Araith Welsh Grand – Gyllideb

I am grateful for the opportunity to contribute to the debate and make some comments on the recent car-crash Budget—a Budget that has seen more U-turns than an alpine hill climb in the Tour de France. Part of me thinks that those U-turns have been an act of genius, because all the fanfare has concentrated on pasties, caravans and charity donations. The real, major policy, and by far the most politically significant element of the Budget, which we have not seen a U-turn on, is the tax cut for those who earn more than £3,000 a week. One act has smashed the coalition’s most successful propaganda line: “We’re all in this together.”
The announcement was made at the same time as the announcement of a further cut of £10 billion in the social protection budget from 2013 onwards, leaving the clear impression that tax cuts for high earners were being funded by cuts in welfare provision for the poorest in society. Considering that the human cost of the great recession since 2008 is rising unemployment, pay freezes for those in employment and real-terms reductions in the living standards of ordinary working people, a tax cut for high earners showed us exactly the priorities of the political elite here in Westminster. Labour MPs, with the honourable exceptions of the hon. Members for Newport West and for Bolsover (Mr Skinner), missed the key vote on the issue.
However, the real decisions on economic policy were made during the general election of 2010, in which the key dividing line between the parties was the rate of deficit reduction. The Tories argued that the deficit needed to be eliminated in one parliamentary term; Labour and, at the time, the Lib Dems argued that it should be halved. I personally agreed with the comment made by the right hon. Member for Morley and Outwood (Ed Balls) during his ill-fated leadership bid: even the Labour argument, which would have meant cutting harder and faster than Thatcher, was over-optimistic.
Although the Tory line was a good political dividing line, as it served to undermine Labour’s hard-won and misplaced reputation for economic competence under the right hon. Member for Kirkcaldy and Cowdenbeath (Mr Brown), it was economically stupid. UK debt matures over a 14-year period, so there is no reason to get rid of the deficit within four years. Total debt as a percentage of gross domestic product at the time of the Westminster election was 71%—only 11% above the fiscally conservative European Commission debt reference level under the terms of the Maastricht treaty. Considering the scale of the economic downturn that we witnessed in 2008, there was no reason whatever to push the panic button. Indeed, when the NHS was created in 1947, debt as a percentage of GDP was well above the 150% mark.
Without challenging the Lib Dems to explain their complete change of heart on the key political dividing line at the last Westminster election when they entered Government, we can say that that fundamental decision has shaped the direction of domestic political travel since. In his years in opposition, the Secretary of State for Business, Innovation and Skills wrote a whole book, “The Storm”, warning about overt fiscal consolidation. As it happens, I have a signed copy, and I was amazed to see him on “Newsnight” the week after the election explaining why he had now come to an agreement with the Tories on a very extreme deficit reduction policy that is seen across the world as a great experiment.
The Office for Budget Responsibility predicted after the general election that growth in the UK economy by the end of this year would be 2.8%. As a result of this year’s Budget, it reported that growth would be only 0.8% by the end of the year. That is a disastrous reflection on the policies pursued by the Treasury.
There was a secondary motive, of course. By talking up the severity of the position of the public finances, the Tories could justify their life’s ambition of declaring war on the public sector. A war on waste was declared, and ever since the creation of the new Government, Ministers have been competing for the biggest right-wing press headlines. To sell that perception, the Tories ludicrously equated the finances of the state to those of a household. As a political strategy at the time of the general election, it worked beyond all expectations. However, in the case of a nation state, reducing expenditure can lead directly to a reduction in income. In addition, it cannot possibly take into account the effect that income generation and expenditure has on overall economic growth and the fine balances that need to be achieved.
Labour’s great mistake at the time of the election was to engage in a Dutch auction with the Tories, which led to an orthodoxy quickly developing about the need to tackle the deficit first, rather than getting the economy back on the road to sustainable growth.
Let us return to the present. It is clear that the Treasury’s economic course is reducing growth. We are in a double-dip recession, and it looks as though there will be a period of prolonged stagnation or, at best, below-trend growth. The competing narratives at the moment seem to be either that it is all Europe’s fault, or that there is a double-dip recession made in Downing street. There is an element of truth in both, but clearly the latter is more important. By slashing public investment in the economy at the rate that they have chosen to, the Government are sucking demand out of the economy.
