Budget Resolutions and Economic Situation

Lord Clarke of Nottingham Excerpts

Tuesday 22nd March 2016 Commons Chamber

[Mr Kenneth Clarke (Rushcliffe) (Con)]

I congratulate my right hon. Friend the Chancellor on reviving the tradition of the Chancellor speaking on the last day of the Budget debate. It is one of the many things that my successor, Gordon Brown, should not have abandoned. I think we will agree it has enlivened the debate very considerably, compared with what usually happens. I also congratulate him on his extremely effective and spirited performance in defence of his Budget. He rightly took pleasure in his achievements so far in his term as Chancellor.

It is remarkable that we are having such a lively debate on the Budget at a time when, as we have just discovered from listening to the shadow Chancellor, there is absolutely no alternative economic strategy or policy on offer—no doubt my party will make up for that lack of challenge in its own curious way, but meanwhile I congratulate the Chancellor on where he has got so far.

In case the Chancellor is worried about the controversy surrounding the Budget, let me tell him that it is not unusual. I have been here so long that I have seen much worse. Geoffrey Howe’s 1981 Budget was extremely controversial, and passions ran higher, and far more seriously, than they have on this occasion. Nigel Lawson had his Budget speech interrupted, and the House was suspended because of disorder, when he tried to cut the taxes on the higher paid.

I had merely one defeat on a Finance Bill. I lost to a rebellion on the Floor of the House. My mitigation was that it was not my proposal—it was Norman Lamont who proposed VAT on domestic fuel—although I still think it was perfectly sensible. I immediately came back with more tax proposals to get the revenue I had lost, but my right hon. Friend is quite right to wait for events between now and the autumn statement and then to continue the fiscal discipline he has rightly maintained so far.

[Geraint Davies]

The right hon. and learned Gentleman probably knows that the Royal College of Physicians has announced that 40,000 people are dying a year, at a cost of £20 billion, from diesel emissions and pollution. Does he think the Chancellor should reconsider promoting green transport, public health and savings and rebalancing the tariffs on electric, diesel, hydrogen and petrol in order to save lives and money?

[Mr Clarke]

We have been extremely active on that front, but scientific knowledge is moving on. I remember when diesel was positively subsidised by Governments because it was thought to be more environmentally friendly. In a more appropriate debate, those issues are well worth pursuing. I understand the problem. I turn to what the Chancellor has to devote himself to: the Budget judgment and its implications for the economy. The Chancellor accepted, as he has to, that that is his principal responsibility. The Chancellor has the most difficult job in government, because he has to spend all his time challenging all the lobbies that demand extra expenditure and challenging his colleagues to find savings or improvements in the budgets of their Departments in order to close the gap.

What this Chancellor has not done is take a short-term view at any stage. That is why he has achieved such remarkable economic success. What I liked about his Budget speech was when he stressed how it was for future generations. What he said a few moments ago—a soundbite, if I may say so, which I had not heard before: there is no social justice without sound finance—is one of the best summations of one nation Conservatism I have heard for a very long time.

[Keith Vaz (Leicester East) (Lab)]

rose—

[Mr Clarke]

I shall be in trouble with the Speaker and everyone else who wants to speak if I give way. Otherwise I would love to give way to the right hon. Gentleman.

[Mr Speaker]

Let me say to the right hon. and learned Gentleman that he has never been in trouble with the Speaker.

[Mr Clarke]

I am trying to be reasonably concise rather than too expansive. I apologise to the right hon. Member for Leicester East (Keith Vaz).

I tried to think of what I would have done had I been Chancellor in the present situation. Before the Budget was delivered, I expected a much tougher Budget. Thank the Lord that I am not in my right hon. Friend’s position; I never had to face problems of the kind that he inherited from his predecessor. My instincts are classic, traditional stuff for anyone for whom the iron of the Treasury has entered the soul. This is the first Budget after an election, we have not made fast enough progress in eliminating the deficit and debt, and we will not have sound future progress with a modern rebalanced economy unless we have done that, so my first thoughts would have been to get on with it.

