Finance Bill
Philip Dunne examines the impact of the temporary reduction in the VAT rate - especially in the retail sector - and also raises concerns about the practicalities of raising it back to 17.
5% on 1st January 2010.Mr. Philip Dunne (Ludlow) (Con): I am grateful to be called to contribute to this debate, Sir Michael. I touched on the VAT cut in my contribution on Second Reading, so it is a pleasure to be able to join in the Committee deliberations from the Back Benches. Much of the debate, and indeed the Liberal Democrat amendment to the clause, is an attempt to estimate the impact of the VAT cut in relation to other stimulus measures that have been introduced. Much has been said this evening about the difficulty of measuring the extent to which the apparent increase in retail transactions is attributable to the VAT cut, as opposed to other things.
I should like to give a bit of colour: now that we are in May, data have been published that tell us what has happened to different categories of retail sales since the VAT cut came into effect. In the first quarter of this year-from January to March-like-for-like sales in the food sector rose by 5.3 per cent., but like-for-like sales in the non-food sector fell by 2.9 per cent. That is according to the Monitor retail sales survey, which is one of the most widely respected retail sales measurements. That pattern was followed again in April, the figures for which came out very recently. In that month, like-for-like sales overall increased by 4.6 per cent. as against last April.
At first sight, that would seem to suggest that the Government's VAT cut had had a positive impact on sales, but I have to inform the Minister that that may well be something of an illusion. The total spent on food during that period has risen by less than food inflation over the same period. That indicates that the volume of food sold over those four months is lower than it was a year ago; it is negative. It is therefore erroneous to suggest that there has been an increase in food sales by volume during the period. As I have already indicated, non-food sales have actually declined during that period, so it would be hard for any statistician to be able to determine that there had been an increase in retail sales as a result of the VAT cut.
Mr. Newmark: Does my hon. Friend think that that could have to do with the Government's anti-obesity campaign? Does he think that that is the reason for the decline in volume of food sales?
Mr. Dunne: As the deputy chairman of the all-party group on diabetes, I take a particular interest in the level of obesity in this country. I suggest to my hon. Friend that although the Government have, in order to keep medical bills down, made some strides to reduce the intake of individuals who consume too much, not enough has yet been done in that regard. A lot more could be done. I do not think that obesity measures are the reason that the volume of food sold has declined.
The figures for April showed an overall increase of nearly 5 per cent., as I have said. That could well be attributed to changing patterns-to changes in the date of Easter, a time when retailers put on special promotions and people like to spend money because they are off work, and, of course, to changes in that favourite in the retail trade, the weather. In 2009, Easter was in April, but in 2008 it was in March so sales were typically lower the month after Easter than they were in Easter month. The weather this April, as hon. Members will remember, was balmily sunny, and many of them will have joined my family-well, they were not actually with my family, but they did the same thing as us-in having Easter lunch outside in the sunshine, which was something that we did not do in 2008. We managed to do it in April 2007, which presaged one of the wettest summers on record, and I hope that that is not a portent for this summer's weather. The weather this April was good, but the weather last April was bad, and those two factors may well account for a large part of the increase in overall sales.
Indeed, Stephen Robertson, the director general of the British Retail Consortium, said as much. He said of the sales figures:
"A sunny Easter that fell in April this year is the key reason why overall sales are up compared with last year when Easter was in March and miserable."
Mr. Newmark: Given the Government's huge interest recently in the environment, does my hon. Friend believe that in pursuing their policy they were making a huge bet on global warming driving up sales?
Mr. Dunne: My hon. Friend is most inventive in his excuses for the Government trying to account for the cut in VAT by linking it to increases in economic activity. The Government make great claims regarding their green credentials, few of which come to pass and even fewer of which are put into practice in their Budget measures.
I shall try to move beyond mere retail sales to other things that may account for the improvement in economic activity apart from the VAT cut. I shall quote Mr. Robertson again:
"Following a tough winter, there's some pent up demand, but there's no reason to think that customers suddenly feel flush or eager to spend. With unemployment set to grow through the rest of the year, mounting job worries will hold back spending for some time. The historically weak performance of the last 12 months is behind us, but we shouldn't celebrate yet."
I think he is quite right-it is too early to see the green shoots of economic recovery, and certainly too early to put that down to the VAT cut.
Mr. Binley: Does my hon. Friend agree that for every job loss, two people are equally worried about the possibility of losing their job, which widens the trend that he is discussing? Does he accept that analysis?
Mr. Dunne: My hon. Friend will have seen the unemployment statistics that came out earlier this week, indicating that about 224,000 people joined the unemployment queues over the past three months. That takes the unemployment rate up to 7.9 per cent., which is utterly dire and takes us beyond the unemployment figures that the Government inherited in 1997. There are undoubtedly widespread concerns about unemployment which affect people's spending habits-not just those who have had the misfortune to become unemployed but their relatives, friends and neighbours, who fear for their own position.
