Beer Duty Escalator

Jesse Norman Excerpts

Thursday 1st November 2012 Commons Chamber

[Andrew Griffiths]

If I could finish my point, I will then give way. The reality is that since the introduction of the beer duty escalator in 2008, beer duty has increased by a crippling 42%.

[Jesse Norman (Hereford and South Herefordshire) (Con)]

I congratulate my hon. Friend on securing this debate. Herefordshire has wonderful pubs, which are hard-pressed, breweries and some of the finest hops in the country. Does my hon. Friend agree that part of the review’s solution must be to include a rebalancing of duty away from pubs and towards retailers?

[Andrew Griffiths]

My hon. Friend makes an important point. The gap between prices charged at the pub and those charged at the supermarkets has widened. The supermarkets have driven the price down, as they did with milk, which affected our dairy farmers, and every time there is a duty increase it is the brewers who are forced to stand it.

Illegal Alcohol and Tobacco Sales

Jesse Norman Excerpts

Tuesday 27th March 2012 Westminster Hall

[Jesse Norman (Hereford and South Herefordshire) (Con)]

It is a pleasure, as always, Ms Dorries, to serve under your chairladyship today.

I am grateful to colleagues from across the House for their support in this debate, and to the Economic Secretary and shadow Economic Secretary, the hon. Member for Kilmarnock and Loudoun (Cathy Jamieson), for attending. Many issues will be raised in this debate—including, I am sure, the issue of duty and minimum alcohol pricing. I will restrict myself to describing and discussing the core issue of the illegal smuggling of tobacco and alcohol.

Such smuggling is becoming a serious issue in Herefordshire, particularly in Hereford city itself. My investigations have made clear to me what will already be apparent to many Members—namely, that such smuggling is only the tip of an iceberg and only the beginning of a much bigger problem nationwide. In that context, I especially want to pay tribute to PC John Yarwood, who is the Hereford city beat manager; to Councillor Mark Hubbard, who first brought this issue to my attention; and to the trading standards team at Herefordshire council, who have been fighting to keep the smuggling under control.

The problem is easily stated. A number of shops in my constituency persistently sell illegal tobacco and alcohol under the counter. A regular pattern is emerging: the shops are raided by the police and HM Revenue and Customs, goods are seized and fines are imposed. But weeks later, exactly the same thing happens again—the shops are raided, goods are seized and fines are imposed. And so it goes on. In the past 18 months, some 360,000 cigarettes have been seized in Herefordshire alone.

That pattern does not happen by accident. There is a simple explanation—the profits to be made from illicit sales far exceed the losses from fines and seizures. A single lorry-load of cigarettes can be worth £1.5 million in profits to the smugglers. Costing just 9p, a pack of 20 cigarettes has something like a 4,000% mark-up when it is sold on the street.

It has been reported that HM Revenue and Customs seizes some 1.7 billion illegal cigarettes every year. As a whole, tobacco trafficking is estimated to cost the taxpayer £2 billion a year and alcohol trafficking £1.2 billion a year so this is very big business. In effect, the fines and seizures have become just another cost of doing business—literally, a licence to smuggle. It appears that they have little or no deterrent effect. Many of these shops have had their alcohol licences revoked, but that has proven to be little or no deterrent against illegal sales.

These actions make a mockery of the law and our law enforcement agencies, and they need to be stopped. They cause a huge loss of tobacco and alcohol duty to the taxpayer, they undermine the sales of law-abiding businesses on the high street and of distributors, and there is nothing to prevent under-age sales and illegal working in these shops; one man arrested in a raid in Hereford last year had been awaiting deportation since 2008. They also create serious additional hazards to health.

Someone smoking a smuggled cigarette could be smoking anything, just as someone drinking a smuggled bottle of spirits could be drinking anything. These products are not subject to the same rigorous controls as the legal products. Generally, they are made in backstreet premises in countries far distant from the UK, and they are specifically made to be smuggled. Moreover, there is evidence that illegal tobacco and alcohol outlets are often used to fund organised crime on a far wider scale.

However, the problem goes much deeper than that. There appears to be no way in law to prevent these shops from reopening and no clear line of accountability within Government. The issue sits unhappily poised between HM Revenue and Customs, which reports to the Treasury; the UK Border Agency and the police, which report to the Home Office; and licensing policy and trading standards officers, which report to local councils. I am extraordinarily grateful to the Economic Secretary for coming today, but she cannot be expected to answer questions about policing or border controls. Those topics are for the Home Office, not the Treasury.

I am aware that the Government have taken important steps to address the issue in recent years—providing extra resources during the next four years to increase investigations, intelligence and enforcement; expanding the work of HMRC overseas to tackle importation into the UK at source; and developing new technology and resources to strengthen our borders. I am also aware that, at least in theory, HMRC has a range of penalties at its disposal, including the seizure of goods, civil penalties, fines of up to £5,000, criminal prosecution and the recovery of criminal assets. However, those penalties are not anything like enough. I repeat that a single lorry-load of cigarettes can be worth £1.5 million in profits to the criminal rings behind it.

Furthermore, recent history has not been encouraging. Far from raising their game during the past 10 years, I understand that HMRC and the UK Border Agency have been doing worse over that time: they seized fewer cigarettes and less rolling tobacco in 2008-09 than in 2000-01; they have seized fewer vehicles; and fewer people have been sentenced for tobacco smuggling.

What can we do? I suggest three things. First, we need more information. Is it true that HMRC has been less effective and not more effective during the past few years? How many prosecutions have there been? We need regular and detailed data on prosecutions and seizures. Secondly, it is not enough for the police and HMRC just to be able to seize goods and impose these relatively modest fines. They need to be able to close down premises for significant periods when there have been repeated violations of the law. That may require new law-making.

Finally, there is a clear case for having a Minister who is specifically charged with dealing with the issue and able to work across Departments to be as effective as possible. I note that the Minister with responsibility for broadband, my hon. Friend the Member for Wantage (Mr Vaizey), works across both the Department for Business, Innovation and Skills and the Department for Culture, Media and Sport. Perhaps there is scope for similar joint-reporting lines across HMRC, the Treasury and the Home Office in this area.

[Andrew Griffiths (Burton) (Con)]

I thank my hon. Friend for securing this debate. As the chair of the all-party group on beer, I recognise his commitment to the brewing industry; he has been a great supporter of it since he has been in this place. Does he share my concern about the Government’s recent estimate of alcohol smuggling into this country? They estimated that the equivalent of 28,000 lorry-loads of alcohol come into this country every year, which is about 538 illicit movements per week. If so, does he also share my view that if such a massive amount of alcohol is being smuggled into this country, the problem lies with the customs authorities, which are not policing our borders efficiently and effectively?

[Jesse Norman]

I thank my hon. Friend and colleague for his intervention and questions. He puts his finger on the scale of the problem and he must also be right that the UK Border Agency is not being as effective as it should be in preventing this illegal importation of goods. That is a further element to be addressed by a Minister with the kind of joint-reporting lines that I described earlier.

Let me sum up my argument. Better information, new powers and better co-ordination between Government agencies are all required. Those three steps could make a crucial contribution to tackling the scourge of alcohol and tobacco trafficking, and I am sure that I speak for all Members in Westminster Hall today when I urge the Government to consider those steps carefully as they develop their thinking in this area.

--- Later in debate ---

[Andrew Griffiths]

I agree wholeheartedly that the duty regime is encouraging imports into this country. The fact that the British beer industry pays up to four times the duty paid by the British cider industry is encouraging companies such as Stella Artois to produce cider—or cidre, as it calls its brand—and import it into the UK. We are exporting jobs as a result of our duty regime.

[Jesse Norman]

On a point of information, I would like to make it perfectly clear to hon. Members that the cidre product has nothing to do with Herefordshire.

[Andrew Griffiths]

I would like to put it on the record that, as well as being a great supporter of the British brewing industry, my hon. Friend is a magnificent spokesman for the cider industry. We regularly do battle over whether beer or cider is best.

Let us consider the Government’s alcohol fraud strategy. In 2010, we introduced a new strategy, which has been successful. We have seen the number of illegal goods being impounded and seized increase dramatically: a 71% increase in beer, a 50% increase in wine and a 67% increase in cider. Those figures clearly demonstrate that the smuggling problem is just as prevalent with wine and cider, yet the Government do not propose to put a duty stamp on them. I struggle to understand why beer is being singled out in such a way.

Let us consider the estimated amount of illegal beer that the Government believe is coming into this country. They estimate that 28,000 articulated lorry loads of beer come into this country every year. That is the equivalent of 538 articulated lorry loads of beer every week, with an estimated profit to the smugglers of £18,000 per lorry. That is the equivalent of £9.6 million of profit to the smugglers per week. Of course, we want to stop that profit and that illegal trade. However, are we honestly suggesting that if our border controls have 28,000 articulated lorries going through them every year, the answer is to bring in duty stamps, rather than to tighten up our border controls?

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[Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op)]

It is a pleasure to have you as Chair this morning, Ms Dorries. I congratulate the hon. Member for Hereford and South Herefordshire (Jesse Norman) on securing the debate, and on giving a very good outline of some of the issues.

We have heard a wide-ranging debate covering the amount of money lost to the Treasury through illegal sales of alcohol and cigarettes, and also issues relating to health, smoking, alcohol and so on. I will not stray too much into that territory. However, I was a member of the Scottish Government when Scotland was the first part of the UK to introduce a ban on smoking in public places. That ban was not universally popular at the outset, but I think it has been proved to be the right thing to do. The idea that some policies on health are unpopular but ultimately turn out to be the right thing to do has run through the debate, and I may return to it.

The hon. Member for Hereford and South Herefordshire made the point that this is the tip of the iceberg. People try to avoid paying their fair share of tax in a whole range of areas. Illegal alcohol and tobacco sales are an important part of that, but not the only part. I think the hon. Member for North Antrim (Ian Paisley) mentioned that people try to avoid the appropriate duty on fuel, as well as on tobacco and alcohol. The hon. Member for Hereford and South Herefordshire talked about shops selling under the counter and the amount of goods seized, and how those shops and premises are back in operation a few weeks later. That not only results in a loss to the taxpayer, but has very little deterrent effect. It almost sends a message to people that they can pretty much do what they like—they can take it as a business loss and simply get back up and running again, rather than changing behaviour. I think that the hon. Gentleman felt that there needs to be a change in legislation.

I was surprised that the issue was seen as one for the Treasury Minister only. Tie-ups happen between Her Majesty’s Revenue and Customs, the UK Border Agency, police and local authorities in terms of licensing and trading standards, which indicates that this is a wider issue than just money lost to the Treasury. Many hon. Members have talked about a cross-cutting approach, and that is worth considering.

The hon. Member for North Antrim gave a very powerful description of this serious multi-million pound organised crime industry, if I can call it that. Of course, we will always see situations where some people will try to make a few extra pounds for themselves at a local level by bringing back a quantity of cigarettes or alcohol products if they have been in another country. However, it is absolutely right to focus on those who are seriously involved.

As the hon. Member for North Antrim will be aware, when businesses are shut down as a result of effective action, product substitution occurs: they move on to another product to make money to fund whatever other activities they wish to fund from the illicit gains. Therefore, these issues sit across Departments. I hope that the Minister will say how she will ensure that the Government are able to deal with issues that relate not just to the Treasury—of course, such issues are very important—but that they will begin to consider the deterrent effect of appropriate sentencing for those who persist in breaking the law.

Closure orders were considered in Scotland, particularly in relation to alcohol. For premises that persistently sold to underage drinkers or persistently broke the licensing laws, legislation was introduced to provide the opportunity to shut them down—a message to the retailer and to the local community.

[Jesse Norman]

To be clear, that would close down retailers who have breached the law by selling to underage drinkers, but are otherwise legal in their operations. I also have it in mind to target retail outlets that are not doing any legal trading—they have been set up simply for the purposes of the illegal sale of alcohol and cigarettes.

