Speech on Finance Bill 6th May 2009

John Redwood (Wokingham): The Budget judgment before us, which we must think about in this Second Reading debate, is the Government’s judgment that they need to increase spending at a rapid rate, that they need to make some modest—as they see it—increases in tax revenue, not in the immediate year but in subsequent years, by raising rates for the rich, and that they need to bridge the rest of the gap by very substantial borrowing.

In the opening exchanges, we heard different positions being set up. I am firmly of the view that the Government are running undue risk with the huge gap between spending and revenue not just in the current year but in the years ahead, particularly in the subsequent year, about which the Budget makes a judgment. I would like to see that gap smaller, and I would wish to achieve that by controlling expenditure rather more than we are witnessing under this Government.

This is not primarily a debate about public spending. I have set out at least 17 ways that I immediately see of making reductions, some very big and some quite modest but illustrative. The culture in government needs to be changed so that more is delivered for considerably less. That is not difficult, because the inefficiencies are so gross and the overstaffing on the administrative side is so enormous: The Guardian jobs pages show us that there is no idea of imposing any kind of control on staff numbers and gaining proper value for money for taxpayers.

That is what I would address, but first let us look at the situation in the Government’s terms. They have invited us to support a Finance Bill based on two worrying propositions—first that they should spend that much, which I do not think they should, and secondly, that they should raise so little, given the amount of spending that they wish to do. In their own terms, if they wish to do all that spending and, unlike me, think that every pound of that is providing value and is much sought after by taxpayers, they should be prepared to be honest with the House and say, “That’s the bill, and we need to raise more in taxes, not next year, the year after or when there may be another Government in place. We need to be honest with the public and raise some more money in taxes this year to meet all those spending bills.”

So why, then, do the Government not do that? Obviously, because there is a general election coming up and they know as well as any other elected politician that increasing taxes is very unpopular. As their cover story, they claim that their spending is reflationary, and that it will be good news for jobs and for the economy if this year—by coincidence, a pre-election year—they spend so much more than they raise in taxes.

The economic effects of forcing savings from people are similar to the economic effects of taking taxes from them. If the Government are serious about borrowing all that money from individuals or from companies in the United Kingdom private sector, it has more or less the same effect as if that sum were taken off in tax, because for every pound that they borrow from the UK private sector for this so-called reflationary spending, the private sector has £1 less, so it cannot provide the jobs or buy the goods that it would otherwise use that money to do. It is, instead, providing it to the Government. In their own terms, their argument for under-financing their huge expenditure by such a big margin is unlikely to work.

That is not the only thing that the Government have done in their desperate and belated attempt to turn around the massive recession that their policies, allied to problems throughout the world, have undoubtedly created for Britain. I am strongly of the view that it was policies made in Britain that made the banking crisis so bad here, and that the manic and deliberately perverse monetary policy that the Government and the authorities followed first created a bubble, then created a crash, and is now desperately trying to find a way to reflate and inflate from the crash site rather late in the day.

Monetary policy is an extremely powerful weapon, however, so the heavy lifting to try to turn the economy around will be done not by the Budget, because it will not be nearly as reflationary as the Government suggest, but by having interest rates at almost zero and by gradually nursing the banking system back to strength. I am not a gloom-monger who says that we are going into a 10-year depression and never going to come out of it; monetary policy is very powerful. The reason why we are in crash mode is that the monetary authorities got their monetary policy completely wrong by being far too tight in 2007 and at the beginning of 2008. They are now trying to produce a much looser monetary policy, which started last autumn, and in due course that will definitely have a beneficial impact. It will start to lift some of the gloom, slow the rate of decline and in due course, if other things do not get in the way, turn things around from their current very bad position.

I do not believe that the Budget will turn the economy, but nor am I saying that it will always get worse at the current rate, because that argument would be quite obviously untrue and rather foolish. We all live in this country, we want it to do well, we wish to see more of our constituents with jobs and more businesses to flourish, and we wish monetary policy well. We are more worried about the impact of the Budget, because its tax measures will undermine competitiveness, enterprise and job creation at the margin—or in some cases more than at the margin—and that is not what the Government should be doing with a taxing Budget at this stage in a violent and unpleasant cycle.

