Budget Resolutions and Economic Situation
Philip Dunne speaks in the Budget debate and raises his concerns that the Chancellor is in denial of events surrounding the country and has failed to put in place measures to ensure the UK is in a good position to weather the financial storm.
8.38 pm
Mr. Philip Dunne (Ludlow) (Con): It is a-I was about to say a pleasure to follow the hon. Member for Wrexham (Ian Lucas). I note that in many of the references that he made to the success of Wales in attracting high-tech manufacturers he did not give credit to the Welsh Development Agency and the political skill that Welsh Labour MPs in particular have in persuading it to support business in Wales. On the other side of the Welsh border we notice that to our cost. The hon. Gentleman is to be congratulated on the role that he plays in that.
Ian Lucas: On a point of information, I should point out that the Welsh Development Agency no longer exists.
Mr. Dunne: I am grateful for having been brought up to date on the extent to which Wales keeps ahead of other regions of the country in developing its support for industry.
I should like to focus most of my remarks on the macro aspects of the Budget. Many speakers have discussed the extent to which the Chancellor is in denial of the events surrounding this country. So concerned has he been to convince us that all is well with his stewardship of the economy and that all is stable in his hands, that he failed to recognise-and barely mentioned in his speech-that the stable door has been blown open by the financial storm coursing around the globe, and is left flapping in the wind.
In opening the debate, the Secretary of State for Business, Enterprise and Regulatory Reform repeated the mantra about stability; apparently, the problems are all the Conservatives' fault for talking the economy down. However, we did not cause the credit crunch, as was generously acknowledged in one of the Labour contributions. We did not cause the crisis; nor are we talking it up. However, we do believe that the Chancellor needs to wake up to the consequences of these unprecedented events, as many commentators warn that he should.
What is the Chancellor's reaction to the shocks? In his speech last week, he talked up the resilience of the UK economy and today Ministers and the few Back Benchers who have turned up to support the Chancellor have been parroting that mantra too. However, what is there to be so resilient about in an economy whose house price inflation is among the highest and most resilient-in that sense-in the world? Our household debt levels are at record highs and our consumer saving ratios are at record lows. The day after the Budget, Roger Bootle, a leading economist, wrote:
"Our housing market is one of the most over-valued; our consumer saving ratio has plunged to levels only exceeded by the US; we are heavily exposed to the global economy, which is threatened; we are heavily dependent upon international financial activity, which could be severely hit; and our scope to take expansionary fiscal action is limited by our recently lax fiscal policy. On balance we are relatively badly placed to weather the storm."
That says it all-far more than the Chancellor has acknowledged in his assessment of how we are placed to cope with the financial crisis.
It is not only our own economists who are spreading cautionary tales. The managing director of the International Monetary Fund, Dominique Strauss-Kahn, was quoted in the papers as saying:
"It's a problem for economic growth. We clearly face a situation in which the risks to economic growth are more and more serious."
I hope that he passed that message on to the Prime Minister and the Chancellor when he met them today.
Today, the Bank of England published its latest quarterly review. In commenting on activity in the sterling financial markets in February, it pointed out that the
"difficult conditions in bank term funding markets would continue for some time, which would be likely to lead to a reduction in the supply of credit to the economy generally...This could act as a drag on economic activity, and in turn could prompt further deterioration in the quality of banks' assets and limit their ability and willingness to lend".
One example of the speed of change is that the central forecast in the Budget is for house price growth of 2.5 per cent. per annum. Figures for last month show that house prices have already declined, after five successive months, to an annual rate of only 1.4 per cent. So, before the year has even begun, we are considering an optimistic annual house price assumption in the Red Book.
Where does that leave Government finances and the Chancellor's forecasts? It leads to an overwhelming lack of credibility. The Chancellor chose to downgrade his GDP growth range for 2008 to a range of 1.75 to 2.25 per cent., rising back to trend after 2009. However, he did that on the back of consensus economic forecasts, which looked to 1.5 to 1.7 per cent. The bottom of the Chancellor's range for growth in GDP in the year that is about to start is marginally above the consensus average. Independent commentators, who gave evidence to the Treasury Committee on Monday, raised particular anxieties about that. Bridget Rosewell from Volterra Consulting described the Chancellor's forecast as complacent. She said:
"The particular form of optimism that I find most disturbing was not that overall headline number, where even the bottom end of the range is above the current consensus, which seems odd, but also the discussion about the UK's resilience to economic shocks and how this is expected to have increased. It was the complacency surrounding that which I found particularly disturbing."
