Finance (No. 4) Bill

Public Bill Committee, 26 April 2012.

(Except clauses 1, 4, 8, 189 and 209, schedules 1, 23 and 33 and certain new clauses and new schedules) - Clause 3 - Personal allowance for 2012-13 for those aged under 65

Peter Bone (Conservative, Wellingborough)

I remind the Committee that we are discussing amendment 10, with which we are discussing clause stand part.

We shall finish this morning’s sitting no later than 10.25 am, which will enable members of the Committee to get to the Chamber in time for proceedings there.

Grahame Morris (Labour, Easington)

I rise in support of amendment 10. In view of the figures published yesterday, it is worth while focusing on the impact on ordinary families of the double-dip recession, which has now been confirmed officially. While Opposition Members welcome the increase in the general income tax personal allowance—the basic rate, that is—when people first start paying tax, it is important that the overall impact of all policies on low and average income earners is assessed, because the increase in the personal allowance is only part of a package of measures.

The question that must be asked is who will be better off as a result of the changes made in the Budget by the Chancellor? Our amendment is reasoned. Indeed, it calls on the Government to report back to the House on the overall impact of their policy on those whom they claim will be better off as a result of the increase in the personal allowance. The long-term objective of raising the basic personal allowance to £10,000 during the parliamentary year is to be applauded. In a previous debate, the hon. Member for Watford asked whether Opposition Members supported it. We certainly do, but the measure must be seen in context alongside the slash-and-burn policies of other Departments, most notably the Department for Work and Pensions.

According to independent experts, the changes coming into effect in April will leave a family with children worse off by an average of £511 a year. That is on top of the VAT rise, which I remind the Committee will cost an average couple with children £450 a year. In earlier proceedings, my hon. Friend the Member for Pontypridd highlighted several case studies, and it is right that we should look at the policy’s impact on poorer, working families in receipt of housing and council tax benefits. As he said, they will be just £33 a year better off from the tax threshold increase because, as their income goes up, their benefit entitlement goes down.

Graeme Morrice (Labour, Livingston)

To go back to my hon. Friend’s comment about VAT, it seems that earlier this week Government Members were disputing the figures that we had been given. For example, my hon. Friend the Member for Livingston mentioned that an average couple with children would lose £450 a year. Does he accept that the official figures were confirmed by the Minister, fin response to a question asked by my hon. Friend the Member for Gedling (Vernon Coaker), recorded in Hansard on 5 July 2010?

Grahame Morris (Labour, Easington)

I believe that it was the hon. Member for Bristol West who queried the figures that we were quoting. It is important that we set the record straight. They are official Treasury figures.

Stephen Williams (Liberal Democrat, Bristol West)

The hon. Gentleman mentioned my earlier intervention on him, I think. The £450 may be true on average across all families in the UK, but the specific point that he and his colleagues were making was that the poorest in society, particularly people in his own constituency, would be worse off by £450 as a result of the rise in VAT, which, from memory, would mean that they had spent £18,000 on standard-rated, VATable items. I challenged him to say how many people in his constituency might actually spend £18,000 on VAT standard-rated items. I think he said, “Very few,” so I do not think I was wrong.

Grahame Morris (Labour, Easington)

I refer the hon. Gentleman to the reply quoted by my hon. Friend the Member for Livingston.

Ian Swales (Liberal Democrat, Redcar)

Will the hon. Gentleman give way?

Grahame Morris (Labour, Easington)

If the hon. Gentleman will allow me to respond to the intervention of the hon. Member for Bristol West, I will then give way.

My perception is that ordinary families, such as those in Easington, spend the vast bulk of their income on VATable items; they do not save it, buy Ferraris or holiday homes, or put it into pension pots. The figure I quoted is from the Minister’s response to a parliamentary question.

Ian Swales (Liberal Democrat, Redcar)

I am sure that the hon. Gentleman is aware that there is no standard-rate VAT on housing and public transport costs, food, children’s clothes, fares, insurance, TV, gambling, the lottery, energy or utilities. For me and my household, that is the bulk of our spending. Is he aware that the Office for National Statistics says that someone would have to be in the top 20% of earners to spend £18,000 on VAT standard-rated items?

Grahame Morris (Labour, Easington)

That amount was in the Treasury’s reply to a question from my hon. Friend the Member for Gedling, and it is the increase in an average family’s expenditure as a consequence of the VAT increase. If the hon. Member for Redcar queries the response, perhaps he should take it up with the Minister. I simply quoted the figure given by the Treasury.

Ian Lavery (Labour, Wansbeck)

Is my hon. Friend as surprised as me by the two interventions from Liberal Democrat Members, who stood at the election with the slogan “VAT bombshell” and, with VAT having been increased to 20%, are now saying on behalf of the coalition how wonderful that increase is?

Grahame Morris (Labour, Easington)

As might be expected, I completely agree with my hon. Friend’s sentiments.

Earlier, I referred to independent figures from the Institute for Fiscal Studies, which I assume Government Members accept. Those figures show that families with children will, on average, be £511 a year worse off in this financial year as a result of Government decisions on tax, spending and pay. I am trying, perhaps in a laboured way, to raise the issue of opportunity cost. If we compare the negligible increase in personal allowances, which will make some of the poorest even poorer, with the £3 billion tax cut for those earning more than £150,000, the choices that are being made are stark.

Iain McKenzie (Labour, Inverclyde)

My hon. Friend is making a powerful argument for those who are suffering most under the Government’s policies.

I ask also that, above and beyond the amendment, the Government look at their policies and the impact that they have on those who will not benefit from the tax allowance increases—those who are out of work or do not work enough hours and are having to look for additional hours, which are difficult to come by.

Grahame Morris (Labour, Easington)

That intervention reinforces my point. I remind Government Members that we do not seek to amend the increase in tax thresholds. We are simply asking in amendment 10 for a proper review to be carried out, to assess the impact of the change, which seems completely reasonable. As I mentioned and my hon. Friend has just highlighted, politics is about priorities and making choices. The Chancellor has chosen to give a substantial £40,000 tax cut to 14,000 millionaires. That choice would not meet with favour in Easington, in much of the north-east or across the country.

Seema Malhotra (Labour, Feltham and Heston)

Does my hon. Friend agree that one of the most important things after a Budget is that families are able to assess the impact of the Budget on them and their household income? A communication approach of simply talking about one part of the Budget will be insufficient to allow families to plan for their needs. We need to understand the net impact and have that transparency.

Grahame Morris (Labour, Easington)

Absolutely. I thank my hon. Friend for that completely reasonable point. I do not understand how the Government could argue against that. If their contention is correct, why not have a fair and reasonable assessment of the impact of the measures? As part of that assessment, we need to assess the overall impact of the whole package of measures net, as my hon. Friend the Member for Feltham and Heston said. Let us not forget that the Chancellor has chosen to keep VAT at 20%—clearly a regressive tax that hurts the poor most. He has also chosen to continue wage freezes throughout the public sector. He has chosen to go down the route of regional pay, an issue that I sought to highlight in yesterday’s debate in Westminster Hall. Areas such as mine would effectively be turned into low-pay ghettoes.

Ian Mearns (Labour, Gateshead)

The point my hon. Friend makes is magnified in the context of rebalancing the overall economy. In the north-east of England at the moment it is very difficult for businesses to get off the ground and grow because disposable income has been sucked out the local economy by the depression in local government wages and jobs, and the depression in benefits.

Grahame Morris (Labour, Easington)

My hon. Friend makes an important point. Depressing demand is having a negative effect. I do not intend to list the series of private sector job losses that we have experienced in Easington; it is considerable. We are haemorrhaging jobs at an alarming rate and that has a negative impact on the local economy and on people’s incomes.

Richard Harrington (Conservative, Watford)

I would like to go back to the point the hon. Gentleman made before the previous intervention, about the proposal for regional pay in the public sector. I have two questions. First, I was tired when I got home last night so I cannot remember whether it was on “News at 10” or “Newsnight”, but there was an interview with an employer in south Wales, in Ebbw Vale, who was struggling hard to keep a plastics factory going. He could not compete with the public sector to employ people to work in his factory; he was losing people to the public sector. What is the hon. Gentleman’s response to that item on the news?

Secondly, what would he say to my constituent who complained to me yesterday, having struggled hard to set up a business in Watford, that it was difficult to recruit people when the local council, which has a turnover far less than his business, is paying so many people in excess of £100,000 a year?

Grahame Morris (Labour, Easington)

I am grateful for that intervention. I am not an expert on the employment situation in south Wales, but perhaps my hon. Friend the Member for Pontypridd is. The issue in the north-east is joblessness, not a lack of willingness to take up job opportunities. In the constituency of my hon. Friend the Member for Middlesbrough South and East Cleveland, 30 jobseekers chase every vacancy.

Sheila Gilmore (Labour, Edinburgh East)

Does my hon. Friend agree that the argument asserted by the hon. Member for Watford would work if there were a shortage of people looking for work in an area? If there were a shortage of labour and a public sector employer paid more than a private sector one, there might be an issue. However, when so many people are not working, I find it hard to understand that argument.

Grahame Morris (Labour, Easington)

I am grateful for that intervention. The situation that the hon. Member for Watford illustrates is not one that strikes a chord. From the evidence that I have seen from various sources in my region, employers being unable to attract suitable candidates is not an issue; the problem is a lack of available vacancies.

Owen Smith (Labour, Pontypridd)

I go slightly further by suggesting that it is risible to argue that the reason why people are failing to employ workers in Ebbw Vale, a town I know extremely well, having once stood for election there—

Mark Hoban (Conservative, Fareham)

Unsuccessfully.

Owen Smith (Labour, Pontypridd)

Unsuccessfully. Happily, I am now elected in my home town of Pontypridd. I offered myself to the people of Ebbw Vale, but I was rejected.

I happen to know five or six of the people who were interviewed last night on “Newsnight”. The notion that the private sector is failing to employ people in Ebbw Vale as a result of the competition is nonsense—[Interruption.]

Peter Bone (Conservative, Wellingborough)

Order. As someone who offered myself in the neighbouring constituency to Ebbw Vale, Islwyn, and lost by 36,000 votes—

Owen Smith (Labour, Pontypridd)

I only lost by two, Mr Bone.

Peter Bone (Conservative, Wellingborough)

—I understand the argument that Mr Morris is making. However, we cannot have a discussion on the whole economy in this clause stand part debate. I should appreciate it if we were a little closer to the clause.

Grahame Morris (Labour, Easington)

Thank you, Mr Bone. I was tempted to return specifically to the subject of the amendment. I argue that we should make a reasonable assessment of the impact of the tax threshold increase on everyone to see whether the Government’s contentions that it will be of benefit are correct. We must consider the whole package of measures. I mentioned issues relating to regional pay. We must also assess the impact of the fuel duty increase, which is a huge bone—no pun intended—of contention.

Ian Mearns (Labour, Gateshead)

My hon. Friend is remiss, because he has not wished good luck to the constituent of the hon. Member for Watford in his start-up business, which I presume is a Ferrari dealership.

Grahame Morris (Labour, Easington)

I do apologise. I wish that constituent every success in his search for employment, in selling Ferraris or whatever it might be.

My hon. Friend on the Front Bench, the Member for Pontypridd, has added some new words to the dictionary: “clever-dickery” was one from the previous sitting and the “omnishambles” of a Budget was another. The Budget certainly had the longest build-up and perhaps the most leaks of any that I recall. As the implications of the granny tax, the pasty tax, the caravan tax, the corporate tax cut and the top rate tax cut have all been digested, we are now seeing the full implications of the Budget. Scrutinised in detail, it seems to be undergoing a profound unravelling, probably more than any Budget that I can recall.