[Cathy Jamieson]

I hear what the hon. Gentleman says, which is very important because there are two separate issues. If an operation is set up simply for the purposes of selling illegal products or trading illegally, that should be taken very seriously with the full force of the law, not only with an appropriate sentence when it is brought to court, but with the ability to act quickly to stop these activities. That needs to be considered.

The hon. Member for North Antrim talked about the report published by the Northern Ireland Affairs Committee. I will certainly read that with interest, as I am sure other hon. Members will. His contribution, and the contributions of my hon. Friend the Member for Stockton North (Alex Cunningham) and the hon. Member for Bristol West (Stephen Williams), highlighted the consideration of smoking policies more generally as they relate to health, as well as to business and trade.

There was a fairly lively debate on the issue of plain packaging. I am not a smoker. I have never been a smoker, and in my former careers I took a fairly dim view of smoking generally. Therefore, I think that the Government should take an interest in anything that can be done to deal with health issues, but it must be done in a way that makes sense and is enforceable. I take the point that many people who work in the industry are worried about their jobs. We have to have some cognisance of that in our discussions.

My hon. Friend the Member for Stockton North mentioned some of the work that was done by the Labour Government. I had no wish to make this a party political debate—that is not a criticism of my hon. Friend—because I think all hon. Members share common ground in trying to deal with these important issues.

My hon. Friend also raised one of the more serious issues: the so-called tab houses, which have been the subject of responses to parliamentary questions and on which work has been done previously, with a particular focus on the introduction of children to smoking. We are also concerned about whether children and young people are being introduced not just to smoking, but to crime, drug misuse and other activities in which they should not be involved.

In debating these issues, it is important that we do not focus simply on packaging. There will be different views about how much packaging and branding impact on consumer behaviour—I am sure that there are plenty of PhD theses about that, even if they are not in this room—and that debate will continue. One important point, which my hon. Friend mentioned, is how we deal with the problems of criminality relating to these issues. Again, I do not wish to make this a party political point, but the appropriate number of people must be involved in intelligence-led policing and the joined-up approach between policing, trading standards, licensing authorities and the UK Border Agency. There would be concern that elements of that approach rely on many people who are sometimes described as the backroom staff in police forces. None the less, they are the ones who gather the intelligence, analyse the data and information and do the forensic work to track down some of those involved in serious and organised crime. That will be important as we consider a way forward.

As well as discussions on smoking and the impact on health, we also heard from the hon. Members for Great Yarmouth (Brandon Lewis) and for Burton (Andrew Griffiths), the chair of the all-party parliamentary beer group, particularly about duty stamping. Again, that is controversial and both hon. Gentlemen are putting forward viewpoints on how this would work in practice and what the impact on the industry would be. Will the Minister reply to the hon. Gentlemen’s questions, which I should also like to pose?

We heard about some technical issues in respect of duty stamping and whether it would be the correct option. Have the Minister and her colleagues considered forming a working group, bringing together different industry interests to look at what is technically the best way to work on avoidance of duty and whether duty stamping is the correct way to take this forward? If other options are being considered, perhaps the Minister could lay those out for us today, because we will have to consider this matter in more detail as we debate it, following on from the Budget.

Overall, we have had a useful debate. It is clear that there are different interests and views across the political parties, and within them, particularly on plain packaging on cigarettes. I should like briefly to highlight another issue relating to tobacco. Work done by HMRC on avoidance considered what it called the tax gap. In 2009-10, the spirits duty gap was 3.4%, the beer duty gap was 14%, the gap in cigarette duty was 10% and in respect of hand-rolling tobacco the duty gap was estimated at 46% and had reached a high point of 50% in 2008-09. We have not looked at that in detail this morning. None the less, there could be greater focus on that area as we move forward.

In conclusion, we have had a good debate. We have covered smoking and issues to do with the duty stamp, about which, I hope, we will get more information. We have heard about enforcement issues and about how we have to take health policy into account. We have heard how important this matter is for the Revenue and for business. But the important message that must be taken away by the Government is that we have to find solutions to all the problems that have been identified. I reiterate the point that has been made: having a lead Minister or someone identified to work on the cross-cutting agenda and take this forward would assist the process. I hope that the Minister addresses that point as well as the other questions that have been raised this morning.

--- Later in debate ---

[Miss Smith]

My hon. Friend might want to ask about cider and wine, and I shall come to them in a moment. I would not dream of failing to answer that question for him, but I will work through a few more points before coming to that strand.

Ensuring that honest businesses can compete fairly is a Government priority. Another priority brings me on to joint working, as mentioned by several hon. Members, notably my hon. Friend the Member for Hereford and South Herefordshire and the hon. Members for North Antrim (Ian Paisley) and for Kilmarnock and Loudoun (Cathy Jamieson). I hear the calls for a single Minister in this respect, but let me first outline what we already do, which I hope will assist and which, I am sure hon. Members will agree, takes us fairly close to having accountability in the right places.

Her Majesty’s Revenue and Customs has a seat on the board of the UK border force and works closely with it, not only in designing and developing fraud strategies but in operational activity, such as sharing intelligence, tackling the organised criminals who have been rightly attacked in today’s debate and conducting joint exercises. The director of border revenue is accountable to the Treasury through me, the Economic Secretary to the Treasury, so hon. Members can see HMRC, the Home Office and the Treasury coming together. The border force was introduced recently, as announced by the Home Secretary; its responsibilities are explained on the website. I have regular meetings with the chief executive and others in that organisation, so that we work effectively together.

I hope that begins to reassure hon. Members that the right parts of Government are working together. Moving on to what we can do together, with the UK border force, HMRC already carries out substantial enforcement activity against all forms of alcohol fraud, successfully disrupting illicit supply chains and penalising those involved in the fraud. However, given the scale of the problem, enforcement alone is not enough to provide the level playing field that we all seek for our legitimate businesses, so I come to the Budget proposals for further ways to bust fraud and to explore all potential enforcement and legislative measures, which include restricting criminals’ access to stocks of illicit alcohol in the first place and tackling the illicit supply of alcohol to wholesalers and retailers. On the table are options including the introduction of fiscal marks for beer, supply chain legislation and a licensing scheme for wholesale alcohol dealers. I heard the points made by my hon. Friend the Member for Hereford and South Herefordshire on licensing more broadly and on the closure of premises, which is definitely one weapon in the arsenal.

I can clarify something for my hon. Friend at this point. HMRC can refer cases to other regulatory authorities for consideration of the revocation of a retailer’s licence to sell alcohol. I am aware of at least one case—from the Hereford and Worcester BBC news, no less, in 2011—in which a shop in Hereford lost its licence after smuggled cigarettes and alcohol were found during two raids.

[Jesse Norman]

As I mentioned to the shadow Minister, the hon. Member for Kilmarnock and Loudoun, some premises are not licensed at all and therefore not subject to the loss of a licence. In many cases, such premises are not controlled by the people in them, so raiding them, fining them and impounding the goods may deter the individual but does not deter the criminal ring behind the business. What is required is some method of closing the premises for a period.

[Miss Smith]

My hon. Friend makes an extremely valuable point. That will require joint discussion and consideration, but I hope that local authorities will seek to take a role in it under the powers that we wish to allow them through the alcohol strategy and other means.

Questions were asked about fiscal marking. The consultation document was launched yesterday and is available on the HMRC website. In response to the point about how we are conducting the consultation, I welcome the continued engagement of the alcohol industry. There is already a joint HMRC and industry group on fraud and other matters of concern, which I hope satisfies the hon. Member for Kilmarnock and Loudoun.

Turning to wine and cider specifically, cider revenue losses are not believed to be as substantial as losses elsewhere. On wine, I am well aware of the points about equivalence not only of wine, to which my hon. Friend the Member for Great Yarmouth (Brandon Lewis) referred, but of cider. Most wine comes from outside the UK, so fiscal marks are less practical than for beer. The consultation refers to how to mark bottles and cans that move through the UK.

Amendment of the Law

Jesse Norman Excerpts

Wednesday 21st March 2012 Commons Chamber

[Sammy Wilson (East Antrim) (DUP)]

We all recognise that the Chancellor has been confronted with a difficult task in this Budget. He has had to walk a tightrope: if he goes too far one way, our financial credibility is immediately questioned so interest rates have to rise, yet if he goes too far in the other direction, we impair our ability to earn our way out of the recession.

My party does not have any political points to score against the Conservative party, as it is not represented in Northern Ireland, so we simply want the Chancellor and the Government to succeed. That is the basis on which I assess the Budget. Is this Budget likely to achieve the objectives we all want: restored growth and increasing employment?

Some of the Budget’s measures are very welcome. From a Northern Ireland perspective, we welcome the devolution of air passenger duty, which will be included in the Finance Bill. That will enable the Northern Ireland Executive to set its own rate for long-haul direct flights from Northern Ireland, which is essential to our investment strategy and to tourism. We also welcome the reduction in corporation tax as it brings our rate closer to the rate in the Irish Republic, which is our main competitor for foreign direct investment—although those rates are still far apart. We welcome, too, the film and high-end TV tax concessions. We have been seeking to promote that industry in Northern Ireland. The Executive have pushed for that. “Game of Thrones” is now filmed in Northern Ireland, and it has been a big revenue earner. We have also pushed for Belfast to be chosen as one of the broadband cities.

However, although there is clearly much to be welcomed, I am concerned about three aspects of the Budget. First, the Government could spend more money on infrastructure in the United Kingdom. That would enhance economic growth. Such pump-priming by the Government could enable us to draw upon some of the funds—£700 billion in cash—that private companies are currently hoarding.

After all, does the Chancellor believe his own rhetoric? He says that both the deficit and debt have fallen as a percentage of GDP, that the public sector net debt peak will not be as high as previously anticipated, and that we are on course for deficit reduction. He must therefore know that his credibility in the international money markets is sufficiently high for him to be able to invest in projects that offer a rate of return and that could help to promote economic growth, rather than merely pay unemployment benefits. Either he does not believe his own rhetoric, or else he is deliberately—perhaps for ideological reasons—holding back on what I believe could be an important means of investment.

Secondly, I am concerned about a choice that has been made. At a time when we are preaching austerity to people who are bleeding in that many of them cannot pay their heating bills or their rent or buy food, it is bizarre that the Government should choose to prioritise reducing the top rate of tax for the top 2% of earners in this country. That demonstrates a blatant disregard for the very difficult sacrifices that we are asking people to make.

Let us consider how the money could have been spent. There has been much argument today about whether or not the rich will pay more. The one thing we do know, however, is that it has been calculated that that reduction in the top rate of tax will immediately release £3,010 million to the top 2% of wage earners. The Government are relying on tax exiles flooding into the United Kingdom and beating on the door of Her Majesty’s Revenue and Customs to ask, “May I pay my tax in the United Kingdom now?” The Treasury hide behind the theory of “behavioural assumptions”, but we need only look at the literature to see that there are a lot of assumptions that may, or may not, be realised. The same situation applies for the money that could come from stamp duty and limits on the back claims.

The fact is that this money could have been used in a better way. For example, the Government could have used it to lower fuel duty, but despite the fact that fuel prices are going up, the Government are going to take £800 million more off motorists in the United Kingdom this year.

[Jesse Norman (Hereford and South Herefordshire) (Con)]

I am thoroughly enjoying the hon. Gentleman’s speech and would not wish to interrupt it for a second, but may I ask him what money he is referring to when he talks about a better way of spending that money? What we know from the Treasury is that our top rate raised very little incremental cash and that reducing it is likely to raise more money from the same people. So what money is he talking about?

[Sammy Wilson]

According to the Treasury, the direct impact—the direct static cost—is going to be £3,010 million. That is the figure that the Treasury has put out. Some of that money will be offset by behavioural change, but that is based on assumptions about tax income elasticity and what happens to income. So real money will go back to people who currently are top rate taxpayers. My argument is this: if the Government were going to release that kind of fund, would it not be far better to release it either to bring more low-income families out of tax or to release the hard-pressed motorist from the fuel duty that is going to be imposed on them?

