Under the Order of the House of 15 June, I will now announce the determination of the party make-up of the Backbench Business Committee, which will be elected on Tuesday 29 June. Four members shall come from the Conservative party, two members shall come from the Labour party, one member shall come from the Liberal Democrat party. These proportions—[Interruption.] Order. These proportions reflect the proportions of parties in the House. It follows, of course, that nominations may be received only in respect of members of those parties.

On a point of order, Mr Speaker. Is it in order to describe Members as dupes—[Interruption.]

Order. The hon. Member for Cardiff West (Kevin Brennan) is in danger of becoming over-excitable, and I know that he would not want to be. Let me respond to the point of order from the hon. Member for Wrexham (Ian Lucas). What he has raised is not a point of order—

Yes it is.

Order. I require no help from the hon. Gentleman. It is not a point of order; it is a matter of taste, and we will have to leave it there.

Further to that point of order, Mr Speaker. In the light of your ruling, could we rename the session that we have just had, “Prime Minister’s Tantrums”? Is it not more accurate to describe the Liberal Democrats, rather than Opposition Back Benchers, as dupes?

There is nothing disorderly about the remark that the hon. Gentleman has just made, but unfortunately his attempted point of order suffered from the disadvantage of not being a point of order. However, he has made his point very clearly, and it is on the record. I have a hunch that he knew that before he got up to speak.

On a point of order, Mr Speaker. Given your statement on the Backbench Business Committee, does that mean, therefore, that we in the smaller parties are excluded from it? In a Committee that is designed to increase accountability and democracy in the House, how can that be right?

I am grateful to the hon. Gentleman for his point of order, and I recognise that he and other Members will be dissatisfied with the situation. However, what I want simply to say to him is twofold: first, the Committee is being constituted in accordance with party strength in the House; and, secondly, we are operating in accordance with the Standing Orders of the House by doing it that way. Not to proceed in that way would require us to revisit Standing Orders. Now, whether we should do so or not is a matter for the House to decide, but I am stating the factual position to the hon. Gentleman and for the benefit of the House.

On a point of order, Mr Speaker. I wonder whether I could have your guidance on how Back Benchers in the Opposition parties with only two Members on the Committee can get a fair hearing when there are five Members from the Government Benches.

The operation of the Committee is a matter for Members on the Committee and for its Chair. I am sure that the hon. Gentleman has every confidence in the capacity of his colleagues to discharge their responsibilities on the Committee, and I am sure that he would not have wanted to suggest otherwise.

Further to the point of order asked by the hon. Member for Perth and North Perthshire (Pete Wishart), Mr Speaker. Referencing your previous admonition to the House about what the public think outside, as opposed to Members inside, is it not ridiculous, and will it not seem so to the public and to the people we represent in the smaller parties, that we are excluded, by whatever device, from the Backbench Business Committee, and from other Committees in this House as well? Would you, Sir, be open to a consideration of how we may meet to discuss how the smaller parties can be properly represented in such Committees in this House?

I understand the hon. Gentleman’s point, and I understand his frustration, but I have already ruled on this. The House can always look at these matters. I would gently say to him that it would be unwise for the Chair to speculate on the ridiculous.

Further to that point of order, Mr Speaker. Could you tell me, and the House, why some Back-Bench Members are more equal than others in respect of membership of the Committee?

I am a little concerned that the hon. Gentleman is trying to continue the debate. I cannot believe, knowing his normal regard for order, that he would do that, but I have a worrying hunch that he might be making a first attempt. He has made his point, and I think that we will leave it there.

Before the shadow Chancellor rises, may I appeal to hon. Members who are leaving the Chamber to do so quickly and quietly so that we can hear him? I call Mr Alistair Darling.

I welcome the opportunity to open the second day’s debate on the Budget. There are two tests to be applied to this Budget. The first is what it does to ensure that we can secure the recovery and get long-term sustainable growth, and therefore support jobs. The second is what it does in respect of fairness and, in that context, what it says about the promises made by the parties that now comprise the Government.

I expect that over the next few days many points of detail will be explored, but I want to look at some of the bigger issues, especially the context against which this Budget needs to be judged. Before I do that, I welcome the Secretary of State for Business, Innovation and Skills to his place. I have not had an opportunity to cross swords with him in this Parliament, and I look forward to doing that and to hearing what his views are now as opposed to what they were a mere seven or eight weeks ago.

I want to start with the context in which the new Government made their decisions on this week’s Budget. Yes, that context has to be the need for us to reduce our borrowing—no one disputes that, although there are very live and real arguments about how fast and the extent to which the deficit ought to be reduced. However, I believe that it must also be seen in the context of growth. For some, like the Business Secretary, what I have to say will not be news because, after all, he largely agreed with the approach that I took during a lot of the last Parliament. However, he seems to have become rather more forgetful in the past few weeks, so a reminder may be useful.

On 28 April, which the right hon. Gentleman may now regard as being ancient history, but for most of us does not seem that far away, he said:

“The deficit problem is easier to solve if there is growth. That is why the next government has to recognise the fragility of the economy and not take action which would precipitate a double dip recession leading to more unemployment and even bigger budget deficits.”

I agree with the sentiments behind his statement. He was right on 28 April, and my guess is that he will still be right on 28 June, but I cannot understand why he has changed his mind in the intervening period. Growth is slightly stronger than before the general election, because at that time we thought that it was just 0.3% in the last quarter. However, although it has improved, it can, on no view, be said to be anything other than pretty modest and pretty fragile. I believe that the measures announced in the Budget yesterday present a risk of derailing that recovery, and worse, of giving rise to a situation in which our economy simply bumps along the bottom for a number of years. In that way, we would not get the growth that we need, and we therefore would not get the jobs. Worse still, of course, we would not have the funds to reduce our deficit and, therefore, our debt.