I want to ask the Minister some questions. If Government Members still believe that the Budget is good for lower and middle income families, and not just good for the richest, as the Opposition contend—why do they not support our amendment so that the Government can provide a proper assessment of the impact of their policies? I am fascinated that the Liberal Democrats have been completely over the top in their support for the rise in personal allowances. We support that drive to lift people out of tax, but they trumpet it as their flagship policy.

Seema Malhotra (Labour, Feltham and Heston)

Does my hon. Friend agree that, when setting out the impact of particular measures, it is vital that the Government make clear how much will be given to or taken from people, bearing in mind that the Library has stated that the impact of the personal allowance changes on the basic rate taxpayer will be £42 a year, or 81p a week?

Grahame Morris (Labour, Easington)

I am grateful for that intervention, and I will come on to what would have happened if the Government had not sought to increase the basic rate personal allowance.

Charlie Elphicke (Conservative, Dover)

I thank the hon. Gentleman for giving way. He has been extraordinarily generous in taking interventions from everyone today. In fairness to my hon. Friends in the Liberal Democrat party, the personal allowance increase was in their manifesto, and it has been supported by many Government Members, including me, for a long time. The hon. Gentleman says that the Opposition do not have a problem with the proposal, but that was not my understanding of the speech made by the hon. Member for Pontypridd; he spent most of his speech rubbishing it, and saying that it would benefit rich people, rather than saying that it was a really great thing that would look after the least well-off.

Grahame Morris (Labour, Easington)

I thank the hon. Gentleman for that intervention, but he misrepresents the position of not only the Opposition, but my hon. Friend the Member for Pontypridd. We welcome the change to the personal allowance, but the point that we are trying to make—perhaps I am not doing it awfully well—is that we need to look at the whole package of measures. Although we welcome the change in personal allowances, we want to look at the impact on ordinary families and on the economy as a whole. Is it generating jobs and growth? That is the acid test of the success of the policy.

Ian Lavery (Labour, Wansbeck)

I thank my hon. Friend for giving way; he is very generous this morning. Does he agree that the personal allowance increase will have no impact whatever on the people, including at least 1.1 million young people, who are out of work? Does he agree that people who are not making enough to benefit from the change in personal allowance will suffer even more greatly as a result of the double-dip recession announced yesterday?

Grahame Morris (Labour, Easington)

That is an excellent point. We would like to see specific, targeted measures to help particular groups, such as people at the bottom end of the income scale. We want measures to assist the economy and to bring about growth and jobs. There are better ways of doing that. We will talk about corporation tax under later clauses. Although we are not resisting the change in personal allowances, our proposals would have a more beneficial effect on the economy, and would stimulate job creation and growth.

Graeme Morrice (Labour, Livingston)

I am grateful to my hon. Friend for giving way once again; he has been exceedingly generous. To follow on from the intervention by my hon. Friend the Member for Wansbeck, does my hon. Friend the Member for Easington not take the view, as I do, that in addition to accepting this amendment, the Government should review the impact of their policies on all those who are not in work, or are in low-paid work—those who will not benefit from the increase in personal allowance—particularly given yesterday’s news that this Government have taken us back into recession? Finally, does he also agree that although raising the personal allowance was indeed in the Liberal Democrat manifesto and, as we have always said, we do not oppose that measure, it is one of the few manifesto commitments that the Liberal Democrats have honoured, now that they are in government?

Grahame Morris (Labour, Easington)

I am grateful for that intervention, and I am pleased that that has been placed on the record.

I will respond more fully to the point made by my hon. Friend the Member for Feltham and Heston on indexation and the consequence of the uprating. If we look in a little more detail at the normal price indexation of the personal allowance, the assumption underlying the Office for Budget Responsibility’s forecasts for the public finances would mean that the personal allowance would reach £8,885 by 2015-16, without any discretionary policy changes, given the current projections on the rate of inflation.

Although we welcome the policy, there is an opportunity cost. Compared with a baseline of £8,885, a personal allowance of £10,000 in 2015-16, which this policy moves towards, would mean that tax revenues for the Treasury would be £5.3 billion lower in that year. The fact that the Chancellor has just committed to spending £3 billion on a few thousand millionaires by cutting the top rate of tax highlights that the personal allowance increase is a relatively small gesture to basic rate taxpayers. That is the reality of the rise in the personal allowance.

Stephen Williams (Liberal Democrat, Bristol West)

The hon. Gentleman is talking about a notional increase in 2015-16, but is he forgetting anything that might happen in 2014-15?

Grahame Morris (Labour, Easington)

The point I am making is that although there will be progress towards the target of having a basic rate personal allowance of £10,000, we would have made substantial progress without any intervention, just allowing for inflation. The actual cost to the Treasury, according to its figures, is £5.3 billion, and I highlight that the opportunity cost of a tax cut for top rate taxpayers—millionaires and those earning more than £150,000 a year—is £3 billion. If the Chancellor had forgone the 5p tax cut on the 50p top rate of tax, he could have easily afforded to reach the £10,000 threshold next year. That is my simple point.

Charlie Elphicke (Conservative, Dover)

It is a pleasure to speak under your chairmanship for the first time, Mr Bone. I will keep my remarks brief, as a Government Member should, taking the advice that the Exchequer Secretary to the Treasury gave at the outset of our proceedings.

I welcome the increase in the personal allowance. Many of us in the Conservative party have campaigned for an increase in the personal allowance for many years, and I am delighted that my hon. Friends in the Liberal Democrats had that in their manifesto. We agree with them, and we are implementing the proposal to ensure that we look after the least well-off.

Grahame Morris (Labour, Easington)

While I welcome the move towards a personal allowance of £10,000, does the hon. Gentleman concede that if the Chancellor had chosen not to reduce the top rate of tax, he could have made progress towards that goal very much quicker, achieving it in perhaps a year or two?

Charlie Elphicke (Conservative, Dover)

No, I would not concede that. First, the amount of money involved is only about £100 million. Secondly, Paul Johnson at the IFS—I know the Opposition are fond of the IFS—said, when reviewing the Budget, that the experiment with the 50p rate did not seem to have been a success. It was initially intended to be temporary, and we have made sure that it is temporary.

Sheila Gilmore (Labour, Edinburgh East)

Will the hon. Gentleman also quote the IFS’s comment that after one year, it was far too soon to make that kind of judgment?

Charlie Elphicke (Conservative, Dover)

The IFS says that there is some uncertainty. We may be talking about not a cost of £100 million, but a surplus to the Exchequer of £500 million as a result of fewer people avoiding the tax, which is promising.

Owen Smith (Labour, Pontypridd)

Will the hon. Gentleman give way?

Charlie Elphicke (Conservative, Dover)

Allow me to make some progress.

Owen Smith rose—

Charlie Elphicke (Conservative, Dover)

I would like to make a little bit of progress. I did say that I would try to speak briefly.

Owen Smith rose—

Peter Bone (Conservative, Wellingborough)

Order. It is quite clear that the hon. Member for Dover is not giving way at the moment.

Charlie Elphicke (Conservative, Dover)

I will give way to the hon. Member for Pontypridd in due course, but I should like to make a little bit of progress. Amendment 10 would require a report on the overall impact on families. In looking at the amendment, one needs to look at the mischief that is being addressed by the Government. The fiscal tightening is, inevitably, due to the state of the nation’s finances. Public sector net debt is 60% because of the massive mismanagement of the nation’s finances under the previous Government. Over this Parliament, while we are turning around the supertanker, that will rise to about 76%, because it takes time to bring the nation’s finances under control when they are in such a mess. There has to be fiscal tightening across the board.

On the overall impact on families, VAT and indirect taxes have been raised. I have had a look at “The effects of taxes and benefits on household income”—the latest one, which is for 2009-10. VAT as a percentage of expenditure varies across all income groups from 6.5% to 7%. It is slightly lumpy across all income groups, but broadly the percentage of income expended on VAT seems quite flat. The least well-off paid £995 in VAT. The rise would be equivalent to about £25, by my calculations. The richest 10% paid £3,745 in VAT—that is a £94 increase as a result of the 2.5% rise—which is a fourfold increase. However, VAT is a sideshow if one looks at indirect taxes as a whole.

Iain McKenzie (Labour, Inverclyde)

Will the hon. Gentleman give way?

Charlie Elphicke (Conservative, Dover)

I will in one moment.

Several hon. Members rose—

Charlie Elphicke (Conservative, Dover)

Allow me to make this point. The bottom 20% paid £1,103 in VAT. That is non-retired households, which is as close as one can get to families for these purposes. The total indirect tax paid was three times as much: £3,318. What are these indirect taxes that were preying on low-income families? They were things like duty on tobacco, which was massively increased by the previous Government, and on beer and wine. Fuel duty was massively and outrageously increased under the previous Government. Vehicle excise duty was massively increased—a poll tax under the previous Government. There was the TV licence; we know what a waste of money that is. Stamp duty was massively increased under the previous Government. There was also customs duty and betting taxes. All these stealth taxes are the real story.

The real story is that what is hitting families is all these chickens coming home to roost at a time when we have great fiscal difficulties and challenges because of the poisoned legacy of the previous Government. If there were to be a report on how families are bearing up as the Opposition request in amendment 10, we would need a bit of impartiality—not just partial figures—and to look at the issue of indirect taxes across the board. No wonder the Opposition pick on VAT when all these indirect stealth taxes, which the former Prime Minister spent over a decade massively increasing, are twice the amount of the total revenues from VAT.

Ian Mearns (Labour, Gateshead)

From the way the hon. Gentleman read out his list of duty changes and the impact on poorer families, it was almost as though he was characterising poorer families as inveterate gamblers, drinkers and smokers. That is not the reality that I understand in my constituency. He should reflect on the way he emphasised those particular things.

Charlie Elphicke (Conservative, Dover)

I do not make that point at all. I would hesitate to make that point. In fact, I believe that it was a former Home Secretary—either the right hon. Member for Kingston upon Hull West and Hessle (Alan Johnson) or his predecessor, who was the Member for Airdrie and Shotts—who some time ago talked about how such imposts were hurting working-class people’s little pleasures; some may recall that it was a Labour Home Secretary who said that.

I am digressing from the central point, which is simply to point out what the figures say. I am not making any judgment; goodness knows, I gave up smoking a week ago—I am feeling better for it, but it has been a real struggle for me—and I am not in the 20% least well-off in this country. I make no pejorative remark about anyone who has vices; as I believe Marcus Aurelius said in his “Meditations”, into every life a little rain must fall.

Jacob Rees-Mogg (North East Somerset) (Con) rose—

Charlie Elphicke (Conservative, Dover)

My hon. Friend will no doubt correct me.

Jacob Rees-Mogg (Conservative, North East Somerset)

I am happy to confirm that it was Marcus Aurelius who said that into each life a little rain must fall. I believe he said it in Greek, which I cannot quote. I would like to ask my hon. Friend whether it was the sharp increase in tobacco taxes that encouraged him to give up.

Charlie Elphicke (Conservative, Dover)

That was clearly a fiscal incentive, I have to admit.

What one needs to look at, with regard to how hard-pressed families have been getting by, is the whole picture—not just the issue of VAT, but what has happened with indirect stealth taxes over the past decade or longer—and how that has put pressure on families. In particular, the fuel duty escalator was a poll tax on wheels, and it absolutely crucified many of my constituents, and many constituents of Opposition Members.

Ian Lavery (Labour, Wansbeck)

A lot of constituents in the north-east would be totally outraged to hear the suggestion that VAT is a sideshow. With regard to the stealth taxes that the hon. Gentleman mentioned, of which there are many, can he confirm that his party and the coalition Government are looking to rescind them?

