Cable, Goldsworthy and Younger-Ross quiz Darling on the Pre-Budget Report

• [Dec 09] Dr. Vincent Cable: ' . . THIS is a good Budget for bingo and boilers . . '

I thank the Chancellor for sending me his statement, even though it was missing 43 paragraphs.

What is clear from the statement is that the economic position of the country is still very grave. We know now that we are 5 per cent. poorer than we were a year ago, and that the Government estimates of borrowing for this year and next year are higher than even they had forecast. What we needed was a national economic plan, but what we have got is an election manifesto.

There have been genuinely great Labour Chancellors in the past-Stafford Cripps and Roy Jenkins, among others-but they would not have been obsessed, as the Chancellor is today, with drawing tactical dividing lines. There are small things that one welcomes, such as initiatives on jobs for young people, on technology and on environmental policies. This is a good Budget for bingo and boilers; I think that is what it boils down to.

The underlying problem, however, is that for the past decade or more, the British Government have been over-dependent for their revenues on the fickle fortunes of the banking industry. We have had an economy that has been built on sand-on the assumption that property prices rise for ever, and on consumer borrowing-and the economy is now being rebuilt on sand, because the only signs of real recovery that we have are rising house prices and booming bank profits at a time when industry is continuing to decline.

Let me speak specifically about the banks. The Chancellor has clearly been provoked into action by the extraordinarily stupid and arrogant behaviour of the RBS board. What he has come up with, to the extent that it is intelligible, is an extraordinarily complex mechanism. Will he explain precisely how he will stop the banks converting their bonuses into basic salary? He talks about avoidance measures, but how is he going to stop that? Will he give us a worked example of what it means in reality?

Let us take as an example Mr. Bob Diamond of Barclays Capital, who has just walked away with £27 million on the back of a taxpayer guarantee. How would that be affected by the Government's proposal? Surely it makes more sense, as I think the Prime Minister entertained when he went to the G20 summit, not to try to tax bankers separately from other high earners, but to have a levy on bank profits because the banks depend on a taxpayer guarantee. Until they can be broken up and can stand on their own two feet, they have to pay for the insurance that the taxpayer provides.

The heart of the Chancellor's statement was about the borrowing requirement and the long-term problem of the structural deficit. What we needed was a clear, long-term way of dealing with this problem. What we had, to the extent to which we can understand the early statement that he made, was that there is an increase in tax-approximately £6 billion to £7 billion a year-much of which will be in the form of national insurance. Let us be clear about what will now happen. Any worker earning more than £7,000 a year will pay 32 per cent. marginal income tax and 12 per cent. national insurance contributions. All the money raised in additional tax will go to public spending, and none will be used to pay down the borrowing requirement and the deficit. That is a complete distortion of the priorities that the Government should surely have.

In respect of timing, it is obviously right that we heed the advice of the Governor of the Bank of England and others that, if the economy is continuing to stagnate, it makes no sense to embark on rapid cuts in public expenditure and reducing the deficit. That is the problem that the Conservatives have got themselves into, but it is also right that, if there is rapid growth, the Government must get on with dealing with the deficit. What the Government have assumed today is that there will be high rates of economic growth-3.5 per cent. in 2011-but what is the basis for that assumption?

It is a little like the old story of the economist who is given a tin of food to eat and says, "Let's assume the existence of a tin opener." The Government are saying, "Let's assume economic growth." Why? Have they made any estimate of the very real risk that the economy will revert to a double-dip recession or continue to stagnate? What is the risk of those things happening-is it one in 10, one in five, or one in two? Surely we cannot operate on the basis of a single-line forecast that is based entirely on optimism and very little else.

To the extent that we can understand what the Government are doing about cutting public spending growth, it comes down to two items. Perhaps the Chancellor will confirm that. One of the items involves hitting low-paid workers by cutting the proposal for personal allowances, which I understand has been postponed or deferred. The other is the approach adopted to public sector pay. On the assumption that the Govt have made, a 1 per cent. increase for a low-paid manual worker is a real cut. Of course, it is worth 10 times as much for a permanent secretary on £150,000 a year as it is to a worker on £15,000 a year. If there is to be restraint-and we have argued for it-surely it should be a flat sum across the board. We have argued that it should be £8 a week for everyone. That is the heart of the issue of fairness, which the Chancellor claimed was at the heart of his statement.

Of course it is right that we should be concerned with fairness in the tax system and in public spending priorities. The hon. Member for Tatton (Mr. Osborne) keeps saying that we are all in this together, but that is simply not right: we are not all in this together, as some people have done much better than others.

