Finance (No. 2) Bill

§ Madam Speaker

Before I call the Minister, I ask right hon. and hon. Members for short speeches. There is a great deal of interest in the debate, but I simply appeal for voluntary restraint on the length of speeches.

§ The Chief Secretary to the Treasury (Mr. Michael Portillo)

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

I welcome this opportunity to commend the Finance Bill to the House. My right hon. Friend the Chancellor's Budget judgment this year was exceptionally difficult. He had to avoid putting the recovery in jeopardy; he needed to tackle the level of Government borrowing; and, above all, he had to frame a Budget that would promote confidence. He made exactly the right judgment, and the measures in the Bill achieve those aims.

Business optimism since the Budget has been demonstrated to be at the highest level since April 1988 —so says the Confederation of British Industry, and so says 3i in a survey published today. Activity is rising in all sectors, according to Dun and Bradstreet and also the Association of British Chambers of Commerce.

Retail sales in the first three months of this year were up 3.3 per cent. on a year earlier; they are now at record levels. Car production is up 8 per cent. in a year and car registrations up 12.75 per cent. Production in our factories is rising, while industrial production in Japan, Germany and France is falling. Output across the whole economy in Britain is up 0.6 per cent. on last year, and in the non-oil economy up 0.6 per cent. in the first quarter. The economy has now been growing for three successive quarters.

Business surveys now show better export prospects and improved competitiveness in the home market. Exports to non-EC countries are up 12 per cent. on last year. The level of the pound may be part of that, but the real key to competitiveness lies elsewhere. During the recession, companies have improved their productivity through better management and by getting to grips with quality control.

The Labour party would have us believe that British manufacturing industry is dead. Far from it. Last year, it exported £87 billion-worth of goods—more than £1,500 for every man, woman and child in this country, which is higher than the figure for Japan.

Manufacturing exports are at record levels, and manufactured export volumes are forecast to grow 7½ per cent. in the year ahead, in 1993. That will give Britain a rising share of world trade in manufactures, after years in which that level fell.

Unit wage costs recently rose sharply in Germany and Japan, by about 9 per cent. in each case—but in the United Kingdom they are down 2 per cent. on a year ago, which is the biggest fall since records began. This country now has that genuine competitive edge. It has nothing to do with the currency, but is an underlying improvement in our competitiveness vis-a-vis the performance of other countries.

§ Mr. Nicholas Winterton (Macclesfield)

Like my right hon. Friend, I warmly welcome the improvement in the economic indicators, but will he direct his attention to the huge and growing deficit in United Kingdom manufactures? What do the Government intend to do about that, because manufacturing industry produces the only form of non-inflationary growth in this country? Will my right hon. Friend also confirm that the Government have no intention of returning to the exchange rate mechanism in the foreseeable future?

§ Mr. Portillo

My hon. Friend intervenes at the very point in my speech that will deal with his question. British industry's competitiveness is most important—for example, in the energy supplies that it buys. I hope that we will have my hon. Friend's support when we do things that may be difficult and unpopular, but which are absolutely essential in maintaining competitive energy supplies to our manufacturing industry. That point is not one on which we have always had my hon. Friend's support.

§ Mr. Dennis Skinner (Bolsover)

If everything in the garden is rosy, as the Minister says, will he give an assurance that unemployment will fall below 3 million at the end of this calendar year?

§ Mr. Portillo

Only Labour's spokesman is foolish enough to try to make predictions about unemployment. The hon. Member for Dunfermline, East (Mr. Brown) makes such predictions and falls flat on his face. I shall point out how he has done so recently. The Government do not make forecasts of unemployment, but we are very pleased at the recent figures recorded. I shall come to a possible explanation.

Manufacturing output is at its highest level for more than two years, and manufacturing productivity is at its highest level ever, and is growing faster than at any time in six years. Manufacturing is not only alive and well but performing vigorously.

Sustaining our competitive advantage will depend on controlling costs, and on controlling wage costs in particular. It is good news that earnings growth is at its lowest level for a quarter of a century. Wage restraint will help our businesses to compete. It will assist the creation of new jobs too, and it may be no coincidence—here I take up the question asked by the hon. Member for Bolsover (Mr. Skinner)—that lower earnings growth has been followed by two months of falling unemployment.

The hon. Member for Peckham (Ms Harman) is always calling on the Government for a jobs package. She ought to call on her trade union friends to work towards achieving higher employment and not just higher wages, as they so often do. I give the hon. Lady marks over and above the hon. Member for Dunfermline, East, because, in the light of increasingly good economic news, that hon. Gentleman has been swerving like a weathercock in a stiff breeze—from lugubrious and grudging through to churlish, and finally coming to rest at despondent. The hon. Gentleman cannot see a good economic indicator without wishing to talk it down. Perhaps he has a good future in air traffic control—"Labour control to the British economy: change your indicators, you are coming in too high." That is the attitude of the hon. Member for Dunfermline, East.

We know that some economic indicators tend to lag behind the economy; we know that housing and unemployment are the last indicators that tend to turn 730 —they are known in the jargon as "lagging indicators" —but the last thing of all that turns is the despondency of the hon. Member for Dunfermline, East. He is the economy's most lagging indicator of all. His motto is "A sound bite a day keeps confidence at hay."

The hon. Gentleman's last effort was a real gem. Last week, he could not wait for the unemployment figures to be announced. He put out a press release in advance, crossed his fingers and hoped for the worst. He said that the news would herald a summer jobs crisis. The good news on unemployment, when it came through, must have been a crushing disappointment for him.

My right hon. Friend the Chancellor of the Exchequer recently said that his song was Edith Piaf's "I have no regrets." I think the hon. Member for Dunfermline, East's song should be Ricky Nelson's "Fools rush in, where wise men fear to tread."

The hon. Member for Dunfermline, East is going to face a summer jobs crisis, because he is under threat from the hon. Member for Sedgefield (Mr. Blair)—the man with the golden smile. It is not the golden smile that the hon. Member for Dunfermline, East has to watch out for; it is the golden elbow—and I think that that is coming very soon.

I want to be fair to the hon. Member for Dunfermline, East, because he is not the only one in the Labour party who is a member of the posse of gloom merchants.

§ Mr. John Townend (Bridlington)

There is more than one?

§ Mr. Portillo

There is more than one. There are also the hon. Member for Livingston (Mr. Cook), the hon. Member for Glasgow, Garscadden (Mr. Dewar) with his long, lugubrious face, and the right hon. and learned Member for Monklands, East (Mr. Smith). They are the four horsemen of the apocalypse: death, disease, disaster and Dunfermline.

Dame Elaine Kellett-Bowman (Lancaster)

This is a repetition of exactly what happened last month, when the whole centre page of one of our local papers, the Lancashire Evening Post contained a statement from local trade unionists heralding disastrous job figures when they had improved vastly. The article was published before the figures.

§ Mr. Portillo

My hon. Friend is absolutely right. Mr. Bill Jordan, the leader of the Amalgamated Engineering and Electrical Union, has now put matters right. He said that a poll of his members had shown that eight out of 10 firms have full order books and that only one in five companies are still making redundancies. So the trade unions have spoken, even if the Labour party finds it difficult to admit what conditions we are now operating in.

