§ [Relevant documents: European Community Document No. 4683/93, the Commission's Annual Economic Report for 1993, and the draft Decision adopting the Report.]
§ Madam Speaker
The Question is as on the Order Paper. I remind the House that the Budget debate continues on the motion entitled "Amendment of the law". Before I call the first speaker, may I plead for short speeches today, please? A number of Members are seeking to catch my eye and I should be much obliged if speeches could be rather shorter today.
§ Mr. Gordon Brown (Dunfermline, East)
Two years ago, we had a "Budget for business". Since then, 100,000 businesses have gone under. Last year, we had a Budget called a "Budget for the recovery". No recovery materialised. In November, we had an autumn statement "for investment". Public investment continued to fall. Now we have what is called a Budget for jobs, and I make one Budget forecast—that, after the Budget, unemployment will rise this month, next month and for months afterwards. This "Budget for jobs" is really a Budget with only one intention, to save one job—the Chancellor's own job. It was the Chancellor's last Budget to be held in March, and it should be his last.
The Budget makes it clear that taxes will rise not only this year but next year and the year after. There will be tax rises now, tax rises later and tax rises two years later. That is not only a double whammy but a triple Conservative tax whammy.
National insurance contributions, which the Conservatives said would not be increased, have risen. VAT, which they promised would not increase, is now to be imposed on fuel. As the President of the Board of Trade would say—
§ Mr. Brown
I shall give way later.
290 As the President of the Board of Trade would say, "Taxes to the left, taxes to the right, taxes everywhere." For people paying VAT, there will be "tax rises before breakfast, before lunch and before dinner", and people will have to get up the next day and pay taxes yet again.
Before the general election, the Conservatives promised not to devalue—
§ Mr. Arnold
Bearing in mind the statement on the Labour party's green creditials made by the hon. Member for Islington, South and Finsbury (Mr. Smith), and the commitment to reduce CO2 emissions by the end of the century, if the hon. Gentleman opposes the imposition of VAT on domestic energy, will he explain how the Labour party would honour the commitment?
§ Mr. Brown
The difference between us and the Conservative party is that we have a policy for the environment. We are not using the environment, as the Conservatives do, simply to raise taxes at the expense of the rest of the people.
At the general election, the Conservatives promised not to devalue. They did devalue. They promised a recovery that has not happened, and they promised to end repossessions, which continue at the rate of 1,000 a week. They promised and guaranteed young people jobs or training; hundreds still have none. They promised that they would not privatise Scottish water, and now there is a real fear that they plan to do so.
Most of all, the centrepiece of the Conservatives' election campaign was the promise that taxes would not rise—indeed, that taxes would fall. The Chancellor's Budget has been not a Budget for Britain but a betrayal of the people of Britain.
The central failure of the Budget is the failure to tackle unemployment and economic decline. The Budget deficit and the tax rise that will ensue result from the central failure to produce economic prosperity. A Government who tackle only the consequences and not the causes of economic and industrial decline will fail in the Budget, and they will fail Britain.
Reading the Budget statement, which makes it clear that unemployment will continue to rise and that little will be done about it, we realise that the only consistent view that the Chancellor has held over two years has been the view that, for him, unemployment is a price well worth paying.
I am sorry that the Chancellor is not in the Chamber. The first thing that Ministers must do is apologise to the House and to millions of people throughout the country. Two pounds a week is the price that will be paid in the fuel bills of elderly people and of many millions of others. That amounts to £100 a year and, as I noticed yesterday, there is no guarantee of full compensation in social security payments or in pensions.
§ Mr. David Shaw (Dover)
Is the hon. Gentleman actually denying the words that hon. Members heard the Chancellor say quite clearly, quite categorically—that those who are getting benefits through the social security 291 system will have those benefits made up to take full account of what is going to happen on the additional VAT?
§ The Chief Secretary to the Treasury (Mr. Michael Portillo)
I intend to make a speech later.
§ Mr. Brown
That is the Tory party at work—the Tory party that never, ever tells a truth in answer to a simple and straightforward question.
Let us consider in precise detail what the Government have said about tax rises. During the election campaign, the Chancellor said on "Channel 4 News":We will not have to increase taxes. I cannot see any circumstances in which that will be necessary.Just to be sure, Jon Snow, the interviewer, pressed him and asked:Does that mean direct and indirect taxes?"Yes," said the Chancellor. The Chancellor and the Ministers who have betrayed promises made during the election campaign can never be trusted again.
The tax promises were not casual remarks or offhand, throwaway comments. They were not a peripheral element of the Conservative campaign. The Chancellor made it the centrepiece of his whole election strategy that taxes would not just not go up, but would go down under his leadership. I repeat that he said that he could not see any circumstances in which tax rises would be necessary.
Is that the same Chancellor who has raised taxes by £17 billion over two years, the same Chancellor who kept telling us during the election campaign that tax rises would destroy work incentives, the same Chancellor who has imposed tax rises amounting to £8 a week on the ordinary taxpayer from next April, and the same Chancellor who unveiled billboard poster after billboard poster saying that Labour's plans to raise taxes were a folly and a fraud on the people of this country? Is it the same Chancellor who has imposed—
§ Mr. John Townend (Bridlington)
Will the hon. Gentleman tell the House whether, if he is so opposed to dealing with the Budget deficit by increasing taxes, he accepts that inevitably he would have to introduce substantial cuts in public expenditure?
§ Mr. Brown
The hon. Gentleman fails to understand that it is the failure to solve the problems of unemployment and of economic decline that is forcing up the Budget deficit. The Budget's failure to deal with the causes of the problem and the fact that it deals only with the consequences mean that it is a Budget that fails Britain.
I should have thought more of the hon. Gentleman if he had told us that he would apologise to the voters in his constituency whom he told during the general election campaign that there would be no VAT rises and no national insurance rises. If he cannot point out the section of the election manifesto which warned of increased tax rises for the ordinary voter under a Conservative Government, he should be ashamed of himself.
§ Mr. Townend
If the hon. Gentleman looks at my election address, he will see that I talked about no increases in direct taxation.
§ Mr. Brown
The hon. Gentleman's comment is interesting. I presume that he meant that there would be no increase in national insurance. Was that the policy with which he went to the electors? Was that the policy? He cannot answer the question. National insurance is a tax that is paid by every worker, and by next year people will be paying £3 a week more.
There are only two explanations for what has happened since the election—either Ministers are incompetent on a scale that beggers belief or, with the access that they, uniquely, had to the Treasury papers before the election, knowing of the problems that their policies and their failures had created, they set out to deceive the people of Britain on a massive and unprecedented scale.
Let us remember that this is the Chancellor who told us that he would not devalue and did; who forecast that the recession would be shallow and short-lived; who told us that the recession would end two years ago, then one year ago; who told us that he had seen the green shoots of economic recovery—months before there is any sign that a recovery is happening. Can anyone ever believe anything that he says to the House or the people of this country again?
During the election campaign, the Tories put up billboards throughout the country saying that the country could not trust the Labour party. Now they should put up billboards in every town and city saying that the country can never trust the Conservative party again.
§ Mr. D. N. Campbell-Savours (Workington)
Is there not something far more sinister about these matters? Given that the Government have a majority of only 20 and that among those 20 are a number of marginal seats, is not it quite clear that, had it not been for the tax lie, there would probably have been a minority Labour Government today? Should not the wider public be told that?
§ Mr. Brown
If the truth had been told, there would have been a majority Labour Government.
What did the Prime Minister say? His reputation is clearly on the line in connection with all the promises that were made. Let us be absolutely clear that it was not just the Chancellor—who is taking the lion's share of the blame—but the Prime Minister who made the promises. The Prime Minister was asked about VAT. "We have no plans," he said, "to increase VAT. There will be no VAT increase."
Let me remind Conservative Members—who will have to live with this as these decisions come back to haunt them between now and the next general election—of what the Prime Minister said. Asked by The Independent on 27 March:Can you give the same pledge that Mrs. Thatcher gave in 1987 that you will not extend the scope of VAT to children's shoes, clothing, gas, electricity and food?",the Prime Minister replied,I have made the pledge in the past. I have made it clear that we have no plans…no need…no plans…to extend the scope of VAT.The Prime Minister was not content with that. He went further and promised tax cuts year on year:I have no doubt,he said,that we will be able to make further reductions in the rate of taxation.293 Those were the words of a Prime Minister who put himself at the forefront of a manifesto that said that lower taxes were necessary to encourage people—they would make for "a more productive economy"; and wouldtransfer power from the state to the people"—and that high taxes wouldkill the goose that lays the golden eggs".There is now no refuge for the Prime Minister in claiming that he did not know anything about the length of the recession. It was he who gave the unequivocal promise: "Vote Conservative on Thursday and the recovery will continue on Friday." They were calculated, cold-blooded and cynical statements, made simply to win the election. The result is that the Conservative party, under the Prime Minister's leadership, will never be trusted again.
Let us just remember that, to win an election, President George Bush said, "Read my lips—no more taxes," then put taxes up and lost the election. The Prime Minister said, "Read my manifesto—no more taxes." Now he has put taxes up, and he will be thrown out of office.
§ Dr. Liam Fox (Woodspring)
Will the hon. Gentleman take this opportunity to pledge his party to reverse the extension of VAT to fuel and power?
§ Mr. Brown
Perhaps the hon. Gentleman would like to join us in the Lobby on Monday, when we will be voting against the VAT increases. I will tell him something else: when we draw up our election manifesto, we will be fair to pensioners and to all those to whom fuel prices matter, and when we go to fight an election campaign, we will tell the truth.
The Chancellor has argued that the Budget will set Britain on the road to recovery. He has argued, when he has produced figures, that the balance of payments will rise to £17.5 billion, that investment will grow by only 0.5 per cent., that the trade deficit in manufacturing will double, and that the Budget is a sign of the successes of his policy. But let us consider what is happening to unemployment in Britain.
After the Budget, unemployment will still cost the country almost £30 billion a year. The cost of every unemployed person—the rising numbers—is £9,000 a year. When faced with the problems of massive unemployment in the 1930s, we had a new deal in America. After the war, we had the Marshall plan to reconstruct Europe. We need a mobilisation of resources to combat unemployment now.
