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Budget Resolutions and Economic Situation

I refer the House to my entry in the Register of Members’ Interests. In case anyone has any unworthy thoughts about whether my outside interests will affect my judgment in making my speech, I assure them that they certainly do not. Having put that behind me, let me say that I think that I have listened to my last Budget speech from the current Chancellor. I have listened to 10 of them, and they are a fairly bewildering collection; he has had some fairly dull ones, and some odd ones. This was probably one of the most political that he has made. I suppose that he lived up to my constant expectation that he will surprise everybody. On this occasion, as I shall try to illustrate, his mind was fixed on headlines and politics, not on a responsible policy on public spending, and tax and spend. That distorted his judgment in ways that I shall seek to demonstrate. Perhaps it is time to reflect on the Chancellor’s legacy. Of course I do not claim that he has been a bad Chancellor. The economy continues to perform reasonably well, and we keep adding to the number of years and quarters in which we have enjoyed growth with low inflation, and I congratulate him on that. The four such years that he inherited have had about 10 years added to them, and we have no idea when they are likely to come to an end. However, our performance has not been remarkable compared with that of many other countries, so I do not think that the eulogies that are sometimes heaped on him, and the claims that he is a remarkable Chancellor, are thoroughly deserved, but he has been a good, average Chancellor, and he has certainly performed better than an awful lot of Labour Chancellors. I attribute his 10-year record to a combination of the legacy that he was given—he inherited an economy that was in good shape, and that was enjoying a run of growth with low inflation—and a remarkable degree of luck, which is something that every Chancellor needs. The fact is that the global scene has been remarkably benign throughout his period of office. Most Organisation for Economic Co-operation and Development countries have enjoyed fairly unprecedented periods of growth with low inflation. The nearest that he got to a global crisis was when the dotcom bubble burst in America, causing great problems in 2000-01. That crisis was averted, as the hon. Member for Twickenham (Dr. Cable) rightly said, by an influx of liquidity hastily put into the system by Alan Greenspan in the United States and Eddie George in this country. Otherwise, the background has been one of increasing globalisation, which has been extremely beneficial. It has made it much easier to achieve growth with low inflation, because it means that there is downward pressure all the time from low-cost competition from around the world. In addition, the supply-side reforms of the Thatcher and Major years have begun to feed through steadily, and we find ourselves far more able to adapt, as an industrial economy, to the rapidly increasing amount of change taking place in the global economic climate. The result is that the Chancellor has presided over a reasonably benign scenario. There are always fragilities, and there are considerable ones in the present situation. It is well for the Chancellor’s successor to have an eye to the risks that we face that might stop the current period of growth with low inflation. Some of the unknowns are global ones utterly beyond the control of the British Government, such as the question of what will happen to the American economy over the next year or two, after the remarkable sudden collapse of America’s housing market, and given a likely reduction in consumer demand there. There are political problems throughout the world and our situation is not good, either. If I were asked why we are sustaining a reasonable level of growth, I would answer that it is dependent to a remarkable extent on the huge number of immigrants who have come to this country from eastern and central Europe in the past year or two. That has brought in a very industrious work force, but it has probably had more effect on the growth of the economy as a whole than on gross domestic product per head, in terms of improving our performance. The other thing sustaining our present level of growth is the rapidly rising level of public spending, which has not yet begun to slow down.We are too dependent on those two factors. I will not repeat all the figures that my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) gave at the beginning of his excellent speech to show how our underlying competitiveness in the global economy has steadily deteriorated in recent years. To pick out just one of the indicators that he used, I think that one of the starkest indications of our decline in competitiveness is our balance of payments position. I remember the years when a ridiculous amount of attention was paid to monthly balance of payment figures. Governments changed if the figures went wrong in the wrong month, in the run-up to an election. Of course, the balance of payments figure is only one among many, but our balance of payments now is the worst since records began. It continues to deteriorate and we have to go back hundreds of years to find a similar position. The balance of payments is a good measure of competitiveness, because it indicates that people overseas find it much easier to sell their goods and services in this country than we find it to sell our goods and services in outside markets. We are not in a particularly competitive position. That is the background to this year’s