Cable on the cost of living

12.52.18pm GMT Thu 26th Jun 2008

' . . the sense of hubris that derived from the claims about there being no more boom and bust and about the best economic performance since the Hanoverians . . '

[Jun 24] Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): The hon. Member for Runnymede and Weybridge (Mr. Hammond) gave a clear and forceful critique of Government economic policy, much of which I agreed with and so do not need to repeat. I am thinking in particular of the sense of hubris that derived from the claims about there being no more boom and bust and about the best economic performance since the Hanoverians, and the contrast with today's reality.

There is one commodity that is not in scarce supply at the moment, and that is criticism of the Government, so I do not need to add to a glut in the market. I shall concentrate instead on scrutinising more closely what the Conservatives are offering as an alternative economic strategy and the terms of their motion. I think that there is a genuine interest, both positive and negative, in what an alternative Government might have to offer. Perhaps I could start by dealing with the phrasing of the motion, by which I am genuinely a bit confused. The first five lines seem eminently sensible and fair, but the motion then goes on to talk about "excessively loose fiscal policy" with approval. The correct policy response to excessively loose fiscal policy-this is presumably what the Conservatives think the Government should have done, and is what the Conservatives would have done and would now do-is to use a combination of higher taxes and reduced spending. That is the opposite to loose fiscal policy. But the motion does not say that. It says that what the Government should have done-what the Conservatives would presumably have done-is to provide assistance and support to hard-pressed families, which involves cutting taxes and increasing spending. Within the same sentence, we have two diametrically opposed macro-economic policies-

John Redwood (Wokingham, Conservative): Was the hon. Gentleman asleep when the Conservatives produced endless proposals for getting better value for money and having fewer administrators, fewer targets, fewer quangos, fewer ID cards and all the other claptrap that has wasted billions?

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): I was not asleep: I was assiduously reading "The Cost of Living Under Labour" and I shall address the seven-point plan that the Conservatives propose to deal with the situation. It is possible plausibly, and perhaps wisely, to argue for fiscal austerity and for crowd-pleasing tax cuts and spending measures, but to advance them at the same time completely lacks credibility. I will proceed through the seven points, and I hope that my argument will begin to stack up.

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative): I have great respect for the hon. Gentleman on these issues, but does he accept that "excessively loose" was not our description of the Government's fiscal policy-it was the OECD's description? Does he agree that if the Government had adopted a less excessively loose fiscal policy during what the Governor of the Bank of England called "the NICE years", they would be in a stronger position now to provide support and assistance to hard-pressed families and businesses and thus to draw the sting from the pressure for inflationary wage increases that they now face?

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): That does not follow at all. The hon. Gentleman said in his speech that the main emphasis of policy has to be on monetary policy and if interest rates have to fall-which I think is what he wants to happen to deal with the slow-down in the economy-fiscal policy would have to be tightened. There is a problem with fiscal policy, as the OECD identified, although it is less extreme than the hon. Gentleman claims. Were we to go into a period of slump, or of prolonged stagnation as they had in Japan, it would be very difficult for the Government to embark on strikingly Keynesian policies, because of the erosion in the fiscal rules that has already taken place. But that is not what the motion says. It gives the impression that we can simultaneously have fiscal austerity and crowd-pleasing measures of assistance and that is a fundamental contradiction.

I shall go through the seven proposals. The first is to give 1.8 million couples an extra £2,000 a year, addressing the couple penalty in the tax credit system. That is a good policy, and I applaud it, but the concluding sentence makes it clear that the change

"will be implemented as savings are generated through our radical programme of welfare reform."

In other words, it may happen, but it would take time and it certainly would not provide much relief to hard-pressed families in the short term.

The second proposal, which interested me particularly, was shifting the burden of taxation away from families. It talks about

"our commitment to increase the proportion of taxation raised through green taxes by rebalancing taxation away from taxing 'good' things, like jobs and investment, towards taxing 'bad' things, like pollution and carbon emissions."

When I read that, I felt like a member of the General Medical Council reading an essay by Dr Raj Persaud. I felt that I had read that somewhere before and, in fact, I wrote it. The Conservatives have lifted our green tax switch policy of several years ago.

