Amendment of the Law

Vince Cable Excerpts

Thursday 22nd March 2012 Commons Chamber

[The Secretary of State for Business, Innovation and Skills (Vince Cable)]

The central issue on which this Budget—and, indeed, the coalition Government—will be judged is how we cope with the fallout from the massive financial collapse and the destruction of wealth, with the loss of approximately 10% of our national income, and put the economy back on a sustainable path.

The shadow Chancellor made some very kind and considerate remarks, and I thank him for his concern about my personal finances. Perhaps I can take him back to a toe-curling interview he gave a few days ago, when he described his two-decade relationship with his former boss, mentor, guide and friend as “unbelievably debilitating”. That is relevant to this debate, because it gets to the heart of the problem of who is responsible for the legacy that we are having to manage. We inherited not merely a large fiscal deficit, but the largest in the G20 and the largest amount of household indebtedness of any developed country.

We inherited an economy in which the share of the banking sector—the banking assets—had doubled in Labour’s period of government, to become the largest of any major economy, and in which, simultaneously, the share of manufacturing had contracted by almost a half, from 18% to 10%. We have heard a long speech about equality and fairness, but we also inherited an economy in which, throughout Labour’s period of government, the share of income of the top 1% and the top 10% of the population inexorably rose, and in which wealth became progressively more unequal.

[Sheila Gilmore (Edinburgh East) (Lab)]

rose—

[Vince Cable]

I will take the intervention in a moment.

A narrative has developed in which one man was responsible for this fiasco, but it was a genuine team effort, and the shadow Chancellor was an absolutely key member of that team. Being lectured now on how to manage an economy is a little bit like being given a talk on seamanship by the captain of the Costa Concordia—another believer in light-touch steering.

[Mr Russell Brown (Dumfries and Galloway) (Lab)]

The Secretary of State talked earlier about indebtedness. Can he share with the House how much of the debt was down to the previous Government having supported the banks and the finance houses to get through the potential economic crisis?

[Vince Cable]

It was actually on the back of an uncontrolled housing boom. Personal indebtedness as a share of people’s incomes doubled in the period of the last Government. Of course the process of deregulation beforehand did not help, but the core increase—the fundamental problem of indebtedness—arose when the shadow Chancellor was a key decision maker in that Government.

I want to talk about the Government’s basic economic strategy, but before I do, I want to address the issue of unfairness and distribution. There were two allegations. One was that the policies have had a damaging effect on the so-called squeezed middle; the other was about the millionaires. Let me deal with each in turn. On the squeezed middle, if hon. Members look at the distribution charts, they will see that the squeezed middle has been squeezed a great deal less than the squeezed top. The major cash impact of the Budget was on low and middle-income families, as a result of lifting the threshold to over £9,200, with £220 for more than 20 million taxpayers. That was right, not just because of the fairness involved, but because it gives a significant economic stimulus, and at the margin—the 1 million people being lifted out of tax—it is a major incentive to work. The policy also contrasts favourably with the strategy that the Labour Government adopted in office—which we discussed many times—of using tax credits. By increasing tax allowances in the way we have, we are giving people the freedom to choose how to spend their own money, not taking it from them and then giving it back to them, through a complex, means-tested system, with high marginal rates of withdrawal.

[Sheila Gilmore]

Is the Secretary of State disappointed that he lost the battle to rescind the cuts to working tax credit for couples working 16 hours, given that they do not benefit at all from raising the tax threshold, because they already do not pay tax? Did he lose that battle or did he not fight it?

[Vince Cable]

The shift from a system based on tax credits to one based on tax allowances obviously benefits the middle and low-income population as a whole. The impact on particular groups depends on a variety of things, including the minimum wage, which we have just uprated, and the complex interaction of tax and tax credits.

However, let me turn to the point about pensioner income. I find it quite extraordinary to hear the shadow Chancellor expressing such alarm about the impact of the Budget on pensioners. I do not know whether he has looked at the scorecard, but it is clear. In 2012-13, the effect of the increase in the basic state pension and the pension credit minimum income guarantee will be to transfer £1.75 billion to pensioners. The impact of the changes on age-related allowances is £360 million—one fifth of the additional funding going to pensioners as a consequence of this Budget. When we look at the pensioner population, we of course see big differences. There are 5 million pensioners who do not pay tax, many of whom are poor, and who are not, of course, affected by the changes at all. There is a small group of people—frankly, my contemporaries—who have high retirement incomes and considerable asset wealth, and it is right in principle that they should pay a bit more. There is a group in between, as the shadow Chancellor rightly said, of people who are not wealthy and do not have particularly high incomes, but who could be affected to a limited extent, as a result of inflation eroding the value of the allowances—inflation is currently estimated at 2.5%. Those people will benefit enormously from the increase in the basic pension.

