I beg to move, That the Bill be now read a Second time.
The emergency Budget takes tough action at a critical time for the British economy. The Bill implements many of the necessary measures in the Budget. As my right hon. Friend the Chancellor of the Exchequer said in his statement:
“The coalition Government have inherited from their predecessors the largest budget deficit of any economy in Europe, with the single exception of Ireland. One pound in every four we spend is being borrowed.” —[Official Report, 22 June 2010; Vol. 512, c. 166.]
The gap stands at £149 billion for this financial year alone. Yet the previous Government left us with no credible plans to reduce their record deficit. Nothing at this time is more urgent for Britain than setting out a tough, realistic and fair plan that demonstrates how we will regain control of the public finances.
The right hon. Gentleman just told the House that the previous Government’s plans for a reduction were not credible, but how can he say that when the Office for Budget Responsibility’s latest independent analysis found that the Labour reduction plan would have more than achieved the target to halve the deficit over four years from 11.1% in 2009-10 to 5% in 2013?
I am grateful for that intervention. As the OBR set out both in its pre-Budget forecast and in the forecast published with the Budget, the comparison that the hon. Gentleman is seeking to make is based on interest rate assumptions that took into account market expectations under this Government’s measures, not market expectations of the measures that the previous Government were taking. He should read the OBR report if he does not agree, because that is an accurate account of what it says. It is clear that, had the previous Government carried on with their plans, interest rates would have been different. The risks that we are seeking to avoid through the Budget are those of higher interest rates, lower growth and fewer jobs, which I believe would be the consequence.
In light of that answer, what are we to make of Sir Alan Budd’s resignation today? The right hon. Gentleman puts much store by the OBR’s reports, but did they not contribute to Sir Alan relinquishing his post? He said that this was the greatest challenge of his professional career. He must have an extremely exciting career that he can give up that post so quickly.
I am grateful to the hon. Gentleman for giving me the opportunity to place on the record my thanks and those of this Government to Sir Alan Budd for his superb work in establishing, in a short period, an independent Office for Budget Responsibility with a strong reputation. It was always known that he intended to move on after a short period—a few months—in his post, and that is what he is doing. In a short time, he has established greater independence of the forecasts that go with the Budget than the previous Government managed in 13 years.
Sir Alan Budd is leaving the Office for Budget Responsibility, so to ensure that that organisation is seen to be independent, will the right hon. Gentleman give the House of Commons the power to appoint the successor or is he going to keep that for himself as a Minister?
I am not sure that that power ever rested in the hands of the Chief Secretary but, as the hon. Gentleman knows from the Gracious Speech, the Government intend to implement legislation to put the OBR on a statutory footing. He will have the opportunity to make that point in considering that legislation, and I am sure that he intends to do so.
I would like to make progress.
We have considered the plans of the previous Government and it is clear that they left us open to the risk of ending up in an even more serious crisis than that which we currently face. Such a crisis could ask questions of the kind that some other European countries face today, with higher interest rates—I mentioned those to the hon. Member for North Durham (Mr Jones)—more businesses going bust and higher unemployment. That is not a risk that we are prepared to take. The Budget takes the tough action necessary, but it does so with fairness, protecting the most vulnerable, including children in poverty and pensioners. In his emergency Budget, my right hon. Friend the Chancellor has set out clearly how we will pay for the bills of the past and start to plan for the future. This has already had an impact on the credibility of and confidence in the British economy.
On fairness, it is clear that the measures that the right hon. Gentleman is enacting mean that the poorest 10% of people lose in percentage terms twice as much of their incomes as the richest 10%. What definition of fairness is he using when he says that that is fair?
I am sorry, but I do not accept the figures that the hon. Lady set out. If she looks at the information presented in the Red Book, she will find that it shows that the richest 10% of the population pay the greatest contribution, both as a share of their income and in cash terms. That is what I mean by fairness, and that is what we have set out. It is worth pointing out to her that this is the first time that a Government have chosen to set out in detail in the Budget documentation the distributional impact of the Budget measures. That is not a measure that the previous Government took, for example, when the 10p tax rate was being abolished.
I know that the right hon. Gentleman is doing his apprenticeship, but does he not understand the difference between the proportion and the actual tax take? Surely for a family in my constituency who are earning the minimum wage, the VAT situation alone will mean that the effect on the proportion of their income will be larger. If he looked at the research paper that has been ably produced in the House of Commons, he would find that it points out that fact.
I ask the hon. Gentleman to look at the tables on page 67 of the Red Book. I draw his attention to chart A2, which is on the
“Impact of all measures as a per cent of net income by income distribution”.
He will find that it makes it clear that the impact on the top decile is the highest as a share of income. Other charts make it clear that it is the highest in cash terms and that the impact is broadly progressive across income distribution.
I am rushing to get to the ballot box—[Interruption.] The right hon. Gentleman is welcome to come to the ballot box too, if he so wishes. He will know that not only does chart A2 include the Labour measures from the March Budget, but it does not go beyond 2012-13 and does not include housing benefit. Is he also aware that the House of Commons analysis has shown that more than 70% of about £8 billion of direct tax and benefit measures introduced in his Budget are being paid by women? What figure does the Treasury put on the proportion of those direct tax and benefit measures being paid for by women?
There were a lot of questions there but not a single apology for the record of the previous Government. The single measure announced by the previous Government that is included in the charts in the Budget Book is the national insurance change. We have chosen to introduce that measure, so it is legitimate that we have included it in the charts. Other measures that affect people on higher incomes such as the increase in capital gains tax for higher rate taxpayers, which the previous Government never chose to introduce, cannot be included in the tables, so the impact on the wealthiest may even be greater than is illustrated in the charts.
I wish to respond fully to the intervention. I will come to the right hon. Gentleman in a little while.
We have taken a number of measures in the Budget, such as the earnings link with pensions, with a triple lock of earnings, prices or 2.5%, which the previous Government never managed in 13 years. That is a record of which we can already be proud. I give way to the former Chief Secretary.
As I understand it, the House of Commons analysis does not include the impact of all the measures in the Budget. VAT is paid much more in cash terms––that has been accepted by the Institute for Fiscal Studies––so it is paid more by the wealthiest. The analysis that we should rely on is that which is presented in the Budget because it shows that the distributional impact of the Budget measures hits those on highest incomes hardest. That is the relevant measure and the one that I intend to draw attention to.
I commend my right hon. Friend on the fairness that he has ensured runs right through the Budget, especially in respect of pensioners, but may I draw his attention to one small potential unfairness that may have crept in? Pensioners who are on a modest works pension and the state pension will pay £100 more in tax this year than they did last year because of the difference in the thresholds. I am sure that this was inadvertent. Will he look again at that particular issue?
I can confirm that we have carried out an analysis of the Budget across the income distribution to evaluate its fairness. We have also conducted an analysis of the impact on child poverty, which is the most important aspect. We have ensured that, even in the toughest Budget since the second world war, there will be no impact on measured child poverty—something that could not always be said of the previous Government’s Budgets.
