; that is part of the new politics.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

I accept that the hon. Gentleman is wrestling with his conscience, but the bets are that it will be a draw. We remember the explicit terms in which people talked about VAT increases. The leader of the Liberal Democrats specifically campaigned strongly against VAT increases and particularly fingered another party on that basis and spelled out that it was a regressive tax. He was right then; he is wrong now to pretend that it is not a regressive tax that will clearly have an impact on the poor-not just on the existing poor, but on the new poor created in the context of the Budget and the current financial outlook.

People who are in public sector jobs will be put out of them. People on public sector incomes above £21,000 will face a pay freeze-that is a pay cut in real terms-and we know from what has been said in the Budget that many people on benefits will either find them capped or themselves dumped off benefits. In those circumstances, not just the existing poor, but the new, additional poor will suffer. If we consider the Budget as a package, we must think about those sides of the package as well, not just the Lib Dem accessories that they are proud of in the Budget, such as the increase in personal allowances and so on. The total impact needs to be remembered, and that is what most of these amendments are getting at.

Of course, there is a clear, absolute overriding amendment, which has not been tabled as a probing amendment. It is amendment 13, tabled by Stewart Hosie. Just as many Labour Members have criticised Lib Dem Members and questioned their credibility, given what they campaigned on, and challenged Tory Members as well, I have to tell my Labour friends that, if they want to be credible in the criticisms and attacks that they are making on the Lib Dems, they will vote for amendment 13.

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Photo of Jonathan Edwards Jonathan Edwards Shadow PC Spokesperson (Treasury), Shadow PC Spokesperson (Business, Innovation and Skills), Shadow PC Spokesperson (Transport), Shadow PC Spokesperson (Communities and Local Government), Shadow PC Spokesperson (Culture, Media and Sport), Shadow PC Spokesperson (Wales)

I am delighted to have this opportunity to speak in support of amendment 13, which was tabled by my hon. Friend Stewart Hosie on behalf of the Plaid Cymru-Scottish National party group.

Our opposition to the increase in the standard VAT rate from 17.5% to 20% from January stems from two key reasons-one social and one economic. On the social front, there is little doubt that VAT is a regressive tax. As the excellent Library paper on this specific emergency Budget proposal indicated, the poorest in society spend 18% of their disposable income on VAT, while the richest spend about 10%. For the poorest in society, VAT is more likely to hit necessary spending, but as one gets richer VAT costs tend to hit discretionary spending, and that is a very important distinction.

The increase in VAT will also leave people on fixed incomes terribly exposed. The Budget included real-terms cuts in benefits payments, given the change from the retail prices index to the consumer prices index for the calculation of benefit increases. Only today, we saw the levels of RPI at 5% and of CPI at 3.2%. The people dependent on welfare payments therefore face an unwelcome double whammy on their incomes, affecting their purchasing power-a theme to which I shall return later in my contribution.

There is always a lag between the human cost of a recession and the end of an economic downturn, so placing further pressure on the very people who are the true victims of the banking crisis by hitting their disposable income seems callous. Indeed, the VAT increase could actually deepen the human cost of the recession as social problems such as personal debt increase. For those of us on the left of the political spectrum, the steep VAT increase in the Bill, and its disproportionate effect on the poorest in society, contrasts with the treatment of the banking and economic elite, who have had a far easier ride in the emergency Budget. Social justice would demand that those responsible for the economic recession-with their irresponsible behaviour-and the subsequent budget deficit, which fixates the new UK Government, should pay more than their fair share. Although the VAT increase will raise £13.5 billion, the bankers will be subject to a feeble banking levy of £2 billion per annum when it reaches its full force-with its effect wiped out by the changes to corporation tax.

I deal now with the economic argument against the VAT increase in the Bill. VAT is essentially a tax on consumption. Considering that economic growth over the past decade was largely driven by consumer spending, resulting personal debt levels in the UK rocketing to the equivalent of 100% of gross value added, at £1.4 trillion, there is a medium to long-term economic case for addressing that unsustainable situation by reducing the dependence on retail spending in the economy and promoting production and manufacturing. Indeed, debt charities such as Citizens Advice report that the debt problems they deal with continue to increase as the human cost of the recession feeds into the system.

My preference would be to change the banking code and make it more difficult for lenders to seduce consumers into debts that they cannot service, rather than directly reducing the purchasing powers of individuals via the use of VAT. However, the major issue faced by the economy is a lack of demand. Growth in consumer spending will be the key if the UK Government are to reach the economic growth forecasts they have set in order to achieve their fiscal consolidation targets. The eminent economist David Blanchflower has argued that the Budget's VAT proposals will stymie the consumer-led growth on which it depends. The increase will also hit small businesses, which are the backbone of the economy in constituencies such as mine.

Importantly, the increase in VAT will also hit the public sector at a time when UK Government Departments are being asked to make swingeing cuts to their budgets. I should be very interested to learn whether the Treasury has calculated the effect of the VAT increase on the budgets of the devolved Administrations, and whether any consideration of the VAT increase has been made, given the stringent financial situation that the devolved Governments now face.

Furthermore, T he Guardian estimated over the weekend that charities could face additional costs of £150 million per annum as a result of the VAT increase. Considering that they are the very bodies that will bear the brunt of dealing with the human cost of the economic downturn, I must note that slapping an extra bill on the activities of those vital life-support organisations is a very worrying indirect consequence of the proposal. For those reasons I urge the Committee to support amendment 13 when we vote later.

Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

In the absence of anyone else catching my eye, I call Mr Liam Byrne.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

Thank you very much, indeed, Mr Hancock. This has been a good-

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Photo of Alec Shelbrooke Alec Shelbrooke Conservative, Elmet and Rothwell

On a point of order, Mr Hancock. Is it in order for the shadow Chief Secretary to the Treasury to make a second speech on the amendments?

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I am very grateful, Mr Hancock.

This has been a good debate. I know that the amendments have been grouped in a certain way because of how they interrelate, but none the less, having heard the debate and the contributions of right hon. and hon. Members, we will seek to divide the Committee on amendments 41 and 46, as well as on clause 3. I think that we will turn to amendment 35 in a moment.