What do we have instead from the Government, when more people are unemployed; when more people are chasing jobs; when, in some constituencies of Conservative Members, 1,000 people go for every vacancy on offer; when we need a great national effort that would repair our roads and railways, build homes, improve our schools and hospitals and upgrade our environment?
When we look at the plans produced yesterday by the Chancellor and the Secretary of State for Employment, let us remember that there are fewer training places now than in 1990, when the Chancellor and the Prime Minister came into office. Let us remember that the amount spent on every unemployed person has not increased but has been reduced.
When talking about broken promises, let us also remember the promises that were made to the 294 unemployed, which have been cynically betrayed: the promise that, by March 1992, employment action would create 30,000 places—it never did; the promise that the Government would increase the funding available to the training and enterprise councils—the Chancellor had to admit that the funding was being cut; the guarantee that all young people would have a job or training—thousands, and now hundreds, do not have that; the Chancellor's promise in 1991 that the monthly rate of increase in unemployment had peaked and was likely to moderate further. All those promises were never met.
What do we have now in the Government's employment programmes? Employment action, which produced neither employment nor action, is now relaunched as training for work, to disguise a £34 million cut. The business start-up scheme mentioned by the Chancellor yesterday has been relaunched under a new name, with almost half the places that it originally had five years ago.
Certainly there are twice as many job interview guarantees from the Chancellor and the Prime Minister, but when the two main firms in the job interview guarantee scheme helping the Government are the Post Office and British Gas and between them they are laying off 26,000 people in the next few years, how can the job interview guarantee scheme generate thousands of jobs for the unemployed? After all that, we are left with the central fact that unemployment is rising and will continue to rise, and that the Government's whole approach is essentially this: that unemployment is a price well worth paying.
I say that there is no recovery that we will call a recovery when it assumes that 3 million people stay out of work. There is no recovery that is worth its name which does not begin to put Britain back to work.
Will the Chancellor tell the couple who stand to lose their home as well as their jobs as a result of higher unemployment that unemployment is a price well worth paying? Will he tell the man in his 40s who knows that he will never work again once he loses his job that his unemployment is a price worth paying? We all know very well that, if the Government accepted their responsibilities for jobs, we could begin to get Britain back to work.
Will the Chancellor tell the youngster with no hope, no cash and no job that his long-term unemployment is for him a price well worth paying? The Chancellor knows that he could abolish youth unemployment if he had the will to do so.
The tragedy is that the only redundancy that really worries the Chancellor is his own, and that the repossession of No. 11 Downing street is the only repossession he cares about.
What are the Government's excuses for what has gone wrong? They started, in 1979, by blaming the trade unions. Then they blamed Labour councils, the European Economic Community, the exchange rate mechanism and Jacques Delors. When European excuses ran out, they discovered world recession. At the weekend, the Secretary of State for Trade and Industry even blamed the Labour party.
The weekend before that, as things were beginning to get desperate, they looked nearer to home and found someone else to blame—Lady Thatcher—who, in her own words, is now the "enemy within" for the Conservative party. All was explained. The Prime Minister had been terrorised into silence in her Cabinet on a subject dear to his heart—British manufacturing industry. That is the 295 Prime Minister, the voice of the silent minority in the Cabinet, who failed to speak up for his love of British manufacturing industry—the love that dared not speak its name.
Having blamed Europe, the world, the Labour party and their former leader, whom do the Government blame now, when many people would say that they have no one to blame but themselves? They blame the British people. The Prime Minister has identified the British people's instinct for self-deprecation and for talking the country down. Not to be left behind, last Sunday the Chancellor discovered it all—the British people are to blame for the alibi society. Now we know it from a Tory—society is to blame after all. The party that told us that society did not exist has reinvented it, if only to take the blame for its own failures.
The truth is that Britain is not an alibi society that has let down a well-meaning Government: Britain has an alibi Government, who have been letting down British society for 14 years.
§ Mr. David Nicholson (Taunton)
I am sorry to interrupt the hon. Gentleman's tide of enjoyment, but does he recognise that, as the Chancellor pointed out in the early stages of his speech yesterday, there is recession, unemployment and a fall in growth in other European countries, including socialist France? What does he have to say about socialist France, which is facing elections this month?
§ Mr. Brown
The hon. Gentleman should look at the figures. He will know that, during the past two years, unemployment has risen faster in Britain than in any other EC country. Let us remember that the Government claimed that they had created an economic miracle. In 1988 and 1989, they told us that we were living through a supply side transformation of our society. Some members of the Government even claimed that living standards would continue to rise year after year. Now, the Government have created 3 million unemployed.
When we consider what has been happening in Europe and around the world—
§ Mr. Lamont
Why does the hon. Gentleman not answer the question put by my hon. Friend the Member for Taunton (Mr. Nicholson)? Unemployment in France is 3 million, in Ireland and Spain it is well in excess of the level in this country, and in Italy it is very similar to the level in this country. The European Commission projects that unemployment will reach 11 per cent. for the Community as a whole. Does every word of criticism, every stricture and every argument that the hon. Gentleman has made apply to those Governments as well as to our Government?
§ Mr. Brown
I am grateful to the Chancellor, because he allows me to explain what has been happening in Europe during the 1990s. Is it not the case—does he deny—that Britain was at the bottom of the league for growth not merely last year but the year before? Is it not the case that 296 Britain has been at the bottom of the league for investment, and for employment creation? Is it not the case that Britain has been at the bottom of the league in the European Community for every major indicator in the 1990s? If the Chancellor is prepared to deny that, I will happily give way to him.
§ Mr. Brown
I thought that the Chancellor helped Back [...]nchers, rather than the other way round.
On Sunday, The Sunday Times revealed what we already knew: that we are not only experiencing high unemployment but are engaged in a process of industrial decline. It revealed that Britain invested half as much in its industrial workers as many of the world's best economies; that our skill levels are 40 per cent. below some of the world's best; and that we have the worst record for manufacturing investment since 1979, bar none, of the countries in the European Community. While investment in manufacturing has grown by 100 per cent. and more in Japan since 1979, it has fallen by 5 per cent. in Britain.
Our argument is that this Budget does not even begin to tackle the central questions of reversing our economic decline by rebuilding our industrial capacity. The central questions are how we invest in people for the future, how we invest in industry and how we invest in the social and economic fabric of our country to ensure that we will have not only rising production in industry but rising standards of living.
The remarkable feature of this Budget is that the tax rises are to pay for the mistakes of the past. The Chancellor does not have one contribution to make towards laying the foundations for future success.
We have been saying for years that manufacturing and industry matter; that we need a policy for manufacturing for the future; and that we neglect it at our peril. For years, we have been saying what the Department of Trade and Industry data reveal: that action to restore manufacturing required a comprehensive policy for research, technology, investment and the regions. We said this not because we believed that manufacturing was inherently preferable or because we had some romantic attachment to factories instead of offices, but because we knew that manufacturing is one of the major centres of innovation in our economy and important to our great industrial regions. It is central to our exports, to our tradeable economic base and to the future of our balance of payments.
The Prime Minister tells us that he was in the minority when arguing the case for manufacturing industry. I have looked through the speeches he made during the 1980s, when he was that voice for manufacturing industry but could not raise it forcefully in public. When he spoke about the famous economic miracle, did he say that he was worried about the future of manufacturing or that something had to be done about the balance of payments? No. He said:In the 1960s we watched the German miracle from our sick beds. Today in Europe we are the economic miracle.That was what the Prime Minister said. He did not tell us that there were problems with manufacturing when, since 1979, German manufacturing has grown at five times the British rate. He said that Britain was the economic miracle.
What of the Conservative party under the Prime Minister's Chancellorship? Did the document about the state of manufacturing industry issued in 1990 by the 297 economic research department betray the Prime Minister's worries? No. What that document said was that manufacturing was an obsession of the Labour party—that it was an outdated attitude of the Labour party that put manufacturing at the centre of affairs.
What of the balance of payments which we warned about? Did the Prime Minister give speeches saying that the balance of payments deficit could cause us a problem? No. When even the President of the Board of Trade was warning that the deficit was of consequence, that it could not be dismissed as a second order problem, that it would not be easily financed, what was the Prime Minister saying? Nothing more, nothing less than that it was a second order problem, of little consequence, and could be easily financed.
What of the Chancellor during those great years at the Treasury when the Prime Minister and he were supposed to be speaking up for manufacturing industry? He said:The idea of an industrial strategy is moth-eaten, and one might even say half-baked.Those were not the words of someone who looked as if he were supporting the industrial strategy that is now referred to by the President of the Board of Trade.
Even as late as 1990, as the recession required a new approach to industry in this country and a change of policies to allow British industry to triumph over the recession, did the Chancellor say that policies would have to adapt to the needs of manufacturing industry? No. He said:The real test of Thatcherite economics is now only beginning. The slow-down in prospect will put to the test the new-found flexibility and resilience of the economy and the effectiveness of the labour market reforms. It looks as if we may now be seeing the beginning of a reverse of a long-running trend which has seen the share of manufacturing in national income fall. I feel that the resurgence we have seen so far is nothing like the resurgence we are about to see.For three years after that, manufacturing output has fallen, businesses in the manufacturing sector have gone bankrupt in record numbers, and unemployment has risen substantially. Surely that speech about Thatcherite economies was one of the great misjudgments of history. If the past three years have been the real test of Thatcherite economics, when the Chancellor sums up the Budget debate on Monday, it will be interesting to see whether he can tell us what the results for British manufacturing industry have been.
The Budget was effectively a betrayal of the people of Britain. The Government first betrayed the pensioners in 1979, when they broke the link between pensions and earnings. They then betrayed the unemployed, when they taxed unemployment benefit and then cut it. Next they betrayed the home owner, with the increase in mortgage rates that their policies produced. They then betrayed the low-paid by abolishing, cynically and cruelly, the wages councils on which 3 million people depend. They then betrayed patients in the national health service and public service consumers, and they continue to do so.
§ Sir Terence Higgins (Worthing)
For how many years did previous Labour Governments have a link between pensions and earnings?
§ Mr. Brown
I think that the right hon. Gentleman should refer to history. The link between pensions and earnings was introduced by a Labour Government to help 298 the pensioners of this country. The right hon. Gentleman should know that, as a result of breaking the link between pensions and earnings, many pensioners are hard up.
