Finance Bill

§ Mr. Speaker

Before I call the Minister, I must announce to the House that a very large number of right hon. and hon. Members wish to participate in this debate. In view of the late start, I propose to limit speeches between 7 and 9 o'clock to 10 minutes, but I hope that hon. Members who may be called before that will bear the limit in mind.

§ The Chief Secretary to the Treasury (Mr. John Major)

I beg to move, That the Bill be now read a Second time.

This Bill embodies the legislation that flows from my right hon. Friend's Budget. Over the past 10 years we have seen a transformation in economic policy and performance. Policies of demand management and state intervention that failed have been replaced by policies of free enterprise within a sound medium-term framework that have succeeded. The underlying performance of the economy has improved dramatically as a result.

The evidence for this is overwhelming: output has expanded by over 20 per cent. since 1979, business investment has risen to its highest ever level as a proportion of GDP, the public finances are now in large surplus and not in large deficit and there has been a marked rise in productivity and employment and a drastic reduction in inflation. As a result, real living standards are now much higher than they were 10 years ago and have every prospect of improving further.

There are two measures that illustrate the improvements we have seen. First, the performance of our economy has been transformed compared with its own performance in earlier years; but, secondly, and equally importantly, it has also been transformed when compared with the current performance of our competitors. That is why in the 1980s output and investment have grown faster here than in any other major European Community country, a marked contrast to earlier decades, particularly the 1960s and 1970s; and manufacturing productivity has grown faster here than in any other major industrial country, including Japan. In all these measures the United Kingdom was bottom of the league of performance in the 1960s and 1970s. Our position has now dramatically improved.

Also, in the 1980s, small businesses are being created at an unprecedented rate. In the year to March 1989 the net increase in the number of firms registering for VAT was nearly 70,000, an increase of over 40 per cent. on the previous year, which was itself a record. This means that on average over 1,300 new firms are being established every week. I cannot imagine that this has ever happened before in this country. It is noticeably higher than the 1,000 new firms a week we previously claimed.

This is by any yardstick an outstanding record of success and this year's Budget seeks to build on it. But there are difficulties as well which we acknowledge. The Budget was framed against a background of an 818 unwelcome increase in inflation at home and abroad. Inflation in all the major nations is currently at its highest level for three and a half years. In the United Kingdom, current inflationary pressures, although much exaggerated by the perverse effect of mortgage interest payments on the RPI, had their roots in the events of October 1987. At the time of the stock market crash commentators feared that is would precipitate a world wide slide into recession, as it had done in 1929. That fear was shared by many right hon. and hon. Members.

It was precisely to avoid that risk that we, along with the other major industrialised countries, deliberately made sure that monetary conditions at that time were not too tight. We were successful in that aim, in that the effects of the crash were not remotely as bad as we, or anyone else, including Opposition Members, feared. It is clear that the current strength of the world economy owes much to the prompt and co-ordinated action taken by the major nations in the wake of the crash. But it is also clear that in response to the inflationary pressures there has been similar prompt action to tighten monetary policy around the world. I hope, believe and expect that that reflects a worldwide determination to get inflation under control, and to keep it under control.

The Budget was also framed against the background of the current account deficit. This largely reflects an excess of private sector investment over private sector saving, and not the reckless public spending which was the hallmark of previous deficits. It is thus fundamentally different from those of the 1960s and 1970s. The investment boom we are now experiencing underlines the confidence which domestic and foreign investors have in the United Kingdom economy and will stand us in good stead for the future.

Against an international background of rising inflation, this had to be and was a prudent and cautious Budget. That was undoubtedly the right judgment, and it is generally shared. Our long-term aim is a balanced budget, but in the current circumstances my right hon. Friend judged it appropriate to budget for a further year of substantial debt repayment. That means that, in three years, we will have paid back roughly one sixth of the public debt accumulated over two centuries, thus saving about £3 billion a year in interest payments. That saving will continue in each and every future year. The burden of debt interest as a share of GDP will be the lowest since 1915. That both lightens the burden on the shoulders of future taxpayers and, at the same time, leaves room for further tax reductions, further debt repayment or for higher spending on areas we judge to be priorities, and those decisions can be taken in each successive year.

Much of the economy's success is a direct response to the favourable tax structure created by my right hon. Friend and his predecessor in the past 10 years. Successive Budgets have broadened the tax base, lowered tax rates and made the tax system more coherent, more intelligible and a great deal simpler. The tax climate is undoubtedly a significant factor in attracting the stream of welcome inward investment recently and magnificently continued by Fujitsu, Bosch and Toyota. That inward investment, as a result of tax and other changes, should be welcomed by hon. Members in every part of the House—[Interruption.] —or nearly every part of the House.

The 1989 Budget made further progress. It contained a major reform of national insurance contributions and the abolition of the pensioners' earnings rule. Those two 819 measures were considered during the Report stage of the Social Security Bill yesterday. Both have received widespread support. Both will remove significant distortions and disincentives. The reform of national insurance contributions will also increase take-home pay for the majority of those in work by about £3 a week; and the abolition of the earnings rule, long necessary and now effected, will give significant help to pensioners, who will also benefit further from other measures in the Bill.

In his 1987 Budget, my right hon. Friend recognised the special needs of older pensioners by introducing a new and more generous age allowance for those aged 80 and over. Clause 29 extends this higher allowance to people aged between 75 and 79. This will take an additional 15,000 elderly single people and married couples out of tax altogether. In real terms, the age allowance for those aged 75 and over will be 19 per cent. higher than in 1978–79. Three quarters of all those aged 75 and over will not be liable to income tax at all.

The clause also reduces the rate at which the age allowance is withdrawn for those with incomes above the income limit. It is clearly right to concentrate the benefits of the age allowance on elderly people with relatively modest incomes, but we received a number of representations from hon. Members calling for a reduction in the marginal tax rate faced by those with incomes in the withdrawal band. I am pleased that the Budget met these concerns, which were expressed forcibly by hon. Members—among others—in Committee on last year's Finance Bill.

These changes ensure that pensioners keep more of their own money. They also build on what is already an impressive increase in pensioners' incomes. Between 1979 and 1986, the average net incomes of pensioners increased by 23 per cent. in real terms. By contrast, despite the concern I know exists among Opposition Members, pensioners had an increase of only 3 per cent. in the years of the Labour Government between 1974 and 1979.

The Budget has been hailed as a Budget for the elderly —[Interruption.]—a view endorsed by the director general of Help the Aged in a recent letter, which I will quote for the benefit of Opposition Members. He wrote: I thought you would appreciate hearing how much we applaud the actions you have taken in your Budget to help pensioners. We are especially pleased at the abolition of the age related earnings rule and are grateful too for the changes you have made in VAT regulations in connection with charities. This will be of considerable assistance to us in our efforts to help elderly people, both in this country and overseas. That letter was from Mr. John Mayo—[Interruption.]—and I read the whole of the letter.

This Bill contains one other measure to help the elderly. Clauses 51 to 54 will give tax relief for private medical insurance premiums for the over-60s. Unlike Opposition Members, I do not want to endow this measure with a false importance. It accounts for just 1 per cent. of the tax reductions announced in the Budget. It addresses a very real problem, and I make no apology for the measure, for I fully support it.

In recent years, employers' health insurance schemes have expanded rapidly, and I welcome that. It is attractive to see independence and choice increasing, and I regret that Opposition Members are hostile to that. It is largely due to such schemes that some 50 per cent. more people are covered by medical insurance schemes today than in 1980. But membership of these schemes usually ends on 820 retirement. People are then faced with a double increase in costs: not only do their employers cease to pay their premiums, but the premiums tend to rise at precisely the moment when people's incomes fall.

We have had a large number of representations over the years from people caught in this trap who did not think it was fair that they should suffer this double penalty. I agree with them, and the relief is designed to deal with that specific problem. It also encourages the overall provision of health care and investment in it, and thus eases the demands in that fashion on the NHS.

Indeed, in a curious way, the greater the take-up of this relief, the more that effect will be apparent. In particular, pressure on waiting lists will be eased, which will benefit all of us who continue to depend overwhelmingly on the NHS for medical treatment. Even non-taxpayers will benefit because they, too, will pay their premiums net of tax relief.

The medical insurance industry has begun to introduce policies which are aimed at those who cannot afford, or do not want to take out, more expensive cover. Some of the policies are intended specifically for people in retirement, and I welcome that extension of choice for them.