I would have introduced a Budget, as I frequently did in my time, raising taxes and cutting public expenditure. I am glad to hear, for reasons that I shall return to later, that my right hon. Friend has committed himself to his continuing long-term objective, and has decided to pause. I thought this was going to be a popular Budget. People speculate as to why we chose an easier path. [Interruption.] The Chancellor has in the short term relaxed fiscal policy. It is good that the Bank of England is retaining a very relaxed monetary policy, but it will tighten it if we were to abandon fiscal discipline. In the short term, my right hon. Friend has lowered taxation and lowered Department spending targets for cuts. He has eased off on public spending and lowered taxation. I was surprised by that.

I assume that this was partly caused by the considerable uncertainty that the economy faces. No one has addressed that issue in any of these debates, although the Chancellor did in his Budget speech. The global economy is slowing down, and mainly as a consequence of that, the British economy is slowing down. The uncertainties for our economic prospects over 2016 are very concerning. There are many uncertainties, all of which would threaten most of the developed economies if things go wrong. We still do not know whether China, for example, is going to achieve a soft landing; I think it will. In the emerging markets—there are associated problems with emerging market debt—there is volatility and some unsoundness in the financial world.

And there is the risk of Brexit. I am very glad that the Governor of the Bank of England decided to reassure people by setting out publicly that he was prepared to take action if we had a flight of capital from this country should people be alarmed about the referendum. So far, such risk has led only to a big decline in the value of sterling and the freezing of most people’s investment plans. One would be a bit of an idiot to invest in the British economy in anything that had the slightest risk when we do not know what the circumstances and trading patterns are going to be in six months’ time.

I assume one reason why my right hon. Friend took a more relaxed view than a traditional Chancellor would have done and did not make those big spending cuts or increase taxation—in fact, he eased taxation for businesses and the low-paid—was to avoid the mistake of being too severe when circumstances might well worsen as the year goes on. That underlines the point that, in the long term, one cannot forecast and fix these kind of things further forward.

A great deal of the debate around the Budget centred on the forecasts and the Office for Budget Responsibility. The fact that the OBR’s forecasts keep changing so rapidly just underlines what I am saying about the uncertainties for the immediate future. Fortunately, thanks to my right hon. Friend, the British economy has been the fastest growing developed economy in the last 12 months, and we are probably less at risk than most others. However, the fact remains that this was a time to be cautious. Personally, I would have maintained the squeeze—it has all been put off until the latter half of this Parliament, and into the next if we are not careful—because so long as the economy continues to grow, and there is a reasonable prospect that it will, we should not be running a deficit of this percentage of GDP, piling up more debt for our successors.

My doubt is whether this pause was totally justified. I accept that it probably was; but certainly we must resume things. I listened to a shadow Chancellor who plainly does not have an idea in his head about how he would save any money or do anything other than continue spending and borrowing. It is totally profligate stuff, as we have seen very much in the past.

I am very glad that my right hon. Friend made the changes to business taxation. When I was in office, I put up taxes, but I never put up business taxes because I was trying to encourage growth. We still need to make our economy stronger, so it is welcome that the Chancellor stepped in, keeping our corporation tax level at a competitive rate. I particularly welcome the help he has given to small and medium-sized businesses. Encouraging business is, of course, the best way of protecting ourselves against economic risks for the future in this uncertain world.

My right hon. Friend has not been wholly generous towards big business. He and the Government have been leading in the OECD on attempts to tackle the problem of tax evasion and tax avoidance on the part of big multinational companies. He has incorporated the first serious attempt for a long time to attack the problems of tax relief on interest when it is exploited and misused, on royalties and on past losses. I get told a lot about how the Chancellor should be collecting more from big international companies, but no Government have done a blind thing about tackling this tax avoidance for the past 20 years. This Government are leading international discussion towards agreement, which is what is needed, and in this Budget, the Chancellor has started to act.

We are told that we are relieving tax on the rich, but everybody knows—I certainly know, and not just from the newspapers—that the Treasury has been looking at the idea of doing more on tax relief for the wealthy when they contribute to their pension funds. If they have very high earnings, tax relief on pension funds is the way of avoiding tax and it is a great way of ensuring that 45% tax is not paid on a very considerable part of one’s income. That was the case, but we have now put a cap on it. I feel that we are still rather too generous, but in today’s politics that was another lobby, and when someone leaked it, it was seen off by the pensions industry in about 10 days flat. So my right hon. Friend was not allowed—on that occasion, I suspect, because of fear about what would happen on this side of the House—to proceed with fairly modest changes in tax relief for the rich.