The Government betrayed the unemployed; they betrayed the low-paid and home owners. The Government betrayed people in the national health service, and they have now betrayed the taxpayers of this country by raising national insurance and value added tax. There is no one left for this Government to betray; they have no credibility in this country. The electorate will never trust them again. If Britain is to have a new start, it will need a new Government—and that will have to be a Labour Government.
§ The Chief Secretary to the Treasury (Mr. Michael Portillo)
What a speech we have just heard. What passion was shown as we witnessed the glowering countenance of the hon. Member for Dunfermline, East (Mr. Brown) across the Dispatch Box. I detected in his speech the sound of disappointed rage. The hon. Gentleman is disappointed that my right hon. Friend the Chancellor has framed a skilled Budget which is well suited to this stage of the cycle. Once again, faced with substantial difficulties in framing the Budget, my right hon. Friend has none the less produced a Budget which demonstrates a real grasp of the subject. He has exceeded the expectations of his critics.
Before yesterday, the commentators were saying that the Chancellor faced a stark choice—he could either protect the recovery or tackle the Government's borrowing, but could not do both. But my right hon. Friend has done both in the Budget—[Interruption.]—and British business has recognised that achievement. Sir David Lees of the CBI said:this budget will certainly help the recovery.The Institute of Directors said:The Chancellor has listened carefully and the package of business measures announced is relevant and helpful.The Federation of Small Businesses said:Small businesses will welcome being singled out for special support.The Association of British Chambers of Commerce said:We asked for a budget which did not upset the fragile recovery, but addressed the urgent need to boost exports and press on with deregulation. This is what we have heard.A cross-section of business leaders has given the Budget the thumbs up.
§ Mr. Max Madden (Bradford, West)
What is the Treasury's assessment of the reduction in the demand for coal as a result of the imposition of VAT on fuel announced yesterday?
§ Mr. Portillo
The VAT changes alone will produce a reduction in carbon dioxide emissions of about 1.5 million tonnes and that is part of our firm commitment to the Rio convention. I shall later be asking Labour Members how they would achieve that commitment.
§ Mr. Bryan Davies (Oldham, Central and Royton)
We appreciate, this being a debate, that the Minister has a prepared speech. But will he address his remarks to the interesting point raised by the hon. Member for Dover (Mr. Shaw), who alleged that the Chancellor said yesterday that the Government intended to restore in full to those on benefit the cost of the fuel tax? Is it really the intention of the Government to restore in full that extra tax on poor people?
§ Mr. Portillo
The Chancellor's words on that were clear. He said:Social security benefits will, of course, rise automatically to reflect the price effect of this change. But I recognise that this will cause particular problems for those on low incomes. My right hon. Friend the Secretary of State for Social Security will take this into account when the income-related benefits are uprated next year."—[Official Report, 16 March 1993; Vol. 221, c. 183.]That was perfectly clear.
§ Mr. Gordon Brown
Will the Minister confirm what the hon. Member for Dover (Mr. Shaw) understood to be the position—that the benefits will he uprated in full to take account of the rise in VAT?
§ Mr. Gordon Brown
The point is not whether the VAT rise will be reflected in the RPI. Will the right hon. Gentleman give an undertaking that the VAT rise will mean that the benefits for ordinary people on income support and pensions will rise to take account of that? Will they rise in full?
§ Mr. Portillo
The hon. Gentleman is apparently inventing an entirely new concept—[Interruption.] He is saying that in some way income-related benefits must be adjusted for particular price rises that occur. That is an entirely new concept, and I will give him an example because all such issues are made up of swings and roundabouts. The increase announced in duty on road fuels puts about ¼ per cent. on the RPI. People on low incomes are very low users of road fuels, but they will be compensated through the RPI for the extra expense that other people will face. So there are swings and roundabouts—[Interruption.]—and the words of the Chancellor were perfectly clear.
§ Mr. Rooker
Let us be absolutely clear on the point. How does the right hon. Gentleman respond to the work published this morning by the department of applied economics at Cambridge showing that, whereas the Budget will have a 3 per cent. effect on those with the lowest 10 per cent. of household incomes, partly as a result of the tax and VAT changes, it will have only a 1.5 per cent. effect on the top 10 per cent. of earners? In other words, if the nation's 10 per cent. poorest are not to suffer disproportionately, their social security benefits must rise by 3 per cent. above the rate of inflation. If the right hon. Gentleman will undertake to do that, we shall go away reasonably happy, or at least not so unhappy, and it should be easy for him to do that if he wants the Budget to be fair to all sections of the population.
§ Mr. Portillo
I believe that the Budget is fair to all sections of the population. For example, those on the highest earned incomes will be hit hardest by the tax changes in the tax credits for dividends, the tax changes for company cars and the tax changes to the married couple's allowance. All those affect people on higher incomes. There are swings and roundabouts. The hon. Gentleman did not bother to point out that currently income support scales contain a 20 per cent. allowance for community 300 charge. Nobody will be asked to pay the council tax after 1 April, but that money is not being withdrawn—it is being left in income support. I refer the House once again to the words of my right hon. Friend the Chancellor yesterday.
§ Mr. Gordon Brown
This is wholly unsatisfactory; it is a clear attempt to evade the question. Will the Chief Secretary give us an unequivocal answer—will those on income support be compensated in full for the rise in VAT?
§ Mr. Portillo
I am not in any way evading the question; I am referring hon. Members to what my right hon. Friend the Chancellor said yesterday, which was that the rise in VAT would be taken into account when the income-related benefits are uprated next year. My right hon. Friend chose his words carefully and they are on the record.
Since the Conservatives took office 14 years ago, our two guiding economic aims have been sound money and sound public finances. Those aims must stand above all others. We have reiterated those principles day in and day out, before breakfast, before lunch and before dinner. All those involved in wealth creation know that those are the right principles. By contrast, the Labour party—which is not involved in wealth creation—scarcely even recognises those principles.
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. The recession has lasted longer than anyone thought and the proof of that is that the Labour party reminds us of it every day of our lives. Indeed, it has made the length of the recession its excuse for abandoning all the tax proposals that it put forward at the election. Its present stance shows that now, as always, it could not care less about the state of public finances.
§ Mr. Dennis Skinner (Bolsover)
There has been a forecast of a £50 billion public sector borrowing requirement for some considerable time, so it has not come as a surprise to most people. The Chief Secretary fails to recognise that in the first 10 years of the Thatcher Government, the richest 1 per cent. in Britain accumulatively had £26.2 billion handed to them in tax cuts. What the Chancellor should have done yesterday was to recoup that money from the wealthiest 1 per cent. and not land it on the pensioners and others who will have to pay the additional VAT without any compensation.
The truth is that the Tory Government, through their Budget yesterday, not only helped the rich, but they refused to take back any of the money that they had given to them and, instead, they have crippled millions of other people. The Government are in favour of looking after the bosses and lining the pockets of their friends.
§ Mr. Portillo
The amount of money raised in income tax from the highest 5 per cent. of earners has risen consistently during the time that we have been in office. I have already pointed out that the changes that we made yesterday to the married couple's allowance, company cars and dividends will impact most heavily on the highest earners. The Budget was designed to be fair across all sectors of society and all levels of income.
The Opposition's policy has veered from side to side, with extremely strange results. They are now apparently in 301 favour of raising taxes only at election time. That is not something about which I want to complain, but they should consider what that says for the political acumen of the man whom they have recently elected leader of the Labour party.
At the election, the Labour party proposed to raise taxes by £35 billion a year, three and a half times what the Government propose. Labour wanted the tax increases to be immediate. Labour's purpose was not to pay off debt but to pay off scores against the middle classes. We heard the same tone just now. Labour wanted 10p on income tax and 9p on national insurance, not to repay borrowing but in order to be able to spend more money.
§ Mr. Campbell-Savours
May I tell the Minister once again that the £35 billion that he quotes was a monstrous lie which won the Conservative party the general election. Does not he realise that millions of people are saying this morning that the election was won by the Tory party on the back of a lie? Does not he realise that, now that we have had the Budget?
§ Mr. Portillo
The election was won for the Conservative party perhaps by the right hon. and learned Member for Monklands, East (Mr. Smith), following the Luigi restaurant incident. That was the key. The right hon. and learned Gentleman corrected the then Leader of the Opposition, the right hon. Member for Islwyn (Mr. Kinnock), who tore him off a strip. That lost the election for the Labour party. The right hon. and learned Gentleman was rewarded by being made leader of the party.
We have to raise revenue because it is our duty as a responsible Government to do so. We have chosen to do it in ways that do not harm recovery or depress incentives, ways which draw money from all levels of earnings and which contribute to meeting our commitments on the environment.
Here are the facts which cannot be ignored. Next year the public sector will be borrowing £1,000 a year for every man, woman and child in the country. The interest on that borrowing will have to be paid for many years to come. My right hon. Friend the Chancellor could have chosen to postpone action. Many presumably expected him to do that. But those who create jobs in Britain need to know that the Government will reduce their borrowings.
The "mañana" approach would have done nothing for confidence. Investors in Britain take the level of borrowing seriously. [Interruption.] The Labour party is convulsed because it does not. For example, the hon. Member for Peckham (Ms Harman) has built a political career on moving from television studio to television studio evincing righteous indignation about alleged underprovision by the state for health or education or whatever other good cause she has in mind.
The hon. Lady was at it again last night, touring the studios of London like an understudy for Joan Collins, complaining that borrowing was too high, that we should be spending more, and that we should not raise revenue. It was a curious view from a shadow Chief Secretary; it was perhaps more appropriate for a film star. I am not aware that the hon. Lady has ever addressed the need for control. 302 I am not aware that she could even spell the word "restraint". She was indeed a most original choice as shadow Chief Secretary.
The first lesson for Chief Secretaries, shadow or otherwise, is that there is no such thing as a free lunch. I should know, after my recent lunching experiences. If the hon. Lady thinks that her reputation can stand it, I will happily take her to the Churchill room for lunch and explain to her why that is so. [Interruption.] The right hon. and learned Member for Monklands, East has got the joke; well done. The Leader of the Opposition is very quick.