The Labour party insists on talking Britain down, but I am pleased to report that no one out there is listening to the Labour party. Britain remains a very attractive location for inward investment. The United Kingdom attracts one third of all the investment that comes into the European Community; that is twice the amount that goes to France, and France is our nearest rival.

The Budget and the Finance Bill are designed to protect incentives. We retain the lowest corporation tax of any developed country and a top rate of income tax of 40 per 731 cent., which is much lower than in Italy, Germany, France and even the United States. That is one of the things that make us such an attractive place for investment.

§ Mr. Peter Hain (Neath)

Will the right hon. Gentleman give way?

§ Mr. Barry Jones (Alyn and Deeside)

Will the Chief Secretary give way?

§ Mr. Portillo

No, I want to finish.

The Bill removes obstacles to inward investment by tackling some of the problems that foreign companies have faced with advance corporation tax, by reforming the taxation of foreign exchange gains and losses, and by putting in place the biggest ever deregulatory package for small businesses. Remember that the social chapter will apply to others, but not to us. My right hon. Friend the Prime Minister has said that they can have the social chapter; we will have the jobs.

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

Given all these things, what is it that has happened since the Red Book, which was published before the general election, that explains the Government's growth forecast being so much lower for the next four years than it was when forecasts were made before the general election? Before the general election, we had forecasts of 3.25 and 3.75 per cent. growth over the next couple of years. All the forecasts are now below 2 per cent. What has happened to make the situation so much worse?

§ Mr. Portillo

The right hon. Gentleman knows that, across the world, the recession has gone on for longer than people hoped. The right hon. Gentleman also knows that, every time we have a meeting of the Organisation for Economic Co-operation and Development or G7 Ministers, we are all in the business of revising down the forecasts that had been made collectively across the world of the rate at which recovery would occur, so there is no mystery about this, particularly for the right hon. Gentleman, who follows these matters closely.

§ Mr. Hain

We have had a list of sound bites from the Chief Secretary and a Pinocchio impression, but could we have some serious economics? I put it to him that, if any of the factors that he has quoted approvingly are valid, they are due to the 18 per cent. devaluation since last September. Why, therefore, are the Government deliberately encouraging an appreciation of the pound by about 5 per cent.? Surely the policy and the priority should be low interest rates, but interest rates are still very high in real terms, and are crippling prospects of long-term sustainable industrial recovery.

§ Mr. Portillo

Pinocchio's nose grew with telling untruths. We have had a lot of untruths from the Labour party and the Liberal Democrats. I shall be coming to them shortly. In framing his joke, the hon. Gentleman has not been listening carefully to my speech. All right, we have a lower exchange rate, which is helpful to competitiveness in the short run, but I have been pointing to an underlying change in the competitiveness of this country. I have been talking about a change in our unit wages costs vis-a-vis other countries. Perhaps the hon. Gentleman needs a moment longer to reflect upon what I 732 know is an unfamiliar concept, but one which, when he has absorbed it, he will realise is extremely important in explaining our recovery.

Two of the foundations for recovery have been in place for some time. They are low inflation and low interest rates, but after this recession what Britain needs is rising confidence, and rising confidence has been enhanced by the Chancellor's clear medium-term economic policies. He has set all his policies in a medium-term framework.

First, the Chancellor set out a clear monetary policy—a target for underlying inflation of 1 to 4 per cent., and a set of indicators that he will consider when deciding on interest rate policy. Secondly, in the autumn statement, he established a public spending policy for the medium term. Over time, the Government's spending will grow less than the trend growth in the economy. We have published fixed spending ceilings, above which we will not go. Thirdly, the Budget set out a strategy for tackling the deficit in the coming years.

The form that this Finance Bill takes underlines the Government's medium-term strategy for the economy, because, unusually, this Bill sets out tax rates not just for this year but for the years ahead. Contrast these clear statements with what we have heard from the Opposition. Before the election, they had a policy for everything, and usually two policies for everything. Since the election, they have entered a policy void. The hon. Member for Dagenham (Mr. Gould)—remember him? I might say, my hon. Friend the Member for Dagenham—puts it very well. Of the Labour party, he says: We appear not to have an independent view on the level of public spending or borrowing, or where interest rates should be, or the importance or otherwise of monetary policy, or how the exchange rate should be managed. What a condemnation of the Labour party. I want to make it clear that this is not something I picked up from the hon. Member for Dagenham over lunch in the Churchill Room. This is something that he has stated publicly—writing in The Mail on Sunday, no less.

The hon. Member for Peckham is shadow Chief Secretary. She has held her job almost as long as I have held mine. I have to badger Ministers all the time about controlling spending. That does not make me a very popular chap. It is probably for that reason that I have to look to people on the other side of the House to have lunch with. But what about the hon. Member for Peckham, who is in the equivalent position?

I cannot remember a single subject upon which the hon. Lady has called for restraint. All her comments have been to the effect that more money is needed for health, education, overseas aid and everything under the sun. Like the other megastar whom she most closely resembles—I am of course referring to Miss Joan Collins—she likes to have the most expensive of everything and, like so many of Joan Collins' screen roles, she just cannot say no. On the subject of what our tunes are today, I suggest that her tune is "I'm Just a Girl Who Can't Say No", from the musical "Oklahoma".

If public spending is too high, it weighs on the country's wealth-creating sector. We lose sight of that fact at our peril. This year, general Government expenditure is planned to be more than 45 per cent. of GDP. Government spending is likely to rise by 19.5 per cent. in real terms between 1988–89 and 1993–94. Central Government debt interest payments are projected to rise by nearly 9 per cent. 733 a year in real terms between now and 1996–97. On their own, they will add nearly I per cent. to the proportion of national income which is taken by public spending.

On 8 February, I announced to the House a programme of fundamental public expenditure reviews. During this Parliament, that process will consider every Government programme, reassessing spending commitments against the needs of the 1990s and the century ahead. I have agreed demanding agendas with the Secretaries of State for Social Security, for Health and for Education, and with the Home Secretary, and work is now under way on that. We have chosen those programmes because they are among the biggest. What is loose change in those programmes is, or can be, more than the entire budget for some other programmes.

Social security is a prime example. It accounts for £80 billion a year, one third of all public spending. Every working person in this country contributes £10 daily to cover the costs of social security. Every year, the amount we spend on social security increases. Since 1978–79, leaving aside unemployment, the programme has grown by more than 3 per cent. a year in real terms. In last year's public spending round, we added £3.9 billion to the DSS programme—that is what we added for one year—and it is a striking thought that that increase in social security spending is nearly twice the total annual investment in national roads, even though investment in national roads is at a record level.

Looking to the future, the prospects are also very difficult. Demographic pressures are against us, and they will add £250 million a year on their own. Items which a few years ago were insignificant have swollen to massive proportions. Back in 1978–79, help with mortgage interest rates through income support was £10 million. Today it is more than £1 billion. The number of people claiming invalidity benefit has doubled over the last year, while the nation has become healthier over the past 10 years. The number of single parents has also doubled. There are now 1,300,000 single parents bringing up more than 2 million children. All too many of those families depend on income support, and the numbers seem set to keep rising.