Budget. The Budget certainly surprised me, because I thought that it was fairly obvious that we would have a low-key Budget, as there was really only one subject that the Chancellor had to address. One of the big weaknesses in our economic performance is the fact that the Chancellor has made a dreadful mess of the public finances. Nowadays, the stability and growth to which I referred depend to a considerable extent on the performance of the Governor of the Bank of England. During the Chancellor’s period in office, there have been two Governors, who performed their task excellently. Of course, I congratulate the Chancellor on his excellent decision to make the Bank independent, but the fact is that responsibility for the health of the public finances is now a bigger part of the Chancellor’s role, and he has got himself into an ever deeper mess on public finances. We are still running substantial deficits, and he still fails to forecast the size of those deficits successfully. Recently, there have been some very good years for growth, and if we had any sensible fiscal rules, such as the one that I held, which was to ensure a balanced Budget over the cycle, we would run a surplus in the current good years of the cycle; that is what we should do if we are to achieve any kind of sensible health in public finances in the longer term. I shall not bother with the Chancellor’s discredited fiscal rules, which he always tells us he still adheres to, having so manoeuvred the goalposts over the years that they are rendered completely and utterly meaningless. The fact is that we are running an unstoppable deficit and he had to address it. Everybody knew that and, to be fair, he has done so in the Budget, though he certainly tried to bury it. The right hon. Gentleman has been a tax and spend Chancellor on a colossal scale since his Pauline conversion back to taxing and spending in about 2000. He came into office saying that he abhorred the whole idea of being a tax and spend Chancellor, and he was extremely severe in his first few years. When he was following my figures, as he always used to say, he finally got the level of public spending in this country down to 37.1 per cent. of GDP in 1999, but in 2000 he began to expand public spending on a grand scale, and he began to increase the tax burden and public borrowing greatly as well. The result is that the budget deficit was troublesome, needed to be addressed and no sensible fiscal rule could be hit over the next cycle unless something started being done with that deficit now. We have reached a situation in which tax in terms of the tax burden and the tax take from the GDP and spending levels as a proportion of GDP have been taken back to levels that we have not seen for about 20 years, since the early years of the Thatcher Government. The difference between the position of the present Government and the Thatcher Government in the early 1980s is that the Thatcher Government had inherited a fiscal crisis from their predecessor, and Sir Geoffrey Howe made determined efforts to get it under control and to get budget deficits and public borrowing requirements on a downward path, whereas this Government have presided over a steady growth in the level of public debt and are belatedly, after many years of warning, finally realising that they have to address that. So the Chancellor has got himself into a position where he had to increase taxation and he had to announce more controls on public spending. It was plain as a pikestaff to everybody looking at the principal problem facing the Chancellor of the Exchequer when he came to the House that he had to do those two things. On tax, I regret that he had to do that. I would have controlled public spending very much earlier than the Government have started to do so. I did not think the Chancellor would raise taxation in his Budget because he had done what he always does nowadays—get that out of the way in the pre-Budget report before Christmas. He now makes a regular habit of that. The pre-Budget report, which started as a process, allegedly, of consulting for the Budget to come, is now a lesser-noticed occasion on which he tucks away bad news that he does not want to save up until he makes the major speech in March. In that pre-Budget report he raised £2 billion worth of extra tax revenues. If we take not only the last pre-Budget report, but the last two pre-Budget reports and the 2006 Budget, we can see that the Chancellor has raised £6 billion worth of extra taxation. Hence he has got the tax burden on the economy as a whole up to a near record-breaking level. As has been pointed out, in this Budget he added a further £1 billion to the burden of taxation on business. I shall return to that in a moment. Tax was not the Chancellor’s principal concern. I waited for more news on spending, which is the key thing. There is, of course, the comprehensive spending review. The Chancellor is trying to impose on his successor much tighter controls on the level of public spending once he is out of office than he was ever prepared to accept since 2000. It is a strange comprehensive spending review, because it keeps being put out in dribs and drabs to make bits of it sound more attractive than they otherwise would be. To be fair, the Chancellor has added to our knowledge of the expectations under a Brown Government for the growth of public spending. It will be sharply reduced. It will be reduced below the likely level of growth of the economy as a whole, which Conservatives from the Front Bench and I and others from the Back Benches have been urging for a considerable time. It is called sharing the benefits of growth. That