The Welsh Economy

Speech by Peter Black delivered to Plenary on Wed 23rd Apr 2008

Peter Black: I propose that the National Assembly for Wales:

1. notes with concern the effects of:

a) doubling the 10p income tax rate;

b) spiralling consumer debt;

c) the credit crunch; and

2. believes these will have an adverse impact on the people of Wales and the Welsh economy. (NDM3917)

I will start by referring to the amendments. We will not be supporting any of the Government's amendments, but we will support the two Conservative amendments, and I will explain why in a minute.

On amendment 5 from the Conservatives, it is worth explaining that, although the economic downturn will impact particularly severely on the economically inactive, they will not be the only people hit by it. Other people who are economically active will also be hit by that, and so I think that we need to add that caveat to the amendment.

One reason why we will not support the Government's amendments-apart from their being petty and nit-picking-is illustrated by the first amendment. Our motion suggests that the Assembly notes with concern the effects of 'doubling' the 10p income tax rate, but the Government suggests in amendment 1 that the Assembly should note instead the effects of 'abolishing' the 10p income tax rate. It is all very well to play semantics like that, but we need to bear in mind that 195,000 people in Wales-13 per cent of all taxpayers in Wales-pay only the 10p income tax rate, and 3.1 million people are in the same boat in England, namely 11.8 per cent of all taxpayers in England.

Therefore, not only do we have a higher proportion of people in Wales paying the 10p income tax rate, but the effect of abolishing or doubling that rate, whatever you want to call it, is that they will now pay a 20p tax on every £1 their income, as opposed to 10p. For those people, it is not a question of abolishing the rate, but of doubling it, so let us be clear about that. Labour is playing with words in this amendment, and it is trying to hide the impact that this tax change will have on some of the poorest people in our society, who are earning a very low wage and are paying the 10p tax rate on their earnings only. That is important.

We also need to point out that more than half the population of Wales earns £18,000 or less per year, and so this change in the budget will have an impact on them in some way or another, and a negative impact at that. Sixty per cent of those people earning less than £18,000 per year are women, and so not only are the Chancellor's proposals hitting the people of Wales disproportionately, they are also affecting women disproportionately.

We have heard in the past 24 hours that the Chancellor of the Exchequer no longer has to face the rebel amendment tabled by Frank Field, who has withdrawn it following the package of measures put together by the Chancellor. The Labour backbenchers say that they are now satisfied, but we must question whether this package of measures will have the impact that some of those Labour backbenchers expect it to.

The fact remains that 5.3 million people are already worse off as a result of the cynical decision to punish the poor to grab the easy headlines, which the former Chancellor-who is now the Prime Minister-sought more than a year ago. People who have just seen their tax rates doubled are unlikely to be comforted by the Government's assurance that it will instead tinker with an overly complex and failing tax credit system, to which people under the age of 25 years are not even entitled.

Let us look at the package that the Chancellor is proposing. If he is to ensure that all people are fully compensated for the abolition of the 10p rate, the Exchequer will have to spend an additional £1.23 billion. Alistair Darling has said that he will see whether 60 to 64-year-olds who have lost out can be compensated through the winter fuel allowance. To ensure that all 600,000 people receive full compensation, the winter fuel allowance will have to be almost doubled from £250 to £482, at a cost of £121 million to the Treasury.

He announced that he would investigate changes to tax credits to compensate people. However, people under the age of 25 are not entitled to tax credits. Furthermore, the take-up of tax credits by eligible people without children-one of the key groups to lose out from the doubling of the 10p rate-is just 22 per cent. The Chancellor has said that, for people currently outside the tax credit system, he will consult the Low Pay Commission on possible changes to the minimum wage. To ensure that all people on the minimum wage would no longer lose out from the abolition of the 10p rate, it would have to be increased for all people to £18,500 per year, or £9.49 per hour.

If the Chancellor can find the money to do that, that is fine. However, it seems that he has taken a fairly simple mechanism, of the 10p tax rate, and overcomplicated it so that it is almost impossible to understand, so that people are no longer able to benefit from the many compensatory packages in place-and the difficulties of applying for tax credits because of the bureaucracy is a good example of that-and so that a large number of people in this country will lose out. Frank Field has been premature in withdrawing his amendment to the budget. Those Labour MPs will regret withdrawing their opposition to the Chancellor, and the people of England and Wales will severely punish Labour for that on 1 May, a week Thursday.

Gordon Brown likes to boast about how he oversaw one of the UK's longest periods of sustained economic growth, as Chancellor of the Exchequer. This is only partly true. While economic growth has been strong for the past decade or so, much of that it has been predicated on strong consumer spending on the back of a massive expansion in personal debt. In anything but the lowest of interest rate environments, this is not sustainable. The banks are worried about their margins, as the cost of borrowing remains high. Bank of England rate cuts may not translate into cuts by high street banks, and we have already seen that with the desperate pleadings of the Chancellor to the mortgage lenders in meetings held at Nos. 11 and 10 Downing Street.

Personal debt in the United Kingdom has exceeded £1.3 trillion. Over the past year, it has increased by 10.2 per cent. The scale of these figures is phenomenal, and, for most people, it is difficult to grasp exactly what they mean. However, the fact that personal debt has now exceeded our gross domestic product, meaning that our debt is now bigger than the entire economy, should set alarms bells ringing. It will have an impact on the people of Wales, as well as on the Assembly Government's programmes to tackle child poverty, fuel poverty and the other mainstream issues that it says are a priority for it.

We are now seeing some of the effects. Banks are becoming more cautious about lending money to each other, which is one of the most important elements of ensuring a buoyant economy. As a result, banks are experiencing their own troubles; as an increasing number of people fail to meet their mortgage obligations, banks are repossessing more and more homes. That will have an impact on the Assembly Government's housing policy and the so-far invisible affordable housing strategy that the Assembly Government trumpeted in 'One Wales', but of which we have yet to see any evidence in the form of results or a projected programme to deliver those results in the next three years.

We are beginning to see a downturn in the housing market, which is likely to result in a further depression in Wales and the UK. The average house price in Wales fell by £5,000 in one month alone between January and February, and the International Monetary Fund believes that house prices in the UK are 25 to 30 per cent overvalued. Regardless of whether you see this drop in value as the start of a property market crash or as the start of a market 'correction'-which is the euphemistic term used by economists, very much like the euphemistic terms used in the Government's amendments-the net effect will be the same. We are likely to see a return to the conditions of the early 1990s, when homeowners up and down the country were forced into negative equity, and those who did not own a house were unable to get on the property ladder.

I hope that the Assembly, in supporting this motion, even if the Government insists on amending it, as it will, can express its concern to the UK Government, the Chancellor of the Exchequer and the Prime Minister that even this package that has been cobbled together at the last moment will not help those who will be severely affected by last year's budget. That is particularly true of those who are on low incomes, and some of the poorest in our society.