Finance Bill

Chuka Umunna Excerpts

Tuesday 20th July 2010 Commons Chamber

[Mr Chuka Umunna (Streatham) (Lab)]

The measures in the Bill and the emergency Budget in general have been called many things. The Chancellor has described them as “tough but fair”, the Prime Minister has described them as “open” and “responsible” and the Exchequer Secretary, who is no longer in his place, has referred to the comments of the Chief Secretary on the Bill’s Second Reading. The four characteristics that the Chief Secretary chose to attribute to the Bill and the emergency Budget were “fair”, “business-friendly”, “responsible” and “unavoidable”. I shall address each of those in turn and relatively quickly as I understand that others wish to speak.

First, however, I want to consider the premise on which the Bill is being marketed to us. According to the coalition, the Bill addresses the need to reduce the deficit that was caused by profligacy of the previous Government. In Committee, the right hon. Member for Wokingham (Mr Redwood) said that “we are where we are because of the utter mess bequeathed to us by Labour in the last Government”. It seems that reference to this supposed mess has become mandatory in all interventions by Cabinet Ministers and Members on the Government side for the duration of the Bill’s passage through the House.

In the coalition’s view, the credit crunch is but a minor detail when studying the public sector debt: the liquidity crisis that took hold of financial markets from August 2007 is just a blip; central banks having to step in to provide extra liquidity from there on is a minor detail; and the collapse of Lehman Brothers in September 2008 is insignificant. In adopting that stance, they utterly fail, as my right hon. Friend the Member for Birmingham, Hodge Hill (Mr Byrne) has pointed out, to acknowledge the huge role that the international banking crisis played in relation to the state of the public finances and our economy at large.

[Jacob Rees-Mogg]

Will the hon. Gentleman give way?

[Mr Umunna]

I wish to make a bit of progress, but I might give way in a bit.

I wish to acknowledge that the Conservative side of the happy couple that is our coalition is at least consistent in its approach. The Conservatives fail to acknowledge the gravity of the financial crisis and its effect on our economy now and they failed to acknowledge the gravity of the crisis back in the autumn of 2008 when the Labour Government and others around the world took decisive action to save the financial services sector from itself and to protect the deposits of our constituents. The current Prime Minister and his Chancellor were then advocating the complete opposite—a do-nothing approach.

Let us be clear. Whatever those on the Government Benches say, no serious economist currently claims that the deficit can be disassociated from the global credit crunch I have just described. The credit crunch led the last Government to spend billions to prop up the financial services sector and to support our economy in the face of a global economic downturn that caused tax receipts to plummet and benefit payments to increase.

[Gavin Williamson (South Staffordshire) (Con)]

Will the hon. Gentleman give way?

[Mr Umunna]

No I will not; I will make some progress first, and I will give way in a bit.

What we are witnessing now is a gross and distorted rewriting of history and repainting of the picture to justify the imposition of a Finance Bill and Budget that are less about economics and all about politics.

On 23 June, in an insightful piece in the Conservative house journal, The Spectator, its political editor described the Chancellor’s Budget thus:

“The mission, as Mr Osborne sees it, is to shrink the public sector and grow the private sector—the classic goal of the modern British centre-right.”

That is what the measures in the Bill and the emergency Budget are all about.

Let us address the Chief Secretary to the Treasury’s claims that the Bill is fair. He said:

“This is a Budget that protects the most vulnerable, especially children in poverty and pensioners, while ensuring that those with the broadest shoulders take the greatest share of the burden.”—[Official Report, 6 July 2010; Vol. 513, c. 203.]

Just a few weeks ago, a Liberal Democrat leaflet was pushed through thousands of letterboxes in my constituency under the headline, “Clegg delivers on promises”, proclaiming that the Government are reducing the deficit in as fair a way as possible. It made a series of claims in relation to the Bill and the emergency Budget. First, it claimed that there will be “more money for schools”. We have seen now how accurate that claim was: consider the Building Schools for the Future debacle that we have witnessed over the past few weeks.

Secondly, the leaflet claimed that

“tax credits for needy households”

will be

“saved”,

yet the emergency Budget, in fact, freezes child benefit, thus producing a real-terms cut for more than 14,000 in my constituency who receive the payment. Thirdly, it claimed that the emergency Budget included

“a tax cut for low and middle income families by raising tax allowances”.

That neglects to mention that the increased allowances are completely outweighed by the panoply of regressive measures in the Budget—most notably, the unfair VAT rise that will be introduced under clause 3.