The past three years have been tough for businesses and families throughout our country and, indeed, many are still experiencing the problems that arose because of the recession. However, as I said, we have seen a return to growth, but it is only 0.3% in quarter one; unemployment has stabilised and begun to fall; and tax receipts are higher than expected, which is why our borrowing is £11 billion less than I forecast in March. All those improvements are a direct result of the action that the previous Labour Government took.

Throughout this debate and for some time to come, doubtless we will hear the now familiar mantra that everything that is wrong and all our problems are confined to one country alone—ours—and that they are due solely to the actions of the previous Government. Like any Government, we got some things right and some things wrong, but I am absolutely certain that the action we took to stop this country tipping from recession into depression was right, as was the action we had to take to stabilise the banking system. I will not yield to anyone who says we should have done differently. We needed to stabilise the economy and to keep people in their jobs and homes. We took that action because we do not believe that in such a situation people should be left to sink or swim. Those actions were taken largely with the support of the Liberal Democrats when they were in opposition, but everything has changed in the past seven weeks.

rose—

I will give way to someone who is perhaps an unreconstructed member of the Liberal Democrats, especially one who represents a constituency in the north of Scotland that may be the subject of change because of his leader’s determination to reduce the number of constituencies, particularly in his neck of the woods.

I am grateful to the right hon. Gentleman for those kind words, but I suspect I would be out of order if I responded.

May I bring the right hon. Gentleman back to the point he was making and remind him that when the Northern Rock crisis hit, my right hon. Friend the Business Secretary immediately proposed that nationalisation was the correct way forward, and that the Government whom the right hon. Gentleman represented prevaricated for six months before taking that action?

The hon. Gentleman raises an interesting point. He is right that the right hon. Gentleman called for nationalisation at an early stage. The current Chancellor, however, was dead against that. I imagine that if that situation arose now, the Chancellor’s view would prevail and the Business Secretary would have to do what he is told. The hon. Gentleman is absolutely right that at the time I agreed with a lot of what the Business Secretary was saying. For reasons that I will not go into just now because of the various legal requirements and other considerations, we did not nationalise Northern Rock until February 2008, but we were absolutely right to do so then. The Chancellor still thinks that we were wrong, but I am glad to say that the current Secretary of State for Justice believes that our action was right. The action we took, whether in relation to Northern Rock, the rest of the banking system or the rest of the economy, was critical.

While we are reflecting on recent history—the Chancellor yesterday spoke of the levels of debt prior to the economic crisis and blamed a long history of alleged Labour overspending —will my right hon. Friend speculate on why the Conservatives supported the Labour Government’s spending plans right up to the end of 2008?

The Conservatives did so because they thought it expedient, but at the end of 2008, they decided to change tack. In all we heard yesterday, the Chancellor did not explain why, if everything was going wrong and we were spending too much in the previous few years, he was quite happy to support such spending right up until the end of 2008.

I am listening with great interest to the right hon. Gentleman’s exposition of what the last Labour Government did. However, if everything is so good, why is our economic and financial position so much worse than those of our competitors after his tenure as Chancellor of the Exchequer?

It is largely because we have a very large financial sector that contributed about 25% of all our corporation tax receipts. When the banking crisis hit, those receipts fell. There is something in the argument that has been advanced on both sides of the House in recent years—although, perhaps in retrospect, sadly not as much as it might have been over the past 30 years —that our economy has become dependent on the financial services sector, particularly on tax receipts. I think we would all like to see that rebalanced. Of course, there is a big question about how we do that, and I cannot for the life of me see how cancelling the help to Sheffield Forgemasters, for example, will go anywhere towards helping that rebalancing. However, I shall come on to that in just a moment.

At the moment, our recovery is fragile. What makes matters worse is that the position in our main export market, Europe, is extremely worrying. I am far less optimistic than I was in March about what is likely to happen in the European Union economies over the next year. Growth in France has fallen back; in Germany, it is pretty flat—just positive; other countries have tipped into recession; and Spain has unemployment over 20% and other well-understood problems. On top of that, whereas the predominant view certainly until the beginning of this year was that we had to support our economies to ensure that we established growth, the Chancellor is right that he can pray in aid the change of view among some of his counterparts, such as in Germany, which is now pursuing policies to reduce the deficit that will impact on demand, not just in that country but within other parts of Europe as well. Germany is our major trading partner. If demand there is suppressed, and if taking large sums of money out of our economy here has the effect I suspect it will have, the result will be reduced demand, which will affect business confidence, its propensity to invest and, therefore, our ability to grow and generate the receipts we need to get our borrowing down. That is a real concern.

There is no doubt that, over the past few months, the balance in the approach has moved away from what one might characterise as the Keynesian towards the more orthodox. I, for one, think that that is a profound mistake.

Does my right hon. Friend share my worry about the much-cited examples of the quite savage cuts agendas in Canada, Sweden and elsewhere? They were done against the backdrop of growing export markets, monetary policy and currency devaluations. His analysis of what is happening in the eurozone at the moment should fill us with caution, if not dread, because if the Chancellor’s judgment is wrong, this country is going to hell in a handcart.