--- Later in debate ---

[Brandon Lewis (Great Yarmouth) (Con)]

I wish to focus primarily on the Budget’s impact on business and growth, but before doing so I wish to touch on one other area: duty stamping on alcohol. The Red Book says that the Treasury will look to move forward with its consultation on duty stamping, and I welcome that important step. The wholesale industry estimates that the revenue lost to the Treasury through the lack of duty stamping on beer alone is about £500 million a year and that the loss might be the same again in respect of wine. We need to consider beer and wine together, because the two products are clearly becoming competitors and we cannot deal with one without looking at the other. Duty stamping on spirits is already in place and it has not affected the sale of spirits or the industry, as spirits sales in this country have increased by 8%. So it is really important to examine this area, in order to plug another hole and get back for the Treasury some of the money that was wasted and spent by the previous Government.

Such an approach will also have a knock-on benefit, as so much of the Budget does, for other Departments and other areas. For example, a benefit to the health industry will result from a lack of the cheap alcohol that can be found in small corner shops in some parts of our country. Such shops do not necessarily buy through the legal market, taking advantage of alcohol for which the duty has not been paid and which is then sold cheaply to young people. We can cut that out, too; this has a big economic impact and a big health impact, and I welcome the move in the Budget.

[Jesse Norman]

My hon. Friend may not be aware that I have just been granted a Westminster Hall debate next Tuesday on precisely this issue, so I am extremely grateful to him for introducing it in the main Chamber.

[Brandon Lewis]

I congratulate my hon. Friend on securing that debate and I look forward to joining him on Tuesday to discuss the issue in more detail.

No Budget stands alone, and what is important about this one is how it builds on what has been done in the past couple of years, particularly for business. When we consider how we want to move forward in having an economy that grows, with more jobs and more prosperity for all, it is important to remember that we need to rebalance our economy and have growth in the private sector. So the moves that have been taken for business are hugely important, and the further lowering of corporation tax and the speeding up of that process is very welcome. It makes it very clear that our door is open for business. When private sector businesses grow, they need more staff and more money. Less is then spent through the welfare state and our whole economy benefits.

The change in the top rate of tax, which gets rid of the 50% rate, is also important. Apart from the economic arguments that have already been rehearsed today, that has a psychological impact. A message goes out to high earners—the people who are business leaders and business owners—that we value the work they do. People who aspire to get to that position see that they can work hard, develop and grow their business, and benefit as well.

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[Stewart Hosie (Dundee East) (SNP)]

I will start by welcoming a couple of the measures announced today. The Chancellor spoke about backing the creative media sector, which has the potential to be very helpful for the games industry in Dundee. It is just a pity that the old scheme was scrapped and we had to have a hiatus until this one was introduced. We will of course look at the fine print to find out precisely what it does. I also welcome the doubling of council tax relief for serving service personnel, which some of my hon. Friends have campaigned on for many years, and the Chancellor’s comment that he expects to see exports doubled. I hope that when that work is under way the UK Government will work with Scottish Development International, which is already working with nearly 10,000 businesses to internationalise their work.

At face value, the changes to the decommissioning scheme and the new field allowance for the North sea are very welcome. Of course, that is a huge humiliation for the Chief Secretary to the Treasury, whose bright idea it was to increase North sea taxation last year without consulting the industry. However, I have to point out that from 2013-14 onward the decommissioning scheme will actually bring in an additional £1.2 billion to the Exchequer and from 2014-15 onward the new field allowance will bring in £130 million. That might be behavioural change; we will have to see precisely what it means. I also point out, in a gentle aside to the Liberals who have talked about how marvellous the Budget is, that in relation to the squeezed middle the threshold at which people pay the 40p rate of tax will decrease next year to just over £32,000—they have been not so much squeezed as almost halved by the actions of the Government.

The Chancellor, unsurprisingly, sought to take credit for his stewardship of the economy, but before he and his friends get carried away let us look at what he actually did. The deficit on the current budget for 2011 was meant to be £104.8 billion, and it was forecast to be £90 billion for 2011-12. Today the forecast for 2011-12 was increased to £98 billion. The net borrowing requirement was forecast to be £145.9 billion for 2010-11 and £122 billion for 2011-12. Today the forecast for 2011-12 was increased to £126 billion. The national debt, on the treaty calculation, was due to peak at 87.2% of GDP, or £1.2 trillion, in 2013-14, but today it is now expected to peak at 92.7% of GDP in 2013-14, which is £1.36 trillion.

Therefore, there was not a great deal for the Chancellor to be pleased about. That will, of course, allow him to claim that he is on track to meet his fiscal rules—that the structural current deficit should be in balance in the final year of a rolling five-year programme and that debt is falling as a share of GDP by the end of that period—but both those objectives are highly dependent on GDP growth, which, as we have noted in previous Budgets, is massively dependent, according to the OBR, on quite incredible, unbelievable and unmet rates of business investment.

In 2010 the Government suggested that business investment had to grow between 6.7% and 10.6% a year. By the time we got to the OBR’s fiscal outlook in November 2011 growth in business investment had turned negative for 2011 and the forecasts had been changed to deliver business investment growth from 2012 to 2016 of 7.7% to 12.6% a year. What we expect now, the Government having failed on all their measures so far, is business investment growth of between 6.4% and 10.1% from 2013 onward. I am certain that when we get to the autumn statement and are looking at weaker numbers and next year’s Budget the Chancellor will simply fiddle and make more aggressive the business growth investment figures for future years to pretend he is on target to meet his own rules.

That is why the OBR told us last autumn that the contribution of general Government consumption to UK GDP growth would be negative throughout the spending review period, and according to today’s Budget it still will be. It is also why this coalition’s cuts are hugely damaging not least in Scotland, and the changes over the spending review period that delivered an 11.3% real terms cut to Scotland and a 31.7% cut to the capital budget are barely altered by today’s announcements.

Never letting the facts get in the way of a good attack line, the Chancellor made the point that the UK Government are able to borrow quite cheaply at the moment. What he did not mention, and this was genuinely surprising, was the triple A rating that he normally uses in that argument. I suspect that it is because he has worked out that, although the UK had its triple A rating put under threat in February, it was paying an amount of money in yield on its five-year, 10-year and 30-year bonds, while Japan, which had a net debt twice that of the UK and two double A negative ratings, was paying a fraction of the yield on its bonds.

So, although I am very pleased that the UK is able to borrow at reasonably god terms, I am pleased also that the Chancellor has abandoned his boasts about the triple A rating, stopped fetishising it and is concentrating on what really matters, which is the yield that the UK pays.

[Jesse Norman]

The hon. Gentleman is slightly understating the case, is he not? The fact is that we are borrowing at extraordinarily low—historically low—nominal yields, and, given the level of inflation, at even lower real yields. That is a result of the deficit reduction strategy that has been followed, and one reason why we should not fret about double or treble A ratings is that the United States itself has been downgraded, as have one or two other countries, and their borrowing costs have not necessarily been affected. That is just a rational reaction to events in the capital markets.

[Stewart Hosie]

One might also make the case that the United States, with a fiscal stimulus programme, is borrowing money at negative real terms percentages. It has engaged in fiscal stimulus, not in the cut-and-burn approach of the UK Government, and, as the right hon. Member for Doncaster North (Edward Miliband) says, the US has succeeded where the UK is failing.

--- Later in debate ---

[Jesse Norman (Hereford and South Herefordshire) (Con)]

Several speeches have reminded me of Herbert Asquith speaking on the Licensing Bill in 1907, when he gave an eloquent speech for about an hour and a quarter and was then asked for a summary of his notes, which consisted of one page with the words, “Not so many pubs.” In other words, we have had an enormous amount of words but not much content; a lot of

“sound and fury,

Signifying nothing.”

I welcome the Budget on three grounds. First, I welcome it for my county of Herefordshire. Many of its provisions are extremely good. We have 100% council tax relief for servicemen and women, which will make a great difference to many of my constituents. We have a commitment to infrastructure, which we need in our rural areas. We have support for smaller cities and broadband, of which we hope to take advantage, and we have tax simplification for small businesses. All that is extremely welcome.

I also welcome the Budget from the standpoint of the nation as a whole. It has so many things to recommend it. I think of the expansion of support for exports; the northern hub, which will start to fill the gap created by the amazing lack of infrastructure linking northern cities; the integration of the tax and national insurance systems; and the new tax statement, for which my hon. Friend the Member for Ipswich (Ben Gummer) is greatly to be thanked. I also think of the Treasury’s work on its new review of employee ownership. That would be an important repopulation of our system and a move away from the crony capitalism of the past decade.

[Debbie Abrahams]

Does the hon. Gentleman agree with the Chancellor that “aggressive tax avoidance” is “morally repugnant”? If he does, why does he believe the Chancellor failed to mention how he will address the tax avoidance of private health care companies—the same companies that have been lobbying in favour of the Health and Social Care Bill?

[Jesse Norman]

The answer is that a general anti-avoidance rule is what it is. If there is avoidance by health care companies, I hope they will be captured by the rule, in just the same way that I hope the rule extends to include the tax affairs of Ken Livingstone as he runs for the London mayoralty.

Finally, I welcome the lower corporate tax rise, and most of all the rise in the income tax threshold. This is an extraordinarily important moment in British history, in which we begin to roll back the ever-pervasive state created under the previous Government, and in which people are given freedom and control over their economic affairs. I greatly welcome that.

The Budget continues a path of renewal that was begun two years ago. We must never forget that this country lost ground during the so-called boom years of the late 1990s and 2000s. When we adjust the gross domestic product per capita numbers, we see that, in fact, they overstate the country’s success, which relied on immigration, a boom in house prices and a boom in personal indebtedness. When those booms collapsed, so too did our economy.

We lived under the illusion of growth. We thought we were doing better than other European countries, but in fact we were not. We were having our breakfast, lunch and dinner eaten in front of us by Brazil, Russia, India and China and other emerging countries. That was also a time in which a culture of crony capitalism took over this nation. The effect of uniquely targeting inflation gave support to those asset bubbles, which in turn created an economy that was reliant on revenues from the financial sector and fed into the lack of balance, which the Government and this Budget are doing much to address.

On local grounds, speaking for Herefordshire, on national grounds, speaking for the country as a whole, and on historical grounds, as this country continues a transition from cleaning up the mess to rebuilding and renewal, I welcome this Budget.

Oral Answers to Questions

Jesse Norman Excerpts

Tuesday 1st November 2011 Commons Chamber

[Kelvin Hopkins (Luton North) (Lab)]

Next question.

[Jesse Norman (Hereford and South Herefordshire) (Con)]

7. What recent estimate he has made of the level of central Government debt.

[Mr Robert Buckland (South Swindon) (Con)]

11. What recent estimate he has made of the level of central Government debt.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

The Office for National Statistics publishes central Government debt figures monthly. The latest figures released on 21 October gave central Government gross debt as £1.2 trillion or 77.6% of GDP in September. The Government use public sector net debt for their fiscal targets. That figure is also published by the ONS, and it was £966 billion or 62.6% of GDP last month.

[Jesse Norman]

I thank my hon. Friend for that response. This country continues to bear a huge burden of private finance initiative debt. The Government have made important progress in improving the cost and operation of PFI over the past 18 months. Does he share my view, and that of many of my colleagues, that more can be done to secure a fair deal on PFI, while securing investment in our infrastructure?

[Mr Speaker]

It would help if the Chair could actually hear the question being asked.

Jobs and Growth

Jesse Norman Excerpts

Wednesday 12th October 2011 Commons Chamber

[Ed Balls]

My hon. Friend is a leading indicator, not a lagging indicator.

The fact is that the deficit plan is going too far and too fast. As I have said, we should stop putting party political advantage before the national interest. That is why the right thing to do to help struggling families and businesses in the constituencies of Members across the House is to adopt a plan now to get our deficit down by getting our economy moving. We should repeat the bank bonus tax; build 25,000 homes; guarantee a job for 100,000 young people; genuinely bring forward long-term investment projects in schools, transport and roads; temporarily reverse the damaging rise in VAT, which would mean £450 for a couple with children; have an immediate one-year cut in VAT to 5% on home improvement, repairs and maintenance; and introduce a one-year national insurance tax break for every small firm that takes on extra workers.