The Government's claims to fairness are absolutely bogus. The Chancellor's big, totemic step of the last year was to introduce a 50 per cent. tax rate, but he has delivered a gift-wrapped invitation to tax avoidance by keeping capital gains tax at 18 per cent. He had an opportunity today to deal with that, but he has done absolutely nothing about it. Unless there is fairness, the public will not accept the fact that, for the next five years or longer, there is going to be a real hard slog for the economy. The Chancellor has not set out the way forward that we need.

Mr. Darling: I disagree with the hon. Gentleman. We have set out a plan to reduce the country's deficit over a four-year period, and I believe that that will be done in a sensible way that will not damage public services or the fabric of the economy. Yes, the settlement will be tighter and it will be difficult, but I am surprised that the hon. Gentleman did not set out some of his proposals in relation to universities, for example.

I think that choices will have to be made, but I believe that people will recognise that, with public spending having grown over the last 10 years, we can proceed with a much tighter settlement than we have had in the past. However, as I said earlier, I believe that we can protect front-line services at the same time.

I listened to what the hon. Gentleman had to say about tax. He did not say what he would do, but that is one of the luxuries of being on his Benches. I think that using national insurance is a fair approach, and I said I would take steps to make sure that people earning under £20,000 would not be affected.

The hon. Gentleman asked about growth. I have set out my forecasts, which are not dissimilar to those of the Bank of England. Indeed, I remember that after the last Budget he and many others criticised my forecast that the economy would grow by between 1 and 1.5 per cent. next year, whereas the consensus among most commentators now is that that is broadly right.

The hon. Gentleman asked about the financial services industry. Yes, it has been a major part of our economy. I am not sure where he stands on these things nowadays, but I believe that it will remain an important part of the economy. It employs 1 million people in this country and, properly supervised and regulated, it is important. However, I think-and I think the hon. Gentleman thinks so too-that people responsible for banks should bear it in mind that they have had a lot of public support, directly or indirectly, and that their priority should be to rebuild the banks' capital. He asked how the system would work. He seemed to hint that he would have imposed a windfall tax on the banks. I think that would be a mistake, because it would amount to telling the banks to build up their capital position while at one and the same time taking the money away from them. Some of the banks that might be affected by such an approach are those that, arguably, did a little bit less to contribute to some of the problems in the first place.

The way that the system will work is quite simple-there will be a levy of 50 per cent. on bonuses of more than £25,000, and there will be anti-avoidance measures. The hon. Gentleman asked what will happen if people get the money paid in income, and the answer is relatively simple-they will pay income tax on it. That is how the system operates and, unless he is saying that there should be an incomes policy for all bankers, which would be difficult to operate, I disagree with him.

The hon. Gentleman said that I was searching for tactical dividing lines; I have rarely been accused of doing that. I think that the divisions between us and the Conservatives, and between us and the Liberal party, are perfectly there to be seen. We do not have to go looking for them.

• . . Julia c (Falmouth and Camborne) (LD): The Chancellor applauded the flexibility of working tax credits, but no additional support has been offered to two of my constituents who work in a factory and whose hours have been reduced to a three-day week since July. They are not entitled to working tax credits, redundancy pay or jobseeker's allowance. Was it not an omission not to include support for them in the pre-Budget report?

Mr. Darling: We have tried over a number of years to improve the help that we give to people who lose their jobs or go on to short-term working. Yes, we are always looking to see how we can improve that, but it is partly constrained by what we can do. The hon. Member for Twickenham (Dr. Cable), who speaks for the Liberals from the Front Bench, rather gave the impression that he wants the Government to spend less rather than more, but the hon. Lady is absolutely right to say that we need to ensure that we help people to stay in work.

• . . Richard Younger-Ross (Teignbridge) (LD): I congratulate the Chancellor on adopting the proposal that I included in an early-day motion on the boiler scrappage scheme and on also adopting an EDM proposal for an effective 75p rate on banker bonuses. However, if such a rate is to be effective, measures to stop avoidance by increasing salaries or rolling over pay to a following year will have to be in place. What proposals does he have to ensure that such avoidance cannot happen? If he cannot do that, he will be far better off sticking with the proposals made by my hon. Friend the Member for Twickenham (Dr. Cable).

Mr. Darling: I do not know whether the proposals from the hon. Member for Twickenham are to be found in an EDM, but it was not clear to me what his proposals actually were. Anti-avoidance measures will be introduced as part of the Finance Bill. On the other measures that the hon. Member for Teignbridge (Richard Younger-Ross) has proposed, I cannot claim to have read the EDMs, but I am glad that he supports the policies.