The Economy

Debate between Pat McFadden and Angela Smith

Tuesday 6th December 2011 Commons Chamber

[Mr McFadden]

I agree with my right hon. Friend that the economic times that we are in should make us reassess what we think of as normal.

The human implications have been laid out by the Institute for Fiscal Studies in its analysis of the impact on households. As was mentioned earlier in the debate, the IFS has shown that the distributional impact of the measures is geared so that the greatest losses come in the lowest-income deciles, and that there are particularly harsh effects on families with children. The shadow Chancellor in his opening speech referred to the impact of the tax credit measures on individual constituencies. The most striking figure for me is that the IFS forecasts that between 2009-10 and 2012-13 there will be a 7.4% fall in real median net household income, which is about the same as the largest fall since records began.

[Angela Smith]

In the context of what my right hon. Friend says, can it be fair that while £1.2 billion in tax credits for low-income families is taken away, only £300 million extra will be required from the bankers?

[Mr McFadden]

Anyone who looks at the IFS distributional charts would certainly not judge the impact of the Government’s measures as fair.

The background, therefore, is less disposable income, weaker growth, more unemployment and more borrowing. Against that, it is little wonder that there is such low confidence among families and businesses alike.

The question, therefore, is what to do to promote the economic growth that we so urgently need to create jobs. The Chancellor set out a number of measures in the autumn statement—more lending to small businesses, more spending on infrastructure and so on—to try to boost growth. Some of those individual measures are perfectly sensible and should be welcomed. Of course small businesses want more lending, and more capital spending will create jobs, but the real question is whether those measures will contribute to economic growth.

The OBR has already given its verdict. Paragraph 1.14 of its report states:

“We have not made any material adjustments to our economy forecast on the basis of these policy announcements”,

meaning the ones in the autumn statement. Its verdict is that however worthy the individual measures are, they will not make a material difference to the overall picture. Therefore, if growth will not come from consumer spending because the consumer is being squeezed in the way that the IFS has set out, and if it cannot come from Government expenditure because that is contracting, it must come from trade and investment.

The Government should ask what more they can do to encourage business to invest. My contention is that that is not a matter of putting one or two measures suggested by business lobby groups into such statements. Rather, it is a matter of making a sea change in our thinking of how we get growth in these economic times.

I shall focus on one particular issue on which I have spoken before in the House. Although industry welcomes the change announced on R and D tax credits, there is real concern about why the Chancellor is pressing ahead with his plan for a £3 billion-a-year hit on manufacturing industry through his cuts to capital allowances. It is not enough to argue for enhanced capital allowances in enterprise zones when manufacturing in the economy as a whole is putting up with that £3 billion tax hit. How does it help us to generate a low-carbon economy if the Government make investment in the equipment and machinery that will get us there more expensive through their tax policy? Even the excuse that that is a necessary deficit-reduction measure is not available, because the money is not being used to reduce the deficit; it is being recycled in a give-away to businesses in those sectors of the economy that do not invest, including the very banks that will not lend to manufacturing businesses in the first place.

If we really want to rebalance the economy, our manufacturing tax stance should recognise the shortened lifespan of machinery, help businesses to invest, and ensure that British companies have an incentive to invest and that they are not hindered in their efforts to keep ahead of the game. That is made more urgent by the sharp downgrading last week of the forecast for growth over the next couple of years. That shows that the Government need to be more, not less, ambitious in their plans to promote trade and investment.

We have twice heard Government plans that have been billed as plans for growth, yet at each economic statement, growth has fallen, and it is projected to fall further. If we should have learned one thing in the past three or four years, it is that assumptions of snapping back to so-called normal trend rates of growth have been consistently over-optimistic. These are not normal economic times. The downturn has been longer lasting than we feared and hopeful projections of future growth have a habit of retreating into the middle distance.

My contention, therefore, is that the era of the politics of less poses challenges for us all—Government and Opposition. How do we secure economic efficiency and social justice in an era of lower growth and squeezed household incomes? If the Government’s spending is to continue on a downward path for some years, and if households face the kind of squeeze in their incomes set out by the IFS, the circumstances demand an industry policy on a scale and ambition way beyond what we saw in the autumn statement last week. They demand a resolve from the Government, industry and all levels of education to make the rebalancing that we talk about happen, and to put weight behind those areas where Britain can succeed. The situation demands more than a regional growth fund at half the level of spending of the regional development agencies; more than a tiny fraction of the €5 billion-a-year relief for energy-intensive industries that is available in Germany; and tax policies that support the rebalancing effort rather than pull in the opposite direction.