The Chancellor does not have to wait 46 days. He can bring forward emergency resolutions in this House next week and we will support them. He can call the plan what he likes. If he wants to appease The Spectator, he can call it plan A-plus. That is fine by us. Britain just needs a plan that works for jobs and growth, which is why he should adopt Labour’s five-point plan for jobs and growth.

[Jesse Norman (Hereford and South Herefordshire) (Con)]

While we are on the topic of football, may I congratulate the right hon. Gentleman on his ample use of the substitutes’ bench, although it was of course not him who used the substitutes’ bench? What would be the cost of his temporary cut in VAT, how does he propose to finance it, and what would be the gain in GDP growth as a result?

[Ed Balls]

“Jesse is the Clark Kent of British politics.” Unfortunately, that was said by the other candidate for the leadership of the Conservative party, Boris Johnson. What an endorsement for the hon. Gentleman to have on his own website! The fact is that the deficit reduction plan is going too far—

[Jesse Norman]

rose—

[Ed Balls]

Get back in your phone box, I am answering the question. We need a slower pace of deficit reduction, not the £40 billion more that the Chancellor boasted of. An injection now to get the economy growing and unemployment coming down is the best way to get our deficit down. People do not have to take it from me; that is what the IMF and the OECD are advising the Chancellor to do. They say, “If the economy gets into sustained contraction, slow down the pace of consolidation.” I will give the hon. Gentleman another go.

[Jesse Norman]

We are all enjoying the shadow Chancellor’s vaudeville act, but he has failed to answer the question. I am interested in what would be the actual cost of the VAT cut that he proposes and how he would fund it.

[Ed Balls]

The hon. Gentleman would know the answer if he listened. I said that attempting to go £40 billion faster in deficit reduction than the plan the Chancellor inherited is not working, but pushing borrowing up. The right thing to do now is to expand demand—[Interruption.] Look, a one-year cut in VAT in its own terms would cost £12 billion. The question is what would be the impact on jobs, growth and deficit reduction. I am afraid that the Chancellor is borrowing not £12 billion more, but £46 billion more. The flatlining economy and rising unemployment mean that his deficit reduction plans are going off track. He should take the advice of the IMF and the OECD and change course.

--- Later in debate ---

[Jesse Norman]

Does the Chancellor share my amazement at the lack of reality on the Opposition Benches? The eurozone is in crisis, the credit markets for the banking system across Europe are in desperate straits, and yields are rising, and yet the Opposition would squander £20 billion to £30 billion and increase our deficit.

[Mr Osborne]

My hon. Friend is absolutely right. Low interest rates are a precious commodity for the UK at the moment, and Members of the House, sent here to represent their constituents, have to ask themselves, “Do we really want an increase in interest rates at this time?” Is that what we want? It is what the motion would lead to.

Independent Banking Commission Report

Jesse Norman Excerpts

Monday 12th September 2011 Commons Chamber

[Mr Osborne]

The hon. Gentleman is being unnecessarily defeatist. I do not see why we cannot construct a regime that means we do not have to bail out banks when they fail. There are a number of different parts to this: requiring banks to hold more capital, including requiring people who hold bonds in the bank, as well as shareholders, to suffer a loss should the bank fail; the role of the regulator in preventing banks from doing stupid things, such as buying a big Dutch investment bank once the credit markets had already frozen up; and the proposals on ring-fencing. We have to work to get to a system where we are not standing behind banks that are too big to fail. If that were the case, we would end up with a banking system that is just a utility, and that would change the way in which banking interacts with our economy. We want banking to be successful and to be out there lending, but we want it to be properly regulated and we want to make sure that we do not have to stand behind it.

[Jesse Norman (Hereford and South Herefordshire) (Con)]

I very much associate myself with the remarks about mutuals and credit unions, but I want to ask the Chancellor about what the commission says about competition, for which it has some excellent recommendations and it is all too easy to think that they apply merely to the retail sector. Does the Chancellor support the idea that we should be taking the wholesale sector as seriously as the retail sector, given that equity underwriting fees, for example, have gone from 2% 20 years ago to something like 4%, 5% or even 6% today?

[Mr Osborne]

My hon. Friend is right to raise the issue of competition in the investment banking sector. It is not often talked about outside the pages of the Financial Times, but it can be very uncompetitive, the fees can be exceptionally high, and there is that old maxim that no one ever got fired for hiring Goldman Sachs. The report will enable Britain to remain a home of competitive investment banking while protecting retail customers. That should encourage new entrants and drive down the fees that are charged. That would all be a good thing.

Private Finance Initiative

Jesse Norman Excerpts

Thursday 23rd June 2011 Westminster Hall

[Jesse Norman (Hereford and South Herefordshire) (Con)]

I am grateful for the opportunity to discuss the important issue of the private finance initiative under your chairmanship, Mrs Main. I thank the Minister, the Backbench Business Committee, which allowed us to hold this debate, and my many colleagues in the Chamber today.

Since its inception in the early 1990s, the private finance initiative has resulted in more than £200 billion of public debt, the cost of which will hang over the British taxpayer for decades. It has created great private fortunes and fundamentally shaped the nature of our public services. It has generated huge public outrage, as we will hear in this debate. It has raised profound issues of fairness between this generation and the next and it has affected virtually every constituency in the land and the lives of millions of people.

For reasons that I will explain, the extraordinary fact is that until now there has never been a full three-hour debate on the PFI in this House. There has never been a comprehensive assessment by the Government of the cost and benefits of the PFI or a successful attempt to collect all the relevant data about the PFI into one place. None the less, the topic of this debate could hardly be more relevant. We need to ask three questions. How did we get here? How can we make savings from the PFI for the taxpayer? How can we design a better system for the future?

[Philip Davies (Shipley) (Con)]

I am grateful to my hon. Friend for bringing this debate to the House. One thing I have stumbled across is that the Prison Service does not own a computer because of the PFI. It rents them all at the cost of £160 a month, which most people would think was a ludicrous state of affairs. To prevent such a thing happening again, does he not agree that the people who negotiate the contracts within Government should be surcharged if the National Audit Office or some other similar body judges that the contract that they entered into was negligent to the taxpayer?

[Jesse Norman]

That is an extremely interesting suggestion. I am not sure how the details would work, but I will make specific proposals for improvement to public procurement later on in my speech. I thank my hon. Friend for his intervention.

Like many colleagues, I first understood the impact of the private finance initiative through my local hospital. Starting in 1999, Hereford hospital was one of the earliest PFI projects. It was built and is currently owned and managed under a 30-year contract through a special purpose company, which is three-quarters owned by Semperian, a large PFI firm based in the City of London, and one-quarter owned by the French industrial services giant, Sodexo. Non-clinical services are contracted out to Sodexo, WS Atkins and to others.

Car parking charges at the hospital have been the source of huge local anger because they penalise patients at a very vulnerable time in their lives. They particularly hit frequent users such as those visiting in-patients and those suffering from cancer. They are socially regressive, falling relatively harder on the poor than on the rich. As I investigated further, I found that that was only the tip of the iceberg. The reason why the charges were so high was down to the PFI itself, because car parking was contracted out not once but twice—first to Sodexo and then to CP Plus, and each had its own mark-up.

[Joseph Johnson (Orpington) (Con)]

Is my hon. Friend aware that fewer than a quarter of England’s 168 NHS hospital trusts have significant PFI hospitals within them, but that those trusts account for almost two-thirds of A and E closures or proposed closures? I know from my own observation of the South London Healthcare NHS Trust how extreme the operational constraints are that face managers who have PFI hospitals within their trusts and how those hospitals force them to take decisions on operational grounds that might not be in the best interests of patients.

[Jesse Norman]

It seems to be true that many decisions were made from a desire to fit the financial cloth to the pocket rather than from the actual clinical needs of the patients. It is certainly true that the squeeze that these inflation-adjusted costs exert on hospitals is heavily responsible for the closure of A and E units.

Let me return now to the situation at Hereford hospital. Later PFI contracts have contained financial safeguards for the NHS, including automatic efficiency savings of 3% a year and the right for a hospital to put services out to public tender periodically. However, the Hereford contract contains neither of those safeguards. There are no automatic efficiency savings, and the contract cannot be retendered until 2029. The hospital trust is doing a valiant job, but it has little influence, legal scope or access to underlying costs which might help it to negotiate changes to the contract. Worse still, no mechanism exists by which the hospital can group together with other PFI hospitals to exercise collective influence over the PFI contractors. By contrast, Semperian has 106 PFI contracts. The imbalance in power is obvious, yet the NHS seems to have done nothing to remedy that.

For almost a year now, I have been campaigning for a voluntary rebate for taxpayers on the PFI of £500 million to £1 billion. Those are large numbers, but that goal is not unrealistic.

[Sir Peter Bottomley (Worthing West) (Con)]

I hope that my hon. Friend does not think that I am sitting on the other side of the Chamber because I do not support his proposal; I do support it. May I ask that those who read his words as well as those who listen to them pay some attention to the old Ryrie rules, which were supposed to limit Ministers using private finance when it was not appropriate? May I also ask my hon. Friend if he would direct the Chamber’s attention to the design, build, finance and operate Dartford crossing, which was a proper use of the private sector? There was a limit to the amount of time that the project could be charged and it had an income stream, so there was no powerful debt either.

[Jesse Norman]

I shall be talking about the early history of the PFI shortly. As my hon. Friend implies, the Ryrie rules were an important part of the fiscal stringency that surrounded that project. What the issue of the Dartford crossing brings out is that PFI is often successful on these economic infrastructure projects and less effective on social infrastructure projects.

[Michael Fallon (Sevenoaks) (Con)]

While my hon. Friend is on the subject of a voluntary rebate, is he aware of the research from the university of Adelaide showing that the average profit made when PFI equity on hospital projects is sold on was more than 66%. Is it not the case that we should be looking at something more than voluntary?

[Jesse Norman]

At this point, I want to keep the rebate voluntary because we are making good progress, but many Members feel that something more stringent would be appropriate. In the assessment of the profits on these equity stakes, I would caution that in some cases those equity stakes have been built up over a considerable period and one should not necessarily look at just the headline number if it is the result of a 10 or 15-year investment.

I have spoken about the campaign that we have run so far. An important feature of the rebate campaign is that at least part of any savings would remain with the public service involved. The result, therefore, would be a win not merely for the taxpayer but for local communities, which could potentially benefit from many millions of pounds in savings over the next two decades.

Let me make it clear that I am not for one moment suggesting that existing PFI contracts should be torn up, but contracts are routinely renegotiated in the private sector. The rebate would be a voluntary one, and not a haircut imposed by Government. There is a valid precedent in the code of conduct that was signed in 2002, by which the contractors agreed to share windfall refinancing gains with the taxpayer. It may be that that code of conduct needs to be further extended to the secondary market trading of equities.

What I did not expect was the level of support that I and colleagues have received from key players in the PFI industry itself. They know that something is wrong. They are aware of public concern, and they want to participate in the next generation of economic infrastructure. Having started as a solo mission, the campaign has become a cross-party movement of more than 70 Members of Parliament. We have sat down with many large PFI companies and talked in detail about the scope for savings.

Parliamentary concern about the costs of the PFI has resulted in an inquiry by the Treasury Committee and, to their huge credit, the Government are taking the idea of a rebate very seriously indeed. Ministers at every level have made clear their desire to see savings. The Cabinet Office has been looking closely at the PFI in its quest for greater efficiency across the public sector; the Ministry of Defence has announced that it is reopening three major contracts as part of its own renegotiation strategy; and the Treasury has opened discussions with the PFI industry about a new code of conduct and it has recently concluded a “deep dive” investigation of the PFI contract at the Queen’s hospital in Romford. That is the first time in 15 years that a Government have taken a forensic look at a specific PFI contract, and it sends out a clear signal of intent to dozens of other PFI projects. So we are making progress. That is the context for this debate—the first Parliamentary debate on the PFI—and I hope that colleagues from all parties will make their support loud and clear for these actions for better public services and real savings for the taxpayer.