Opposition Members like talking about apprenticeships. I am a relative newcomer to the House so can my right hon. Friend enlighten me? What happened to the gap between rich and poor under the previous Government? For my information, did it get wider or narrower?
The hon. Gentleman is clearly not as much of an apprentice in this House as he claims to be. The gap between rich and poor got wider during the previous Government’s term.
The measures in the Budget have already had an impact on the credibility of and confidence in the British economy. As the director general of the CBI, for example, has said:
“This budget is the UK's first important step on the long journey back to economic health.”
The Fitch rating agency said:
“The path of deficit reduction and public debt projections set out in”
“Budget statement are materially stronger than that set out in the March 2010 Budget.”
On fairness, the chief executive of Barnardo’s said:
“we recognise the Government has done what it can to protect the most vulnerable.”
I will make some progress and give way to the hon. Gentleman later.
The Bill shows how the Government will carry out Britain’s unavoidable deficit reduction plan in a way that strengthens and unites the country. The Budget and the Bill stand for three things. The first is responsibility—taking action to eliminate the structural deficit. The second is freedom—helping the businesses on which we all rely to rebuild our broken economy. The third is fairness—protecting the most vulnerable, while ensuring the contribution of all. Those principles are at the centre of the Bill before the House today and I shall address each in some detail shortly.
The right hon. Gentleman mentioned fairness and businesses, and I would like to draw his attention to rural areas. He will understand that the increase in VAT will affect fuel prices in rural areas. Would it not be right to have a rural fuel derogation pilot in place before the VAT increase takes effect?
I am very grateful for that intervention. The hon. Gentleman knows that we are investigating a rural fuel derogation of some sort—that was repeated in the Budget statement. Although I cannot make a commitment on timing, as he knows, I am personally very enthusiastic about such a measure and I will continue to work with my colleagues on it.
No, I want to make some progress.
The Finance Bill before the House today seeks to ensure that the Government’s key tax priorities as set out in the emergency Budget are put on the statute book as swiftly as possible. This year, however, we face exceptional circumstances owing to the timing of the general election, which resulted in a curtailed Finance Bill following the previous Government’s March Budget and a relatively short timetable between our emergency Budget and the summer recess. There remain a number of minor and technical measures that we inherited from the previous Government and which must be legislated for before 2011. We shall therefore introduce those measures in a further Finance Bill in the autumn. Consistent with our aim of greater scrutiny of tax legislation, again set out in the Budget, we shall publish all those measures in draft for consultation before the end of July.
The right hon. Gentleman says that he is thinking about a derogation for rural areas in relation to VAT on fuel. May I point out that not a single house in the Rhondda is more than half a mile from a farm, so will he include the Rhondda in a derogation not only from VAT on fuel but from everything else as well?
The hon. Gentleman has misunderstood what is being discussed, which is no surprise, given the previous Government’s attitude to the idea, as the hon. Member for Na h-Eileanan an Iar (Mr MacNeil) knows. We are not talking about a VAT derogation; the proposal relates to fuel duty.
I was involved when the Treasury last looked at that idea. As the hon. Member for Na h-Eileanan an Iar knows, there are real hardships and we were very sympathetic. However, the Chief Secretary must admit that there are difficulties with developing such a policy, not least because of the potential for smuggling and fraud.
The hon. Lady says she was sympathetic—I attended a meeting where she expressed that sympathy—but no action by the previous Government resulted, despite the matter being pressed for a number of years. I am sure that my hon. Friend the Exchequer Secretary will look at all the issues as the question is investigated.
I ask the Chief Secretary to consider this question. With rural fuel priced between £1.30 and £1.35 a litre, were a rural fuel derogation to apply in Na h-Eileanan an Iar, to where might we smuggle fuel? I would struggle to find anywhere where fuel is more expensive. That smuggling would be a problem is a ridiculous proposition. We had 13 years of nothing but sympathy from the last Government, with absolutely no action. I hope that this Chief Secretary does not make the same mistake.
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.
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.
The Chief Secretary to the Treasury makes the point about growth, but he has not really answered the previous question. The OBR suggests that business investment will increase by 8% to 11% almost every year, but can he tell us of any period of two, three or four years when business investment grew by 8% to 11%—particularly given that we are coming out of the deepest recession that anyone in this Chamber has ever seen?
Those are not my figures; those are the figures that the independent Office for Budget Responsibility produced. By the way, the figures that the previous Government put forward contained hopelessly over-optimistic forecasts for economic growth. In this Budget, we are taking measures to reduce corporation tax, to reduce the small companies rate of corporation tax and to tackle the Labour jobs tax on national insurance, all of which will help to support business development. Those measures, which I shall come on to if I get the chance during my speech, will all help to stimulate economic growth in the private sector, and that is the best way to lead this country out of the economic mess that we are in.
Perhaps I can help the Chief Secretary. There is a precedent for business investment matching the figures in the OBR’s forecast: it has occurred once in the past 40 years. That is the rarity of the precedent on which he now relies for his future growth plan.
I am not sure that the right hon. Gentleman can do anything to help me, given that he left the note saying that there was no money left, and that his decisions led the country to that position. I hope that in response to this debate he chooses to apologise for the mess in which his Government left the country.
My point is that that forecast was made by the independent Office for Budget Responsibility. In the previous Government’s March Budget, their growth forecasts, which were not independent in that sense, were over-optimistic, and I am prepared to accept the forecasts of the independent Office for Budget Responsibility.
No, I am going to move on.
Let me turn to the first of the measures in the Bill. Given that the structural deficit is some £12 billion larger than the previous Government told us, we have to make difficult choices—whether to fill the black hole with yet more spending cuts or increase taxes. Further spending cuts would have made it impossible for the Government to protect the country’s most essential services in the spending review. The only other option would have been to raise taxes on companies or on personal income, reducing the rewards for work at a time when hard work and endeavour must lead the recovery.
The VAT rise is unavoidable. As I said in the Budget debate, it is Labour’s inheritance tax. Clause 3 increases the standard rate of VAT from 17.5% to 20% from 4 January 2011. Everyday essentials such as food and children’s clothing, as well as newspapers and printed books, will remain zero-rated throughout the Parliament, protecting those on lower and middle incomes. Domestic consumption of fuel and power will remain subject to VAT at 5%.
No party proposed an increase in VAT at the election, and no party ruled one out. The Liberal Democrat manifesto—[Interruption.] If Opposition Members will listen, I will explain the situation. In the Liberal Democrat manifesto, we made it clear that we would seek to reduce the deficit through spending measures alone, unless, on grounds of fairness, it was necessary to increase taxes. That was a clear statement in our election manifesto. The rationale that I have just set out is based on the decision that we made. We felt that, given the £12 billion of extra structural deficit left us by the previous Government, the right decision was a rise in VAT rather than increased spending cuts.