My right hon. and hon. Friends are naturally very concerned that the Government will not be able to borrow all the money that they need in the next few months to bridge the gap, and my right hon. and hon. Friends therefore say that either taxes need to be higher or expenditure needs to be lower to secure a tighter Budget. They should bear in mind the fact that the Government are trying to load the dice in favour of their getting away with it for a few months, but that their Budget has a time horizon that stretches only until the next election. It is apparently set within the framework of wanting to get the next three or four years right, but nobody really believes the forecasts, and if we look carefully at the tax measures, we see that they take the form of a Tory tax trap. They are political taxes; they do not seriously try to fill the big void in the public accounts, even after the following election. They are in the Budget for illustration, and probably for spite. They are not there to deal with the colossal black hole in the figures.

Stephen Hammond (Wimbledon) (Con): Although my right hon. Friend describes those taxes as political taxes, their impact on our economy will be worse than that, for several of them will directly impact on the wealth-creating and private sectors that will generate wealth in the future. Although those measures may be Tory tax traps, they have the potential to make an underlying impact on future wealth creation in this country.

Mr. Redwood: I entirely agree, and I said that I would argue that I do not like some tax measures in the Budget, because they will make enterprise, jobs recovery and prosperity more elusive rather than easier to reach. Why, then, are the Government not more worried about the question posed—that the gap is too big and that that will be revealed by their not being able to borrow all the money? There are two reasons. The Government think that they will get away with it for a few months, because they have instructed the Bank of England to buy up to £150 billion of their own debt—debt that they are issuing.

We have this bizarre money-go-round whereby one group of people in the Treasury is desperately trying to issue £175 billion in gilts, or however much it might turn out to be this year, and another bunch of officials in the Bank of England is busily buying in £75 billion, rising to £150 billion if it uses the full permissions and carries on with the programme. I am sure that people in the gilt markets love that; they are pretty clever at these things, and understand that if they sell gilts to the Bank of England at price A and buy back similar gilts at the more advantageous price B, they will make a turn, and a living. That money-go-round, apparently, is the height of modern Treasury and Bank of England policy making.

It all means that if the full proposed quantitative easing plan is implemented, the Treasury and the Bank of England will be pretty relaxed about borrowing for the foreseeable future; they will not borrow anything net at all from other people, but will print the money or give it to themselves. They have another reason to be more confident than we might expect: their regulators are also instructing all the commercial banks to buy piles and piles of gilts, just to make sure. In the middle of this dreadful banking crisis and nasty credit crunch, the regulators have decided—now, of all times—to say that the banks need more cash for the amount of business that they are doing. If only they had thought of that rather good idea in 2005 or 2006, we would not have had to go through the whole grisly business of the crunch; there would not have been the “run on the Rock” or the uncertainties about some of the bigger banks. However, to implement the idea now—when the banking system is much weaker and extremely cautious, and the worry is that it will not finance enough transactions in the economy to get things going again—is rather perverse, to put it mildly.

Mr. Dunne: My right hon. Friend is making a powerful point. Does he agree that at the time, voices such as that of the Governor of the Bank of England were making themselves heard? The Governor made it clear that he felt that debt levels were getting out of control and that the banks needed to act. The problem was that the tripartite arrangement set up by the Prime Minister and the Chancellor did not allow that action to take place. No mechanism was in place to enforce such measures.

Mr. Redwood: That is exactly right. The tripartite mechanism was a dreadful failure, and it is the background to the Budget and these measures. The Government need to raise so much revenue now because the banking system went wrong; the banking system went wrong through a combination of foolish judgments by bankers—that is clearly true, as I am sure my hon. Friend will agree—and a catastrophic failure by the regulators, who were paid big salaries to sort out exactly that kind of problem. They were unable to control cash and capital in a way that smoothed the cycle. They were violently “pro-cyclical”, as the technical people now say; they reinforced the damage of the cycle by being far too easy on the banks in the good times and extremely tough on them in the bad times.

If Ministers foolishly think that I would want to take risks with banks in a way that might bring them down, I should like to disabuse them; I want my country to do well, and I know that it needs strong and stable banks. However, the banks do not have to be instructed today to put so much extra cash into gilts, when we need them to lend a bit more and see business over the worst of the crisis. We now know, I trust, that the Government and the Bank of England are standing behind the banks. People have no reason to take their deposits out because they know that the lender of last resort is there. The Government stand behind the banks, so there is no need for the dramatic requirement for so much more in gilts.

We must assume that the only reason for what is happening is that the Government and the Bank of England think that it would be handy to have another enforced buyer in the market at a time when so much gilt-edged security is being issued.

Some of the pension regulations achieve something similar from the now-rather-mature pension funds, thanks to the fact that the Government’s taxation on pension funds has led to most private sector schemes being closed. When a scheme moves from being active and growing to being closed, the regulators normally say that the scheme must hold much more in fixed income, rather than in growing assets or claims on such assets. That also serves the Government’s book rather well. Paradoxically, the effective wrecking of private sector pension funds in the past 11 or 12 years, through higher taxes and regulation, is now creating a demand for the very borrowing that the Government need to see themselves through to the election.