However, to understand the present we must understand the past. How did we get to such a sorry state of affairs with the PFI? The history is surprising and damning by turns. It can be divided into three phrases: experiment; ramp-up; and standstill. The PFI was introduced in 1992 from Australia by the Major Government, which was interested in how private capital and expertise could be used to support the public services. Labour Members often deride the Conservatives for introducing the PFI, but the facts tell a very different story. The Major Government could not make the PFI work. They insisted on judging each deal on its merits, having inherited a structure from the Ryrie rules, and the merits were sometimes very thin indeed. By 1996, barely £6 billion worth of PFIs had been approved and no PFI hospitals had been approved, let alone built.

Meanwhile, Labour was split. Old Labourites denounced the PFI in traditional terms as “creeping privatisation”, but it is often forgotten that the new Labour position was the exact opposite of that. New Labour thought that the PFI was a good thing and that the problem was that the Tories had not gone ahead with it fast enough. In a speech in Parliament on 28 November 1995, Tony Blair rammed that point home repeatedly. His position was perfectly clear:

“The PFI is right in principle. We have supported it, and in many ways we have been advocating it.”

At that point, John Prescott, who is now Lord Prescott, helpfully intervened with, “We initiated it.” Blair continued:

“It should not be manipulated to cook the books of public finance.”—[Official Report, 28 November 1995; Vol. 267, c. 1077.]

On that point at least, the future Prime Minister and his Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), were agreed, since the right hon. Gentleman also remarked in the early 1990s that

“PFI is a cynical distortion of the public accounts.”

How are the mighty fallen, and in what disgrace. We are accustomed to make fun of Lord Prescott—rightly so—but at that point he spoke truer than he knew. In many ways, Labour was in fact the real originator of the PFI in its current form. In 1997, the new Chancellor, the right hon. Member for Kirkcaldy and Cowdenbeath, and his then adviser, the right hon. Member for Morley and Outwood (Ed Balls), were tied down by the promise that Labour had made to stick to Conservative spending plans for two years. They had committed to keep public sector net debt below 40% of GDP, according to their sustainable investment rule, but they were desperate to leave a legacy by building a huge amount of public infrastructure. They quickly spotted that PFI projects offered a way out of that quandary, because PFI liabilities could be treated as off-balance sheet and so they would never appear formally within the net debt numbers. Of course, as we now know, they later fudged the sustainable investment rule by redefining the economic cycle and then the rule was blown apart as the financial crisis took hold.

After the 1997 election, the new Paymaster General, the hon. Member for Coventry North West (Mr Robinson), summarily fired Alastair Ross Goobey, the chair of the PFI panel and a man with an impeccable record of protecting shareholder value, and ramped up the PFI dramatically. Over time, an unholy alliance developed between the Labour Government and the PFI companies. PFI became the “only game in town”, as more and more projects were pushed in its direction by Government Departments that were desperate for capital spend but prevented by central Government from looking at alternatives.

That ramp-up was aided by the introduction of PFI credits, which allowed Departments to avoid running local authority PFI spend through their own budgets, thus evading responsibility for them; it was also aided by the use of high official project discount rates, which artificially privileged the PFI over other forms of procurement; and it was also aided by the unwillingness of both the Blair and Brown Governments to permit debate on the issue, conduct any overall analysis of the PFI’s cost-effectiveness or gather the full data on primary and secondary transactions, which would have allowed proper transparency and proper public accountability. Frankly, that was disgraceful behaviour.

Fast forward to today and what do we find? More than 800 PFI projects are now in place, covering every imaginable form of public infrastructure from hospitals and schools to roads and military hardware. Nearly £70 billion—not £6 billion, as was the case in 1997—of capital commitments have been made, with a total liability to the taxpayer of well over £200 billion. And—irony of ironies—new accountancy rules are in place that require PFI debt to appear in the national accounts after all. The Balls-Brown attempt to fix the books has proven to be a failure, and a costly failure to boot.

It is important to say that many PFI projects have been completed on time and within budget. There is a mixed picture. Contractors such as Jarvis have gone bust when projects failed, or taken huge financial hits. Also, conventional procurement itself has not always covered itself in glory, as demonstrated by the Eurofighter, Wembley stadium and British Library projects.

In response, it is easy to highlight the many PFI projects that have been horrendously overpriced. They range from huge deals, such as the Airtanker contract, which is now estimated to cost £1.5 billion too much, and the M25 widening, which is now estimated to cost £1 billion too much, to tiny but telling details about smaller schemes, such as the kennels at the Defence Animal Centre in Melton Mowbray, which cost more per night than rooms at the London Hilton.

An even more telling criticism emerges if we look at the overall record on the PFI. We now know that there is no general evidence that the PFI is cost-effective, or that the PFI improves the quality of buildings. Average annual maintenance costs are higher in PFI hospitals than in non-PFI hospitals. The most detailed study of PFI hospitals demonstrates that there is a large element of excess return to both debt and equity holders. Indeed, for equity holders the financial returns have been on occasion up to six times higher than the risk would justify.

There have been important secondary effects. The ramp-up of PFI projects helped to create an artificial boom in construction, which pushed up costs and over-extended the construction industry. Within the NHS, it has resulted in a huge and inflexibly designed Maginot line of hospitals, each one on inflation-adjusted contracts lasting decades, at a time when health care is moving towards more flexible models that combine specialist institutions with health and social care nearer to the home.

[Paul Uppal (Wolverhampton South West) (Con)]

First and foremost, I congratulate my hon. Friend on securing such an important debate. It is a testament to his tenacity, research and expertise in this field that this debate has been attended by so many Members. I concur with his view that the PFI picture is mixed—

[Paul Uppal]

I will attempt to be brief. Does my hon. Friend concur with my view that, although the picture is mixed, the fundamental issue is that the PFIs are often short-term solutions to the long-term problems that we face in government? That is illustrated exactly by the issue with Southern Cross, which has often used sale and leaseback to finance its own businesses.

[Jesse Norman]

I thank my hon. Friend for that intervention. I absolutely share his view that there is an interaction between inflation-adjusted costs and budgets, which of necessity are less able to rise, and that that interaction creates tremendous tension within these institutions. In many ways, Southern Cross is rather similar to the PFI, as the Chairman of the Health Committee, my right hon. Friend the Member for Charnwood (Mr Dorrell), reminded me this morning. The PFI costs for hospitals that I have been describing are not under the hospitals’ control, so the effect of escalating payments will be to suck up free cash flow within hospital trusts, to reduce flexibility and to impede innovation, just when those things are most needed.

We are in an unhappy mess, which is the true legacy of Messrs Brown and Balls. We shall better see the financial extent of that mess in July, when the Office for Budget Responsibility reports on the whole of Government accounts. However, the key point is that, although PFI was expensive before 2008, since 2008 it has become exorbitant. As a result of the financial crisis, PFI credit margins over gilts have risen from an average of around 0.75% to between 2.5% and 3%. Specific projects have even worse financial profiles. For example, the outline business case for the £244 million Royal Liverpool and Broadgreen University hospital projects a weighted return to investors of 8.58%. That is more than double the rate on long-term Government gilts, which is 4%. The extra cost is such that there is now a strong case for a one-year moratorium on that project, as on others, to allow proper consideration of alternatives, and I encourage the Government to consider that suggestion closely.

I shall sum up. A new settlement is needed on the PFI, and I offer three recommendations. The first is that the Government should take steps to improve their database on PFI deals, and their collection of new data. The quality and quantity of PFI data are surprisingly bad. On primary deals, that is due to inconsistencies in collection, and on secondary market deals it results from a hands-off methodology, which regards trades in PFI debt and equity as purely private transactions, outside the scope of government. All aspects of data collection should be reviewed and improved.

My second recommendation is that the Government should undertake a major consultation soon on the best means to procure and finance new infrastructure. This country badly needs new infrastructure, at a likely cost of hundreds of billions of pounds over the next few decades, and the private sector has a vital role to play. To finance that development, we need alternatives to the PFI, and several economic models are available. These include regulated asset base models developed from the utilities market, property-based models, strategic infrastructure partnerships and tax increment financing, as well as a reconsideration of conventional procurement methods. I have recently advocated the idea of a national asset trust fund as well, in a publication of my own. The consultation should also focus on how procurement is done. Should different models be used for different sectors? How can public sector institutions be made into better clients?

Thirdly, and finally, the Government should continue their current drive towards a taxpayer rebate and a new code of conduct on the PFI, if possible with every PFI company involved. Many have already engaged with the Treasury, but some—particularly some large banks, accountancy firms and legal advisers—have yet to do so. I have written to the head of every major PFI firm to put the question directly to them, and I plan to keep the House informed of their participation. The code of conduct would in due course lead to a matrix of all PFI transactions, which would show savings agreed with the private sector to ensure that they were fairly shared. That will require implementation over some months, so that the savings are genuinely realised. The Treasury could also set up a small team to advise individual hospitals and other public services on how to benefit most from the rebate process, with the team’s costs being met out of the savings generated. One thing, however, is vital. Most of any rebate should of course go back to the Treasury, and on to the taxpayer, but a portion should remain with the affected local public service, so that local people can be absolutely certain that their school, or hospital, has benefited.

I very much hope that all colleagues present—and there are many—will support these recommendations, and will join me in pressing the Government to ensure that savings are made and local people feel the benefit.

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[Mr Jones]

I am not necessarily saying that PFI should not happen at all, but that contracts should be negotiated in the correct fashion to minimise the taxpayer’s exposure to situations such as those we have seen. Contracts must be right when ensuring that organisations are a suitable size, for example, to fit into the local health economy. With hindsight, we might question whether the PFI hospital at Coventry was too large for the wider Coventry and Warwickshire health economy.

The general point is that we must get the issue right in future. I accept the hon. Lady’s comments, but I am confident that Ministers are ensuring that any contract negotiations will be made properly, so that we do not over-commit the Government, as was done previously.

[Jesse Norman]

Does my hon. Friend share my view that there is a world of difference between Building Schools for the Future, a form of PFI that the Government could and did cancel, or specific projects which were inherited but which they were uncomfortable with, such as Hartlepool hospital, which they have also stopped, at least for the time being, and the vast preponderance of the 61 projects inherited from the previous Government? The toxic inheritance from the previous Government was an enormous sausage machine, with huge embedded costs, which we have had to deal with despite a difficult economic situation. There is something grossly wrong in comparing £200 billion of spending under the previous Government with the need to get the situation under control. Does he share my view?

[Mr Jones]

I share my hon. Friend’s view, which he has expressed powerfully. We must also consider a point made by my hon. Friend the Member for South Northamptonshire (Andrea Leadsom) that, thanks to the Labour party, the country is now so indebted that, to put in any new infrastructure, we have to look seriously at schemes such as the PFI, because without them the country simply does not have the money to finance any projects.

--- Later in debate ---

[Mr Robin Walker (Worcester) (Con)]

I congratulate my hon. Friend the Member for Hereford and South Herefordshire (Jesse Norman) on securing this debate. Herford and Worcester have a long history of fruitful co-operation, and I hope that the debate will show that we can work together to deliver better value for our constituents and our country.

As we have heard, PFI has become a dirty word—almost a term of abuse—but it was not always so. Both Conservative and Labour Governments saw the benefits of working with private finance and, from the 1990s onwards, the opportunity to deliver better public service by using it. Rightly, many hon. Members have challenged the essence of the scheme, and I accept that it should be reviewed and that we should look at competition, as my hon. Friend the Member for South Norfolk (Mr Bacon) has suggested. However, Members should remember that some PFIs allowed valuable new public buildings to be delivered, which would not otherwise have been possible. That was often used to justify the scheme, even after some of the initial value-for-money problems became clear. That was certainly the case with the Worcestershire Royal hospital in my constituency, and I want to focus on matters close to home, in the same way that my hon. Friend the Member for Nuneaton (Mr Jones) did. Most of my comments today will be about that particular PFI.

