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Finance Bill

My Lords, I begin by declaring my interests as set out in the Register of Lords’ Interests in case anything that I may say could be thought to impinge on them. I continue by complimenting in advance the noble Lord, Lord Vallance of Tummel, and, through him, the Select Committee on Economic Affairs for its report on aspects of the Finance Bill 2009, which we now debate at Second Reading. As usual, the committee has chosen specific items from the Bill and provided useful scrutiny and comment on them. However, the Bill is derived from the Budget, and the Budget and more recent developments in the economy form the background to today’s debate. The fact that the economy shrank by 2.4 per cent in the first quarter—as the committee points out, the fastest rate for more than half a century and far worse than expected—provides a truly serious background to our deliberations. Sadly, this House cannot amend the Finance Bill but we can question the Government and offer our own views and I begin by brief reference to the three topics that the committee chose to examine: foreign profits, the pension annual allowance and real estate investment trusts. As so often these days, the recurring criticism which has coloured debate on the Bill and which the committee’s report echoes is the lack of consultation before rushing to legislation. It was with masterly understatement that the committee concluded that, ""it is not good practice that the Finance Bill should be incomplete at the time of publication"." This policy of "shoot first, ask questions later"—the kind of YouTube politics favoured by the Prime Minister—should have no part in consideration of a Finance Bill, or indeed of any other. The noble Lord, Lord Vallance, and other noble Lords participating in the debate will doubtless wish to debate these matters more fully but, on foreign profits, I simply urge the Government to take on board the recommendations of the committee and to delay implementation of the worldwide debt cap, which runs the risk of incentivising debt, until there has been a chance for further proper consultation, as the committee requested. The distinguished witnesses whom the committee met described this issue as a "Frankenstein monster". Clearly they felt strongly about it, being of the view that the Government had not yet got it right. On REITs, the committee pointed out that the reforms, ""failed to live up to expectations"." They did not, as Deloitte pointed out, go far enough. That there are no residential REITs, nor any new ones, that are not converted from property companies suggests underlying structural defects in the design of the scheme. On pensions, I acknowledge that some progress was made in Committee in another place on, for example, anti-forestalling and the responsibilities of senior accounting officers, but that progress was only very limited. Why do the Government not realise the importance of encouraging savings as part of a sound economy? Now they seem obsessed with restricting and penalising, through piecemeal and ill considered legislation, those who would save through their pensions. So soon after the redesign of the whole system, it is unsettling, to say the least, that what looks like a morass of potential tax traps has now been imported, piling on complications where simplification would be preferable. Surely the Prime Minister has damaged the pensions sector enough over the years. What is needed is a stable, predictable and fair environment. As for the rest of the Finance Bill, lengthy and complex it may be, as the noble Lord, Lord Myners, said—that is the habit of Finance Bills—but it does little to address the great issues that we face. We see what can only be described as snide little political wheezes like the 50p tax rate brought forward by a year and increased by 5p simply to try to wrong-foot the Opposition. Is there no limit, one wonders, to the extent to which the Prime Minister is willing to demean himself and debase his office? Did he learn nothing from the 10p tax rate debacle? The latest measure was condemned by all informed opinion, such as the Institute of Directors, the Institute for Fiscal Studies and Ernst & Young. Far from raising the Treasury’s planned £2.4 billion, the combination of avoidance, emigration and a consequential fall in indirect tax revenues must surely erode that figure substantially—similarly with the £12 billion VAT reduction, to which the noble Lord also referred. Notwithstanding the fact that he has rounded up support from one organisation, I believe that that was another ill judged irrelevance, denounced by retailers and the public alike, both of whom might have been thought to be beneficiaries at a time when massive discounts of 20 per cent and often much more were being offered to help them to survive the recession. What thought did the Chancellor give to the real impact that will come when he restores his cut on 1 January next year? That will be the sting in the tail to an economy in crisis. The fact is that the Budget managed to be both an odds-and-ends ragbag that contributed nothing to recovery and, by common consent, one of the worst in modern times. It was bad because of what it failed to do. It failed to provide a theme—a vision even—of how to address the debt crisis that is poised to overwhelm the country. How, for example, do the Government plan to solve a debt crisis by piling debt upon debt? The Budget failed to instil confidence. It breached manifesto commitments and it undermined competitiveness and still we wait to learn how the Government plan to tackle the public finances that they have so wantonly destroyed. Last year, the Chancellor predicted that the Government would need to borrow £38 billion this year. Now that forecast has increased to £175 billion, almost five times as much. The Prime Minister had said that he wanted the International Monetary Fund to be an early warning system. On Budget Day, the IMF warned him within an hour of the Chancellor sitting down that the decline in GDP this year would be not 3.5 per cent but 4.1 per cent and that the budget deficit would be the worst in the G20 next year, at 11 per cent of GDP. From the perspective of three months later, the Budget can be seen as inaccurate, inadequate, irrelevant and one more wasted opportunity to start the recovery process, just when it was most needed. But the IMF has gone on to warn that Britain is the only leading economy in the G20 that is unable to budget for any kind