Let me turn specifically to the tax measures in the Budget. The Government belong to the school of thought that says, “Make us a bit more chaste—but not yet,” and takes the view that we can raise more revenue by putting rates up. I have already dealt with the first folly. We need to start to control spending much more immediately because of the longer-term strain on the accounts, but we also need to challenge the assumption that putting rates up in such conditions, or even in the conditions that will prevail in a year or so, will necessarily raise more revenue. The Treasury should be asked to do rather more work on what happens when there are increases and decreases in the rates on entrepreneurs and on people who earn significant salaries.

I remember that the Labour party was full of grief when a Conservative Government dared, in two stages, to lower the top rate of tax on earned income from 83 per cent. to 40 per cent. Labour said that the Conservatives were letting the rich off scot-free, that it was a disgrace, and that they were helping their rich friends. The net result of that big change was to make us competitive again in a world where, when we had those very penal rates, people thought that we were a complete joke and not a place to come and do business. As a result of those changes, two important things happened. First, the rich paid a lot more tax. I think that that is rather good news. I would like the rich to pay a lot more tax, but the way to achieve that is to impose realistic, not penal, tax rates on them. Secondly, and even better from the Labour point of view, the rich paid a bigger proportion of tax. Not only did the economy start to grow faster, but the rich had to pay more.

Mr. Newmark: There is a third lesson in what my right hon. Friend is talking about. The Laffer curve shows that when taxes are lower it is not just that the rich are paying a higher proportion of tax but that far more is collected from the country as a whole. That is what is important about lowering taxation.

Mr. Redwood: That is an extremely important and powerful point, which brings me to my next case study—the Republic of Ireland.

The Republic of Ireland has made some mistakes on monetary policy and control in the past few years, and it has had an equally bad, or perhaps even worse, version of the credit crunch. It was made worse partly by the Irish joining the euro, which meant that they did not have the flexibility on the exchange rate that the United Kingdom, mercifully, still has. However, what one cannot take away from Ireland is its phenomenal success in turning a country well below the European average in terms of income per head and general prosperity into one well ahead of the European average.

The prime reason for that was not EU subsidies—those were quite small and mainly went into agriculture, which did not do that well—but the low tax rates that the Irish bravely set. By setting very low rates on income and corporate profits, they issued a huge invitation. Many Irish people who had gone abroad to seek their living because they did not like the high tax rates decided to go back to their home country, and many businesses decided that Ireland was the right place to set up business within the European Union as a whole. Because the Irish had the courage to set those low rates, there was an explosion in tax revenues, which meant that they could spend more on public services, and an explosion in jobs and profitability.

In this Budget, the Government are inviting a future Government, perhaps, to go in exactly the opposite direction. They are saying that it is right to raise the marginal tax rate from 40 per cent. to 50 per cent. on higher-earning people, to change the tax arrangements on personal allowances in an adverse way, and to tamper with the pension reliefs which were put in place some time ago and which people thought indicated a stable framework for long-term saving. Pensions are, by definition, very long-term investment and savings projects, and it is very disruptive to make such changes. Taken together, those three things will clearly have a disincentive effect.

Treasury Ministers should tell us rather more about what work they have done. Why do they think that we are so different from Britain in the 1980s, which proved that the way to tax the rich is to make rates competitive? Why are we so different from Ireland in the ’90s and early noughties, which proved that when there are lower rates there are a lot more rich people, and that they are taxed rather more?

It is true that the figures that I have mentioned conceal two different trends. First, competitive rates mean that there are more rich people in the country, so in that sense there is a little trick in my figures. However, it is also the case that the rich people who are already in the country are more motivated to get richer. They make that extra commitment, work those extra hours and set up that new business, because they think it more worth while taking a risk with their money. They put their money to work rather more successfully and often, so, as my hon. Friend the Member for Braintree (Mr. Newmark) rightly reminded us, more activity is generated. I should like the Treasury to explore its rationale with us a little more.

My party is rightly saying that this is a tax trap. We have no wish to posture or go around saying that we want to be a soft touch on the rich at any time, and particularly not at this juncture in our fortunes.

