Finance Bill

In his Budget of 22 June, my right hon. Friend the Chancellor announced that the standard rate of VAT would increase from 17.5% to 20% on 4 January 2011. Clause 3 and schedule 2 effect this change. In the course of this afternoon, we have had a good and lengthy debate. Several hon. Members have spoken to amendments that would either cancel the rate rise entirely or reduce its effects. Of course, we understand hon. Members' concerns about the impact of this change on low-income households. I therefore propose to reiterate our reasons for taking this path, in the course of which I will deal with the various amendments. Before doing so, it is necessary to point out that the VAT rise was one of the central measures in the emergency Budget—a Budget made necessary because the coalition Government have inherited from their predecessors the largest budget deficit of any economy in Europe with the single exception of the Republic of Ireland. The independent OBR's pre-Budget forecast revealed that the structural deficit—the part of the deficit that will not go away with the recovery—was higher than previously thought, at around £12 billion, or 0.8% of GDP, higher in 2011-12. That means that £1 in every £4 we spend is being borrowed. The gap stands at £149 billion for this financial year alone, yet the previous Government left us with no credible plans to reduce their record deficit. The OBR forecast that, if we had continued with the previous Government's plans, debt repayments would reach more than £67 billion by 2014-15—more than is currently spent on defence or on schools in England. Nothing at this time is more urgent for Britain than setting out a tough but realistic plan that demonstrates how we will regain control of the public finances. We have literally no other option. The Government are therefore taking urgent action to eliminate the bulk of the structural deficit as a necessary precondition for sustained economic growth. High levels of public debt could lead to a loss of market confidence and higher interest rates, raising the cost of borrowing for families and businesses and discouraging investment and consumer spending. To continue with the existing fiscal plans would put the recovery at risk, given the scale of the challenge and the risk posed by the sovereign debt crisis in Europe. My hon. Friend the Member for St Ives (Andrew George) asked about the Government's willingness to make hard choices. It is necessary to look at this VAT measure in the context of the overall Budget measures. It is not possible to remove it, because the central message of the Budget was that we have a Government who are willing to get to grips with the deficit and to bring our borrowing down, and if we are to address that quickly it is necessary to move forward with the VAT increase.