Finance Bill

Debate between Martin Horwood and Michael Meacher

Tuesday 6th July 2010 Commons Chamber

[Mr Meacher]

My hon. Friend helpfully assists my argument.

I want to be fair and point out the Government’s proposals on corporation tax and the small companies tax to get firms investing, as well as the national insurance cuts for firms outside the south-east to aid new hiring. That is all very welcome, but those measures will be more than cancelled out by the additional Tory spending cuts of £32 billion a year by 2014-15, and the additional £8 billion in tax increases. Let us take a highly topical example. It has been pointed out that the construction industry gets 40% of its work from public sector contracts. The 700 cutbacks in the schools building programme announced yesterday, and the nadir in house building, which is now at its lowest ebb since 1923, will almost certainly cost tens of thousands, if not hundreds of thousands, of building workers their jobs over the five-year period.

I shall give the House another example. According to the Treasury Red Book, the OBR forecast for public sector net investment is that it will be flattened from its current level of about £49 billion to just £21 billion in 2014-15. That is a staggering drop. It is not just a marginal change or a change in direction but a staggering reduction. So I repeat, where is the growth going to come from, especially as the banks are not lending? The Bank of England reported a fortnight ago that the flow of net lending to UK businesses was still negative. In other words, people are repaying money to the banks, rather than the banks handing out money to businesses. That compares with the situation in the first half of 2007, when there was annual growth of 20% in the relevant M4 figures for banks lending to businesses.

The great fallacy of the Bill—the fantasy black hole at the centre of the Budget—is that as the devastating public spending cuts take effect, the private sector will expand its hiring and investing to compensate. That is the Government’s argument, but the premise is completely indefensible. Why should the private sector do that? The only reason that private businesses invest is because they see the possibility of profitability and expansion, but where will that come from when consumption is falling, when the banks are not lending and when export markets are fading? Where is the growth to come from? All the coming misery is allegedly unavoidable because there is a crisis in the bond market, which there is not, and because the UK is supposedly like Greece, which it certainly is not.

Many of my colleagues have pointed out the real risk involved in this deficit-cutting fixation to shrink the state. Let us make no mistake, this cannot be justified economically; it has ideological motive. That is the fundamental bottom line in assessing this Budget. It will impale Britain on a very low growth path for years ahead, with rising joblessness and stagnant gross domestic product, even if the country does avoid a double-dip recession, although the Lord Chancellor and Secretary of State for Justice admitted the other day with typical frankness that that remains an open possibility.

Even in the Chancellor’s own framework for the Budget, there remains the question of striking a balance between tax increases and spending cuts. The Chancellor chose an 80:20 ratio, but that is far more heavily weighted against public spending than in previous economic episodes of this kind, including under previous Tory Governments, such as that of the early 1990s. Poorer households will unquestionably be the main victims of the spending cuts, and even the tax increases—notably VAT—will of course impact most harshly on the poorer half of the population. This is anything but a fair Budget.

Even the two new taxes that impact directly on the rich will have little effect on them. The £2.5 billion bank levy will mainly be offset. There has been no mention of this, but it is fixed at the very low rate of 0.07% of eligible liabilities. One could hardly find a tax rate lower than that. One can be sure that it will be largely avoided through balance sheet adjustments away from short-term wholesale funding, together with other devices such as group restructuring and de-leveraging.

The second tax change that will affect the rich is the increase in capital gains tax to 28%, but that still takes it only halfway to parity with higher rate income tax, which is where it ought to be, and where Nigel Lawson—Nigel Lawson!—left it in the 1980s. The change will still allow people with very high incomes to dress up their income as capital gains so as to halve the tax that would otherwise be payable. The idea that the rich are making an equivalent sacrifice and—to use the mantra that I think will come back to haunt the Government—that we are all in it together is nothing more than a sick joke.

[Martin Horwood (Cheltenham) (LD)]

I have some sympathy with what the right hon. Gentleman is saying, because the Liberal Democrats were also inclined to support a higher rate of CGT. But does he still support that proposal, given the evidence that it would raise less income and thereby impose harsher penalties on the public sector than if it were left at 28%?

[Mr Meacher]

I have never believed what some Laffer economists say, which is that increasing taxes on the rich results in a reduction in the net income. I believe that that is based on a false premise.