Stephen Hammond: My right hon. Friend is making a very powerful point, and I understand his asking Treasury Ministers to explain their rationale to us. We have already seen huge parts of the Budget unravel, and dare I say to my right hon. Friend that Ministers will not be quite so keen to hear what he is saying? However, surely they must take notice of what the Treasury Committee said in its immediate report after the Budget. It used the words “considerable uncertainties” about the yield from the tax rise. The Budget is already unravelling from the Committee’s point of view, and surely the Government must address in this debate what it says.

Mr. Redwood: That is absolutely right. The Treasury Committee has come to a very sensible view and asked the right sort of questions. Private forecasters are now saying that such a tax increase could actually reduce the amount of revenue by driving some rich people out of the country altogether, and making others work less hard or put less money at risk.

Mr. Jeremy Browne: The right hon. Gentleman said that this was a “tax trap”. I do not understand this concept of a trap. The Government come up with tax policies and the principal Opposition party has to decide whether it believes in those policies. If this is a trap, every single tax policy put forward by the Government is a trap. Surely, to follow the logic of his argument, this is a straightforward opportunity to vote on a point of principle. If he believes that the rise is such a disincentive for people to become wealthier, be entrepreneurial and work harder, surely this is an opportunity to vote against the Government. I do not understand why it is a trap.

Mr. Redwood: I am sure that the hon. Gentleman does. He is a better politician than he is giving us to believe with that rather childish intervention.

The Government’s idea was crude and simple—“Let’s put this down for a future year. We don’t actually think it’s going to raise very much revenue.” Perhaps they did not believe it would raise any at all. They saw it as a win-win situation for Labour. If the Conservatives voted it down, Labour would spend the next year going around the country saying, “The only thing the Tories care about is rich people and their marginal tax rate.” If the Tories voted for it, Labour would go around the country saying to people who might otherwise vote Tory, “Look, the Tories are useless. They don’t even stand up for your kind of proposals, and they aren’t really the party of enterprise after all.”

We do not intend to play that game, which has turned out to be a lose-lose for Labour. It has pitted an important part of the business community against the Labour Government, because the business community is not impressed by their reneging on the clear promise that I remember them making at the last general election that they would make no changes to the overall rates of income tax at any level.

The change has also pitted Labour MP against Labour MP. We know that the Blairite faction is extremely unhappy with it. The Blairites thought that the fact that the previous Prime Minister had accepted the Conservative settlement on tax prior to 1997 was a very important part of winning over floating voters in middle Britain whom Labour needed to win over to form a Government again. They believe that it is disruptive and a clear tearing-up of that element of the new Labour settlement that the Government have now decided to go from 40p in the pound to 50p. Indeed, at the margin it is rather higher than that if we take into account the changes to allowances, pensions, national insurance and so forth. Far from being a trap for the Conservatives, it has been another factor in the growing civil war between Blairites and the supporters of the Prime Minister.

There will be those on the left for whom the change does not go far enough. They think that this crisis is a good opportunity to increase the rate to 60p, 70p or 80p—the rates they were used to in previous periods of government. However, there are others on the Labour Benches who understand that in a globalised and footloose world economy—whether we like it or not, we have to live with it—it is all too easy for people with money, talent, capital or high incomes to say, “I won’t base my activity here any more, I’ll base it somewhere else—I’ll go to Dublin, the Bahamas or Asia,” because the Governments in those jurisdictions really want talented people and new businesses. There are jurisdictions that wish to give a home to businesses that might otherwise have been located in London or Britain. That is the danger that we now face.

In other respects, the Government claim to believe that putting a tax up means having less of something. For example, they are busily increasing the tax on gas-guzzling cars because they want fewer of them. They are also increasing the tax on drink, because they want people to drink less. Probably only the ministerial drinks cupboard will be well stocked at the new duty rates, because public spending is still in free flow, whereas other people are expected to reign back, which we are told is good for their health. The Government believe that increasing duty on tobacco means that people will smoke less and that fewer cigarettes will be sold.

Mrs. Jacqui Lait (Beckenham) (Con): I am paying careful attention to my right hon. Friend’s argument. I wonder whether he would like to think back to the introduction of the single market and to what happened to the UK, with wine and tobacco coming into this country through smuggling, and whether, despite the drop in the value of the pound, the change in duty may be yet another way of increasing smuggling.

Mr. Redwood: It could well be. As hon. Members will know, the drinks industry in particular is extremely unhappy about the change. At a time when the industry is struggling to maintain licensed premises and its general business, the Government are being far from helpful in their tax policy.

My point is about the consequences of tax changes. In all the areas that I have mentioned, the Government quite rightly say that if they increase tax on something, there will be less of it, so why do they not think that the same applies to working hard? If we increase the tax on working hard, will there not be less of it? Will people not either do less or go somewhere else to work hard where the Government do not take so much money? The Government’s proposed increases in taxes on doing things, such as drinking, smoking and so on, and on larger vehicles are in conflict with their wider statement about their wish to have a reflationary Budget.

