DEBATE ON PRE-BUDGET REPORT

- Wednesday, 26th November 2008

 

Mr. Peter Lilley (Hitchin and Harpenden) (Con): It is a great privilege to follow the hon. Member for Coventry, North-West (Mr. Robinson), who speaks with great authority on these matters. I respect everything that he said, and I agree with some of it.

We owe a debt of gratitude to Mr. Speaker for granting us this three-hour debate, which was the maximum time that he could grant us.

We must consider the scale of the Budget measures announced on Monday-which dwarf anything that I have known in real Budgets over 25 years-and the calamitous state of the public finances that was therein revealed. Given the gravity of the economic situation, our constituents would have found it positively incomprehensible if Parliament had not debated the measures that we are discussing for this brief and inadequate period today.

Mr. Geoffrey Robinson indicated assent.

Mr. Lilley: I see that the previous speaker agrees with me.

Is there any Member in the House who would support and justify the Government’s refusal to allow a debate on this Budget? There is none, and I hope that hon. Members will make their feelings known to the Leader of the House, who should be pressing on our behalf-

Simon Hughes: Will the right hon. Gentleman give way?

Mr. Lilley: Only if the hon. Gentleman is going to do that. Is he going to justify not having a debate?

Simon Hughes indicated dissent.

Mr. Lilley: Then I will not give way.

Given the inadequate time allocated for this debate, I shall make just a few brief points. Unless we correctly diagnose the causes of our problems, we will not get the right cure. It is therefore extremely worrying that the

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Chancellor and the Prime Minister persist in the self-serving delusion that the cause of our problems lies exclusively in the United States of America. It was not America that caused us to have the biggest boom and bust in the housing market. The excessive lending, which exceeded not only that of America but that of the rest of the world, was a British-made problem. The failures of regulation by the regulatory system introduced by this Government were at least as severe as those in America. It was those mistakes, and not sub-prime mortgage lending, that brought down Northern Rock, then Bradford & Bingley and finally HBOS. It was the Government’s policy of spending more than we were raising in taxes that led to the deficit in the public finances and the corresponding deficit in the balance of payments, thereby necessitating the huge devaluation in the pound that we have seen recently. I cannot see how any of the measures announced by the Government relate to those fundamental, underlying causes of the problems that we face.

Mr. David Drew (Stroud) (Lab/Co-op): I am interested to hear what the right hon. Gentleman is saying about public spending. I do not know on how many occasions he has made it clear in his constituency that he opposes this Government’s investment in public spending. As a Labour Member, I congratulate them on that investment. Of course it has to be paid for, but does the right hon. Gentleman not agree that we should argue the case for higher public spending?

Mr. Lilley: Almost all my constituents who discuss this issue with me tell me clearly that the Government have been spending more than we can afford. They regret that, and of course they would like more spending, if it could be afforded. When it is clearly unaffordable, however, they condemn the Government for that practice; and when that spending leaves us with this kind of problem, which puts my constituents’ jobs at risk, they are not going to put doctrines about public expenditure above the security of their employment.

Chris Huhne: Will the right hon. Gentleman give way?

Mr. Lilley: I should like to make some progress, if I may.

The second issue that I want to address is the Government’s optimism that the fiscal stimulus, as they call it-increasing expenditure while reducing taxation-will be expansionary. I devoutly hope that it will prove to be expansionary. I hope it will work. However, most people, as well as the Government, believe that its impact is likely to be quite small. The right hon. Member for Bolton, West (Ruth Kelly) said that it would reduce the impact of the recession by about 0.5 per cent. of GDP. If the Government are convinced that that expansion will work, and that we face a severe contraction, why have they not done more? If there is a limit on affordability, why did they not double the cut in VAT for half the time? A 5 per cent. cut for six months would probably have had a more stimulatory effect-for the reasons spelled out by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke)-and we would have known sooner whether that was going to work or whether we would need to switch to other measures.

Dr. Palmer: Does the right hon. Gentleman accept that a 5 per cent. cut, to 12.5 per cent., would require consultation with the European Commission, and would have taken longer to implement?

Mr. Lilley: The hon. Gentleman is right: we are forbidden, under the present laws, to reduce VAT to under 15 per cent. That is absurd, and we should have asked for a waiver from that requirement. We should not allow that to be a restriction at a time of national emergency. However, it is significant that, by the modesty of their package, the Government recognise that even these measures are at, or even above, the maximum that we can afford, and that more might have had a negative effect.

