Finance Bill

Michael Meacher Excerpts

Tuesday 6th July 2010 Commons Chamber

[Danny Alexander]

I am grateful for the intervention, in both senses.

Returning to the Bill, I should say that our plan stands first and foremost for responsibility, because a failure to deal with the deficit is the greatest threat to our economy and to the well-being of our nation. A failure to act now would mean higher interest rates hitting businesses, hitting families and hitting the cost of repaying the Government’s debt. That would mean more business failures and sharper rises in unemployment, and it would risk a catastrophic loss of confidence in the economy. The Budget’s forward-looking fiscal mandate will eliminate the deficit in five years and put us on track to have the debt falling by 2015.

The Office for Budget Responsibility forecasts that the measures in our Budget will lead us to meet that challenge one year early and the bulk of the reduction will come from lower spending, rather than from higher taxes. My right hon. Friend the Chancellor announced that the spending review will conclude with an announcement on 20 October and address precisely how we will bring down spending.

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

If the Budget is to meet the objectives that the right hon. Gentleman has in mind, where exactly does he expect growth to come from over the next five years?

[Danny Alexander]

I draw the right hon. Gentleman’s attention to the Budget measures forecast, which the OBR published. It demonstrated significant growth in the private sector, based at least in part on measures, which I shall come on to describe, in the Budget and in the Finance Bill.

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[Mr Redwood]

Once again, the hon. Gentleman is not listening. I was explaining that the coalition Government have made no change to the capital expenditure line that they inherited from the outgoing Government. What they will do is get more bang for the buck—to get more spending on construction, relative to the total investment line in the Budget. On the radio this morning, I was able to satisfy the other people in the discussion; the independent forecaster’s overall forecasts for the economy say that investment is going to rise. There will be an overall increase in investment because more homes will be built over the next five years than the pathetically low figure that was reached under Labour. There will be more investment in housing improvement, and more investment by the private sector. That more than offsets the decline in the investment programme in the public sector inherited from Labour.

[Mr Meacher]

The right hon. Gentleman’s fantasy that there will be a continuation of or an increase in capital investment is completely belied by the OBR forecast on page 90 of the Treasury Red Book, which shows that net investment will fall from £49 billion in the current year to £21 billion in 2014-15. That is a colossal drop.

[Mr Redwood]

Those are Labour’s figures for the public sector. I have just told the House that I am talking about total investment across the economy. Overall, the right hon. Gentleman will find in the Red Book that it is anticipated that the rises in investment elsewhere will more than offset Labour’s cuts in the capital programme, which we have decided to live with. I should also tell him that he is quoting the net line when he should be quoting the gross line. In other words, he is knocking off the depreciation, whereas we are interested in the total spend—the gross line, which is much higher than the figures that he has inadvertently, I think, given the House in error.

--- Later in debate ---

[Mr Meacher]

How can the right hon. Gentleman believe that private investment will remotely compensate for this enormous fall in public sector net investment, given that household consumption is falling, particularly with the increase in VAT, the banks are not lending, and export markets are fading because of the situation in the eurozone? Why should the private sector invest in those circumstances?

[Mr Redwood]

That is what I have been explaining to the right hon. Gentleman. We are in this position because everything has been so awful. The private sector has just been through a couple of years when it has invested practically nothing because companies could not get any money and were not making much profit. Now, profit margins are growing, there is a bit more money around and they are getting more confident for the future.

It would be much better if Labour Members got behind their voters and constituents, who want the jobs that we wish to see created, got behind the recovery that everybody else is forecasting, and started to live in the real world. They presided over the collapse. Throughout their years in office, manufacturing fell, whereas in the Tory years before that, manufacturing rose. We want to get manufacturing rising again. From that point of view, the one good thing that they did was to preside over a collapse in the value of the pound. They probably allowed it to collapse a bit too much, and it is beginning to rise again under the new Government. That gives those in manufacturing a huge opportunity to make better profit margins, to invest more money, and to produce more. That is exactly what they are beginning to do, and there will be a beneficial effect.

[Mr Redwood]

A shift in the relative position predicted by someone else does not necessarily mean that manufacturing is going to decline. The figures in the official forecast, and I think in most sensible forecasts outside, show that manufacturing will recover from the very low base that it reached in 2009-10. That is what is needed, and we need to have policies that do just that.