If the Budget were genuinely about reflation, surely it would be best to lower taxes on things made in Britain that people might buy. We would not increase the costs of owning an expensive vehicle if we wanted to sell more expensive vehicles nor would we increase the taxes on drink if we wanted more people to work or even just survive in jobs in the drinks, entertainment or hospitality industry. There are contradictions at the heart of the Government’s policy.

Mr. Newmark: Another point that my right hon. Friend might want to address is the fact that the increases are regressive, because they hurt the poorest people in society, who spend a larger proportion of their wealth on things such as drinking, smoking and driving. A second point is that such increases do not really change behaviour, which is what the Government are trying to do, but are just an extra means for the Government to try to fill the black hole in their public balance sheet.

Mr. Redwood: That is absolutely right. Just as there is a contradiction between the Government’s tax policy on the one hand and their so-called reflationary policy on the other, because some of their taxes will clobber jobs and business, so there is a conflict between their reasonable wish that people on lower incomes should have a better deal and the tax policies that they are pursuing.

The most regressive tax in the Budget is the fuel escalator. A lot of people on modest incomes need to use a car. They need to buy fuel, but often they cannot afford to buy the more fuel-efficient vehicles that better-off people can afford. The Government are deliberately targeting people on low incomes to pay more tax as some kind of penalty.

At a meeting earlier today, I heard about some of the plans for the water industry that I think may have the Government’s approval. The implication was that we will have to pay more for our water because the Government want to raise revenue by selling off licences for extraction. We await the legislation enabling them to do that on a big scale, but they are doing it already on quite a big scale to pay the costs of the Environment Agency.

If that is a serious proposition, it is an even clearer example of what I and my hon. Friend the Member for Braintree have just described—that those on the lowest incomes will face the biggest proportional increase in the price of a basic requirement that the Government believe should be rationed by price.

The most obvious example of that involves motorists in London. Only extremely rich people are now able to drive regularly during the day in central London. Motorists have to pay £8 a day out of their taxed income to use the road, as well as meeting all the fuel duty, vehicle excise duty and other costs incurred in running a car. In addition, fuel use in London is especially high because the regimes of the Government and the previous Mayor have made travelling around London freely extremely difficult, which increased the amount of fuel burned and therefore the cost for Londoners.

There is a strange conflict in this Labour Budget—the party that wishes to be the party of the people is actually clobbering the people, and the poorer people are the more they get clobbered by specific taxes on things that they have to buy. The other dilemma is that a Budget that wishes to be reflationary contains a series of tax proposals that are anti-enterprise and anti-business, and which target specific sectors of the business community especially severely.

The Budget papers also reveal a further development in the Government’s surveillance and control activities that is far from welcome. One thing that is doing the most damage to the Government’s reputation among the wider electorate is their complete compulsion to control every aspect of our lives. They want to eavesdrop, carry out surveillance and impose cameras on us; they want to inspect and audit us, and they assume that everyone is doing wrong until they can prove otherwise. I am afraid that the Bill is another example of that.

The tendency is not confined to the Home Office and the hapless Home Secretary. What I have described is also being done by the Chancellor of the Exchequer and his junior Ministers. The Bill has some tough clauses strengthening the powers of Revenue and Customs to intrude on lives and business and individual records, even when they have no reason to suspect that the people involved are criminals. The proposals will give people a very nasty feeling: they will make the relationship between state and citizen that much more unpleasant and put everyone on edge. They will also create extra cost and harassment of a kind that is very unpleasant.

I believe that the Government, in their own interests, should revisit the proposals before the Bill is finalised. Opposition Members have drawn attention to the problem. We do not like the proposals, and think that many of our law-abiding constituents will find them very irksome and unpleasant. Above all, however, the proposals that I have described do damage to the Government, because they reinforce the view that the state is all-bossy and wishes to be all-knowing. The Government seem not to trust anyone at all, but to believe that every taxpayer will be up to no good unless they take extremely draconian control.

I suspect that the Government’s approach is the result of two things. First, it is the result of politics, because some Labour Members believe—quite wrongly—that all successful people are tax fiddlers who must be hounded out and purged. Secondly, it is the result of the Government’s theory that they will one day find the crock of gold containing all the billions that the rich have been hiding all these years. The fact that they have not got to grips with the cash before means that it will be an easy, soft option for filling the hole in the accounts.

