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Value Added Tax

I beg to move,"That an humble Address be presented to Her Majesty, praying that the Value Added Tax (Change of Rate) Order 2008 (S.I., 2008, No. 3020), dated 24 November 2008, a copy of which was laid before this House on 24 November, in the previous Session of Parliament, be annulled." Let me move on from the end of term spirit to a very serious issue, which is the motion to annul statutory instrument No. 3020 relating to value added tax. There are two reasons to be concerned about the VAT change, and we want to register that fact from the Opposition Benches. Some people do not believe that there should be a fiscal stimulus or think that it would be damaging; I would expect the Conservatives to make that case in due course. My approach and that of my colleagues is somewhat different: we have no objection to the principle of a fiscal stimulus, but we think that this is a bad one that is not likely to be effective even on its own terms. Perhaps I should start with the Chancellor's own language in the pre-Budget report, when he declared:"““I have decided that the best and the fairest approach is a measure which will help everyone””—[Official Report, 24 November 2008; Vol. 495, c. 483.]" and said that he proposed to give back some £12.5 billion to consumers. Our view is that that is not the best and fairest approach, that it will not help everyone, and that it certainly will not give £12.5 billion back to consumers. That is not to say that it is completely hopeless. There is a case for providing a fiscal stimulus through this measure that does not rely on ““best”” or ““fairest”” or consumer stimulus. It is a somewhat mechanical approach. What will happen—we can already see it happening—is that this measure will be absorbed in increased retail margins for everything from small shops to Sainsbury's, Asda and Tesco. Of course, that is putting money into the economy; no doubt if Tesco earns a little bit more profit as a result, that will be reflected in its share price and feed through into pension funds. If the Government had been honest with us and said, ““Actually, this has got nothing to do with helping the consumer—it's all about putting £12.5 billion into the economy in the quickest way we can think of, and it's marginally better than dropping money from helicopters””, we would find it difficult to quarrel with the logic. However, they have not done that—they have grossly overstated their case, and so we need to have a look at it and at its weaknesses. The policy makes extraordinarily optimistic assumptions about the course of the economy. It assumes, as was said in the pre-Budget report, that we expect a recovery in 13 months from now. Because of that very optimistic view of the course of the British economy, this measure could have some perverse and negative consequences that were clearly not thought through in the Treasury. As we approach the end of next year, most people will have to look forward to an increase in VAT that may be greater than a return to 17.5 per cent.—to reopen the whole issue of what the Government really intended—as well as an increase in income tax, although it is called national insurance. Most rational consumers will calculate that they face a reduction in real income and adjust their budgets and spending patterns accordingly. There is another, more subtle effect at work. Most economic forecasters now expect that next year we will see something that we have not seen for decades, possibly generations—namely deflation, whereby prices fall as they did in the 1930s and at various times in the 19th century. That is now factored into the assumptions of some of the money markets, so the Americans talk about it quite openly. In a deflationary world, prices fall. When consumers see prices falling, they hold back from spending, so the VAT cut has the perverse effect of encouraging deflationary expectations. That encourages people to spend less, rather than more. Those are two possible perverse consequences of the measure. I am not predicting that that would happen, but before we glibly assume that the VAT cut is simply an injection of consumer spending, I am pointing out factors that could work in the opposite direction. Secondly, on the impact of consumer behaviour, we need to take into account the fact that we are talking about a very small change. Mr. Steinbrück, the German Finance Minister who has often been quoted in the Chamber in the past few weeks, chose a singularly unhelpful example: he asked, rhetorically, whether people would respond to a change in the price of a DVD from £39.90 to £39.10. That is quite a good example, and I can give others: one that I have quoted in the past is the £5 off the £220 flat-screen TV from China. There is also the example of 60p off a £25 meal. One can question how much that is likely to influence the behaviour of a rational consumer.