As far as other tax moves that my right hon. Friend has made, on personal allowances and the thresholds for the higher rate, because the higher paid—the rich—now pay such a huge proportion of tax, it is almost impossible for Chancellors to ease the tax burden on the low-paid and the ordinary citizen without it being possible to demonstrate mathematically that they have done quite a lot for the rich as well. If Chancellors bought that argument every year, they would never move the threshold at which people start to pay tax, and they would never raise the 40% rate for the people who are currently in modest jobs and find that they are subject to a marginal rate of 40% because Gordon Brown started the habit of freezing the threshold in order to secure stealth taxation. Raising these thresholds is welcome, and I am glad that my right hon. Friend felt able to do it.

Other measures should be seriously canvassed. The pensioner benefits, to which I am entitled, are discussed every now and again. I am always told that we have put things in a manifesto, but I have yet to meet a candidate or an elector who read the last general election manifesto, which, although it seems to contain considerable detail, was certainly not crucial to my constituency victory, or, I suspect, to anyone else’s. We have ruled out ever raising income tax, ever raising national insurance, ever raising VAT; we appear to have ruled out doing anything at all that would stop the very wealthiest people having free bus passes and receiving the winter fuel allowance. I am not going to advocate the breaking of manifesto pledges, but I know of no prosperous pensioners, and certainly none who are in full-time employment like me, who would object to, at the very least, those benefits being made taxable.

I think that there is a case for considering those measures and various alternatives, but I will not risk going into it any further, first for reasons of time, and secondly because, given today’s populist politics, I fear that if I do, some lobby yet unknown to me will descend on me in the next two or three days in order to mount a campaign, through our ridiculous media, to blow that case out of the water.

Of course we must judge the Budget on its own merits, and I understand why my right hon. Friend has got to where he is. No two Chancellors have ever done the same in respect of every measure. Within our system, a Chancellor makes an overall judgment, and this Chancellor retains my full confidence: I am prepared to support his judgment.

I have another reason for supporting my right hon. Friend’s judgment. As I have already said, the present Government are in a strange position. Absolutely no alternative proposition is being advanced by anyone outside. Some pundits, and, as a result, some politicians, seem to believe that we are wrong to maintain our target of a balanced budget over the cycle, or however we choose to put it. They suggest that, actually, there are no problems, and the answer is simply always to run a deficit, on and on and on. After all, it is free money. It is a bit troublesome that interest rates might return to normality one day, but meanwhile, just let it pile up: it will sort itself out.

People on the far right say “Tax cuts, that is all you want. Tax cuts will inspire such tremendous entrepreneurship that jobs will be created, wealth will be created, and it will all be paid back. You will not be in debt for long.” On the left, the argument is “Boost every welfare payment, increase public spending on every public service, and that will generate such demand from the grateful taxpayer recipients that they will pump it into the economy, and it will pay for itself.” That is Mickey Mouse economics, as practised by the last Labour Government, and it got us into this trouble that we are still—thanks to my right hon. Friend—getting out of now.

As for my final reason for backing my right hon. Friend’s judgment, his record, after eight Budgets and six years, is absolutely amazing. I must concede, having been one of his competitors at one point, that he is far the most successful departmental Minister in this Government to date. If anyone had said, when he took over the state of affairs that he took over more than eight Budgets ago, that he would stand here, in charge of the fastest growing economy in the developed world, with near-full employment and with employment at record-breaking heights, able to demonstrate the steadily improving state of not only the public finances but the condition of the poor, as well as the alleviation of social problems across the country, that person would not have been believed. It is a quite remarkable performance.

So I back my right hon. Friend’s judgment. I am also delighted that he is helping us all to avert the risk of Brexit in the forthcoming referendum, because, if the public were so ill advised to vote for it, that would be the only thing that could really send this economic recovery off the rails in a big way.

[Several hon. Members rose—]

--- Later in debate ---

[Mr Steve Baker (Wycombe) (Con)]

I rise to support the Budget and, in particular, to welcome the Government’s supply-side reforms. This has been a dramatic Budget, and I would be failing the Government if I did not concentrate on the areas of drama. First, on the disability reforms, the challenge before the Government is clear: to deliver a policy that we can all be proud to defend in our constituencies and in front of any objective scrutiny. I do not think we would have been able to do that if the Government had not wisely made the decisions that they have over the past few days.