At the same time the hon. Lady can explain to me Labour's policies. She can explain about the extra public spending which Labour wants—more spending on employment, on health, on education, on science, on research and development, on investment—more on everything under the sun. To pay for it, there are only two choices—more borrowing or more taxing. The hon. Member for Dunfermline, East set out the options. He said:I am not talking about increasing current borrowing… I am not talking about raising income tax or national insurance or VAT.So what on earth was he talking about? Is Labour saying that borrowing is too high and spending too low, but that taxes must stay exactly where they are? If Labour is saying that, what nonsense it is.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
I understand that the Chancellor wants to raise revenue, and he chose VAT as a way of doing that. When our zero rating was under pressure from the Community in the 1970s, I argued that it was needed to prevent VAT from becoming a regressive tax. Income tax is a progressive tax. By removing an essential element of VAT, the Government are turning a neutral tax into a regressive tax, to avoid using income tax—which would have been the proper thing to do.
§ Mr. Portillo
The proper argument against Community intervention in our zero rates is the right of the House to determine our taxation rates. It is the right of my right hon. Friend the Chancellor of the Exchequer to decide what they should be. It has been our consistent policy to move from taxes on income to taxes on spending.
Our commitment to a medium-term strategy for public spending was shown in the autumn statement. It is essential that we reduce the proportion of national income spent by the state. For the years 1994–95 and 1995–96, we are committed to real increases in the control total of 1 per cent. and less. At a time when we are committed also to increasing money for the health service and increasing the number of students, and facing pressures on social security, those are very tough ceilings. Some of my hon. Friends think that they are not tough enough. A poll of Conservative Members of Parliament published in last week's Financial Times showed that 62 per cent. favoured cuts in public spending.—[HON. MEMBERS: "Hear, hear."] My hon. Friends say "Hear, hear." I admire their spirit, and I will welcome their support for the hard decisions that lie ahead.
I have started a programme of fundamental expenditure reviews, and over the medium term and beyond they will make an essential contribution to meeting 303 our spending targets and to containing the size of the state. All the industrialised countries of the world are facing up to the same problem.
§ Mr. Robert Ainsworth (Coventry, North-East)
If those are the right hon. Gentleman's policies, and given that the Government have been in power 14 years, can he explain why public sector expenditure is 44.75 per cent. Of gross domestic product? Why is that figure higher than it was when the Conservatives took office from a Labour Government in 1979?
§ Mr. Portillo
That is a curious point to be made by a member of the Labour party. The proportion of public spending in national income was higher when Labour lost to a Conservative Government. We got it down to just over 39 per cent. The figure has now risen to the mid-40s due to the recession. I am determined that it should go back down from here. That is this Government's commitment.
My right hon. Friend the Chancellor used yesterday's Budget not just to raise revenue but to pursue tax reform—most notably, by increasing the 20 per cent. band. When he introduced that band, Labour dismissed it as a gimmick, even though a 20p band was its policy also. Labour claimed that we would never get anywhere with it— underestimated us in that. My right hon. Friend is determined to extend the 20p band year after year, until it becomes the basic rate of tax for all and the top rate of tax for most. For 5 million taxpayers, that pledge is already met—delivered, despite the recession, in the very first Budget of this Parliament.
The Budget accepts Britain's responsibilities towards the environment. The Rio convention was in June—after the election. It radically affects the view that we have to take and our judgment of how taxes must be raised. Reducing the quantity of carbon dioxide that the United Kingdom puts into the atmosphere is not easy or cheap. The Government are in earnest. My right hon. Friend the Prime Minister put Britain's name to the United Nations convention on climate change. Along with others, we are committed. We have to reduce carbon dixoide emissions by 10 million tonnes by the year 2000. The Budget measures, along with the steps that we have already announced, will deliver a reduction of about 7 million tonnes. We are therefore two thirds of the way to meeting our commitment, less than a year after the Rio convention was signed.
We have carefully chosen the way in which we shall reduce emissions. The extension of VAT to fuel and power will help us to meet our Rio convention commitments and minimise the burden on industry. Indeed, it brings domestic consumers of fuel and power into line with industrial and commercial consumers, who already have to pay VAT on their energy bills.
The House will recall the dreadful humbug that we have heard from Opposition Members. Labour's election manifesto of April 1992 proclaimed:The greatest challenge we face is the responsibility to ensure the survival of the planet.Opposition Members might have done better to concentrate on the survival of the Labour party.
§ Mr. Portillo
I shall give way later. I am coming to the hon. Gentleman.
304 The leader of the Labour party was up there, leading on greenery. He said:Protection of the world environment must move to the top of the international agenda.Bravely said. There he is—the jolly, green giant of Monklands, East. His words were fine, but where is the beef? Labour talks about the environment; it lectures about the environment; it preaches about the environment; it chops down trees and prints policy documents about the environment. But anyone who studies Labour very closely will find no green roots—a few green nuts perhaps, but no green roots.
How would Labour achieve our Rio commitments? Would it perhaps impose a national speed limit of 35 mph? Would it introduce a new Eurotax? Would it build more nuclear power stations? Or would it close all the coal pits in the country? The decisions that we have made take us two thirds of the way to meeting our commitment, two thirds of the way to Rio—just about as far as Caracas. The Labour party has not got as far as Clapham junction.
§ Mr. Chris Smith
The right hon. Gentleman may like to tell us why his proposal to impose VAT on domestic fuel will reduce carbon dioxide emissions by less than 1 per cent. He may also want to remind the House that the Labour party's proposal, published a month ago, on a national programme for energy efficiency work would be four times as successful, at no cost to the taxpayer, and with no imposition on households.
§ Mr. Portillo
The hon. Gentleman must acknowledge that the VAT change will enable us to achieve 15 per cent. Of the Rio commitment. It will account for 1.5 million tonnes of the 10 million tonnes to which I have referred. The hon. Gentleman's remarks puzzle me very much. I have here a copy of something he wrote in Green magazine of February 1993—just last month:Back in 1990 I proposed a series of small but effective tax measures, none of which have yet been put into practice. If I were Secretary of State now I would twist the Chancellor's arm right up his back to see these implemented.So what are these tax changes that the Labour party wants to introduce? Not VAT, perhaps? If they did not involve VAT, however, by now the hon. Member for Dunfermline, East would surely have risen to say that he would definitely repeal the imposition of VAT on fuel and power. We are led to the interesting conclusion that what we have done is precisely what Labour proposes to do.
§ Mr. Chris Smith
The Chief Secretary is talking nonsense. If he had eyes in his head, he would have read the proposals for tax changes that we published in full three years ago. We stand by those proposals, not one of which included the imposition of VAT on domestic fuel.
§ Mr. Portillo
I will tell the hon. Gentleman how I reached my conclusions. I note that the hon. Member for Dunfermline, East has not chosen to deny the charges that have been put to him. He has visited one studio after another, but he has not once denied that he will maintain VAT charges on fuel and power. When asked about it by my hon. Friend the Member for Woodspring (Dr. Fox), he made no answer. Silence was not only golden in this instance; silence was Gordon.
I have examined the matter closely. Watson might say, "Very curious, Holmes", but it is not all that curious, Watson. Labour's policy document "Looking to the Future" stated: 305Zero-rating on items such as food, fares, books, and children's clothing should remain.Hon. Members should note that, cunningly, the document did not mention fuel and power. A most significant omission, Watson. The document went on to say:We will look at ways of…increasing taxes on environmentally damaging products".Aha! I deduce from that passage that Labour was planning to put VAT on fuel and power all along. Elementary, my dear Watson—but there is more.
A Labour document produced after the election, entitled "Agenda for Change", talked ofdeveloping a range of green taxation incentivesand "fiscal incentives". Most tellingly of all, only a month ago Tribune stated:Labour's Shadow Chancellor is expected to announce…proposals for green taxation".What a dreadful end. Hanged, Watson, with words from his own mouth!
The Budget helps business. It helps exporters, by increasing export cover; it helps British companies, and foreign-owned companies that want to invest in Britain, by tackling the problem of surplus advance corporation tax; it helps small firms by encouraging fixed-rate lending; it helps entrepreneurs by letting them reinvest the capital gains that they make from selling their businesses; it helps the construction industry by setting out new plans to build the channel tunnel rail link and the Heathrow Express; it helps the self-employed by offering them perhaps the greatest ever package of deregulation for small businesses, covering self-assessment, statutory audit, VAT cash accounting, bad debt relief and VAT penalties; and it helps every one of the 800,000 businesses that were facing large increases in their rates bills.
The hon. Member for Dunfermline, East concentrated much of his speech on unemployment, but I found his lack of grasp alarming. His prescription is "First tackle unemployment; recovery will follow." Dr. Brown treats the symptom first, rather than the disease. In fact, Governments must first provide for recovery; then they can secure lower unemployment. The order cannot be reversed. In his speech today, the hon. Gentleman was hopelessly confused on that point, expressing the belief that reducing unemployment would produce recovery. That is a complete misunderstanding of the position.
In a Guardian interview on Saturday, the hon. Gentleman committed the Labour party not only to full employment, but to full and fulfilling employment for everyone—not just jobs, he said, but good jobs. That is an admirable aspiration, but, with the hon. Gentleman's policies, it is an impossible dream. The hon. Member for Peckham has been more cautious. I think that she may be developing some chief secretarial tendencies after all. Interviewed on Channel 4 by Vincent Hanna, the hon. Lady said:What we are committed to is full employment redefined to take account of the changing circumstances of the economy.Vincent Hanna said:So it's not full employment.The hon. Lady replied:No, it's just a new definition of full employment.However redefined, full and fulfilling employment for all would not be achieved by Labour. The party's claims are a sham, a cruel deceit of the unemployed and a remarkable piece of political dishonesty. The truth is that 306 Governments cannot spend their way out of unemployment; what we can do is help the unemployed to improve their skills. The long-term unemployed can lose both skills and motivation, but the Budget contains measures specifically designed to help them. A total of 30,000 long-term unemployed will be able to take courses at colleges of further education, and will receive an allowance based on their benefit. We shall enable 60,000 more to tackle the tasks that are crying out to be performed in our communities.
On top of that, we shall set up innovative pilot schemes, paying a subsidy to employers who take people on to their books after they have been out of work for a long period. The subsidy will be based on benefit rates. It will be withdrawn in stages, but we hope that, by then, many of the people concerned will have proved themselves, and that their employers will be happy to keep them on. Those are truly pioneering schemes, and they have been widely welcomed.