§ Mr. Malcolm Wicks (Croydon, North-West)

rose—

§ Mr. Portillo

Let me say a little more.

The Opposition recognise the problems, and the fact that great difficulties are posed by some of the trends. The Opposition have set up a social justice commission to put some of the issues in the spotlight while apparently leaving the shadow Chief Secretary in the dark. We must be prepared to examine in an open-minded way some of the fundamental features of our approach. What is the right balance between universal and selective benefits? That question, those words and those sentiments are not mine; they are the words and the question of the right hon. and learned Member for Monklands, East.

§ Mr. Wicks

The Minister said that 70 per cent. of one-parent families in Britain depended on state social security. Does he recognise that, in Sweden, for example, 70 or 80 per cent. of single parents are in employment and standing on their own two feet? Does that not imply that what is needed is a package consisting of jobs, training, education and child care to enable one-parent families to be independent, which is good for the economy and good for those families? Will the right hon. Gentleman draw on those lessons for the United Kingdom?

§ Mr. Portillo

I note that the Swedish economy had been in tremendous difficulty recently, and that Swedish interest rates have made ours look like a Sunday picnic. Our own rate of employment is second in the EC after Denmark. The participation of our labour force in employment is very high. I recognise the hon. Gentleman's argument, but there are clearly counter-arguments to be advanced.

Public expenditure control is necessary and is in place but, in present circumstances, our commitment to sound public finances requires us to raise revenue, too. We shall do so in the way that least affects the recovery or incentives, in a way that spreads the burden fairly and in ways that accord with our long-established principles. Over time, we have shifted the tax burden away from direct taxes, which blunt incentives, to indirect taxes, which do not. We also prefer to broaden the tax base rather than increase rates of tax.

The Prime Minister signed the Rio convention on climate change last June. We are determined to meet our environmental commitments, along with others, and return carbon dioxide emissions to 1990 levels by the year 2000. If we sign up to commitments, we mean it and we meet them. VAT on domestic fuel and power will contribute significantly to the achievement of our Rio target. The Opposition parties argued last year that the Rio convention did not go far enough, yet now they are unwilling to face up to the consequences of curbing pollution. Their reaction has been as predictable as it is depressing.

It is quite clear that the Labour party was itself planning such a change. It has issued statements about green taxes and has written policy documents about taxing fuel. It has omitted any reference to fuel and power when talking about our zero rates, and has quite explicitly said that VAT should be increased on things that damage the environment. One does not need to be Inspector Morse to work out that that means VAT on domestic fuel and power.

Today, however, I want to take issue with the Liberal Democrats in particular. In the Newbury by-election campaign, they have pledged themselves to scrapping the extension of VAT, and have sought to make that the centrepiece of their campaign. The right hon. Member for Yeovil (Mr. Ashdown) tells us that he believes in a new kind of politics. In what he has called the "Newbury declaration"—if anyone can imagine anything so pompous—he explained that politicians should look to "long-term gain" not "short-term calculation", and that politics ought to be about telling people the truth". So have the Liberal Democrats been telling people the truth? Listen to what they said in "Costing the Earth", a federal green paper issued in 1991: Liberal Democrats advocate as a first priority the imposition of a tax on energy … the UK is unusual amongst EC Members in not applying even standard rates of VAT onto domestic fuels … if it proved completely impossible to persuade our international partners to adopt energy taxes … we would nevertheless press forward … for example, by ending the anomalous zero rate of VAT on fuel.

§ Mr. Beith

Will the Chief Secretary give way?

§ Mr. Portillo

I will give the right hon. Gentleman his moment.

The "Newbury declaration" of the right hon. Member for Yeovil is not only pompous: it is sanctimonious humbug. Liberal Democrats are wedded to short-term 735 calculation and do not give a damn about "long-term gains". So far from believing that politics ought to be about telling people the truth, for a few extra by-election votes the Liberal Democrats would sell their grannies.

§ Mr. Beith

The Minister will acknowledge that that green paper did not become party policy. Instead, we took up the suggestion, which the Minister is resisting, that energy taxes should be related to pollution and resource depletion effects like a European carbon tax. That is the sensible way to proceed: not to visit a tax at the same level on wind power as is visited on nuclear power.

§ Mr. Portillo

The right hon. Gentleman's integrity and that of his party are not improved by wriggling. It is perfectly clear what the Liberal Democrats were saying then and it is perfectly clear what they are saying now, and it is perfectly clear that there is a huge gap between the two.

§ Mr. Robert Hughes (Aberdeen, North)

Now that Inspector Clouseau has had his fun with the Liberal party, perhaps the Minister can tell us why, if the VAT on domestic fuel was related to Rio and global warming, the total sum generated is not going into energy conservation in the home?

§ Mr. Portillo

The hon. Gentleman emissions the point. Putting VAT on domestic fuel and power will reduce our carbon dioxide emissions by 3.5 per cent. and, with our other measures, that takes us two thirds of the way towards fulfilling our Rio convention commitment. That is how it operates, and it achieves exactly that effect. The hon. Member for Aberdeen, North (Mr. Hughes) knows perfectly well that we are talking about a Budget in which revenue has to be generated. We have the honesty to talk about generating revenue, while the Labour party does not.

In contrast to what we have heard from the Liberal Democrats, the truth is that independent experts, such as the Institute for Fiscal Studies, have confirmed that this Budget will impose a roughly equivalent extra financial burden on those in all income brackets in our society.

The action that we propose on the married couple's allowance, on dividends and on car taxation ensure that the better-off pay their fair share. The truth is that any increase in domestic energy prices feeds through automatically in the normal uprating of all benefits, including retirement pensions, and we have promised to provide extra help on top of that for people who will face the most difficulty in meeting their higher fuel bills. That special assistance to those on income support and other income-related benefits will be available before the new bills come in.

The truth is that the Government can be proud of their record of help for the neediest people. Last October, we boosted the weekly income support rates for pensioners by £2 for a single pensioner and by £3 for a pensioner couple. This month, everyone on income support has benefited by between £1.40 and £2.80 per week because they no longer have to make any contribution to local taxation. What is more, this month all major benefits—not just income-related benefits—have risen by 3.6 per cent., which is nearly twice the current rate of inflation?

§ Mrs. Barbara Roche (Hornsey and Wood Green)

Will the Minister give way?

§ Mr. Portillo

No, I will not.

Following privatisation, everyone has benefited from falling fuel prices. Domestic gas prices have dropped by 9 per cent. in real terms over the past five years, and domestic electricity prices are actually being cut in price terms this year.

Under the previous Labour Government, electricity prices rose by 30 per cent. in real terms. No special help was given to people on low incomes then. What is more, Conservative Members remember that the right hon. and learned Member for Monklands, East (Mr. Smith) was an Energy Minister in that Labour Government.

§ Mr. David Shaw (Dover)

With regard to pensioners, does my right hon. Friend recall the position in 1976, when the International Monetary Fund had to be called in, the Christmas bonus could not be paid and Barbara Castle had to change the pension payment date—from April to April, to November to November—in order to lose 10 months of inflation and rob the pensioners? Is it not the Labour party which always has its stiletto knife in pensioners' backs?