As a candid friend, I can tell the Conservatives in strict confidence that adopting Liberal Democrat policy in that respect would not be without problems. There are two ways in which that Conservative policy-I take it as a compliment that they have borrowed it from us-could be delivered. The first is to have a carbon tax, which in reality is a tax on household fuel and even I am not brave enough to argue for that. The second is to increase taxation on transport fuels. A bit can be raised from aviation taxes, but the green tax switch, which is the third element in the Conservative proposals, in fact involves increasing taxation on the motorist.

I do not know whether the editor of the Daily Mail has been told yet that the Conservatives are campaigning to increase taxes on the motorist. I am not even sure that the shadow Chancellor has been told, because he told The Daily Telegraph last week that he was committing himself to not increasing the 2p rate on duty on petrol in the autumn, which struck me as an extraordinarily silly and impetuous thing to do. It might be that the Government will not increase it, and that might perhaps be the right thing to do, depending on conditions at the time. We do not know what the Government's fiscal position will be in the autumn. We do not know what the oil price will be. Any sensible person would wait before making such a commitment.

Stewart Jackson (Whip, Whips; Peterborough, Conservative): Being lectured by the Liberal Democrats on tax policy is rather like being lectured by a eunuch about an orgy. The only two discernable fiscal policies that the Liberal Democrats have had are the 50p top rate of tax, which was unpopular, and the local income tax, which is completely unworkable. Apart from that, the Liberals are doing well. Has the hon. Gentleman any other ideas on fiscal policy that he will be putting in his next manifesto?

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): I was actually talking about one of our policies, which the Conservatives are talking about introducing, and I was explaining how they could do it. I am not sure what the hon. Gentleman's problem is.

As I say, the shadow Chancellor has committed himself to the 2p tax reduction-at least, he has made that commitment to the readers of The Daily Telegraph blog, although it might not have gone any further yet. The implication, of course, is that the family fund that the Conservatives propose to establish to help cut taxes for families starts with a deficit of £1 billion a year. That is a problem.

The third element of the programme involves cutting stamp duty for first-time buyers, but to do so at this stage of the housing cycle is not just economically foolish but positively unethical as that is trying to draw people into the housing market at a time when house prices are falling. Be that as it may, I agree that stamp duty needs to be reformed. In particular, it needs to be reformed not for people at the bottom end but for those who are paying more than £250,000 for a property, who pay the 3 per cent. slab. There is an argument for reforming stamp duty to shift the burden on to much higher value houses from those in that price range.

The interesting thing about the proposal-perhaps the Conservative spokesman can clarify it-is that that policy depends on the assumption that the tax change will be paid for in full by the fixed levy on foreign non-doms. My understanding is that that levy is going through the Budget, but once the Budget has been completed, will that policy lapse or will there be a second levy on foreign non-doms? That is a legitimate question and I hope that at some point we might get an answer.

There is another set of Conservative proposals to do with personal debt. I am very interested in the subject and have spoken a lot about it, and the Conservative suggestions are quite sensible if extremely modest. The one specific suggestion concerns illustrative scenarios for credit card users, and the only problem with the policy is that it is already happening. I believe that the Office of Fair Trading ruled three years ago that such illustrative scenarios for credit cards should be introduced. They have been introduced and they do not work because they are not comparable. The policy seems to have limited value, although it is perfectly sensible-

Philip Hammond (Shadow Chief Secretary To the Treasury, Treasury; Runnymede & Weybridge, Conservative): No doubt we are going to hear what the hon. Gentleman's policies are in due course.

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): The hon. Gentleman mentions our policies, but it is not our Opposition day. We had an Opposition day three months ago in which we set out some detailed proposals on the housing market and repossessions. I am happy to repeat what I said then, but this is not our Opposition day. The Conservatives have set themselves up and I hope that they would accept that it is reasonable to scrutinise what they have to say.

Finally, I want to draw attention to the proposals on council tax, because they are fair. The Conservatives rightly point out that the doubling of council tax since the Government came in has been a major contributory factor to the pressures of the cost of living on low-income families and pensioners. It is a regressive tax that bears very little relation to current property values, and the Conservatives should know that because they introduced it. What I am puzzled about is why they have ignored some perfectly sensible reforms. We have argued that council tax should be abolished, but it does not have to be. The Lyons report contains some perfectly sensible reforms for increasing the take-up of council tax benefit, but they are not even mentioned by the Conservatives. Instead, they suggest that there should be a referendum to deal with excessive increases in council tax, and on page 18 of their document they list five councils that have imposed such increases.