This has been an important debate, because we have seen with greater clarity where not only Conservative but Liberal Democrat Members stand on the issue before us. However, Andrew George, looking at tax policy in the round, was right to say that the VAT rise has to be-in his words, I think-among the least welcome alternative proposals. He did not want to be drawn into the Chancellor's wider fiscal judgment, and that was unfortunate; instead, the hon. Gentleman wanted to debate the balance of measures in the Budget, and he sought a different balance. He could have made more of the fact that the Budget hits growth in this country so hard that an extra £9 billion of tax has to be raised to make up for lost growth.

The hon. Gentleman's hon. Friend, Stephen Williams, confused us-perplexed us, slightly. I was not sure whether he was elected, appointed or anointed to the position from which he spoke, but he confirmed that he was speaking on economic affairs on behalf of Liberal Democrat Back Benchers, rather than Front Benchers. I was not sure whether that was a device for saying one thing and doing another, but he rapidly disabused us of that with his support for the Government's case. His was a strange argument, because he said he would not support our amendments to protect pensioners and others, as somehow our arguments lacked moral force. So there we have it: the party of Lloyd George is now so empty of moral momentum that it has to look to the Labour party for its source of ethical locomotion.

We heard some powerful speeches from Opposition Back Benchers. My hon. Friend Chris Leslie underlined the point that the Budget does not share out the pain, and that those with children, in particular, will be hit very hard. He was right to highlight the commentary in the City outlining the hit that retailers will take, and he had a very good phrase: VAT will be both regressive and regrettable. That is a good conclusion to our debate.

My hon. Friend's speech was echoed well by my hon. Friend Rachel Reeves, whose constituents, she said, earn just £16,000 a year. They will be hit very hard by this Budget, and that particular unfairness was highlighted by my hon. Friend Owen Smith, who made an excellent point about the problem of irrecoverable VAT and how it will hit the national health service. My hon. Friends the Members for Caerphilly (Mr David) and for Hemsworth (Jon Trickett) also made excellent arguments about the hit on jobs. Of course, there has been some confusion about that from Government sources over the past couple of weeks, but the bottom line is pretty clear: employment will be much lower as a result of this Budget, in contrast with previous Budgets. The IMF, if we needed any help reinforcing the point, backed up that argument earlier.

We are having this debate ultimately because of the Chancellor's wrong-headed decision on the fiscal judgment. The Budget was so damaging that his own independent advisers told him that they had no choice but to downgrade the country's growth forecast, and the IMF rapidly followed suit. Just when Britain needed a Budget to speed up the recovery or, at the very least, maximise its certainty, we were given a Budget that actually slowed the recovery down. The reason we were given was the strange behaviour in the markets, but in fact interest rates and long-term bond yields had been falling for some time before the election. This Budget entirely ignores that point. It hits growth so hard that it has to raise extra taxes, and that is before we address the impact on jobs.

We are still trying to get to the bottom of the changes to how the OBR forecasts job losses, but the Red Book's judgment was grim enough: 100,000 fewer people will be in work as a result of this Budget. That is because the Conservatives have reverted to type and decided that, just as in the 1990s, 1980s and 1930s, unemployment is a price worth paying. It is only a shame that the Liberal Democrat party-the party of Keynes-has abandoned its intellectual heritage and signed up to the economic doctrine of Lord Lamont, the man who famously sang in his bath as unemployment spiralled, "Je ne regrette rien."

All this follows from one decision-that of the Chancellor to bring forward by just a year the date at which debt as a proportion of GDP begins to fall. The price of that is a £40 billion increase in taxes and spending. It means that the Chancellor is now relying on a growth strategy for the next few years that is quite unlikely to come to pass. He has not hedged his bets; he has decided to hit domestic demand and consumption as hard as he possibly can. He is, I am afraid, going for broke.

That is why we object so strenuously to clause 3. I hope that the Government see fit to accept the amendments that we have tabled to try to protect people from its most egregious impacts. If they do not, I am afraid that we will have to vote against clause stand part

Photo of David Gauke David Gauke The Exchequer Secretary 8:00 pm, 13th July 2010

In his Budget of 22 June, my right hon. Friend the Chancellor announced that the standard rate of VAT would increase from 17.5% to 20% on 4 January 2011. Clause 3 and schedule 2 effect this change. In the course of this afternoon, we have had a good and lengthy debate. Several hon. Members have spoken to amendments that would either cancel the rate rise entirely or reduce its effects. Of course, we understand hon. Members' concerns about the impact of this change on low-income households. I therefore propose to reiterate our reasons for taking this path, in the course of which I will deal with the various amendments.

Before doing so, it is necessary to point out that the VAT rise was one of the central measures in the emergency Budget-a Budget made necessary because the coalition Government have inherited from their predecessors the largest budget deficit of any economy in Europe with the single exception of the Republic of Ireland. The independent OBR's pre-Budget forecast revealed that the structural deficit-the part of the deficit that will not go away with the recovery-was higher than previously thought, at around £12 billion, or 0.8% of GDP, higher in 2011-12. That means that £1 in every £4 we spend is being borrowed. The gap stands at £149 billion for this financial year alone, yet the previous Government left us with no credible plans to reduce their record deficit. The OBR forecast that, if we had continued with the previous Government's plans, debt repayments would reach more than £67 billion by 2014-15-more than is currently spent on defence or on schools in England.

Nothing at this time is more urgent for Britain than setting out a tough but realistic plan that demonstrates how we will regain control of the public finances. We have literally no other option. The Government are therefore taking urgent action to eliminate the bulk of the structural deficit as a necessary precondition for sustained economic growth. High levels of public debt could lead to a loss of market confidence and higher interest rates, raising the cost of borrowing for families and businesses and discouraging investment and consumer spending. To continue with the existing fiscal plans would put the recovery at risk, given the scale of the challenge and the risk posed by the sovereign debt crisis in Europe.

My hon. Friend Andrew George asked about the Government's willingness to make hard choices. It is necessary to look at this VAT measure in the context of the overall Budget measures. It is not possible to remove it, because the central message of the Budget was that we have a Government who are willing to get to grips with the deficit and to bring our borrowing down, and if we are to address that quickly it is necessary to move forward with the VAT increase.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I understand that hard decisions need to be taken. Last night, when the Financial Secretary spoke to the British Bankers Association, he mentioned a new initiative-a proposed additional levy on banks in respect of their bonuses and profits. Does the Exchequer Secretary know what that might yield? I am sure that many of us in this House would prefer to see those who contributed most to getting us into this difficulty doing most to help us to get out of it, rather than levying rises in VAT.