is what he is doing. We now know that over the next three years, the growth of total public spending will be, in real terms, 2 per cent. per annum, well below trend growth of the economy and, if we are lucky, assuming that benign conditions continue, well below the likely actual growth rate that we will achieve. So public spending as a proportion of GDP will at last start coming down again, though in fact, on the Chancellor’s own figures, it will still be above 40 per cent. at the end of the three-year period, so it is not as drastic as it should probably be. I always aimed to get it below 40 per cent. and the Chancellor followed that target when he first came into office. The other announcement that the Chancellor made was about education. We now know that education spending will be, in real terms, about 2.5 per cent. over the next three years. That is a very sharp reduction in the growth of education spending, which has been at about 4.5 per cent. in real terms in previous years. Following on from the remarks of the hon. Member for Blaydon (Mr. Anderson) in his very good speech, which I have the pleasure of following, that seems to me a reduction in the proportion of GDP being spent on education, as it is likely to be below the growth in the economy. I seem to recall that at the last election, the Government were pledging the reverse, as has been pointed out. We have very sharp falls in the rate of growth of public spending. I do not dispute that. It is long overdue. We should not have had a period of famine followed by feast followed by famine, or by diet. Given that the years of feast have resulted in the money being spent so badly and public authorities getting casually used to considerable increases in real terms spending each year, I know of no policy direction that the Government are following that will help those who manage the services to cope with the sharp reduction in the growth of their budget. When I talk to people in education or the health service, they are completely unprepared for that. There is a slight tendency out there to believe that that cannot happen, after they have been buying their way out of trouble on most fronts so much for the past few years. The money has gone largely into payrolls, very considerably into pay increases in some important parts of the health service, and has mainly achieved a sharp drop in productivity in our key public services, without adequate improvement in the quality of service to show the hard-hit taxpayer. I do not understand how, if one looks back over the Chancellor’s period, there is the slightest strategy in any of this. I have already said that I do not think the golden rule and the sustainable investment rule make any sense at all now. He has just responded to events. He first tried to build a reputation for prudence, then he panicked in 2000 and he and the Prime Minister started to throw money at everything. Now the public finances are in a mess and he is putting out in dribs and drabs the least damaging indications that he has of slowdown in spending. Across the public service as a whole, that will cause great difficulties, some of which we already know. Maintaining a freeze on Home Office spending after years in which the Government have been doing their best to increase the prison population at a fantastic rate seems to me to be almost impossible. If the prison population continues to rise at the rate at which it has risen in recent years, as the Home Secretary has tried desperately to get the right headlines in all the most popular right-wing newspapers, it will merely mean a tremendous squeeze on spending in every other part of the criminal justice system, including the police, the probation service and the Courts Service. No doubt that explains the Prime Minister’s sudden and remarkable conversion to the policy of reducing the number of people in prison. We will see that sort of thing across the board as the real impact of the comprehensive spending review hits public services, and the Budget has given us a few more of the details. Of course, the Chancellor did not confine himself to that. I had expected his speech to contain a great deal about the public finances and about how he had already covered the tax situation and would now cover spending, but that was not the sort of speech he wished to make on the eve of his translation to the office of Prime Minister, when he will have the pleasure of appointing a Chancellor of the Exchequer who can preside over the difficult nitty-gritty of returning the public finances to some sort of healthy state. Instead, he made a wholly political speech aimed, as far as I could see, at the next day’s headlines. However, it did not even work on that front, because he only secured headlines of the sort that he wanted in the most gullible newspapers, which I strongly suspect had been briefed to look for a particular theme in his speech before he delivered it. The other newspapers, which were able to analyse it overnight, realised that it was not a great tax-cutting speech, but that was the political note on which the Chancellor wished to leave. The first thing that impressed me about the speech was that it was governed entirely by the Chancellor’s position vis-à-vis my right hon. Friend the Member for Witney (Mr. Cameron), the Leader of the Opposition. The hon. Member for Coventry, North-West (Mr. Robinson) said that he admired a Chancellor who was not concerned by the up-and-down fluctuations of opinion polls. I do not believe a word of that. The Budget speech was written when the Chancellor had read some opinion polls and seen what his ratings were in relation to my right