When I look at page 150 of the OBR’s report, on the successive forecasts for spending on disability benefits, I can see that the Government’s envelope within which to deliver this humane disability policy is very clear. When we came to power in 2010, the Government were spending £12 billion on disability benefits, which rose to £16 billion by now, which is an increase of a third. The figure is forecast, with the reversal of the PIP measures, to reach £18 billion by 2020-21. It is clear that the Government have an envelope within which to work to ensure that we have a world-class policy that any of us can defend, even in an environment of fierce and partisan political attack.

I signed the two amendments on VAT to highlight the extent to which VAT is controlled by our membership of the European Union. Neither amendment has legislative effect. I congratulate the hon. Member for Dewsbury (Paula Sherriff) on her amendment, which, as she said, makes clear our intent to zero rate tampons and other sanitary products. Of course, both amendments are pursuant to Government policy, and this is the bitter irony of our membership of the EU. We had to have a dramatic row over VAT in the context of an EU referendum in order to secure the following commitment from the European Council:

“The European Council notes that the Commission intends to publish shortly a communication on an action plan on VAT. It welcomes the intention of the Commission to include proposals for increased flexibility for Member States with respect to reduced rates of VAT, which would provide the option to Member States of VAT zero rating for sanitary products.”

That is welcome, and it is clear that the Government’s policy and the House’s wish is that sanitary products should be zero-rated. It is welcome that the Government have secured this change of EU policy but, particularly as a participant in the campaign, I do not want us to have an EU membership referendum every time we want a different policy on our second largest tax.

[Mr Kenneth Clarke]

Will my hon. Friend accept that British Governments have always supported the idea of having an EU framework on VAT? Otherwise, the problem is that there is pressure on Governments to compete with each other in lowering the tax on selected products when they think that their manufacturers or producers will benefit. Also, it is very difficult to operate an open trade area if everybody is going for competitively different tax rates. If we go too far down that path, the main beneficiaries are smugglers.

[Mr Baker]

My right hon. and learned Friend raises some interesting points and, although I am grateful for the additional minute for my speech that he has given me, I cannot touch on all of them. He illustrates the difficulty of operating a customs union among interventionist nation states. The old doctrines of liberalism did not require that one got rid of non-trade barriers, for the most part. There were no non-trade barriers because laissez-faire was the norm. I abridge an argument that could be made at much greater length, but at the heart of the exchange that we have just had is the difficulty involved in interventionist nation states attempting to engage in free trade. In a world of globalisation, air travel and the internet, we need some degree of harmonisation on a global scale, provided that that enjoys democratic consent. That is probably a subject for another debate, but I am grateful to my right hon. and learned Friend for his intervention.

Until the VAT directive 2006/112/EC is changed, it will be technically unlawful under EU law for any amendment to be introduced in UK law, even if it is not applied and takes effect in the future. That is the situation that we face. It is similar to the situation concerning insulation products, on which a judgment in the European Court of Justice on 4 June 2015 ruled that

“The United Kingdom cannot apply, with respect to all housing, a reduced rate of VAT to the supply and installation of energy-saving materials, since that rate is reserved solely to transactions relating to social housing.”

That is the position in law while we are in the EU. Although I hear what my right hon. and learned Friend says, it is a fact that while we remain in the EU, we cannot control what is currently our second-biggest tax. I am grateful that we have had this opportunity to put this part of the EU membership debate on the public record and have it discussed in the media. I am particularly grateful that the Government will not be opposing either amendment. If there is a Division, I shall certainly vote for amendment (a) and I shall probably abstain on amendment (b).

Perhaps the most dramatic aspect of the Budget is a subject that I have talked about at every Budget. It is a subject that I mentioned in my maiden speech—the insane state of monetary policy all around the world. If the European Central Bank was printing €80 billion of new money every month in paper and shipping it around the continent in articulated lorries, it would already have destroyed faith in paper currency. Yet, because the process is one of buying Government and corporate bonds, we simply notice a recirculation of money and celebrate the coarse aggregate results. In 25 seconds, I cannot give a lecture on capital-based macro-economics—[Hon. Members: “Oh!”] If Opposition Members would like to call a Back-Bench debate on the subject in their own time, I would be glad to give them the lesson. I welcome this Budget, but its dramatic consequences will be felt much later as a result of easy money.