Over time, it has become clear that value for money was not sufficiently protected, particularly in early PFIs, such as our hospital in Worcester. When the Labour Government came to power in 1997, they were determined to embark on a massive programme of public building, but with a commitment to remain within the spending plans of the previous Conservative Chancellor. The PFI provided a valuable get-out from that Catch-22 situation, because it allowed the Labour Government to borrow against the future—build today and pay tomorrow. That was not in itself a problem, as long as future costs were taken into account and rigorously controlled. Sadly, the political imperative overrode financial good sense, and projects were signed off without the rigorous checks that should have been made.

In the case of Worcestershire Royal hospital, I can state categorically that the decision to approve the structure of the PFI was political, that it was taken by a Labour Government and that it would not have been approved by a Conservative Government. The reason why I know that is peculiar. I happened to be working as a volunteer driver for my right hon. Friend the Member for Charnwood (Mr Dorrell), who was then Secretary of State for Health, during the 1997 general election campaign. We were both from Worcestershire originally, and we were both well aware of the clamour in the city for a new hospital, so the topic came up naturally during our travels around the country. I asked my right hon. Friend why he would not sign off the hospital that everyone wanted. He explained that, although it was absolutely right that the city should have a new hospital, the contract that had been put forward for it was too expensive and inflexible, and did not build in the extra capacity that the hospital would need over the next 30 years. He said that when the Conservatives were re-elected he would renegotiate that contract and ensure that we had a hospital to be proud of. Alas, that was not to be.

With the advent of a new Government impatient to get spending, the contract was signed off unchanged and the Worcestershire Royal hospital, a fine building in many ways, where a lot of fantastic work is done, lived up to the concerns of my right hon. Friend. The reply to my recent parliamentary question to the Department of Health in February on the costs of the PFI confirmed that over the life of its 30-year contract the Worcestershire Royal hospital will cost approximately 10 times the capital cost of the project—£852 million over 30 years, compared with its £82 million capital cost.

Hon. Members may point out that it is not reasonable to compare directly the capital figure of a project with the total cost of the PFI contract, because account must be taken of the cost of capital, the service elements, and the fact that a PFI project is maintained as new throughout its lifetime. However, it is reasonable to benchmark such figures against other, and especially more recent, hospital PFIs. In recent hospital PFIs, the lifetime costs have been more like four times the capital cost, which shows the vast gulf in value between early hospital deals, such as that at Worcestershire Royal hospital, and more recent PFIs.

Hon. Members do not have to accept my word for the poor value of that PFI. In 2006, Patricia Hewitt, who was then the right hon. Member for Leicester, West and Secretary of State for Health in the Labour Government, told the Select Committee on Health that the financing of the Worcestershire Royal had been “a disaster”, and that it had been much more expensive than other PFIs.

We have a problem not with cost alone but with capacity, and they are similar to those raised by my hon. Friend the Member for Nuneaton. The hospital in Worcester has to serve as both the acute hospital for the county and the community hospital for Worcester. It is now, and has been for some time operating at close to full capacity, and as more services have been centred there, it has become a headache for the management of our acute trust. With the opportunity to have more cancer services centred on the Royal, which my constituents warmly welcome and support, comes the challenge of deciding which services must go elsewhere in the county as a result of the capacity limits.

As my hon. Friend the Member for Hereford and South Herefordshire has pointed out so eloquently in this debate and others, one of the knock-on effects of poorly negotiated PFIs has been to raise the price of hospital parking, which is certainly true in Worcester. In fact, in the early life of the PFI, land that had originally been set aside for parking had to be sold to help the trust to meet the costs of paying for it. That has added to the difficulties of parking. The costs are of understandable concern to patients and visitors, and there is a knock-on effect of people parking in nearby residential estates to avoid those costs.

[Jesse Norman]

My hon. Friend’s powerful speech suggests that his hospital, the total cost of which is 10 times its capital cost versus an average of four times, leaves six times £80 million, or just under £500 million of excess cost, in that contract. Is that an appropriate calculation?

[Mr Walker]

That is an appropriate point to raise, and a strong argument for the sort of rebate that my hon. Friend has been advocating.

It is regrettable for all those who are affected by high charges for parking or by cars cluttering their streets as a result that the previous Government did not take more time to negotiate, to think more about the long-term consequences of their hurried decisions and to get a better deal for taxpayers before signing off that PFI.

However, we are here not simply to point the finger of blame but to deliver solutions. I believe that there are solutions to these problems, which is why I have passionately supported my hon. Friend’s campaign for a significant PFI rebate. We need not let past mistakes for ever damn the idea of the PFI, but we should learn from them and ensure that we deliver better value for money, better planning and a stronger position for taxpayers in future.

I support my hon. Friend’s contention that a 0.5% rebate nationally would deliver enormous benefits for taxpayers and, in the case of the Worcestershire Royal hospital, it would deliver millions of pounds that are desperately needed in our local health economy. I also support the urgent measures that our Government are already taking to bring PFI companies to the table and to ensure that better value is delivered for taxpayers. I am delighted for that reason that the Worcestershire Royal hospital is one of those being reviewed by McKinsey, and I urge it to examine closely the details of the current agreements and to search for areas where value can be unlocked. In Worcestershire, as elsewhere, many of us believe that the long-term costs of the PFI are placing serious strain on the finances of our acute trust. Consequentially, they are a significant barrier to the vital short-term goal of achieving foundation trust status, not to mention the essential long-term aim of delivering the best possible care for everyone in Worcestershire, free at the point of need.

There is good news on that front, which shows that the light that my hon. Friend has shone on the PFI, and the determination of this coalition Government to deliver value for money, are already bearing fruit. I understand that the Worcestershire Acute NHS Trust is already finding significant savings that can be delivered from the soft services parts of their contract. As part of the trust’s strategy to deliver greater efficiency from its PFI provider, commercial discussions are currently under way with ISS to benchmark the provision of soft services every five years. ISS provides services such as cleaning, catering, portering, security and laundry to the Worcestershire Royal hospital site, and it has indicated that it is prepared to work with the trust to deliver savings over the next five years in line with national efficiency assumptions of 4% a year. That would be delivered while offering a guarantee that there will be no impact on quality. I understand that the trust’s board is due to consider a formal offer within the next month, and I welcome that.

The trust is also due to commence negotiations with Siemens on the managed medical equipment deal, which is due to have a benchmarking review in 2012, in line with its 10-year anniversary. Those negotiations are entirely welcome and show that some private companies are already engaged in seeing how better value for money can be achieved for taxpayers. However, I am worried that, as yet, there has been no indication of similar negotiations with the main PFI contractor, Catalyst, a special-purpose vehicle. I take this opportunity to urge it to come to the table and, recognising the exceptionally good deal that it has had at the Worcestershire Royal hospital, to begin talking about how some of the value from that deal could be rebated to taxpayers and the local NHS.

The main shareholders in Catalyst when it was set up were Bovis Lend Lease and the British Linen bank. The latter, via HBOS and the ill-conceived merger that the previous Government forced through, has become part of the Lloyds banking group, in which UK taxpayers now have a significant stake. Surely such banks, publicly bailed out as they have been, should be doing everything in their power to ensure that they are giving good value to the public and the NHS? That should be the case whether or not they hope to win more business from the Government, but I have recently discovered that that same consortium has hopes of winning the contract to deliver a new radiotherapy unit for the Worcestershire Royal hospital.

That radiotherapy unit will be a vital addition to the suite of services that Worcester is able to offer to cancer patients, and I have been campaigning for that for many years. I welcomed the decision of our trust first to approve it and then to locate it in Worcester at the heart of our county. I have been asked whether I am worried that Catalyst is in the running to deliver it. I do not see it as a matter for concern so much as a golden opportunity. I hope that Catalyst can show in its bid for the radiotherapy unit that it is determined to offer taxpayers value for money and to share the benefits of the original PFI contract for the Worcestershire Royal hospital. It must have many advantages in terms of cost and synergies with its existing contracts, so I am sure that it will be as determined as I am that those advantages are shared fairly with taxpayers. I will be only too happy to support my acute trust in its negotiations with Catalyst to make sure the bid offers the excellent value for money that it should.

In particular, I am hopeful that the benefits of this project will be not only financial but will provide the opportunity to address the long-term parking problems at the hospital. I urge it to consider the need for a multi-storey car park at the Worcestershire Royal, and the golden opportunity to deliver that alongside the provision of a new radiotherapy unit. Indeed, more broadly, the Government should recognise that, as we strive to deliver value for money in all our public services, we must take a more aggressive approach in our purchasing and commissioning, negotiating hard to ensure that taxpayers receive good value. I was happy to hear of the hundreds of millions already saved by the Cabinet Office through negotiation with major suppliers, and I hope that the Minister can assure us that that approach will in future be taken to the PFI.

I congratulate my hon. Friend the Member for Hereford and South Herefordshire again on his campaign and exhort the Minister to take on board the many excellent points that have been made in this debate. Not only do we have a responsibility not to repeat the mistakes of the past but we have an opportunity to put things right for the future.

--- Later in debate ---

[Mark Garnier]

Those are the equity sale profits. So those companies are PFI providers who have then sold their contracts, and those figures are the profits they have made. Just to be fair, the figure was 56.3% for Kier Group. Those are pretty sizeable returns.

[Jesse Norman]

It is very important to distinguish two things. One is the internal rate of return, or IRR, of an investment, which is the annual amount by which it gets upgraded; the second is the value that a provider gets when it sells a share. We do not know the answer to this question, but those values are perhaps what they are in part because of the period of time that they have been held. If someone held a share in the London stock market for 10 years, they would see a certain uplift in its value. I do not know what the number is, but it might be 20%, 30% or 40%. It is that kind of thing. The contrast is with the returns that were being made, for example, with the Norfolk and Norwich university hospital, where the refinancing, which loaded up the hospital with £100 million of additional debt, realised an IRR—an annual upgrade in the return to the investors—of 60%. So what my hon. Friend is talking about might be, in fact, a 7% or 8% return each year. We just do not know, and that in itself is a great embarrassment for the previous Government, because we do not have the numbers.

[Mark Garnier]

My hon. Friend makes an incredibly important point. I suspect that what these numbers are telling us is that the annual returns are being treated rather like the dividends on an equity investment in the stock market and these capital returns—the sales of equities—are the capital return that the company gets. So they are already getting their annual rate of return and this money is in addition to what they would expect to receive if they ran the contract to the end. But we need to clarify that, because these are incredibly important points.

The Government are committed to the PFI and, as we have already heard, they have 61 new projects being procured as of earlier this year, with a value of £7 billion. That is not necessarily a bad thing because money is being invested into the supply side of the economy, and we need that investment to support our expectations of economic growth and to sort out the financial mess that the coalition Government have inherited. The PFI allows that investment to happen without any immediate impact on measures of public sector capital expenditure or borrowing. However, the efficiency case for the PFI rests on the model’s ability to allocate risk more effectively than regular procurement. To date, there seems to be no empirical evidence to support any claims that the higher price of PFI finance has offset any reduction in costs.

The efficiency case looks even more fallacious in the light of falling interest rates, as we heard earlier in the debate. The Government can borrow directly at around 3.3% and yet the IRR on a PFI contract is now 4% higher than that. That is a significant risk premium to be paid by the Government, especially when the PFI investor frequently offloads risks on to subcontractors. We have heard that before. Given that we have very low interest rates and can issue gilts on a 25-year basis, should that not be one way to look at financing some of the supply side of the economy?

Coming away from the financial side, I am not sure that some of the users of PFI facilities are always that happy. Wyre Forest was one of the areas that suffered under the cancellation of the Building Schools for the Future programme. I am continuing to work hard to get rebuilding finance for up to 11 of my local schools. We are waiting for the James review on that.