My hon. Friend’s point about Canada is an important one. Yes, Canada reduced its deficit quite dramatically. As a result of that country’s provincial set-up, a lot of the action was taken by the provincial governments rather than the national Government. It was taken, however, an the back of a growing US economy. Given the relative size of the Canadian economy compared with the US economy—it is much smaller than the Californian economy alone, for example—there is no doubt that the Canadians could do things on the back of their next-door neighbour’s rising prosperity. Our problem is that our next-door neighbours, the EU, are not in the same position at all—indeed, quite the reverse. Equally, when Sweden was going through a similar exercise, it was helped by the fact that the economy of much of Europe was growing at the time.

Does the right hon. Gentleman agree that he should also consider the example of Spain, of which I am sure he is more than aware, when talking about our EU neighbours? Despite having a lower debt-to-GDP ratio than us and a lower budget deficit, it is on the verge of a sovereign debt crisis. Its banks have been frozen out of the borrowing markets for the past three weeks, and it has reportedly held emergency meetings with the International Monetary Fund, the EU and others to try to arrange a bail-out package. Does that not make what we had to do yesterday even more critical?

There is another difference, of course. Official unemployment in Spain is more than 20%. The Spanish construction industry is in dire straits. A lot of Spain’s smaller banks, which are heavily tied to that industry, are finding things difficult. There is a world of difference between the Spanish economy and our own, just as there is a world of difference between the Greek economy and our own.

Just about every day in the run-up to the election, the hon. Gentleman’s party was anxious—desperate even—to compare our economy with the Greek economy. To his credit, the Secretary of State for Transport—he is not here today, but I made this point to him when we were debating on the television last night—said that Britain was nothing like Greece. The idea that we are in the same position as Greece or Spain is complete nonsense. Our economy is much larger and much stronger, and our ability to service our debt is much greater. The average maturity of our debt—as the hon. Gentleman knows, I assume—is 14 years, whereas in Greece the average maturity is three years and in continental Europe it is about five years.

Of course we have to get our borrowing down and ensure that we can get debt down as well. No one would disagree with that. The question for us is how do we do that in a way that maintains growth, so that we can ensure not only that we get growth in our economy and that we do not damage our future prospects, but that we do so in a way that is socially and politically fair? That is the difference, but to compare us with those smaller countries is, frankly, ludicrous, as many in the hon. Gentleman’s party realise.

Did the right hon. Gentleman really believe that the previous Government had ended boom and bust, and is that why he put no money away for the rainy day that has now arrived?

The hon. Gentleman was not here in the last Parliament, but I was asked that on numerous occasions. No Government can ever eradicate economic cycles. They have been around for years, and I expect that the current Government will find that they will be around for years as well. What I would say to the hon. Gentleman is this. Just before we went into this crisis, we had the second lowest debt level of the G7, behind only Canada, and although we had a structural deficit, it was much smaller—[Interruption.] Yes, we were borrowing to build schools and hospitals, but when they were sitting here on the Opposition Benches, Conservative Members used to call for more spending on schools, hospitals and the police, not less.

The point is that whatever we do, when we get that borrowing down, we have to ensure that we do it in a way that does not damage the fabric of the economy. Indeed, the Secretary of State for Business, Innovation and Skills said that he was

“very much opposed to the Conservative approach of rushing into cuts…regardless of the condition in the economy. That’s not sensible.”

He was right then and he would have been right now, but he is pursuing a different policy.

rose—

No, I am going to make some progress.

The current context is a fragile recovery, with growth in Europe sluggish. Crucially, however, we cannot assume, as the Government seem to, that it is axiomatic that if we cut back on public expenditure, the private sector will come in and take its place. That is not guaranteed at all. We have seen that in Japan and other countries. Indeed, the private sector often relies on public sector spending in many ways, whether through investment and support or directly, because it supplies goods and services to the public sector.

As I have said, borrowing is too high and we need to get it down. As I said to the hon. Member for Bexleyheath and Crayford (Mr Evennett), our receipts from income tax and corporation tax fell, as did our stamp duty receipts when the housing market went down, but that would have happened—indeed, it did happen—to every other major economy. We are not talking about something that was confined to the United Kingdom. Of course, as unemployment goes up, social security spending goes up as well. Indeed, it is interesting that if we look at what has happened to other countries across the world, we see that the deficit this year in this country is about the same as it is in the United States. If we look at debt and the IMF comparisons that were published in 2009, we find that our debt was less than that of Japan, Italy, Germany and France, and, looking ahead to 2015, it will still be less than that of the United States, France, Italy and Japan.

The idea that we are talking about a particularly British problem simply does not stack up. It is not true, but it is used as a convenient excuse for what the Conservative party always wanted to do. The truth is that the Conservatives supported our spending plans right up until the end of 2008—the hon. Member for North West Leicestershire (Andrew Bridgen) might want to consider this point. Indeed, when the now Prime Minister was challenged—I think by some right-wing newspaper—as selling the pass, he said that those spending plans were “tight”. That was the word he used. He said:

“This is why we are sticking to Labour’s spending totals. Taken alone, these are tight.”

That is what he said in 2008, but now the Conservatives turn around and say that what happened would not have happened if they had been in power for the past five years and that things would have been completely different.

Let us be clear: we all want to see borrowing come down, and we need to ensure that that happens. It is also clear that we need to understand the consequences of what we are doing, so that we do not damage our economy or damage the social fabric of this country. However, to suggest that we should not have done anything to support our economy as we went into recession or that we should not have stepped in to prevent the banking system from collapsing—and it was hours from collapsing—is simply nonsense, frankly. Indeed, if we had not done what we did, the cost, in terms of increased borrowing and higher debt, would have been far higher even than it is today, so that argument simply does not stack up.