Although this measure is important, it needs to be seen in perspective. Our public expenditure plans mean that, overall, the NHS will have an extra £2,500 million in 1989–90, and a further £2,500 million in 1990–91—a total of £5 billion—before resources for it are reconsidered in subsequent public expenditure rounds. The cost of tax relief is nothing in 1989–90 and £40 million in 1990–91—less than 2 per cent. of the increase in planned spending on the NHS. I must say to the Opposition in all charity that if they have chosen to target their attack on the Budget on this measure, it serves simply to underline how little they find to criticise both in the Budget and the Bill.

§ Mr. John Battle (Leeds, West)

Can the Chief Secretary tell the House why the Secretary of State for Health and the Minister of State for Health welcomed the measure in lukewarm fashion, saying that, at best, it was an interesting detail in the Bill, and, at worst, would damage attempts to sell the White Paper on health about which the Government are struggling to convince the country?

§ Mr. Major

It is within my knowledge that both my right hon. and learned Friend and my hon. and learned Friend strongly support this measure. There is no doubt about that.

A dominant feature of the Bill is the improvement of the taxation of savings. It contains a series of measures to increase and deepen the ownership of shares, especially by employees and smaller investors. In the post-war period up to 1979, there was one clear trend in the composition of personal savings and that was the dramatic decline in direct share ownership. In 1957, shares and unit trusts accounted for around 20 per cent. of personal sector wealth. By 1979, their proportion had fallen to 8 per cent. That decline had nothing to do with the pre-tax return on equities because, historically, they have tended to out-perform other savings instruments. But it had a great deal to do with the post-tax return that investors received on their investments.

In contrast to saving through large tax relieved institutions, such as occupational pension schemes, direct equity investment subjected the saver to a range of punitive taxes. A top rate of tax of 83 per cent., combined with an investment income surcharge of 15 per cent., 821 meant that direct investors in equities could receive as little as 2p in the pound of dividend income. On top of that, they were taxed not only on real capital gains, which I am afraid were few and far between from 1974 to 1979, but also on inflationary gains, which were in considerably more plentiful supply. If the investor wanted to hand on his shares to his children, he was subject to yet another confiscatory tax in the form of capital transfer tax, where rates could be as high as 75 per cent. It is hardly surprising that direct share ownership went out of fashion in the 1970s; the only surprising thing is that it survived at all. Since 1979, my right hon. Friend and his predecessor have given share ownership a dramatic boost.

The trend has changed— I hope irreversibly. Shares and unit trusts now account for a growing share of personal wealth. Moreover, share ownership has widened dramatically. There are now 9 million shareholders. That represents 20 per cent. of the adult population, compared to only 7 per cent. in 1979. That has come about partly through a programme of privatisation which has proved immensely successful and which will continue in this Parliament and the next. But even more important for the longer term has been the creation of a more sensible tax system. Now that no tax rate is higher than 40 per cent., investing in shares is again a worthwhile proposition.

We believe that it is right to go further to promote private saving through equity investment. Direct share ownership must be allowed to compete with institutional saving. That is why my right hon. Friend introduced personal equity plans in 1986 and further improved them in the Budget. The increase in the overall investment limit from £3,000 to £4,800 and in the unit trust and investment trust limit from at best £750 to £2,400 will give PEPs an additional impetus. Unit and investment trusts allow investors to spread risk and are a good introduction to equity investment for the small saver. Along with the important PEP deregulation measures announced by my right hon. Friend, the changes have been widely welcomed. More plan managers are setting up plans and a number of new products are being marketed. As the chairman of the Unit Trust Association has said: PEPs should now be the major success that for investors they deserve to be. We all look forward to that.

Employee share schemes are specifically designed to encourage direct share ownership by workers in their own companies. As such, I know that such schemes have supporters in each and every part of the House. They have the particular advantage of giving employees a direct stake in the company that they work for, and have been an important factor in breaking down the "them and us" mentality which pervaded British industrial relations, resulting in great damage, in the 1960s and 1970s. That mentality is going, and good riddance to it. The sooner it is gone, the better. The House will know of the success of all-employee share schemes, 1,600 of which have been approved to date against only 30 in 1979. Clauses 59 to 62 are designed to give them added impetus by increasing the limits for relief and relaxing the material interest rules.

Employee share ownership plans, known generically as ESOPs, provide an alternative means of encouraging employee ownership. Clauses 64 to 71 and schedule 5 provide a statutory basis for tax relief for company contributions to those plans. For some companies they 822 offer more flexibility than normal all-employee share schemes. The point is that ESOP trusts can borrow to acquire shares rather than relying entirely on funds provided by the company. That enables a substantial number of shares to be held in trust for longer-term distribution to employees. Those clauses ensure that payments by a company to an ESOP trust, set up to acquire and distribute shares to its employees, will qualify for corporation tax relief, provided that certain qualifying conditions are met.

The most important of those conditions is that the shares must be distributed to employees within a maximum of seven years of their acquisition by the trust, and on an all-employee, similar terms, basis. ESOPs have a number of enthusiastic supporters on both sides of the House, and I am sure that those clauses will be welcomed. As the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) said on Second Reading of the Finance Bill three years ago: I wish to make it clear that I support genuine extensions of share ownership schemes which enable and encourage employees to acquire stakes in their companies. The schemes that I want would carry voting rights proper to share ownership, and would be available to all company employees".—[Official Report, 29 April 1986; Vol. 96, c. 819.] I hope that the right hon. Gentleman will use his voting rights to support this measure because I agree with what he said three years ago and it is contained in this Bill.

The changes to the taxation of pension schemes set out in clauses 72 to 74 complement the wider share ownership measures. They will increase pensions choice and encourage greater personal responsibility for pension provision. They will also deregulate an area of savings which has become excessively and undesirably circumscribed by Inland Revenue rules.

The Government's record on improving private pension provision has been substantial over recent years. We have introduced personal pensions and free-standing additional voluntary contributions. We have made it easier for employees to contract out of the state scheme if they wish to do so, and we have improved the rights of scheme members, in particular those of early leavers.

Those clauses build on that record. The rules for additional voluntary contributions, or AVCs, will be greatly simplified, reducing the administrative burden on employers' schemes; and the anomaly whereby successful investment performance of the AVC led to a reduction in the employee's occupational pension will be ended. In future, excess AVC funds will be returned to the employee subject only to a special tax charge.

Ending the link between Inland Revenue limits and the maximum pension payable by employers also makes the pensions regime more flexible. Employees and employers will now be free to negotiate whatever pension package they jointly think is appropriate. Inland Revenue rules will no longer constrain the size of the pension, only the extent of the tax relief.

The cap on tax privileged pension benefits completes the changes begun by my right hon. Friend the Chancellor in 1987. Based on earnings of £60,000, the cap has been pitched at a generous level. It will still be possible to receive a privileged pension of £40,000 a year, or, where benefits are commuted, a maximum tax-free lump sum of £90,000. Moreover, the limit will be indexed annually to prices. The transitional arrangements are equally generous. Only new 823 schemes and new members of the existing schemes will be subject to the cap on benefits. Most ordinary scheme members will simply not be affected.

I believe that a cap is necessary. Although we are committed to widening private pension provision, that should not he at an ever-increasing cost to the majority of taxpayers who do not receive such large pensions themselves. There is a limit beyond which tax-privileged saving is unfair and crowds out other ordinary saving. Other tax reliefs are subject to monetary limits, and it is time the tax relief for pensions was put on a similar basis.

These changes have also provided an opportunity to redress the balance between occupational and personal pension schemes. Many members of personal pension schemes start contributing late in life, for reasons well understood in the House. They have no access to the accelerated accrual available in the best final salary schemes, and often have lower pensions in retirement as a result. Although tax-relieved contributions to personal pension schemes will be subject to an annual cash limit, we also propose that the limit on contributions be raised as a percentage of earnings for those aged 36 and over.

To take the example of someone aged 56, under the old rules he received relief on contributions up to 22.5 per cent. of his earnings; under the new rules he will receive relief up to 35 per cent. of his earnings. This change will give a further boost to personal pensions and will be of special value to those who, in their earlier working life, need to plough back every penny available into building up their business. On Budget day, my right hon. Friend the Chancellor reported that more than 1 million people had taken out personal pensions by the end of 1988. I am pleased to tell the House that that number has risen to 1.5 million.