[Mr Meacher]

rose—

[Mr Love]

rose—

--- Later in debate ---

[Mr Michael Meacher (Oldham West and Royton) (Lab)]

I pay tribute to the three maiden speakers whom we have just listened to: the hon. Members for Ipswich (Ben Gummer) and for North East Cambridgeshire (Stephen Barclay) and my hon. Friend the Member for Scunthorpe (Nic Dakin). I am always struck by how confident, forthright, quite often amusing and, on occasion, even inspiring maiden speakers are. I am sure that we shall hear a great deal more from them all. I also noticed that they all touched on issues of policy. When I first came to the House, it was a custom that maiden speakers talked about their constituencies and their predecessors, but skirted round any question of policy. I am pleased that that rule is obviously now more honoured in the breach, and I hope that we shall hear much more about policy from all the maiden speakers whom we have heard this evening.

On the Finance Bill, let me start by agreeing with what I can—this part of my speech will be very short. I agree that the deficit is too large and that it needs to be reduced. On every other issue—the size of the cuts, their composition, their impact on growth, the balance between tax increases and spending cuts, and the whole question of fairness—I think that the Budget judgment, as expressed in the Finance Bill, is fundamentally and manifestly wrong.

First of all, as some of my hon. Friends have also said, the Chancellor made great play of the idea that his Budget to eliminate the structural deficit within five years was unavoidable. That is absurd. Balanced budgets are the primitive 1920s economics of Montagu Norman in this country and Herbert Hoover in the United States, and in both countries they led directly to the great depression. Capitalism is driven by cyclical forces that need constant regulation, not balanced budgets irrespective of the economic cycle. The truth is that the Chancellor has gone overboard on austerity. The cuts are as tough as those that the IMF is imposing on Greece, which is on the verge of bankruptcy, which we certainly are not. They are also twice as tough as the Canadian measures that the Chancellor has repeatedly prayed in aid to justify what he is doing, three times as tough as Sweden’s measures in the mid-1990s and much tougher even than the IMF measures in 1976.

Then there is the question of how the deficit should be reduced—as I have said, no one disagrees that it needs to be. There are three ways of reducing the deficit: not only through tax increases or spending cuts, but through economic growth as well. Before the Budget, the OBR estimated that UK growth this year and over the succeeding four years would be slightly less than 2.5% on average. As each 1% of growth adds an annual £15 billion to UK income, the OBR forward projections of economic growth imply an increase in UK income over the next five-year period—the perspective of the Bill—of between £150 billion and £180 billion.

Because all Governments take roughly 40% of any increase in UK income, those figures imply an increase of revenues to the Government of around £70 billion to £75 billion over this five-year period. That would be enough virtually to halve the current budget deficit over that period, which hugely reduces the need for spending cuts. I do not say that I am against spending cuts totally. Indeed, when it comes to Trident, ID cards and some of the extraordinarily wasteful Government IT databases, there is plenty of room for cuts. However, the figures that I have quoted raise starkly the question of whether the Chancellor’s enormous spending cuts will squash out the growth-generating potential of the economy—something that, frankly, would make the cuts simply counter-productive.

Indeed, those figures also raise the central issue, which had something of an airing between those on the Front Benches in the earlier debate, of where the Chancellor expects the growth to come from over the next few years. Household consumption, which accounts for two thirds of national output, is now almost certain to fall, particularly with the increase in VAT. Any growth in wages after inflation is already weak and is likely to weaken further as unemployment rises, which it will. According to all surveys, consumer confidence is fading, while some 60% of UK exports go to the eurozone, which as we all know is in considerable disarray. So where exactly is the growth going to come from?

I give the right hon. Member for Wokingham (Mr Redwood) credit for being the one Government Back Bencher who tries to make a case for the Budget, but he seems to have forgotten the prime rule of computer projections, which is: garbage in, garbage out. If we feed in dodgy premises, we get out dodgy conclusions. Government Members keep quoting the OBR as though it is independent—I do not think that Sir Alan Budd is actually independent, and the OBR is next to the Treasury, so it is not exactly independent—but that is not the point. The key point is that the OBR projections are based on certain premises that are––I say this without exaggeration—fantasy.

[Richard Graham (Gloucester) (Con)]

Given the strength of the right hon. Gentleman’s views on the neo-Keynesian economics that effectively advocate keeping on spending because that is the only way to grow the economy, what does he think of the performance of the Irish economy? In 2009, Ireland managed to reduce state spending by 7% as a result of stringent measures involving public spending and public sector salaries, yet, in the first three months of this year, its economy grew by almost 3%. Does that not demonstrate to him and to other Labour Members that it is a false assumption to say that reducing public sector pay will shrink the economy, and that cutting back can in fact provide an opportunity for the private sector to grow again?