Photo of David Gauke David Gauke The Exchequer Secretary

I assure my hon. Friend that this Government are determined to raise as much as possible from the banking sector. He makes the very good point that it is right that those who got us into this mess should contribute significantly to getting us out of it. However, we need to move quickly to provide reassurance to international investors that the UK is a safe place in which to do business and that we will not be caught up in a sovereign debt contagion. His point is well made, but we still have no choice in needing to raise substantial sums of revenue in a certain way.

We were left with a very difficult choice as to whether to fill the black hole with yet more spending cuts or increase taxes. Further spending cuts would have made it impossible for the Government to protect the country's most essential services in the spending review. It is notable that, in the past couple of days, two of the candidates for the leadership of the Labour party have suggested that the previous Government's own plans on cutting spending went too far. The shadow Education Secretary has questioned whether they were seeking to cut the deficit too much by cutting taxes, while the shadow Health Secretary has said that they should have looked more at raising taxes. I see no appetite on the Labour Benches for more spending cuts. The only other option would have been to raise taxes on corporate profits or on personal income, reducing the rewards for work at a time when hard work and endeavour must lead the recovery and ensure that we have a private sector-led recovery. We need to reduce the deficit in a sustainable way that does least damage to growth. While the bulk of the deficit reduction will come from spending, tax also has an important part to play.

We increased VAT rather than increasing income tax or national insurance contributions, which are probably the only other sources of revenue with the capacity to raise the necessary sums, because that was the least economically damaging way of doing this. Of course, we are not alone- [ Interruption. ]

Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

Order. It is very difficult for the Minister to hold the attention of the Committee with so much going on; he looks disturbed by the chattering. Can we give him a chance to finish his speech in peace?

Photo of David Gauke David Gauke The Exchequer Secretary

Thank you, Mr Hancock.

Of course, we are not alone in reaching the conclusion that the right step is to raise VAT. With exquisite timing, we saw today the serialisation of Lord Mandelson's memoirs, in which he noted that the previous Chancellor had reached the conclusion that raising VAT was the right thing to do. Apparently, he told Lord Mandelson that he was

"minded to...raise it over time, to 18 or even 19 per cent, rather than push up national insurance charges."

Lord Mandelson tells us that he was "impressed" by this. He says:

"These were exactly the sort of hard choices that would enable us to regain the initiative."

Well, they did not take the hard choices and they did not regain the initiative-but we will.

The Budget has already had an impact on the credibility of British economic plans. As the director of the CBI has said:

"This Budget is the UK's first important step on the long journey back to economic health."

The Fitch rating agency said:

"The path of deficit reduction and public debt projections set out in" the

"Budget statement are materially stronger than those set out in the March 2010 Budget."

I am afraid that I cannot accept amendments 13 and 14, tabled by Stewart Hosie, which would prevent the VAT increase from happening. I have explained that we have no option other than to take this action, and I therefore ask the hon. Gentleman to withdraw them. Similarly, amendment 22, tabled by Chris Leslie, and amendments 54 and 55, tabled by my hon. Friend the Member for St Ives, would undermine the basic rationale for the increase. They would not allow us to reduce the deficit as quickly as we would like. I agree with the observation made by my hon. Friend the Member for St Ives that one would have expected the shadow Chancellor to support amendment 54.

I have a particular concern about amendments 22 and 55. One argument made for the temporary VAT cut by the previous Government was that it would shift expenditure into the relevant year, 2009, when the VAT rate was somewhat lower, and therefore accelerate the recovery. If we did the reverse of that and had a sunset clause, essentially setting out plans to increase VAT but with a promise that we would then reduce it, it would have the reverse effect. It would defer expenditure, which would damage the recovery.

I note the point made by Mark Durkan about the Government's views on sunset clauses. The tax policy document that we produced is very good and has been well received, but the arguments for a sunset clause in the case of a rate change are not very persuasive, particularly given the economic effects that it would have.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

The premise behind my amendments was that, as this is an emergency Budget, the VAT rise must be an emergency measure, which must surely be time-limited. Can the Exchequer Secretary confirm to the House that there is no intention of retaining the 2.5% rise for all the coming years of this Parliament?

Photo of David Gauke David Gauke The Exchequer Secretary

We have announced the policy and the increase. All taxes are reviewed on an ongoing basis, and that will obviously be the position with VAT. However, for the reasons that I have set out, it would not be sensible to have a sunset clause. It would have a damaging effect on the pattern of expenditure.

Underpinning the Government's approach is a commitment to fairness. Consequently, the VAT increase will apply only to the standard rate, ensuring that the zero rate is maintained on everyday essentials such as food and children's clothing, and that the 5% rate on domestic fuel and power stays in place. It is also part of a wider Budget package in keeping with the Government's commitment to tackle the deficit while protecting the most vulnerable.

The VAT charge is part of a fair and progressive Budget, and the wider package contains a number of measures specifically intended to help the most vulnerable, in particular the increase in personal allowances by £1,000, the triple lock for increases in the basic state pension and the above-indexation increase in the child care element of the child tax credit. All sections of society will contribute to tackling the deficit, but the richest will pay more than the poorest. That has been supported by the chief executive of Barnardo's, who has said that

"we recognise the Government has done what it can to protect the most vulnerable."

Amendments 1 to 4 would provide that the rate increase would come into effect only after an impact assessment had been laid before the House. Similarly, amendment 25 would provide that before the rate increase took effect the Chancellor must produce a report on its impact on a number of specific groups. Amendments 41 to 43 are further variants on that theme, as is amendment 46. Together, they would provide that the increase be deferred until the earlier of 4 January 2012 or the date of the production of a report on the impact of the increase on disabled persons, pensioners, children and child poverty, inequality, the bottom quintile, charities and the informal economy.

Those amendments are unnecessary. At a time when the Government need to show a willingness to tackle the deficit and a sense of direction to ensure that there is confidence in the running of the British economy, it is vital that we have the credibility of bringing the VAT increase into effect as soon as possible. It is worth noting that the OECD has stated that the Government have demonstrated that they are taking courageous and appropriate action in the Budget. That is what we are doing, which is why it is right that we reject attempts to delay the implementation of the VAT increase.