The Bill also contains important measures for business. In his first Budget my right hon. Friend introduced a major reform and simplification of corporation tax which enabled the main corporation tax rate to be reduced to 35 per cent., one of the lowest in the industrial world. That low rate, together with the removal of the old bias against employment inherent in the old system, has made a significant contribution to rapid economic growth, employment growth and the high investment that we have seen in recent years.

Of no less importance was the reduction in the small company corporation tax rate from 42 per cent. in 1978–79 to 25 per cent. today. It is now right to extend the benefits of that rate to more companies. Clause 33 therefore raises the profit limit by 50 per cent., far more than was required to keep pace with inflation. That measure will enable firms to make profits of up to £750,000 a year before paying the average rate of 35 per cent.

§ Mr. Dennis Skinner (Bolsover)

In this and in other Budgets in recent years, many in the Government would argue that they have given large sums of money through taxation relief to the top salaried people. The last set of figures shows that the salaries of company directors have increased by 26 per cent. Does the right hon. Gentleman take the view that those company directors who have been fed pretty well by the Government in the past few years are perhaps biting the hand that feeds them? What has the right hon. Gentleman to say about the 26 per cent. increase when low-paid workers are being packed off with increases of 4, 5 or 6 per cent.?

§ Mr. Major

We have made significant changes in taxation affecting people at all levels of income and not just those on high incomes. The basic rate of taxation, which affects all the 20-odd million people at work, has been reduced from 33 per cent. to 25 per cent. The hon. Gentleman will know—perhaps in view of what he has just said he will support it—that it remains our objective to reduce that as soon as we prudently can from 25 per cent. to 20 per cent. I am pleased that he thinks that that is a desirable objective. I hope that he carries the support of his colleagues.

§ Mr. Gordon Brown (Dunfermline, East)

Will the Chief Secretary confirm that the very people who have been calling for wage restraint from the workers have seen their standard of living rise, after tax, by 26 per cent. in the last year? Is he aware that, according to the British Institute of Management, the standard of living of senior directors has risen by 47 per cent. in a year and that, according to another study, the standard of living of those on unearned income has risen by 87 per cent. in one year alone? Will he condemn those rises?

§ Mr. Major

The hon. Gentleman should bear in mind that payments to directors of companies are not a matter specifically for the Government. Taxation rates are legitimately a matter for the Government to determine. Incomes are not directly under the control of the Government. I have no intention of responding in detail and directly at the Dispatch Box on each of those points.

§ Mr. Neil Hamilton (Tatton)

Does my right hon. Friend agree that that little exchange shows with the greatest possible clarity the difference between the Opposition and we on this side of the House on taxation? Opposition Members see taxation as a fine on success regardless of whether it brings more money to the Treasury. The decrease in taxation rates on higher levels of income has increased the amount of money brought into the Treasury, which is then available for redistribution to those on lower incomes.

§ Mr. Major

My hon. Friend is entirely correct in what he says about the tax yield. It is equally true to say that under the management and guidance of the people criticised by the hon. Member for Bolsover (Mr. Skinner) there has been a dramatic increase in investment, employment, the profitability of companies and the general well-being of people in this country. We see tax changes, at both the upper and the lower level, as supply-side measures, and they have proved to be so over recent years.

§ Mr. James Lamond (Oldham, Central and Royton)

What my constituents in Oldham cannot understand is that, in the midst of this success story which the Minister has just told us about, last year, when they went on holiday to Spain, they got 202 pesetas for their pound, while this year they are getting only 192.5 pesetas. Does that reflect a strengthening of our economy?

§ Mr. Major

What the hon. Gentleman misses out of that interesting illustration is how many more of his constituents have been able over the past 10 years to afford to go abroad as a result of the policies of this Government.

Returning to the necessary, if perhaps esoteric, area of small companies corporation tax from which I was unruly ripped, I was about—

§ Mr. Nigel Griffiths (Edinburgh, South)

Untimely.

§ Mr. Major

I am grateful for that Shakespearian memory. "Untimely ripped" is the correct quotation from "Macbeth", appropriately coming to me from a Scottish Member.

The measure in clause 33 will enable firms to make profits, as I reminded the House a few moments ago, of up to £750,000 before paying an average rate of 35 per cent. What is relevant about this is that it strengthens once again Britain's claim to have the most favourable tax regime in Europe for small companies and it has been very widely welcomed by business men and managers, who, as the director general of the British Institute of Management wisely said—and the Opposition should listen to this— prefer stability and good sense to histrionics. How wise the director general was.

A substantial chunk of the Bill will complete the reform of the administrative framework for the main taxes, which began with the setting up of the Keith committee in 1980. Clauses 138 to 165 simplify and update the system of interest and penalties for tax offences and revise the information powers of the Revenue. They will help to ensure that the operation of the tax system is effective and efficient, while at the same time remaining fair and just. They are the product of an almost unprecedented degree of consultation on tax matters and have been widely welcomed in responses as achieving a proper balance between the rights and obligations of the taxpayer and between the powers of the Revenue and safeguards for the citizen.

Clauses 17 to 21 implement last June's judgment of the European Court on VAT zero rating. As my right hon. Friend said in his Budget statement, we have made every effort to minimise the unwelcome burden of tax that we have been obliged to impose on businesses and, more especially, charities. Again, we have consulted widely with those who will be affected; indeed, consultation began on a contingency basis even before the judgment was given. I am glad to say that my right hon. Friend was able to meet their main proposals for minimising the judgment's impact. We have delayed implementation for as long as is possible and the transitional arrangements are said to be and are generous.

One of our main concerns has been the effect of the judgment on charities. We have managed to ensure that for their basic non-business activities charities will continue to benefit from zero-rated construction services and fuel and power. Homes for children, the elderly and the disabled will continue to be zero rated. In addition, charities will be relieved from VAT on fund-raising events, classified advertising and sterilising equipment for medical use. These measures have met with the approval of many charities. As a Royal National Lifeboat Institution spokesman put it: We stage all sorts of fund-raising events where the admission charge carries VAT. It will mean a good few thousand saved for our coffers. I certainly hope so.

§ Mr. Robert Sheldon (Ashton-under-Lyne)

The right hon. Gentleman has been speaking for more than half an hour in dealing with the details of the Finance Bill much more fully than is normal on Second Reading. When will he turn to the critical report of the Treasury and Civil Service Committee?

§ Mr. Major

The right hon. Gentleman is entirely correct in saying that I have been speaking for half an hour, but a considerable part of that time has been taken up by interventions. He says that I am dealing in detail with the Finance Bill. That is what we are discussing, and it is a courtesy to the House to deal with what we are discussing.

There are a number of other provisions in the Bill which will benefit charities. Clause 25 exempts from car tax vehicles leased to the disabled. This will reduce the cost of each car by £400 and it has been widely welcomed. I quote from the deputy chairman of Motability: Without doubt this measure will help to enhance mobility for disabled people, especially those with very limited resources. As a former Minister of State for the disabled, this gives me particular pleasure.

The best way to help charities is to encourage people to contribute to them. In recent years in budgetary measures we have improved relief for charitable covenants, introduced relief for companies making one-off donations and, most recently, introduced relief for payroll giving.

The response has been encouraging. Between 1978–79 and 1987–88 covenanted giving to charities grew by 140 per cent. in real terms. Payroll giving has also grown steadily since its introduction in 1987. There are now over 3,600 schemes in operation covering 100,000 participants. Clause 55 gives a further encouragement to this form of charitable giving by doubling the limit for relief. I am delighted that this measure has met with considerable approval among charities. It also shows that tax reductions and growing net incomes have increased charitable giving and that we are by no means the selfish and materialistic society that the Opposition sometimes claim.

Finally, and perversely, I would like to draw Members' attention to clause 1. This contains the measures designed to promote unleaded petrol, which have met with universal approval.

Despite the growing availability of unleaded petrol, its lower price and clear environmental benefits, at the time of the Budget it still accounted for only around 5 per cent. of petrol sales. That was, frankly, extremely disappointing and it prompted my right hon. Friend to try a new approach. He made it clear that he expected the full tax reduction of 3.6p a gallon on unleaded to be passed on to consumers. This has happened. The price differential at the pumps between four-star and unleaded is now generally between 9p and 10p per gallon compared with 6p before the Budget. Furthermore, the increase in duty on two and three-star has raised prices to at least the level of four-star, leading to a reduction in the market for these two grades and creating more capacity for unleaded.