Wyre Forest secondary schools were to be built under PFI contracts. In private chats that I had with various head teachers and governors, they were concerned that a PFI contract would tie their hands financially, limiting their ability to determine their budgets and, therefore, investment in teaching and teachers. We all want new schools, but at what cost to education? PFI has a place in the future in terms of funding investment, but it has to be done at the right price. A lot more work needs to be done on ensuring that we get the end product at the right price. That is why I am incredibly grateful to my hon. Friend the Member for Hereford and South Herefordshire, for taking the initiative to question this important area so closely, and to work so hard for the future of PFI.

--- Later in debate ---

[Jesse Norman]

I am grateful to you, Mrs Main, for permitting me to speak again. I want to thank everyone who has contributed today. It has been a fascinating and extraordinarily enriching debate. I thank the Minister and the shadow Minister. I especially thank the Minister, who is not formally responsible for PFI, for discharging that responsibility today.

I have three short comments. First, the claim that without the PFI projects would not have been built is not true. A cheaper PFI could have been devised under which they would have been built. Secondly, far from being difficult to negotiate, a rebate is under way as we speak, and that process will culminate in the code of conduct that the Minister mentioned. I welcome the support given to the code of conduct by the Minister and other Ministers all the way up to the Chancellor. Thirdly, we need a wider debate, and I hope that we will have it in the main Chamber soon.

Amendment of the Law

Jesse Norman Excerpts

Thursday 24th March 2011 Commons Chamber

[Ed Balls]

In a second, but I certainly will.

In Britain, we have to make some tough choices to get the deficit down. That means fair tax rises and spending cuts, but the Chancellor’s policy is going too far and too fast, and we are paying the price in lost jobs and slower growth.

[Jesse Norman (Hereford and South Herefordshire) (Con)]

I am not sure quite which hallucinogenic substances are being ingested on the Opposition Benches, but if I may ask a question—

[Mr Deputy Speaker (Mr Lindsay Hoyle)]

Order. I think that we will reconsider the suggestion about drug taking.

[Jesse Norman]

I am happy to withdraw the suggestion and to make it clear that the substances in question were not hallucinogenic. May I simply ask the shadow Chancellor—

[Mr Deputy Speaker]

Order. Is there a suggestion that my ruling was wrong?

[Jesse Norman]

indicated dissent.

[Mr Deputy Speaker]

I take it that you have withdrawn the suggestion, Mr Norman. I accept that. Are you now going to pose a very quick question?

[Jesse Norman]

Will the shadow Chancellor enlighten us on why WPP left this country under the last Administration, and why it has now returned, as has been announced in the news today?

[Ed Balls]

I am very pleased that WPP has returned to this country, and I am very disappointed about the 3,500 jobs lost at Pfizer in Kent. That is why we need to be careful about how we proceed.

I have to say that I have never in my life taken a hallucinogenic substance. I am happy to take any intervention from Government Front Benchers on that subject.

--- Later in debate ---

[Vince Cable]

In the earlier part of his comments, the hon. Gentleman was right to acknowledge how important interest rates are. He is also right to say that because of the badly damaged banking system, small companies have an extreme problem with lending. That is why the Chancellor and I have been dealing with the banks to try to get them to reach an agreement, which they now have, to extend considerably the amount of lending to small and medium-sized enterprises. That was one of the earliest decisions we had to make—to focus on access to capital.

While we are dealing with the issue of what has to be cut, I would like to ask the Opposition what they would do. The right hon. Member for Wolverhampton South East (Mr McFadden) wants us to run a bigger deficit. What would the Opposition cut? It is a question I often pose to my opposite numbers in the BIS team. They had planned a 25% cut in departmental spending, which is what I am doing. We are cutting a lot of things—very painfully—so I ask the Opposition what they would do, but we have not yet had a single suggestion about what they would do instead.

Government Members often raise that sort of question, but it is becoming obvious that the natives opposite are also getting restless. I noticed that the right hon. Member for Salford and Eccles (Hazel Blears)recently said that the Labour party needs to be

“explicit about cuts… The public expects us to at least give a broad direction—but I think they are worried that we haven’t been as clear as we ought to be”.

Another senior Labour Member of Parliament—who, perhaps wisely, remained anonymous—told the Financial Times:

“It can’t be that hard for us to say what we would cut, or at least give a few examples, for goodness’ sake.”

[Interruption.] Beneath the shouting, those are the questions that Labour Members are asking themselves, and they are absolutely right to do so.

[Jesse Norman]

On the question of evidence, is my right hon. Friend aware that institutions as wide ranging as the Institute for Fiscal Studies and the Bank of England have calculated independently that we would be borrowing between £7 billion and £10 billion more if interest rates had been allowed to stay at the same level, without the fiscal austerity programme that was introduced by the Chancellor?

[Vince Cable]

Yes, indeed. There is clearly a close link between the level of the budget deficit and interest rates, both long-term interest rates in the markets and short-term interest rates set by the Bank of England. That is why maintaining a monetary policy that is supportive of growth—which is what we are doing—requires fiscal discipline.

Let me now deal with how we can achieve sustainable, balanced growth, and what “sustainable, balanced growth” actually means.

--- Later in debate ---

[Jesse Norman (Hereford and South Herefordshire) (Con)]

I speak not merely as a member of the Treasury Committee but on behalf of tens of thousands of working people in my county of Herefordshire. It is a county where the average income is £21,000, where residents face the very high costs of living in a rural area—especially for fuel and transport—and where there is a very high relative number of small businesses. These are real people putting in the hours to support themselves and their families at a difficult economic time.

I welcome the Budget and especially several measures that will have a direct impact on the well-being of my constituents. The first is the cut in fuel duty, which we have pushed for very hard with the Treasury. The second is the rise in the income tax threshold, which will take many Herefordians out of income tax all together. The third is the support for small businesses and entrepreneurship; for apprenticeships; for local housing; for the university technical colleges; for the green investment bank; and, finally—a measure that is perhaps as important as any of those—for filling in potholes, an area in which Herefordshire rather specialises.

The Budget marks a further decisive step in dealing with the disastrous legacy of the previous Government. We know the brute economic facts, but it is important to remind ourselves of the wider picture: that this country now faces paying nearly five times more in debt interest every day than it does on care for the elderly; and that we have, in addition to the disclosed public debt numbers, £200 billion-plus of off-balance sheet debt for the private finance initiative. The wider story, however, concerns the atmosphere of unreality on the Labour Benches, and particularly on the Front Bench, which one might describe as a fog enshrouding planet Balls.

The intention seems to be to rewrite history and to deny, as the shadow Chancellor did today, the fact that in 2007-08 the previous Government created a 3% budget deficit at a time of 3% economic growth—a structural deficit that had existed at that point for seven years. It is unrealistic to pretend that America and Germany are parallel cases to ours in terms of economic recovery. America has the global reserve currency in the dollar and therefore has a far greater intrinsic ability to inflate its way out of trouble, and Germany has benefited massively over the past year or two from the expansion in the American purchasing of industrial goods. Their situations are not parallel to ours. The truth is that our economy is grossly unbalanced and that that is what exposed us to the situation we find ourselves in.

Also unrealistic is the Opposition’s refusal to acknowledge the weight of expert opinion supporting the present policy, including from the G20, the IMF, the OECD, the US Treasury Secretary and even Tony Blair. The Bank of England testified only a couple of weeks ago that without the current austerity measures, our borrowing costs would be 3% higher. Given the amount of refinancing we have to do over the next two or three years, that implies additional borrowing of some £10 billion. If one has any doubts about this issue, one need only look at Portugal, which is close to economic meltdown.

Finally, we have the shadow Chancellor’s denial, which we heard again today, that any deficit ever existed. As they say, “De Nile is not just a river in Egypt.” [Interruption.] I am in town all week! Labour’s strategy has been pretty clear: ignore economic reality, disavow the previous Chancellor’s own plans to make cuts and increase taxes, attack the coalition wherever possible and hope the voters do not notice. The result has been a refusal to articulate any constructive, concrete proposals at all. I note the contrast with the Republicans in the US, who have opposed the Democrats with great vigour. Whatever their personal merits, the fact is that the Republicans in Congress have created positive alternative plans that have to be debated. That is in sharp contrast to the actions of the Opposition in this House.

The truth is simple: this country has suffered the biggest economic shock since the great depression. It will take years to recover fully from that shock and the world’s economic system remains very fragile. The USA took slightly longer than a decade to rebuild after the great crash of 1929. Japan started to recover from the asset-based deflation of the early 1990s only a few years ago and it will be a doubly cruel blow if the earthquake sets back its recovery any further. The idea being pushed by the Opposition that this Government are in any way responsible for the current economic mess is laughable.

[Martin Horwood]

The hon. Gentleman makes a powerful case about the Opposition’s economic strategy, or lack of one. Does he agree that what they might also have done is risk an increase in interest rates that would have hit everyone with a mortgage, everyone with an overdraft and every new business seeking to borrow?

[Jesse Norman]

I thank the hon. Gentleman for that intervention. It is certainly true that if we had higher borrowing costs and a tighter monetary policy, interest rates would be higher, mortgage rates would be higher and the average mortgage holder and household would be suffering considerably.

I welcome the fact that the Budget is a reforming Budget that has not shied away from taking difficult long-term decisions, such as the proposals to merge income tax and national insurance. A properly functioning system of social insurance could have been a very fine thing—indeed, that was what Beveridge originally anticipated—but the system has been allowed to slip away from the contributory principle into a disguised income stealth tax. The new reform will bring home to people just how heavily they are taxed and will encourage them to demand better public services for their money.

In short, the country is emerging from a time of fake capitalism that was matched by fake government—a time when Fred Goodwin could destroy an august 200-year old financial institution, squander billions in shareholder value and then walk away with a fortune and have a Minister sign off on his pension. The economy became grossly unbalanced in that time and executive compensation soared both inside and outside the financial sector with little or no relation to performance. It was a time of increased complexity, short-termism, bureaucracy and regulation. As every Herefordian knows, what we need now is real capitalism, with real people taking real risks, investing real time in real work and reaping real rewards for their efforts, and this Budget is a very important step in that direction.

Amendment of the Law

Jesse Norman Excerpts

Wednesday 23rd March 2011 Commons Chamber

[Sir Stuart Bell]

I have seen that study. I have also seen the study by PricewaterhouseCoopers about the impact on the north-east of the various deficit reduction plans.

May I, without in the least way being sycophantic, congratulate the Leader of the Opposition? He made a short and precise speech but he hit every nail on the head that needed to be hit. Growth is down. Snow or no snow, we entered into zero growth in the last quarter. Where is growth going this year? It is at 1.7% for the year. How does that compare with Germany, where there is 3% growth?

[Jesse Norman (Hereford and South Herefordshire) (Con)]

Will the hon. Gentleman enlighten the House about when in any recovery from any major asset-based deflation growth has returned within even a five or seven-year period? One thinks of the 1930s, and there was no return to growth until the end of that decade, and of Japan, where there was no return to growth until the beginning of this decade. How can he possibly attribute the situation as regards growth to this Government in such a way?

[Sir Stuart Bell]

I am grateful to the hon. Gentleman for his point, because we have argued consistently—and so has the international community—that we had a financial crisis from 2008 and 2009 and that out of that financial crisis, without referring to tsunamis or earthquakes, there have been many aftershocks and it will take much time to get over that. I agree with that point but it was not us who said that we would raise growth last year—it was the Conservative Government. The hon. Member for Chichester made an excellent point when he said, quite rightly, that under a Labour Government we had 40% debt in relation to gross domestic product. My recollection is that for some years it was 37% and it was the financial crisis that pushed it up to where it was.