hon. Friend the Leader of the Opposition. He then decided on the old new Labour practice of triangulation, which the hon. Member for Coventry, North-West remembers only too well: he decided to go for what he believed were the strong points in my right hon. Friend’s position. As he appears to imagine that our appeal depends on tax-cutting, he presented himself as the tax-cutting Chancellor, cutting income tax and business taxes in one and the same speech. I actually think that that was a slightly bogus view of where the Opposition stand. Personally, I admire my right hon. Friend the Leader of the Opposition and my hon. Friend the Member for Tatton (Mr. Osborne), the shadow Chancellor of the Exchequer, for being so responsible. We have said over and over again that we put the stability of the economy first. No one will follow this Government’s period in office by being able to make quick reductions in taxation. Indeed, my right hon. Friend usually gets into more trouble through disappointing the more enthusiastic of our party’s supporters by refusing to hold out the prospect of near-term tax cuts. The Chancellor of the Exchequer and the Government decided that the Chancellor would shoot a fox of some kind—one that he, at least, saw coming out of the burrow—by announcing himself as a man who would cut the rate of income tax and business taxation; but, of course, he did not do so. That was rapidly discovered, and has had some fairly perverse effects. I shall deal with the two principal issues. First, there is the cut in corporation tax. There is a case—indeed, many Conservative Members have been making it—for reducing the headline rate of corporation tax, which has steadily been left behind as all our competitors have reduced it, by making some cuts in allowances. We might have been given a little more explanation of how the impact would fall, however, because different sectors of the economy will be affected in different ways. There is no doubt that the move is of huge benefit to the financial services industry, but cutting all the capital allowances overnight will have been very unattractive to heavy manufacturing and the utilities, which will be very adversely affected. I agree with all the Members who have said that the most baffling aspect of the headline cut in corporation tax was that it had to be paid for in part by an increase in the small business rate of corporation tax. The Secretary of State for Trade and Industry did his best, saying ““No, no, there will be no trouble whatever.”” He has set out the allowances, which some businesses can claim. It is true that some small businesses will be able to take advantage of the allowances, but he does not believe that they all will. A 3 per cent. increase in the small business rate is an extremely unattractive way of raising some of the money so that the overall burden of business taxation will still increase. The extra tax on small business raised £850 million, with the result that the burden of taxation on business is still rising while the Chancellor stands there trying to bask in the glory of being the man who cut corporation tax and taxes on business in his last Budget. The effects are even more perverse in relation to personal taxation. I always put my cuts in the standard rate in the last paragraph of the Budget as well—usually after I had put up a lot of other taxes. As a theatrical gesture, it is not original, but this one was neither successful nor very well concealed. Because the Chancellor wanted the headline about 2p off the standard rate, he has had little regard to how that redistributes between different sections of the population, especially given the other things he has done to the national insurance ceiling and the bottom rate of income tax. To an extent, I welcome that because the Chancellor has found a way of paying for it by taking from Peter to pay Paul, and some of the Pauls are quite deserving. One of the recent problems in our economy has been how little of the benefits of economic growth have got down to ordinary wage earners and workers on ordinary incomes, and they will benefit from a cut in the standard rate. A remarkable feature of recent years, which the Chancellor has not addressed, is that the disposable incomes of people in the middle bracket have hardly risen at all—by less than 1 per cent. a year—during the past four years of economic growth. It is worse than that. The discretionary spending available to the ordinary family on average earnings has dropped, because while their incomes have remained pretty much stable, they have found that bills they cannot avoid paying, such as council tax, utility bills and mortgages, are going up. The retail prices index, which covers the kinds of items that the ordinary family spends heavily on, has been outstripping the rising incomes of many ordinary families. They will benefit from this Budget. It is inescapable, however, that low earners have suffered most. Couples and single people with no children in the lowest earnings bracket will be most out of pocket. Attempts have been made to compensate some people with children through tax credits. However, the take-up of child tax credit still cannot be got above 80 per cent. The system is fiendishly complicated, and I have always criticised it for that. I never predicted that the Revenue would get 50 per cent. of cases wrong each year, and I never expected to meet so many people suffering hardship and coming to my surgery, and those of other hon. Members, because they have received tax credits and then found that the Revenue is demanding from them thousands of pounds in repayments because of a mistake that it has