§ Mr. Portillo

My hon. Friend is right in his recollection of history. In every election since 1979, the Labour party has made grandiose promises to pensioners, but pensioners have not believed them, because they remember that the Labour party tricked them when Labour was last in office, and they know that, when the Labour party offers them policies, they do not add up, and they have no expectation of those promises being fulfilled in future.

In recent weeks we have seen a string of very good economic figures. They have forced the hon. Member for Peckham to change her tune and to recognise that recovery may be under way. However, not being able to bear such good news, like all great stars she has taken out her handkerchief and spoken in tragic tones. Her performance has been very moving. She now directs our attention to the need for sustained recovery and for tackling the underlying weaknesses of the economy.

On the Government side of the House, Members have always been interested in sustained recovery and in building up the underlying strengths of our economy. My right hon. Friend the Chancellor of the Exchequer strengthened the car industry by abolishing car tax; it has responded with the best monthly production figures for 19 years.

The Chancellor gave unparalleled help to exporters in the Budget; exports to non-European Community 24countries are up 12 per cent. on last year. He took steps to help the housing market; prices are beginning to stabilise and even to rise a little.

The Opposition are not really interested in building up the underlying strengths of this economy. They oppose every policy that offers Britain a stronger future; they opposed every privatisation that turned loss-making corporations into profit-making businesses; they have fought every trade union law reform which has given us the best industrial relations record for 100 years; and they have let their union friends boycott every major training initiative. Now they refuse to condemn the teachers' boycott of testing in our schools, even though it is damaging our education and our economic prospects.

737 The British people will contrast that record of the Labour party with the courage shown by my right hon. Friend the Chancellor of the Exchequer. His tenacity has brought down inflation to its lowest level for a generation.

The evidence of economic recovery is growing, confidence is returning, Britain is on track. This Finance Bill will keep Britain on track, and I commend it to the House.

§ Ms Harriet Harman (Peckham)

The Bill arises from a Budget which breaks promises, hits hardest at the people who can least afford it and fails to do what is necessary to deal with the fundamental weakness of the economy and to set the country on course for sustainable economic growth.

At the heart of the Bill lies a fraud on the electorate. The Tory election campaign was centred on the pledge to cut taxes. The Prime Minister promised specifically and repeatedly that the Government would not put value added tax on gas and electricity—they would not and they had no need to—yet they are putting before the House a Finance Bill which means that for every £1 paid on heating bills they will take another 17.5p in tax, which will affect everyone. It will hit hardest at the poorest, as they spend a larger share of their incomes on heating bills, and the Government know it. It will hit hardest at the elderly, who spend more time at home and need to use more gas and electricity to stay warm, and the Government know that, too.

Not only have the Government broken their election promises, not only are they hitting the poor and the elderly hardest, but they add insult to injury by trying to justify the measure by claiming that it is environmental. When the Chief Secretary spoke in the Budget debate, he was slightly more honest, saying: Before the election we said that we had no plans to raise VAT, and that was the plain truth [Interruption.] Yes, it was. Last year, we were looking at a level of Government borrowing far lower than that we are facing today. We must take action to deal with the changed position."—[Official Report, 17 March 1993; Vol. 221, c. 300.] So which is it? Is it what the Chief Secretary said on 17 March—that the Government have gone into the red—or is it a green measure, as he is trying to pretend today? We know that this is not a measure for the environment; it is intended to raise money. It is a measure not from a Government who have gone green but from a Government who have gone into the red.

§ Mr. John Butterfill (Bournemouth, West)

Can the hon. Lady tell us what the Labour party did to help the elderly? When Labour was last in power, electricity prices rose by 30 per cent., and I do not recollect her protecting them at that time.

§ Ms Harman

Since the Conservative Government have been in power, our pensioners have fallen behind those in the rest of Europe. They have found that residential care services, domiciliary care services, home help and meals on wheels have been cut. They have found that the public transport services that they need to get round have been cut. I should like to know whether the hon. Member for Bournemouth, West (Mr. Butterfill) told those people whom he asked to vote for him at the general election that 738 he would vote to increase VAT on their gas and electricity. I will give way for him to say what he put in his election address.

§ Mr. Butterfill

Will the hon. Lady answer my question?

§ Ms Harman

I have answered the hon. Gentleman's question. Not only will VAT be put on the cost of the fuel that is used; it will also be put on the standing charge. How on earth can it be an environmental measure to put VAT on a standing charge that, by definition, does not vary with the amount of fuel used? The Government came up with the answer that to have VAT on gas and electricity but not on the standing charge would lead to tax avoidance. Do Conservative Members really believe that, or is it simply another thing that they have taken to saying without even caring or knowing whether anyone believes them any more?

§ Mr. Stephen Milligan (Eastleigh)

Can the hon. Lady tell us clearly what a Labour Government would do, in the remote possibility that they came to power? Would they repeal the tax? If so, how would they find the additional revenue?

§ Ms Harman

We will vote against the measure tonight. We will vote against putting VAT on gas and electricity. I challenge the hon. Gentleman: when he asked his constituents to vote for him, did he say that he would put 17.5 per cent. on their gas and electricity bills? Our principles are to be fair to pensioners and ensure that a Labour Government do not clobber them with the same economic mistakes as this Government have.

In the last general election, the candidate for Enfield, Southgate, Michael Portillo, said: Conservatives want to cut your taxes. Can that be the same Michael Portillo who now, as the Chief Secretary to the Treasury, asks for £17 billion extra in taxes? Curiously, the Cabinet that has decided to put taxes up is full of right hon. Members who told their voters that they would put taxes down.

The Tory candidate for Rushcliffe, Kenneth Clarke, said in his election address: Only the Conservatives believe in keeping taxes down. Did he mention that when the Cabinet considered the Budget? The Tory candidate for Edinburgh, Pentlands said: six reasons for voting conservative this time … (3) to stop your taxes going up". Did he mention that in the Cabinet? The Tory candidate for Wirral, West, David Hunt, said: Ten reasons to vote Conservative … (1) keep taxes low". Did he mention that when the Budget was considered by the Cabinet? The pledge was echoed by Tory candidates throughout the country.

Perhaps I can remind some of the hon. Members who will be voting tonight of what they said to their voters. The Conservative candidate for Richmond, Yorks said: Only the Conservatives can keep taxes down … A Conservative Government means lower taxation. A Conservative Government has not meant lower taxation. The Tory candidate for Chichester, Anthony Nelson, said: A Conservative Government means lower taxation. I want to see taxation reduced further. Those Tory Members and all the others who made the same promises now face a choice. They can either keep the clear promises they made to their voters or follow the discredited Ministers through the Lobby to put up taxes as 739 the Government's panic response to the damage that they have done to the economy. If they vote with the Government, their constituents will know that they can never be trusted again. [Interruption.] Perhaps the hon. Member for Rutland and Melton (Mr. Duncan) can tell us what he said about keeping taxes down.

§ Mr. Alan Duncan (Rutland and Melton)

The Labour junior Treasury spokesman in the other place said that VAT should be extended to all zero-rated goods. Does the hon. Lady agree with her Front-Bench spokesman in the other place?