--- Later in debate ---

[Sir Stuart Bell]

We had no difficulty with the structural deficit because we believed in infrastructure projects. We believed in public-private initiatives and off-balance sheet finance, which was exactly the same as what the Germans were doing. At the time, it was thought a fine way of doing things and it is still a fine way of doing things. In my constituency, we got the first public-private initiative in the James Cook university hospital, so we have nothing to regret about what is now called the structural deficit. As I said earlier, the structural deficit is like any other, it is part and parcel of the fullest objective. The right hon. Member for Wokingham (Mr Redwood) was right to say that, while we are tackling that particular deficit, public expenditure in other areas is going up. We need to get the balance right, but that is not happening at the moment.

The Chancellor said that we had moved from fourth in the league of competitiveness to 12th and made a big thing about competitiveness, but he did not mention the eurozone, not surprisingly. He did not mention the conference tomorrow and the day after when the 17 members of the eurozone will get together to create a competitiveness pact. Why are they doing that? Because they wish to increase their growth and exports, and we are in competition with them. We are in competition with Germany and France and we will be in competition with those other countries.

The Chancellor talked about Greece, Portugal and Spain, but why does the fourth-largest economy in the world have to compare itself with Greece, which has a deficit of 150% against gross domestic product, not the 60% or 50% we are talking about? Why does our nation state have to be compared with a small country such as Greece? On that basis, we had £67 billion-worth of deficit reduction in one Budget. Today, the Chancellor was very gracious in saying that, now he has taken all that money out of the economy, he will not take any more out. He might have said, “I’ll do you all a favour: I’ve hit you on the head with one big hammer, so I’m not coming back with another.” How gracious of him to destabilise, within the space of nine months, our economy. That is what he has done and is continuing to do. He will certainly rebalance the economy—away from the welfare state, the public sector and the work force of our country—and he will weaken the fabric of our country. He will weaken the standard of living of all our people.

[Jesse Norman]

It is not the Chancellor who has associated our economy with those of Portugal, Ireland, Greece and Spain, but the international markets. When the Governor of the Bank of England was before the Treasury Committee two weeks ago, he and his team confirmed that without a package of fiscal austerity measures, this country would be borrowing in the international markets at a rate 3% higher than we currently are. That is the Bank’s official position and that is why those difficult measures have been taken.

[Sir Stuart Bell]

I am not going to go down the route that the shadow Chancellor of the Exchequer might have gone down at one stage of attacking or criticising the Governor of the Bank of England. That would not be appropriate for me. The advice that was given to the Government, when they came to government, was very severe and we were compared with Greece.

The hon. Member for Hereford and South Herefordshire (Jesse Norman) makes an interesting point. At what point in our history did we turn over our economy to the rating agencies instead of saying, “It’s only the rating agencies”. When the rating agencies call the Élysée palace, they have a fit of panic there, asking, “You’re not going to reduce our rating are you?” Why did we, as a nation state, give our economy over to a rating agency—to Fitch, Moody’s or Standard and Poor’s? Where was the Chancellor of the Exchequer who stood up and said, “No, I am not going to do that”? The rating agencies had accepted the Labour Government’s deficit reduction plan and were at ease with it. They were happy with the four-year programme and it was the current Government who fell back to the age of Lord Lamont and John Major, whom my right hon. Friend the Member for Doncaster North (Edward Miliband) has mentioned, and ideas such as, “If it’s not hurting it’s not working”.

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[Mr John Redwood (Wokingham) (Con)]

I remind the House that I offer industrial business advice to a Swedish, quoted international industrial group and investment advice to a British investment company.

Some Opposition Members have expressed displeasure that Government Members should have mentioned the circumstances in Greece and Portugal. The Opposition rightly remind us that we have a much bigger economy than those of Greece and Portugal and I am pleased to say that ours is also currently better managed. Those points are important because our public deficit was larger even than theirs, as a proportion of national income, when the big deficit reduction programme started. I praise my right hon. Friend the Chancellor for seeing that his single, central task, day in, day out, month in, month out, year in, year out—indeed, the five-year burden for all of us in the House—is to get that deficit down before it kills our public finances and our economy.

If anyone thinks there is no risk, I invite them to visit Greece, Portugal or Ireland and see what happens when a country ignores a deficit for the best of reasons and says, “I do want to spend a little more on a good public cause so I will borrow it to spend it.” Of course, we all have great causes on which we would like to spend more money. Borrowing is so often the easy option, but when a country gets to the point at which it is borrowing too much, it does not just destroy the general economy and place too big a burden on those who have to pay the taxes and interest charges—in the end, it brings down the public sector as well, with far bigger cuts and far less favourable choices than we have when we take matters into our own hands by planning a steady deficit reduction.

We are debating, in a relatively civilised atmosphere and in a relatively sane and sensible way, an economic position about which there are strong disagreements. However, there is no overall disagreement about the imperative to avoid big rises in bond rates and interest rates and to get on with some kind of deficit reduction. It is particularly poignant that we are having this debate on the same day that the Portuguese Parliament is meeting to discuss not its first, second or third, but fourth package of emergency, deep, damaging public spending cuts and unaffordable tax increases. Such is the plight that its economy has been driven into by reckless overspending and too much borrowing and, of course, by being in the euro area.

[Jesse Norman]

Does my right hon. Friend agree that to answer the question of the hon. Member for Middlesbrough (Sir Stuart Bell), who asked when the rating agencies took over, one need go no further back than 1949, 1969, and 1976 to 1979, when there were runs on the foreign exchange markets under Labour Governments?

[Mr Redwood]

My hon. Friend is quite right, but the Labour party could point to one or two examples under Conservative Governments, so I do not want to be drawn too far down that historical path. We can see what we need to see by looking at the modern reality. As my right hon. Friend the Chancellor said, fortunately, British bond rates—the rate that we have to pay to borrow money for public purposes—are much closer to those in Germany than those in many other countries in Europe. They are under half the level of those in troubled Portugal. The Portuguese 10-year rates went above 8% today. I stress to beleaguered Portuguese parliamentarians, who are battling over whether a general election is the answer to their problems, that if they do not take dire and immediate action, their country simply will not be able to borrow at an affordable rate of interest. They cannot go on spending the extra 10% of national income that we are spending, which is borrowed, to tide us through and get us to better-managed times.

My right hon. Friend the Chancellor, having set out a pathway for tackling the deficit, was right to turn to the question of how he can accelerate growth. The truth of the five-year deficit programme is simple: we need well-above-average growth in the last three or four years of the programme to deliver the numbers in the Red Book, which are similar to those in the Chancellor’s first edition of the Red Book last summer.

To remind the House of the scale of the task, the Government plan to spend £70 billion a year more, in cash terms, in the fifth year of the plan—2014-15—than in the last Labour year; that is not a big increase, but there will be pressures because of it. They plan to get the deficit down by increasing the tax revenue collected in the last year of the plan to an eye-watering £175 billion more than in the last Labour year. We believe that we have seen all the important tax rate rises that the Chancellor thinks are needed to do that; the rest depends on the above-average growth that is still in the official forecasts of the Office for Budget Responsibility.

--- Later in debate ---

[Mr Redwood]

If those countries come up with good ideas, we can adopt them, and if they come up with bad ideas, we would be wise to sidestep them; that is exactly the freedom that I and others have argued for passionately over many years, and that the Government wish to enjoy if all goes well.

The hon. Gentleman also said that the reductions could prove difficult. Believe it or not, I did not become a Member of Parliament to have teachers sacked from my schools or doctors sacked from my surgeries; I want them to be well paid and well funded, and I want sensible growth in numbers where there is extra demand. We are all of that view—it is quite misleading of the Opposition to suggest that some of us do not appreciate that and do not want that for our constituents—but it has to be affordable. It has to be within the power of the free enterprise part of the economy to pay for that out of reasonable taxation in a way that does not damage our growth; that is so important.

The Government have managed to find an extra £70 billion of cash spending for the fifth year of the plan, compared with in the start year. It is crucial that we keep public sector costs down, so that the maximum amount possible can go to improving service and quality, and, in some cases, to improving the amount of service, and the minimum goes on extra costs and extra inefficiencies. All parties will say in office that they want more efficiently run public services, but they have to will not only the end but the means. That is why the reforms on which the Government are embarking are so important. It is crucial that the Government listen, and that sensible criticisms be taken on board, but public services have to be reformed so that we can say to people in five years’ time, “You are getting more for that £70 billion. We haven’t had to cut things that really matter, because we have managed things better and have found a bit of extra money.”

[Jesse Norman]

Is my right hon. Friend aware of the enormous interest in the private finance initiative community in reform of the PFI? A succession of chief executives of PFI companies have asked me, “Why can we not be allowed to save money?” The reason is the enormously expensive procurement process. Not a single school has been built recently that does not have an atrium, and that is because it has been decided that schools, which have nothing to do with corporations, must have corporate atriums. Nothing could be sillier or more resistant to good Government spending.

[Mr Redwood]

My hon. Friend is quite right. Improving the quality and cost-effectiveness of our purchasing is crucial in Government. There are many opportunities; PFI and public-private partnerships provide some good examples, but so does general purchase. It would speed up the deficit reduction if there were a stronger moratorium on purchasing items and supplies where there are already stocks. Any company undertaking the kind of radical turnaround that the country is trying to achieve would immediately freeze all unnecessary purchases and make people run stocks down to save money.

Where I have had answers to my questions on this subject, I have found that the current rate of natural wastage of staff in core Departments is running at about 6% per annum; it was about 4% in the first eight months. Quite a number of those posts have been filled by taking on new people from outside. I urge my friends on the Front Bench to get more of a grip on that, because the easiest way of reducing the administrative overhead on the scale that they want—the least painful way for their staff, who need their morale to be up—is to not replace people who leave and not to make others redundant. We cannot afford the redundancies. If we make greater use of natural wastage, Ministers can say to their staff that it means better opportunities for promotion and a change of job. If the post vacated is not essential, it should be removed; if it is essential, we should appoint someone from inside and remove some other, less important, post. That surely is the civilised, sensible way to tackle the necessary task of cutting the administrative overhead. If the Government can cut their administrative overhead by the very large 30% that they are talking about, it takes the pressure off cuts in the areas where none of us wish to see them—in the schools and hospitals, the front-line services that matter so much.

The question that I was about to ask before the interventions was about the international context. How easy is it going to be for the Government to have the three or four years of above-average growth which are so crucial to the strategy? I must warn those on the Front Bench that I fear that the world background will get more difficult going into 2012 and 2013 than it is at present. There has been a prolonged boom in the emerging market world, and we now see China, India and Brazil lifting their interest rates to very high levels. They are desperately trying to squeeze inflation out of their system, so in a year or so we must anticipate some fall-off in demand and spending power growth rates in those big emerging market economies.

The United States economy will have a good year this year, by the looks of it, on the back of a lot of money printing, low interest rates and other matters. That comes to an end in the middle of this year, so by next year we will see a slower rate of growth in the United States of America as well. Were the situation in the middle east to get worse, and the damage from politics to spread into oilfields outside Libya, we could have another unpleasant external shock on the oil price, which would also serve to impede the growth of the world economy.

The conclusion that I take from this is that the world economy does not look as though it is going to go back into another deep recession—we are not going to have that kind of impossible situation—but the world economy is not going to provide the impetus that it is currently providing. It may not feel that great, but it is providing quite a bit of impetus at the moment. It will provide less impetus next year and beyond. That means that the Chancellor must intensify his pursuit of measures that make the UK that much more competitive and that much more successful.

Oral Answers to Questions

Jesse Norman Excerpts

Tuesday 22nd March 2011 Commons Chamber

[Mr Gauke]

I am grateful to the hon. Gentleman for asking that question. That legislation will remain on the books and—I do not think we have announced this formally before—we will put it on a permanent footing.

[Jesse Norman (Hereford and South Herefordshire) (Con)]

Is my right hon. Friend aware that the Governor of the Bank of England confirmed to me recently in the Treasury Committee that without the current austerity measures, our international borrowing rates would be some 3% higher?

[Mr Osborne]

Of course, the Governor of the Bank of England is one of many people who have pointed out that there was no credible plan when we came into office and that we have put a credible plan into place.