made. I have never met a tax credits claimant who understands how the figure for their tax credits has been arrived at. It seems from the cases that I have dealt with that half the officials of the Inland Revenue do not understand how to get the calculations right. That is not a very good mitigation for taking away the 10p rate, despite the hon. Members for Coventry, North-West and for Blaydon trying to cheer themselves up when they reflected on the effect on lower paid earners in their constituencies. There are plenty of two-earner families where the second earner cannot claim child tax credit even if they have children. I disapproved of introducing the 10p rate. It was a gimmick when the Chancellor introduced it. He used it for political purposes, and it complicated the system. I always looked forward to its being removed, but it has been done in an extremely cack-handed way. I assumed that it would be impossible for any Chancellor to increase the tax burden on lower earners again. I assumed that we would have to wait until we could eventually afford to freeze the ceiling and raise the threshold of the rate until the ridiculous invention eventually vanished. Doing it because he needed the headlines now will reduce the income of some very poor people next year. Who has benefited? It is no secret that I am over the age of 65. I never describe myself as a wealthy pensioner, although the capital value of my pension as a long-standing Member of this House is quite high, so I am fairly comfortably off. I have not done the exact calculation, but I think that I am substantially better off as a result of the Budget because I do not pay national insurance, nor does anyone else above the age of 65, so 2p off the standard rate is a useful benefit. Like everybody else, I have been getting more heavily taxed by the Chancellor, so any remission of that is gratefully received. However, I do not for the life of me understand why people like me are benefiting at the expense of those on low incomes, who earn at the level where the 10p rate was important to them. There is no rationale for that. For political purposes, the Chancellor has made headline-seeking announcements, which have a fairly arbitrary effect on businesses and individuals. That is no way to set about improving this country’s public finances and certainly not the best method of simplifying the tax system. I object to the current form of the Budget speech. I hope that the next Chancellor will go back to being a little nearer the rules for Budget speeches. The old rules were quite strict and made for boring long stretches of speech, but they required all tax changes to be properly explained. I must admit that I got away from some of that a little, by leaving things that were of interest only to accountants with a handful of clients to the Red Book. However, I did not do what happens now. The Budget speech used never to be a political speech that was designed to give a totally misleading impression to the next morning’s newspapers. No Chancellor in the past attempted to gabble out figures at the rate that this Chancellor does, in a not unintended attempt to ensure that nobody can follow the Budget’s precise impact on the public finances. The Chancellor switches from cash figures to percentage figures. The dates all come out in a tumble. It requires a miracle for anyone in the House to follow the details of the speech because he wants us to hear the headlines of 2p off corporation tax and 2p off income tax. He is determined that no one in the House or the Press Gallery will understand any of the downside by the time he sits down. That is unhelpful and I fear for the Chancellor’s reputation when he becomes Prime Minister. His good friend the hon. Member for Coventry, North-West did his best to protect him as an individual, and I have always acknowledged that I do not dislike the Chancellor as a man, but his political style puts him in serious jeopardy as he embarks on his next job. He is not charismatic and never will be—I do not criticise him for that. He has the reputation with the public of being a political heavyweight. He scores well on trust and has been around for so long that he is almost part of the British constitution. He is a formidable figure in a Government of whom one cannot say that the entire Cabinet is composed of formidable political figures. However, the Chancellor’s reputation has been sinking recently and the public’s reaction to the Budget speech will be damaging to him. It was not the right farewell to his period as Chancellor to go in for a Budget that was a blatant attempt to mislead the public about what he was doing. Only the most loyal sections of the Murdoch press were inclined to buy it. I was looking forward to a period of more straightforward presentation of public policy—a little less spin, to use the cliché—and less of the extraordinary manner whereby information comes out of the Government, but the Chancellor, under the pressure of events, the pressure from my right hon. Friend the Member for Witney, and impending responsibilities, is showing signs of taking up new bad ways of disseminating information. It will not work. If he continues in that way, I am afraid that I wish him a premiership that is much shorter than his tenure at the Treasury. The Chancellor’s successor—I hope that the nationality of the Secretary of State for Trade and Industry is not fatal to his hopes—will have a miserable task in implementing what has to be done to the public finances. I trust that whoever it is will give us a much more straightforward and open Budget, with a candid account of what has to be done, this time next year.