These Budget schemes cost money—£230 million in all. Our latest proposals add to the large amount that the Government already spend on training and help for the unemployed. We are now spending £2.8 billion a year on helping the unemployed, and offering 1.5 million opportunities. If those whom we are now training are to find jobs in future, however, we need sustained recovery and a sound economy. Unemployment can be brought down; jobs can be created. Between 1984 and 1990, the United Kingdom economy produced 3 million extra jobs. That was the best performance in Europe. Even now, Britain still has more people in work than it had 10 years ago, and more of the work force are employed than in any other major European Community country.
We have the conditions for recovery and job creation. We have the lowest interest rates in Europe; inflation is below the European average and at its lowest level for a quarter of a century; we have the lowest corporation tax rates in the European Community or the G7; we have a top income tax rate of 40 per cent., which is much lower than the top rate in Italy, Germany and France; we have rising manufacturing investment, rising productivity—it is rising faster than it has for five years—rising manufacturing exports, the highest level that we have ever had, and rising business optimism: it is at its highest for five years. Moreover, the punitive regulations of the social chapter will apply to others, but not to us. For that reason, foreign companies are flocking to the United Kingdom.
The Budget has created the conditions for a lasting recovery. It helps business and tackles Government borrowing: it provides a climate for growth. British business is enjoying low inflation and low interest rates. It knows that the Government are responsive to wealth creators; it sees that we have established a clear strategy to control spending and raise revenue. That is the achievement of this Budget and that is why I commend it to the House.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
As I listened to the Chief Secretary, I recalled that he had written a pamphlet entitled "A Vision for the 1990s". I wondered whether this was the Chief Secretary who argued in the pamphlet foran ultra low tax, high growth economy.307 He is the Chief Secretary who has to describe to us an economy which is not growing and who is trying to defend a Budget which includes significant tax increases. However, he is also the Chief Secretary who wrote in the pamphlet:No Conservative can want to rest at present levels of taxation in Britain.He has certainly given a new meaning to that phrase.
It has now become clear that the Government are a tax-raising Government. Of course, that was the case before it was less clear. The Government have raised taxes regularly and consistently. The question that the Chief Secretary left with us, even at the end of his speech, is how much more are the Government prepared to raise taxes in order to deal with the public sector borrowing requirement which they forecast? Even on the Government's own assumptions about recovery, there is a £30 billion PSBR at the end of the period described in the forecast. From what the Chief Secretary said, that does not sound like something he is prepared to accept or approve. Is there a further strategy of more tax increases if the Government are shown to have been too optimistic and if the recovery does not occur? That is the question that Ministers must answer in the debate.
It is a question asked not only by hon. Members but by the markets and those who lend to the Government. If the Government are so confident, one wonders why they are prepared to offer such a high real rate of return on gilts to the market. If inflation is going to be kept down to the extent that the Government prophesy, they are offering a very favourable rate of return on gilts.
The Budget confirms failure and does not build success. The price of that failure is visited heavily on the many families and individuals on low and modest incomes, through the 1p on national insurance and the 17.5 per cent. value added tax for fuel. The useful aspects of the Budget, such as the adoption—on a limited basis—of our proposal to convert benefits into a job subsidy for the long-term unemployed, are simply not enough to speed up recovery.
Of course, I welcome the fact that the Government have shown an interest in our proposal, but I was surprised that they want to limit it to people who have been unemployed for two years. Many more people who have been unemployed for between six months and two years could also benefit from the scheme. The idea of introducing only a pilot study will mean that, on the Government's best assumptions, a maximum of only 10,000 people can be helped. We believe that many more could be helped without significant cost to the Exchequer. The idea is to transfer benefits to a job subsidy. Our proposals involved transferring only part of the benefits so that any displacement costs would be covered. However, the job-encouraging projects are not sufficient to speed up recovery, and nor are the capital projects.
Very little is new in the capital projects which the Chancellor chose to mention yesterday. The Heathrow link has been with us for ages, and proposals and Bills have been before the House for a long time. It is no great new bonus to the construction industry. The channel tunnel link has been thrown into absolute confusion by the Government's announcement. British Rail has done all its work for a King's Cross terminal, but the terminal is now to be at St. Pancras. We hope that the project will go ahead, but it will be delayed and further confused. It seems that crossrail will disappear without trace on the basis of yesterday's announcement.
308 Let us consider the autumn statement. We were told, very disingenuously, that the Jubilee line was to go ahead. That announcement was made in the autumn statement, but the line is still not going ahead because the private sector does not think that the funding which the Government have so far offered is adequate. That was the case when the announcement was made, and it is still the case. The capital projects are far too limited to promote a real recovery.
What does the Budget tell us about the general economy? It tells us how big a mess the Government have got us into—a £50 billion deficit and little sign of the promised post-election recovery. We were promised, as soon as it was announced that the Conservatives had won the election, that recovery would take off. It did not happen. Instead, we have massive unemployment, which makes the debt problem spiral. We cannot tax our way out of that spiral. We must reduce unemployment if we are to give confidence to business and to individuals.
Individuals do not rush out to buy goods in the shops, even if interest rates are lower, because they fear that they or their families will be hit by unemployment. They may now fear that they will be hit hard by the tax changes which are to come. Even if it is relatively cheap to borrow capital, businesses will not borrow if they see no prospect of selling the goods that they make because they will not have a return on that capital.
It is necessary to have capital spending of a kind that will benefit the construction industry. It is necessary to have a job start scheme on a much larger scale. It is also necessary to help small businesses—an area in which the Government have taken up a number of the ideas that we and small business organisations suggested to them.
In some cases, the Government could have done more. The VAT threshold for accounting could have been raised to a much higher level. The Chief Secretary must bear in mind that companies which have tried to cut their costs or have tried to expand by moving premises will not benefit from transitional relief, so they still have the problem of the uniform business rate. There were some helpful changes in that sector, but they do not add up to enough to make the vital difference.
A more comprehensive programme of the kind that we advocate would need to be backed by an anti-inflation monetary discipline, but we do not have that. The Chancellor was fascinating and revealing on the subject of the exchange rate mechanism. He explained what a good thing it had been and how valuable in reducing inflation but how much better off we were going to be now that we were out of it. He made it sound as if we had been to a health farm for a couple of weeks to lose weight, but, thank goodness, we did not need to go back again. It is not like that. Sooner or later we shall need to apply an effective anti-inflation discipline again, but we do not have it. All that we have is a series of indicators from which the Chancellor can pick and choose, depending on how he feels when he gets up in the morning. That is not a coherent or understood basis for monetary policy, and not one on which the Government and the markets can rely.
With neither the type of programme nor the discipline that I have described, we face the prospect of sustained high unemployment as well as a continuing high public sector borrowing requirement, even if the Chancellor's optimism is justified. How is that hole to be filled? That question has not been answered.
309 Let us consider the tax measures that the Government have introduced. The Chancellor announced the tax on domestic fuel with a thinly veiled attempt to curry the support of the Eurosceptics in his party. That technique has not been developed very successfully by Government Whips in any event but, in this case, the Chancellor tried to curry that support by arguing that it would be not a European but a British tax. The Eurosceptics might be expected to oppose the harmonisation of VAT rates, but the Chancellor said that there would be no nasty European energy tax for us as we have a much nastier tax of our own.
It is much nastier because it is not an energy or resource tax. It is not directed at resource use or pollution. Orimulsion and windpower are taxed on the same basis under VAT. Oil and solar power have the same impost levied on them under VAT. They will attract VAT of 17.5 per cent., as will the standing charge which is so hated by pensioners who try to keep down their energy costs. All will be subject to 17.5 per cent. VAT. The new arrangement does not discriminate as a carbon, energy or resource tax would.
Just such a tax is on the agenda of the Council of Ministers and will come up in April under the Danish presidency. It appears that it is backed by a great deal of Danish commitment. The Chancellor has sought to pre-empt the decision by substituting a tax which does not draw any distinction on the basis of energy efficiency, of pollution or of resource use. It is a tax designed to raise revenue, but the Chancellor would be a very disappointed man if it achieved its effect. If the tax had the effect of drastically reducing energy consumption, he would not get his revenue.
The tax will not have that effect because it is targeted at those whose demand for energy cannot be elastic. It is directed not at industry but at the ordinary domestic consumer. It will bear heavily on families who have no choice, especially tenants of badly built houses, which are not energy efficient. Those people have no choice about where to live—they probably live in the only house allocated to them when they applied to the council. The tax will hit pensioners hard, especially in the north and in Scotland where energy costs are necessarily higher. The unspecified benefit changes, which the Chief Secretary was unable to define or explain, will not help those who are just above the benefit levels.
It is a stock response of Governments, when introducing a new penal impost, to say, "There is no need to worry, because poor people will be helped by benefits." On the basis of what we have heard today, I do not think that they will—but apart from that, it is on the many people who are struggling to pay their way and who are not entitled to any benefits at all that such a tax bears so heavily. Pensioners with just a little bit of capital saved for their retirement, who receive no benefits because of those savings, will receive no compensation for the energy tax. Working families just above benefit levels are among the people who will be hit hard.
The Chancellor should remember his election campaigns. He should remember the way in which he attacked other parties for the possibility that they might introduce taxes on energy. He has proposed a far more drastic petrol tax than we did, and without any of the safeguards for rural areas. Would he be kind enough to trawl through the 310 stock of Conservative leaflets that argued so vigorously and bitterly that anybody who voted Liberal Democrat risked higher energy charges, especially charges on petrol? The Government have gone far beyond anything that we proposed in either direction.
Let us examine the other key taxation element in the Budget—personal taxation. The most devious tax increase is the raising of employee's national insurance contributions. In all but name, that is an increase in income tax—something that the Conservatives said that they would not introduce. It is even worse than an increase in income tax, because it is not as fair. It does not apply to higher levels of income, and makes the anomalies of the national insurance system even worse—national insurance does not apply to perks and all the other factors that the income tax system covers. That is because of the distinctive, and now outdated, character of the national insurance contribution.