I am grateful to the Chief Secretary for explaining his approach to fairness. Can he explain why it is fairer to cut spending on public services, on which the poorest rely most, than to use a progressive system of taxation? Why does the balance have to be 20% in favour of taxation and a whopping 80% in favour of public spending cuts?
In a way, the hon. Lady makes my point for me. The point that I just made is that given the additional £12 billion of structural deficit, as revealed by the OBR forecast, that was left us by the previous Government, we had to decide whether to make £12 billion of further spending cuts or to establish a tax measure to fill the gap. We made the right decision. The tables in the Budget book show that the overall impact on fairness—particularly for children living in poverty, which is a long-standing concern of the hon. Lady’s and on which she has a strong track record—is minimised.
I am going to make progress for a few moments, or the former Chief Secretary will never get a chance to have his say.
Clause 4 takes further action to tackle the deficit by increasing the standard rate of insurance premium tax from 5% to 6%. The higher rate of insurance premium tax will increase from 17.5% to 20% from 4 January 2011, to bring it into line with the new VAT rate. The increases are both fair and sustainable.
Is it fair to increase the higher rate of insurance premium tax to 20% on travel insurance, which is vital for many ordinary working people as they take a break and go on holiday? They may be able to do so for only one or two weeks a year. If they do not have travel insurance, that could leave them in significant jeopardy. Will the increase not prevent or deter people from taking out travel insurance?
I am sure that the hon. Gentleman is right to exhort people to take out travel insurance. As he will know, when insurance premium tax was established, both its lower and higher rates were linked to VAT. It is therefore right that they go ahead together on the same basis.
We have inherited plans to limit tax relief on pension savings for the wealthiest. We have concerns about the complexity of the changes and their potential consequences for pension saving, UK competitiveness and the complexity of the tax system. However, given the state of the public finances, we cannot be blind to the £3.5 billion of revenue that the policy was set to raise. Therefore we have set out our commitment to protecting the public finances by pursuing an alternative approach that raises no less revenue than existing plans, potentially by reducing the annual allowance. We will therefore engage employers, pension schemes, experts and other interested parties to determine the design of an alternative scheme. To keep our options open, clause 5 provides the power to repeal the regime that was legislated for in the Finance Act 2010.
Secondly, our Budget stands for fairness. This is a Budget that protects the most vulnerable, especially children in poverty and pensioners, while ensuring that those with the broadest shoulders take the greatest share of the burden. As my right hon. Friend the Chancellor said in his Budget statement, it is a progressive Budget.
As regards fairness, is it fair to my constituents and to the construction industry that the Chief Secretary has already stopped £168 million of expenditure on Building Schools for the Future projects and postponed the Mersey Gateway project? Total expenditure on those projects would have been £500 million. How does that help the construction industry?
I think it was irresponsible to make commitments to those sorts of projects, which could not be funded on the basis of the previous Government’s plans for halving capital spending over the next few years while building into their plans ever further, unsustainable commitments.
Will the Minister give way?
I am going to make some progress, but I will give way to the hon. Gentleman in a moment.
The Budget includes progressive measures such as increasing the rate of capital gains tax by 10 percentage points for higher rate taxpayers while keeping it the same for basic rate taxpayers. Clause 2 increases the rate of capital gains tax to 28% for higher rate income tax payers, but basic rate taxpayers continue to pay an 18% rate. The entrepreneurs’ relief lifetime limit will be extended from the first £2 million to the first £5 million. That implements the commitment in the coalition agreement to provide generous exemptions for entrepreneurial businesses.
On a point of order, Mr Deputy Speaker. The Chief Secretary hinted a few moments ago that the money was not available for Building Schools for the Future projects in my constituency, yet the shadow Education Secretary has had a letter from the permanent secretary at the Department for Education saying that the money was available. Also, I know for a fact that the money was there for the Mersey Gateway project, yet the Chief Secretary said it was not. Can we have some consistency in the accuracy of answers?
On geographical fairness, does the right hon. Gentleman agree with the recommendations of the final Holtham report, published today, which calls for an immediate Barnett floor to protect Wales from further convergence, the implementation of transition mechanisms towards a needs-based formula, and a place at the table for the Welsh Government in discussions on fiscal autonomy for Scotland?
I am grateful for that intervention. I have not yet had a chance to read the second Holtham report, which is published today. However, in the course of a meeting with the Welsh Finance Minister, I undertook to meet Mr Holtham once he had published his second report, and I look forward to doing so and having a chance to discuss it directly with him. At this stage, I will not make any commitments of the sort the hon. Gentleman wants, except to note that on the path of public finances as they are at the moment, further convergence is not forecast over the next few years.
The changes to capital gains tax help to pay for further progressive measures such as our increase in the income tax personal allowance, which takes almost 1 million of the lowest-earning income tax payers out of income tax altogether. It also increases the incentive for people on low incomes to get a job. That is fairness.
I do not have the figure to hand, but I will happily let the hon. Gentleman know at a future date or write to him with the precise figures he is looking for.
The measures that we are taking, rightly, close the avoidance issue that arose under the system put in place by the previous Government, whereby someone who was taking a substantial bonus, for example, in capital gains could pay less tax than the person who cleaned their office. [Interruption.] I am being asked if that was fair. I certainly do not think it was fair—it was highly unfair. That is why we have chosen to try to reduce that avoidance risk. The hon. Member for Wrexham (Ian Lucas) will know that the yield from the measures that we have taken comes in large measure from income tax, which reflects the fact that that sort of avoidance was going on.
I thank the Chief Secretary for his generosity in giving way. I will give him one more chance to answer this important question: has the Treasury done any analysis of the direct impact of the tax and benefit measures on women, separately from men? Does he know?
I am not sure that that analysis was carried out under the previous Government. We are the first Government to have published analysis of the impact across the income distribution, and we have conducted specific analysis of the impact on child poverty. It is notable that the House of Commons analysis assumes that women will be the only people affected by changes in benefits that are targeted on families. It does not make any allowance for the way incomes may be shared within the household, and as a result it may well exaggerate the impact of Budget measures on women’s incomes.
The Budget includes a number of measures to ensure fairness for pensioners. For example, it locks in an annual increase in the state pension in line with earnings, prices or a 2.5% increase, whichever is the highest—the so-called triple lock—to the benefit of 11 million pensioners. It also enables individuals to make more flexible use of their pension savings. The Government intend to end the existing rules that create an effective obligation to purchase an annuity by age 75 from April 2011. Clause 6 provides interim measures to raise the age at which a person is required to purchase an annuity, or otherwise secure a pension income, from 75 to 77. That is to protect those who might otherwise be forced to annuitise before the new rules that we are seeking to introduce come into place. We will consult interested parties on the detail of that change later this month.
I welcome the age increase to 77 to allow flexibility, but a constituency query regarding that matter has emerged in the past 48 hours. If someone has already reached 75 and their annuity was going to be so miserable that they chose not to buy it yet, will they be covered by the new rules or will they fall in a hole in the middle in which, if there is anything left in their pension pot in the future, it will be subject to inheritance tax?