We need a sensible plan to get borrowing down, but if we get this wrong we will cause major problems, given the scale and speed of the Government’s action. Again, the Business Secretary said a few weeks ago that

“it would be foolish to rush in significant cuts now which take the economy down even further, which lead to an even bigger deficit problem”.

He was right when he said that, yet the view of the Government of whom he is now a member is rather different. To be fair to the Chancellor, he has been consistent. He has wanted to take this risk for some time, and he is now taking it in great style. Even better, from his point of view, is that he has got the Liberals to front it up. No wonder that, once they are out of this Chamber, Conservative Members are laughing at the very idea of getting the Chief Secretary to the Treasury fronting up the cuts last week in his boss’s constituency. That is indeed new politics; I just wonder how long it will last. All I can say is that if things get better, there is no way that the Conservatives will allow the Liberals to front up any good news when it comes.

I am concerned at this time that we run the risk of derailing the recovery, which is why I took a different view. I thought that we should halve borrowing over four years, rather than go further and faster. Looking at the Office for Budget Responsibility’s forecasts published yesterday, I am concerned that it has downrated the growth forecast for this year, which it published a week before, from 1.3% down to 1.2%, and that it has downrated growth in 2011 from 2.6% to 2.3%. The OBR therefore recognises that growth is going to be suppressed as a result of what is being done.

Will the right hon. Gentleman give way?

Yes, I suppose so.

I am honoured that the right hon. Gentleman has taken the time to give me tuppence-worth of his attention. Will he comment on whether he supports the creation of the Office for Budget Responsibility, bearing in mind his own predictions? In March he stated in this place that the growth forecast for 2011 was 3.25%, but now the Office for Budget Responsibility says that the forecast is 2.6%.

I am glad that I gave way to the hon. Gentleman, because the last time we touched on whether I supported the creation of the OBR, I think that the Chancellor said that I had always opposed it. However, I was careful before the election, and I think that I am right in saying that I did not oppose it as a matter of principle. The present Government decided to set up the OBR. If it works, it is worthy of support, so we will support the legislation in principle, but we will look at the detail. One interesting question is whether the OBR should be responsible to the Treasury or to Parliament—to this House in particular.

It has rubbished your forecasts.

Let me come to the forecasts. Forecasting, as I am sure the hon. Gentleman knows, is an art rather than a science. Let us just see, because as I understand it, the OBR is being advised by exactly the same civil servants who advise the Chancellor, and who advised me a few months ago. However, I note that when Sir Alan Budd announced the OBR pre-Budget report a week last Monday, he said that one of the reasons why he had changed his estimate was recent developments, including what is happening in Europe. As I said earlier, I am less optimistic now than I was three months ago about what is likely to happen to growth.

Will the right hon. Gentleman give way?

No, I think I have dealt with that point.

There will be some people who argue that the private sector would see faster growth and job creation if there was a swift consolidation that supported looser monetary policy. However, with inflation down, interest rates at 0.5% and bond yields coming down—they were coming down before the election, as well as after it—there is no evidence of suppressed private sector demand, so that argument does not stack up. I am concerned that we may see a situation when there are not the right conditions or the right confidence to bring forward business investment. I am happy to welcome the proposed reduction in corporation tax rates and other business help, but what governs whether businesses come forward with investment is whether they are confident that the economy is going to be growing so that people will buy their goods and services. That is what I am concerned about.

I am also concerned that the Office for Budget Responsibility forecast shows employment taking a hit of about 100,000 compared with what we had forecast previously. The Chartered Institute of Personnel and Development foresees unemployment rising and sticking around 3 million for this entire Parliament. The history of Japan in the 1990s—and, indeed, our own history back in the 1930s—provides a lesson in what happens if we get all this wrong. Wherever we sit in this House, we should all be concerned about rising and persistent unemployment. Not only is it an economic waste; it is also a social catastrophe, as we have seen on many occasions.

rose—

I shall give way to the hon. Gentleman, not least because I had the pleasure of visiting what is now his constituency during the election campaign, and I can see that my contribution there did not quite work out.

I thank the right hon. Gentleman for giving way—and, indeed, for visiting North East Somerset, where he will be welcome again. He has mentioned Japan, and what Japan got wrong. What it got wrong was massive overspending, as a result of which it is now forecast to have a debt to GDP ratio of 246%. Surely that overspending is exactly what we need to avoid.

What Japan got wrong was snuffing out a recovery at a very early stage and never really getting over it. As the hon. Gentleman knows, the Japanese have had complete stagnation for a long period now. The debt is just going up and up, and understandably they are very concerned about it. The new Prime Minister was the finance Minister until a few weeks ago, and understandably, he has huge problems on his hands.

The tests we need to apply to the Budget relate to growth and jobs, which I remain very concerned about; there is a substantial risk there, and I would like to have heard more said about policies to promote growth so that we do not end up with years of very sluggish growth at best or, even worse, bumping along the bottom for some years.

I have said that one of the tests that needs to be applied to this Budget is its fairness and another relates to the promises made about it before the election. Where better to start, then, than with VAT? During the election there was a lot of discussion about that. The Conservatives, like ourselves, said that they had no plans to raise VAT. I remember having a discussion with the Chancellor when he announced his plans not to go ahead with at least some of the national insurance increases, and he said that he would fund that from efficiency savings. I remember saying that I thought that was highly doubtful, and that they would have to raise money from another big tax. Sure enough, VAT is going up.