Mr. Newmark: My hon. Friend makes an interesting point. I believe that up to 600,000 young people will leave school and college in June, thereby possibly increasing the unemployment figures by another 500,000 to 600,000. As a result of the VAT cut and the potential pick-up in volume, will the retail trade hire more people to deal with the problem, or have the Government seen no evidence of that coming down the path?
Mr. Dunne: My hon. Friend has posed a question for the Financial Secretary, who is now back in his seat; I am sure that his colleagues will brief him so that he can provide a proper answer. My point is that the Government seem set on failing to provide sufficient university places to school leavers this summer. The ranks of the unemployed may well be swollen by young people unable to get into university because the Government have not provided adequate funding.
I move on to consider briefly one or two other factors that may have more significant impact than the VAT cut: I am thinking of the consequences of the reduction in interest rates. In the past 12 months or so, the base rate has declined tenfold from 5 to 0.5 per cent. That will undoubtedly provide a significant increase in disposable income to households that have tracker or variable rate mortgages. The point applies to the disposable income of not only low-income households, as suggested by the Liberal Democrat amendment, but that of all households that benefit from such mortgages. Those who were on fixed-rate mortgages and had the opportunity to reset them in the past 12 months will see some increase-although it will not be as significant, because the banks are clearly making up their margins on mortgages and are not fully passing on the base rate cut. However, I would argue that that cut has had a far more significant impact on disposable incomes and economic activity than the footling VAT cut.
Mr. Newmark: My hon. Friend makes an excellent point about the shift downwards in interest rates. Many of us have store cards; it would be interesting to know whether stores have passed on the decline in interest rates to consumers. Alternatively, have they kept their rates high? Do the margins that they make on that side more than make up for what they may be losing in trade due to VAT cuts and so on?
Mr. Dunne: The retail sector is one of the most innovative in our economy. It would not surprise me at all if customers had the opportunity of significant discounting on the ticket price, particularly of large ticket items, while the back-office finance departments recovered their margins by maintaining significant spreads on store cards and other forms of credit made available to facilitate purchases.
Mr. Bone: I am grateful to my hon. Friend for giving way; he is being exceptionally generous. Before he moves on, I want to put something on the record. A lot of banks are gouging people on interest rates. The interest on the Royal Bank of Scotland Black Card, which has just been introduced, is more than 50 per cent. a year. That bank has certainly not been passing on the cut.
Mr. Dunne: The whole House will be astonished at that information, and I am grateful to my hon. Friend for bringing it to our attention.
I should like to make two other brief points to Ministers about the clause. The first is an issue that I raised when the VAT cut was first announced last autumn: the extraordinary impact on the sectors of our economy that have the benefit of flat-rate VAT arrangements. By introducing the measure with such haste, the Government failed to take properly into account the consequences for the many sectors that benefit from such arrangements. Like, I am sure, almost every other hon. Member, I have had constituents writing to me complaining that, far from seeing a reduction in VAT as a result of the 2.5 per cent. general cut, their customers have seen an increase because the Government have failed accurately to calculate changes to the flat-rate arrangements. Many businesses are having to impose on their customers a higher flat-rate charge during this period of the so-called VAT cut than they did previously. That is quite extraordinary, and the Government have failed to provide a proper justification for it at any point. I hope that they will revisit the subject, even at this late stage.
Finally, I should like to touch on the point made forcefully by my hon. Friend the Member for Braintree (Mr. Newmark) about the date. I also mentioned it in the Second Reading debate. It is quite extraordinary to choose a Thursday to introduce a significant change that will require the re-ticketing of every item, on and off the high street, that is subject to VAT. As my hon. Friend said, the only thing that the proposal has in its favour is that it is the calendar year end. It is not a month end or a week end; in most cases, it is not a financial year end. If the Minister had any familiarity with retailing, he would recognise that most retail financial year ends vary. They will typically fall at the end of January, not the end of December, but they vary according to the calendar. If it is, say, 31 December, it will be the final Saturday of the month closest to that date, not a Thursday.
I ask the Minister to consider something that might be familiar to his Parliamentary Private Secretary and to many of his other colleagues. Has he had any discussions with the retail trade in Scotland about what the impact might be of introducing a significant change requiring a large number of manual amendments to stock price items after close of business on Hogmanay evening? I suspect that that will be extremely inconvenient to retailers in Scotland, who will have to pay substantially more in overtime to their long-suffering staff for coming into work after lights out on Thursday 31 December, when they may well have other things that they would prefer to be doing. I hope that the Financial Secretary will deal with that point directly.