§ Ms Harman

We are opposed to putting VAT on gas and electricity. The Government promised that they would not put VAT on gas and electricity—but they are doing exactly that.

The Finance Bill not only breaks election promises but fails to set the economy on course for sustained economic recovery. The Chief Secretary joked about that, but many people in Britain believe that the situation remains serious. Of course everyone hopes that there will be a recovery. Every sign of improvement is welcome, because the price that the country has paid for the Government's economic incompetence is high. During this recession, 1,347,000 more people lost their jobs. During this recession, 420,000 more young people joined the dole queue. Some 149,000 more businesses have failed and 188,000 more families have lost their homes through mortgage default.

Having failed to accept responsibility for the recession, the Government now try to take credit for the recovery. Every increase in unemployment is due, of course, to factors outside the Government's control. Every drop in unemployment is due to the Government's economic policies. Every business failure is due to factors outside the Government's control. But any increase in business confidence is due to the Government's economic policies.

The fall in retail sales was due to factors outside the Government's control. The increase in retail sales is now directly due to the Government's economic policy. No one who lost his job can blame the Government, but everyone who finds a job has the Government to thank. This is a Government who take credit for anything, but accept responsibility for nothing.

§ Mr. David Willetts (Havant)

The hon. Lady referred a moment ago to the recovery. Does she accept that a recovery is under way?

§ Ms Harman

I very much hope that a recovery is under way. I very much hope that this unnecessarily long recession, caused by the Government's economic failures, is ending. But I want to be sure, and people in the country want to be sure, that never again do so many lose their jobs and so many businesses fail because the Government think that the economy is nothing to do with them.

The economy remains scarred by recession. Still 2,940,000 people have no job. Still more than 1.5 million people live in homes worth less than their mortgage?

§ Mrs. Ann Winterton (Congleton)

If the hon. Lady agrees that, indeed, the recession appears to be ending and recovery is under way, how much of the start of that recovery does she put down to our coming out of the exchange rate mechanism? Is it her party's policy to return to the ERM in due course?

§ Ms Harman

We want to see stability for business in Britain as part of economic recovery. One of the things that business has lacked on exchange rates, interest rates or any other issue is certainty for the future. We believe that management and co-operation on exchange rates are part of that. But one of the problems with the ERM that the Government have failed to address is why our economy was so fundamentally weak that we had no chance of surviving at the rate at which we entered.

The economy has become seriously weakened. We have fallen behind the countries with which we have to compete. There was no recognition of that in the Chief Secretary's speech. British investment per manufacturing worker is half that of Germany and America and only one third that of Japan.

We have fallen behind on skills. Skill levels are 40 per cent. below those of our leading rivals. The skills gap is particularly serious in engineering, in which Germany and France continue to produce twice as many qualified people as we do. Our failure to invest in skills and industry shows in our failure to match our competitors on productivity. British productivity is now 30 per cent. below the Organisation for Economic Co-operation and Development average.

The Government's lack of attention to those economic fundamentals is reflected in a growing balance of payments problem. Despite the recession, we continue to import more than we export. The manufacturing deficit is set to rise. The balance of payments deficit will worsen in the next two years. The volume of imports is set to rise faster than exports. Government forecasts show that they expect consumer spending to lead the economy out of recession. But that will make the already serious balance of payments problems worse unless it is matched by investment in industry and skills.

Only the Government fail to recognise the deep problems that remain, problems which are evident to those who look at Britain from home and abroad, even if they are apparently undetectable to those who survey the scene from either No. 10 or No. 11 Downing street.

The Government must address the skills gap and the investment gap which are at the heart of our growing trade gap. Before the Government sound the trumpet to celebrate the end of the recession they should notice that the trumpet, too, is now made in Japan by Yamaha. That is why it remains vital that the Government should adopt the measures that the Labour party is proposing not only for an urgent employment programme, but for a boost to investment, starting with the phased release of the accumulated receipts from the sale of council houses.

The Government have been borrowing, and the cost of the recession and the weakening of our industries is revealed by public finances. They have borrowed not to train people or to equip them with new skills, but to keep them idle. For the first time since the systematic collection of statistics began, more public money is being borrowed than invested. The Government's approach to public spending is like running the bath taps with the plug out.

When the Prime Minister was Chief Secretary, he said that we would have a zero PSBR; he then said that he would not accept a PSBR of £25 billion, but now the Government forecast, and they hope to be able to keep to, a PSBR of double that at £50 billion.

Despite the £115 billion in oil revenues and the £62 billion in privatisation receipts, the Tories are set to push public borrowing to a record high. The quest to press on 741 with privatisation has now become a sick joke. Group 4 may need to change its name to Group 8 in recognition of the number of prisoners who have escaped. The Chief Secretary will remember that Margaret Thatcher promised that her plans for privatisation would set the people free. Group 4 has given a new and fresh meaning to that election slogan.

The privatisation receipts, in common with the oil receipts have not gone on investing in skills, industry and our social and economic fabric, but on financing the growing dole queue. The country has enormous strengths, but the Government's economic policy is eroding them systematically. It is not that the Government have an economic problem, but that the economy has a Government problem. It is not the Labour party which is talking Britain down, but the Conservatives who are holding it back.

At a time when unemployment remains at around 3 million, it is extraordinary that the Finance Bill contains a measure for the taxation of oil which, on the Chancellor's own assessment, will result in at least 10,000 job losses. The oil industry and independent forecasters estimate that the proposal will cause nearer 30,000 job losses. The change in the tax regime for North sea oil will result in a fall in exploration, and will therefore affect the future of the oil industry. The Government have introduced this change at a time when many other areas of the world have substantial oil reserves, sometimes greater than those in the North sea. The loss of incentives to continued exploration in United Kingdom waters may be highly damaging.

The measure in the Bill will benefit some operators in the oil industry, especially if they cut the amount of exploration they undertake, which many, faced with the proposed change, now plan to do. Operators in the mature fields will benefit from the reduction in, and eventual abolition of, the petroleum revenue tax. There is a real risk, however, that those operators, instead of investing their new profits in the North sea, will invest that money in other parts of the world. This may be an issue for Scotland and the oil industry, but it is also an important issue for the country. It poses a significant risk to the United Kingdom, not just in terms of immediate jobs losses, but in terms of the future of our energy resources.

As the economy struggles out of one of the deepest and longest recessions for 50 years, confidence may return to the high street, but public confidence will not return to the Chancellor and his Ministers. The Tories will not address the question of how to build a strong economy because, quite simply, they do not believe that that is an issue for government. They think that it can all be left to the market and that the economy has an inherent capacity to grow.

It is simply no longer possible to place any trust in what the Tories say either about the economy or about their plans for the economy. The Conservatives failed to forecast the recession and they denied its existence when it started. They underestimated its severity and length, and they overestimated how soon a recovery would begin. Every official forecast made by the Prime Minister and by the Chancellor has had to be revised downwards—except for the forecast for the PSBR, which has had to be doubled. The Chief Secretary has just said—

Several hon. Members

rose—

§ Ms Harman

I have given way half a dozen times. I am not prepared to give way now, because many hon. Members want to speak in the debate.