[Mr Meacher]

The opposite conclusion should be drawn from the Irish economy. The Irish Government made huge, swingeing cuts of 12% to 15%, which absolutely decimated that economy. Sooner or later, of course there will be a revival in all economies, but at a fearful cost. We shall very much be going down the route of the Irish economy if this Budget goes through. If the hon. Gentleman were to go to the Republic of Ireland and ask people’s view of the finance budget of three or four years ago, I think that he would get a very different impression.

[Helen Goodman]

I support my right hon. Friend’s interpretation of what has been going on in Ireland. The construction industry has been completely destroyed, and there are empty shells of houses all around the countryside. Unemployment is sky high and, for the first time in many decades, people are emigrating from the Republic.

[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.

[The Economic Secretary to the Treasury (Justine Greening)]

Can the right hon. Gentleman explain why his Government failed to narrow the gap between rich and poor?

[Mr Meacher]

I regret that the Labour Government did not succeed in narrowing the gap between rich and poor. However, they did something quite remarkable in reducing the number of children in poverty by 600,000. No, it was not enough, and we fell below our target. I can tell the hon. Lady why the gap widened, however. To cite a phrase that was used early on in the Labour Government, new Labour took the attitude that it was fairly unconcerned about people becoming filthy rich. That was a serious mistake, and the increase in the wealth of the tiny top segment of the population has been enormous. That is the reason that the gap increased.

[Charlie Elphicke]

I am interested to hear the right hon. Gentleman raise the issue of child poverty. Can he explain why in the last Parliament it went up by 300,000 on every single measure?

[Mr Meacher]

Indeed. The hon. Gentleman is wrong on the figure; the last figure available for when Labour were still in government suggested an increase of about 100,000. That, of course, was the result of a recession caused by the bankers. The Labour party protected the poor and the unemployed to a significant degree, as those groups are about to find out from the very different treatment meted out to them by this Government.

[Kate Green]

I have no idea what statistics the hon. Member for Dover (Charlie Elphicke) is looking at. Over the period Labour were in power, between 1997 and 2010, child poverty fell by 500,000 on every measure. While it is true that it rose in one or two years, it still finished significantly lower than it had been at the beginning of the first Labour Government’s term.

[Mr Meacher]

I think I must move on—and we must move on—from debating poverty between the parties. Since I have the privilege of speaking, however, I have the last word. The fact is that the Thatcher Government tripled poverty to more than 3 million over the period between the early 1980s and the end of the 1990s; Labour reduced that significantly, but did not, in my view, do as much as it could have done to reduce the enormous gains of the wealthy.

As always, it is the dog that did not bark in the night to which we should give most attention. There is nothing in the Bill about a financial activities tax on financial speculation, which is a domestic version of the Tobin tax. Considering that the banks’ recklessness was a major contributor to the crash, that would have a significant reforming potential as well as being a major revenue earner. There is nothing for a really tough crackdown on tax avoidance, which is still estimated to cost the Exchequer some £25 billion a year, nor is any action being taken on the indefensible non-dom loophole. Nor is there any reference to a wealth tax, which might have seemed reasonable when, according to The Sunday Times rich list—not a trendy-lefty organisation—the top 1,000 richest multimillionaires, a minuscule proportion of the population, have nearly quadrupled their wealth over the last decade and a half by no less than £335 billion. This was all in The Sunday Times rich list two or three months ago. In the last year alone, their wealth increased by £77 billion. The fact that they are not being required to make any significant sacrifice at all, when everyone else is—

[Andrew Bridgen]

Will the right hon. Gentleman give way?

[Mr Meacher]

No, time is going on and I want to conclude.

The fact that those people make no sacrifice while everyone else is being hit extremely hard makes an utter mockery of any idea of fairness in the Budget. This is not an honest Budget or an honest Bill. It was born of an ideological fixation to shrink the state well below 40%. The facts and arguments have been massaged to fit around this preconceived idea, and the methods used—draconian cuts to produce a balanced Budget—remain a throwback to the reactionary and ultimately disastrous economics of the 1930s. It will fail, but the risk is that it will drag down Britain with it.