Although we have not necessarily labelled all the material that we have produced on the matter as impact assessments, we have produced a great deal of material about the impact of the VAT increase and the Budget more generally. It would be damaging to businesses if we did not proceed, as they need the certainty that we will do so.

I shall set out some of the impacts of the rise that we have already described. In annex C of the Red Book we set out the OBR's assessment of the economic impact of the Budget measures. The impact of the VAT increase is built into the inflation forecast in paragraph C.19. Paragraph C.23 sets out the impact on household demand and paragraph C.24 the impact on company profits. Paragraph C.5 sets out the OBR's view of the VAT tax gap, and paragraphs C.39 and C.64 explain that VAT is expected to fall as a percentage of GDP, because the OBR assumes rebalanced economic growth with consumption - [ Interruption .]

Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South 8:15 pm, 13th July 2010

Order. I think it is in the best interests of the Chair and everyone here if we get a chance to hear what the Minister is saying. He is trying to express his point of view in answer to a very long debate, so let us have a bit of patience and let him finish his speech so that we can all hear it.

Photo of David Gauke David Gauke The Exchequer Secretary

Thank you, Mr Hancock. I could go on setting out the lengthy list of information about VAT that we have provided. The Opposition's case that there has not been any analysis is all the more ironic given that Labour was the party that produced the doubling of the 10p rate of income tax and provided no distributional analysis whatever. We, however, have examined that particular tax change, and it is worth noting that the five bottom deciles lost out and the five top deciles gained. That is what our predecessors did, and it is not the case under the distributional analysis of VAT. As I have said, there is a strong case for looking at the expenditure basis, which shows that VAT is indeed progressive.

The impact on pensioners is a legitimate concern, but if the focus is on those with the lowest income, that needs to be considered in the context of the overall distributional analysis.

Amendment 23 would provide for children's prams, cots, nappies and other items to remain at 17.5%. I am afraid that that amendment is illegal under EU law, so we cannot pursue it. Amendment 40 would provide for the Treasury to produce a report on the standard rate of VAT by 4 January 2011. The Chancellor has made it clear that we have no plans in that regard.

Clause 3 makes provision for the standard rate of VAT to increase from 17.5% to 20% on 4 January 2011. That is an unavoidable measure, and I urge the Committee to reject the amendment, which risks the Government's plan to reduce the deficit.

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Photo of Stewart Hosie Stewart Hosie SNP Chief Whip, SNP Deputy Leader, Shadow SNP Spokesperson (Treasury)

We have heard all the arguments over a long debate, but we remain convinced that this VAT rise is regressive, socially damaging and economically dangerous, and we invite many Members from across the House to join us in supporting amendment 13 to strike down the rise.

The Minister and his colleagues argue that the rise is necessary and inevitable. It is not necessary to increase the VAT bill for the poorest families by more than £31 a week; it is not necessary to put further pressure on those who will feel the burden of housing and unemployment benefits and tax credits being squeezed; it is not necessary, as the British Retail Consortium said, to introduce a "disappointing" measure that "will hit jobs"; and it is not necessary to introduce a measure that can push up prices on the high street and is inflationary.

It is necessary to tackle the deficit and the debt, but it need not be done over a fixed time scale using this methodology. It is far better to take a medium time scale approach that tackles it credibly. We think that the VAT rise is wrong, and I shall press amendment 13 to a vote.

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Question put, That the amendment be made.

The Committee divided: Ayes 21, Noes 316.

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Question accordingly negatived.

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Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

For the convenience of the Committee, I should explain that we are going to move directly to debate amendment 57, in the name of Andrew George. There will be further votes on amendments in the previous group, but they will come at the end of the next debate.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I am rather taken aback to be called at this moment, Mr Hancock- [ Interruption. ]

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Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

Order. If Members are leaving, can they give Mr George the privilege of being heard?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

Thank you, Mr Hancock- [ Interruption. ]

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Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

Order. It is impossible for anyone to hear what Mr George is saying. Could I ask Members who are leaving-whether that is preferable or not is questionable-to go quietly?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

Thank you, Mr Hancock, I will try again.

I beg to move amendment 57, in page 2, line 8, at end insert-

'(1A) The amendment made in subsection (1) shall not apply to:

(a) purchases of goods or services made by registered charities;

(b) purchases of goods or services made by public authorities;

(c) renovations of dwellings in council tax bands of F or below; and

(d) non-exempt fuel sold to permanent residents living in rural locations which the Chancellor shall, by order, define.'.

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Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

With this it will be convenient to discuss the following: amendment 35, page 2, line 11, at beginning insert

'Subject to subsection (3A) below,'.

Amendment 36, in page 2, line 13, at end insert-

'(3A) The amendment made by subsection (1) shall not have effect in relation to any supply made on or after 4 January 2011 to a charity where such supply is made to that charity solely in relation to its charitable non-business activities.'.

Amendment 37, in page 2, line 17, at end add-

'(6) In this section, "charity" has the same meaning as in the Charities Acts 1993 and 2006, the Charities and Trustee Investment (Scotland) Act 2005 and the Charities Act (Northern Ireland) 2008.'.

Amendment 56, in page 2, line 17, at end add-

'(6) The amendment made in subsection (1) shall apply only to purchases of goods and services at a cost of £25,000 or more, with the following exemptions:

(a) purchases made by registered charities;

(b) renovations of property;

(c) non-exempt fuel sold to permanent residents living at rural locations which the Chancellor shall, by order, define.'.

Amendment 58, in page 2, line 17, at end add-

'(6) The Treasury shall prepare a report into the impact of the rise provided for by subsection (1) on mountain rescue services in the United Kingdom and lay it before the House of Commons.'.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

With the leave of the Committee, I would appreciate the opportunity to talk to amendment 56 as well as amendment 57, which stand in my name and those of my hon. Friends.

Amendment 57 proposes to exempt certain groups from the impact of the proposed 2.5% rise in VAT, so that it would not apply to

"purchases of goods or services made by registered charities ...purchases of goods or services made by public authorities," or to

"renovations of dwellings in council tax bands of F or below".

The purpose of the amendment is to further the debate on an issue that I have been probing in both the Budget debate and in debates on the Finance Bill. In spite of the great speed at which the issues have been considered, we have had the opportunity both to review the evidence brought forward by the Treasury to support the proposed VAT increase and to discuss this with some of those affected in the sectors concerned.