I am afraid that I have news for the Government. I am sure that the intelligent Ministers realise that there is no such crock of gold—if there were, Governments over the generations would have found it by now. It does not exist: to get out of the colossal deficit that is the centrepiece of and background to the Budget the Government either have to impose a lot more tax on everyone, or exert much better control over public spending.

The Bill, like all too many of its predecessors over the past decade, is an enormous piece of work. It is 433 pages long, with 61 schedules and 126 clauses. This becomes a burden in itself. How can business people, who are worried by the recession, trying to preserve the jobs of their work force and desperately trying to sell a bit more product and raise the quality of their service, be expected to get their heads round 433 pages of changes to tax law, some of which are extremely complicated? If they do not do so, however, the Government will say, “There you are. These people aren’t serious. They are not good directors and managers of businesses. They did not understand page 417 and they should have done.” They will then use the new draconian powers to call people in for questioning, or worse. It is not fair to impose so much on people when they are desperately worried about the state of the markets and the state of their companies.

One problem that I fear the Government will have to revisit is that of revenue collapse. I said earlier that I was not a doom-monger. I do not think that we will stay in recession for ever; I think that, at some point, easier money works. However, I do think that this will be a very deep and long recession by post-war standards; it looks as though it is going to be the longest and deepest by quite a long way.

In my experience, the Treasury always gets the figures wrong both ways: it always underestimates the amount of revenue that will come in when the economy is growing a bit faster than it expects, and it always overestimates the amount of revenue that will come in when the economy underperforms. I fear that its models are not revealing just how big a drop in revenue there will be. There must, for example, have been a catastrophic drop in stamp duty, because there are so few housing transactions and because house prices are now 20 per cent. or more below the peak levels. There will also have been a very big drop in corporation tax. We know that some of the largest profit-makers of yesteryear were the banks, and that the biggest bank—now a state-owned entity—has managed to lose £24 billion instead of making billions. Corporation tax revenue must be well down.

We also need to factor in a big reduction in dividend tax revenue. The banks accounted for a high proportion of dividends being paid; I think that they paid about a quarter of all the dividends on the all-share index in 2007. Some will now be paying little or no dividend, while others will find themselves in straitened circumstances, so there will be nothing like as much dividend income coming in from one of the big sectors. I suspect that some of the other cyclical sectors will also suffer big reductions in pay-outs and, therefore, in tax revenue.

Mr. Syms: My right hon. Friend is right; there might be a reduction in dividends from banks, which is why manufacturing industry could be important. There is a story running on Sky at the moment that there are problems with Tata and the negotiations over Jaguar Land Rover. That will certainly be important for the west midlands and for much of British industry. Perhaps we ought to have a statement on that.

Mr. Redwood: That is a very helpful idea. Jaguar is another example of the conflicting attitudes in the Budget document, which contains tax increases that will hit people who buy those cars. Perhaps that will put some people off buying them. Perhaps that is a good thing; perhaps that is what the Government want. But why, then, should we consider subsidising a car maker to make vehicles that the Treasury is trying to prevent people in Britain from buying by taxing them off the road? That is another muddle that shows the conflict in the Budget between its reflationary intention to get people back to work and to retain jobs in companies such as Jaguar, and its spiteful intention to change behaviour and to increase revenues through tax increases.

My advice to the Government is that this should be a Budget about reflation, and this is therefore not the right Finance Bill before us today. In order to have a successful and well-based reflation, they need to be kinder to businesses, individuals, enterprise and jobs than they have been in these tax measures. Many of the proposed increases will make that recovery more difficult, and could drive people abroad and result in things happening that they do not wish to happen. They will also increase the amount of subsidy that they will have to pump into some of the companies that will suffer as a result of their tax measures.

I do not believe that the Government will get a big reflationary push out of the fact that they are raising so little revenue when considering their costs relative to their expenditure. Treasury Ministers and I will strongly disagree on how to do that: I would reduce spending, while they would increase taxes. The Government need to tell us this evening how they would fill this black hole if they were to stay in government, because it is quite obvious from this Finance Bill that they have not put in place the range of taxes and the right tax breaks necessary to do so. To make it a little more difficult for them—it is a very difficult problem, because they have created an enormously complex problem for themselves—I would say that simply putting tax rates up will not necessarily be the way to fill the hole, even if they wish to carry on spending at this rate, because they are reaching the point at which revenues could be reduced because of a disincentive effect.

