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Value Added Tax

There are three words for this VAT reduction: foolish, foolish, foolish. It is foolish in its conception, it is foolish in the way it has been implemented in the House as well as across the economy, and it is foolish because it will not achieve the outcome for which the Government hope. I do not question the Government's motive; I simply question the method by which they are attempting to deliver their aim. The right hon. Member for Birkenhead (Mr. Field) used the word ““effective””, suggesting that there were probably more effective ways in which £12.5 billion, an enormous sum, could be put into the economy, or put into monetary stimulus, that would actually make a difference. I share that view, but I would put it slightly more strongly. I would say that reducing VAT is categorically the wrong thing to do at this time. Let me deal with the first count of foolishness in conception. I think that the reduction was conceived prematurely. The problem that we have is the lack of liquidity. Can people borrow money? Can people renew their mortgages? The answer is no, not at the base rate that has been set. Can businesses continue with their existing overdrafts and loans? The answer is no, certainly not at the current interest rate, and many facilities have been withdrawn. Can people purchase cars? We have seen a 37 per cent. decline in the number of cars purchased in the last quarters. People cannot purchase cars because there is not enough liquidity. There is not enough cash in the system, so the finance houses will not finance new vehicles. That is the problem, and sadly the solution provided by the Government is an incorrect one. They are providing a fiscal stimulus when what is required is more cash flowing through the banking system. It is the Government's banking solution that has not worked. I believe that the VAT reduction was also born out of panic. It is clear that a massive economic failure is taking place. We can argue about whether it is a world downturn, and of course we acknowledge that it has international aspects; but we are clearly in a worse position than most developed countries to respond to the situation. I believe that the Government were under pressure to do something, and simply grasped at a measure that they hoped to be able to implement quickly. They grasped at the wrong measure, and I suspect that they are beginning to realise that that was a mistake.