We need to consider in what circumstances a budgetary stimulus or fiscal expansion has a positive effect, and in what circumstances it has a negative effect-the Government clearly fear the latter if they do more. Helpfully, the European Central Bank and the European Commission have studied the research done on all the fiscal-or so-called Keynesian-measures undertaken by different Governments in the past few decades. They come to some striking conclusions. They say that when Governments deliberately increased their borrowing to stimulate the economy, the effect of such expansionary measures was, at best, small. On half the occasions, the effect was the reverse of the Government’s aim. My right hon. and learned Friend pointed out that we know from British experience that that is often the case. In 1976, we had what the Keynesians would call a contraction. Under the influence of the IMF, we cut spending and raised taxation. The effect was immediate. As Lord Donoughue said on Monday last week-and he was a member of Callaghan’s Cabinet-the economy started recovering the next year, much more rapidly than expected. In 1981, 364 economists said, at what subsequently turned out to be the nadir of the downturn, that the measures that Lord Howe introduced in his Budget would accentuate the downturn because he raised taxes, cut spending and reduced borrowing. In fact, that marked the beginning of a sustained period of rapid growth.

The documents produced by the European Central Bank also show that the opposite has happened. Governments introduced what they thought would be expansionary measures, but they had a contractionary effect-they are called contractionary budget expansions. That is our worry-that the Government have done too much and it will have a contractionary effect. The studies show that such measures are most likely to have the opposite to the Keynesian effect when the Government start with a high level of borrowing-precisely the position we are in. Other countries that have managed their finances prudently and have low borrowing are in a position to take expansionary measures, and I hope that they do so and create markets for us to grow through export-led growth, but we are not in a position to do that on any scale.

Chris Huhne: The numbers suggest that the debt position is not as alarming as the right hon. Gentleman says. The current public sector net debt is 36.3 per cent. of GDP. In the last year of the Government of which he was a member, it was actually 42.5 per cent. Is he saying that circumstances today are so different from the circumstances that the right hon. and learned Member

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for Rushcliffe (Mr. Clarke) inherited, with a fiscal expansion under that Government of 3 per cent. of GDP between 1990 and 1993-94?

Mr. Lilley: I was not trying to make an absurd party political point like the hon. Gentleman: I was quoting the European Central Bank and the European Commission studies of the experience of other countries. They have shown that when other countries have tried to launch a fiscal expansion on the back of a high level of borrowing or deficit-and the hon. Gentleman knows the difference between a deficit and the inherited debt of previous Governments-there is a danger that it actually leads to contraction. Why does it do so? There are three reasons. First, it undermines confidence. People think, “Gosh, the Government’s finances are already pretty shot through. If they are going to borrow even more, we had better get out of here.”

Chris Huhne: Will the right hon. Gentleman give way on that point?

Mr. Lilley: The hon. Gentleman has just made one silly party political intervention: he does not get a chance to make a second.

The second reason is the possible effect of the risk premium, even for Government borrowing. My right hon. and learned Friend made the point that the Government now have to pay more to borrow than private companies, and even French banks. The third reason, which is not often mentioned, is the fear among the general public that the additional money they receive from the Government borrowing more will have to be paid back through increased taxes. The public therefore save that money to pay the taxes in future.

I have always found the idea of Ricardo equivalence-that the general public can estimate the likely tax effects of borrowing in the distant future and predict on whom they will fall-very unlikely. But in the present circumstances, when the Government have spelled out that the short-term boost will be followed by specific and immediate increases in taxation, and when we know from what they have been trying to hide that any uncertainty is only that taxes may be even higher than so far revealed, it is all too likely that people will increase their saving to meet their future tax bills, thereby negating the effect of this attempt at expansion. Having said that, I hope that it works.

The Government are relying on an increase in taxes, and they will withdraw the personal allowance for people who earn more than £100,000-or £1 for every £2 of extra income. In effect, that will restore a 60 per cent. marginal tax rate for income above £100,000. In the past, that had a negative yield. We got more money when we reduced the top tax rate than when we maintained it. The Government have learned nothing and forgotten everything, and I hope that they will give us more time in the next Session to rub their noses in what is a very dangerous and risky Budget.

 

 

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