Charlie Elphicke (Conservative, Dover)

In due course, I would like that to be the case—of course I would; I am a tax-cutter—but right now, we do not exactly have wiggle room in the public finances, due to the catastrophic mismanagement of the previous Government. When we consider families, we need to see the issue in light of the challenges that have been left to us, and how we are trying to manage things to improve families’ quality of life.

When we look at the IFS report on the impact on families, we need to take into account the impact of universal credit. I know that the Opposition do not like universal credit, or the idea of making work pay and encouraging people to go to work—[Interruption.] Well, they have argued consistently against it, and have rubbished it time and again.

If we look at the slide from the IFS, we can see that the changes that will take effect by April 2014 will help the least well-off, and the impact on them is kept to the absolute minimum. That is important. One has to look at what the Government are doing from a fiscal point of view across the board, and how that encourages work, helps families and encourages economic growth.

Graeme Morrice (Labour, Livingston)

I certainly take exception to the suggestion that Opposition Members do not support making work pay; of course we do. I take the view that everyone in Parliament supports that position.

I congratulate the hon. Gentleman on giving up smoking; that is a courageous thing to do, and I know that it can be quite difficult. The hon. Member for North East Somerset suggested that he might have done so because the Government increased tobacco duty to 36p in the Budget. The hon. Member for Dover mentioned a range of indirect and other taxes that seemed to be the fault of the Labour Government, and said that that added fuel to the fire, so to speak, but does he not accept that it was a previous Conservative Government—John Major’s Administration—who introduced the fuel escalator in 1993? The hon. Gentleman also mentioned, by mistake I assume, the poll tax.

Peter Bone (Conservative, Wellingborough)

Order. Two points: first, the intervention is too long, and, secondly, although it was absolutely fair to make the point that Mr Elphicke made, we cannot debate every aspect of it, or we will be here until next April. Could we try to keep a little closer to the clause?

Charlie Elphicke (Conservative, Dover)

Thank you, Mr Bone; I am deeply obliged.

When one looks at the impact on families, as the amendment would require us to do, we need to look at VAT, but we also need to look at other direct taxes. I will finish by saying that according to the ONS report, VAT is £1,103 a year for the least well-off in society—the bottom quintile—and total indirect taxes are three times that amount, at £3,318. Perhaps I chose my words badly when I said that VAT was a sideshow. My central point is that it is one third of total indirect taxes. The other taxes—the two thirds—have massively increased.

For the richest in society, VAT is something along the lines of £3,410, whereas total indirect taxes are about £8,000. The way that the impost works leads to a pretty similar picture across society and all families. We need to look at other indirect taxes. The Opposition should look at their part in massively increasing those taxes and burdening families during their period in office. They should accept some responsibility for that, for wrecking the nation’s finances, and for the fiscal tightening that we need across the whole of society. We do not want to do it; we would like to cut taxes, but we are in the invidious position of having to apply fiscal tightening to families and everyone else due to the complete chaos that the Opposition left behind.

Julie Hilling (Labour, Bolton West)

Does the hon. Gentleman not appreciate that our amendments relate to the effect of the whole Budget, so they are not only about VAT, but about the pasty tax, the granny tax and all the other elements of the Budget that affect ordinary people? He cannot simply say that the previous Government introduced all the taxes he mentioned, when in fact indirect taxes increased vastly under the previous Tory Administration, and are being increased vastly under this Administration. It is about looking at the picture in the round, and we should absolutely look at other indirect taxation as well.

Charlie Elphicke (Conservative, Dover)

I appreciate the desire of the Opposition to have a year zero and ignore everything that went before, in a classic Maoist sort of way. That idea has long pervaded their party; one can see that the spirit of the former Prime Minister is alive and well. Nevertheless, we cannot see things through that prism. We need to look at what has happened, where we have come from, and where we are going. We will rebalance the economy and get a better future for families, and I am confident that by the end of this Parliament, families will be much better off than they would have been had the previous Government remained in power. We are making changes, including to the personal allowance, to help and look after the least well-off, to make work pay, to help families have a better future, and to help unmortgage our children’s futures.

David Gauke (Conservative, South West Hertfordshire)

It is a pleasure to welcome you back to the Chair, Mr Bone. Following earlier remarks, a thought has occurred to me: when, some years hence, the inevitable happens and you are elevated to the upper House, I hope that you can be prevailed upon to take the title Lord Bone of Contention. I suspect that that is not the last bone pun that we will hear during the Committee.

Sheila Gilmore rose—

David Gauke (Conservative, South West Hertfordshire)

Indeed, I hope that we shall hear one very shortly.

Sheila Gilmore (Labour, Edinburgh East)

No, puns are not my forte, but is the Minister coming out against House of Lords reform?

David Gauke (Conservative, South West Hertfordshire)

Whether or not the House of Lords will exist in its current form, I have no doubt that you, Mr Bone, will be elevated to the nobility in one form or another. I only hope that a peerage will be sufficient.

Clause 3 supports the Government’s continued aim of creating a fairer tax system by rewarding the efforts of those who choose to work, and supporting millions of taxpayers. The clause increases the personal allowance by £630 in cash terms, from £7,475 in 2011-12 to £8,105 in 2012-13.

Ian Lavery (Labour, Wansbeck)

The language quite often used is that people who “choose” to work will benefit. What about people who would love to work, but do not have the opportunity to do so? The Office for National Statistics said that in my constituency only two months ago, 55.5 people were after each jobcentre vacancy, while the Library says that 22.2 people are pursuing each jobseeker’s opening. The Minister continually uses the language of people who wish and choose to work, but what about people who cannot work and do not have the opportunities that we all want them to have?

David Gauke (Conservative, South West Hertfordshire)

The point is that it is vital that we have work incentives and that people are better off working than not, which has not always been the case. The fundamental reform of the welfare system will ensure that that happens, and the Government are proud to deliver it. I recognise the hon. Gentleman’s concern: of course we all want to reduce unemployment. On that front, it is pleasing that the last set of numbers were at least moving in the right direction. None the less, we face a problem. At the height of the Brown boom, when the economy was growing quickly—we now know that was unsustainable—the country still had 5 million people on out-of-work benefits. That is not something the country can afford, and to address it, we need to ensure that work pays. Raising the personal allowance and reducing the tax on low-paid workers is something of which the Government can be proud.

Cathy Jamieson (Labour, Kilmarnock and Loudoun)

Will the Minister provide some more information? He has talked about the need to make work pay. He will know the concerns of those who will lose their working tax credit, and who, despite the increase in the personal allowance, will still be worse off. When will the Government make available the figures on the number of people who will now be worse off continuing to work than if they left work and claimed benefits?

David Gauke (Conservative, South West Hertfordshire)

The hon. Lady will be aware that the working tax credit regime we inherited had a requirement that couples, in their aggregate total, worked 16 hours before they qualified. We think it is perfectly fair that the aggregate minimum total for couples should be 24 hours. There will be a behavioural change as a consequence, and it is a fair policy.

Increasing the personal allowance will lift an additional 260,000 individuals out of tax altogether and give 25 million taxpayers an average real-terms gain of £42 a year. The increase we are discussing is for 2011-12, and there will be a greater increase next year. The clause represents the next step towards meeting our long-term objective of increasing the personal allowance to £10,000. At the Budget, the Chancellor announced a further step—a £1,100 increase in the personal allowance in 2013-14, which is the largest ever cash increase in the personal allowance.

Iain McKenzie (Labour, Inverclyde)

The Minister is identifying the long-terms plans of the Government. What effect will the double-dip recession that we are now in have on those long-term plans?

David Gauke (Conservative, South West Hertfordshire)

What we will not do—I am sure that I shall return to this several times during Committee—is abandon our prudent attempts to reduce the deficit in order to get our public finances back on a sustainable footing, given the mess that we inherited. Were we to fail to do that, the consequences for the UK economy would be devastating because of the uncertainty that would be created and the higher interest rates that would follow. The Government will stick to our task.

Owen Smith (Labour, Pontypridd)

I have a simple question: in the light of yesterday’s growth numbers from the ONS, how is the project of reducing the deficit going? What would the Office for Budget Responsibility predict the deficit to be, as a proportion of GDP, by the end of this spending period? Will it be up or down?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman will be aware that the OBR last month predicted the state of the public finances. He will also be aware that this week, we received figures on the public finances that were entirely consistent with the OBR’s predictions, and he will know that the OBR’s independent forecasters all say that borrowing is falling, year on year on year.

Owen Smith (Labour, Pontypridd)

Perhaps I misheard. Did the Minister just say that yesterday’s figures on growth were entirely consistent with the OBR’s predictions? There were not; they were 0.5% out.

David Gauke (Conservative, South West Hertfordshire)

No. It may have escaped the hon. Gentleman’s notice, but figures on public finances also came out this week, which were entirely consistent with the OBR’s predictions. Altogether, the increases introduced by the Government will take 2 million more individuals out of tax from April 2013 that the previous Government’s plans would have done, and benefit 21 million basic rate taxpayers by about £170 a year in real terms. Amendment 10 would require the Government to publish a comparison of the effects on families of the personal allowance increase, together with other measures that we have announced.

Ian Swales (Liberal Democrat, Redcar)

As a new member of the Committee, I find it extremely useful to have a huge pile of analytical documents on the Budget, including the section on the impact on households in the Red Book, and another document with six separate impact assessments, including one on individuals and households, of every policy. Is that less or more information than would have been available in previous Finance Bill Committees? Were such clauses common in Finance Bills under the previous Government? As a new MP, I do not know whether they were.

David Gauke (Conservative, South West Hertfordshire)

I am grateful to my hon. Friend for his excellent intervention. He made a good point. The essence of the arguments made by several Opposition Members is that the Government should publish information so that we can look in the round at the various changes. Obviously, they do not want to talk specifically about the personal allowance. I am still not entirely clear whether the Labour party supports the increase in the personal allowance. However, it is a reasonable argument that all measures should be looked at in the round.

What rather surprises me is that Opposition Members do not seem to have noticed Annex B of the Red Book. We have reduced the size of the Red Book by roughly half, so there is perhaps a greater opportunity for people to read what we actually publish. Annex B deals with the central concerns that hon. Members have expressed, and I am delighted to see them turning to that part of the Red Book. I shall walk them through it. The first sentence of Annex B, on page 89, states:

“The Government has taken unprecedented steps to increase transparency and enable the effective scrutiny of policy making by publishing detailed distributional analysis of the impact of its reforms on households.”

My hon. Friend the Member for Redcar is right to say that such distributional analysis was not previously available. I remember the 2007 Budget announcements, including the doubling of the 10p rate, and how difficult it was to get distributional analysis of that measure and others.

Owen Smith (Labour, Pontypridd)

Will the Minister give way on that point?

David Gauke (Conservative, South West Hertfordshire)

Perhaps the hon. Gentleman will explain why that was so difficult.

Owen Smith (Labour, Pontypridd)

I do not intend to explain that, as I was not in the House. I was going to perform my duty as an Opposition spokesperson and question the Minister on his policies. I have read Annex B and think it an interesting addition to the Red Book. Will the Minister explain why Annex B, in its distributional analysis, fails to include the impact of cutting the 50p rate to 45p? It fails to include the impact on the richest deciles in the country. I thought it strange that it was not seen fit to include that.

David Gauke (Conservative, South West Hertfordshire)

I can give an explanation for that. The Red Book and all the numbers in it are signed off by the Office for Budget Responsibility. The OBR thinks it is a sensible and reasonable forecast to say that the cost of reducing the 50p rate is £100 million, but that is outweighed more than five times by other measures that will be levied on the wealthiest. On average, the wealthiest will be paying £1,300 more in tax every year. The Budget in fact increases the amount of tax that will be received from the wealthiest. That might give an explanation.

Owen Smith (Labour, Pontypridd)

Will the Minister give way one more time, because what he has said does not really spell it out?