Interestingly, for some reason, not much was said about efficiencies yesterday, although they loomed very large during the election. We now know that “no plans” on the Tory side meant exactly what Geoffrey Howe said in 1979 when he said he had “no intention” of doubling VAT. Of course he was factually right, as it only went up from 8% to 15%. It was the same with John Major when he was Prime Minister in 1992, and said he had “no plans” to raise “extra resources from VAT”: of course, VAT went up. Even last year, the Prime Minister said in opposition that putting up VAT was regressive. He said:

“You could try, as you say, put it on VAT, sales tax, but again if you look at the effect of sales tax, it's very regressive, it hits the poorest the hardest. It does, I absolutely promise you.”

I assume he was not absolutely promising to do that, but was trying to point out to the questioner that he thought that VAT was regressive. Yet here we have it—VAT going up to 20%, as I always suspected would happen.

What I find even more curious is how on earth the Business Secretary can back this proposal. He cannot have been unaware of the Liberal campaign which spent two days dealing with the “Tory VAT bombshell”. We saw the posters all over the country. They said a Tory Government would come up with “a secret VAT bombshell”, but the only secret appears to be that the Liberals intended to vote for it when it was introduced. The hon. Member for Bermondsey and Old Southwark (Simon Hughes), who is no longer in his place, said last week that he thought VAT was

“the most regressive form of tax”

in that it “penalises the poor”. When the Business Secretary said during the election that he would

“hardwire fairness back into national life”,

did he have this in mind?

I see that there are, wisely, only four Liberal Democrats in the House at the moment; the others are no doubt explaining to their constituents why it is that when they said, “Vote for us and keep the Tories out,” they completely misunderstood the position. It seems to me that this is not just a broken promise, as there are real issues at stake. I was criticised for what I did with national insurance, but I wanted to ensure that pensioners would not have to pay the increased tax and I wanted to protect people earning less than £20,000—of course, that has not happened.

The Chancellor keeps saying that we are all in this together, but the headlines in The Financial Times today suggest otherwise. Under the headline, “Well paid breathe collective sigh of relief”, the article quotes someone from RBC Wealth Management saying:

“Many high earners will be breathing a sigh of relief.”

Does that not prove that we are not all in it together?

My hon. Friend makes a fair point. It is interesting that the Liberal Democrats promised us that if they went into coalition they would get something in return on capital gains tax. They wanted a 40% CGT, yet they appear to have settled for 28%.

That is 10% higher than under Labour.

The Chancellor says it is 10% higher, but when I raised capital gains tax to 18%, I remember the angry campaign waged against it by Conservative Members. They said that 18% would discourage enterprise and was a terrible thing, but they seem to have changed their minds on that absolutely and completely. By the way, we are not going to oppose the increase in capital gains tax; especially when there is a higher 50p rate of tax, sooner or later action would have to be taken to stop the real risk of leakage. As I think the Chancellor said yesterday, the real gain from raising capital gains tax comes from income tax receipts. The position of the Liberal Democrats, however, was quite different.

There are other areas, too, where questions of fairness will be raised. Where in the manifestos of either of the political parties that form the Government was it said that they were going to index benefits to the lower inflation index of the CPI—the consumer prices index—which takes about £6 billion away from people whose income, generally speaking, is not that great? Where was it said in their manifestos that they were going to cut more than £100 in relation to child benefit, or to freeze that benefit for three years? Other changes also deserve very close examination. Everybody knows that housing benefit is in need of reform, as is the disability living allowance, but as we all know, these are complicated, difficult and sometimes controversial issues. It will be interesting to see whether the coalition Government can deliver all the things they promised yesterday.

The shadow Chancellor said that action would have had to be taken on the CGT rate sooner or later, but I cannot remember him criticising his predecessor when the Labour party reduced CGT from 40% down to 18%. Is he now saying that that was the wrong thing to do, or not?

I am not saying that, and I am bound to say that I do not remember anybody—and certainly not the Conservative party at the time—criticising the reduction of CGT down to 10%. It was believed that it would help and encourage entrepreneurship—[Interruption.] The hon. Gentleman might like to have a long look at that, but I am sure that many arguments can be mounted both ways. As he knows, I made changes in 2007; I remember that the Conservative party’s complaint then was not about the reduction of CGT, but about my increasing it to 18%. As I said, with income tax rates at 50%, it is sensible to keep an eye on this.

I believe that people will find it difficult to characterise a number of measures announced yesterday as fair. On tax credits, the Chancellor said that the Government were going to start to taper away tax credits from household incomes of over £40,000, but that is already true now. In the following year the threshold goes down to £30,000. As we always said during the election—when it was denied—people on incomes as low £15,000 will be affected. Look at table A.5 on page 64 of the Red Book: it is there; it is all set out. It shows that cuts in entitlement to tax credits go far further than the right hon. Gentleman set out yesterday.

I think that the Liberals will have some difficulty in characterising these things as “progressive cuts”. I understand that the leader of the Liberal Democrats points to the table published in the Red Book, which makes it look as if people at the top end are bearing a fair share of the reductions and tax increases, but it shows that only because the Government have published a table showing measures yet to be introduced, including our national insurance increases. The top decile will be paying more because of measures that I, not the Chancellor, introduced. It is slightly disingenuous of the Prime Minister to give the impression, as he did at the end of Question Time, that what the Conservatives are doing is redistributive and fair. That is not the case.

The shadow Chancellor has told us that he supports the rise in CGT. Does he also support the rise in the personal allowance by £1,000, the re-linking of pensions to earnings and the freezing of council tax? If he does, why were they not in his last Budget?

Our policy, as the hon. Gentleman will know, was to restore the earnings link from 2012. I can see that bringing that forward to a year in which earnings are likely to be very low had a political attraction. I think that was the subject of exchanges at Prime Minister’s Question Time, and it will not have the cash effect that is thought. As for personal allowances, I am in favour of taking people out of tax if at all possible, but the same people who are being taken out of tax will be paying increased VAT.