I do not intend to detain the Committee for too long, but on charities, a certain amount of work has been under way for some time. It is perhaps worth while acknowledging that Governments of both parties over the past couple of decades have looked into the problem that the charitable sector has had with irrecoverable VAT. A number of attempts have been made to address it, and although charities have not been able to secure a special VAT status, the best way in which Governments have felt that they could be compensated-in the past, at least-has been through the gift aid mechanism. It is clear from the Exchequer Secretary's answers to questions that I have asked previously about the impact of the VAT rise on charities that the Treasury does not intend to make any exemptions for them.

The Charity Tax Group has published a paper since the Budget suggesting that an increase in VAT to 20% would cost around £150 million. Although I have not studied the analysis, I believe that that figure was arrived at on the basis of an extrapolation from 87 charities across the range of sizes. If the Government believe-and I would agree with them-that the charitable and third sector has a significant contribution to make to a number of social and economic measures to improve our society, they need to give it some consideration in the Budget.

As for the second of the measures, I know that various attempts have been made to estimate the likely impact of the VAT rise on public authorities. I have questioned local housing associations, for example, including Penwith housing association in my constituency-a relatively small housing association, but one covering the bulk of the stock in the Penwith peninsula, which is the Land's End peninsula, to most people who understand the geography of Cornwall; that is, the bottom left-hand corner of the UK. Penwith housing association has estimated that the VAT rise will add just over £150,000 in costs to its modest activities over the year, and that will affect it, as a local housing association performing an important public function.

Photo of Bob Russell Bob Russell Liberal Democrat, Colchester

Will my hon. Friend confirm that the small charity to which he has just referred was in no way responsible for the financial mess that the country was left in by the previous Government?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I am grateful to my hon. Friend for that intervention. He might have missed some of our earlier exchanges on these amendments, but it is fair to say that concerns have been raised about the way in which the Budget gets the balance right, and the way in which we might achieve circumstances in which those who did the most to drop the country into this mess were seen to be doing the most to pull it out again. This has been a theme throughout our debate.

I reflected earlier on news that was reported today. I was not at the British Bankers Association dinner last night when the Financial Secretary to the Treasury proposed certain new measures that were not in the Budget. They would result in additional taxation of the banks' bonuses and profits. That would be over and above the banking levy, which Liberal Democrat Members were particularly pleased to see incorporated in the Budget.

I do not wish to stray beyond the subject matter of the amendments, Mr Hancock, but if we are talking about removing the capacity of the Budget to increase the tax yield in a particular area, it is important to indicate where we might recover that tax from. For example, we should perhaps be looking at a banking levy of 0.04%, going up to 0.07%, possibly with a view to increasing it. I welcome last night's announcement by the Financial Secretary to the Treasury, however, and I hope that we shall hear more about that matter, because I think that it is taking the policy in the right direction.

Photo of Adrian Sanders Adrian Sanders Liberal Democrat, Torbay

I congratulate my hon. Friend on tabling the amendment. Has he made any assessment of the churning of Government money that goes into the charitable and public sectors and that will now be paid back through the increase in VAT?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

My hon. Friend is asking me whether I have made that assessment, but I have in fact been seeking such an assessment myself. As I mentioned a moment ago, the Charity Tax Group has made its own assessment based on a survey of 87 charities. That is a modest attempt, but it is also a significant effort on behalf of the charitable sector to undertake its own assessment and to extrapolate information from it. I believe that that assessment took a reasonable random sample across a range of charities, and that is probably the best that the group could manage in the circumstances.

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Photo of Alun Michael Alun Michael Labour, Cardiff South and Penarth

I do not want to embarrass the hon. Gentleman, who has been a vigorous champion of the voluntary sector over the years. However, according to his own words, £150 million is going to be extracted as a tax on charities as a result of these measures. He says that the Treasury is unwilling to make concessions. Does he not find that unacceptable?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

If we are seeking to make that kind of point, it is worth pointing out to the right hon. Gentleman that when Labour was in government, it did very little to address the problems in that sector. I am concerned that families across various income groups will be affected by the proposals, and we have still not received sufficient information about the impact on those groups. This question has dominated much of our debate, and other sectors of society, including charities, public authorities and those involved in building renovations, will also be affected.

Photo of Alun Michael Alun Michael Labour, Cardiff South and Penarth

I dare say the hon. Gentleman feels obliged to make some party political points, but would he not acknowledge that the creation and expansion of gift aid gave a massive boost to the charitable and voluntary sector over many years, and that that is just one of a large number of issues that the previous Government did address? It is his Government who are responsible for the fresh burden placed on this sector by the Budget, so why does he not find it unacceptable?

Photo of Andrew George Andrew George Liberal Democrat, St Ives 8:45 pm, 13th July 2010

I have already acknowledged the benefit of gift aid as having an ameliorating impact on the consequences of irrecoverable VAT for charities; that reasonable point has already been acknowledged. At the end of the day, this issue needs to be addressed, but I do not want to go back to a Second Reading debate on how we get the proper balance of measures. I would have thought that, across the Committee, the balance of Members would agree, as I do, with what the Chancellor announced on Budget day-that those most capable of making a contribution should pay most and the vulnerable should be protected. The VAT rise raises questions about whether the vulnerable are sufficiently protected by the range of measures in the Budget as a whole.

Photo of Kate Green Kate Green Labour, Stretford and Urmston

I welcome much of what the hon. Gentleman says about the importance of looking at a balance that achieves protection for the most vulnerable, but one problem with increasing the burden on charities is that it feeds through to the most vulnerable because they are, of course, their client group. Many charities will be either unable or reluctant to pass on to their service users the consequences of this VAT rise, so they are likely to eat into their own reserves, weaken their own financial standing and, ultimately, get hit with the additional whammy of finding it more difficult to attract funding from other sources, including those in the public sector. That will reduce their impact-their very good impact-on the most vulnerable in society.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

The hon. Lady makes the point about the potential impact on charities rather more articulately than I think I am making it. There are potential knock-on consequences for charities, and for public authorities, in being able to perform their functions, so it is important to address those issues.

Finally, on the renovation of buildings, the primary purpose is to distinguish between the treatment in VAT law of new build and of renovation. I am seeking to probe that subject in order to elicit a response from the Exchequer Secretary. Surely we as a society should be trying to encourage renovation of existing buildings rather than always taking up greenfield sites for development. In particular, we should not discourage improvements to dwellings in the lower council tax bands.