of package next year. Not only that, but the Chancellor must start paying back debt much earlier than next year’s Budget. Is it not time now for the Government to spell out their plans, instead of hiding them for electoral reasons, so that we can start to shore up international confidence? However, this is a Government with form. Despite the strong and growing economy that they inherited in 1997, they have not achieved a budget surplus since 2001, the year after the plans that they had inherited from their predecessors ran out. Through all the years of plenty that followed, while other countries were reducing taxes and building reserves, this country was doing the opposite. Even at the top of the cycle, the Chancellor was still running a 3 per cent deficit, while lecturing others on what they should be doing. As the OECD has pointed out with regard to the UK, fiscal policy is constrained by weak budgetary policy. It has also forecast that our fiscal deficit will climb to 14 per cent next year, the worst in the industrialised world. In 1997, all the economic indicators were strong and heading in the right direction. Now they are all weak and heading in the wrong direction. Productivity, a vital and often overlooked measure of economic health, is down by 4.7 per cent in the first quarter of this year. In manufacturing, it is down by 8.3 per cent, almost double the fall of the previous quarter. Business investment fell by 7.6 per cent in the first quarter compared with the previous already poor quarter. That is hardly surprising considering the continuing credit famine. Exports of goods fell by £4.1 billion in the first quarter and our overall deficit in trade in goods last year was £93 billion—so much for the proclaimed benefit to exporters of a weak pound. GDP in the production industries is down by 12.5 per cent in two years. As regards employment, in the first quarter of this year public sector employment rose by 15,000, while private sector employment fell by 286,000. I regard both those figures as bad news. Since March the deterioration has accelerated dramatically, with youth unemployment leading the way. One can imagine not only the heartache and misery that that must cause but also the massive and growing cost to the public purse at a time when revenues are drying up. I fear that that trend has much longer to run. As the Government scrabble around over the next few months trying to find green shoots, they will be clutching not at green shoots but at straws. All they will find is a lunar landscape, with mountains of debt stretching to the horizon and a dust cloud of inflation hovering above it. Already soaring upwards, borrowing will be more in the next two years than the entire accumulated debt of all previous Governments since the 17th century added together. It will double the national debt. We will be paying more in interest on those debts than on the whole of the education budget. I believe that the bloated state of our public finances will delay our recovery from recession, not hasten it. Unless we get to grips with it soon, the situation will get even worse. The Government want to sell £220 billion of gilts this year and they are competing with, among others, the United States, Germany and Japan, which alone are seeking between them to raise £2.7 trillion. Therefore, the possibility of a gilts strike and the collapse of sterling cannot be ruled out and the consequences of that would be calamitous. I have no wish to sound unduly alarmist, but this should come as no surprise, because if we include, as we should, the cost of rescuing the banks, off-balance-sheet PFI liabilities and public sector pension liabilities, the United Kingdom’s gross liabilities already exceed 275 per cent of GDP and, while the liabilities and debts are rising, GDP is falling. On top of public debt, personal debt, with the active encouragement of the Government, has reached the highest levels in the world, at 186 per cent of disposable income—higher than America’s 142 per cent and, indeed, the highest that any G7 country has ever seen. We have one of the lowest gross national savings ratios in the world, while house price inflation averaged 9.3 per cent in the decade before the credit crunch, compared with 3.9 per cent in America. The damage wrought by this "dysfunctional" Government—to quote their colleague in this House, the noble Lord, Lord Sainsbury of Turville—is literally immeasurable. It will take years, indeed decades, to repair and it has been caused not just in the past two years of panic and misjudgement but cumulatively over the past decade. It comes as no surprise to learn only today that for the first time in 350 years the Treasury has had its own accounts qualified by the National Audit Office. The noble Lord, Lord Myners, says that the Government are not complacent, but it seems to me that they are not in control of events. It is easy to say that the crisis is international and that it all began in America. Of course, what happened there partially triggered the denouement, but it also began in the United Kingdom. Northern Rock collapsed before Lehman Brothers. Our banks and building societies were every bit as extended as America’s and they were poorly regulated as a result of the Prime Minister’s fateful changes of 1997. I warmly welcome my honourable friend George Osborne’s clear-sighted proposals to reverse the split-level responsibility that has so damaged banking regulation. Our housing market was every bit as overheated, overpriced and overborrowed as America’s, the result of easy credit fanning the feel-good factor to win votes. With our public spending levels, our high taxation, our deficits and our debt, ours was not an economy whose fundamentals were stronger than others, as the Prime Minister and the Chancellor repeatedly claimed. It was not an economy uniquely well placed to weather the storm, as they also claimed. It was and is the reverse of those things. It is uniquely weak, uniquely overextended and irresponsibly managed. We urgently need an exit strategy. We need firm decisions to tackle public expenditure and borrowing levels before confidence in sterling collapses and inflation engulfs us. Yet the Government prevaricate; they do nothing and say nothing. This year’s Finance Bill, like the Budget and recent government behaviour, is largely irrelevant to the truly dreadful problems that the nation’s finances face. The day cannot come soon enough when a new Government can come to grips with them and get down to rebuilding our country.