During the general election campaign, my Liberal Democrat counterpart and I spoke at an international Save the Children event in my constituency and we both talked of the need to reduce child poverty. Save the Children is running an excellent campaign in opposition to the VAT hike—a hike that the Liberal Democrats now sanction. I note that there is but one Liberal Democrat Member, I think, in the Chamber at present.

[Andrew George]

Three.

[Mr Umunna]

Okay; three.

The charity said:

“A 20% VAT rate means that the poorest parents will see their VAT bill rise to at least £1,600 a year—affecting already overstretched budgets—and driving some into the arms of loan sharks”,

as my hon. Friend the Member for Wakefield (Mary Creagh) has just mentioned.

The fourth and final claim in the Liberal Democrat leaflet is that they stopped

“Tory plans for a huge Inheritance Tax give-away for the wealthy.”

Even if we accept that claim—I do not—the omission of that giveaway from the Bill pales in comparison with the appallingly regressive overall impact of the Budget, which the Institute for Fiscal Studies and others have looked into. It has calculated that the total effect of the tax rises and spending cuts will cost the average family in the top income decile £1,135 a year. It will cost the average family in the bottom income decile £1,344—£209 more in real terms. The poorest will be 20.5% worse off, and the richest will be 1.6% worse off. So when it comes to social justice, the Government have absolutely nothing to boast about.

The suggestion made in the leaflet that those who are on low incomes should rejoice at the fairness of a Budget that places a larger real-terms burden on the poorest than the richest is an utter disgrace. What is even more disgraceful is the fact that the measures in the Bill and the emergency Budget were a choice. Whatever rewriting of history the coalition indulges in, it cannot distract us from a simple fact: the coalition Government have actively chosen to do this to my community.

[Gavin Williamson]

Does the hon. Gentleman not feel that the last Labour Government had any responsibility for the economic situation that we find ourselves in and that the uncontrolled borrowing had an impact and led to the decisions that are encompassed by the Bill?

[Mr Umunna]

I will turn to those exact points in the rest of my speech if the hon. Gentleman will wait.

Let me address the claim that the Bill will, as the Chief Secretary said, help

“businesses that we rely on to rebuild our broken economy”.—[Official Report, 28 June 2010; Vol. 512, c. 674.]

The signs are that those businesses, along with leading economic experts, do not share his optimism. A recent survey of the service sector by the Chartered Institute of Purchasing and Supply showed that confidence in the sector has been dented by the austerity measures announced in the Budget, of which, of course, the Bill is a part. The survey registered a fall in confidence between May and June this year that was the most significant drop since records began 14 years ago. Since the First Reading of the Bill, the International Monetary Fund has updated its 2011 growth forecasts, downgrading that of the UK by 0.4% on its April figures—the largest drop in the forecast of any major economy over that period. The BDO business optimism index, which measures business confidence, saw its sharpest fall since 1995 between May and June this year, and who can blame those involved?

[Tom Blenkinsop (Middlesbrough South and East Cleveland) (Lab)]

I should like to echo my hon. Friend’s words, especially given that the Government will reduce annual investment allowances by £75,000 under the Bill, which determines that a monetarist miracle will be export-led. Given that on emergency Budget day, the Engineering Employers Federation, which represents manufacturers, said:

“Reducing the corporation tax rate over time…might be a positive signal for large companies, but not for their suppliers”,

how will that meet export-led targets that are predicted, yet not witnessed since 1945, especially when the majority of nations’ economies are contracting?

[Mr Umunna]

Of course, I agree with my hon. Friend. In addition, behind closed doors, some people in the Treasury share the pessimism about the state of our economy, with a leaked Treasury document showing an expected unemployment increase of 1.3 million over the next five years owing to the coalition Government’s economic policies. As well as the colossal human cost of those job losses, that will exacerbate the deficit by significantly increasing unemployment benefit payments, as I mentioned before, and cutting income tax and national insurance receipts significantly, but let me go on to the next point, as I wish to make some progress.

According to the Chief Secretary, the Bill will help to reduce the deficit and take action to eliminate the structural deficit, which is, of course, an obsession of the Government. We have already seen that their determination to do that could lead to the biggest cuts in Government spending that we have seen for many decades, but let us linger a little on the claim that the Bill is “responsible”. I have already explained how the coalition has sought to conflate public finances before the financial crash with the measures taken to mitigate the crash’s impact on hard-working ordinary people, but it is crucial that we establish what is “responsible” and what is not. The facts tell a very different story from that told by the coalition Government.