Photo of Alan Beith Alan Beith Chair, Justice Committee

Does my hon. Friend appreciate that there are cost-neutral ways of removing that imbalance, which are always opposed by the volume builders-despite the fact that there is not much volume building going on. The renovation of existing properties could contribute a great deal more to dealing with homelessness if both kinds of activity were taxed at the same, relatively low, VAT rate.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I agree entirely with my right hon. Friend. We are limited in what we can achieve by amending this Bill, as I know because I went to the Public Bill Office and sought advice about what was possible. I cannot suggest the introduction of entirely new measures, but my right hon. Friend is absolutely right to say that if we were able to range freely with amendments to the Finance Bill, we would have opportunities to revisit this issue in a new way.

Photo of Simon Hughes Simon Hughes Deputy Leader, Liberal Democrats

This issue is a long-standing subject of debate. Following what was said by my right hon. Friend Sir Alan Beith, may I suggest that it would be helpful to hear from Ministers later whether they have considered revenue-neutral ways of taxing renovation as opposed to new build? Are there not very good environmental reasons, very good energy-saving and green reasons, and very good land use and planning reasons, for continuing to use existing sites rather than building on new greenfield sites?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I am grateful to my hon. Friend for making that point. I hope that the Exchequer Secretary is listening carefully, and will respond to all the points raised in relation to this amendment and others that deal with the same issue.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley

I should declare my interests. I am a senior partner in VAT-registered organisations, one of which writes computer software that calculates VAT. A need for complicated VAT calculations would, of course, provide us with lots of money, but I have some concerns about the practicality of my hon. Friend's proposals, although I agree with the principles. Is this a probing amendment, or does my hon. Friend intend to press it to a vote?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I think I can reassure my hon. Friend that it is a probing amendment. It was put together at some speed, and I believe it is technically deficient, in ways to which I shall not draw attention. [Interruption.] No doubt others will. I hope, however, that the Exchequer Secretary will concentrate on the issues raised by the amendment rather than on its technical deficiencies, which I fully acknowledge.

Amendment 56 seeks to achieve the same aim, but introduces a new concept. It proposes that the increase should apply only to purchases of more expensive goods. For the purposes of the debate I have set the level at £25,000, although I could have suggested that VAT on goods and services costing that amount should rise by a great deal more. There may also be an argument for a range of charges for goods and services between £2,500 and £25,000.

The level, as such, is not something that I would die in a ditch to defend. I am concerned simply with the principle of adopting a measure intended to achieve what the Budget stated that it wished to achieve, by ensuring that those who can contribute most to restoring the public finances do so and the vulnerable are protected. Those who can buy expensive yachts, big Ferrari cars and other expensive consumer durables may be more able to make their contribution through a rise in VAT than the vulnerable households and individuals who have, I believe, been the predominant concern of Members on both sides of the House.

I do not expect the Exchequer Secretary to accept the amendment without question this evening. However, I shall be interested to hear his response to the general theme. It has been acknowledged-certainly by the Institute for Fiscal Studies-that the lowest decile in terms of household income will pay a higher proportion of their income to meet the proposed tax rise, but I hope that a measure to reduce its impact on those with modest and low incomes will be acceptable to the Treasury, either now or in the future.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I am sure that my hon. Friend wants to point out another technical deficiency in the amendment.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley

Does my hon. Friend accept that expenditure deciles, which address the size of a household's budget, are a better guide to the wealth of a household than income?

Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

Order. That is not relevant to this debate.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

I am grateful to you for your advice, Mr Hancock. As I do not know all that my hon. Friend was going to say on this issue, I cannot respond to his remarks.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

These two amendments are clearly probing amendments. The intention is to take further my concerns in respect of assessments on groups other than low-income households.

Photo of Andrew George Andrew George Liberal Democrat, St Ives

As the hon. Gentleman has been so assiduous in trying to intervene, I will give way to him.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

I thank the hon. Gentleman for being so generous in giving way. May I probe him on his probing amendment? He has picked £25,000 as the sum at which the higher rate of VAT would be charged on goods and services. Has he picked that sum so that the seats purchased by Lord Ashcroft would be subject to the higher rate of VAT, or would they fall just outside that?

Photo of Andrew George Andrew George Liberal Democrat, St Ives

The hon. Gentleman has greatly entertained us with his intervention, but I do not think I will respond to it-especially as if I were to do so I think that you would probably rule me out of order, Mr Hancock.

In summary, I wanted to highlight the knock-on effect of VAT on public authorities and charities and, as many of my party colleagues have also done, the impact on building renovation. That sector could be substantial, and we should be encouraging it, not discouraging it. We should also seek measures that protect vulnerable households and people on low incomes-and that is the purpose behind my amendments.

Several hon. Members:

rose -

Photo of Mike Hancock Mike Hancock Liberal Democrat, Portsmouth South

The Chairman of Ways and Means has selected these amendments and has grouped them very narrowly. I hope that Members will respect his wishes by addressing them as they are grouped on the selection list.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

I rise to speak to amendments 35, 36, 37 and 58, tabled in my name and the names of my hon. Friends.

This debate has already shed a great deal of light on the impact of this hasty rise in VAT. Over the course of the afternoon we have heard about the impact of the rise on a number of groups about which we are all concerned. We heard about the impact on jobs, the economic recovery, the low-paid and pensioners, and this group of amendments offers us an excellent chance to examine the impact of this rapid rise in VAT on Britain's charities. I will not speak at length, but I want to make a few quick points.

Amendments 35, 36 and 37 seek, in essence, to stop the VAT increase applying to the goods charities buy in to deliver what is called their "charitable non-business activities", and for which they cannot then charge VAT. I know about the difficulties of protecting charities from VAT altogether, and I am sure that the Exchequer Secretary will return to that point, but this is an important debate that we have been pursuing for some time.

I know that many charities want to be classified like, for example, local authorities, which do not have to pay VAT in the same way. Many groups, including the Association of Chief Executives of Voluntary Organisations, have been arguing for some time that in the competitive provision of services, especially in the public sector, local authorities are often at an advantage compared with charities and third-sector organisations.

Photo of Ian Lucas Ian Lucas Shadow Minister (Business and Regulatory Reform)

Does my right hon. Friend not agree that, in a sector in which charities are being encouraged to play a larger role in delivering services that are often supplied by local authorities, that distinction is particularly inappropriate?