David Gauke (Conservative, South West Hertfordshire)

I will give way one more time, if the hon. Gentleman wants to persevere with that argument.

Owen Smith (Labour, Pontypridd)

I will do so happily. That is not what Annexe B says explicitly. What it says explicitly is that including static costs would be an enormous change, and would make a radical shift to the pattern, and would show great benefit. All the other changes included are largely static costs, not ones that factor in the behavioural impact. The behavioural impact is enormous. The information is at the top of the page that the Minister is looking at. The difference essentially reflects the Government’s belief that the uncertainty around the behavioural impact is so enormous that they did not see fit to include it.

David Gauke (Conservative, South West Hertfordshire)

Let me quote paragraph B.21, which addresses that specific point. Addressing all the issues that affect this group, it says:

“Taken together, it is estimated that the reduction in the additional rate of income tax to 45%, the 25% cap on income tax reliefs above £50,000 and the increase in stamp duty rates for high value properties will result in an expected average contribution to the Exchequer from those with incomes of above £150,000 of an additional £1,300 a year.”

That rather reinforces my point.

Let us turn to Annex B. The essence of hon. Members’ argument is that we need to see the cumulative impact of the tax, tax credit and benefit changes across various income deciles. Chart B.1 shows the cumulative impact of modelled tax, tax credit and benefit changes in cash terms by income deciles. That analysis shows that in absolute terms the top decile sees the largest reduction in income. Chart B.2 presents the cumulative impact of modelled tax, tax credit and benefit changes relative to net income, and shows that, as a percentage of net income, reductions in income remain greatest for the top decile. Then we turn to charts B.3 and B.4, which show that cash reductions in income for the bottom expenditure decile are less than a tenth of those for the top expenditure decile and, as a percentage of expenditure, the top expenditure decile sees the greatest reduction in income.

The Government sympathise with the essence of the argument that we should provide information and a full analysis, which is why we have taken unprecedented steps to provide more information, including a breakdown of income deciles. That is why amendment 10 is unnecessary. The Government are committed to providing taxpayers with more information, not only in Annex B but, as the Chancellor has announced, by issuing tax statements so that individuals can see their income tax and national insurance contributions, and where that money is spent. We are taking steps to provide taxpayers with much more information, so I hope that the hon. Member for Pontypridd will withdraw his amendment.

I have one further observation on today’s debate, in which hon. Members have made a number of impassioned speeches on Government policies and the changes to the welfare system. The hon. Member for Pontypridd read out a long list of Government policies in that area, although he gave no indication of whether he supports or opposes any of those measures.

During proceedings in this Committee and the Committee of the whole House, concerns have been raised about the impact of some of the Government’s changes on the poorest. We have heard concerns about the impact of changes to working tax credits for people earning £20,000, £30,000, and so on. We have heard concerns expressed by Opposition Members about marginal rates for people earning £42,000, £41,000, and so on. There has also been opposition to changes that will mean that those earning the top 10% of incomes no longer receive child benefit. In passing, there has also been opposition to the cap on reliefs that will result in some of the wealthiest people paying more income tax.

I gently remind Opposition Members that we face the most enormous deficit—when we came into office, we faced the biggest deficit in our peacetime history—a larger deficit than almost any other major economy. Yet during this debate we have heard opposition to measures that affect the poorest, those on medium incomes and those on high incomes. I sometimes wonder how the Opposition would reduce the structural deficit, given that they oppose every single measure that is proposed—I have to make that point to Opposition Members. There is no acceptance, no realisation, of the need to reduce the deficit.

As Annex B shows, we have taken steps to reduce the deficit. The reality is that the biggest contribution is coming from the highest earners, and the reality is that we have been able to find, even within the constraints, the money to increase the personal allowance in a way previously unseen, taking millions out of tax, reducing the burden on 25 million people and benefiting basic rate taxpayers. That is something of which the Government can be proud.

Seema Malhotra (Labour, Feltham and Heston)

There will be further debate about whether those at the top are giving more in absolute terms or in proportionate terms. Does the Minister agree with the independent figures produced by the IFS that show that families with children will be, on average, £511 worse off in this financial year because of the Government’s decisions on tax, spending and pay?

David Gauke (Conservative, South West Hertfordshire)

The IFS analysis makes certain assumptions about the uprating of benefits. Given some of the steps that we have taken with regard to child tax credits, we are doing what we can to protect families. For example, I can point to the £7.2 billion for the fairness premium to support the poorest in the early years and at every stage of their education, through free education and care at age two, funding for a pupil premium for school-age pupils, and a new national scholarship fund to support students in higher education.

We have also protected funding for Sure Start services. We are introducing a new system of flexible parental leave so that fathers and mothers can share the child care work load differently if they wish. We are protecting the average family as best we can. I must remind hon. Members that we faced the most enormous deficit. We have to get the deficit down, and that involves taking tough decisions. I appreciate the fact that the Opposition do not like doing that, but it strikes me that there is no section of society for whom they are not prepared to stand up and say, “No, this group much not be touched.”

Ian Lavery (Labour, Wansbeck)

The Minister makes an eloquent speech explaining that all the changes are necessary because of what happened under the previous Government. Is it not a fact that we are now in a double-dip recession? The Minister’s contribution seems to suggest that we have a wonderful way forward. In fact, we are moving backward. We are in a double-dip recession and we are moving back to the ’70s and back to the ’30s, and people are suffering greatly as a result. Instead of explaining how well we are doing, why not accept how badly the Government have done in terms of the economy, jobs and growth over the past two years? That is very important to the people out there.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman always speaks with great passion on these matters, but the long-term benefit to our economy will not be achieved by abandoning deficit reduction. We will not solve a debt crisis with more borrowing. The Government will not take that approach. We are going to ensure that we get the public finances under control.

Graeme Morrice rose—

David Gauke (Conservative, South West Hertfordshire)

I will give way one more time and then conclude my remarks.

Graeme Morrice (Labour, Livingston)

The Minister says that we cannot solve the problem of the deficit by borrowing more, but is it not the case that the Government are going to borrow another £150 billion, over and above what was initially planned?

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman ought to be a little careful with the statistic that gets thrown around. Borrowing is falling every year in this Parliament. That is an important point to make.

I am delighted that we have been able to take steps to increase the personal allowance in spite of the difficult state of the public finances. The Government have demonstrated their commitment to helping the low-paid, and I beg to move that the clause stand part of the Bill.

Owen Smith (Labour, Pontypridd)

The phrase “cloud cuckoo land” has been bandied about in recent weeks. I am tempted to start by saying that the Minister may not be living in cloud cuckoo land, but he is certainly not someone who got up this morning and read the newspapers or went home yesterday evening and watched “Newsnight”. If he did watch it, it should have come screaming home to him that things were not going swimmingly for the Government as they sought to tackle the deficit and deal with the economic aftermath of the global recession that we and other nations across the world faced, and that the decisions that the Government were taking in respect of ordinary families were not working. They are not working for the economy and not working for individuals.

The Minister asked a moment ago how the Opposition could draw attention to the changes that I highlighted earlier and the changes in the fortunes of ordinary working families in this country that my hon. Friends lamented in their speeches yet not understand that all of those concerns needed to be subjugated to the national interest of reducing the deficit by cutting spending. What were we arguing that we should be doing differently? As I told the Government Whip, I can answer in one word: growth. Growth is what we would deliver. Growth is what is required to mitigate the need for some of the austere, draconian self-defeating measures that are being undertaking by this country. If the Minister wants to get up and tell us why growth is not occurring, I shall be extremely grateful.

David Gauke (Conservative, South West Hertfordshire)

The hon. Gentleman will be aware that we have a very substantial structural deficit. Would he like to share with the Committee how he would define a structural deficit and why simply saying “growth” does not quite address a structural deficit?

Owen Smith (Labour, Pontypridd)

I will not bandy about tedious phrases with the Minister. We could engage in a semantic discussion, and I have no doubt that the Minister would be extremely pleased, and possibly relieved, if we did. But we do not need to do that because we can rely on hard facts as opposed to semantic discussion. We can look at the numbers; they are very clear. On growth, the OBR forecast for quarter 4 is a 0.1% reduction; out-turn 0.2%. For quarter 1, the OBR anticipated a 0.4% increase. What did we see yesterday? We saw a 0.2% decline. Practically every sector of the economy is shrinking apart, ironically, from Government spending, which was up 0.4% in terms of productivity across the quarter.

We know what the facts are. We know that the Government have flatlined the economy ever since they came to office. We know the judgment that is being passed on them. That is not just by the Labour party, not just by commentators but by just about everybody out there, including sectors of the commentariat that normally would be expected to support the Conservative party. For example, The Daily Telegraph this morning states:

“By swinging the axe in the wrong places on public spending, the Chancellor risks further years of stagnation… there has been lamentably little sign of progress… Embarrassingly for the Coalition, the present period of stagnation dates almost exactly to the start of its austerity programme.”

I quote that because I think it makes the very clear point that politics and economics are always about choices. There is never a period when there is nothing that can be done; when there is no change in policy that can be made and no turn in the road that can be taken. Yet that is increasingly what we are being asked to believe by the Government: there is nothing else they can do; there is only the one course; there is only the one club in their bag that they can continue to thrash at the turf, with clods flying everywhere apart from in the direction of growth.

That is not just our view. It is a view that is becoming entrenched across the country. Interestingly, the Daily Mail, another Tory-supporting newspaper said this morning:

“What is most troubling, however, is the way ministers complacently shrugged their shoulders”—

I did not see a shrug a moment ago, did I?—

“blamed the downturn on the tumult in the debt-ridden eurozone and suggested that… there is little more they can do. This simply isn’t true.”

That is the view of the Daily Mail and it is a view that I share this morning. Growth is what we need, not defeatism. [Interruption.] I know, I never thought those words would ever pass my lips. There is a first time for everything in life, and today I find myself at one with the readers of the Daily Mail. The brothers of Tunbridge Wells and I are at one—with the TUC, too.

Charlie Elphicke (Conservative, Dover)

I caution the hon. Gentleman against throwing the ONS figures about too much, because they are subject to revision, and many other business data indicate that after that revision, it may well turn out that we have not been in a double-dip recession. In addition, the OBR indicates a sharp rebound in quarter 3, which might be sharper still if the eurozone crisis is resolved, because business investment, which the OBR says has been held back, is likely to take off. The Opposition would be wise not to make too much out of the situation, because they may look a bit daft in a few quarters’ time.

Owen Smith (Labour, Pontypridd)

The complacency and arrogance beggar belief.

Ian Mearns (Labour, Gateshead)

I think that the hon. Member for Dover urges caution in using ONS figures, because the small print states that revisions to Office for National Statistics estimates can go down as well as up.

Owen Smith (Labour, Pontypridd)

The estimates have been broadly right. First, it strikes me as amazing that the Government are reduced to blaming the eurozone, which has grown more strongly than Britain during the period of this Government. Secondly, several times in the past 24 hours I have heard cheerleaders for the Government suggest that the underlying data will show that there is underpinning growth and that the ONS figures are wrong. They are the official statistics produced for the Government, and we ought to rely on them. They have not been revised radically. Frankly, even if they were revised by the maximum amount, which the hon. Member for Dover will know is 0.2% up, what would that show? It would show that the economy did not grow at all in the past quarter and that it had not grown by minus 4.1% as opposed to minus 4.3% over the period since his Government came to office, which is hardly a badge of commendation.

Grahame Morris (Labour, Easington)

My hon. Friend makes an excellent point. Will he remind the Committee what the growth level was when Labour left office? Was it 2.8%?