Jonathan Evans (Cardiff North) (Con):
I respect the hon. Gentleman’s knowledge of economic matters, but he is, in a sense, being economical about events that have occurred since the election. He will know that the Government had to pay a significantly higher rate of interest on the sale of Government bonds at the time of the election in 2010—a rate similar to Spain’s. Looking across Europe, what has happened to that rate in the UK, and how has that compared with what has happened in almost every other country in Europe?
Jonathan Edwards:
The hon. Gentleman and I have had a few jousting sessions on the radio, and we have had some interesting debates. I will address some of the issues he raises later in my contribution, if he will hang on.
There are four main drivers of economic growth. One is public investment, which is being cut by £83 billion in real terms during the comprehensive spending review. That is a huge economic headwind. The second is consumer spending. The Labour years saw massive asset bubbles based on personal debt and house prices, and total personal debt is equivalent to 100% of gross value added in the UK, at an incredible £1.4 trillion, so there will not be a consumer-led recovery in the next few years. The third main economic driver is exports. The strategy in the UK is being sold on the example of Canada in the 1990s, but the major difference is that Canada was exporting to a booming US at the time. The major problem that the UK economy faces is that our major trading partner, Europe, is in even more difficulty than we are. The fourth driver is private investment. As a result of a lack of confidence in the economy, private businesses are sitting on their cash. They are not using that money to invest in the economy. It is difficult, therefore, to see where the growth will come from in the next few years.
Basically, we are in a Blanchflower-type death spiral. The only way out of it, as argued by Nobel prize-winning economists such as Krugman and Stiglitz, is for the Government to pursue a policy path that we have been advocating since 2008, based on ensuring that there is infrastructure investment to stimulate demand. That would require direct Government spending, which would stimulate private investment. We have to learn the lessons of the great depression. We cannot cut our way out of a severe economic downturn. The hon. Member for Cardiff North mentioned the low interest rates in the UK. They are a direct result of the troubles in Europe, because investors pump money into the UK, rather than a reflection on the Treasury’s policy. With those interest rates at an all-time low, now is the time to use that money to invest in infrastructure and stimulate demand.
Jonathan Evans:
I do not want to delay the Committee, but I think it is worth making the point that Joe Stiglitz, whom the hon. Gentleman quotes as an authority, has for the past three years been the advisor to the Greek Government.
Jonathan Edwards:
Stiglitz also said—I have quoted this many times—that negotiating with markets is like negotiating with a crazy man: you may give him what he wants and he may still shoot you. That is what has happened in Europe and might well happen in the UK. I notice that the credit rating agencies are already downgrading the forecast for growth and suggesting that the triple-A credit rating is under threat.
The pity is that the Government seem to be obsessed with supply-side reforms in the economy; there were the infamous Beecroft recommendations recently. As Naomi Klein argues, the political right never lets a good crisis go to waste. It is completely the wrong policy response, and unless the Treasury stimulates demand, things will get far worse. “Sack on the spot” would be a further erosion that would suck demand out of the economy, because working people will be afraid of losing their jobs and will not spend any money.
I would like to concentrate the remainder of my remarks on the content of the Budget. The most worrying aspect, as far as we are concerned, is the implementation of localised pay, although there are rumours in the press that there might be a U-turn on that. I was somewhat bemused to see the First Minister claiming immediately after the Budget that he had single-handedly defeated regional pay, and I respectfully request that the No. 1 in Wales makes a bit more effort to get out of Cardiff Bay. Labour introduced regional pay for court workers and prison workers, and its hysterical opposition to the Treasury’s proposals reeks of hypocrisy. That is another good example of the Labour-Tory tag team in operation.
Mr David Hanson (Delyn) (Lab):
As the hon. Gentleman knows, I oppose regional pay. His party is called Plaid Cymru, “the party of Wales”, and he seeks ultimately to have an independent Wales. Is that not surely, downstream, independence?
Jonathan Edwards:
If pay devolved to the Welsh Government, that would become national pay, would it not? Indeed, that point was made by the First Minister when the ideas were first mooted during the pre-Budget report. The First Minister—the leader of the Welsh Labour party, the No. 1 in Wales—was calling for the devolution of pay, which is exactly what the Tories want. Why is the right hon. Gentleman doing a U-turn?
Mr Hanson:
In my constituency, 3 to 4 miles from the English border, people who live in the town I live in, Flint, work in England and Wales. They do the same job in both, and they should not be paid differently for doing equal work. Under his proposals, as well as those of the Government, that will ultimately be a possibility.
