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The Economy and Welfare Reform

I congratulate hon. Members who have made maiden speeches today, particularly my hon. Friends the Members for Preseli Pembrokeshire (Mr. Crabb), for Mid-Bedfordshire (Mrs. Dorries) and for Northampton, South (Mr. Binley). In their eloquence and passion, they demonstrated that they will be doughty champions of their constituencies in this Parliament. The Chancellor’s speech today was characteristic of his speeches on all these occasions. It was full of facts and figures that supported his case, but it carefully ignored those that did not do so. He refused to stand by the forecasts that he made during this year’s Budget. At times, he seemed to be preparing the way for breaking the golden rule, but above all, he struck a note of complacency and self-satisfaction. There can be no room for complacency in the running of the economy. No one can afford to take risks with it at the moment. I recently heard an economist say that current economic growth is built on the twin pillars of Government debt and personal debt. We can see from the Red Book that debt is helping to finance higher Government expenditure. For example, the 2002 Red Book forecast what would happen in the current fiscal year. It predicted a surplus of £9 billion and Government expenditure of £444 billion. This year’s Red Book shows that public finances have deteriorated over the past three years, and have swung from a surplus of £9 billion to a deficit of £6 billion, with £15 billion used to fund half the increase in spending. That increase in spending and the Government’s problems in meeting their forecast tax revenues have led economists to predict that the Chancellor will have to fill a £10 billion black hole in his next Budget. He can only do so by increasing borrowing, which will take him towards the top of the golden rule, or by raising taxes on hard-pressed businesses and consumers. Strong consumer demand is partly financed by the increase in personal debt. If anyone doubts that relationship, they should look at the headlines that greeted the announcement at the end of the last week that, for the first time in several years, consumers have paid off more on their credit cards than they have put on. Many commentators link the fall in credit card borrowing with the downturn in the high street and the poor results announced last week by some of our major retailers. We must be careful, however, as it would be wrong to forecast that the end of the world is nigh. People will continue to borrow if they believe that they can afford to service their debt. That will depend on the level of interest rates and their employment prospects, as well as incentives not to spend or borrow but to save. The incentives to save in the present economy are not sufficiently strong, and do not encourage people to put money away for a rainy day in case their employment prospects deteriorate or to save for their pensions. The reform of the pensions system on which the Government are seeking cross-party consensus should look at ways of strengthening incentives to save and providing greater stability for the economy. In his maiden speech, the hon. Member for Normanton (Ed Balls) referred to the stop-go economy of the post-war period. The Government should consider the way in which they tackle tax changes in the Budget. Too often, the changes that they propose are ill-conceived, ill-considered and ill-thought-through. They distort underlying economic activity and send signals to businesses to embark on projects from which they later have to retreat. Just as the stop-go economic policy of the post-war period sought to fine-tune the economy by reducing taxes or increasing them and introducing credit restrictions when the economy was out of control, so tax changes stimulate activity but then lead the Government to row back when they recognise that they are damaging. Let me cite three examples. The Government were proud to introduce tax reliefs to stimulate film production in the UK. They were later forced to restrict those reliefs, however, because of the way in which taxpayers had taken advantage of them. If only the Government had thought through that change earlier they might have been able to stop other taxpayers having to subsidise those reliefs through the higher taxes that they had to pay instead. A couple of years ago, the Government introduced a zero rate of corporation tax. I remember the Paymaster General saying in Committee that that would stimulate enterprise and have a tremendous effect. It also, however, encouraged unincorporated businesses, such as sole traders and partnerships, to incorporate to take advantage of those tax reliefs, not to stimulate economic activity. The Government have therefore had to restrict that tax relief, realising that in trying to drive the economy forward they have made a mistake, as it sends out the wrong signals and encourages the wrong type of activity in our economy. Not that long ago, the Chancellor announced with a great flourish that he wanted to abolish stamp duty on commercial property transactions in disadvantaged areas, and that that would be a great reform to stimulate property transactions in those areas. The Government sought state aid exemption from the EU, which runs out at the end of 2006. That relief was forecast to cost £50 million. When the Chancellor announced its withdrawal in the Budget, however, the tax saving from which taxpayers would benefit was £350 million. Yet again, a measure that the Government introduced had been ill-thought-through and was costing taxpayers far more than the Government had suggested. As a consequence, people working on property schemes in the areas concerned stopped suddenly, as the relief was withdrawn overnight, and scrambled to complete deals that were in the pipeline. Such ill-conceived, ill-considered measures harm the stability of the economy. They do not give businesses a secure framework in which to plan their activities, or a stable tax regime in which they can develop long-term projects for the future. Too much of this micro-fiddling in the economy, with small reliefs and measures that are suddenly taken advantage of and become much more expensive than the Government predicted, ends up distorting business priorities and taking business’s eye of the ball. I spent several years working for a firm of chartered accountants, and I understand some of the issues that businesses consider in relation to long-term projects and some of the taxation issues. The Government need to think carefully about this activism in the economy. In the same way as targets imposed by Government on our health, education and other public services distort the priorities of GPs, teachers in our schools, and nurses and doctors in our hospitals, such activism distorts the priorities of businesses and gets in the way of businesses being run in a way that is right for the economy, their employees and customers. Let me give this advice to the Treasury Bench at the start of this Parliament: Ministers should look for a more simple, straightforward and above all more stable and predictable tax regime, so that business can continue to flourish and thrive.