Owen Smith (Labour, Pontypridd)

It was, and it was rising, and unemployment was falling. A tentative—let us be no more bullish than that—recovery was under way. The data were heading in the right direction; they have gone south on this Government’s watch and are continuing to do so. The net consequence is that the deficit, as a proportion of gross domestic product, will continue to grow, as it had grown at the time of the previous OBR announcement. The flatlining increase in 2014-15 led to a predicted deficit rising from 2.1% of GDP to 4.5% of GDP. This year’s recession will have the same impact, which is why I asked the Minister what he thinks the deficit will be as a proportion of GDP at the end of the whole spending period. Inevitably, it will be higher than the 4.5% predicted by the OBR, because the economy has continued to flatline.

I return from that aside to the amendment, which is about transparency and trying to ensure that we have an accurate, holistic picture, in the round, of the impact of the Government’s policies. The Minister suggested that Annex B to the Red Book provided such a picture. Annex B is a useful addition, and it is good that the Government provide that level of detail, but they could go far further. They could acknowledge that there are deficiencies in how they have presented the data and in the volume of data that is presented. Our amendment presses the Government to be more transparent in how they go about doing that, because, in essence, the data that are captured in tables B.1, B.2, B.3 and B.4 in that annex present a static picture of the cumulative impacts of tax over this Government’s period in office versus some of the benefit changes. The reason why that is important is that it is why, in the latest version of the Red Book, they chose not to include the impact of the 45p rate cut, because to do that would completely blow a hole in their argument that the richest were paying most, both in cash and proportionally. It would blast them beneath the Plimsoll line and that is why they do not include it. The second thing that the statistics do not show is a proportional impact. While they may show the impact in cash or in absolute, as my hon. Friend the Member for Easington said earlier, they do not show proportionally how families face a disbenefit down the income scale as a result of these changes.

Ian Mearns (Labour, Gateshead)

Has my hon. Friend seen any real evidence that the people who do as much as they possibly can to avoid paying the 50p rate will do any less to avoid a 45p rate?

Owen Smith (Labour, Pontypridd)

Again, that was the most laughable argument that I have heard in this place since I came in. The Committee does not need me to make the argument, because the Secretary of State for Business, Innovation and Skills made it himself when he was in opposition. The notion that people will suddenly decide to work harder and pay their taxes with more vigour and not salt it away in a bolthole somewhere in a Caribbean island is frankly nonsense.

Stephen Williams (Liberal Democrat, Bristol West)

Will the hon. Gentleman give way?

Owen Smith (Labour, Pontypridd)

I would be delighted to take the hon. Gentleman’s intervention in a moment, but I hope that he will quote the Laffer curve back to me, because I would love to debate that some more.

Stephen Williams (Liberal Democrat, Bristol West)

I am sorry to disappoint him and for the benefit of the Government Whip, I will be brief. Does the hon. Gentleman think that it was laughable to reduce capital gains tax from 40% to 18%, as happened under the Labour Government?

Owen Smith (Labour, Pontypridd)

There is an interesting argument about capital gains tax and perhaps when we come on to the clauses that relate to it, I will engage in that argument. I do not think that it would be in order to discuss capital gains tax at this juncture, but I will happily do so at a later stage.

The third thing to say about the tables that are included in Annex B is that their overall message, for all that the Minister prayed in aid, is clear: everybody loses out. That is except, of course, the rich. For the richest decile, the line would go up at the end if the 45p rate cut was included, as opposed to plunging down in that dramatic fashion. What it hides is that everybody is worse off, just as I have been saying all along. Those people at the bottom end of the income spectrum are worse off than those in the middle.

Charlie Elphicke (Conservative, Dover)

You did that.

Owen Smith (Labour, Pontypridd)

It is about choices, as I said earlier to hon. Members on the Government Benches. We could be growing the economy and we could be taking different decisions. We could, for example, be doing what America has done and adopting a far more balanced and sensible approach to deficit reduction. What would have happened? I suggest that we would have seen exactly what they have seen in America: growth up 2.8%, as opposed to 4.3% down over the spending period.

Mark Garnier (Conservative, Wyre Forest)

My apologies, Mr Bone, if I return to an earlier part of the hon. Gentleman’s speech. He quoted The Daily Telegraph. I have just found the article, because modern technology is helpful. I will read a little further on. It states:

“Yet dire though the situation is, it’s important to keep a sense of perspective. To think that the mess the UK economy finds itself in is the result of government actions over the past two years is to descend into fantasy.”

Owen Smith (Labour, Pontypridd)

I did suggest that it might be too much to imagine that I was entirely at one with the Daily Mail. Clearly it is partially correct, but partially talking through its hat—same as usual.

Iain McKenzie (Labour, Inverclyde)

The only fact I see here is that the constituents come to my hon. Friend and me week after week and say that they are now finding that their hours are being reduced, that they are going to part-time hours and that their benefits have been reduced. I will dearly try to show them these lovely graphs and tell them that indeed they cannot be feeling the pain or the restriction in income that they are receiving. I suspect that the only thing that they will offer—

(Except clauses 1, 4, 8, 189 and 209, schedules 1, 23, and 33 and certain new clauses and new schedules) - Clause 3 - Personal allowance for 2012-13 for those aged under 65

Peter Bone (Conservative, Wellingborough)

I remind the Committee that with this we are discussing clause stand part.

Iain McKenzie (Labour, Inverclyde)

In the previous sitting, I was in the middle of welcoming the Budget 2012 document. I referred to the lovely graphs that the Minister pointed out. I said that when my constituents come to my surgeries, bringing with them statistics such as the 81% increase in long-term youth unemployment or the 620,000 families in Scotland who will lose their family tax credit, I will give it my best go to point out those graphs to show them that they are not as badly off as they think they are. I suspect they might say that the only use they have for the document is to reduce their fuel bills by putting it on the fire.

Owen Smith (Labour, Pontypridd)

That was a good intervention. I enjoyed that, although I confess that I had forgotten that I was being intervened on—it is easily done.

I shall draw my remarks to a conclusion shortly, but I have one or two points to make before I do. I am delighted to see the hon. Member for Dover return to his seat, because one of my points relates to the VAT matters that he, my hon. Friend the Member for Easington and the hon. Member for Bristol West raised. I think it was the hon. Member for Dover who calculated the relative cost of VAT to types of individuals or households. Although those calculations were interesting, I could not challenge them, because they were his own.

The simplest thing for me to do, therefore, is quote the Exchequer Secretary, because in 2010 he answered a parliamentary question on VAT asked by my hon. Friend the Member for Gedling (Vernon Coaker), who asked the Chancellor of the Exchequer simply to estimate the net effect in cash terms, and as a proportion of average annual income and so on, of VAT on a group of households. The Exchequer Secretary was good enough to respond, saying that

“For the requested household types, the estimated impact of a one percentage point rise in the standard rate of VAT”

was £110 for a pensioner couple, £50 for a single pensioner, £180 for a couple with children, or £90 for a one-parent family. Of course, for the couple with children—the average couple—that translates into the £450 that we have quoted; for the one-parent family, it translates into £235; for the pensioner couple, £295; and for the single household, £125.

For the record, I think that the Government can no longer dispute those figures, which are their definitive take on the average cost to average households of the kinds described of a 1% and a 2.5% increase in VAT. I do not think those figures can be disputed, but I look forward to hearing the hon. Member for Dover have a go at it.

Charlie Elphicke (Conservative, Dover)

I simply point out that the figures I took for the cost of VAT were from the Office for National Statistics publication, “The effects of taxes and benefits on household income” for 2009-10—the latest available—which the Institute for Fiscal Studies refers to as TAXBEN. It is a key ONS publication that is regarded as very accurate. I calculated the VAT paid by each decile; those are the figures I gave in relation to the 2.5% rise. I cannot answer for the Treasury’s written answer or the circumstances behind it, but I am confident that the ONS publication is accurate because it is very reliable, and I think I can operate a calculator, although I stand to be corrected.

Owen Smith (Labour, Pontypridd)

I would not for a second think of making the cheap point that although only a couple of hours ago the hon. Gentleman disputed the accuracy of the ONS figures on growth, he now wants to rely on its figures for his calculations on the back of a fag packet, however much that fag packet costs. I, for one, will rely on the word of the Exchequer Secretary, who I know is a man of the greatest integrity and would not have provided anything but the most accurate Treasury estimates of the impact of VAT. I will rest on the number that he gave the House, which was £450 for the annual cost of a 2.5 percentage point rise in VAT for an average family.

Nigel Mills (Conservative, Amber Valley)

I could not resist. I like this principle that we take either everything from what one source says as gospel, or nothing. Presumably, as the hon. Gentleman is taking everything the Minister says as gospel, he will accept the cost of reducing the rate from 50p to 45p.

Owen Smith (Labour, Pontypridd)

I would not accept that as gospel. However, the hon. Gentleman has provided me with an opportunity to ask a question of the Minister, in order to clarify his precise words regarding the impact of the 50p rate. He said again today that the impact would be negligible, and the Prime Minister said at Question Time last week that no money was being raised by the 50p rate. I still find that hard to square with the comments made by the Minister in a debate that I attended last week, which I will quote for the elucidation of the Committee. The question I asked the Minister was this:

“If the yield was less than £1 billion, how much less was it? Surely the Minister knows”.

The Minister did know, because he responded to me with these precise words:

“The central estimate, which the OBR has confirmed, is £700 million.”—[Official Report, 18 April 2012; Vol. 543, c. 372.]

The description has been “next to nothing” or “nothing”, but £700 million seems quite a lot to me, to be perfectly honest, especially in these straitened economic times. Perhaps the Minister wants to intervene to confirm once more that the additional sum, so far as he is aware, that the 50p rate raised was £700 million, as he said in last week’s debate.

David Gauke (Conservative, South West Hertfordshire)

Those are the figures, but the cost of abolishing the 50p rate, which we have done, and bringing it down to 45p is £100 million. That is the reduction in direct tax intake, although we have made it clear that indirect tax is likely to increase as a consequence, in the sense that more VAT will be paid. That is not part of the usual Budget calculations, but were that to be taken into account, the cost of the 45p rate versus the 50p rate would be negligible, if anything.

Owen Smith (Labour, Pontypridd)

We have made it plain on a couple of occasions that we do not buy that voodoo economics, just as I think the Treasury and Her Majesty’s Revenue and Customs do not buy it, which is why they had to say 31 times throughout the document that they thought that the calculation was hugely, highly or deeply uncertain. However, I am grateful to the Minister for putting that on the record, because there is a stark contrast between the candour with which he has just described the £700 million, and the slipshod way in which the Prime Minister has described the rate as raising “next to nothing”. That gap is quite extraordinary.

Jacob Rees-Mogg (Conservative, North East Somerset)

If the hon. Gentleman does not accept the so-called voodoo economics of lower tax rates bringing in more taxation, can he explain why, when the tax rate went from 83p in the pound to 60p and then from 60p to 40p, tax revenues rose?

Owen Smith (Labour, Pontypridd)

I am grateful to the hon. Gentleman for that question; I have been waiting to respond to him on that point. There are several reasons well documented in academic literature, largely to do with the fact that the base of taxation was broadened significantly, and with the dramatic change in how stocks were dealt with during that period. The most telling rebuttal that I have come across of the Laffer curve argument, which the hon. Gentleman is making, came from George Bush’s senior adviser in the States in the period in which those policies were introduced. He subsequently said that he thought that Laffer curve economics was, bluntly, the last refuge of charlatans and crooks. I would not for a minute suggest that the hon. Gentleman is either a charlatan or a crook, but I point out that that particular piece of economics does not stand up to scrutiny, either in this country or in America.

The reasons for the changes in receipts are many and various, and not straightforwardly down to a knee-jerk response. We will have an opportunity to test Arthur Laffer’s theory in this country over the next five years or so. We will see whether it delivers greater revenues. I suspect that, like lots of the other predictions made by the Government, that prediction will fall flat on its face.