The Chief Secretary said in a moment of seriousness that, when the Government signed up for commitments, they kept them. I thought that he must be about to make a joke, but I realised that he was trying to be serious. The Government said that they would maintain the value of the pound, but they devalued it. They said that the recession was ending in April 1992; it had another year to go. They said that they would not put VAT on gas and electricity. It is set to go up by 17.5 per cent. They said that they would not have a PSBR of more than £25 billion. It is to be double that. They said that they would cut taxes, but they are to raise them by £17 billion.

The Chief Secretary said that there would be £1.75 billion in extra investment for councils from the release of receipts from the sale of council houses and from other capital receipts. In the autumn statement debate, I challenged that figure, because councils told me that they expected not an increase but a drop in receipts, because they could no longer sell council houses. Yet the Chief Secretary and the Chancellor, when they clearly knew that councils would not have £1.75 billion to invest and to spend, kept giving that figure.

The Institute of Housing has carried out a survey which supports my findings. It concludes: Local authority building will be zero and only 400 additional homes will be built through housing associations. A modest increase in investment in 1993 will be paid for by cuts in 1994 and 1995. Will the Chief Secretary now admit to the House that there was no £1.75 billion-worth of capital receipts available for council investment and that that figure was and is bogus? I shall give way to the Chief Secretary if he wants to admit that that figure is bogus. I see that he is staying in his seat.

The Government are now set to chop the welfare state. The increase in unemployment and the fall in receipts are used as the excuse not only to increase taxes, but to cut services. The election promises to protect services and benefits have also been forgotten. No Tory candidates and no Tory Members warned constituents that to vote Tory would mean chopping benefits and services. Of course, cutting the welfare state is not just an expedient caused by the Government's economic incompetence, but is the hidden agenda of the Tory right wing. It sees the increase in borrowing as a chance to take the axe to services in which it has never believed and to benefits on which it has never had to rely.

The Institute of Managers reports that, even at the bottom of the recession, directors have managed to award themselves a pay increase of 5.5 per cent., yet the Chief Secretary tells us—he told us this again today—that the key to a successful economy is low wages, not for directors, of course, but starting with a cut in the living standards of people working in the public sector?

§ Mrs. Angela Browning (Tiverton)

Will the hon. Lady give way?

§ Ms Harman

I have given way about six times and I intend to press on.

As the Government cut the welfare state and push up fuel costs for the elderly, more people will turn to charities for help.

§ Mrs. Browning

Will the hon. Lady give way?

§ Ms Harman

I give way on condition that the hon. Lady tells the Chief Secretary to clean up his jokes about me?

§ Mrs. Browning

I thank the hon. Lady for giving way, and if I can help her in the matter of the Joan Collins jokes I will be pleased to discuss that in private with her after the debate.

I should like to take up the hon. Lady's point about pay increases. We are all aware of the need for pay restraint right across the public and private sectors, but the hon. Lady will recall that the House voted on Members' pay and that many hon. Members, particularly Conservative Members, voted for a zero increase. The same cannot be said for all her Back-Bench colleagues.

§ Ms Harman

The trouble is that the Conservative Members who voted for no pay increase for Members of Parliament did not vote for their pay as directors or as consultants to be frozen. The difference between us and the Conservatives is that we believe in a highly skilled, high technology, high investment economy—and high wages will be part of that. We do not think that we should have a low skill, low technology, low wage economy and then try to compete with the third world.

As the Government cut the welfare state and push up fuel costs for the elderly, more people will turn to charities for help. Last year the Cancer Relief Macmillan Fund gave out more than £3 million in patient grants, of which by far the largest category were grants for heating costs. But the charities to which the elderly and the ill turn will in future be less able to respond because the Government plan to take money off them by making them pay VAT on gas and electricity for the first time.

The Imperial Cancer Research Fund calculates that VAT on gas and electricity will mean that it has to pay extra tax of £170,000 a year; and the Charities Reform Group calculates that 11 national charities will have to give the Government more than £1 million more.

The measures in the Finance Bill to encourage more payroll giving and gift aid will go nowhere towards making up for the millions of pounds that the Government will take off the charities through VAT on fuel or to make up for the fall in private charitable giving that has been caused by the recession.

The Government cannot even get their alibi right. The Chancellor claims that the rosy 1992 Budget forecast for growth was blown off course because of problems in the world economy. The Red Book, however, shows that the one figure that the Government got right in 1992 was that for growth in the world economy, as Dr. John Wells of Cambridge university has pointed out. The problem had everything to do with misleading the electorate about the country's immediate economic prospects and the possibility that taxes would be raised.

The Government did not tell voters at the last election that they planned to put up taxes and put VAT on gas and electricity, because they knew that, if they told them, they would not be re-elected. Although most Tories are happy to cheat the people who elected them, some, at least, have a conscience. I was glad to see that the Conservative group on Dundee council was prepared to second a motion from the Labour leadership of that council. Although he had a heavy heart in doing so, the Tory leader of Dundee council said that he had come to the conclusion that to oppose the 744 motion condemning the Government for putting VAT on gas and electricity would be to try to "defend the indefensible"; and that to impose it for environmental reasons, for controlling pollution, was to stand logic on its head. Conservative candidates are asking for votes in the May council elections throughout England and Wales, but, before voting, people are entitled to know where those candidates stand. Do the Tory candidates, for instance, support the proposal to put VAT on gas and electricity? Perhaps the Chief Secretary can tell us, to help the voters of Newbury, whether, if the Tory candidate there were elected, he would vote for VAT on gas and electricity. Will Julian Davidson vote for that if he is elected? Can the Chief Secretary tell us? It would be very odd if he did not know whether a by-election candidate for his own party would vote with him on this matter if he were elected.

The Chief Secretary is not prepared to tell us whether his candidate in that by-election supports that key measure in the Budget. It is clear why he will not. If the candidate pledges to vote for the VAT extension, he has no chance of being elected, so he will refuse to say. The people of Newbury will know two things about him—that he plans to vote for VAT on gas and electricity and to conceal that fact from those he is asking to vote for him. In that respect, he is like other Tory Members. If any Tory Members have any integrity left, they will join us in the Lobby to vote against the Finance Bill and to keep their promises.

§ Mr. John Maxton (Glasgow, Cathcart)

On a point of order, Mr. Deputy Speaker. What is the position about Second Reading of the Bill? Am I right in thinking that it is exempted business? Many hon. Members are rising to speak, and if it is exempted, the vote does not need to be at 10 o'clock but can be at whatever hour the House decides.

§ Mr. Deputy Speaker (Mr. Geoffrey Lofthouse)

The hon. Gentleman is quite right on both points.

§ Mr. Nigel Forman (Carshalton and Wallington)

On a point of order, Mr. Deputy Speaker. Do the rules of the House contain any guidance about how we are expected to deal with a shadow Chief Secretary to the Treasury who apparently aspires to the job, yet suggests that public expenditure is to be increased and taxation is to be resisted?

§ Mr. Deputy Speaker

That is not a matter for the Chair, as the hon. Gentleman well knows. His point is a sheer waste of the House's time.