All the signs are that those changes are having the desired effect. The proportion of garages now selling unleaded petrol is close to 40 per cent. and is expected to top 50 per cent. by mid year. I hope and expect that that will increase still further. The onus is now firmly on individual motorists—be they two, three or four-star users —to ensure that, where they can, they switch soon to the cleaner fuel. I hope that they will do that.

The Bill contains a series of measures to improve the taxation of savings, to widen share ownership, and to help small businesses. It will simplify and modernise the administration of the tax system. It underpins the continued strength of our public finances, takes forward 827 our programme of tax reform, and improves the supply performance of the economy. It is a Bill well worthy of support, and I commend it to the House.

§ Mr. Gordon Brown (Dunfermline, East)

We welcome some of the measures contained in the Finance Bill as explained in what I suppose the press may call a less than robust defence of the Chancellor's policies by the Chief Secretary to the Treasury.

We welcome and will support the improvement in the age addition for pensioners and the change in the earnings rule for pensioners. We welcome and will support the differential in unleaded petrol, although many of us believe that the Chancellor could have gone further in that. We welcome and will support, with regard to the Chancellor and the Bill, the changes in the management of the Inland Revenue recommended by the Keith committee. Although we do not believe that they go far enough, we will welcome the changes in national insurance set out in the Social Security Bill.

However, we cannot support a Finance Bill, an economic strategy and a Budget which has done little for the vast majority of people throughout the country and which will do nothing to tackle the underlying weaknesses of the British economy.

Ten days ago inflation crept up to 7.9 per cent. when at this time last year it was half as much at 3.9 per cent. Tomorrow, even if the best hopes of the Chancellor are realised, we will still be running the worst trade deficit in our history and certainly a worse trade debt than our European competitors.

Ten months after interest rates began rising, home owners could be excused for hoping that it was time that they came down. However, once again they fear that interest rates are in danger of rising, even when interest rates are 5 per cent. in Japan, 6.5 per cent. in Germany, 10 per cent. in America, but are already 13 per cent. in Britain.

Interest rates have been at 13 per cent. for five months and they have been above 10 per cent for nine months. Inflation has been rising for 13 months in a row. The balance of payments deficit has been worsening for just about all the time that this Chancellor has been in office. As a result of the need to finance that deficit, the high interest rates have meant that 9 million mortgage holders have had to pay on average an extra £40 a month in mortgage repayments.

In the face of all that, people will want to know why, after 10 years of this Government, after 10 years of North sea oil revenues when the Government have received £76 billion in tax returns from the North sea, we are going to end this decade with the highest inflation, the highest interest rates and the worst trade deficit of our major competitors. Is it not therefore surprising that the Treasury and Civil Service Committee, whose report I will mention even if the Chief Secretary to the Treasury would not, said that the Chancellor is walking on a tightrope? Is it not also surprising that almost all the expert evidence which the Committee has been able to assemble has been critical of the Chancellor's policies? I commend the Chairman and his Committee for doing such a thorough job in examining the economy.

Is it surprising that at least one Cabinet Minister has deigned to come above board and criticise the full thrust 828 of the Chancellor's policies when referring to the Chancellor's high interest rate strategy and the impossibility of one simplistic economic dogma solving a nation's economic problems? The Secretary of State for Wales called for regional and industrial investment and expressed his fears about what is happening in the economy at the moment. He said: Capitalism could be severely damaged if we continue a system where currency exchange rates fast fluctuate as a result of the decisions not of Governments or of major industrialists but of those who command the vast flows of hot money circulating throughout the world. The Chancellor has brought us to that as a result of his policies.

Perhaps the most astonishing criticism among the growing criticisms of the Chancellor was that made in a recent speech by the director general of the Confederation of British Industry, Mr. John Banham—[Interruption.] The Chancellor may laugh at Mr. Banham, hut Mr. Banham may read the report of our debate in Hansard.

Mr. Banham compared Britain in the 1980s, not, as the Chancellor does, with Japan in the 1980s, but with Britain in the 1930s. He said that the Chancellor's policies reminded him of Churchill's phrase about the 1930s—the "locust years." He questioned whether the "locust years" was a term which could be applied to the 1980s. He questioned also whether we are in danger of making the same terrible mistakes today and being guilty of the same short-termism for which we have rightly criticised Chamberlain and Baldwin.

§ Mr. Tim Boswell (Daventry)

Did the hon. Gentleman also notice that John Banham is quoted in the CBI's house journal as saying that this Budget is a cautious responsible budget with some useful measures for business which will help smaller companies in particular."? How is that consistent with the slashing attack which he has recently given?

§ Mr. Brown

Mr. Banham was referring to the kind of measures which we have welcomed. Mr. Banham, in his speech of 16 March, criticised the Government for bringing us to a position where the 1980s may be the "locust years."

Mr. Banham has been even more critical of the Government's record on inflation. He blamed the Government for water and electricity price rises as being the single most important factor in pushing up inflation. He said that the Government are creating inflation in a way which will postpone vital investment which could deal with the underlying causes of inflation. The hon. Member for Daventry (Mr. Boswell) cannot look for much comfort in Mr. Banham's comments. He should reflect on the remarks by the CBI. He should also consider the results of surveys like that carried out in Scotland which showed that investment intentions are now the worst for 18 months and that there are worries that manufacturing employment may fall.

§ Mr. Tim Yeo (Suffolk, South)

Will the hon. Gentleman give way?

§ Mr. Brown

No, I want to proceed.

We have the highest interest rates of our competitors, the highest inflation rate and the worst trade deficit in our history. I believe it was the Chairman of the Treasury and Civil Service Committee who first said in November that 829 the jury was out on the Chancellor. That was almost six months ago. Three weks ago the Governor of the Bank of England said that the jury was still out.

The jury has been out for a long time now. It has been out so long that the Chancellor has had the benefit of one of the longest trials in recent experience and undoubtedly, for the nation, one of the most expensive. It is about time that the jury returned. Is the verdict not now overdue? Perhaps the verdict on the Chancellor's performamce will be delivered in the expected Cabinet reshuffle. Perhaps the best that he can hope for is leniency and that he may get off with a suspended sentence or probation under the personal supervision of Sir Alan Walters, who is due to provide what he calls his "independent advice" on 1 May.

Inflation is twice what it was a year ago and twice what it was when the Chancellor took office and pledged to eliminate it. It is 7.9 per cent. in Britain, 1.4 per cent. in Japan and 2.6 per cent. in Germany. Despite the freezing of excise duties, which will prevent the rate rising by 0.5 per cent., the inflation figures have yet to show the nine price rises that came in the first weeks of April, for most of which the Chancellor was directly responsible. Those include the 7 per cent. rise in electricity, 3 per cent. rise in gas, 10 per cent. to 30 per cent. rise in water, rate and rents, prescription charge rises, television licence fee rises, the new health charges and the petrol price rises, about which the Chancellor has been strangely silent when faced with the behaviour of oil companies as they push up petrol prices.

Perhaps the Chief Secretary regrets saying in the Second Reading debate last year: What is vital, and unusual for post-war recoveries … is that this … sustained growth in the economy has been achieved without a resurgence of inflation."—[Official Report, 26 April 1988; Vol. 132, col. 215.] The tragedy is that the inflation that he did not forecast is the inflation that he and his Ministers caused. Last July—

§ Mr. George Walden (Buckingham)

The hon. Gentleman paints a bleak picture of the British economy. If, for the sake of argument, one accepts his analysis, will not the position grow even worse than he describes it if higher-than-inflation wage settlements are reached? What would the hon. Gentleman advise those unions seeking higher-than-inflation wage settlements?

§ Mr. Brown

The hon. Gentleman is joining me in criticising the 26 per cent. post-tax rises for directors and the 47 per cent. rises to senior directors. I shall tell the hon. Gentleman how the Chancellor could begin to tackle inflation. He could postpone the electricity and water price rises, imposed for one purpose only—to fatten up the industries for privatisation. When the hon. Gentleman looks at the figures, I think that he will agree with me and others that the Government have been responsible for most of the inflation from which we now suffer.

§ Mr. Keith Mans (Wyre)

The hon. Gentleman mentioned rate rises. Does he agree that the majority of rate rises have been due to Labour councils?