Jonathan Edwards:
The right hon. Gentleman obviously has expert knowledge of the situation, because he introduced regional pay for court work. That is exactly what has happened with regard to court work in Wales.
Regional or local pay will institutionalise many Welsh communities as low-pay areas, lead to a brain drain of our best public sector workers and also hit the private sector, as there will be less disposable income and less money circulating in local economies. I have some sympathy with the argument regarding differing costs of living, particularly housing cost; I believe that that was the rationale used by the Labour party in its early days in government and by the current Government to introduce the policy. However, the way to address that seems to be to introduce rent caps, in particular in the private rented housing sector, as in New York and countless other parts of the world, including the Republic of Ireland. That would regulate living costs, help control housing benefit bills and curb housing speculation. It seems to be complete no-brainer and a win-win.
We welcome the rise in the personal income tax allowance in the Budget. It was a clear policy that we had, going into the general election, and it looks like the only red line the Lib Dems will keep to in their five years in coalition. I congratulate them on that small victory.
I fear that the Treasury has scored a massive own goal with the removal of age-related allowances, which basically means a tax increase for pensioners. Her Majesty’s Revenue and Customs estimates that 4.4 million people will be worse off in real terms in the next financial year.
Mr Peter Hain (Neath) (Lab):
I agree, as would the Labour party, with the hon. Gentleman on many of his attacks on the Budget. However, on pay, I must point out to him that an independent Wales would set its own pay. Is he seriously saying that pay rates for nurses, teachers and police officers in an independent Wales would be higher than in the rest of Britain? Of course they would not be. There would be pressure on them to downgrade.
Also, I take this opportunity, since I cannot be here this afternoon, to thank the Secretary of State for her gracious remarks, and my hon. Friend the Member for Pontypridd for his warm words. I wish him all the best. After seven years as Secretary of State and two years as a shadow of my former self, I am happy to give way to him and his youthful dynamism. I think he will be the Secretary of State for Wales after 2015.
Jonathan Edwards:
In Scotland, where such issues are devolved, the pay levels of police and health workers are higher—
Mr Elfyn Llwyd (Dwyfor Meirionnydd) (PC):
And it is not even independent yet.
Jonathan Edwards:
It is not even independent yet.
Hywel Williams (Arfon) (PC):
On the subject of Scotland, the Ernst and Young report today says that the Scottish Government have been the most successful in the UK in attracting foreign direct investment and job creation. I wonder what my hon. Friend ascribes that success to.
Jonathan Edwards:
That is an extremely interesting point. It seems that if we follow the Labour party’s line of thought in today’s debate, which is “London bad, Cardiff good”, it is making a case for more economic powers for the Welsh Government. I would like to see the Labour party develop that thought and provide some evidence to the Silk commission, which is under way.
Mrs Gillan:
I have been following the hon. Gentleman’s speech with interest, but I do not think that his aspirations are workable. He will be pleased to know that UK Trade and Investment has offered to put a permanent UKTI representative in Treforest, in the Welsh Minister for Business, Enterprise, Technology and Science’s organisation there, to try to ensure better co-ordination. That is something that I have been pushing and shoving quietly at for a long time, because I think it is important. If, through the Welsh Development Agency, Wales was able to attract some of the biggest and best businesses in the world over its borders, there is no reason why Wales cannot do that again. I want to give it a fair wind and every chance, and I hope that he will welcome close working, and the hand of friendship that I offer to the Welsh Government, despite the politics, so that we can try to achieve that together.
Diolch, Mr Owen. I will conclude my remarks as soon as I can to allow as many Members as possible to partake in the debate.
Before we adjourned, the Secretary of State made a helpful intervention. I welcome the fact that there will be a UK Trade and Investment presence in Wales. It is something that I have been calling for, because we have been the only nation in the British state not to have a UKTI presence. May I press her to make further demands on the Secretary of State for Business, Innovation and Skills? When the Select Committee on Welsh Affairs recently visited Germany, it struck me that Germany Trade and Invest—UKTI’s counterpart in Germany—has a deliberate strategy to direct investment to the poorest parts of the state. That is how it has been able to address the issues of reunification. I would like a similar commitment from UKTI, not simply a presumption to push investment into the south-east of England.
The Secretary of State for Wales (Mrs Cheryl Gillan):
I am grateful to the hon. Gentleman for giving way. He makes a valid point about other countries, but I must point out that inward investment, as Mrs Hart, the Business Minister in the Labour Welsh Government has said, is a matter for the Welsh Government. I believe however that the two Governments need to work very closely together, which is why I am pleased that we will now potentially have a permanent presence in that Government office.