Further to the intervention of the hon. Member for Crewe and Nantwich (Mr Timpson), will my right hon. Friend expose the nonsense of the supposed council tax freeze announced by the Government and the small amount of money given to local authorities at the 2.5% level? Is not the rug being pulled from under local government through swingeing cuts to grants? How on earth are local authorities supposed to plan ahead and make their budgets? Surely they will not be able to do that until they see the spending review.

I noticed that the spin on Tuesday morning was that council tax was to be frozen in England next year. By the time of the speech, however, the Chancellor was saying that if local authorities did certain things, he would see what he could do to help them, which is not quite the same.

Let me put some questions to the Secretary of State for Business, Innovation and Skills. On the Chancellor’s proposed levy on the banks, will the Secretary of State tell us precisely what the French and German Governments propose to do? I, too, had discussions with my French and German counterparts, but it was not always clear that they were proposing to do precisely what we might have done. Things have clearly developed, and I would like to know what those developments are.

The Chancellor announced measures to help development outside London and the south-east. He mentioned regional funds and other help, so will the Business Secretary give us further details? The Chancellor also mentioned that he wanted to change the approach to pensions tax relief. He made the point that the Labour Government had had a number of discussions; legislation went through on the nod, I think, just before Dissolution. Does the Chancellor’s alternative mean reduced annual allowances? My recollection is that that would affect far more people than we proposed to affect, and is therefore less progressive?

People are right to be concerned about the overall thrust of the Budget in relation to the effect on growth and jobs. Yes, we need to get borrowing down—we all know that—but we must do it in a way that is sensible and will result in us coming through all the problems and being able to grow and secure jobs in the future. The Budget also fails the fairness test. Over the next few weeks and months, we will consider yesterday’s announcement and, equally importantly, the cuts to departmental spending. The Business Secretary’s Department is not protected. Perhaps he will say what the effect of a reduction of a quarter in his budget would be, given that he is responsible for science, universities and business support.

We will return to those big questions. Like all Budgets, this one will be judged in the fullness of time. We are coming through a difficult period, and the action taken by the Labour Government was totally justified. We must be careful not to derail that effort and end up undoing all the work done over the past few years.

This is the first opportunity that I have had to debate with the shadow Chancellor from this side of the Dispatch Box. May I start by paying tribute to him? I have always said publicly, and am happy to continue to do so, that in many respects he was one of the people who emerged from the wreckage of the previous Government with an enhanced reputation. He did so for two reasons. First, he inherited an enormous banking crisis that was in part the result of the naivety and negligence of the treatment of banking before he became Chancellor. He dealt with it decisively in the autumn of 2008, through liquidity and part nationalisation, and I reassert that he deserves credit for that. Secondly, he has at his core a strong element of honesty and integrity, which occasionally involves him blurting out the truth. There was the famous occasion when he came back from a holiday in the Hebrides and uttered the blasphemous four-letter word “cuts” for the first time, much to the annoyance of his next-door neighbour in Downing street.

The question to which the Government have wanted an answer is this: why were we left £50 billion of cut commitments without any explanation of what they were going to be? On 12 June, the shadow Chancellor gave us an insight into what had been going on. He said:

“I wanted to show more examples of what we could cut, and more examples of what we could switch. But there was a more limited appetite for that than you might think.”

It was not just the appetite of his then next-door neighbour, who is now being blamed for everything, that was limited. I think that there was a limited appetite here and there, and as a result we have been left with the responsibility of spelling out what those painful cuts are.

There is another comment which is not a direct quote of the shadow Chancellor, and he might not even have said it, but let me give it to the House, as I think it reflects quite well on him. He is said to have made an insightful observation on the nature of sovereign debt crises. Apparently, he told the Cabinet, “The ice seems solid the moment before it cracks.” That captures beautifully the dilemma that the Government now face with a sovereign debt crisis in the background. I wish to return to that issue, but first I will briefly answer the technical points that he threw in at the end of his speech.

As I understand it, the French-German proposal is a balance sheet levy similar to what is happening here. The proposals relating to regional rebalancing, which are an important part of the Government’s proposals, have two elements: £5,000 relief from employer national insurance contributions for new companies with up to 10 employees outside the east, the south-east and London, and a fund that will be distributed on the basis of bids received for good projects, especially those with a high-technology and environmental component. The details on that will emerge in due course.

Why, if the Government are so keen on rebalancing the economy regionally, did they turn down the loan to Sheffield Forgemasters?

The hon. Lady knows the reason; it has been explained several times. A lot of questions had to be asked about the affordability, value for money and risk of that project. What was a very highly geared project promised extraordinary rates of return to the private promoter. We looked carefully at all the evidence, and the project clearly had positive aspects, but we decided that in the circumstances of a Government with highly constrained public finances, we could not support it.

Will the right hon. Gentleman give way?

I have answered the question; I do not want to pursue it.

Were the private promoters able to take the project forward, we would be delighted, because as a commercial project it has many attractions. However, the Government could not commit large amounts of money to such a project.

The shadow Chancellor made a series of challenges, which I will take systematically. He asked why we, and I personally, have endorsed austerity policies and especially quick cuts; he asked about the issues around fairness and value added tax, with which I will deal; and he asked about the important economic question of how we get growth emerging from a period of austerity, and I will try to answer that. First, however, let me explain why I changed my mind—for I did change my mind—about the necessity for early action on the budget deficit. Let me describe the sequence of events, because I think that it is quite important.