§ Mr. Brown

The hon. Gentleman shows a strange misunderstanding of what has been happening to central Government expenditure in relation to local authorities. Over the past 10 years the Government have not only cut 830 their contribution but cut their proportionate contribution to local authorities so that rates have been forced up for those local authorities trying to maintain services. In Scotland, we now have the final result—the poll tax, which is basically a flat rate charge, and is being imposed against the wishes of the vast majority of people in Scotland.

Our case against the Chancellor and the Government is not merely that we have the highest inflation and interest rates, and the worst trade deficit, or that we have returned to stop-go economics even before North sea oil has run out. It is not only, although this is bad enough, that the Chancellor's solution to the problem—creating high interest rates and by discouraging investment—is part of the problem rather than the solution. Our case against the Chancellor is more than that. It is that, having made all these mistakes by engineering a consumer boom that was not properly backed up by adequate investment, he has no greater desire in life than to keep his job and to repeat them at a later stage.

§ Mr. Yeo

rose—

§ Mr. Brown

I shall not give way.

Having engineered a consumer boom that was preceded by high interest rates, and having used for tax cuts resources that should have been used for investment, the Chancellor intends to engineer another pre-election boom, preceded by the present high interest rates, which are so damaging to investment. He will use the Budget surplus not for investment in our future, but for tax cuts. That is the mistake that the Chancellor makes when planning the long-term future of the economy. The result is—

§ Mr. Yeo

rose—

§ Madam Deputy Speaker (Miss Betty Boothroyd)

Order. The hon. Gentleman has made it clear that he is not giving way.

§ Mr. Brown

The result is that we end the 1980s in the astonishing position in which household consumption has increased by 30 per cent. during the past 10 years, but industrial production has increased by only 10.5 per cent. The obvious result is that imports have had to increase by 50 per cent., giving the trade deficit that is causing all the problems that the Chancellor will sooner or later have to face.

Even more astonishing is the fact that in the past 10 years manufacturing production has risen by only 8 per cent., while manufacturing imports have risen by about 100 per cent. That is the position to which the Chancellor's policies have brought us. The problems are due to the neglect of investment over a long period, the inability to prepare our industry for the future. We face the 1990s and the harsher marketplace of 1992 with the worst trade deficit in our history and a Chancellor who has no policy for sorting it out.

Our complaint against the Chancellor does not stop there. Even when he has a Budget which he claims will help the low paid, he ends up, as usual, helping the higher paid. National insurance changes mean that there is nothing for anyone earning less than £43 a week. There are about two million people in that position. There is £1.50 less in some cases, far less than £1.50 a week for those earning less than £115 a week. None of that will be paid until October, whereas the Chancellor was very keen to give his top-rate tax cuts of last April in April. The figures show that those at the top benefit far more than those at the bottom.

831 The Budget was not one for low income Britain, but one which compounds last year's errors by giving most to upper income Britain. It does not do anything for people faced with high mortgage repayments, many of whom as a result of building society decisions saw their mortgage rates rise on April 1, on the annual basis used by companies such as the Halifax building society.

In a lecture, the Governor of' the Bank of England said that it was unlikely that last year's experience with mortgage arrears would be sustained. He said that building societies were already reporting an increase in short-term arrears and that the full impact of higher mortgage rates was yet to be felt. Last year, for the basic rate taxpayers, those who are home owners, tax cuts amounted to about £1.5 billion in a full year, but the mortgage rises for that period would be about £4.5 billion. For 118 out of the 120 months of the Chancellor's period in office, mortgage rates have been above 10 per cent. As we work out the figures, we realise that for the vast majority of home owners the tax cuts have already been clawed back by the mortgage rises and the vast majority of people are already worse off and suffering a deterioration in their standard of living as a result.

What do the Government say about this? Far from helping home owners or the majority of pensioners—although we welcome the changes in the earnings rule and age addition—and far from unfreezing child benefit, about which there was a debate last night in which the Government took a hard line, the Finance Bill gives far more to those who have than to the majority of people who have not. It seems that the Chancellor is not content with the £2 billion that he gave to the top 1 per cent. in last year's Finance Bill, the £26 billion that he has given over 10 years, the £10,000 each that those in the top 1 per cent. have received each year, or the £100,000 that he has given cumulatively in tax cuts to the typical person who falls within the top 1 per cent.

The Finance Bill contains a series of changes which can only be said to raise the incomes of those who are already rich, without doing anything for those on low incomes. The changes in inheritance tax will cost £35 million but will cover only 39,000 taxpayers. There are changes in capital gains tax, from which any personal possession that is sold off and is worth up to £6,000 is exempt. The Government have closed the obvious and glaring loophole in closed company tax relief in relation to the business expansion scheme, but have not made the change retrospective although they have been aware of the abuse for some time. They have not dealt with the fundamental flaws of the business expansion scheme, which provides rented housing at a far greater cost than if local authorities or housing associations were given the same money to build.

We shall support the Government's attempts to implement the recommendationss of the Keith committee. We regret that they have not faced up to a number of its recommendations, such as the power of entry and inspection of business records in respect of transfer pricing. We might have expected them to act on the taxation of non-residents as well, especially after the Treasury paper issued last summer which said that the current loopholes encourage the setting up of arrangements overseas which can be more or less artificial. There is nothing of substance in the Bill to deal with that abuse, and we shall press the point in Committee.

832 What justification have the Government for failing to sign the OECD agreement on an international campaign to clamp down on tax evasion?

§ The Financial Secretary to the Treasury (Mr. Norman Lamont)

Can the hon. Gentleman name any country that has signed?

§ Mr. Brown

A number of countries are very concerned that the agreement be signed. Why has Britain refused to sign it? Why have the Government given us the explanation that they are doing quite enough about lax evasion already, when all the available evidence suggests that massive evasion on an international scale is taking place and is not being properly dealt with, and that international agreements are required for it to be so dealt with? When that matter is raised in Committee, I believe that the Economic Secretary will be persuaded of the need for further action.

Another proposal that the Chief Secretary said had achieved a false importance in debates on the Budget and the Finance Bill is the proposal for private medical insurance. We shall, of course, discuss that at length later, as we are entirely opposed to the relevant clause. Last week the Treasury issued an explanatory memorandum, although the regulations which are vital to an understanding of how the scheme will work have yet to be issued in full. The Treasury said that the test for private medical insurance was that the £40 million or more—we believe that it is more—would relieve pressure on the National Health Service". I will tell the Minister the best way of relieving pressure on the National Health Service—give the money to the National Health Service. Is it not clear that the best way of providing health care for anyone is to provide it for everyone? That is the proper way in which to use the available resources.

We shall debate all these matters in Committee, both upstairs and on the Floor of the House. It is interesting to note, however, that this Finance Bill ends a 10-year period under the present Government in which Ministers have claimed that there has been an economic miracle and an industrial resurgence, and that Britain has been transformed by their policies. The Chief Secretary started to say that earlier this afternoon.

What sort of economic miracle is this? Despite all our revenues, the growth rate of the British economy has been only 2 per cent. a year in the 10 years since 1979, half that of Japan. It has been 2.5 per cent. in Italy, 2.5 per cent. in the OECD countries as a whole, 2.7 per cent. in America and 4 per cent. in Japan. What sort of economic miracle is it when manufacturing output has grown by 1 per cent. a year in Germany, by 1.5 per cent. a year in Italy, by 2.5 per cent. a year in America, by 4 per cent. a year in Japan and by 2.2 per cent. a year in the OECD countries, but by only 0.8 per cent. a year in the country that the Chancellor claims is hosting an economic miracle? What sort of miracle is it when exports have increased by 3 per cent. in Italy, by 4 per cent. in Germany, by 5 per cent. in America and by 7 per cent. in Japan, but by only 2.8 per cent. in Britain?

On all those indicators, Britain is not leading the world; it is very near the bottom of the table—and the reason is that the policies of the Chancellor and his predecessors have been wrong.

Yesterday the Government voted to freeze child benefit for 7 million mothers and 12 million children. In the past 833 few weeks, half a million pensioners and others on benefit have been denied any uprating at all. This month, destitute teenagers who have already lost their unemployment benefit are now losing many of their housing benefits. Pensioners faced with price rises that are way above their pension rises are seeing their living standards fall.

On top of that, this month has brought the new health charges. We have already experienced housing benefit cuts, and, in Scotland, the imposition of the poll tax. Yet at the same time—as the British Institute of Management confirmed yesterday, and as was pointed out by my hon. Friend the Member for Bolsover (Mr. Skinner)—huge windfall bonuses have been paid to people who are already rich as a result of tax changes made last year which the Government have been prepared to maintain this year.