Fabian Hamilton (Labour, Leeds North East)

Does my hon. Friend have any concrete evidence to support the Minister’s spurious claim that if the rate of direct taxation goes down from 50p to 45p, the VAT take will go up?

Owen Smith (Labour, Pontypridd)

No. There is no concrete evidence. As I said, there are economic theories that indicate that individuals will work harder, earn more, and spend more on VATable goods, and that indirect taxation will therefore go up. The Government have calculated that essentially £2.9 billion of the £3 billion static cost that is to be lost to the Exchequer will be recouped by those changes. We think that is an extraordinary punt in the dark by the Government. If it is wrong, the Budget is not neutral, and the deficit will be higher than we have anticipated.

Ian Mearns (Labour, Gateshead)

Even in an area such as the north-east of England, which is relatively impoverished compared with the rest of the UK, there is significant evidence that those with disposable income are putting it into savings rather than spending it in the local economy. That is being replicated across the country, because people lack confidence and are saving for what they expect to be a very wet, rainy day.

Owen Smith (Labour, Pontypridd)

Again, I can only agree that all the evidence indicates that that is the case. One need only look back at the out-turn figures for consumer household spending in the period when Labour temporarily reduced VAT from 17.5% to 15% to see that £3.5 billion extra was spent by consumer households. What has happened since VAT was put up from 17.5% to 20% corresponds almost precisely with that: there was a reduction of more than £3 billion in consumer household spending. Crucial demand in the economy has been sucked out by a muddle-headed decision to increase indirect taxation. The Government should consider all those factors openly, transparently and in the round. Our amendment would provide them with the means of doing that, and we urge them to accept it.

Clause 5 - Main rate of corporation tax for financial year 2012

Owen Smith (Labour, Pontypridd)

I beg to move amendment 4, in clause 5, page 4, line 12, at end add—

‘(3) The Chancellor of the Exchequer shall review the impact of the corporate tax structure including the principal rates and investment allowances on the level of business investment, and place a copy of the review in the Library of the House of Commons.’.

Peter Bone (Conservative, Wellingborough)

With this it will be convenient to discuss the following:

Amendment 11, in clause 5, page 4, line 12, at end add—

‘(3) The Chancellor of the Exchequer shall review the impact of the corporate tax structure on different sectors and place a copy of the review in the Library of the House of Commons’.

Amendment 12, in clause 5, page 4, line 12, at end add—

‘(3) The Chancellor of the Exchequer shall review the impact of the corporation tax rate on growth, jobs, and investment in the economy, and produce a plan for jobs and growth, which he shall lay before the House of Commons.’.

Clause stand part.

Amendment 5, in clause 6, page 4, line 19, at end add—

‘(4) The Chancellor of the Exchequer shall review the evidence in favour of using reductions in the headline rate of corporation tax as a means of promoting long term international competitiveness and place a copy of the review in the Library of the House of Commons.’.

Clause 6 stand part.

Owen Smith (Labour, Pontypridd)

Clause 5 sets the main rate of corporation tax for this financial year, 2011-12, and amends it, so that

“In section 5(2)(a) of FA 2011 (main corporation tax rate for financial year 2012 on profits other than ring fence profits)”

it is set at 24%, as opposed to 25%. Clause 6 changes the main rate for the following year, 2013-14, and effectively reduces that rate by a further percentage point to 23%. It also sets the main rate of corporation tax for oil and gas companies; those are the taxation rates referred to in the documents as the “ring fence” taxation rates. We are talking about the upper rate of corporation tax—the large profits rate that applies to companies with profits of between £300,000 and £1.5 million a year.

Our amendments are simple and helpful, seeking clarity about the impact of the rates on different areas of the economy and on business investment. They also probe, in respect of clause 6, the international effectiveness of tax competition and the international sustainability of tax competition. The questions around the CT rate are profoundly important, because this one-club golfer of a Chancellor, as he is described in one of the newspapers this morning, has one club in his bag, which is, by and large, corporation tax. He has bet the farm on business pulling this country out of recession. He has bet the farm on the ideological concept that the Government need to shrink the public sector and cut back on public sector spending, which is fancifully thought to be crowding out private sector investment and expenditure. If he does that, private sector investment and expenditure—business investment, in other words—will flood in, fill the gap, float our economy on a tide of exports and increase productivity. There is absolutely no evidence whatever for that fanciful view. In fact, the evidence that we saw yesterday, and that we have seen repeatedly over the two years that this Government have been in charge of the economy, is quite the reverse.

Amendment 4 effectively relates to business investment. It argues that in clause 5 we should add:

“The Chancellor of the Exchequer shall review the impact of the corporate tax structure including the principal rates and investment allowances on the level of business investment, and place a copy of the review in the Library of the House of Commons.”

Amendment 11 relates to the sectoral impact and calls on the Chancellor to

“review the impact of the corporate tax structure on different sectors of the economy and place a copy of the review in the Library of the House of Commons.”

Amendment 12 calls on the Chancellor to look at the impact of CT rates on growth, jobs and broader investment in the economy, and to produce a plan for jobs and growth to lay before the House of Commons.

Amendment 5 to clause 6 says that the Chancellor shall

“review the evidence in favour of using reductions in the headline rate of corporation tax as a means of promoting long term international competitiveness and place a copy of the review in the Library of the House of Commons.”

That final point is important and applies across both clauses. The Government have invested enormous faith in the competitiveness of our tax system being not one of the principal drivers but arguably the principal driver of our economy in the coming years, and the principal means by which we incentivise investment in indigenous companies and attract foreign direct investment to the UK. Unfortunately, there is scant economic evidence in academic literature to suggest that that is the case; nor is there empiric evidence from the Government’s performance to date.

However, the Government undoubtedly believe it. A year ago in this Committee, possibly in this very room— I am not sure, as I was not here—the Exchequer Secretary, when describing the plans to reduce corporation tax, said:

“It is a considerable tax cut for businesses in order to get them to grow. Reducing corporation tax will reduce the revenue we take from an inefficient tax, thereby increasing the rate of return on investment and resulting in greater business investment, greater productivity, higher wages and salaries and more jobs.”—[Official Report, 4 May 2011; Vol. 527, c. 690.]

It is not going very well. As predictions go, that is right up there with the Office for Budget Responsibility’s view of what growth would do over the past couple of years: bigger business investment, greater productivity, higher wages and salaries, and more jobs. However, unemployment is on course to hit 3 million, which is 9.3% of the entire work force by the end of the year after next; wages, both public and private, have stagnated right across the country for two full years; business investment is predicted by the OBR to hit a 0.7% increase this year; and overall, all the Budget measures, including the CT rate change, are anticipated to increase GDP by 0.1%. That does not strike me as a terribly good record so far. The Government possibly have a few more years to go, so we must see whether they can improve it. At the moment they are scoring nul points, to continue the French theme.

In fairness to the Minister, when he made that bold prediction, he was backed up by the OBR, which he quoted from at the time, saying:

“It expected that the recovery would be supported by business investment, and the reductions in corporation tax underpinned its forecast for strong business investment growth over the next five years.”—[Official Report, 4 May 2011; Vol. 527, c. 688.]

The problem is very simple. The OBR has dramatically changed its mind over the past couple of years. The truth is that the OBR has got its growth projection wrong every single time it has attempted one. The OBR was first forced to revise down its figures for 2011 the very first time it had to report on how it was doing. It initially predicted 2.8% growth, before the emergency Budget in June 2010. It downgraded that to 2.3% after that Budget; 2.1% in November 2010; 1.7% in 2011; 0.9% in November 2011 and, finally, 0.8% in March 2012.

That is where we are. We have gone from 2.8% anticipated growth to 0.8%. Most commentators think that even 0.8% is pretty heroic. The Ernst & Young ITEM Club, for example, which uses the Treasury numbers and methodology, thinks 0.4% is more likely to be the number we hit this year. In truth, in light of yesterday’s growth numbers, which the OBR anticipated would be 0.5% higher than they were, it is hard to see that even 0.4% is going to be arrived at. What is certainly hard to see—I am increasingly struggling to find anyone outside the Government who is prepared to stand over this number—is the notion that growth will bounce back, like the proverbial rubber ball, from its current static position to 2% growth next year and 3% in successive years. I think that most people out there imagine that to be entirely fanciful.

Charlie Elphicke (Conservative, Dover)

It is important to ask what has happened with business investment, and why it has been lower than expected. At paragraph 3.62 of its economic and fiscal outlook, the OBR says:

“We therefore expect only moderate growth in business investment this year as the heightened uncertainty from the ongoing euro area difficulties limits firms’ investment plans to capital replacement rather than expansionary projects.”

No one could predict when exactly the euro would start to implode and end up in a complete crisis. Thank goodness we did not join it.

Owen Smith (Labour, Pontypridd)

That argument would have more credibility if it was not true that business investment was increasing in most of the eurozone countries. In fact, it is even increasing in some of the ones that are technically in recession right now. The hon. Gentleman need simply look at the OECD numbers to see that even countries in the eurozone are outstripping us. Companies in those countries—particularly in Germany, but also in France—are continuing to invest in capital projects.

John Pugh (Liberal Democrat, Southport)

The hon. Gentleman spoke briefly about the lamentable record of the OBR in predicting economic growth. I asked the Library some time ago to indicate which of the many organisations that predict economic growth has been the most consistently successful over the past decade and a bit, and the answer, in qualified terms, was the Treasury.

Owen Smith (Labour, Pontypridd)

So the hon. Gentleman is telling me that the Treasury, under a Labour Government, was the most efficient means of predicting of how the economy would perform. All I can say is that with a firmer hand on the tiller and a clear sense of macro-economics, we ended up with some pretty good projections. Unfortunately, questions are beginning to be asked not about the OBR’s independence, but about the extent to which it seems keen to present a positive perspective on how growth will perform in this country. I will be no bolder than that. I think that people are increasingly wondering how long the credibility of the OBR will remain untainted and unchallenged if it continues to present extraordinary growth numbers, because two newspapers said this morning that it is “absurd” to suggest that, from the current flatlining position, we will see 2% growth next year.

David Gauke (Conservative, South West Hertfordshire)

I want to be clear about what the hon. Gentleman is saying. Given his explicit criticism of the OBR record, is he suggesting that a future Labour Government would scrap it and return its responsibilities to the Treasury?

Owen Smith (Labour, Pontypridd)

No, I am not suggesting that. I am merely pointing out that to date, the OBR has had to revise down its growth projections five times, and it is likely to have to do that again. It has unfortunately had a shoddy hand of cards dealt to it by the Government. The OBR is having to dial down its growth predictions time after time because his Government introduced self-defeating austerity policies that are sucking demand out of the economy, crippling business confidence, and leading to the downward spiral of the economy. There is an increase in the cost of living for ordinary families in Britain. The OBR is merely having to reflect that; it is running behind the chaos caused by the Chancellor and his colleagues in the Government.

Ian Mearns (Labour, Gateshead)

I am grateful to my hon. Friend for being so generous in giving way. The line that he is taking is very much backed up by other analysts in the field, apart from the OBR. A leading economic think-tank, the Ernst and Young ITEM Club, warned last week:

“Britain’s battered economy will grind to a halt this year as businesses sit on huge piles of cash”.

It warned that demand is being sucked out of the economy, despite British business sitting on huge piles of cash. What is going wrong?

Owen Smith (Labour, Pontypridd)

I shall expand on that point at some length later. My hon. Friend is entirely right that Britain’s corporate sector is currently sitting on cash and asset reserves of some £750 billion, which is an extraordinary amount of money. I would like to explore at some length why the corporate sector has done that. Crucially, businesses are not spending or investing money because they have absolutely no confidence that the Government can get our economy moving or that this country is a good place to invest right now, which is our point on corporation tax.