As the shadow Chancellor knows, because he was still Chancellor then, when the election took place there was, in the background, a major sovereign debt crisis in Europe. The day after the election, when there was a hung Parliament, the then Prime Minister suggested to me, I think for reasons for courtesy, that I talk to some senior officials in the Government and the governor of the central bank about the existing situation, in order to obtain their assessments of what was going on. I did so. The leader of my party talked to the governor, and I have talked to him since.

The advice that I received, uncompromising and unequivocal, was that the incoming Government, whoever they were—we did not know who they would be at the time—would have to act immediately and decisively on the budget deficit, because there was a serious threat to this country. I took that advice, but was left with a nagging question. The former Chancellor was presumably receiving the same advice. What would he have done? Was he proposing to disregard it? The line of policy that he is developing now suggests that he would have liked to disregard it, but was he going to do so, or was he going to be responsible, accept the advice and act on it? Because he is a responsible and serious man, I think he would have accepted it.

We now know, because the figures are becoming clear, that in the current financial year, when, as the shadow Chancellor said, the economy was fragile, he was introducing a fiscal tightening of £23 billion. The new Government have introduced a tightening of £6 billion. The last Government did not announce that fiscal tightening—it emerged in the small print from the Institute for Fiscal Studies—but the shadow Chancellor did it, and he clearly did it with good reason. The problem was that it was never clear what the Government were doing, it was done in a very chaotic way, and some Ministers—including Lord Mandelson, my predecessor—plainly wanted to support the Chancellor and to act in the public interest, and got on with those cuts. When I entered the Department, people such as further education lecturers and scientists were being made redundant as a result of the measures that had already been initiated by the Government in response to the crisis that they knew existed.

The right hon. Gentleman may well have had his damascene conversion, for who knows what reasons, but does he not owe an apology to the millions of people who thought when they voted Liberal Democrat that they were voting for a pro-growth strategy and against these massive cuts? Should he not apologise to his own electors?

No; we are trying to deal with the problem that the hon. Gentleman and his colleagues left behind.

Since the right hon. Gentleman referred directly to me and to advice and discussions that I may have had, let me say to him that there has never been any argument in the House about the fact that we needed to reduce borrowing. The discussion was always about when the reduction should start—before the election, he and I were on the same side on that—and about the extent to which, and the speed at which, it should take place.

As for Greece and the sovereign debt crisis, I am sure that the right hon. Gentleman will also have been advised that the real problem was that the rest of the eurogroup took far too long to do what was necessary to support the Greek Government. Had they done it in February, when the problems first became apparent, some, although not all, of those problems might have been avoided. As it was, they were allowed to become acute. No one is arguing that we did not need to reduce our borrowing, but we were not in the same position as Greece.

I know that we were not in the same position as Greece. I was not talking about what the Greeks and the eurozone needed to do; I was talking about what we needed to do, and the advice that we received.

There is an evidence base to look at. It is true that, as the shadow Chancellor said in his speech, the cost of borrowing in terms of bond yields was starting to fall under the last Government. That is because markets are driven by expectations, and they expected a change of Government. Since the election, however, and since this action was taken and announced, the cost to the United Kingdom of borrowing, in terms of bond yields, has fallen by 20 basis points. In Greece it has risen by 170 basis points, or 2% in ordinary language. It has risen by 94 points in Ireland, by 95 in Portugal, and by 65 in Spain. Spain is a serious, big country: we are not talking about tiny, peripheral economies. It is a serious country, which was caught up in the financial firestorm that we have had to head off from here. That was the basis on which we made decisions.

Let me now develop that immediate question into the broader issue of the Chancellor’s Budget and the magnitude of the task that we had to undertake. There is, of course, a difference between the problem of the deficit and the problem of the debt. There is a public debt problem, which is growing rapidly, but as the Chancellor has pointed out and as I have often pointed out myself, it is not greatly out of line with what is happening in many other countries, or with what has happened historically. The real problem for the United Kingdom is the massive level of public borrowing. That is why markets are important. The deficit in the last financial year was 11% of GDP; in the current financial year, it is 10.5% of GDP. That money—£155 billion—must be borrowed. My views on that, on how it should be dealt with, and on the kind of radicalism that is needed had nothing to do with the formation of the coalition. My views were set out a year ago, when I wrote a pamphlet which did, indeed, bear a strong resemblance to what the Chancellor produced yesterday in terms of scale, scope and speed.

Let me tell the shadow Chancellor why I feel strongly about the need to act in such a decisive way in terms of fiscal policy. There are two reasons. First, I saw the disaster unfolding under the last Government, when they were overtaken by a major financial crisis for which they were not prepared and to which they had massively contributed. Of course there is a global problem—we know that—but its impact has been much more serious in this country than elsewhere. That is because the Government allowed household debt, in relation to income, to rise to the highest level in the developed world; because they acted and planned on the assumption that house prices rise for ever, although we know from the evidence that they go up and down roughly every 17 or 18 years, as they have done for the last 300 years; and because they created, encouraged and fostered an almost Icelandic dependence on major international banks, the combined magnitude of whose balance sheets represented 400% of our economy.

The Government allowed that to happen. Some of us warned about the dangers, and they took no notice: they said that we were scaremongering. But the crisis hit them, and, having experienced it once, we on this side of the House are determined that such a financial crisis should not happen again as a result of sovereign risk. That is why we are decisive, and why we feel that we need to act.

If what the right hon. Gentleman says about the banks is true, why has the Budget been quite so lenient with them? Why has it taken only £1 billion from them, when the rest of the country is having to pay £14 billion as a result of the measures in the Red Book? What will his Department do to prevent the banks from passing even that £1 billion on to their customers?