Let us just remind ourselves what is happening. We have an increase of £5.30 in the basic state pension for a single person. On top of the increase last year, we are talking about a £10 increase in the basic state pension, as a result of the protections that this Government have introduced. For many years, the pension steadily fell behind earnings as a result of de-linking, and, despite numerous promises, the previous Government did absolutely nothing about the problem. More and more pensioners were sucked into means-testing. This Government have corrected that problem. We have a triple lock system and, as a result of that, and of this Budget, the vast majority of pensioners on low and middle incomes will be considerably better off than they were before.

[Angela Smith (Penistone and Stocksbridge) (Lab)]

What does the Secretary of State have to say to the Institute for Fiscal Studies, which has today described the Budget as a “hotch-potch of reforms” that are risky because they might be “less fiscally neutral” than the Chancellor is claiming?

[Vince Cable]

I am sorry; I do not follow the logic of the question. The Budget is of course fiscally neutral. I have just quoted figures, which the Office for Budget Responsibility has validated, which show that pensioners as a whole will gain five times as much from the increase in the pension and from pension tax credits as from the change in allowances.

[Kate Green (Stretford and Urmston) (Lab)]

What will the Secretary of State say to people who have saved into a pension all their working lives and who have only modest additional pension provision to rely on, but who will now, completely unexpectedly, see the reward for making that effort to save wiped away?

[Vince Cable]

There is a genuine issue about pensioners with limited income, much of it savings income, which has been progressively ignored over the years. I have fought very hard in Parliament on the issue of annuities reform, as have many colleagues, particularly on the Government Benches. Many of the people the hon. Lady describes are annuitants who have been severely squeezed by the very low interest rates. Despite numerous appeals to the previous Government, absolutely nothing was done about annuity reform. We have made an absolute commitment to end compulsory annuitisation, which will offer far more practical help than any of the things that she and her colleagues are describing.

Let me turn to these millionaires. I agree with the Chancellor that the decision to cut the top rate of tax from 50p to 45p was economically the rational thing to do. I want to focus the debate not on symbols but on substance. I share the emotional reaction of the many people who are disgusted to hear pampered financiers whinging about their taxes. On an emotional level, nobody can sympathise with that. However, we have to deal with the practical realities that were burned on my consciousness as a result of sitting in my place on the Opposition Benches for 13 years, exchanging views on the top rate of tax with successive Labour Ministers from Blair to Brown to Balls. Year after year, they would tell the Liberal Democrats that it was economically stupid to raise the top rate of tax above 40%. That was their message, year after year. Then, a few weeks before the end of their Government—I think it was 57 days—they introduced the 50p rate in order to create a political dividing line. That decision had nothing whatever to do with economics. The point that they had been making over all those years was that raising the top rate in that way would raise relatively little revenue.

Despite the casuistry of the shadow Chancellor’s intervention a few moments ago, in trying to argue that vast sums of money had been sacrificed, line 3 of the scorecard makes it absolutely clear that we are talking about a revenue loss of £100 million a year. That figure has been endorsed by the Office for Budget Responsibility. The changes that have been introduced in the Budget, including increased taxation of high-value property, plugging loopholes and much tougher anti-avoidance rules, will bring in at least five times that amount.

[Ed Balls]

The HMRC report states that, in 2013-14, the static cost—that is, the cost to existing top rate taxpayers—will be £3 billion, rising to £3.35 billion, then £3.7 billion and £4.2 billion. It then states that that will be offset by a behavioural impact of £2.9 billion, £3.2 billion, £3.6 billion and £4 billion, which I think is heroic. The document states that behavioural responses are often “highly uncertain”, and the Business Secretary himself said that such assumptions were utter nonsense. He said, “Pull the other one!” Is he now saying, “Mea culpa—I got it totally wrong”?

[Vince Cable]

I am just trying to deal with the facts. I believe in evidence-based decision making. The information in the Budget document, which has been validated as the best central estimate by Robert Chote of the OBR, suggests that we are talking about a revenue loss of £100 million. I think that the right hon. Gentleman is fundamentally underestimating the financial significance of something that happened on an epic scale when his Government moved on the top rate, which involved simply switching from one year to another. The underlying impact on revenue has been independently estimated at £100 million.