The Chancellor tried to justify the increase in national insurance contributions by saying that there was a shortfall in the national insurance fund. But Ministers know perfectly well that the fund has become a fiction, and that there will still be a shortfall in it. This is a tax increase, and it was designed to be a tax increase—but it is a badly designed tax increase.
The broadening of the 20p income tax band is worth only £25 next year for someone earning as little as £5,500 a year. That will not even offset the increase in employees' national insurance contributions. Someone on average earnings will be £125 worse off because of the increase in national insurance contributions, even after the extension of the 20p income tax band has been accounted for. When the freezing of the personal allowance has been taken into account such a person will be £215 worse off. Ministers' descriptions of what they are doing have not been entirely accurate or fair.
Mortgage interest tax relief is another subject on which Ministers have consistently attacked other parties for considering measures on which they themselves are now embarking. I vividly remember how, during the general election campaign, our proposals for radical reform of mortgage interest tax relief were furiously attacked by Ministers who implied that Conservatives would never touch this sacred benefit—it was to be preserved for all time. Now they have restricted mortgage tax relief further, but there has been no genuine radical reform. The Government are not transferring help to poorer people so that they can buy houses.
The basic trouble with the system, even when it is modified by being restricted to the 20p rate, is that it still gives a lot more help to people who can afford to buy larger and more expensive houses, with larger mortgages. Furthermore, people paying little or no tax cannot benefit from the relief. There is no longer the old alternative of the option mortgage scheme that used to direct help to people on low incomes who were trying to buy houses.
The Government seem to recognise that mortgage interest tax relief is not a good system. Indeed, I believe that there is increasing recognition of that fact even among Conservatives who fought the election pledged to preserve the system for ever. However, if the Government intend to reform the system, they should do so in ways that genuinely help people suffering hardship, and assist the housing market, too.
There are in the Budget measures helpful to industry and small business. Some of them, such as the cash 311 accounting on VAT, are cut-down versions of our proposals. Several measures have, rightly, been welcomed by the CBI and other industrial organisations.
The advance corporation tax proposal is so complicated that I decline to give a more considered judgment on it until I have examined it for a lot longer—but action clearly needed to be taken, because the old system operated against the interests of some of our best and most efficient exporting companies. I hope that the Government have got it right. We shall discover whether they have when we examine the measure in more detail in the Finance Bill.
My anxiety is that the changes do not add up to a programme that will restore confidence, let alone a programme to rebuild the manufacturing industry about which the Prime Minister now says that he has always been concerned. The Budget is the bill that taxpayers are having to meet for the catastrophic mismanagement of the economy under the Conservatives. It does not relieve that bill with any adequate stimulus for recovery, and it exacts payment through the very taxes that the Prime Minister and the Chancellor promised not to increase—the very taxes that they accused other parties of favouring. That is not so much the Clinton approach as the Bush approach—one goes into an election campaign denouncing things which one then goes on to do. Perhaps the Conservatives will be able to demonstrate that that is the only way to win general elections. That would be a cynical commentry on the way in which politics have developed. The Conservatives have debased politics by seeking election on a platform of low taxes while pursuing a policy of high taxes.
§ Mr. Rod Richards (Clwyd, North-West)
Does the right hon. Gentleman recall his party's document, "The Policy Declaration for the Social and Liberal Democrats", dated 1988 which says:The party should therefore not be afraid…to extend VAT over several years to food, children's clothing, domestic fuel, newspapers and financial services"?Will he comment on that?
§ Mr. Beith
I recall that document vividly, and also how totally it was repudiated within six hours of its having been produced by the two then leaders of the party. I recall that occasion with special affection, because I was one of those who was most determined to repudiate the document. On this matter it was plain wrong, and I am sorry that the hon. Member for Clwyd, North-West (Mr. Richards) has not only read it but been influenced by it, and is pursuing part of the policy set out in it. In that respect it was plain wrong. I said so at the time, and so did my parliamentary colleagues, which is why the document never became party policy.
I was arguing that the Government have bebased politics by seeking election on a platform of low taxes while pursuing a policy of high taxes. They have reduced the economy to the point at which, according to their own forecasts, even the large tax increases proposed will achieve not a balanced budget but a £30 billion deficit. The Government should go.
I believe that the British public are entitled to a re-run of the general election, in which the Conservative party is required to stand on the policies that it is in fact pursuing. I invite the Prime Minister to arrange just such a re-run of 312 the general election. I am sorry that, for the saddest of reasons, it is only the voters of Newbury who will have the opportunity to deliver that judgment.
§ 5.7 pm
§ Mr. Michael Jopling (Westmorland and Lonsdale)
I hope that the right hon. Member for Berwick-upon-Tweed (Mr. Beith) will forgive me if I do not follow him exactly, except to say that I was interested to hear another example of the typical Liberal Democrat party posture of having a new policy every day. If the policy that they have tomorrow does not suit them, they change it for the day after tomorrow.
The right hon. Gentleman used words such as "catastrophic failure of economic policy" to describe the Government's performance. I guess that, in the middle of the recession, opposition parties all round the world are using that parrot cry about the Governments with which they are confronted. It is not very constructive.
I hope that my remarks will be short, and I shall divide them into two parts. First I shall speak about the Budget; secondly, I want to express my significant anxieties about where it leaves us for the future.
I welcome the Budget, which I believe is constructive and helpful. I especially welcome some parts of it. In my constituency, where there are many small businesses, the measures proposed by the Chancellor, especially those on VAT, will be a huge help. I hope that the House will endorse those measures when the time comes. I declare an interest as a director of Blagden Industries. We have been enormously penalised by the imposition of advance corporation tax, so I welcome the proposed changes to that.
I want to be brief, so I shall not dwell further on the Budget, except to say that I have grave anxieties about a public sector borrowing requirement of £50 billion this year. That is too much. Although the Government are right to spend more in a recession and to put up their borrowing requirement—Keynes is not yet dead, I guess—I point out to my right hon. Friend the Chief Secretary that I told him some weeks ago that there should be significant increases in taxation, given that level of public sector borrowing requirement.
I hope that the Government have gone far enough in the Budget. I am enormously concerned to read the public sector borrowing requirement projections for the years ahead. They are summarised on the second page of the pamphlet published by the Treasury yesterday which is entitled, "The Budget in brief". Table 1, which deals with the public sector borrowing requirement, shows that, starting from £50 billion in 1993–94, there is a continuing PSBR, ending with 30 £billion in the financial year 1997–98. When one adds up the figures, one realises that the horrific figure for the PSBR in the six years up to and including 1997–98 is no less than £233 billion. That figure should cause every one of us, especially Opposition Front-Bench Members who have been pleading for more and more Government spending, to hesitate.
I am really alarmed when I see in the Red Book what is projected to be the cost of servicing that massive debt. I invite the House to turn to page 73 of the Red Book and to look at the figures for central Government debt interest. The figure is due to rise from £17.5 billion in 1992–93 to £26 billion in 1995–96. What the Red Book does not make clear is the figures that are made clear in "The Budget in 313 brief". In the extra two years up to 1997–98, there is a further PSBR of –35 billion in 1996–97 and another £30 billion in 1997–98.
It is almost impossible to avoid the conclusion that, in 1997–98, we are likely to have to look for £30 billion in debt interest. We shall be in the most uncomfortable position in that year, because, while borrowing £30 billion, we shall have to find another £30 billion to pay the interest on the debts that we have incurred.
§ Mr. William Ross (Londonderry, East)
I am interested in what the right hon. Gentleman says, because I have also noticed the figures. Does he think that the figures given for debt interest are too low, given that the total debt at that time must be more than £400 billion? Surely the Government must be projecting a debt interest rate of about 7 or 8 per cent. per annum. I fear that, with that level of debt, we shall not get money at such a rate of interest.
§ Mr. Jopling
If the hon. Gentleman looks at table 1 in "The Budget in brief", he will see just above the figures I mentioned for PSBR for six years the figures for the percentage of gross domestic product. It is all right to have a relatively high percentage in a single year, or even for two or three years. I commended the Government for that. However, to continue that for six years—as I said, the figure is £233 billion over six years—should cause anxiety to all of us.
I attempted to examine the implications of that huge bill in debt interest for the future rate of taxation necessary to pay for it. Having consulted the autumn statement tax ready reckoner, which the House has before it, I am forced to this conclusion. Revalued to 1993–94 prices, the increase in central Government debt interest from £17.5 billion in 1992–93 to £26 billion in 1995–96 is equivalent to about £6 billion. To raise that additional revenue at 1993–94 income levels would require an increase in the standard rate of VAT of about 2.75 per cent. or an increase in the basic rate of income tax of about 3.5 per cent., assuming that the increases applied for a full year.
I have made it clear that the figures in the Red Book take us only up to 1995–96 whereas the PSBR projections go up to 1997–98. There is a further £65 billion of debt added in the final two years. Extrapolating from those figures, the implication of what is in the pamphlet is that paying for that debt would require either an increase in VAT at that time of 4 per cent. or an increase in income tax of 5 per cent.
§ Mr. Townend
Does my hon. Friend agree that there is an alternative? That alternative is to take a long and hard look at public spending.
§ Mr. Jopling
I am coming precisely to that point, but I am grateful to my hon. Friend for raising it. My hon. Friend has arrived at the next point in my thought process slightly before I got to it. The figures for debt interest in the years ahead just will not do. The Government really cannot go on on the basis of those figures for the years ahead.
The Treasury has three options for dealing with the situation, which will otherwise be intolerable. The first is to increase taxation. The second is to spend far less, as my hon. Friend the Member for Bridlington (Mr. Townend) suggested. The third is to engineer much faster growth in 314 the economy. The Government are likely to have to do all three. I hope that they will not cringe from further taxation in the November Budget or after that.
I hope that my right hon. Friend the Chief Secretary will be more than usually tough and hard in the public expenditure survey round, which I presume will be, as usual, in the summer and autumn. I hope that the Chancellor will continue to do what he has been doing to encourage business, to encourage the economy and to get more growth. Clearly, that is a way in which we can find the funds to deal with the extremely worrying situation that will develop.
To sum up, the Government have been correct this year, but the projections for the next four years are unacceptable. There is a great deal of hard work to be done, and the Government will have to take a great many tough decisions. I urge them not to shrink from taking them.