That was a very strange intervention. It may reflect the fact that the hon. Gentleman—whom I respect a great deal—has rejoined the House following the election, and may not be familiar with the arguments that led up to it. He will know, however, that the last Government were going to phase out their bonus tax. We have reintroduced a stable system of taxation on banks, the incidence of which will increase over time. Of course, many things need to happen to the banking system. We will discuss, as colleagues, how we should deal with such matters as bank lending, on which there is an outrageous record of bank dysfunctionality.

rose—

I will take another intervention, but then I must move on.

It seems to me that, to rectify the problems, the right hon. Gentleman has signed up his party to a Budget that represents a massive gamble for the country. What happens if it fails? What is plan B?

The hon. Gentleman says that a gamble is being made. Certainly there is a risk. There are risks in tightening fiscal policy too quickly, but there are also risks in doing nothing, or in doing less. We have had to balance those risks, and we have concluded that we must act.

Since the questions are coming from Labour Members, let me now give the other reason why I feel strongly about the need to act decisively in the way in which the Chancellor acted yesterday. Thirty years ago, as an adviser, I occupied the office that I now occupy as a Minister. It was the end of a Labour Government who had chosen to ignore the build-up to a major financial crisis. As some people will remember, the painful measures—the taxes, welfare cuts and spending cuts—were not taken by choice. They were imposed from outside by the International Monetary Fund. Because I was there at the tail-end of that Government, I saw the consequences, not the least of which were the massive divisions that opened up. People in the Government such as Denis Healey, Roy Jenkins and my boss, John Smith, believed that the Government had to be responsible, but there were a lot of others—I sense a growing echo of this feeling on the Opposition Back Benches today—who said, “We don’t need to do anything, we can fight the gnomes of Zurich and drive them underground, we can ignore the rest of the world and we do not need to act.” It was a disastrous alternative strategy, and the Labour party is in great danger of returning to that territory.

That is why I have come to the same position as the Chancellor of the Exchequer. We come from different political traditions; I do not try to hide that. As it happens, my role models as Chancellor of the Exchequer include Sir Stafford Cripps and Roy Jenkins, because they understood the need for sound public finance and they combined tough action on budgets with fairness. That is the tradition that we have continued.

Let me list some of the measures in this Budget with which I am proud to be associated. There is the lifting of the tax threshold by £1,000, towards the £10,000 mark. There is the action on capital gains tax, which is not just a tax-avoidance measure, but is about fairness. We have acted on public sector pay not just by freezing some salaries but by giving special help to people on low pay in the public sector. We have introduced the bank levy. We have done what the Labour Government failed to do in 12 years and introduced a triple-lock to protect pensioners—the shadow Deputy Leader of the House, the hon. Member for Worsley and Eccles South (Barbara Keeley), could not quite get her head around what the triple-lock is—and in addition supported pensioners through improved pension credit, which is a major cost on the budget going forward. We took action to head off any increase in child benefit, too.

Let me read a comment on child poverty made not by a politician, but by Barnardo’s, one of the leading charities. Yesterday it said:

“There’s some pain in this Budget for the poorest families, but we recognise the government has done what it can to protect the most vulnerable.

Our calls for child tax credits to be redirected away from more wealthy families to the poorest have been heard—an action we highly commend.”

I do not doubt the right hon. Gentleman’s motives during his journey over the years and the past few weeks, but does he give credence to the fact that there is an alternative that could minimise the risk to his communities and mine? It is not to do with rejecting an agenda of cuts, efficiencies or reprioritisation; it is to do with timing. It is not just me saying that, or the “dupes” on the Labour Benches. Paul Krugman, “Danny” Blanchflower, Will Hutton and many other economists are saying, “Minimise the risk; just delay, and make the decisions at the right time.”

I think that the gentlemen to whom the hon. Gentleman refers are mostly talking about competitive deflation in the world economy, which is, of course, absolutely disastrous. The Chancellor referred in his speech yesterday to the fact that other countries that are in surplus have to do the opposite of what we are doing in terms of fiscal consolidation. The Chancellor made that very clear in relation to action to be taken by the Chinese and action that should be taken by countries such as Germany. Of course we understand the wider context.

Let me return to the criticisms about value added tax. The shadow Chancellor put the question in a personal way when he asked why I was supporting the increase in value added tax. The three of us—the shadow Chancellor, the Chancellor and myself—went around the television studios during the election campaign; we were the three Chancellors, a bit like “The Three Tenors”. We had our several encounters and each of us was asked time and again, “What do you think about value added tax?” As I recall, all three of us gave an identical answer: “We have no plans to increase value added tax, but we have not ruled it out.” The reason why we are now having to confront the matter is that there is a bigger structural deficit than was appreciated and action had to be taken. That could have been a tax measure, or it could have been a spending cut. Is that what Labour Members are saying? Do they want more cuts in spending? Do they want another tax? What do they want?

I was just wondering what impression the Liberal Democrat poster about the Tory VAT bombshell was meant to give.

Anybody who read my comments on tax policy over the past year would, I think, hardly imagine that there was a surprise or a bombshell, because I said on many occasions that if taxes had to be increased, it made much more sense to tax expenditure than income or corporate income or employment. That was my view, and I expressed it on many occasions.

I wish to associate myself with many of the measures that we as Liberal Democrats can take pleasure from in the Budget, including the increases in personal allowance and in pensions. On VAT, to what extent does my right hon. Friend accept that we could have explored alternatives, including increasing capital gains tax still further or increasing the bank levy to ensure that the balance of tax increases was more proportionate?