May I also correct a misunderstanding? There has always been a UKTI person looking at Wales, but they have not been based in Wales, but have been nipping in and out, which I do not think is helpful. At lunchtime, the Government published their response to the Welsh Affairs Committee’s report on UKTI. I think that the hon. Gentleman will want to read it.
Jonathan Edwards:
I am grateful for that intervention. From my perspective, as long as Wales is part of the British state, it is impossible that the apparatus of the British state will work in the interests of Wales. I will continue to make that point.
To conclude on the Budget, we were somewhat concerned about the removal of universality in child benefit. It creates a huge anomaly. A single-income household with earnings above the arbitrary threshold of £50,000 could be worse off than a household with two people earning slightly less than the threshold. The Treasury has yet to address that point.
We welcome the reduction in corporation tax, but if the Treasury is serious about geographically rebalancing the economy across the British state, it should surely think about how it could offer fiscal incentives to stimulate demand in those parts of the state that face the brunt of the cuts. That is, those parts of the British state that are more reliant on the public sector. Unfortunately for us, Wales is included in that.
We need countervailing measures. I am personally relaxed about whether corporation tax is devolved to the Welsh Government, or the Treasury implements a policy of differential taxation across the state. I am relaxed about which avenue is taken. The key point is that there must be countervailing measures. I understand that there are moves ahead to devolve responsibility to Northern Ireland; what is good enough for the Six Counties is good enough for Wales.
A big theme in the Finance Bill, which we will debate on the Floor of the House before we rise for summer recess, is the planned 3p increase in the cost of fuel. We will table an amendment calling for it to be scrapped, and that is in addition to our work on a true fuel price stabiliser. We are all aware that in the isolated and remote communities we represent, fuel prices are a major issue for constituents. Clearly, if someone lives in an isolated community, they are far removed from where they work, seek leisure and access services.
Jonathan Evans (Cardiff North) (Con):
Will the hon. Gentleman give way?
Jonathan Edwards:
I will finish this point and then give way.
Plaid Cymru will table an amendment to the Finance Bill and we look forward to the support of hon. and right hon. Members. I hope that the hon. Member for Cardiff North is about to say that he will join us in the Lobby.
Jonathan Evans:
I am about to suggest to the hon. Gentleman a way in which we can work more closely together—on transparency in relation to petrol prices. He will know that when the wholesale price of crude oil goes up, there is an immediate increase in the petrol pump price, yet, as the Secretary of State has pointed out, there is not a commensurate drop-off when the wholesale price falls. Of late, a colossal fall in price has reflected the fall in crude prices. In the context of transparency, should more not be done in rural areas to draw the public’s attention to places where the decrease is not being passed on?
Jonathan Edwards:
The hon. Gentleman makes a very interesting point, and I certainly agree with him in that regard. However, the focus in terms of the Finance Bill will definitely be the planned 3p increase.
Turning to what we were calling for in the Budget, we would have saved £8 billion by scrapping the higher rate pension rebate. We would have introduced a windfall tax on the profits of the big six energy companies and reinvested that revenue in improved energy efficiency for homes. That would have achieved the twin objectives of creating jobs in the green industries and dealing with the major social issue we face across the British state in terms of fuel poverty.
We particularly wanted the housing revenue subsidy scheme for Wales to be scrapped, which would free £80 million for local authorities that have retained their stock to invest in their housing. The scheme has been scrapped in England and never existed in Scotland and Northern Ireland. There is no justification for its continuation. I look forward to the conclusion of the intergovernmental negotiations on the planning formula, when I hope the matter might be addressed.
We also wanted positive moves towards a financial transaction tax to curb speculation by casino financers and to raise revenue for investment in the productive side of the economy. We would cut employer’s national insurance, as it is essentially a payroll tax. A reduction would therefore encourage job creation. As John Maynard Keynes said:
“Look after unemployment and the budget will look after itself.”
The Treasury would be wise to locate that wisdom at the heart of its thinking.
In conclusion, what we needed was a Budget for jobs and growth. Although it was spun in those terms, this was not such a Budget. The catalogue of mistakes in the Budget has exposed the vacuous nature of the coalition. The Government did inherit an absolute mess from Labour, but their remedy is making matters worse.

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