No, I do not accept that. In fact, the increase next year will be protected. According to the forecasts for average earnings, the increase in the following year, 2012-13, would have been 2.4%, so our floor of 2.5% will ensure that the increase in the second year is higher than that forecast by the previous Government.
No, I am going to make some progress. I have given way a great deal and an awful lot of questions have been asked, and no apology has been heard from any Opposition Member for the dreadful mess they left the economy in.
Fairness in the tax system is also about ensuring that everyone pays their fair share of taxes due. Too many individuals and firms in Britain today exploit the tax system through tax avoidance, a practice that ultimately means the rest of us have to pay more tax. The Bill puts in place measures to protect about £200 million of revenues per annum from tax avoidance. Clause 8 sets out an anti-avoidance measure to prevent matched income and expenses from being derecognised in a company’s accounts. That will ensure that income from financial instruments such as loans and derivatives can no longer be excluded from the accounts and go untaxed.
Clause 9 sets out a further anti-avoidance rule, building on section 47 of the Finance Act 2010 to prevent life insurance companies from avoiding tax on previously unrecognised profits. It will do so by ensuring that section 47 will be effective in cases in which life insurance business is transferred to another company. We will take further measures in future to tackle avoidance. In particular, a consultation on a general anti-avoidance rule was announced in the Budget.
No, I have given way nearly 30 times already.
Thirdly, the emergency Budget stands for freedom because it frees businesses to go for growth. A genuine and long-lasting economic recovery must have its foundations in the private sector. That is where jobs will come from, and we will do everything we can to support their creation. That is why the Budget sets out a plan to open Britain for business once more.
We will open Britain for business by creating a more competitive system of corporation tax, reducing the rate from 28% today to just 24% over four years. It will give us the lowest rate of corporation tax of any major western economy, and one of the most competitive rates in the G20.
It is good to see the right hon. Gentleman in his place; I welcome him back to the House after the experience that he had, for which Members of all parties feel enormous sympathy.
As I understand it, the practice in Finance Bills is to legislate one at a time for the changes that are needed in the following years. The Chancellor’s commitment in the Budget speech was for year-on-year reductions, and we will fulfil it.
I am grateful for the further intervention and it is interesting to hear the right hon. Gentleman cite Lord Lawson. I am not sure that the Labour party cited that example in its Budgets. There are various technical reasons, which have just been discussed, and which my hon. Friend the Exchequer Secretary will explain in his closing speech. The basic point is that our method is more business-friendly.
As a first step, clause 1 reduces the main rate of corporation tax from 28% to 27% from 1 April 2011. Consequently, the corporation tax of around 47,000 companies will fall. The Budget also supports Britain’s small businesses by cutting the small companies rate of corporation tax from April 2011, reversing the previous Government’s plans to increase the small companies rate. That will benefit some 850,000 companies. The Budget takes action to stop the previous Government’s job tax by increasing the threshold for employers’ national insurance contributions, thereby lifting 650,000 employees out of that tax. Of course, a separate Bill will deal with that.
Taken together, those measures offer a stable and consistent platform for a private sector recovery.
I will not give way.
Clause 7 amends the tax rules for the expenses incurred by Members of Parliament, following the creation of the Independent Parliamentary Standards Authority. I know that that is of interest to many Members. The clause will broadly have the effect of maintaining the tax system and treatment that applied to similar expenses paid under the previous regime.
I will not give way on that. The hon. Gentleman can make his points in the debate.
The emergency Budget takes decisive action to tackle the deficit that we inherited and to confront the greatest economic risk to our country. It is tough, but it is fair. We have set the course for a balanced budget and falling national debt by the end of the Parliament. We have to pay the bills of past irresponsibility, but in doing that, we have ensured that those with the broadest shoulders carry the greatest share of the burden.
The Budget and the Bill represent a break with past traditions. They demonstrate a genuine shift in approach from that of the previous Labour Government. Our decisions are in the best interests of the economic cycle; those of the previous Government were dominated by the news cycle. Our actions are based on hard facts and the real world; theirs were based on wishful thinking and, in some cases, complete denial of the economic reality. We have been guided by independent forecast, not political whim. We are acting responsibly; they remain in the mindset of profligacy, which led them to make spending promises that they knew could not be kept while they were in government.
The Opposition now say that they will oppose many of our measures, but without giving any indication whatever of what they would do instead—not a single suggestion. They are in denial; the Government are facing up to reality. The provisions in the Bill are fair. They will help to put our public finances on a solid footing and provide a strong platform for economic recovery. I commend the Bill to the House.
May I begin by putting on record the Opposition’s thanks to Sir Alan Budd for his excellent work in the short months that he has served the Government? May I also congratulate the Chief Secretary, who is rapidly becoming one of the Chancellor’s longest-serving advisers? After his performance this afternoon, I think we can see why that is. He is pursuing what is now a noble Liberal Democrat tradition of fronting up some of the Government’s nastiest and most regressive policies in the House. His speech was a Liberal Democrat defence of an emergency Budget—an emergency so great that the Chancellor could not be bothered to join us this afternoon to listen to the House’s deliberations.
It is fair to say that since we met last week to debate the Budget, the economic horizon has darkened. British families and businesses fought so hard in the past year and a half for this country’s recovery, but the Bill puts all that at risk. We can see from the Bill that the Chancellor would like us to believe that size is not everything—although it is very thin, it is none the less very dangerous.
We all enjoyed the Chief Secretary’s summary of business opinion, but Opposition Members thought it odd that he missed some of the news that has appeared since the Chancellor gave his Budget speech. The truth is that, as we warned last week, the dangers in the global economy have become not less visible—they have not ebbed away—but, if anything, become more visible and more dangerous. This week, for example, the news from our trading partners and from the United States, which is our single biggest export market, has not been good. Factory orders in May dropped after eight consecutive months of improvement, and confidence surveys last week showed the biggest falls for some time—far bigger than expected.
Last week, we heard that the number of Americans in work has fallen by almost the largest number since 1995, and new figures for the eurozone show unemployment stuck at more than 10%. The news from new markets is likewise not great. China’s stock exchange hit a 15-month low yesterday, and confidence surveys have reported the worst outlook for a year and a half. Therefore, we cannot blame British businesses, investors and exporters for being somewhat depressed. They know that the odds of success in the gamble on which the Chancellor has embarked are slim, and they know very clearly who will pay the price for his failure.
The right hon. Gentleman has today put out a number of very constructive suggestions—for example, urging people hit by budget cuts to wear more clothes, to turn down the thermostat and to eat more vegetables—[Hon. Members: “Withdraw!”] I am merely quoting the Daily Mail, which is a source I trust—it is, of course, beyond reproach.
I am happy to withdraw comments published in the Daily Mail.
The point that I was about to make was that the business community, having had a chance to reflect on the Budget, has come to some conclusions, and I was surprised not to hear about them in the Chief Secretary’s remarks. A fortnight ago, the Chancellor told us that the Budget was
“a balanced package that will send the signal that Britain is open for business.”—[Official Report, 22 June 2010; Vol. 512, c. 176.]