What does that forecasting optimism mean for the public finances? The Government, especially the Chancellor's predecessor, have form on forecasting the public finances. Every year since 2003-seven years in a row-the year in which public finances cross over into Budget surplus has been pushed out. In the 2003 Budget, it was predicted to happen in 2005-06. Only last year, in the 2007 Budget, the date was pushed to 2008-09. The pre-Budget report, which was published only last October, pushed it to 2009-10 and the Red Book now says that it is to be 2010-11.
The public sector net debt, excluding Northern Rock and the international financial reporting standards-IFRS-changes, to which my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) referred, has increased by £20 billion over the period of the Red Book. What impact does that deterioration in public finances have on the Government's famed sustainable investment rule? It places it perilously close to a breach. Table C5 on page 184 of the Red Book shows that public sector net debt reaches 39.8 per cent. of GDP. How much headroom does that give us? Headroom of 0.2 per cent. is equivalent to only £2.8 billion. That compares with a £13 billion to £14 billion average forecasting error since 2003. That leaves a high probability of a breach-a 50:50 chance, according to the experts who spoke to us on Monday. Where is the discussion about what happens in those circumstances in the Chancellor's explanation of the Budget? It appeared nowhere in his speech or in the Red Book. The Chancellor is crossing his fingers that it will not happen.
Of course, the figures completely exclude the impact of Northern Rock, which the Office for National Statistics declared will have to be added to the public debt yet the Chancellor conveniently decides that he can ignore. The ONS calculated the Northern Rock debt at 30 June as adding 6.7 per cent. to the public sector net debt as a proportion of GDP, blowing us way off the sustainable investment rule. Yet that has not been discussed and there has been no explanation of what the Government will do.
The figures also exclude the impact of moving the public accounts on to an IFRS basis. The Government have agreed to that but decided to defer doing it for another year. That is likely to add a further £30 billion of PFI off-balance-sheet debt to the public sector net debt. Again, there was almost no discussion of that in the Chancellor's presentation.
Let me consider briefly the specific measures that the Chancellor proposes. We are debating a tax-raising Budget. Much has been made of the fact that it is fiscally neutral and, technically, it is, but only for the year that starts in April. Measures to be introduced in April 2009 raise just short of £800 million and those to be introduced in April 2010 raise a further £1.8 billion. When taken with measures that were announced in the Budget in 2007 and since, the figure rises by a further £1 billion to £2.8 billion in the third year of the Budget, so we are talking about a tax-raising Budget, not a tax-neutral Budget.
By and large, the measures in the Budget are puny-that point was well made by the hon. Member for Taunton (Mr. Browne). Of the 52 measures set out in table A.1, which shows the fiscal impact of the policy decisions in the Budget, 42 have a fiscal impact in the first year of plus or minus £25 million or less. Indeed, many have either a zero or an insignificant impact. By 2010-11, some 34 of those 52 measures will continue to have a minimal impact. Those measures amount to tinkering at the edges and have little significance on the national accounts.
Overall, the measures are also regressive. Almost everybody earning less than £18,000 will be worse off under the proposals, particularly if they drink, smoke or drive. The more significant measures have been shambolically introduced. Other hon. Members have talked about the capital gains tax changes, which were announced in the pre-Budget report. It was then announced that there would be a rethink, but the rethink was delayed. Finally, the proposals were confirmed a few weeks ahead of the Budget, giving business men very little opportunity to arrange their affairs before the end of the tax year.
The Secretary of State for Business, Enterprise and Regulatory Reform had the gall to argue that the Budget is a Budget for entrepreneurs that, to use the expression that I think he used, abandons short-termism. In fact, the Government's capital gains tax proposals abandoned the very incentives that encouraged long-term investing. Is it any wonder that the Government's reputation for economic competence has now been exposed as blowing in the wind?
8.52 pm
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PHILIP'S OTHER CONTRIBUTIONS TO THE SAME DEBATE
Mr. Philip Dunne (Ludlow) (Con): The Secretary of State refers to the greater simplification that the Budget provides to small businesses, saying that it will mean business men taking less time to prepare their tax affairs. Has he assessed how much time it will take them to read through the 107 new tax notes included as part of this Budget?
Mr. Hutton: The hon. Gentleman, for whom I have a lot of respect, has argued with me before about the extensive administrative burdens reduction programme that the Government have been pursuing for the past two years. It will produce significant benefits in the round to small businesses' dealings with regulation and tax matters. The Government are seized of the importance of trying to reduce all compliance costs associated with these matters.