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury 9:00 pm, 13th July 2010

This is a particular problem, and I was about to pay tribute to my hon. Friend, who has done some important work with the Library in helping us to understand what this VAT increase will actually mean for Britain's charities. I also commend the work of the Charity Tax Group, which Andrew George prayed in aid. Its assessment is pretty blunt-that this increase will cost Britain's charities £140 million to £150 million. Because much of that VAT cannot be reclaimed, Britain's charities stand to lose £60 million to £70 million. That is a lot of money, and certainly a lot for charities that are already struggling with contributions, which are down because of the recession. Many in the sector are worried about how voluntary contributions will rebound as the recovery sets in.

Others who read the research will, like me, have been struck by the Charity Tax Group's case study of Action for Blind People, one of the largest charities in the UK, which provides free and confidential support for blind and partially sighted people. The study makes the point that the rise in irrecoverable VAT for Action for Blind People will total some £100,000 a year. Charities in that sector that are about to take such a hit must immediately look at which services they can no longer offer. That gives rise to a question that will concern Members in all parts of the House, and which demands an answer: how are these charities going to be compensated for this hasty increase in VAT?

The increase appears to hit smaller charities hardest-a point made by both the House of Commons Library and the Charity Tax Group. They say that smaller charities such as those with an income of less than £30 million will be hit, as VAT currently accounts for some 3.6% of their income, compared with 2.3% for larger organisations with an income of more than £30 million. In other words, this VAT increase will create a greater gulf between bigger charities and smaller charities. That is obviously a concern because, as my hon. Friend Ian Lucas pointed out, there is a big push on at the moment to ensure not a narrower role but a wider role for smaller charities in delivering public services.

Photo of Stephen Williams Stephen Williams Liberal Democrat, Bristol West

We will all agree that the whole area of charity taxation needs serious examination in this debate, and perhaps the Government will review it in future. However, perhaps the right hon. Gentleman will remind us whether, in the 13 years in which the Labour Government were in office, they exempted the charities from the proposed increase in national insurance. In fact, it cost charities a lot. During consideration in Committee of what became the Finance (No. 2) Act 2005-it was the first Finance Bill Committee I served on-charities complained a lot about the Labour Government restricting the scope of gift aid. They did not help charities out then. When income tax was reduced, they did not allow charities to recover the difference. This enthusiasm for protecting charities from tax changes is therefore somewhat new-found on Labour's part.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

With respect, the hon. Gentleman is making a partisan point in a quite unfair way. I was about to make a point on which I hope there is consensus in the Committee. We all now know what the impact of the VAT increase on charities will be, and all of us will be worried about the impact we foresee on smaller charities. The truth is that there is strong cross-party consensus on the need to support charities further.

I was studying this afternoon not just the rhetoric but the reality set out in some of the manifestos put before the country at the election. The Conservative manifesto said:

"Britain has a proud and long-standing charitable tradition, and we are convinced that the voluntary sector should play a major part in our civic renewal."

The Conservatives' specific proposal was to

"introduce a fair deal on grants to give voluntary sector organisations more stability and allow them to earn a competitive return for providing public services."

The Liberal Democrats had a slightly different take on the right policy prescription, as page 85 of their manifesto talks about the need to reform gift aid still further. They proposed that it should

"operate at a single rate of 23%-giving more money to charity while closing down a loophole for higher rate tax payers."

Labour Members are very proud of our record in supporting the third sector in this country. Over the past 10 years, we doubled the amount of public sector income going to the third sector and Britain's charities, from £5.5 billion to more than £11 billion. So although we had not finished the job of sorting out VAT, what we had delivered was a doubling of income going into the charitable sector in this country. That was the biggest single increase in income going to the third sector in this country almost on record. In the past 10 years that meant that the sector was stronger in taking on public service delivery contracts. Indeed, those contracts with the third sector doubled since 2000 and by the time Labour left office there were about 60,000 social enterprises, worth £8.5 billion. We are proud of our record.

Photo of Mark Durkan Mark Durkan Shadow SDLP Spokesperson (Foreign and Commonwealth Affairs), Shadow SDLP Spokesperson (Home Affairs), Shadow SDLP Spokesperson (Justice), Shadow SDLP Spokesperson (Treasury)

My right hon. Friend referred to the level of funding that the Labour Government achieved for the third sector. What does he think will be the implications for that funding of the announcements to be made on 20 October? Should not the Committee be considering the impact on charities of the spending decisions that are coming down the tracks, as well as the taxation impact?

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

As ever, the hon. Gentleman is on the money. If departmental cuts, particularly to the Cabinet Office, are between 25% and 40%, the impact on public funding for third sector organisations in this country will be devastating. We can all see this coming ahead of us-we can all see this train coming-so these amendments seek to ensure that a report is set out by the Treasury before the VAT hike is introduced. I hope that a bit of good old-fashioned common sense will prevail this evening, and that we will be able to agree to them.

I understand that this measure is being introduced at haste. It is perfectly plausible to suggest that the Treasury did not foresee it, and there is something we can all do this evening to ensure that charities are protected from unintended consequences. We ask the most unreasonable things of Governments-we cannot expect them to have the power of omniscience-but we can agree this measure in a way that protects charities.

The final point that I wish to make relates to amendment 58, which touches on one particular group of charities-mountain rescue charities-and on which some expectations have been set.

Photo of Tony Cunningham Tony Cunningham Labour, Workington

May I tell my right hon. Friend just how delighted I am that he has raised the issue of mountain rescue teams in amendment 58? The emergency services are often praised for the tremendous work that they do, but the mountain rescue teams are a sort of forgotten emergency service. No better example of this could be given than what happened last November during the floods, when the Cockermouth mountain rescue team saved people's lives and did an incredible job.

Photo of Liam Byrne Liam Byrne Shadow Chief Secretary to the Treasury

My hon. Friend has pretty much made my argument for me. All of us know what an extraordinary service mountain rescue provides. Of course these charities confront a particular problem when using gift aid to provide compensation for the kind of VAT hit that they are about to take, because when someone is collecting money through tins it is sometimes difficult to collect gift aid on the contributions that they receive. So amendment 58 seeks to extend protection to mountain rescue services in England and Wales by, again, asking the Treasury to prepare a report on the impact of the VAT hike on their services. These are common-sense amendments, which draw on a strong cross-party consensus that has developed over the past few years. I hope that the Government are able to support them.