Sheila Gilmore (Labour, Edinburgh East)

On that subject, I do not know whether my hon. Friend heard the same interview that I heard on the “Today” programme yesterday in which a businessman who owns such a company admitted that he had assets in hand that could be invested. When asked why he was not investing, he said that there was no demand in the economy for what he would produce, so there was no point in investing and expanding at the current time.

Owen Smith (Labour, Pontypridd)

I worked for some of those big companies in a former life, and I talk to people who still do. There is absolutely no confidence that this is an economy in which one would seek to invest right now, which is why they are sitting on cash. [ Interruption. ] There is a strange, quizzical look from a sedentary position over there.

Businessmen are also deeply concerned that we may well descend into further recession—before yesterday, of course, that was a question, now it is a fact—as a result of the activities of the Minister’s colleagues in the Treasury. These businessmen are not fools, and they have good reason for worrying about the prospects for growth in our country with posh and wrecks in charge.

Grahame Morris (Labour, Easington)

Would my hon. Friend care to elaborate on the sectoral impact? I am concerned about the impact on the construction sector. A whole list of companies, such as Carillion in my area, are in difficulties as a consequence of the Government’s cutting back on infrastructure investments.

Owen Smith (Labour, Pontypridd)

The numbers do not make happy reading for the Government. Construction sector output decreased by 3% in Q1 of 2012, an absolutely cataclysmic collapse, following a decrease of 0.2% in the previous quarter. We have to remember that construction was booming when we left office. In large measure, construction can be taken as an aspect of the economy that reveals the symbiosis between the public and private sectors. Why was the construction industry booming at the tail end of the Labour Government?

Richard Harrington (Conservative, Watford)

Will the hon. Gentleman give way?

Mark Garnier (Conservative, Wyre Forest)

Will the hon. Gentleman give way?

Owen Smith (Labour, Pontypridd)

I will give way in a moment, but I want to finish my point first.

A Labour Government chose to stimulate the economy through public spending on things such as Building Schools for the Future in order to try to protect jobs and stop a recession turning into a depression. Why did we choose to do that? Because we understand macro-economics. We understand that there is a balance to be struck in the economy between the public and private sectors. When the private sector contracts and decides to tighten its belt, what do a Government need to do? We have learned the lesson of the 1930s: the Government need to expand their waistline. They need to spend money to stimulate the economy.

Mark Garnier (Conservative, Wyre Forest)

One of the things that was happening towards the end of the Labour Government was anticipation of a new Government and the end of the Labour era. I just want to throw into the general debate the question whether the hon. Gentleman can comment on the fact that the lack of business investment has somehow miraculously coincided with the rise of Labour in the opinion polls.

Owen Smith (Labour, Pontypridd)

I barely know where to start, to be honest. Business confidence has collapsed in this country because there is no sense that the current Government will deliver growth. Demand is not picking up. Demand is flat, which is why there is no good reason for businesses to invest.

Charlie Elphicke (Conservative, Dover)

Will the hon. Gentleman give way?

Richard Harrington (Conservative, Watford)

Will the hon. Gentleman give way?

Owen Smith (Labour, Pontypridd)

I give way to the hon. Member for Watford.

Richard Harrington (Conservative, Watford)

I cannot say how grateful I am that the shadow Minister has given way to me, as opposed to my hon. Friend the Member for Dover, whose comments I actually look forward to hearing shortly. I wish to make two points. First, it is quite obvious to most of the country that spending money you do not have like a drunken sailor on a binge is no answer to anything in the economy. Secondly and more importantly, will the hon. Gentleman comment on the fact that the recent construction figures to which he referred relate to a survey of construction companies? They do not apply to every construction company. They are temporary figures and apply to a few thousand out of many thousand of construction companies. In the past, the construction figures have been shown to be lumpy and change all the time. Rather than crowing at figures that have come out now, the hon. Gentleman should be a bit more patient and learn to wait and see what the position is in three or six months’ time.

Owen Smith (Labour, Pontypridd)

I am so pleased to have had that intervention. The argument about the ONS figures being a bit flaky really is the last refuge. It is like a drowning man clinging to a life raft. Let us be clear: not just in one quarter has growth gone down but in two. I am talking about 3% last quarter and 0.2% the quarter before that. It blipped up a little in the quarter before that, but it was down significantly the quarter before that.

Overall, since the beginning of the recession, all productive areas of the economy were down 4.3%. America has more than made up for the output that it has lost. No one on the Government side can point to the figures and draw anything but cold comfort from them.

Jacob Rees-Mogg (Conservative, North East Somerset)

The hon. Gentleman referred to the economic policies of the 1930s, as the Labour party so often does, forgetting the fact that the then Chancellor, Neville Chamberlain, cut expenditure—at which point the economy began to grow. There is a relationship between keeping the public finances in order and leading back to economic growth.

Owen Smith (Labour, Pontypridd)

For some reason, the 1930s spring to the forefront of my mind when the hon. Gentleman rises to his feet to speak. Sometimes, I even go back as far as the 16th century when thinking of him. What I recall from the 1930s is the bankers’ ramp, which again is strangely appropriate when responding to the hon. Gentleman.

Iain McKenzie (Labour, Inverclyde)

I have some information for the hon. Member for Watford. There is more chance of seeing bankers on a drinking binge with the bonuses that they have been receiving than sailors.

Owen Smith (Labour, Pontypridd)

My hon. Friend has put forward a perfect segue to my reference to the bankers’ ramp.

Sheila Gilmore (Labour, Edinburgh East)

While the hon. Member for North East Somerset might be a historian, I suspect that his knowledge goes back a bit earlier than the 1930s. From the history that I have read, my understanding has always been that the economy struggled until the end of the 1930s and that, sadly, the primary driver for recovery was re-armament in the period up to the war. [ Interruption. ]

Owen Smith (Labour, Pontypridd)

Hon. Members say that it is not true, but I am a historian, too. I studied history, not economics, and my father is a professor of history— not of the 1930s but of Labour history and to a certain extent, economic history. I think the real example from the 1930s is Snowden. The Government are making many of the same mistakes that Snowden made as Chancellor of the national Government in that period.

Ian Swales (Liberal Democrat, Redcar)

The hon. Gentleman is making a powerful case for extra public spending. Will he say whether that will be financed in his model by borrowing, or will he give us a menu of cuts that he would make in order to finance the extra spending?

Owen Smith (Labour, Pontypridd)

Gosh, that was not predictable in any way, shape or form. I had not previously heard that point—[Hon. Members: “Answer it then.”] The answer we repeatedly give is that we would have done two things differently.

First, we would have had a slower and lower trajectory for repaying the deficit. We would have done something more like, for example, what the Tory Government did in the 1990s, post-ERM, taking seven or so years to pay the debt back, or what Labour and Tory Governments did in the 1970s, after the IMF crisis, when it was paid back over a slower period. We would certainly not have made the insane, ideologically-driven decision to try to reduce the budget deficit at a rate never attempted anywhere else in the developed world, over this period. That is the madness of the economic policy being pursued. Secondly, we would have grown the economy. There would, therefore, have been fewer problems.

Ian Swales (Liberal Democrat, Redcar)

I thank the hon. Gentleman for that answer, but how does he square it with the comments of his own leadership? Does he have a budget for his input into the Committee, in terms of how much he is allowed to add to Labour’s commitments?

Owen Smith (Labour, Pontypridd)

I do not quite know what that intervention was, but I do not need a budget here. My job is to point out the flaws in the Bill and, more broadly, in the Government’s economic analysis and thinking. I am doing that, but frankly, I do not need to, because the Office for National Statistics did it for me yesterday. To refer to the 16th century or even earlier, the hapless serfs on the Liberal Benches support this Government—perhaps not all, but some—and the Government are potentially overseeing a decline in GDP and a trough in economic performance that we have not seen in this country since the 1870s. That is an historical precedent that no Government should seek to achieve, but this Government are in danger of doing so. The economy right now is a basket case, but only of the Government’s making.

Harriett Baldwin (Conservative, West Worcestershire)

I thank the hon. Gentleman for giving way, and I would like to take him back to the amendment under discussion. At the beginning, he asserted that there was no academic literature supporting the notion that lowering corporate rates of tax increased investment and employment. Yet there is an extensive body of academic research showing that the lower corporate taxes are, the higher the level of investment in a country, and that is widely supported in related academic literature. Is the hon. Gentleman planning to withdraw his economically inaccurate point?

Owen Smith (Labour, Pontypridd)

No, because I do not think it is economically inaccurate at all. There is a widespread and, bluntly, right-wing body of academic literature suggesting that. What I said is that empiric evidence—which I think we should rely on, rather than substandard, right-wing economic treatise—does not make that correlation clear. I will come to that later in my speech, perhaps referring to specific examples.

David Gauke (Conservative, South West Hertfordshire)

Does the hon. Gentleman therefore disagree with the following statement:

“A lower rate of Corporation Tax can boost the competitiveness of UK companies in the global economy and attract greater levels of foreign direct investment.”?

Owen Smith (Labour, Pontypridd)

I do not know for certain, but I would wager a sneaky fiver that that quote is from the shadow Chancellor, or possibly the former Prime Minister or the Leader of the Opposition. Of course, it is absolutely right, in principle. Corporation tax is one means by which one may stimulate the economy, which is why when we come to vote on this issue later this morning, or this afternoon—whatever time of the day it is—or possibly next month, we will not contest the reduction in the CT rate, because we think that the economy is desperate for any stimulus that it can get. Although we think that this is just one club in the Government’s bag and they are hacking away, we are not going to stop them hacking. We simply suggest that there may be other clubs in the bag that they might want to deploy at some point.

David Gauke (Conservative, South West Hertfordshire)

I think that it is only fair that I—

Owen Smith (Labour, Pontypridd)

Put me out of my misery.

David Gauke (Conservative, South West Hertfordshire)

Put him out of his misery, but before doing so, I am struck to hear that a moment or so ago, the idea that cutting corporation tax might result in increased investment and be good for the economy was a view of various right-wing treatise or whatever, yet when I put the quote to the shadow Minister, which was actually from the Budget 2007 report, it becomes entirely reasonable and he is in agreement with it. I am not sure quite where he is, but he seems to be all over the place.

Owen Smith (Labour, Pontypridd)

I am not all over the place at all. I simply believe that one needs to be nuanced and intelligent in economic management and macro-economic strategy, as opposed to—if you will pardon the pun, Mr Bone—bone-headedly pursuing the same failing policies. That is what the Government are doing. They are saying that there is but one way to go—cut public sector spending and the private sector will flourish—and we have but one tool to do it—provide confidence in the stability of the corporation tax rate and its downward trajectory. That is not the only tool that the Government have in their locker. There are other ways to stimulate the economy.

It is entirely legitimate for the Opposition to point to the fact that there is not a simple correlation between reducing corporate taxation rates and increasing business investment. Were it simple, were that correlation clear and were there empirical evidence in this country to back up some of the academic treatise, then what would we have seen in the past two years? I would have thought that the oxymoronic “expansionary fiscal contraction” would have been realised by now.

Surely to goodness if a Government decided that they had one great swing of their club—corporation tax, which is what the Government have said—and when the Chancellor’s emergency Budget came out he had said, “Right, business needs a lower, more competitive corporation tax, because we have to compete with the US and lower tax regimes, principally across Europe. We have to reduce our rate to be competitive,”, at that point they would have stimulated business and provided it with confidence, not only this year but next year and the year after that, even on the aspiration to a 20% corporation tax rate, which is 15% lower than in America. If it was going to work, businesses would have said, “Right, we’ve really got confidence in these guys. They really know what they are doing. Corporation tax will come down. Hell, let’s put our hand in our pocket and get on with spending to get out of recession.” What have they done? They have hoarded money—£754 billion of it. They are not spending, because the Government’s tool does not work.