§ Mr. Dennis Canavan (Falkirk, West)
There were great hopes that yesterday's Budget would be a Budget for jobs. Sadly, however, those hopes have been dashed. The whole country needs a Budget for jobs, given that, even according to the Government's official figures, there are 3 million people unemployed. We all know that the Government have tried to fiddle the figures more than 20 times and that the real level of unemployment is over the 4 million mark, which means that unemployment has quadrupled since the Tories came to power.
Much has been said about the social cost of unemployment, but the economic cost is also considerable. It costs the Treasury about £9,000 per year to keep a person on the dole rather than in work. That means that, even on the Government's figure of 3 million, the total cost per year is £27 billion. It is surely common sense to ask why we cannot invest that kind of money in the creation of real jobs and real training opportunities for unemployed people. Why cannot we invest in the construction industry, in housing improvement and insulation programmes, in the provision of infrastructure, in the electrification of the railways and in the many socially useful as well as economically viable projects required throughout the country? The Chancellor specifically mentioned the Heathrow Express and the link from the channel tunnel to St. Pancras. But what about high-speed rail links with the channel tunnel from Scotland and the north of England? I detected no mention of them in the Chancellor's statement.
The Chancellor announced only a few measures that might help a maximum of 100,000 unemployed people—a mere 2.5 per cent. of the total. In Scotland alone, 62,000 manufacturing jobs have been lost in the past three years and more than 10,000 businesses have collapsed in the past year.
The Scottish manufacturing base has been decimated to such an extent that we are surely entitled to look to the Government for special measures to assist what industry we have left in Scotland. Take the Scotch whisky industry, for example. Taking into account the employment generated indirectly by that industry—in bottling, packaging and so on—it employs about 70,000 people, which is a considerable number. Yet a few weeks ago, 315 United Distillers proposed 700 redundancies and several plant closures, including the closure of the Rosebank distillery in my constituency.
Part of the problem facing the industry and those employed in it is the unfair competition that is the direct result of the lack of fairness in the Government's own tax regime. It is no use blaming the European Community, because the Government have the power to take unilateral initiatives to try to create a level playing field. Although they took one small step in that direction yesterday, there is still a long way to go to end the tax discrimination against the Scotch whisky industry, the unfair competition from imported wines from France, and so on. I urge the Chief Secretary to pass on that message to the Chancellor. We are grateful for small mercies, but it is about time that the Government took much more radical measures to help the industry.
The Budget is also a Budget of broken commitments. The Government have clearly reneged on their election promises not to extend the scope of VAT and not to increase national insurance contributions. They have done both. The 1 per cent. increase in national insurance contributions is, in reality, a tax increase. In fact, it is worse—and more regressive—because it will hit people on lower incomes even harder.
Probably the worst feature of the Budget, and the one that has deservedly come in for the most scathing criticism, is the proposal to impose VAT on domestic fuel and power. The Chanceller tried to justify it yesterday by claiming that other European countries do not zero-rate domestic fuel and power. Let me give him another European comparison. There has been a higher percentage increase in the number of winter deaths in this country than in other European countries of a similar climate. Many of those deaths are caused by hypothermia and other cold-related diseases.
Pensioners and families on low incomes are suffering from fuel poverty to such an extent that, particularly during the winter months, many of them face a choice between eating and heating; they cannot afford both. In Britain today, there are about 6 million homes that cannot be heated to the basic standards for healthy living set by the World Health Organisation. The 17.5 per cent. increase in domestic fuel bills will make matters considerably worse.
The Chancellor said yesterday that there will be additional help from the Department of Social Security for people on income support, but the Chief Secretary gave no commitment to my hon. Friend the Member for Dunfermline, East (Mr. Brown) who asked whether that additional help would meet the whole of the additional fuel burden that people on low incomes face.
The Campaign for Cold Weather Credits has been fighting for some time for a more equitable system of assistance to help people on low incomes meet their fuel bills during the winter. It suggested the extension of the £6 per week cold weather allowance—which is not very much, after all—to all recipients of income support during the months December to March inclusive. I understand that the total cost of that would be about £550 million. However, when I wrote to the Secretary of State for Social Services suggesting that that scheme be adopted, I received an unsympathetic and negative reply, so I am not hopeful. We shall have to wait and see what the Secretary of State comes up with in his statement, which I hope will be made soon.
316 The fact remains that there are many individuals and families on low incomes who do not qualify for income support and, according to the Chancellor's statement yesterday, they will get no assistance whatever to help them meet the 17.5 per cent. increase in their fuel bills.
It is ironic that many of the victims of fuel poverty are literally sitting on top of hundreds of thousands of tonnes of viable and workable coal reserves which are in danger of being abandoned because of the Government's nonsensical energy policy and proposed pit closures.
As the Liberal spokesman, the right hon. Member for Berwick-upon-Tweed (Mr. Beith), said, it is undoubtedly a feature of the Budget that people on low incomes are being asked to pay for the Government's economic failures. From when the Conservative Government came to power until the end of the last financial year, the Treasury received £132 billion in revenue from North sea oil and proceeds from privatisation of various industries and public services. What have the Government done with that money? Instead of investing it in our future, they have frittered much of it away in tax benefits to their rich friends.
Investment in manufacturing industry is 6 per cent. lower than it was in 1979. Manufacturing trade has been in deficit since 1983. As the right hon. Member for Westmorland and Lonsdale (Mr. Jopling) said, the public sector borrowing requirement is at an intolerably high level. The Government's own estimate for the next financial year is £50 billion. The Government have brought the country to the brink of economic ruin and we would be down the plug hole completely if it were not for the proceeds of privatisation and North sea oil revenues.
Sadly, the Budget is a missed opportunity. It will do nothing to promote economic recovery. It will do nothing to create real jobs or training opportunities for unemployed people. It will do nothing to create or redistribute wealth. It will reduce the living standards of people on low incomes and try to make them pay for the economic failures of this discredited Government.
The only consolation is that yesterday's Budget statement will probably be the last to be made by the present Chancellor of the Exchequer. His departure will not be regretted and I hope that he will take the Chief Secretary to the Treasury with him.
§ Mr. Michael Brown (Brigg and Cleethorpes)
I shall dwell on the last comment of the hon. Member for Falkirk, West (Mr. Canavan) because it is frightfully important. I very much hope that my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont) delivers the next Budget and the next public expenditure round with my right hon. Friend the Member for Enfield, Southgate (Mr. Portillo). It is essential that the policy which my right hon. Friend the Chancellor of the Exchequer announced yesterday is seen through.
I have never suggested to my right hon. Friend the Prime Minister whom he should or should not have in his Cabinet, but I intend to do so today. I hope that he will bear it in mind. It is essential that my right hon. Friend the Chancellor of the Exchequer should present the next Budget, and especially the one after that, because he must see through the strategy that he produced yesterday for economic recovery and to deal with the public sector borrowing requirement.
317 I have absolute confidence in the Chancellor of the Exchequer. [HON. MEMBERS: "Why?"] I will tell Opposition Members why. Yesterday's Budget was the 15th that I have listened to on these Benches. The Budget which I cheered most loudly was the one delivered in 1981 by Lord Howe.
§ Mr. Brown
No, it did not get me a job, but it won the 1983 general election. It sowed the seeds for winning the 1987 general election. The hon. Member for Hartlepool (Mr. Mandelson) seems more interested in jobs here. I am interested in jobs out there in the constituencies. I am more interested in jobs in Brigg and Cleethorpes than the hon. Gentleman is interested in jobs.
The Budget in 1981 sowed the seeds for our election victory in 1983. It sowed the seeds for the whole recovery of the 1980s. I cheered that Budget to the echo. It was received with total consternation by Opposition Members, and not a little consternation by Conservative Members. Yesterday, my cheers for the Budget were second only to my cheers for the Budget in 1981.
This is only the second time that I have sought to catch the eye of the Chair in a Budget debate. The last time was in 1981. What moved me to speak in that debate was what moved me to speak in the debate today. The devastating state of the economy in the late 1970s led the then Chancellor of the Exchequer to take some brave and bold decisions in 1981. He had to balance the need to restructure the British economy and take it out of recession with the need to deal with the burgeoning PSBR which had defeated Labour Governments throughout the 1970s.
Similarly, yesterday, the Chancellor, faced with the world recession and its consequences for Britain as we come out of that recession into recovery, had to deal with the problems that recessions create for the PSBR. I endorse the comments of my right hon. Friend the Member for Westmorland and Lonsdale (Mr. Jopling).
The hon. Member for Hartlepool might be interested to know that the present Chancellor of the Exchequer is the first since I have been a member of the Parliament who has been kind enough to seek my views on what should be in the Budget. So I am making slow progress. My right hon. Friend asked me at lunch earlier this year at No. 11 Downing Street what I thought should be in the Budget. My hon. Friend the Member for Richmond, Yorks (Mr. Hague) was present, and will testify to this. The only thing that I asked my right hon. Friend to do was to tax, tax hard, tax heavily and tax as soon as possible. That is not something that I like saying, but it has to be done, for the reasons that my right hon. Friend the Member for Westmorland and Lonsdale gave.
My only slight criticism of yesterday's Budget was that the medicine which was poured out should have been swallowed by the country today rather than next year or the year after. However, I fully appreciate that the Chancellor of the Exchequer has to make a judgment and balance the need to ensure that the fragile recovery is not jeopardised with the need to make sure that we deal with the PSBR.
318 For precisely the reasons that my right hon. Friend the Member for Westmorland and Lonsdale said were in the Red Book, if one looked closely, and in the Budget package which we received from the Vote Office, there will be consequences if we delay dealing with the PSBR now in respect of the additional moneys which my right hon. Friend the Chief Secretary will have to find to service that PSBR. It is essential to deal with it.
My right hon. Friend the Chief Secretary was involved in the public expenditure round last autumn. Many hon. Members on both sides of the House cheered that public expenditure statement to the echo. I was more hesitant with my cheers then, since I felt that the public expenditure settlement was reasonably generous. I knew that there would be consequences, and we heard them in the Budget yesterday.
I give my right hon. Friends the Chief Secretary and the Chancellor of the Exchequer every encouragement to take whatever difficult decisions have to be taken, even if they impact on the various spending hobby horses which every hon. Member in the House has. I have my own. I fully acknowledge that I may have to make sacrifices.