When Labour came to power, as the shadow Chief Secretary has said, public sector net debt was 42.5% of GDP. On the eve of the financial crisis, it was 36.5%, and interest payments had fallen from 3% to 1.6% of national income. A recent report by the IFS found that,

“the UK public finances were in better shape when the financial crisis began than they were when Labour came to power.”

By contrast, Germany’s indebtedness amounted to 65% of national income in 2007. In France, the figure was 63.8%; in Italy, 103.5%; and Japan ran consistent deficits, with the result that it owed 167.6% of national income by 2007. In short, the UK Government’s borrowing at that time was not of the order suggested by the Conservative party and certainly did not by any stretch of the imagination cause the economic crisis that followed.

That crisis, of course, caused the world economy to contract for the first time since the second world war. As I said, that called for decisive fiscal expansion—for billions to be injected into failing banks and into a flagging economy. How lucky we were that the then Government intervened. I for one refuse to apologise to Government Members for the bold action that the Labour party took to keep people in work, to ensure that they could still take money out of the ATM cash machines in the wall and to prevent the recession from mushrooming into a catastrophic depression.

Let it be said loud and clear that responsibility was what the previous Government did, but irresponsibility is pinning the blame for the size of the public sector debt on the previous Government and using that as a reason to hack off chunks of the public sector through spending cuts. Will Hutton, whom the Government have just appointed to head up their commission on high pay in the public sector, hit the nail on the head when he wrote in October that it was not the Labour Government

“that got us into this mess…What got us into this mess above all was the 30-year rise of Big Finance”.

However, the same people who insist that the previous Government got us into this mess propose in the Bill a corporation tax cut that will gift millions to big finance—that is what I call irresponsible.

Let me finish by examining the claim around which much of the Budget debate has revolved: that this was an “unavoidable” Budget, thus making the Finance Bill unavoidable, too. The two parties in government have made a set of choices that, I dare to venture, predate the economic crisis by a number of years. The game plan on which the Budget was based was disclosed long ago in the 2005 Conservative manifesto, the author of which happens to be the new occupant of No. 10 Downing street. The Conservatives pledged in their manifesto to slash 250,000 public sector jobs and to abolish 168 public bodies. Back then, Howard Flight, the party’s deputy chairman, was secretly recorded saying that the cuts publicly advocated by his party were a fraction of those planned. He said that the actual plans had been recalibrated into something that would be “politically acceptable” and that his party

“had to win an election first”,

but that afterwards

“you can actually get on with what needs to be done.”

We therefore cannot say that we were not warned, although people’s surprise that the Conservatives have been joined in their venture by the Liberal Democrats is wholly understandable.

Given all the shifting political sands and hidden agendas, the game of choices necessitates an eagle eye, because what stands out from the Bill and the Government’s general economic policies is not just the unfair VAT rise and the corporation tax gift to the City, as well as the disingenuous rhetoric with which they are presented, but what is absent from the Budget and the Finance Bill. Where, for example, is the plan to make the financial services sector bear its fair share of the burden? The Wall Street Journal said that the City should

“count itself lucky with the coalition government's emergency budget”.

Of course, the Government will introduce a bank levy that is forecast to raise about £2 billion, but that is a pin-prick when one considers the vast profits made in the sector. Even the IMF has proposed that the levy should raise £6 billion a year if we are properly to curb the “reckless behaviour” of the people in the industry. That additional £4 billion a year could—

[Mr Deputy Speaker (Mr Nigel Evans)]

Order. The hon. Gentleman’s speech is going wider than the Finance Bill itself, so will he please direct his comments to the Bill?

[Mr Umunna]

I was actually reaching the end of my speech, Mr Deputy Speaker. The key point that I am trying to make is that there is an alternative: a deficit reduction strategy that is based on growth and fair tax rises, as opposed to the scorched earth policy being pursued by the two parties in government. The alternative is similar to the strategy that President Obama is pursuing in the US which, in vain, he is trying to persuade our Prime Minister to follow. The alternative is to go for a more sensible timetable for deficit reduction, because as Roger Bootle of Capital Economics said last week before the Treasury Committee,

“In straightforward economic terms, I am not sure it would make a great deal of difference if the adjustment were over a longer period.”

The alternative is to avoid the overwhelmingly avoidable measures presented in this Bill—not least the VAT rise—that ultimately hit the poorest hardest. I assert that the Bill is four things: avoidable, unfair, damaging to business and deeply irresponsible.