Finance Bill

Owen Smith Excerpts

Tuesday 20th July 2010 Commons Chamber

[Mr Byrne]

I seem to remember that the Government’s response to the banking system was opposed by the Conservatives when it came down to the substance of a vote. When legislation was brought before this House to accelerate the way in which the banks could be sorted out, the Conservatives voted against it.

In the Budget and the Finance Bill, the Conservatives should have centred their rationale on how the recovery can be sustained. In the debates on those measures, I think we have established that there is a consensus that the deficit has to come down. The price of dodging an economic doomsday was not cheap, and the deficit was bound to rise. However, when the shocks hit back in 2008, we had the second lowest debt in the G7. Between 1997 and 2007, we cut public sector debt from 42.5% of gross domestic product to 36% of GDP. Over the 10 years before the crisis, UK borrowing averaged 1.4% of GDP compared with 1.9% for the rest of the OECD economies. As a result, even amid the current expense, our national debt will simply rise in line with every other major economy.

We have learned something from the debates on the Finance Bill and the Budget about the disposition—the economic philosophy—not only of the Conservatives but of the Liberal Democrats. They may feel that the price of recovery was not a price worth paying, but they cannot ignore what economic statistics are now saying about how the recovery is improving the position of the public finances. In March, my right hon. Friend the shadow Chancellor told the House that the deficit this year was £13 billion better than expected for 2010-11; in June, the Office for Budget Responsibility said that it was £8 billion better even than that. Since February, £123 billion has been knocked off projections for national debt, and that is before we sell our shares in the banks. The Government’s budget was underspent last year to the tune of £5 billion according to Treasury figures that we saw a week or two ago, and interest rates were falling in the months before the election.

When we examine the savings generated by falling unemployment, we can really see the wisdom of a strategy that hinges on growing our way out of recession. Our policy all along was to act to ensure that we kept unemployment down. Not only did that policy work well, and not only was it morally right, but it was economically wise. Our policy has delivered unemployment that is 2% lower than either in America or across the European Union. In the Budget in 2009, we had to assume that unemployment would stick at about 2.44 million. A year later, in the 2010 Budget, that forecast had fallen by 700,000 people to 1.74 million. That meant that over the four years from 2010 to 2013, there would have been a fall of £14 billion in the unemployment benefit bill, as well as an incalculable saving in human misery.

With that inherited recovery in place, the question that the House should ask in relation to the Finance Bill is what action should be taken to speed up the recovery. How can we guarantee the recovery’s certainty and begin to marshal investment into rebuilding an economy that is better balanced? Instead of providing any answers to those questions, the Budget and the Finance Bill will slow the recovery down and put more people on the dole. They offer a strategy for rebalancing the economy composed in equal measure of a wing and a prayer.

Nothing better illustrates the gambling instincts of this Government than the fast cuts to public sector jobs and the depression of consumer demand through VAT. With the most breathtaking casualness, they are prepared to put our hardest-fought recovery at risk. With such an unlikely scenario for growth in his pocket, one would have thought that the Chancellor might just hedge his bets a little and ensure that the private sector was creating jobs at some pace before bringing forward plans to sack up to 800,000 public servants. One might have thought that he would have some regard for cities such as my home town, Birmingham. It already has high unemployment, but if the Chancellor cuts 9% of the 156,000 public sector workers there, it will potentially rise by 14,000 people. That will not help the recovery in Birmingham; it will act as a drag anchor on recovery. That story can be told in towns and cities all over the country.

[Owen Smith (Pontypridd) (Lab)]

On precisely that point about the different levels of private sector job creation and public sector job losses around the country, was my right hon. Friend worried to see the Oxford Economics report of last week predicting that in Wales, for example, just 4,000 jobs will be created, which represents 0.3% growth over the next five years? That will lead to significant net increases in unemployment in Wales and the report predicted that we would not see a return to the current levels of employment until 2025. The picture is similar in the west midlands and other areas across the country.

[Mr Byrne]

My hon. Friend highlights the second risk that I wish to move on to. With risks so great, and talked about so freely and with such casualness, one would have thought that at the very least, the Finance Bill would contain one or two more measures to encourage the growth of domestic demand instead of measures to try to tax it back into recession.

The truth is that the Bill attacks domestic demand with such viciousness that the country is now hoarding its silver at an almost unprecedented pace. Britain’s families and businesses now have so little confidence in the future of the economy that rather than make the odd investment here and there, they have tucked away something of the order of £130 billion in the bank as the household saving rate has escalated. Britain is now saving money that is not being spent either in the shops or on building new factories or production lines. The Budget has not restored confidence but is draining it fast.

--- Later in debate ---

[Matthew Hancock]

What Policy Exchange has done is review the economic literature, which is what I am looking at. Perotti, in 1999, said:

“High debt levels are associated with higher probability for fiscal policy to have”

expansionary effects. The European Commission—not something that Labour Members tend to barrack—said: “Expenditure cuts may exhibit” expansionary features,

“even in the short and medium run.”

So the economic evidence is there. The best quotation from that review is this:

“Though now quite well established in economic literature”—

referring to the argument that fiscal consolidations promote growth—

“this work is still feeding its way into the wider public consciousness.”

No doubt part of the reason for the slow move of that argument into the public consciousness is the argument put forward by Opposition Members that it is not true.

There are two other important ways in which consolidation will get to higher growth. The first, of course, concerns expectations of future tax rates. If people around the country can see that spending is out of control, they will anticipate that taxes might have to rise in future, whereas setting out a clear path for taxes makes it clear that there will not have to be sharp and immediate tax rises in future, even if that path includes some tax measures. That forward-looking element of human nature, which is so important in understanding how the economy works, matters at a personal level—for some people far more than for others, as I entirely accept—but it especially matters in the corporate world. Businesses look to the future to see how much tax they will be paying, as well as how much it will cost them to pay it because of the complexity of that tax. That is why it is so important to have both the simplification of the tax system that my hon. Friend the Exchequer Secretary—soon to be right hon. Friend, no doubt—set out, and the ladder down in headline corporation tax rate, which will set out a 1% reduction year on year so that our businesses know that Britain is open for business.

[Owen Smith]

On that specific point of corporations looking to the future and thinking about how to plan their business, can the hon. Gentleman tell me of any industrial sector or any big British company that has responded to the austerity budget and said that they now anticipate significant growth and taking on new people? I have not seen any such report.

[Mr Deputy Speaker (Mr Nigel Evans)]

Order. Before the hon. Member for West Suffolk (Matthew Hancock) resumes his speech, let me say that we allow some latitude on Third Reading of the Finance Bill, but that it would be useful if Members made reference to the Bill from time to time.

[Matthew Hancock]

The reductions in corporation tax that are outlined in this Bill have been welcomed by the CBI, the British Chambers of Commerce, the Institute of Directors and the Federation of Small Businesses. Indeed, a multitude of business organisations have welcomed it. Even the Engineering Employers Federation said that this was a path in the right direction. That shows the support from business organisations.

[Owen Smith]

rose—

[Matthew Hancock]

Let me make some progress; I have only a couple of minutes left.

The final argument is about productivity. Greater tax competitiveness not only helps productivity in the private sector, as consolidation can also help productivity in the public sector. We read only this morning that the police have said that they can take 12% out of their budget without affecting front-line services. I wonder what that 12% was spent on under the previous Administration.