In the weeks since, it is fair to say that business has not been hanging out the bunting. The stock market has now recorded its worst quarterly fall for eight years, as it fell to its lowest point for 10 months. Goldman Sachs has warned that tighter fiscal policy now
“would make it hard to deliver improving growth for all, or possibly any”
country. The chief economist of the British Chambers of Commerce has said that the scale and severity of the Budget
“inevitably increases the danger of an economic setback”.
The Chartered Institute for Purchasing and Supply has said that its managers have
“voiced grave concerns that budget cuts and VAT will tip the scales and amplify the likelihood of the UK slipping back into recession”.
The confidence of Britain’s finance directors has fallen to a 12-month low—just one in four is optimistic, and two thirds say that tighter fiscal policy will hurt their business. Yesterday, the confidence of Britain’s supply chain had its largest monthly fall since 1997. It is for those reasons that a wise man once said that
“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.”
That was, of course, the Business Secretary in April—once a prophet and now a lost cause.
That news was somehow absent from the Chief Secretary’s remarks. He and the Chancellor may now think that everything is fine. I know whose verdict I would rely on, and it is not the Chancellor’s.
I do not want to depress the House unduly and I have a little bit of good news—
That is precisely right and I will have more to say on that in a moment.
I promised a ray of good news among all the bad news and depressed expectations from the business community. A command paper was sneaked out last week. It had barely a press notice—it ran to a grand total of six lines—and there was no written ministerial statement with it. What could justify such secrecy? All is revealed on page 52 of the public expenditure survey, published last week, wherein we discover that Departments under Labour’s management underspent their budgets last year by £5 billion. Anyone would think that the Government wanted to keep that news secret. In a knee-jerk response yesterday, they decided to cover it up by announcing another £1.5 billion of spending cuts instead.
In Halton, £168 million of the Building Schools for the Future project was cut yesterday. The Mersey gateway has been postponed, and if it is cut it will take the total loss of investment—in that one area—to £0.5 billion. In an area like Merseyside and Cheshire, which especially needs that investment, that will be a massive blow to the construction industry. Does not it also underline the fact that public expenditure provides private sector jobs?
One of the great flaws in the Budget is that the Government are relying on a bounce-back in private investment, for which there is barely a precedent, and nor is there any evidence from the business community that it might happen.
Make no bones about it, since the Chancellor sat down a fortnight ago, the gloom has grown. However, the Finance Bill does not adjust the Government’s strategy. All we have heard from the Chief Secretary this afternoon is a very clear economic credo: where there is worry, let us spread fear, and where there is risk, let us bring danger. Whereas the Labour Government planned to halve the deficit in four years—a plan that the Chancellor’s own independent advisers said we were on track to deliver, and which the G20 said met its timetable—this Chancellor has added nearly £40 billion in new tax rises and spending cuts. He has locked us on a course to slash away come what may, and, in a world full of risk, he is now preaching to others to do the same.
Do the recent figures for the motor car industry not show that the previous Government were on the right course for an economic recovery, and does my right hon. Friend not agree that a £360 million cut in Coventry’s schools programme will have a devastating effect on the schools and construction trade there? I am sure he knows that the construction trade always leads economic recovery.
My hon. Friend is right. One reason the British supply chain is now so worried about the Government’s intentions is that it has seen these knee-jerk reactions, such as yesterday’s decision, of which the Chief Secretary was so proud he did not dare come to the House to say a word about it.
I want to make a point that follows on from what my hon. Friends have said. Rather than balancing spending over the economic cycle, we now have, in the Budget, a plan to eliminate in just five years the structural deficit. However, the Finance Bill ignores the question of what happens if growth is weaker than expected. It is worth for a moment the House exploring the economic consequences of this Chancellor’s proposals. If growth fails, the structural deficit as a percentage of our economy goes up, yet the timetable for its elimination remains unchanged, so the Chancellor’s only course of action is to cut deeper and deeper. If growth falters or the economy shrinks, the Chancellor cannot stimulate the economy, but can only respond with cuts. It is not a plan to manage the economic cycle; it is a plan for an economic death spiral. Like some kind of self-flagellating penitent who believes borrowing is so morally wrong, he responds to any new urges with another bout of whipping. He might feel it gets him to heaven a little faster, but I am afraid it is no way to run an economy.
I note that the hon. Gentleman was so eager to participate in this debate that he missed the beginning of it. The words I used were not my words, but the words from a wide section of the British business community. [Hon. Members: “Who?”] Well, Goldman Sachs, the Chartered Institute of Purchasing and Supply, and the judgment of the stock market. This is not a perspective held by a narrow corner of the business community. The judgment on this Budget is widely shared across this country.
Absolutely. Jim O’Neill is a very respected economist, he is chief economist at Goldman Sachs, and his opinion was echoed by the chief economist at the British Chambers of Commerce. So this is not a narrow perspective from any one particular corner of the business community. This view is widely shared.
We have to accept that the Prime Minister has kept one promise. He said that the cuts would affect the north-east of England the most, and that has been proved to be true. The Government have cancelled a new hospital, abolished One NorthEast and stopped nearly 100 Building Schools for the Future projects, which would have created many construction jobs in the private sector. Is it not a shame that the Prime Minister did not keep the other promise, which was that cuts would not affect the front line?
My hon. Friend is absolutely right. Like so many words that we heard during the election from those now in government, those ones turned out to be rather empty.
Perhaps we would not be quite so worried about what we have heard from the Chief Secretary this afternoon if we did not know that the risk of failure for this Budget was so great. The Office for Budget Responsibility, which is supposed to know, has said that there is just a 40% chance of the Chancellor hitting his growth forecast for next year, yet the VAT increase in the Bill will tax consumption so hard that we will be forced to rely on a history-making burst of exports and business investment. Last week we heard that just once since 1966 have we had the kind of rise in investment and exports on which the Chancellor will be banking in each of the next three years. The House would therefore be right to ask what measures exist in the Finance Bill to help. On close inspection, there appears to be no help at all for exporters, yet the Chancellor needs Britain’s exporters to grow their trade abroad by £100 billion for his plan to come true. That is the equivalent of our trade with America rising threefold, our trade with China rising by 20 times or our trade with India rising by 40 times. It is fair to say that that is not a bet that any of us would take.
Was my right hon. Friend surprised when he saw the Deputy Prime Minister in Germany—he is obviously fluent in German, but not in economics—persuading the Germans to cut their expenditure, when Germany is exactly the sort of market that we rely on for export growth?
Precisely. We need the German Government to contribute to growth right across the European area. One would have thought that the Deputy Prime Minister might have a word to say about encouraging the German Government to do more to help British exporters, but there we are—not a word about that from him.