The unfortunate problem is that four of those councils are Conservative led-indeed, two of them, Birmingham and Leeds, have benefited from a joint administration with the Liberal Democrats. They are clearly not bad councils, therefore, but they appear to have been singled out for a referendum on the council tax.

I am genuinely puzzled about how the referendum would work in helping people with the cost of living. What question would be asked? If people vote no to a proposed council tax increase, does that mean that councils would have carte blanche to cut their education budgets? Would they be free to use their reserves without being subject to the present constraints? The policy is extremely badly thought out, yet it is at the centre of the Conservatives' proposals for dealing with the cost of living.

In the few minutes that remain to me, I want to concentrate on what I think are the two key elements in the increased cost of living that, in reality, we face. On the front of their report, the Conservatives have helpfully included a summary of the main contributory factors to what they describe as "Gordon Brown's Disaster". Those factors are nine price increases-seven of them in food, and the other two in fuel.

What is the Conservatives' proposal for dealing with those nine price increases? Indeed, what can anyone do about them? Three of the price rises relate to dairy products-butter, milk and cheese. What is the failing in Government policy in respect of the dairy industry? How could the Government be expected to mitigate the problem? I have sat through years of painful Department for Environment, Food and Rural Affairs questions, in which the main challenge from both Conservative and Liberal Democrat Members has related to the poverty and poor returns of dairy farmers.

That problem has been rectified through the market, so are the Conservatives suggesting that dairy farmers are now being paid too much, or that the market should not be allowed to work? I do not know, but we are talking about part of "Gordon Brown's Disaster", so I presume that the Conservatives have some idea of how the problem should be rectified.

A much bigger problem exists, of course, and I agree with the Government motion in that much of it has to do with world trade in food. I should be intrigued to know how the Government have responded to last weekend's insane rant from President Sarkozy criticising Mr. Mandelson. I think that he suggested that Mr. Mandelson was responsible for millions of children dying of starvation because he was failing to support French protectionist food policy. That is completely idiotic, and I hope that the Government will make it absolutely and publicly clear that they do not subscribe to that sort of nonsense.

The main contributor to inflation in the short run has been the price of energy. It is worth devoting some time to looking at how that problem has arisen. We might also consider some possible solutions to it, and whether any party has any answers.

The rise in energy prices is partly a function of world prices but, as the right hon. Member for Wokingham (Mr. Redwood) correctly noted in an intervention, another factor is the way that the economic rent from oil is divided between Governments, consumers and producers. For the moment, though, I want to focus on the problem with world prices. It is clear that the Prime Minister thinks that he has a role to play, as he went to the middle east in an attempt to influence the producers.

It is important to say that some foolish myths are circulating. The Government-and the Prime Minister personally-have been responsible for the first of them, as they have argued that the price of oil in world markets is being forced up by members of the OPEC deliberately withholding supply. That is complete nonsense: there is less than 2 per cent. spare capacity, and there are serious production problems in countries such as Nigeria and-because of the war-Iraq. The price rises are not due to the malicious withholding of supplies, and the Prime Minister is totally wrong to have created that impression.

The other myth in circulation is that the price rises are something to do with wicked speculators. It may seem odd, coming from a Liberal Democrat, but I disparage that argument. It has become a fashionable argument; indeed, the leader of the Conservative party was advancing it yesterday. However, there is not a shred of evidence that there are accumulated oil stocks or that futures markets have systematically pushed prices in their current direction. Those markets affect the level of volatility, but not long-term trends.

Speculators are clearly not the issue. There is a policy problem, on which the Prime Minister reported yesterday: there is a shortage of investment in the oil industry. I would like to have raised two issues with him at the time, and I will communicate them to the Minister. If the oil producers are so negligent in failing to attract foreign investment in the oil industry, why was the one OPEC country that has welcomed foreign oil companies-Iran-threatened with sanctions the moment it did so? Foreign oil companies were only too happy to invest in Iran, but they have been told that they will be penalised if they go there.