Mr. William Cash (Stone) (Con): My right hon. Friend and others—I see in his place my hon. Friend the Member for Braintree (Mr. Newmark)—have pursued the level of public debt, about which my right hon. Friend has just made some very powerful points. Is he conscious of the fact that the Treasury Committee report, which came out only a short time ago as the minutes are dated Tuesday 6 May, does not appear to tackle the true level of our Budget problems, as the amounts specified appear to be largely geared to what the Government said, which at least the three of us are quite convinced are hugely less than they should be?

Mr. Redwood: I agree with my hon. Friend. In providing the background to my comments I stated why I believed this to be the wrong Finance Bill as it does not tackle the magnitude of the problem. It is not just about the gap between the revenues and the spending of this year and next year, which is the main background to the Bill, because as my hon. Friend implies, the stock of debt is also important.

If the Government had to account in the way they make large private companies account, they could not get away from the fact that the gross liabilities of the state are more than £4.5 trillion. Pensions have to be included, as do the debt obligations and risks of the banks, the private finance initiative and public-private partnerships, Network Rail and the mortgage banks. Indeed, the lot has to be included if we are to have honest and accurate treatment, and if a finance director of a large company fails to do that, he goes to prison. It is quite simple. I know that they operate under different rules, but the markets out there are adjusting and they do not believe the figures that the Government are providing them with, so we are not seeing the beneficial impact on market responses that the Government want. I think that the Government would have more credibility and instil more confidence—something we desperately need—if they came up with a more honest set of figures that we could all use and view as broadly right.

Mr. Brian Binley (Northampton, South) (Con): My right hon. Friend touches on a point of confidence, which seems not to be understood by members of the Government. The fact is that small businesses are all about survival nowadays, so they need their confidence improved in order to improve the position of the economy generally. However, their confidence will not be improved as long as the Government produce Budgets and Bills of this kind. Am I right in my thinking, and is there a way to get this through to the Government, who are so stubborn on this particular point as on so many others?

Mr. Redwood: I think that the answer to my hon. Friend’s first question is “Yes, he is absolutely right”, while the answer to his second question is “No, there is no chance of getting the message through to the Government”. That task proved too much for the Chief Secretary, who I believe has been the worst Chief Secretary on record because she has not for one minute during her time in the Treasury succeeded in controlling public expenditure. I wonder how she dares to draw her salary, frankly, as she makes no attempt to control public spending.

What I think we need in this Finance Bill—and I hope my right hon. and hon. Friends will seek to achieve it as the Bill makes progress in Committee—is this. We need a Finance Bill that says to the Revenue and Customs not “Toughen your powers”, but “Understand that these are very difficult times”, as businesses have other priorities. While crooks should not be allowed, there is a need to be understanding and to work sensibly with business; otherwise, more jobs will be lost and more orders will be cancelled.

I think we need the Finance Bill to be amended to say that we are going to try to optimise tax revenues by having competitive tax rates on business and incomes, not by plucking them out of the air for other reasons. We need to recognise that our corporation tax level is no longer competitive and that the Government now wish to set uncompetitive income tax rates. I think that we should try to tease out and clarify the Government’s thinking on what they are trying to do with their increased taxes on drinks, cars, fuel and so forth. Are they trying to tax the poor? That seems to be what they are doing. Are they trying to reduce activity in those areas? That seems to be what they are doing. How does it square with what we were told was meant to be a reflationary Finance Bill?

We need a lot of change in this Bill. I think that it is not a good Finance Bill for our current economic circumstances. The Government believe that they can get away with the borrowing in the short term, but if they were a decent Government—if they were interested in the long-term success, strength and stability of this country—they would realise that the gap between spending and revenue is simply too big.

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8 Comments

  1. Stuart Fairney
    Posted May 7, 2009 at 9:14 am | Permalink

    Somewhat OT but from today’s Independent sketch

    Andrew Rosindell mentioned the largest petition on the Downing Street website. “Twice as many people are calling for his resignation as voted for him at the last election.” There was another petition on Gordon’s site begging him not to resign. It had 234 signatures and today it’s gone. The reason? All the names were things like Juan Kerr (it took me a moment as well).

    http://www.independent.co.uk/opinion/commentators/simon-carr/the-sketch-people-as-tired-as-gordon-brown-are-usually-in-hospital-1680393.html

    Really funny.

  2. Waramess
    Posted May 7, 2009 at 10:01 am | Permalink

    What an excellent blog. More of these please. But you are sadly correct: therre is no chance of getting the message through to the Government.

    We will have to wait until the next election, and if the Conservatives win we will see if you can get the same message through to them.