[Ed Balls]

The document from HMRC makes it absolutely clear in section A.19 that that is not HMRC’s view but the Government’s view. It was a ministerial decision on those estimates. But that does not take away from the fact that a £3 billion cost—£10,000 on average for top rate taxpayers—will be offset by a behavioural impact that is huge and, in the Business Secretary’s own words, absolute nonsense. Let us deal in the complexity of the facts, not the simplistic nonsense that the Chancellor told the House yesterday. Does the Business Secretary, with his integrity, look at those numbers—£2.9 billion, £3.2 billion, £3.6 billion and £4 billion—and say, “Yup, I agree”?

[Vince Cable]

I think we are talking about integrity and statistics. Of course there has been a big change under this Government, compared with their predecessor. The numbers that the shadow Chancellor used to use were his own numbers. The numbers we are quoting here are independently verified by the Office for Budget Responsibility. We will analyse the underlying assumptions in those figures. The figures in the Budget document are absolutely unambiguous and they have been endorsed by an independent assessor—something that the right hon. Gentleman was never used to when he was in government—which confirms the value of the numbers that we have described.

[George Freeman (Mid Norfolk) (Con)]

Is not the shadow Chancellor’s knockabout class warfare much more to do with appeasing Labour’s union paymasters? The truth is that all the evidence shows that a competitive personal and corporate tax rate is a powerful driver of entrepreneurship. We proved in the 1980s, when we last had to dismantle Labour’s tax time bomb, that lower marginal rates of tax increased revenue. The announcement today from GlaxoSmithKline of inward investment in this country is a sign that this is working.

[Vince Cable]

It is certainly true. My hon. Friend’s central point, which was made very effectively by the Labour Government when they were in office, is that in a highly mobile world, we have to take account of marginal rates of tax in comparable countries. The current top rate of marginal tax in Canada, Australia, France and Germany is around 45%, and that is the level to which we have moved.

[Seema Malhotra (Feltham and Heston) (Lab/Co-op)]

Does the Secretary of State acknowledge that business leaders, who will benefit from the tax cut, said yesterday that the priority should have been to cut taxes for those on low and middle incomes in order to stimulate consumer spending? Does he agree that that should have been the priority, rather than cutting the 50% rate?

[Vince Cable]

I do not know where the hon. Lady has been for the past 24 hours. The central feature of the Budget was a very large tax cut for exactly the group of people she describes, and it will have exactly the consequences that she describes.

Let me get back to the core issue, which exercises me and the shadow Chancellor. The basic economic strategy of the Government is to get back to a stable, sustainable form of economic growth. I want to address head-on his central criticism, which he has made many times. It can be summarised in the phrase “too much, too fast”. This Government have a deficit reduction programme that was developed following the autumn statement, and it involves removing the structural deficit over a period of six years.

The Darling plan, which the last Government set out, involved a deficit elimination programme of seven years. What I am not clear about, particularly in view of the stridency of the shadow Chancellor’s views, is: what is the Balls plan? Is it for seven years, eight, 10, 20 or never? What is the alternative speed of deficit reduction that the Opposition are urging on us?

We are acting, successfully, on good advice. A few weeks ago, the head of the International Monetary Fund, Christine Lagarde said:

“Those countries that have fiscal space, and that can slow down their fiscal consolidation efforts are very few, and I’m afraid Britain is not in that particular group.”

That is because of the sheer scale of the structural deficit that we inherited.

[Ed Balls]

rose—

[Vince Cable]

I will give way in a moment.

The CBI, quoted in evidence by the Opposition, was equally clear, as reflected in its view that we cannot afford to slow down the austerity programme. That is what authoritative people have to say about “too much, too fast”.

[Ed Balls]

The Business Secretary is a former chief economist. He read out a quote from the head of the International Monetary Fund. On the previous day, the chief economist of the IMF said exactly the opposite—that if growth was “undershooting”, a country like Britain should

“slow the pace of deficit reduction”.

Is the Business Secretary really saying that he is ignoring the advice of Olivier Blanchard, the chief economist of the IMF? I would have thought that the right hon. Gentleman would have recognised Mr Blanchard’s economic credentials.

--- Later in debate ---

[Vince Cable]

I think Mr Blanchard is very firmly on record as endorsing the strategy that we have adopted.

There is, of course, a fundamental dilemma, which any Government in this situation would face. If a deficit is cut very fast, it clearly has an impact on demand; and if it is cut too slowly, we lose the confidence of international creditors and markets. That is what we have not done. Unlike many eurozone countries that are now introducing budgets in panic and under pressure, we have introduced a politically and financially stable approach to deficit reduction. The underlying theme has to be one of financial discipline.