I am sure that the Saudis and others have made another point to the Government, who should reflect on it. The Saudis and others would ask, "Why are you criticising us for not investing, given that you have increased additional corporation tax and petroleum tax levies on the North sea oil industry, making the west of Shetland fields completely financially unsustainable?" Through its own policies, Britain has as much responsibility as the oil producers for failing to produce a supply.

Siôn Simon (Birmingham, Erdington, Labour): Will the hon. Gentleman say a few more words about the speculation question? Is he saying that there has not been a big shift of capital from a weak dollar into oil-perhaps perfectly legitimately, and not necessarily in an abusive or speculative way? Is he saying that there has not been such a shift of capital, or simply that the shift has been legitimate rather than abusively speculative?

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): There is a complicated argument, and we could spend the day on it. I am trying to understand other people's arguments. When people complain about speculative pressures, I think that they are saying two different things. One is that futures markets do not function properly, although I do not think that there is any evidence for that-those markets may be volatile in the short run, but they do not cause enormous shifts over periods of years.

The other thing that such people are saying is that a lot of people who are nervous about investing their savings are putting them into commodity-based securities. That is the argument that the Conservative leader advanced yesterday. However, the actual magnitudes of money involved in those commodity securities is trivially small in relation to the turnover of oil markets. It is difficult to explain what has happened in any way other than through the fact that world oil demand has been rising unsustainably and that supply is fixed in the short run. That is the problem.

Rob Marris (PPS (Rt Hon Shaun Woodward, Secretary of State), Northern Ireland Office; Wolverhampton South West, Labour): In that context, will the hon. Gentleman reflect on his party's policy of an 80 per cent. cut in CO2 emissions in the United Kingdom by 2050? World demand for oil is increasing, and the suggestions that he seems to put forward in respect of bottlenecks because of lack of investment is a policy for increasing oil output. The rest of the world continues to use oil. The macho gesture politics of 80 per cent. cuts in the United Kingdom-probably in isolation from almost the rest of the world-are ridiculous, given that demand for oil is increasing and will continue to increase. I urge the hon. Gentleman's party to reflect on that; otherwise, it will go on asking UK residents to undergo a painful transition, which will not prevent climate change.

Vincent Cable (Deputy Party Leader; Twickenham, Liberal Democrat): This is a complicated argument, and we are getting a bit off the cost of living. However, I refer back to the excellent report produced by the Cabinet Office in 2003, under the original editorship of the then Prime Minister Tony Blair. It suggested that a very large shift to renewable power could be achieved without nuclear power and at reasonable cost within the time arrangements that we are talking about.

The challenge to all parties is to face a few home truths about oil and energy prices. The first is that oil prices, and energy prices generally, are likely to remain high. It is important that they should, for conservation and environmental reasons and because of the need for long-term security of supply. There is no argument for pandering to populist demands to cut oil prices to the final user; that would make very little sense. Although there are real problems for people in remote rural communities, which is why we have argued for a derogation for them, motorists' costs have risen less rapidly than costs for public transport users, and that remains a basic feature of transport policy. Moreover, although British diesel prices are exceptionally high because of diesel taxation, which is one of the truckers' grievances, and a reasonable one, British petrol prices are not out of line with western Europe-they are pretty comparable with those in France and Germany and lower than those in Holland, Belgium and the Nordic countries. The one European country that could, if it wished, offer its residents low petrol prices is Norway-a major oil producer that has much higher taxes and prices than the United Kingdom. Perhaps those are the truths that should be spelled out when we are talking about the high cost of motoring and the high cost of petrol.

The one area where the Government could sensibly intervene to reduce the cost of living in relation to energy prices is gas. The Conservative document has some sensible comments to make about the wholesale market in gas, although it does not go nearly far enough. There is a lot of evidence that there is a case for a Competition Commission reference as regards the gas and electricity producers. Social tariffs are far too ungenerous in relation to the prices that companies offer to their direct debit users. As my party leader has been arguing over a period of weeks and months, there is a case for using the windfalls that producers are earning as a result of the non-auctioning of licences under the European trading scheme to ameliorate the problems faced by poor gas users, particularly pensioners. The Government could do something constructive and useful about that in the short run.

The Government have been staggeringly complacent about the growing problems facing the economy. The Conservative alternative, at least as it has been set out today, is either feeble, in many respects, or dishonest in others. Perhaps they owe us a little more explanation of what they would do faced with this very difficult situation.