--- Later in debate ---

[Angela Smith]

It absolutely does explain the scale of it. Let us make real-life sense out of some of these figures. They mean that 700,000 public servants had to be cast aside, 300,000 more than the Chancellor said would lose their jobs just a few months ago. Some £1.2 billion has been taken off tax credits while bankers suffer a mere £300 million increase in the take from their pay packets by the Treasury.

Any pretence of fairness and of our all being in this together went out the window last Tuesday. Ordinary families are taking a massive hit: already more people are unemployed than at any time since 1994—the current figure is 2.6 million—and to make matters worse the number of people out of work for more than a year is 868,000, with the long-term rate for 16 to 24-year-olds standing at a staggering 30%.

[Mr McFadden]

My hon. Friend refers to the cuts in tax credits in the autumn statement. Since they entered office, the Government have made great play of increasing the incentive to work. How does she think that the incentive to work will be affected by cutting tax credits for low-income families?

[Angela Smith]

It can only have a regressive impact because it will mean that families are less able to provide for their children and to develop the aspirations that are so important in later life.

One in three young people have been unemployed for more than one year and youth unemployment stands at a staggering 1 million, with the figure for those not in education, employment or training standing at a terrifying 1.2 million. The Government are creating another lost generation similar to the one that they created in the 1980s. Clearly, the Chancellor’s policies are hurting the British people, but they are certainly not working. The young in particular are paying a high price for his failures.

There is worse to come as the OBR now states that, at best, the British economy is set to stagnate next year and the year after, with growth broadly remaining flat. Even worse, if the well-respected OECD is correct, the economy will dip again into recession early next year. The British economy has been stagnating for the past 15 years, and the growth and jobs crisis has its roots firmly planted at No. 10 and No. 11 Downing street. Real incomes are being squeezed like never before, with high inflation and rocketing fuel bills not helped by the Government’s decision to increase VAT in January.

Last week’s statement gave hard-pressed families two more years of austerity, with real median incomes set to fall by 7.8% according to the Institute for Fiscal Studies. That means that real median household incomes will be no higher in 2015-16 than they were in 2002-03 and that we will have suffered the longest period of austerity since the second world war.

The Government inherited an economy that was fragile but nevertheless in growth, yet they gambled that recovery on the basis of tired ideas that have been tried before and found wanting. The right-wing prescription failed in the ’30s and is failing again now, with the consequence that the economy could dive into a double-dip recession. The level of unemployment in Yorkshire is almost twice what it is in the south-east and is growing at twice the rate. It is entirely possible that Yorkshire is already in recession.

The autumn statement did not announce any new resources to be injected into the economy—all it announced was a moving around of the money. It will be families with children who will pay for the back to the future jobs fund—the youth contract—through the £1 billion cut to the child element of family tax credits. If this country is not to face a lost decade, or even worse, we need a strategy for growth, and we need it now. The stakes are high and we urgently need to get people back to work before another generation has to pay the same price as mine for an ideologically driven Government who refuse to learn the lessons of history.

In particular, we need as a starting point Labour’s five-point plan, which would reverse the damaging rise in VAT temporarily and give a one-year national insurance tax break for every small firm that takes on extra workers. And crucially, it would bring forward long-term investment projects for schools, roads and transport to get people back to work. What we do not need is what has been recently proposed: a shopping list of projects here and there paid for by redistributed money. Instead, we need a rigorous, strategically driven investment regime designed to drive long-term economic growth.

In the medium and long term, we need a better economic way forward. On that point, I echo the points made by my hon. Friends. The Thatcher-Reagan consensus is crumbling before our eyes. Will Hutton put it even more starkly in a recent article when he said that

“we are about to experience economic, social and political tectonic plates on the move”.

We desperately need to develop an alternative economic paradigm, which means changing the way our capitalist structures work. We need to go back to making things and to give manufacturing a much bigger role in our economy. We need a capitalism that looks to the long term, not just to short-term profits, and we need a society where reward and risk are shared and where it is understood that the state has a role to play in pioneering and driving strategic investment. And we need to invest in innovation

The Government’s strategy of cutting and hoping that growth will magically reappear is not working now and did not work in the past. The Government are bankrupt of ideas for our future and lack the imagination and the bravery needed to take our country forward to its next phase. These extraordinary days require extraordinary solutions, but the fear is that it could soon be too late for many millions of British families who are paying the price for this out-of-touch, ideologically driven Government who seem determined to follow their chosen course no matter what damage it does to the British economy and to families in this country.