Thank you for allowing me to contribute to the debate, Mr Speaker.
Many Bills are based on evidence, but this Bill takes a huge gamble on the judgment of a Chancellor who regards his plans for fiscal consolidation more as an article of economic faith. The extent of the tax rises that it imposes, when added to the effect of the Government’s decision to reduce spending by £81 billion over the next four years, threatens to remove about 2% of GDP from output. As Anatole Kaletsky wrote in the most recent edition of Prospect, that is the equivalent of the annualised growth achieved in the whole of 2010.
The theory that underpins the measures in the Budget and the Bill is that of expansionary fiscal contraction: the idea that cutting deficits as quickly as possible while also making a massive reduction in the scope of the state will liberate private sector capital to fill in the gap, and will create higher levels of growth. That theory is deficient for two reasons. First, in countries where it has been applied there has been a marked expansion in the export sector, normally accompanied by a depreciation of the currency. Secondly, it has tended to be applied in countries pursuing a policy of monetary easing. Neither factor is likely to obtain in the circumstances faced by the UK economy. In the last quarter of 2010 the country recorded the worst trade figures since 1985, there is weak demand in the rest of Europe apart from Germany, and inflationary pressures are making a rise in interest rates more likely than not this year. Nor is it credible for the Chancellor, who in January 2009 described printing money as
“the last resort of desperate governments” whose other economic policies had failed, to rely on further quantitative easing to provide any additional monetary stimulus beyond the £200 billion already utilised by the Bank of England.
Government Members have prayed in aid of their fiscal consolidation plans the experience of the Canadian Government of the 1990s who faced the largest deficit in the G7. In a report entitled “Whose Canada?”, Mario Seccareccia of the university of Ottawa noted the real reasons for the success of the Canadian fiscal consolidation programme. High growth in the United States, Canada’s largest trading partner, a sharply declining Canadian dollar and the implementation of the North American Free Trade Agreement combined to push the export sector’s share of Canadian GDP to 45% by 2000. In addition, an expansionary monetary policy raised consumer spending, and continued until the financial crisis. None of those factors is likely to obtain in the United Kingdom.
Here we have a Finance Bill that imposes the largest squeeze on living standards for British households since the 1920s. As was ably pointed out by my hon. Friend Stella Creasy, its most worrying feature is the massive rise in personal debt and borrowing that underpins its provisions. The Office for Budget Responsibility expects total household debt to rise from £1.56 trillion in 2010 to a staggering £2.13 trillion in 2015, a rise of 36.3% in just five years. Whereas debt represented 160% of household income last year, the debt-to-income ratio will reach 175% by 2015. Through the higher taxes in the Bill and his Budget’s spending cuts, the Chancellor is transferring the burden of debt from the state to private individuals. As the International Monetary Fund’s recently published global economic outlook report finds, the global recovery remains unbalanced. High unemployment is likely to persist in the coming years. In the European Union economy, an underlying low rate of potential output is the biggest problem. The managing director of the IMF, Dominique Strauss-Kahn, noted in a speech at the Brookings Institution on
“The jobs crisis is hitting the young especially hard. And what should have been a brief spell in unemployment is turning into a life sentence, possibly for a whole lost generation.”
He further states that
“fiscal tightening can lower growth in the short term, and this can even increase long-term unemployment, turning a cyclical into a structural problem. The bottom line is that fiscal adjustment must be done with an eye kept keenly on growth.”
Those are wise words indeed.
The Office for Budget Responsibility’s upward revision of projected unemployment for the remainder of this Parliament shows that there is little in this Bill to help tackle youth unemployment and to stop it nearing 1 million and surging over 20%. Indeed, the Government are cutting investment allowances to small and medium-sized enterprises by £2.6 billion in total, which will hurt manufacturers, particularly in the automotive and renewable sectors, and will most benefit high-profit but low-investment companies. As Richard Koo of the Nomura Research Institute in Tokyo says, drawing on his analysis of the Japanese economy in the 1990s, many businesses may remain in a “balance sheet recession”, preferring to pay down debt and protect cash flows and yet shun investment.
Despite this Bill’s lifting of some poor families out of income tax, there are cuts in child tax credits and child care support, and an increase in the withdrawal rates for tax credits to 41%. So the £48 per year which the Chancellor is giving through the increase in the personal allowance in income tax is more than exceeded by the increases in VAT, lower tax credit entitlements, and the slashing of child care support by 10%.
By the decisions the Chancellor has made in his Budget and by the tax rises introduced in his Finance Bill, he has boxed himself into a corner, and has made the economy the prisoner of the OBR’s growth forecasts. Missing the target for growth, as has already happened three times in the last year, means less revenue for the Treasury and a higher than expected deficit.
With tomorrow’s publication of the UK quarterly growth figures, we may get more of an idea of whether it was just the snow or, more likely, the Chancellor’s policies that put the economy in reverse in the last quarter of 2010. For output to bounce back from the calamitous fall in the autumn, the growth rate would automatically need to achieve the minimum level of 0.7%. If the OBR is correct in its above-average estimate for 2011, growth in the first quarter would need to fall in at around 1.2% tomorrow for the economy to be in recovery. If it does not, the Government will have to say how far they will be prepared to see unemployment rise before they decide to change course. It is not too late for a plan B, and I urge the Chancellor to take on board the advice from Gus O’Donnell and the Institute for Public Policy Research on a plan B and a slower rate of deficit reduction.
This Finance Bill is an example of faith-based economics and cynical politics from a Chancellor in whom this country is losing its belief. Britain deserves better, and only with alternative fiscal and taxation policies will we have a fairer way to sustainable public finances and rising living standards for the British people once again.