§ Mr. John Watts (Slough)

The hon. Member for Peckham (Ms Harman) attacked the level of the borrowing requirement and some of the Budget measures that are designed to reduce it. In particular, she attacked VAT on domestic energy but did not mention her party's proposal to impose a levy on the profits of energy utilities and how that would assist consumers. She did not say whether, despite that levy, energy utilities would continue to pass to consumers the benefits from the lower costs that they have enjoyed in recent years.

The hon. Lady gave a grudging welcome to the encouraging signs of economic growth that have emerged in recent weeks, but criticised the Government for, she claimed, acknowledging the recovery too soon. She said that the Government had claimed that it had started last 745 summer, and that we had had to wait a year for it. My right hon. Friend the Chief Secretary explained that the GDP had grown in three quarters. I am a simple accountant and my mathematical ability may not be equal to that of the hon. Lady. However, it is clear that three quarters before the end of the last quarter would take us back to the beginning of the summer of last year. If recovery started last June, it is churlish of the hon. Lady to criticise the Government for a claim which, on her calculation, was perhaps three months premature.

§ Mr. Geoffrey Hoon (Ashfield)

The hon. Gentleman is the Chairman of the Select Committee on the Treasury and Civil Service. Why did that Committee roundly condemn the Budget?

§ Mr. Watts

It would take me a long time to deal in detail with every part of the report that was publi;hed today. The hon. Gentleman is referring to the fourth-form abuse in the earlier paragraphs of the report. I understand the irresistible temptation that faced the Liberal and Labour members of the Committee to insert a few abusive and rude comments about the Chancellor, but they did little to enhance the work of the Committee, and they were not an intelligent commentary on the development of the economy. When I have dealt with another matter that has arisen in the debate, I shall deal with the central feature of that report and the matters that the Government will have to deal with in the years ahead.

§ Mr. Giles Radice (Durham, North)

It would have helped the Select Committee even more if the Conservative Members who should have been there were actually there.

§ Mr. Watts

I plead not guilty, as I was there. As I have said on a number of occasions, I do not consider myself to be either a wet nurse or a Whip for one part of the Committee. My role as Chairman is to serve the whole Committee.

My right hon. Friend the Chief Secretary referred to a number of measures taken to assist the further development of industry and to a Liberal declaration in Newbury about VAT. In both references, he Missed out one important measure in the Budget. He made no reference to the improvement in the VAT treatment of the racing industry, which is a feature of the Budget for an industry that is of importance to many parts of the country. I link it to the Liberal declaration in Newbury, because I have seen reported a scurrilous allegation from the Liberal candidate that the measure was designed for the by-election and for no other purpose.

It is important that the record is set straight. The last time that I saw our late colleague, Judith Chaplin, was when she and I went to see my right hon. Friend the Chancellor in the course of pre-Budget consultations. The matter that she discussed with the Chancellor, as she had done often before, was the need for some reform of VAT on the racing industry. Therefore, it cannot be true, and is not true, that the measure is included in the Budget as a by-election bribe. It is there, if anything, as a tribute to the assiduous way in which our late hon. Friend served the interests of her constituency with such vigour.

§ Mr. Portillo

My hon. Friend is right. Does he agree that, if it had been a by-election ploy, during the course of my speech I would have made quite a lot of that historically helpful measure?

§ Mr. Watts

My right hon. Friend makes his own point in a most powerful way. I thought it appropriate to mention the matter in order to put the record straight and, in particular to draw attention to the role of our late, lamented friend.

The Bill implements the revenue-raising side of the Chancellor's fiscal judgment. It is clear that the difficult judgment, as my right hon. Friend described it, that the Chancellor took was the right one. He was right to avoid premature increases in the burden of taxation, which might have jeopardised the recovery that we are all so glad to see is shown by recent evidence, even though the consequence is a £50 billion public sector borrowing requirement for the coming year. He was equally right, sensible and wise to recognise that the deficit is not a problem that can be ignored and neglected throughout the economic cycle. It poses a potential problem in the development of the economy in the years ahead.

Table 2B.5 of the Red Book shows that, in 1997–98, the PSBR is projected at £30 billion or 3.75 per cent. of GDP, based on the central growth assumption in the forecast. On a low growth assumption, that deficit could be as high as 5.25 per cent. of GDP and, even on the assumption of a high assumed level of growth in the forecast, it would still be 2.5 per cent. The Bill contains revenue-raising measures to take effect next year. Had they not been in place, all those forecast levels of deficit would have been another 1.5 per cent. worse. That underlines the importance of those measures in the Bill.

I am reminded of the comments of my right hon. Friend the Chancellor that the Budget cannot be an a la carte menu. We must look to the revenues that are needed to balance our national accounts. Even on the most favourable assumption that can be contained in the official forecasts, the deficit does not end at the end of the present economic cycle. It is clear that, unless recovery is both substantially stronger than expected, and sustained, further reductions in public expenditure or increases in taxes will be necessary.

Naturally, my clear preference is for reductions in spending so that we can have the opportunity of further reductions in the level of taxation. The Conservative party is the only party, in the House or outside it, committed to lower taxation as a policy objective. The records of the Labour party in office and, if one looks back far enough, of the Liberal party in office and in support of a minority Labour Government prove that to be the case. Therefore, I urge my right hon. Friend the Chief Secretary to proceed with vigour with the fundamental review of public expenditure that he has been charged to undertake. No part of public expenditure can be considered to be out of bounds.

We have to address a medium to long-term problem. Therefore, we should not be seeking short-term cuts of the sort that Labour Governments took in the mid to late–1970s, involving slashing the Government's capital programme and imposing cuts in pensioners' incomes—a fact to which my hon. Friend the Member for Dover (Mr. Shaw) referred earlier—and imposing on workers in the public service not merely pay restraints but reductions in real pay. We must not look for such a menu to meet our requirements. We must look at rather more fundamental changes, both in the scope of expenditure and in the structure of the public sector.

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

Is the hon. Gentleman aware that, when he calls for cuts in public expenditure, he is calling for a continuing downward spiral of low or slashed levels of public investment, leading to nothing happening about the unemployed and to continuing high levels of public expenditure on unemployment? Would it not be far better to invest in the economy, do something about the unemployed and help to cut the PSBR so that we would not have to continue to spend millions on maintaining a standing army of the unemployed?

§ Mr. Watts

I am grateful for the hon. Lady's support. I am sure that, had she been a Labour Member of Parliament in the 1970s, she would have opposed the slashing of the capital programme for roads, hospitals and schools which the Labour Government of the day undertook. That is what I had in mind when I referred to short-term measures almost always being the wrong decisions.

It would be surprising if my right hon. Friend the Chancellor, having taken such pains in his autumn statment to protect the major parts of the Government's capital expenditure programme, were to reverse that decision and make such short-term and ill-considered reductions in beneficial expenditure, rather than having the fundamental review of the role of the public sector that my right hon. Friend the Chief Secretary is undertaking.