For directors the average pay rise, with the tax cut included, has been 26 per cent. According to the survey, the increase for those in the senior directors' grade has been 47 per cent. For those with unearned income—the top 1 per cent.—it has been 86 per cent. I can think of no occasion in this century when the living standards of pensioners and others on fixed benefits have fallen at the same time as there has been such a huge and disproportionate increase in the benefits of those at the very top.

In this Finance Bill, the Chancellor had a unique opportunity to correct last year's errors and to introduce a truly radical element into Tory Budget policy—fairness. By failing to apply that test the Bill compounds rather than corrects those errors, which is why we shall vote against it this evening.

§ Mr. Terence Higgins (Worthing)

On Second Reading of the Finance Bill, every Chief Secretary faces the dilemma of whether to be extraordinarily dull by going through every single clause or whether to be highly controversial. Given the experience of my right hon. Friend's predecessor, who tried the second course, I well understand why he thought it right this afternoon to take a more balanced approach.

None the less, my right hon. Friend did not resort entirely to going through the Bill from clause 1 to the end. He made a number of points at the beginning with which I certainly agree. He was right to stress that the Bill is of substantial importance to the elderly, and also to point out the extent to which the Government have succeeded in repaying the national debt, and the scope that that will provide in future years in relation to taxation or public expenditure on priority items.

I do not wish this afternoon to concentrate on the details of the Bill. Let me just say in passing, in reply to the points that my right hon. Friend stressed about investment in equities and shares, that it is important to strike a balance between them and more institutional forms of saving.

This is a mammoth Finance Bill, with 250 pages. The Select Committee on Procedure, which I chaired some years ago, considered whether we should have a separate tax Bill—perhaps in the autumn—which would be dealt with at a more leisurely pace than is necessary under the Provisional Collection of Taxes Act 1968. We must consider carefully whether it will be possible for any 834 Standing Committee to give the Bill the attention that it needs if our financial legislation is to be properly scrutinised.

The report of the Select Committee on the Treasury and Civil Service is based on evidence given to us by the Chancellor, the Governor of the Bank of England and officials. It is undoubtedly the case that the evidence we now get subjects the Chancellor, the governor and officials to far more intensive scrutiny than was ever the case. That is an advantage for this House when it comes to consider matters connected with this Bill.

The Select Committee report is unanimous. It brings out the various problems inevitably being faced at present. The report also draws attention to matters affecting the origin of the present financial situation. The hon. Member for Dunfermline, East (Mr. Brown) referred to the remarks made by Mr. Banham about the 1930s. We must be clear that many of the present problems are the direct result, as the Chief Secretary pointed out, of action taken by the Chancellor in conjunction with other Finance Ministers, with virtually unanimous support—with the exception of perhaps one of my hon. Friends—to prevent a world slump of the 1930s type after the stock exchange crash in autumn 1987. As we make it clear in paragraph 11 of the Select Committee report—and we quote the Chancellor and the governor.mistakes were made at that point in relation to monetary policy. In a way, we are now suffering a hangover from the stimulus which was given to the economy in 1987, for the reasons that I have explained. In that context, hon. Members must appreciate the point stressed by the Select Committee again and again, that the statistical basis on which the Government and, indeed, Parliament are taking decisions is seriously defective. I welcome the fact that an inquiry has been conducted and that the Government have responded, but the statistical situation must be improved, otherwise inevitably mistakes of the kind recorded in the Select Committee's report will be made.

It is also important to appreciate the speed with which the economy accelerated following the stimulus given to it. As the Select Committee's report points out, the Government and the House are now on a tightrope, with a real danger on either side. On the one hand, if the measures the Chancellor has taken on interest rates have a rapid and too dramatic effect the country could fall into recession. On the other hand, if those measures take too long to produce an effect, confidence in sterling will weaken, and the decline in the value of sterling will generate inflationary pressures. The essence of the problem, as the report makes clear, is essentially one of timing. The dilemma is that we do not know at what rate the increase in the interest rate will actually have effect. As the report makes clear, this situation is likely largely to affect those who have mortgages, having borrowed on an appreciation of house prices. Therefore, there is a lagged effect. It is important that the Chancellor should therefore seek to maintain the balance that he is presently achieving. He should take appropriate action as the occasion arises.

We need to ensure that we do not rush hastily into other measures that push the economy on one side or the other of the tightrope to which the Select Committee has drawn attention. In that context, what is clearly needed is significant evidence that a slowdown in the economy is taking place. In his evidence to the Committee, the Chancellor referred both to house prices and the extent of house purchase transactions. He also referred to the 835 indicator MO on the money supply. I hope that action will he taken to ensure that such evidence as we have on these matters is also improved.

It is also of grave concern that we are likely to suffer from the actions of foreign Governments. Against the background of international monetary co-ordination, which the Chancellor has played a prominent role in fostering, I hope that there will be some co-ordination. The hike in German interest rates last week was unfortunate. The response of the international community generally to that development seemed rational in the circumstances.

The Committee's report also brings out clearly the fact that, in addition to treating interest rates as its main instrument, the Government have taken appropriate action on the fiscal front. We are undoubtedly running a budget surplus of totally unprecedented size. My personal view is that it does not seem reasonable to argue that last year's Budget was too slack if we end up with an all-time budget surplus. However, the Committee's report brings out the fact that we are operating against a background in which consumers are being inundated with appeals to borrow more money. So last year's Budget created an air of confidence that had a greater effect on the economy than could easily have been predicted. I believe that the Chancellor's monetary measures are likely to have an effect. Labour Members have rightly pointed out that interest rates have been increased successively to a very high level. It is right and proper that we should maintain that position.

In many respects, we are in a dangerous position. The balance of payments situation certainly gives cause for concern. Unlike some members of the Select Committee, I do not believe that the solution to the present problems is to be found in a depreciation of the exchange rate. I believe that the Chancellor's attitude in this respect is correct. If we were to have a sterling depreciation when the economy is operating close to capacity, the danger would be that the inflationary pressures would become quite uncontrollable.

A policy of no depreciation of the currency combined with deflation will inevitably take a considerable time to have effect, and this is a cause for concern. The deflation in this case is against the background of very high profit levels, so that the resistance to wage settlements by the private sector is likely to be a rather lengthy process. Overall there are causes for concern, but I believe the Chancellor is right to say that the exchange rate should be maintained at the present level. None the less, he should take deflationary action to deal with the inflationary pressures and bring the economy back into equilibrium.

I believe that the stress the Chancellor is putting on the ability of capacity effect to improve the export side is likely to be an over-estimate. The Select Committee seeks to bring out this point. There are likely to be effects with regard to the import side of the equation.

Basically, I believe that we must hope that international events do not disturb the present equilibrium. We shall need to maintain the exchange rate and keep interest rates at a very high level for a considerable time. None the less, my hope is that it will be unnecessary to increase them further against the background I have just outlined.

§ Mr. Tim Smith (Beaconsfield)

rose—

§ Mr. Higgins

I will not give way. I was about to say that short speeches are in order.

836 I want to make one final point in a wider context about the Delors committee report. The argument has been put forward by Delors that we should progress from 1992 into a situation where we eventually end up with monetary and economic union. Once we have begun going down that path there is to be no turning back. I feel bound to say, in the context of a debate on Second Reading of a Finance Bill, that the whole basis of authority of this House has always rested on the control of money—the control of taxation on the one hand and of expenditure on the other. The ultimate aim sought to be achieved by the Delors committee report is one where there are constraints on the budgetary policies of national Governments. In that context the Chancellor is right to have responded as he has to the Delors committee report. The matter is of great importance. It does not mean that we should not proceed to 1992 and seek to make progress and, if need be, go along with some of the other proposals—for example, the exchange rate mechanism—at whatever may be an appropriate speed. But we should not commit ourselves to a course of action that is explicitly designed to take from this House the fundamental authority that it has in respect of money matters. I hope that my right hon. Friend will put that point clearly to his colleagues in the European Economic Community. I find it extraordinary that the French Prime Minister should attack us for going too slowly when we abolished exchange controls about 10 years ago, and when France still has a considerable way to go in that regard.