Photo of Ian Lucas Ian Lucas Shadow Minister (Business and Regulatory Reform)

I was motivated to highlight this particular area because of the importance of the voluntary sector in my constituency. I suppose that I am not at all alone in having a vibrant and important sector in my constituency. We constantly hear of the good work of the charitable sector from hon. Members from all parts of the House.

We hear of the good work of the charitable sector from the Prime Minister in particular. He spent much time before the general election talking about the big society and how he would want to extend the work of the voluntary and charitable sector if he had the opportunity to move into government. It was therefore with profound distress-but no little surprise-that when the Budget came, I saw the VAT rise that inevitably follows the election of a Conservative Government. Of course, that rise affects the charities in our constituencies. I want to talk about two of them briefly in the context of the amendments.

The first is called Chariotts, a charity in the Wrexham constituency that transports individuals who have disabilities. To put it simply, those individuals pay the fares, and the effect of the VAT increase on that charity is that, as it is becoming registrable for VAT, it will have to charge VAT to its clients. Those individuals, who receive disability benefits, will be asked to pay more to obtain the same service from the charity. That is causing the charity some distress and I have spoken to its representatives about the issue.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley

Is that change a result of the charity's becoming larger and becoming registrable, or is it a result of the changes in the Budget?

Photo of Ian Lucas Ian Lucas Shadow Minister (Business and Regulatory Reform)

The 2.5% VAT increase that Government Members will march through the Lobby to support will mean that those individuals, who are receiving disability benefits, will have to pay more money from their own pockets to the Government. I understand the hon. Gentleman's comment, but the point is that more money is being paid by individuals who receive disability benefits because of the decisions of the Liberal Democrats and the Conservatives.

Photo of John Hemming John Hemming Liberal Democrat, Birmingham, Yardley

Is the hon. Gentleman not aware that with the uprating by CPI, people in claimant households will be on average 1% better off after the uprating as a result of the VAT change?

Photo of Ian Lucas Ian Lucas Shadow Minister (Business and Regulatory Reform)

I think that I should wait to see the position in due course. I have no doubt that as a result of the decisions of the Government parties my constituents, particularly those on lower incomes, will be worse off.

Additional burdens will be imposed on the most vulnerable in our communities. That was not something we heard from the Conservatives before the general election-they did not say that they were going to increase VAT, although I always expected them to do it. When the Liberal Democrats sit there supporting the Conservative-Liberal Democrat Government who are increasing VAT, it fills me with disdain because, of course, they campaigned against that increase in VAT. Their councillors in Wrexham go along to events such as those with Chariotts, which is an organisation that they support locally, yet the Liberal Democrats will impose a financial burden on that charity as a result of their support for this change.

Photo of Phil Wilson Phil Wilson Labour, Sedgefield

It is the same in Sedgefield. There is a very small charity that I visited on Friday, called the LADDER centre, in Ferryhill. A simple £200 or £300 increase in the VAT it has to pay could see it go under. This problem obviously exists not just in my hon. Friend's constituency but across the country.

Photo of Ian Lucas Ian Lucas Shadow Minister (Business and Regulatory Reform)

These charities are very important across the country. Of course, another charity in my constituency that I have approached about this matter-the Nightingale House hospice-has said that as a result of the Budget it will have to find £10,000 to care for the sick people whom it looks after. That is the consequence of the Budget that is being supported by the Liberal Democrats and the Conservatives. This is a specific aspect of that Budget: the penalty that is being imposed on charitable organisations that the parties opposite purport to support.

Politics is all about choices. That is what we are paid to come here to make. The choices that a party makes when it gets into a position of power tell us a great deal about that party. The Liberal Democrats and the Conservatives are choosing to lower the rate of corporation tax, which will apply to the banks that we were talking about last night. While we were having that debate, the Financial Secretary to the Treasury was elsewhere delivering an after-dinner speech, but he should have been here, telling the House about what he is proposing in respect of a banking levy.

The Liberal Democrats and the Conservatives support a cut in corporation tax for Barclays bank, the Royal Bank of Scotland and all the companies that have benefited from the support that the Government have given. They also support a VAT increase that they know will inflict financial pain on charities that are committed to serving the most vulnerable in our communities. Those parties can make those choices because they are in government, but people will remember. We expect such choices from the Conservatives, but perhaps we do not expect them from the Liberal Democrats.

If the Conservatives and the Liberal Democrats make those choices, we will make sure that all our constituents know where they stand. We all know that organisations such as hospices are among the most valued organisations in our communities-that is why the Prime Minister talks about the third, or voluntary, sector. The Government parties should be aware that what they are doing tonight is inflicting financial pain on those organisations, and they should be ashamed.

Photo of David Gauke David Gauke The Exchequer Secretary 9:15 pm, 13th July 2010

Amendments 35 to 37 aim to remove supplies to charities for non-business purposes from the scope of the VAT increase. Similarly, amendment 56 would mean that the increase would apply only to supplies costing £25,000 or more, and that it would not apply to purchases made by charities for renovations of property or of fuel sold to residents of rural locations. Amendment 57 would add supplies to public authorities to the list to which the increase will not apply and is a little more specific about the type of renovations that would be excluded from the increase.

Both those groups of amendments would be illegal under EU law in so far as they would effectively create further reduced rates of VAT in categories that are not on the list of permitted reduced rates. They would also impose a considerable administrative burden on the businesses supplying the goods in question, as they would mean that any business supplying goods or services would have to ascertain first whether a customer is a charity and, secondly, the use to which the customer would put those goods or services. In the light of the customer's answer to those questions, the VAT rate would be either 17.5 or 20%, unless the supplies were eligible for the reduced rate or the zero rate.

Photo of David Gauke David Gauke The Exchequer Secretary

Before I do, I note the spirit in which my hon. Friend Andrew George tabled his amendments, in an attempt to probe this matter, so I do not criticise him. He has acknowledged that his proposals were not technically watertight, but they none the less enabled us to debate this matter.

Photo of Bob Russell Bob Russell Liberal Democrat, Colchester

Can the Minister tell me where the coalition agreement says that charities will be disadvantaged by Government policies? Can he explain what percentage of the total increase in VAT will be borne by the charitable sector?