  3. Acorn
    Posted May 7, 2009 at 10:04 am | Permalink

    “primus inter pares”. Can’t argue with that JR, probably your best speech ever in parliament. Absolutely spot on the money.

    Now please let your followers into the secret. That speech was 45 minutes long; had around 48 topic sentences, (paragraph openers) and you had circa., ten interventions that did not break your delivery. Where were the notes? Just how the hell do you do that, I has to know?

    Reply: I make it up as I go along, but it is a subject I spend a lot of my time thinking about and writing about.
    I have always spoken without notes, save for a few Ministerial speeches where colleagues required me to get approval for a draft.

  4. Neil Craig
    Posted May 7, 2009 at 10:30 am | Permalink

    Very pleased to see some Westminster politician mentioning the Irish experience. I think their success is not just because of cutting taxes but also cutting regulation. While their current % of recession may be greater than ours, starting from being 40% better off than us, a lot of this is because they allowed house building on the way up. By ensuring that we barely have a house building industry Britain has reduced the disadvantges of its collapse.

    I think you are also right to mention that not raising income tax was a Labour manifesto promise. Like breaking the promise on an EU referendum, irrespective of whether raising taxes & preventing the people have a say are good things is the fact that Labour have broken their most specific promises.

    Parties tend not to be trusted after they have blatantly lied. Wise politicians realise that their word is the only stock in trade they carry & when it is gone they are bankrupt.

  5. Robin
    Posted May 7, 2009 at 11:13 am | Permalink

    Read through an excellent speech – but you never mentioned the word “Socialism” once. Context can make a lot of political systems stand up for years. Communism failed to compete in an economically supported arms race against capitalism. That doesn’t make American capitalism right – just better at paying for more expensive weapons.

    In the context of Political Correctness+Liberal Human Rights we see Socialism failing – it’s too expensive to try to make everybody have equal outcomes in life with these constraints imposed on a Government. The process of “social annealing” (i.e. pouring the energy into a system to shift the natural state at room temperature) has been shown not to be able to afford its own cost when Political Correctness means you can’t target poor outcomes as a result of culture and Liberal Human Rights means you can’t target poor outcomes as a result of individuals.

    Social Engineering has been tried to death. Labour have no where to go unless they change their goals or their constraints. I don’t believe they can do this in even 10 years.

  6. oldrightie
    Posted May 7, 2009 at 12:27 pm | Permalink

    “but if they were a decent Government—if they were interested in the long-term success, strength and stability of this country—”

    Of course they are not a decent Government. They pursue power at any price. The Country is just a commodity to be exploited by their stupidity and greed. This whole exercise is Brown’s scorched earth policy to destroy the next Government.

  7. Adam Collyer
    Posted May 7, 2009 at 9:27 pm | Permalink

    Great speech.

    You say, “at the margin [the tax rate] is rather higher than [50%]” – actually it can be a lot higher. My marginal tax rate is currently 73%. (This is made up of 40% income tax and 33% withdrawal rate for tax credits.) And for somebody earning a bit more than £40k, which is a decent but not enormous salary, that seems quite high to me.

  8. FatBigot
    Posted May 8, 2009 at 2:46 am | Permalink

    Another magnificent analysis Mr Redwood, thank you.

    The one thing that troubles me more than any other in current circumstances is the perception by both front benches that it would be politically damaging to explain how bad things really are.

    Like you I do not believe we are on the edge of economic oblivion, but we are in a deep hole and it is hard to get out of a hole unless you know how deep it is and where the hand and foot-holds are that can aid your clamber out.

    It is necessary – necessary in the sense that there really is no alternative – to acknowledge that the so-called boom of 2004-7 was pure pretense. It was based on pretend money magicked out of bubble equity in residential premises and pretend profits from banks selling hot air to each other. This country’s base-line sustainable level of wealth as at May 2009 is not the level of wealth calculated by reference to magic beans in 2007, it might not even be that which was perceived to exist in 2005.

    Every available realistic assessment suggests at least a 5% fall in national wealth by the end of 2009 from the (pretend) level at Autumn 2007. A major realignment is required to reflect the reality that we are probably as wealthy now in real terms as we thought we were in unreal terms in 2004 or 2005. That, in my view, should set the scene for the future. It is going to be a very rocky ride and I would like to see front bench spokesmen being brutally honest about this.

    Incidentally, it was nice to see my old friend Steve Hammond chipping in with a couple of excellent interventions. Did you know he was an very fine hockey player in his younger days? Real hockey, I mean, not the version played by padded thugs on ice.

    Reply: Thanks. As you say, an honest appraisal and work on what is now a sustainable growth rate from here would be helpful.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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