My Lords, it is always a great pleasure to follow the noble Lord, Lord Myners, particularly when he has just misled the House with regard to my surname. I am afraid that the noble Baroness, Lady Noakes, will not speak to me for a month. It is also a great pleasure to hear him speak again so eloquently from the Dispatch Box.
These are clearly extremely nervous times for the economy. Growth is very low at best, business confidence is poor and inflation is relatively high and squeezing real incomes, so it is not surprising that we hear many voices, including that of the noble Lord, Lord Myners, calling on the Government in effect to throw caution to the winds, abandon their deficit reduction plan and stimulate the economy by some combination of tax cuts and greater public expenditure. It is very tempting, but with a couple of relatively minor exceptions to which I shall come later, I think that such a policy would be misguided. There are a number of reasons why growth is disappointing, but the Government's fiscal policy changes are at most only one of many reasons. Imported inflation via commodity and food prices clearly is one, so is a nervousness by the banks and businesses to lend and invest, brought about in considerable measure by international events, particularly in Europe. How can the noble Lord, Lord Myners, even in a time-limited speech of a mere 15 minutes, not mention Europe once? It is as if the Labour Party is unable to see across the channel at what is happening there; namely, the largest financial and fiscal crisis that Europe has seen since the Second World War. Banks here are concerned about what is happening in Europe, members of the eurozone or no, because their direct liabilities are some £20 billion to bonds issued by the weaker, and potentially defaulting, eurozone countries, and their broader liabilities, via interlinked banks, are much greater. Therefore, they are extraordinarily worried about what is happening there and that is affecting what they are doing.
Businesses for which Europe is the single biggest export market are also not surprisingly nervous about what they see across the channel. At the same time, consumers who are faced with higher than expected inflation and very tightly constrained income rises are seeing their real income falling, so it is not surprising that there is a tendency on all sides for people to sit on their hands and not make that investment, take on that additional staff member or buy that new car or television.
In this situation, what should the Government do? In an era when credit-rating agencies appear to hold the fate of economies and Governments in their hands, it would surely be foolish to throw away the credibility that the Government currently enjoy by tearing up the deficit reduction plan. It would also be foolish in the light of the recent Office for Budget Responsibility report, which shows that the longer-term prospects for our fiscal position, given an aging population, are extremely challenging. The idea that if we can only deal with the current crisis, we will somehow reach a sunlit upland where funds would flow into the Treasury and all would be well, is belied by last week's report. The truth is that we face a long-term challenge in raising the taxes we require to fund the public services that people want. Spending more now, as the Government plan to do, would make the task of dealing with that longer-term situation even worse. Indeed, although the noble Lord, Lord Myners, does not seem to acknowledge this, in the other place the Opposition seem to recognise, at least in part, that they had better be careful what they do. They had three opportunities to vote against the VAT increase, and three times they sat on their hands. Could it be that despite the rhetoric and all appearances to the contrary, Mr Balls knows the true cost of fiscal recklessness?
If growth comes in lower than the Government have predicted, as seems likely, I do hope that, as the Chancellor has indicated, there will not be further tightening of fiscal policy. A hair-shirt approach, beyond what we already have, would be unnecessary. However, if I am not advocating a plan B, then what do I think might be done to promote confidence and growth? I would like to make three specific suggestions to the Minister.
First, we currently have a national insurance holiday for staff taken on in new businesses. This should be extended to all micro-businesses. The number of new businesses being established is much less than the projections in the Government's plans, and so it would be possible to extend that scheme, and give confidence to small businesses, within the existing planned expenditure envelope. Secondly, the Government should investigate the costs and benefits of reducing VAT on refurbishments, from the current level to 5 per cent. This is a long-standing policy on these benches, but now, when we have simultaneously a housing crisis and a crisis in the construction industry, it requires further investigation. Finally-a King Charles' head of mine-the Government should bring forward the point at which the green investment bank can borrow. In an emergency situation, accounting rules should not stand in the way to prevent that happening.
In the short time available I would like to make two comments on the very impressive report from the Select Committee. First, I am extremely concerned about the ongoing problem between HMRC and HMT on tax policy. The report says:
"There appears to be a severe, and worrying, disconnect between the perceptions of HMT and HMRC and those of their customers about how well the policy partnership between the two departments is working".
We have real cause for concern. I find the arguments made by the Treasury officials completely unconvincing.
Finally, the report talks about enhancing the role of the committee in the scrutiny of tax legislation. With the new approach to tax legislation, under which you have a draft Finance Bill, there is plenty of scope for this committee of your Lordships' House to undertake a serious piece of work, at that point, so that the committee does not have to do all its valuable work in such a short period, as it currently does. It could get started a lot earlier on, and I think its role would be enhanced, which would benefit the administration of our tax system.