Although the right hon. Gentleman’s excoriating attack on the coalition Government is pretty accurate so far, will he confirm that we had a balance of trade deficit in goods last year of some £82 billion, that Labour lost 1 million manufacturing jobs before the recession and that the impact on GDP growth was to suppress it every year since 2000? Just for the sake of accuracy, will he confirm that those figures are right?
I have not brought those figures with me to the Chamber, but the hon. Gentleman will know that exports from this country have grown strongly over past years. That is precisely why, as we came through the crash, we said that we needed to rebalance our economy, which is why we fought so hard for investment in companies such as Sheffield Forgemasters and why we said that we needed new investment in manufacturing—all investment that has now been cut back.
No, I am going to make another important point, on which the hon. Gentleman might want to comment. The question of business investment is vital—it relates to the argument at the heart of the Budget—and I hope that we will have a good debate on it this afternoon. Business investment is the subject of clause 1, which offers, I am afraid to say, no salvation through investment allowances, which drive up investment and which manufacturers say make the world of difference. This is what the senior economist of the Engineering Employers Federation had to say about investment allowances:
“For smaller companies…there will be cashflow consequences …that will hurt their ability to reinvest in their own competitiveness.”
That is because the Government have withdrawn such allowances.
What, then, of corporation tax? We were promised in the Budget a four-year plan to bring down the rate of corporation tax to 24%, but clause 1 offers us just a one-year plan. We do not know whether that is a wheeze to avoid an unhelpful valuation of deferred tax assets—the Chief Secretary to the Treasury was silent on that point—but is it not more likely that the Treasury is simply hedging its bets? The Government promised us certainty on corporation tax, and all we have got is more risk. The truth is that business is not going to bet on a one-year deal when this country’s recovery demands a longer-term planning horizon. The Chancellor might be a gambler, but Britain’s business community is not.
The business community are not gamblers. In this Budget, they will see encouragement for the bedrock of our economy—namely, small and medium-sized enterprises. Measures in the Budget such as the small profits rate of taxation will help 800,000 small businesses across London and the south-east, and the small business rate relief will help 48% of the businesses in the region. Is that not the kind of investment that will encourage exports?
It would be, but it appears to be absent from the Bill.
The economic gamble that the Chancellor has taken in the Budget is quite clear to the business community and, I think, to the House. There is also the question of who pays. The Chancellor is fond of taking the approach that we are all in this together. One writer called that the equivalent of a chorus line from “High School Musical”. However, the Finance Bill disabuses us of any notion that that claim might actually be true. It is now quite clear that the price of this Budget will be paid by people’s jobs, and that the greatest price will be paid by the poorest in this country.
For the past five years, the poorest in my constituency were paying the highest level of tax per litre of fuel in the UK. Is the shadow Chief Secretary in any way embarrassed or ashamed that a Labour Government let that happen? Or does he now repent and support a rural fuel derogation?
I look forward to hearing the hon. Gentleman’s contribution to the debate a little later. It was not quite clear whether he was talking about marginal deduction rates or other impacts of the tax system but, like me, he will have noticed table A3 on page 69 of the Red Book, which shows that the marginal deduction rates for people on a 90% deduction rate, for example, have not gone down as a consequence of the Budget; they have gone up.
We know from the note that the right hon. Gentleman left for the Chief Secretary that it clearly would not have been he who paid. Will he tell the House exactly where the £50 billion of cuts would have come from under a Labour Government, and how the deficit would have been reduced? Who would have paid in those circumstances?
Does the right hon. Gentleman accept that his attacks might just begin to be credible if Labour’s record were not so dreadful? Inequality increased, the link between earnings and pensions was never delivered, child poverty was not reduced over the whole period of the Labour Government, fuel poverty increased and poor people on low incomes were not taken out of tax. Where is the credibility in that? This Budget will clearly deliver a fairer outcome than the one that his Government left us with.
I was empathising with the hon. Gentleman until his final sentence. As he will know, over the past 10 to 15 years up to 2006, just four countries out of the entire 20 or 30 members of the OECD succeeded in reversing inequality. They were Turkey, Ireland, Mexico and the United Kingdom. The attack on inequality was always a central mission for the Labour Government. Yes, of course we wanted to go further, but we were proud of our record of lifting 900,000 pensioners and 500,000 children out of poverty, of legislating to restore the earnings link and of introducing innovations such as tax credits. In constituencies like mine—and, I suggest, the hon. Gentleman’s—which suffer from a high rate of unemployment, that help is beginning to make a difference. That is why we are so passionate in our objection to the attack on the poorest people in this country contained in this Budget.
I respect the right hon. Gentleman for his constituency commitment to dealing with the poor. Over the period of the Labour Government—during which not everything was done wrongly—the greatest failure of all was that inequality was not reduced over the entire 13 years; in fact, it increased. The rich became richer, the very rich became very much richer, and the people at the bottom—pensioners in particular—did not have the protection from a Labour Government that history suggests they could have expected.
I look forward to the hon. Gentleman telling us later how the increase in VAT is going to support the argument that he is trying to prosecute. I hope that he will also reflect on the cost of this Budget to jobs. The official figures for job cuts as a result of this Budget are bad enough, but the real figures are even worse. We have already watched the extraordinary spectacle of the Office for Budget Responsibility tell the Chancellor that employment will be 100,000 lower as a result of Budget measures, but then the real figures were published in The Guardian—not in this House, but in The Guardian—from which we learned that secret Treasury papers say that the Budget will cost 1.3 million jobs over the next five years. When the Chancellor stood at that Dispatch Box a couple of weeks ago, he told us that he would not hide things in the “small print” and that he would give it to us “straight”; he was so straight and so open that he kept the Treasury advice out of the Budget altogether. Yet even that picture might not reflect the entirety of the Budget’s impact.
Does my right hon. Friend agree that the Liberal Democrats’ comments would have more credibility if they had not spent the six or eight weeks before the general election arguing very accurately and articulately against the very Budget they have just helped to deliver?
My hon. Friend is absolutely right. Some Front-Bench Labour Members believe in redemption, and we have not given up on the hon. Member for Bermondsey and Old Southwark (Simon Hughes). That is why we are looking forward so much to hearing his contribution later this evening. [Interruption.] I hope he is not going to dispel the image I have of his virtue and integrity.
May I say to the right hon. Gentleman and the hon. Member for Chesterfield (Toby Perkins) that the four major proposals on tax, finance and equality with which we went into the election have been delivered in the Budget? The only one that was not delivered was value added tax. The right hon. Gentleman knows that there is concern about its increase, but he has heard me say that I believe that, in the event, rather than making further spending cuts, it was the least worst option.
I will cling on to my image of the hon. Gentleman’s integrity and await his contribution a little later. I remain convinced that, for him, redemption is still possible.
I was about to say in response to my hon. Friend the Member for Chesterfield (Toby Perkins) that the reality is that the impact on jobs might be even worse than we saw in the Red Book, or even worse than we read about in The Guardian, because the Chartered Institute of Personnel and Development tells us that it forecasts that unemployment could continue to rise up towards 3 million.