Ian Mearns (Labour, Gateshead)

Given that the Chancellor and his Front-Bench team of caddies have hacked their way around the course and found themselves on a part of it that they really wish they were not on, does my hon. Friend think that it is any surprise that the Government parties have developed a bunker mentality?

Owen Smith (Labour, Pontypridd)

Very good.

Iain McKenzie (Labour, Inverclyde)

I am glad that my hon. Friend has identified a way to discuss the Government’s aspirations to a 20% corporation tax rate. Like me, is he a bit puzzled about just where the Government will go if the G20 countries continue reducing their corporation tax? Will we see a bidding war? Will they be determined to take it below 20%? Where do the Government intend to draw the line?

Owen Smith (Labour, Pontypridd)

I do not think we know. We know that they aspire to 20%. We will ask some questions about that in a moment. I should like to ask the Minister what he thinks the optimal rate of corporation tax is if the aspiration is 20%. Is that the optimal rate or should we be gunning at some future point in the cycle for an even lower of corporation tax? But that is probably a point for one of the later amendments.

Charlie Elphicke (Conservative, Dover)

Will the hon. Gentleman give way?

Owen Smith (Labour, Pontypridd)

I will, absolutely, in a moment. I hope that, unlike some of his earlier interventions this will not—to continue the golfing analogy—like Bubba Watson’s famous round, end in tears.

Charlie Elphicke (Conservative, Dover)

I will indulge the hon. Gentleman by not discussing good walks ruined. Moving swiftly on, the issue of reducing corporation tax is one not simply of stimulus but of increasing receipts. The empirical evidence shows that when Ireland reduced its rate from 38% to 12.5%, annual corporate growth in that period was 24% so revenue increased. Australia saw a 16% increase; South Africa a 43% increase and the Czech Republic a 10% increase. Contrast that with the UK, the US and Japan which had static rates and did not see any increase at all. Indeed, over the period of the Labour Government receipts for corporation tax went up by only a third, whereas they doubled for income tax. It shows that if one reduces the rate one can often up the take.

Owen Smith (Labour, Pontypridd)

That is the age-old argument. That is the one we have been debating for the last half an hour or so. As I keep pointing out, empirical evidence in this country to date demonstrates that it is not accurate. If the Minister wants to try to give us an accurate projection he can. We know the static cost of reducing corporation tax over the spending period: it is £20 billion. Over the whole period, it will cost the Exchequer roughly £19.79 billion. In June 2010 the OBR looked at what that would deliver in terms of increased business investment, which has to be the principal trade-off. It said it thought it would derive £30 billion extra by 2016-17.

I suspect that the OBR broadly sticks to that position because it anticipates this massive bounce-back of 10% towards the back end of the period. The trouble is that nobody believes it will happen, just as nobody believes that we will see 2% and 3% growth in overall GDP. It is clearly a wildly optimistic projection. But what is absolutely certain is that £20 billion will be lost in revenues. If the Minister could update us later as to what he thinks both the cost and the benefit will be of the behavioural change—the increased receipts we will see as a result of increased activity or the straightforward increased business investment—I should be delighted. But there is absolutely no evidence to date that that will happen.

Yesterday’s ONS figures are very clear. Since Q3 2010, the UK economy has shrunk by 0.2%. It has flatlined over practically the whole of this Government’s period in office, whereas in the United States over the same period there has been a 2.8% growth in the economy. I think that is because this Government have pursued an ideological set of policies; they have painted themselves into a corner and now cannot get out. They have pulled the plug on public sector investment and as a consequence the lights went out on private sector investment and employment.

The supreme irony of yesterday’s figures, which I suspect will make slightly uncomfortable reading for Government Back Benchers such as the hon. Member for Dover, who probably want even lower levels of public sector spending, is that the one bit of the economy that expanded was Government spending—up 0.4%. Retail was flat, production was down by 0.5%, and construction went down.

Jacob Rees-Mogg (Conservative, North East Somerset)

If Government spending increased, how can the lack of growth be due to austerity?

Owen Smith (Labour, Pontypridd)

Government spending increased this quarter on the previous quarter, but Government spending over the whole period is dramatically down. Over the whole spending period, given that we have seen only around 10% of the cuts that will be made, we will see a vast diminution in Government spending, at a rate that we have not seen anywhere else in the world at any point.

Businesses, as my hon. Friend the Member for Easington pointed out earlier, have responded to all that by hanging on to their cash. They have not gone out there on a spending spree because they think things are looking up but have hung on to it—£754 billion, according to the Ernst and Young ITEM club. Professor Peter Spencer of the university of York, the chief economic adviser to the ITEM club, spelled it out. He said:

“UK plcs have strong balance sheets and have built up large cash stockpiles.”

With the Treasury spending cuts depressing demand, business investment is the only possible source of growth in the years ahead. He said:

“We are going to continue on the critical list until companies get their chequebooks out—it’s as simple as that…Business investment has picked up nicely in the US”—

by contrast—

“but UK companies remain extremely risk averse, which is sapping strength from the economy”.

It is not just Ernst and Young. Deloitte’s similar study of a large number of companies showed that

“cash holdings of UK non-financial companies stood at £731.4 billion”—

Ernst and Young thinks that it is slightly more than that—

“in the third quarter of 2011, the highest level on record.”

US corporates are similarly holding vast amounts of capital—$1.73 trillion—but the rate at which they are spending is increasing at three time the rate of UK corporates. So while US corporates, too, have banked large amounts of money for a rainy day, they now have the confidence to start spending.

Ian Stewart, Deloitte’s chief economist, noted:

“While major corporates are profitable and cash-rich, governments and consumers in Western economies are, by and large, short of cash. If Western economies are to grow over the coming years businesses will need to do a lot of the spending.”

We all know that to be the fact, because as I said earlier, in macro-economics, simple rules apply to our economy as elsewhere. If the public sector’s sphere of the economy contracts, the private sector must expand to fill it, or we will see deficits and negative growth. That is precisely what we are seeing.

Ian Mearns (Labour, Gateshead)

Professor Spencer added to that and said that he had grave concerns that households remained under a financial cosh, and that there was no way consumers could spend our way out of the situation, because there was not enough disposable income in the economy.

Owen Smith (Labour, Pontypridd)

Yes. We certainly would not advocate that the Government try to get themselves out of the economy by a dramatic expansion of consumer spending and debt; that would be foolhardy, especially given that we have, under our Government and this one, too high a level of consumer debt. However, we need some consumer spending, and at the moment, that is being entirely depressed by this Government’s actions. We certainly need corporate expenditure; that is vital. They absolutely have to, as Professor Spencer said, get their cheque books out and start spending. However, to do that, they have to have some confidence.

Richard Harrington (Conservative, Watford)

I really appreciate the shadow Minister giving way. He is convinced of the accuracy and precision of the ONS statistics that were published recently, so surely he noticed that consumer spending retail sales actually went up in the quarter.

Owen Smith (Labour, Pontypridd)

Well, from my retail figures, contribution to growth from retail, Q3 and Q1 2012, is zero. It was slightly up last time, slightly up this time, but flat over two quarters—zero.

Richard Harrington (Conservative, Watford)

The most recent figures show that, in the last quarter, sales actually went up. I would have said that it is an approximation anyway, and it might be adjusted. However, the hon. Gentleman is so convinced of the accuracy of his figures that I am sure he wants to comment on that.

Owen Smith (Labour, Pontypridd)

I said earlier that I was happy to concede that the figures could be adjusted. They have been adjusted several times recently. I presume that the hon. Gentleman has spotted which way the trend has been—by and large, down. Over the past series of revisions of ONS figures, on average they have been not up but down. If they are revised, the hon. Gentleman will know that they are never revised by more than 0.2% either way. Let us give him the benefit of the doubt and assume that they are revised by the full 0.2%. We would still have absolutely flat-line growth. We would not technically be in recession, but we would still be in recession.

Richard Harrington (Conservative, Watford)

I am truly perplexed. It seems strange that construction figures cannot be revised because, from what the hon. Gentleman said, they clearly show that we are in recession, but that the approximation may be revised up or revised down. I do not understand it, but I bow to his superior experience in such matters.

Owen Smith (Labour, Pontypridd)

I do not know whether the hon. Gentleman is misunderstanding me or mishearing me. I am saying that all the figures including the headline rate can be, according to the ONS, traditionally revised up or down by 0.2%. That is its standard margin of error that it applies to such figures. Over the past two years when they have been revised, they have been revised down—not up. Let us give the hon. Gentleman the benefit of the doubt and suggest that it might revise the figures up by 0.2%. It would still be flat growth, zero growth over the last period.

The OBR confirms such matters. In reports, it has repeatedly pointed to the fact that it is having to revise down and down and down the business investment that it had initially assumed. In its first report, the investment was down from 6.7% anticipated last year; 8.9% anticipated this year. It was revised down 0.8%, which is what we achieved in 2011. That is the most extraordinary figure of them all. The OBR was anticipating 6.7% growth in business investment in 2011. The out-turn figure was minus 0.8%. It is anticipating 7.7% growth this year. What is its projection now? Not 7.7%, but 0.7%. Business investment is collapsing in Britain. It is not going south; it is practically in the Antarctic.

Iain McKenzie (Labour, Inverclyde)

My hon. Friend has made a powerful argument that investment is collapsing in this country. The Government have said on numerous occasions that the recovery will be built on the backbone of small businesses throughout the country. Yet we see that small businesses will not benefit from corporation tax reductions. Indeed, if the Government’s target of reducing it to 20% is met, small businesses will be paying the same as large ones. How will that affect our economy?

Owen Smith (Labour, Pontypridd)

I beg your indulgence for a moment, Mr Bone, because I think that we shall deal with that issue at length later. One of the remarkable things about the Government is that they often seem to ignore small and medium-sized enterprises. In seeking to draw down the number for the top rate of corporation tax, they are doing nothing with the underlying 20% rate for small businesses, despite the fact that 90% of companies in the country pay at the small profits rate. Only 10% of companies in the country will benefit from the reduction in the upper rate of corporation tax. That strikes me as remarkable, but I shall return to the amendment on business investment.

Ian Lavery (Labour, Wansbeck)

Does my hon. Friend agree that it is again the Tories looking after the multinationals, rather than the people at the bottom end of the ladder? That is in terms of business as well.

Owen Smith (Labour, Pontypridd)

It begins to smell like that, because if there were a more even-handed approach across the whole of the business sector, the Government might do something to address the rate for smaller companies, which, as I have said, make up 90% of the companies paying.

David Gauke (Conservative, South West Hertfordshire)

I can see that the shadow Minister did not want to jump into that elephant trap, but he could not quite resist it. I cannot resist pointing out that when we came into office, the small profits rate of corporation tax was 21% and we inherited a plan to increase it to 22%. Not only did we stop that increase, but we cut the rate to 20%.

Owen Smith (Labour, Pontypridd)

And in this Budget they are leaving it at 20%, with no proposals to change it. The point I am making is that during that period the headline rate of corporation tax—the upper rate—was also higher, thereby maintaining a greater differential between the rate paid by large companies with big profits and small companies with far smaller profits. That is an important differential, because it is about a level playing field. Unfortunately, the Government are levelling the playing field in a way that disadvantages small companies.

Ian Lavery (Labour, Wansbeck)

If it is the Government’s contention that this cut in corporation tax will be one of the major stimuli that allow the economy to grow, I wonder whether my hon. Friend will be surprised to learn that the North East chamber of commerce’s assessment of the Budget says that

“relatively few North East firms will benefit from”

the cuts in corporation tax—

“and we would have preferred to see a greater focus on strengthening investment allowances”.

The rest of the debate is in Hansard.