I cannot resist quoting an excellent statement of what this Government are about, and of what any Government should be about. It says that

“we must ensure we pass the test of fiscal credibility. If we don’t get this right, it doesn’t matter what we say about anything else.”

That was the shadow Chief Secretary, the hon. Member for Leeds West (Rachel Reeves). She is absolutely right and has brought fiscal rigour to the Opposition Front Bench for the first time. I just wonder what kind of response she has made privately to some of the commitments that the shadow Chancellor, and indeed the Leader of the Opposition, have been making in the last few weeks. They have been promising to get rid of the fuel duty changes, child benefit changes, child tax credit changes and the changes to public sector pay. I think the total volume of commitments is something in the order of £30 billion. Before we proceed any further with a debate on the Budget, we need to have absolute clarity about which of those measures the Opposition are committed to and to which they are not—and if they are committed, we need to know what else they are going to cut to make way for them.

Let me summarise where we as a Government are proceeding. Unlike many other countries in Europe, we have not introduced our Budget in an environment of panic or under pressure from financial markets. Unlike in the United States, we do not have political paralysis; we have stable government. This is our strategy: we have, and we will retain, fiscal discipline and we will stimulate the economy. There has to be demand—the shadow Chancellor is absolutely right about that—but this is coming through monetary policy. In order to have a monetary policy that stimulates the economy, we need the confidence of the central bank. The central bank has made it absolutely clear that the Government have to be fully committed to fiscal discipline in order to allow that to happen. Thus we have a combination of low interest rates, quantitative easing, now credit easing and a substantial devaluation. This is where the stimulus to demand comes from.

The third element is fundamental: we are dealing with a broken banking system—something we inherited. The banking system was massively expanded under the last Government, but collapsed with disastrous consequences. There is a continuing problem of credit supply. That is a very real problem—and every small and medium-sized enterprise would tell the same story. We have introduced a whole series of initiatives. The Chancellor has taken this forward with credit easing, while my Department has a new programme building on the Breeden report relating to non-bank finance. I have no doubt that we shall have to come back to this, because the banking system is still not functioning, but this is at the heart of the economic crisis that we are trying to manage. For the first time in our lifetimes, the financial system has collapsed—with disastrous consequences—and we are having to put that right.

The fourth and final element in the story is rebalancing the economy and putting it on a proper sustainable basis. That is why the Chancellor underlined in the Budget our commitment to the growth review and to improving infrastructure. We need to recognise that banks have to be properly regulated, which is why we have increased the bank levy, but in addition, we need to give backing to our successful industries, particularly our export industries—aerospace, creative industries, the oil and gas sector, and pharmaceuticals. Over the last few weeks and months, we have been correcting some of the long-standing errors of policy pursued by the Labour Government—the way in which, for example, public procurement took no account of supply chains; we are putting that right. We are beginning to see serious positive commitment by overseas investors—we are seeing it in the car industry and in pharmaceuticals—as a result of this industrial strategy.

[Clive Efford (Eltham) (Lab)]

With all due respect, we have heard it all before. In May last year, the Business Secretary said:

“I will fight, and do fight…for manufacturing industry…It is leading this country out of recession”.—[Official Report, 24 May 2011; Vol. 528, c. 793.]

Will he tell us what went wrong with manufacturing?

[Vince Cable]

Has the hon. Gentleman followed what is happening? The car industry, for example, has grown by approximately 20% over the last year, and all the major producers are investing in the UK.

[Several hon. Members]

rose—

[Vince Cable]

Let me finish my summary. Hon. Members can make their points in their own speeches.

We are dealing with an extraordinarily dangerous and difficult situation. Quite apart from our own horrendous legacy, we have to contend with the threat of high oil prices and the currently stabilised but continuing crisis in the eurozone. As a consequence, our economic position is very difficult. The economy is not, of course, growingly rapidly. Ever since we came into office, I seem to recall the shadow Chancellor predicting a double-dip recession, which has not happened. This year, growth is not spectacular, but it is higher than Germany’s and significantly better than the eurozone’s.

We acknowledge that we undoubtedly have major problems to deal with. Unemployment is far too high, but it is the same rate as in the United States, which is often regarded as providing a role model of how to deal with a crisis. We recognise the seriousness of the problem; what we will be judged by is our effectiveness in digging this country out of the enormous economic hole that we inherited. We are on track to do it, and we will stick with the policies that we have adopted.