This Finance Bill hits growth so hard—this is a point that I hope the hon. Member for Bermondsey and Old Southwark in particular will reflect on—that, buried in the back of the Red Book, we learn that the Chancellor has had to raise £9 billion of extra taxes to pay for the lost growth. That is not cutting public debt, but adding to it—in pounds and pence and in the unquantifiable misery of wasted human lives. It is, I am afraid, a philosophy that is all too familiar. It is a distant echo of 1992, when a Tory Chancellor told us that unemployment was “a price worth paying”. Back in 1989, another Tory Chancellor, the now noble Lord Major—
Does my right hon. Friend agree that the Chartered Institute of Personnel and Development not only made predictions on unemployment, but also said that the Government’s targets for job creation were not achievable? Its chief economist, John Philpott said:
“There is not a hope in hell’s chance of this happening.”
My hon. Friend is absolutely right. Very few people in the country believe the Budget’s forecasts for employment growth, which is not surprising given how hard the Budget is hitting growth.
I want to move on from the economics of the Bill, and the possibility that it may work, to a wider question that I know we will want to debate this afternoon.
The right hon. Gentleman began, quite rightly, by paying tribute to the Office for Budget Responsibility and the work that it has done. Does he accept that the OBR forecasts make it clear that over the period of the Budget, growth will rise and unemployment will fall? That confirms—if we are trading quotes—the view of the secretary-general of the OECD, who has said that the Budget
“provides the necessary degree of fiscal consolidation over the coming years to restore public finances to a sustainable path, while… supporting the recovery.”
That is what the Budget does, and the right hon. Gentleman should be welcoming it.
The Chief Secretary is a politician who is paid to go to work to make his own judgments in his and the country’s best interests. He will have noted reference to the growth of business investment and exports in the OBR’s report and its projections for the future.
I ask the Chief Secretary to be patient for a moment. The last year in which exports grew as a percentage of our economy in anything like the way that the OBR projects for the next few years was 1974. The Chief Secretary is relying on a unique combination of the business investment that we saw in 2005 and the exports that we saw in 1974. He is assuming that they will come together in perfect harmony in each of the next three years. I must say to the Chief Secretary, very gently, that that is a bit of a gamble for him to take.
Does the right hon. Gentleman accept that it is the independent Office for Budget Responsibility—which I think he welcomes—that forecasts that growth will rise over the current Parliament and that unemployment will fall? Does he accept that, yes or no?
It is not a great triumph for unemployment to fall as an economy returns to growth. The point that I was making is that employment in this country is lower as a result of the Chief Secretary’s Budget, that growth is lower as a result of his Budget, and that the Budget hits the economy so hard that he must raise another £9 billion of taxes, although the Chancellor refused to admit it at the Dispatch Box.
I now wish to turn to a question to which I hope we will devote quite some time today: the wider question of why this Finance Bill is so unfair. We now have the judgment of the Institute for Fiscal Studies, which tells us that the Budget is so regressive that its only redeeming features are Labour policies. Age Concern tells us—clearly, starkly, urgently—that it will put older people’s lives at risk. The Child Poverty Action Group tells us that it will drive poorer parents into the arms of loan sharks. The House of Commons Library tells us that nearly three quarters of the £8 billion tax and benefits bill will be paid by our country’s women—and that is before we get to VAT.
Clause 3 is the clause that deals with VAT, and I think it fair to say that it is the clause without a mandate. I have come to learn that, after nearly 30 years in the House, the hon. Member for Bermondsey and Old Southwark did not get where he is today without knowing what makes his party tick. I believe that when he said, a week before the Budget,
“I hope we don’t have a VAT increase because it is the most regressive form of tax”,
he spoke for the majority of his party’s voters and his party’s members. Before too long, those words will come back to haunt the Chief Secretary and the rest of the occupants of the Treasury Bench.
Back on 7 April, the Deputy Prime Minister warned us about hikes in VAT. He said:
“let’s remember, it is a regressive tax”.
He was right: it is a regressive tax, and we now know that he is a regressive politician for supporting it.
I think that it is fair to say—I feel that I can say this among friends—that I know a thing or two about writing something and regretting it later, but the Liberal Democrats did not just write a silly note. They unveiled a whacking great poster on a lorry saying, “Tory VAT bombshell”. Little did we know that they would be the ones not only to prime it, but to set it off.
I will in a moment.
If Members go to the Deputy Prime Minister’s website—for those who do not have the address, let me be helpful, it is nickclegg.co.uk; it is not a site that I visit quite as much as I used to—they will see that that famous poster saying, “Tory VAT bombshell” is still on the website, available to download. The Liberal Democrats cannot kick the habit of saying one thing and doing another.
Can the right hon. Gentleman explain why putting VAT up by 2.5% before the recession was scarcely over, as the Labour party did in government, was a good idea and did not destabilise the recovery, but putting it up another 2.5% to pay all the previous Government’s bills, which Labour still will not tell us how it would pay for, is a bad idea?
Let me come to that point in a moment because—[Interruption.] I will answer the right hon. Gentleman’s question after touching for a moment on some of the questions that we will raise in this debate and in Committee next week. We will want to press the Government on their clause without a mandate. We will want to know what studies have been conducted, as will many Back-Bench Members in the coalition party, on the impact of the new VAT on Britain’s poorest families. We will want to know the impact on pensioners, children and child poverty. We will want to know whether all zero-rated goods will remain zero-rated for the course of the Parliament. We will want to know whether all exempt goods and services will remain exempt for the course of the Parliament. We will want to know how much the Chancellor has short-changed our pensioners by uprating pensions this September and then legislating for higher prices in January. We will want to know his estimate of the growth in black market trading by increasing the rewards for unregistered traders. We will press the Government on those questions during discussion of clause 3.
We will also want to know the answers to questions on other clauses. Why does clause 1 make corporation tax less certain when we were promised clarity? Why is the measure silent on the regime for North sea oil? Why does clause 2 complicate the tax system when we were promised simplicity? In respect of clause 4, what assessment has been made of the impact of insurance costs for low-income families? Will the reform of pension tax relief bring in as much as Labour budgeted for? Will the plan be as fair?
The great tragedy of the Budget and the Bill is that there is an alternative, so let me deal directly with some of the questions raised by Government Members. In March, my right hon. Friend the shadow Chancellor set out the fastest and clearest deficit reduction plan of any country in the G7.
I hear what the hon. Lady says, but she has of course read chapter 6 of the Budget of March 2010 and, like me, she will remember that there was £3.5 million in savings by holding down public sector pay; there was £1 billion in savings through the reform of public sector pensions; there was £5 billion in savings through cuts to lower-priority programmes; and there was £11 billion in savings by revolutionising Whitehall. There was also the promise of a benefits bill that would have been £14 billion lower through falling unemployment, which was only possible as a consequence of growth. She will also remember the precision with which we set out £19 billion-worth of tax increases, which unlike this Bill, did not hit the poorest in her constituency or mine.