Finally, as the Treasury Select Committee report makes clear, as does the evidence from my right hon. Friend the Chancellor and the governor, we are in a difficult economic situation. I hope that as a result of the policies now being pursued we shall see our way out of the present difficulties, albeit that they are very considerable.

§ Mr. A. J. Beith (Berwick-upon-Tweed)

It is a pleasure to follow the Chairman of the Treasury Select Committee, who guides that Committee so well. There was an indication in his comments that we disagree on some matters. I disagree with the right hon. Gentleman about the need for a move towards economic and monetary union in Europe. The illusion that the House has autonomy and that the Government possess sovereignty over many economic matters is at the root of many of our difficulties. What sovereignty is there when a 0.5 per cent. rise in the Bundesbank's interest rate sends tremors through the whole of our system? We are very interdependent. However, it remains the case that a Select Committee whose members hold many different views as to what precisely should be done analysed the situation and arrived at common, shared conclusions on some of the weaknesses and dangers that exist. The Chancellor of the Exchequer cannot be as dismissive of that as he originally sought to be.

The Finance Bill is lengthy, but that is not a tribute to its gravity or radicalism. The Bill does not achieve any of the radical, tax-reforming changes that remain to be effected. I refer to proper integration of the tax and benefit systems, for example. The Bill does not even integrate properly the tax and national insurance systems. Instead, it turns aside from elements of normal taxation policy, such as indexation of excise duty on alcohol and tobacco. 837 We all know why that was done—because the Chancellor was so terrified of what might otherwise happen to the retail prices index.

My right hon. and hon. Friends and I, along with others, will seek to amend the Bill in a number of respects. We shall strongly oppose tax relief on health care, which the Chief Secretary to the Treasury said is not as important as has been widely suggested. It is like the housemaid's baby—just a little baby. But it is intended that that baby will grow. It is certainly the Prime Minister's intention that it will be the starting point of a much wider system of encouraging people to get out of the National Health Service and to provide for their health needs by private insurance. That is being done in the knowledge that that will be a wholly inadequate way of providing for the health care of many people, and one that will fatally damage the Health Service itself.

We shall seek also to correct other faults in the Bill. The Chief Secretary made mention of the clauses dealing with charities. I still believe that more can be done under the European ruling to ease the position of village halls, for example, without completely defying that ruling. I hope that the Government have not closed their minds to the charitable aspects and that they will be examined in more detail.

We want to close some of the loopholes in the business expansion scheme. One wonders whether anybody will use that scheme to invest in manufacturing while it is so heavily loaded towards property investment, which is protected from serious depreciation by the value of the property itself. The use of the business expansion scheme in manufacturing is no longer seriously attractive and it needs to be modified.

We want to consider also the matter of nursery care, where we believe there is scope for tax relief—particularly as we enter a period of potential labour shortage.

Most right hon. and hon. Members view this not as an occasion to debate Committee points but to examine the background to the Finance Bill and the Budget. Had the situation not changed so dramatically, we might have expected an announcement from the Dispatch Box as to the current state of the economic miracle. That is what the Government used to talk about, but there was nothing miraculous about the Chief Secretary's comments. The "Oxford English Dictionary" defines the word "miracle" as A marvellous event exceeding the known powers of nature … an act … exhibiting control over the laws of nature, and serving as evidence that the agent is either divine or is specially favoured by God. We now clearly see that control over the laws of nature is not within the grasp of the Prime Minister and that she is not a divine agent.

As was seen last year, too much money chasing too few goods produces classic inflation. High interest and high exchange rates increase the difficulty for industry in its efforts to improve exports and achieve the turn-around that the Chancellor requires. None of those laws of nature has been changed. It is time to examine the miracle.

We start with the Government's strong point, which is said to be productivity. That is where the Government say they have achieved the greatest transformation. The Government have a tendency to choose the base year for their statistics very carefully. In 1979, productivity fell by 838 more than 2 per cent. Last year it increased by only 1 per cent. Average growth in productivity since 1979 is only 1.8 per cent., compared with 2.2 per cent. in the previous 20 years. The improvement in productivity has been nothing like as good as the Government suggest.

There have been certain improvements, but some of them are the painful results of a recession that the Government themselves brought about. Others are associated with the ending of restrictive practices and with changing much of the climate of wage bargaining. The situation is not all bad, and there have been some significant improvements. However, the end result is not a more competitive industry. Unit labour costs have not been reduced as a result of productivity gains, and British industry is still not sufficiently competitive. So the Government's productivity record, which is said to be their strongest point, is not really very good.

Inflation is the Government's highest priority, but the picture there is appalling. We have inflation of 7.9 per cent. under a Government who think that they have removed all the basic causes of inflation. The situation is bound to worsen. Wage inflation has seriously taken off. Average earnings last month rose 9.25 per cent., and the danger of a wages spiral is clear. Commodity prices internationally are strong, and the Government themselves are increasing public sector prices. Water charges, transport costs, electricity costs and many other increases are dictated by other Government policies. They are not the result of increases in costs to those industries but of the Government's desire to restructure the water industry, for example. Water industry chairmen—particularly those already in the private sector—are imposing increases of 20, 30 or even 40 per cent. on the basis that they are necessitated by Government changes rather than by cost increases. It is estimated that without North sea oil inflation would be 11 per cent. higher than it is. The Government rely on the benefits of North sea oil to hold at bay a very worrying situation.

The Government's high interest policy may have become a necessity because of their fear of what would happen to inflation if the exchange rate fell. It may not slow the economy enough, or may take so long to do so that the prescription will be worse than the cure. The monetarists within the Government face something of a crisis. Traditionally, they are both monetarists and free marketeers. That was all very well when one could attribute inflation to a high public sector deficit. Then, the monetarists could say, "We shall deal with that. It is in the public sector." But when monetary expansion occurs mainly in the private sector, it is difficult to sustain a monetarist policy and to apply remedies. The Government are frightened of applying remedies to monetary expansion in the private sector.

The Chancellor's fears are illustrated by the extent to which he concentrates on the instrument of high interest rates. We argue that Government policy should be more broadly based. We say that they should drop those public sector price increases that are dictated other than by inevitable cost increases and take steps to stop by persuasion the aggressive marketing of credit. Having advanced that view several times in debates, I have at last evoked some response from the Financial Secretary, who told the Finance Houses Association that its members' advertising gives the impression of "profligate and imprudent" lending. The Government are moving towards 839 what the Japanese call firm administrative guidance. Why not? Why should not the Government exert some pressure on banks and other lenders to improve the situation?

We have argued that the Government, as an obvious anti-inflationary discipline, should have already got Britain into the European monetary system, and we argue that there is still scope for improving the attractions of saving in order to reduce the rapid credit expansion in the private sector. There is scope for increasing saving. The Government themselves concede that what they have done on the PEP scheme, for example, is more likely to "deepen" than to "widen" share ownership. I quote the Chancellor's words. The Economic Secretary to the Treasury is so used to my pressing this argument that he must recognise that there is no real sign that the measures in the Budget will bring about a wide increase in savings.

In addition, the Government have scope to use investment in prudent, non-inflationary ways to tackle the trade deficit problem. Unless they do something like that, there is no sign that anything else will do so. The Government's prophecies about the trade deficit are really quite extraordinary. Having moved from a forecast of a £4 billion trade deficit, they now recognise that we will have a trade deficit of at least £14.5 billion. But they see it going down to £3 billion by 1991. That is the implication of the figures that they have given us. The assumption is that there will be a massive switch in capacity from the home market to exports. There is no evidence to suggest that anything like that is beginning to happen, or is likely to happen, at a time when world trade growth is forecast to slow down, and United Kingdom cost competitiveness is likely to slow down as well. Indeed, there is some danger that the United Kingdom now has a structural deficit, which cannot be changed unless other measures also are taken. It requires far more of a miracle than there has been any sign of so far to bring about that change in competitiveness.

The other star point of the Government's miracle is supposed to be the surplus—the ability to repay public sector debt on a considerable scale because of the budget surplus. But this surplus is derived, in very large measure, from asset sales. Certainly, half of it can quite clearly be attributed to asset sales. It cannot be sensible steadily to diminish our national public investment at such a rate, and on such a scale, when there are obvious needs that the public sector can meet. Maybe those needs are different from those that the public sector has traditionally met.