It will build on the initiative announced by my right hon. Friend the Chancellor and my right hon. Friend the Chief Secretary, which is aimed at a substantial transfer of both responsibilities and risks from the public sector to the private sector. That will have beneficial effects on public finances. We are not looking for cosmetic changes, but if there is a permanent shrinkage in the public sector and if risks that are borne in the public sector are taken on in the private sector, that is not cosmetic but a fundamental change in the role and the scope of the public sector.

Higher taxation is never my preferred option. I am sure that my right hon. Friend the Chancellor will review the progress of the economy in the run-up to his next Budget in November. While the recent growth in consumer expenditure is welcome to get the economy on the move, if that consumer spending growth is excessive and appears detrimental to the current account and the balance of payments because of a high propensity to buy imports, there may be a need to consider some increases in indirect taxation in that Budget. That would ameliorate the growth of consumer spending, if such a growth is becoming a problem, and would contribute usefully, in the short and medium term, to a reduction in the size of the deficit.

My preference is not for an increased burden of taxation as an objective of policy, but for a combination of lower spending and more rapid growth in the economy. That would be preferable and may well happen, especially if our major trading partners—in particular on the continent of Europe—get their economic acts together. Such a combination could present my right hon. Friend the Chancellor with real options in the later years of the medium-term financial strategy, one of which might be more rapid progress in implementing the Government's policy objective of a lower rate of direct taxation—a 20p basic rate of income tax. That objective is not shared by the other political parties.

No doubt many aspects of individual taxes will come under close scrutiny in Committee, both on the Floor of 748 the House and upstairs, but there is only one specific tax measure to which I wish to refer today, and it is the petroleum revenue tax. In view of my right hon. Friend the Chancellor's need to raise revenue to reduce the deficit, it is not surprising that he should consider a tax that had begun to appear almost optional and no longer yielded the revenue that he could once have expected. Perhaps the previous tax regime was over-generous in its relief for exploration and appraisal expenditure. However, I hope that my right hon. Friend will think again about the proposed transitional relief.

As I understand it, many oil companies are committed through their licensing obligations to incurring expenditure. They entered into those commitments when the goalposts were such that they could expect E and A expenditure to be set against their PRT tax liabilities. However, such expenditure will no longer qualify for that relief and nor is it covered by transitional relief. Where expenditure is unavoidable and decisions have been made in the expectation of relief, transitional relief should provide for that.

The second matter—

§ Mr. Robert Hughes

Before the hon. Gentleman leaves the question of petroleum revenue tax, does he agree that it is ominous and sinister that the Chief Secretary, during his opening speech, said not a single word about PRT?

§ Mr. Watts

I find that neither ominous nor sinister. There are many matters to which my right hon. Friend could refer, but he cannot refer to them all.

In fact, my second point was not moving away from PRT. I wonder whether there are other ways in which the yield from PRT could be increased without entirely removing relief for E and A expenditure. One possibility would be to retain a higher rate of PRT and restrict the amount of expenditure that qualifies for relief in any one year. I understand from some oil companies that have been in touch with me that, typically, their E and A expenditure might be about 80 per cent. of their PRT liability. My right hon. Friend's understandable desire to increase the flow of revenue could be achieved by setting a cap of 50 or 60 per cent. on the amount of PRT that can be offset by E and A expenditure. That would increase the flow of revenue to the Exchequer, but would not entirely remove the fiscal incentive to continue exploration for valuable hidden natural resources.

I fear that, in swinging the pendulum from one extreme to the other, the Budget's proposals may have gone too far. I hope that my right hon. Friend will look again at the matter and with an open mind. It may not be until the November Budget that consideration can be given a different long-term regime for oil taxation, but transitional relief—

§ Mr. Alex Salmond (Banff and Buchan)

The hon. Gentleman was recruiting some support on these Benches until his final point, when he suggested that any change could wait until November. Does not the hon. Gentleman understand that, by November, thousands of people—some estimate tens of thousands—in the oil industry will be out of work? Would it not be better to make the appropriate change during the Committee stage of this Bill? Will the hon. Gentleman revise his thoughts about the timetable for sensibly adjusting PRT?

§ Mr. Watts

The hon. Gentleman intervened a little too early. I said that it might take time for a different long-term tax regime to be devised to meet the objective of a strong flow of revenue, while leaving some incentive for exploration to ensure that important national assets are fully exploited. As the hon. Gentleman intervened, I was saying that the issue of transitional relief was more urgent and needed to be dealt with in this Bill. If it is dealt with satisfactorily, those tens of thousands of people to whom he referred will still be in work, because the licensing obligations for companies relate to work that is to be carried out over a significant number of years. Therefore, there is time for the fundamentals of the long-term regime to be dealt with later in the year if it proves impossible to deal with them satisfactorily in this Bill.

I am conscious of Madam Speaker's request that all hon. Members be economical in their use of time. I intend to follow her stricture and conclude simply by saying that, overall, it is a good Budget based on sound judgment, and that it includes sensible measures to underpin sustained recovery.

§ Mr. Denzil Davies (Llanelli)

The hon. Member for Slough (Mr. Watts), who is Chairman of the Treasury Select Committee, is, with the greatest respect, deluding himself if he thinks that in public accounts a clear line can be drawn between capital spending and revenue spending. I am sure that the Chief Secretary would confirm that. If a hospital cannot afford to pay its nurses, there is not much point in having capital, and vice versa. It is not such an easy solution as the hon. Gentleman, perhaps inadvertently, suggested.

The Chief Secretary made a Cambridge Union-style knockabout speech. I do not blame him for that, because he is a man with a problem, and the Red Book shows where it lies. There is a public sector borrowing requirement of £50 billion—8 per cent. of gross domestic product. As the hon. Member for Slough said, even on the best estimates that figure is not likely to come down by much over the next few years. The Government have signed up to the figures in the Maastricht treaty—apparently, we must get the PSBR down to 3 per cent. of GDP. Therefore, the Chief Secretary has a problem. It is in the lap of the gods whether he is still Chief Secretary if and when that 3 per cent. is achieved.

There is also a balance of payments deficit. Based on the Treasury's estimates, the Red Book says that this coming year the deficit will be £17.5 billion. Within that, the figures are even more horrendous. As my hon. Friend the Member for Peckham (Ms Harman) said, the manufacturing deficit is estimated at £13 billion. In addition, under the column headed "Other", there is another figure of, believe it or not, £9.5 billion.

I do not understand why the Treasury does not break down that "Other" figure. It is fairly large, at £9.5 billion. Most of it is probably accounted for by food imports. It is estimated that this country will be in deficit to the extent of £13 billion in the manufacturing sector and close to £8 billion or £9 billion in food. We are importing far more manufactures than we are making, and that is true of food as well. We can no longer pay for our food imports by exporting manufactured goods. We are in the appalling position of suffering major deficits in respect of manufacturing and food consumption.

750 Elsewhere in the table, a figure of £2 billion is shown in respect of oil, although no figure is given for energy. I am not an expert on oil taxation, but if half of what I hear is correct, that £2 billion deficit will probably disappear before long if no changes are made to the Bill. What about all the pit closures? I do not know where all the gas will come from—perhaps Norway or somewhere else. It will not be long before this country has an oil deficit also.

Invisibles account for £3 billion or £4 billion, but that figure fluctuates. This country has massive deficits in production