We know that Governments have to govern, so our opposition to the Bill will be careful, but Labour Members will stand up for jobs and for fairness. That is why we will vote against the Second Reading of the Bill.
The Bill is short, and I will keep my remarks short in keeping with the Bill’s size. This is a coalition Bill, just as the Budget was a coalition Budget. It incorporates Liberal Democrat policies such as our policies on capital gains tax, raising the earnings threshold and the restoration of the earnings link. It also incorporates elements of Conservative policy, which is right because that is what a coalition does. In some respects it is a bit like Hovis, which calls its mix of white and brown bread “Best of both”. That is what we have in the Bill.
Among the Bill’s main elements is the capital gains tax increase from 18% to 28%. The Liberal Democrat policy would have taken it further, but we could run into the law of diminishing returns. We need to be not only practical but fair. It is fair because the well-off, who pay less tax than those who clean their offices, will start to pay a lot more tax. That loophole was never closed by the Labour party, and the measure will make a big difference in fairness and in the level at which those well-off people pay tax.
The entrepreneurs relief should be welcomed by hon. Members on both sides of the House.
I am grateful to the hon. Gentleman for that intervention. I am dealing with entrepreneurs relief at the moment, but I will be pleased to deal with VAT, which I will speak about quite fully, later. I know that the Labour party has had great fun bashing the Liberal Democrats over VAT, so I look forward to being taken to task on that.
The entrepreneurs relief is the reward that business owners are due. They often put everything into building a business. That should be recognised. We greatly welcome the continuance of the 10% rate and the increase in the lifetime limit for gains from £2 million to £5 million.
On corporation tax, the reduction from 28% to 27% in 2011, the 1% reduction in each of the following three years to 24%, and the small business rate tax cut, contrast greatly with Labour’s tax on jobs. It means that we now have the ability to stimulate business, which generates the wealth that we need to pay for the services that we need. We need secure growth for business. Business needs the confidence to invest in that growth.
I come now to VAT. I am sure that the hon. Gentleman—
Will the hon. Lady answer the question put by my right hon. Friend the Member for Birmingham, Hodge Hill (Mr Byrne), who said that the measure in the Bill is for one year only? How will that give confidence to any business wanting to invest? It will have to take decisions on a one-year basis.
The hon. Gentleman asked me about the regionalisation of corporation tax, but these are UK taxes so it is inappropriate to regionalise. He makes an interesting point that I have not considered before, but I am sure that my hon. Friends will take an interest in the idea if it has merit.
My hon. Friend is right. I just wish to say to the hon. Member for Carmarthen East and Dinefwr (Jonathan Edwards) that, as he knows, my party has been supportive of increasing autonomy and self-government in Scotland and in Wales. That has happened in Scotland and it is on the agenda for Wales, and he knows—[Interruption.] It is on the agenda for Wales; it is not agreed and it is not committed, but it is under discussion in relation to Wales. He knows that my party has always been positive towards the idea of allowing greater self-government, both in Scotland and in Wales, but that is different from the regionalisation of UK taxes such as corporation tax.
On a point of order, Mr Deputy Speaker. Is it in order that the Liberal Democrats should now have two Front-Bench spokespeople on the Treasury? Is it completely out of order for the hon. Member for Bermondsey and Old Southwark (Simon Hughes) to be rescuing and answering on behalf of his party?
Thank you, Mr Deputy Speaker. The hon. Member for North Durham (Mr Jones) has intervened on me twice, so perhaps he would like to join me on these Benches and make his contribution. I am sure that he will be making his speech later, and I will have the greatest pleasure in intervening on him then.
VAT is to increase to 20% with effect from 4 January 2011. This is another issue on which the Liberal Democrat bashing by the Labour party has been lengthy.
Perhaps the hon. Gentleman would allow me to make a little progress first. [Interruption.] I am not giving way now, but I promise that I will do so. I might even say something that he likes; one never knows. Like my hon. Friend the Member for Bermondsey and Old Southwark, I do not think that anyone on either the Conservative Benches or the Liberal Democrat Benches is filled with any enthusiasm for increasing VAT. However, I am not going to rehearse all those arguments, because we know that Labour left the finances in a far worse state than we originally anticipated. The structural deficit is £12 billion greater than we were led to believe, so whichever way we look at it, the options are invidious. A VAT increase has therefore had to be the least worst option, as my hon. Friend has said. There are mitigating factors, because the VAT rise will not come into effect until 2011. Therefore there will be a short-term boost; consumers who want to spend money, particularly on large items, will be able to do so before that increase comes into effect.
Is the hon. Lady seriously recommending that to mitigate the impact of the VAT increase to 20%, consumers should wander round Currys and all sorts of other places before Christmas buying up all the washing machines, tumble dryers, fridges and all the rest of it, just to salve her conscience?
The right hon. Lady answers her own question, although I was just coming on to this subject. When I had lunch with the manager of my local branch of John Lewis last week I asked him what difference the VAT increase would make to purchases at his store. He said, “Well, when it went down it didn’t make a whole lot of difference to sales. When it goes up we don’t necessarily think it’ll make a whole lot of difference, either.”
It is clear that this is the story that we are going to hear again and again: we are going to be told that the items that the poorest need to buy are zero-rated, so the VAT rise does not hurt them. How can the hon. Lady say that essentials for families, such as saucepans and clothes for work, are items that the poorest do not have to find the money for? This is a regressive tax.
The hon. Lady misunderstands me. I understand that people have to buy all those capital items, and I know that this is going to be regressive in that respect. [Hon. Members: “Oh!”] There is no question or doubt about that. I said to the House a moment ago that nobody likes the idea of having to increase VAT.
Well, we could have some further job cuts; that would not help. We could just not stimulate business; that would not help. We could charge lower earners more income tax. Hon. Members should not forget that this is the coalition Government who have raised the level of tax for the lowest-paid earners—something that the Labour party did not do in 13 years of government.
Income tax is a very important area in addressing issues that the hon. Member for Stretford and Urmston (Kate Green) and several other Labour Members have raised. We want to ensure that people can keep more of their own money that they have earned. The raising of the income tax threshold towards our Liberal Democrat target of £10,000—it increases to £7,475—takes 880,000 people out of tax altogether and means that 23 million people will gain an average of £176. That is really important to local people.
As I understand it, they are unaffected. I wish to say a word about pensions: is it not strange that in Labour’s 13 years in government the earnings link was not restored? This coalition Government have introduced that in their first weeks in government. We have the triple lock: we have 2.5% or earnings or prices—
I am going to make a bit of progress. Before Labour Members leap to their feet to criticise, they should reflect on the fact that they had 13 years in power and they leave a shameful legacy. It required this coalition Government to come into office to introduce that, and we are doing so in such a short period.
I have listened to the hon. Lady’s arguments for accepting the VAT increase, but over the financial year the projected deficit fell by about £15 billion to £20 billion. Surely that blows apart the Liberal Democrat case for accepting a 2.5% increase in VAT.