I would go some way with the Government in saying that there is, indeed, a logic in releasing resources trapped in earlier forms of public investment, and shifting them into other forms, and, indeed, arguing each case on its merits. But there is clearly an urgent need for investment in training, in transport, and in communications—in things that can help to make industry more competitive. The Government should be identifying the areas of difficulty—areas like skills shortages and transport costs arising from weakness in the transport system—and directing public investment into those areas.

Of course, one of the illogicalities of the present system, to which the Treasury Select Committee has pointed in previous years, is that we never consider these things at the same time. If there is any stronger reason for considering expenditure and revenue at the same time than suddenly finding a surplus far greater than the Government themselves predicted we would have, it is hard to find. When the Government find themselves with an immensely 840 larger surplus, surely there is a case for considering again the expenditure decisions that were made at the time of the Autumn Statement.

Hon. Members of all parties have spent a lot of time over the years telling various groups of constituents that they are in favour of what those constituents suggest, that their ideas are very good, but that the nation cannot afford them. The situation now is that the nation could afford a number of things if—and only if—it could manage the economy in such a way as to ensure that the spending on those things was not inflationary and did not generate dangerous economic pressures. That is the challenge to the Chancellor, but it is a challenge that he is totally failing to meet, because he does not accept the case for public investment in those areas that could make industry more competitive.

The Treasury Select Committee report has helped to remove a lot of the flannel and waffle that have surrounded recent discussion on economic matters and has, I hope, dispelled some of the myths and fallacies. It has attributed quite a bit of blame to last year's Budget, but also to decisions that were taken last year in the aftermath of the stock market crash. To that extent, nearly all of us must accept some share of the blame, because the Chancellor had very few critics for his interest rate policy a year ago. But, having embarked on that policy of lower interest rates, he himself should have realised that to take measures which would give people the expectation that borrowing would be easier, and a very good thing for them, and at the same time to take measures that put a time limit on people rushing out to buy houses and get multiple tax relief on them, would be bound to exacerbate the situation. That is detailed and set out in the Treasury Select Committee's report, and the Chancellor cannot escape the blame for it.

I think that, for that and other reasons, the Chancellor now finds himself, in the Committee's words, "on a tightrope". But he is not alone on the tightrope; also on it are all those people who do not know how they are going to carry on paying their mortgages, and all those people who do not know whether they will still have a job if the only way in which the economy sorts itself out is by a slump. When they fall off the tightrope, it will hurt them a great deal more than it hurts the Chancellor. It is to those issues that the Chancellor must now address himself.

§ Mr. Tim Smith (Beaconsfield)

When I went canvassing in part of my constituency on Friday evening—it was an area that my agent had recommended because, he said, the Social and Liberal Democrats were putting up the strongest challenge there—it was with some trepidation. Recently my postbag has not been full of letters congratulating the Government on the excellence of their policies. I have received a lot of criticism and a lot of complaint. I know very well that, as we have been told during the course of this debate, all those who have mortgages, including, no doubt, many hon. Members, have had to put up with much higher monthly mortgage payments. That can never be popular.

I was, therefore, very pleasantly surprised to discover that support for the Government is holding up very well. I believe that the reason for that is well illustrated by this debate. Although the speech of the hon. Member for Dunfermline, East (Mr. Brown) on behalf of the Opposition was effective at the most superficial level, he 841 told us absolutely nothing about the Labour party's alternative to the Government's policies. I believe, and I think that opinion polls show that the electorate believe, that if at present we do have some economic difficulties to cope with, it is the Conservative Government and their Treasury Ministers who are best equipped to cope with them.

In a sense, it would be a little unfair to direct that comment to the hon. Member for Berwick-upon-Tweed (Mr. Beith), who has just spoken for the Social and Liberal Democrats, because he at least put forward a number of constructive alternatives to the Government's policies. However, I have to tell him that the people to whom I have spoken are not too enthusiastic about his party, simply because it cannot agree with the other party that is supposed to be in the centre—the SDP—about anything, and because two candidates are being put up, not just in the current by-election but all round the country in the forthcoming elections. The hon. Gentleman needs to think about that, but at least he did put forward some constructive proposals.

Yesterday, as I read the Treasury Select Committee's report on the Budget proposals, I felt—and I hope that my right hon. Friend the Member for Worthing (Mr. Higgins) will forgive me for saying this—that there was an element of using the benefit of hindsight about the way in which what had occurred was being looked at.

§ Mr. Higgins

We said that several times.

§ Mr. Smith

I think that the report says so, but the way in which it was portrayed in the press today was such that one would think that the Committee had been extremely critical of the Treasury's handling of policies. But anybody who listened to my right hon. Friend's speech just now will have noticed that he did not criticise the present exchange rate policy or the present interest rate policy. Although there is an element of trying to balance on the tightrope in respect of what is going on at the moment, he did not make any major criticism of the way in which the policy is being handled. Everybody needs to be a little modest, a little humble, about the present situation. As the hon. Member for Berwick-upon-Tweed has just said, there was a pretty good degree of consensus about all this just over a year ago, after black Monday. Then the concern was really that we would have a repeat of what had happened in the 1930s. We knew that if we were to make a mistake, the right mistake would be to have too lax a policy rather than a major recession on our hands. We just need to reflect a little on that as we find ourselves in the present situation. Naturally, everybody is frustrated. People want to see the effects of the present policy coming through.

We have been told that the jury has been out for an awfully long time, and people have asked whether it is not time that it came back with a verdict. Unfortunately, the verdict on these policies is that we shall have to be a little patient, because the policies will take time to work through. The danger is that we shall over-react. The Treasury should hold the line with a 13 per cent. interest rate. The policy of the last five months should be allowed to continue and to work itself through. It will eventually lead to a satisfactory outcome.

§ Ms. Diane Abbott (Hackney, North and Stoke Newington)

The hon. Gentleman urges us to wait and to 842 allow the policy to work itself through. People in my inner London constituency who last year took on an average mortgage are now paying £133 a month more in mortgage interest repayments. Many of them cannot meet their basic domestic commitments. How long must my constituents wait for this policy to work itself through and how high is the hon. Gentleman prepared to see interest rates go?

§ Mr. Smith

I have every sympathy with the hon. Lady's constituents. Many hon. Members have had to face that problem. First-time buyers mortgaged themselves up to the hilt when interest rates were relatively low. It must be very painful for them at present, but I have had a mortgage for about 17 years and I know that it gets better. It will get better for the hon. Lady's constituents, but they will have to be patient. If experience is anything to go by, the proportion of their monthly income that people spend on mortgage interest repayments reduces. The fact that people took on such high mortgage commitments last year was a reflection—perhaps a misguided one as it turned out —of their confidence in the future. Had it been otherwise, they would not have made such a decision in the first place.

§ Mr. John Heddle (Mid-Staffordshire)

Does my hon. Friend not agree that the best advice that he can give to the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott) to pass on to her inner London constituents is that they should put their problem to their building society or to the institution from which they borrowed their money? They are likely to receive a very charitable and most understanding response. Their capital and mortgage interest repayments will probably be frozen; an accommodation will probably be reached over a short-term period.

§ Mr. Smith

I am most grateful to my hon. Friend, who is an expert on these matters. Lending institutions of all kinds are always sympathetic. The loan will have been taken out over a long period. Lending institutions may well be prepared to consider such an accommodation as my hon. Friend suggests.

I share the concern of those who have complained about the length and complexity of the Finance Bill. It amounts to 250 pages. The House needs to reflect on how it will consider future tax legislation. It is 10 years or more since my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), who is now the Foreign Secretary but who at that time was the shadow Chancellor of the Exchequer, suggested that we should have a technical tax Bill. I understand why the Treasury does not relish that prospect. It is bad enough having to deal with one Finance Bill a year; to have another would perhaps be a bit much. It would not fit into the parliamentary timetable. However, it will not be easy adequately to consider all the clauses in this long Bill.

The Select Committee on Procedure—if that is the right Committee—should consider how the House ought to deal with tax legislation. We want it to be simplified. My right hon. Friend the Chief Secretary told us that this measure will simplify matters, but the net result will be a substantial addition to the quantity of tax legislation. I have come to the conclusion that the best and perhaps the only way to simplify tax legislation is to abolish whole taxes. We do not seem to be able to make progress in any other way.

843 The Red Book shows which taxes raise the largest proportion of revenue. Far and away the largest revenue raisers today are income tax, corporation tax and value added tax.

§ Mr. Chris Smith (Islington, South and Finsbury)

And national insurance.