One thing is clear. I support the Government's economic policies, Mr. Deputy Speaker, because if you come to Brigg and Cleethorpes, you will see the recovery taking place. Even Opposition Members and the hon. Member for Hartlepool might make a journey to my constituency. They will see for themselves that today unemployment in my constituency is below the national average, whereas it touched just over 20 per cent. in the 1980s, due to the decline in the steel and fishing industries. It is an industrial constituency and unemployment is now below the level at the 1987 general election.
§ Mr. Mandelson
If, as the hon. Gentleman said, recovery has come to his constituency, can he answer two questions? First, why has unemployment risen by 2,000 in his constituency during the past two years? Secondly, if recovery has occurred, would he tell us the secret of his constituency's success, so that we can share it?
§ Mr. Brown
Yes, I would be happy to do so. First, I suggest that the hon. Gentleman goes to the Library and looks at the figures for my constituency before he quotes statistics. Two years ago, in January 1991, unemployment was 3,932, and in January 1993 it was 5,267. I do not know whether, if one subtracts one from the other, the answer is 2,000.
§ Mr. Brown
No. I now understand why the Labour party has such difficulty with figures. They cannot even get them right when they make cheap political jibes about other people's constituencies.
If the hon. Member for Hartlepool cannot be bothered to go and look for himself, I can tell him that there were massive redundancies in the steel industry in the early 1980s, Thanks to the Conservative Government's infrastructure policies, my constituency was made a development area, whereas previously it was an assisted area.
In the early 1980s, thanks to my noble Friend Lord Joseph, we secured two enterprise zones for my constituency. If the hon. Member for Hartlepool took a 319 journey along the River Humber today, he would first see SCM Chemicals, a Hanson Trust company, which employs about 700 people.
If he had accompanied me to my constituency last Friday, he would have had the opportunity to go to Hydro Fertilisers, which is a large chemical factory—[Laughter.] It is no laughing matter. That large company is based in my constituency and employs about 1,000 people. Last Friday, I attended the opening of its new nitric acid plant, which involved a £5 million investment.
If the hon. Member for Hartlepool had accompanied me to my constituency two weeks ago, he would have been able to enjoy a visit by the President of the Board of Trade, who performed the topping-out ceremony at the—[Laughter] The hon. Member for Hartlepool seems to think that this is a laughing matter.
§ Mr. Portillo
I wonder whether my hon. Friend listened to the Opposition going on earlier about unemployment and manufacturing industry, and whether he can account for the fact that, when he mentioned jobs, manufacturing industry and companies by their names, Opposition Members were convulsed with hilarity.
§ Mr Brown
I cannot account for the reaction of Opposition Members when confronted with the reality of the recovery. I cannot understand Opposition Members' hilarity when I mentioned the employment and expansion policies of companies along the Humber estuary, but I shall ensure that my constituents are made aware of their attitude to serious evidence.
We shall leave the Kimberly-Clark factory, where the President of the Board of Trade performed the topping-out ceremony, and move on to Associated British Ports, which runs a large dock in my constituency—the port of Immingham—where jobs are increasing monthly. Then, we arrive at the power stations. The construction industry has been busy, and fabrication yards in south Humberside full, as National Power and PowerGen's power stations near completion.
The shadow Secretary of State for the Environment, along with other Opposition Members, made much of dealing with the Rio summit and of how the Labour party would implement its provisions. He attacked the Government for applying value added tax to energy bills. The two power stations in my constituency will be able to generate electricity while emitting no sulphur dioxide and virtually no carbon dioxide. My constituency is at the forefront of ensuring that we produce energy in a way that does not result in carbon dioxide emissions.
I have no difficulty in accepting the provisions in the Budget. They will make an important contribution to the recovery and, more importantly, to dealing with the public sector borrowing requirement.
If Opposition Members would like to visit my constituency, I should be only too happy to escort them and to show them the industrial development there. The infrastructure laid does in the 1980s, as a result of 320 Government investment in roads and the motorway system around south Humberside, is one of the major reasons why we have been able to attract inward investment from abroad. Brigg and Cleethorpes has one of the highest levels of inward investment as a result of policies pursued by the Government and those adopted in the 1980s. Today we are benefiting from the industrial policies of the Government in the early 1980s.
§ Mr. Howarth
On a point of order, Mr. Deputy Speaker. The hon. Member for Brigg and Cleethorpes (Mr. Brown) mentioned Associated British Ports. Would it be appropriate for him to declare his interest, as I understand that he is registered as its parliamentary adviser?
§ Mr. Deputy Speaker (Mr. Geoffrey Lofthouse)
The hon. Member for Knowsley, North (Mr. Howarth) is fully aware of the procedures on declaring an interest in the House, and I have no doubt that the hon. Member for Brigg and Cleethorpes (Mr. Brown) is also aware of them.
§ Mr. Brown
Yes, Mr. Deputy Speaker, I am proud and happy to declare that I am the parliamentary adviser to ABP, which is one of the largest companies in my constituency and which runs the successful docks at Immingham. I am certainly not ashamed to do so, and I am sorry that I did not declare that I have the great privilege to be its adviser, as ABP employs many of my constituents in Immingham and I wish the company well. I hope that it will go from strength to strength, make more and more profits and generate more and more investment in the Immingham docks, so that yet more people will be employed there. I have no hesitation in saying with pride that I wish that company well.
There are many industrial manufacturing companies in my constituency. Thanks to the successful application of Government policies in the 1980s, there is solid recovery in the British economy. I invite any hon. Member to come to my constituency. I shall be happy to take the hon. Member for Knowsley, North (Mr. Howarth) around Immingham docks. He might then learn why we have made a success of the east coast ports and why the west coast ports, including Liverpool, failed so dismally in the 1980s.
I fully endorse the Budget, and I wish my right hon. Friends the Chancellor and the Chief Secretary well in their endeavours. I hope that they both continue in their duties at the Treasury for a very long time to come.
§ Mr. Clive Soley (Hammersmith)
The hon. Member for Brigg and Cleethorpes (Mr. Brown) went to the lunch at No. 11 and called on the Chancellor to tax and tax again. The question that the Opposition want him to answer is why he did not say the same to his constituents at the general election. That was the big lie told by the Conservative party. This Budget, perhaps more than any other, will go down in history as the one that revealed that that party won the election on a lie that was bound to be found out, because it knew that the promises it gave during that campaign were untrue.
§ Mr. Michael Brown
My constituents know what I stand for because I have always been described by my political opponents as the arch Thatcherite of south Humberside. Since 1979 I have always made it clear to my constituents that should there be any suggestion of the Government being faced with a deficit in public finances, I would call for taxation to be increased.
§ Mr. Soley
That is not the answer to my question. The hon. Gentleman went along to lunch with the Chancellor and asked him to tax and tax again, so why did he not say that at the general election? The hon. Gentleman must have known then, in common with all his hon. Friends, that the country was in dire economic straits. We all knew that the public sector borrowing requirement would go up, almost regardless of what the Government did. If the hon. Gentleman is saying that he did not know that, he must be economically blind, because it was known by every economic commentator.
I accept that the Conservative party won the propaganda war of the election, but anyone who knew anything about the true state of the British economy knew that its promises were untrue. The hon. Member for Brigg and Cleethorpes may talk about the employment opportunities in his constituency, but we remember the Tory poster during the 1979 election campaign, when the hon. Gentleman entered the House, that sported the slogan "Labour isn't working". The level of unemployment under the Conservative Government, however, has been consistently higher than it ever was under the previous Labour Government. It is worth noting that the last time that inflation was as low as it is now was under a Labour Government, when the rate of growth was 2.2 per cent. and unemployment stood at a third of a million. That achievement is a measure of the Government's failure.
The failure of the 1981 Budget, which compounded previous failures, was that it destroyed the industrial base of Britain. In the early 1980s we lost close on one third of our manufacturing capacity. The policies of Lady Thatcher may have been wrong, they may have failed and done enormous damage, but at least they were espoused openly and honestly. At the previous general election the Conservative party acted dishonestly and it knew it. When Lady Thatcher destroyed the manufacturing base of British industry it was inevitable that Britain would have a weak economy. One cannot have a nation state with a weak industrial base and a strong financial structure. Britain dominated the world for so long because of our strong industrial base. Likewise, Germany and Japan have done well in the current financial world because of the strength of their industrial base. If that is taken away, one's financial strength is also lost. That is why the pound was devalued—any country would devalue in such circumstances.
Throughout the 1980s, the Government chipped away at our industrial base in such a way as to leave us terribly exposed. My hon. Friend the Member for Dunfermline, East (Mr. Brown) won an earlier exchange about Europe with his interpretation of the statistics. The findings behind another statistic, which was issued by the European Community about three weeks ago, should be made crystal clear to everyone. It reveals that, for the first time, the standard of living in Britain is below the average for EC countries. Anyone above the age of 40 will remember that this country was always in the top four in terms of EC 322 standards of living. Now we are below the average; we are one of the poorer nations. The Government, however, try to get away with the lie that, somehow, our situation is comparable with that in other European countries because they, too, are faced with high unemployment or investment problems.
The truth of the matter is that so much damage was done during the 1980s that the Government are now trying to put together the pieces. That is the only thing that one can say in their favour. The right hon. Member for Westmorland and Lonsdale (Mr. Jopling) was right to say that things will get worse. The PSBR will continue to grow until the Government announce the true public expenditure cuts that they need to make, and which the hon. Member for Bridlington (Mr. Townend) would love them to make, to unemployment benefits. The only way in which that can be done, however, is by reducing unemployment, unless one is set on putting the unemployed on the breadline. The Opposition have always argued that one way to get the PSBR under control is not to have a high level of unemployment.
Recently, at Prime Minister's Question Time, the right hon. Gentleman reversed the policy of Lady Thatcher and told me that he sought to achieve full employment. I followed that reply with a written question and, in answer, the right hon. Gentleman defined full employment as high employment with a low level of inflation. To achieve that, however, one's aim must be full employment, but the Government do not accept that. As long as they accept a high level of unemployment, they will, by definition, accept a high level of public expenditure. That will cause them problems because they will either have to make cuts in other expenditure or conceal the dole queues in other ways.
The issue of housing finance has troubled me for a number of years. The Government have addressed it, to a limited extent, in the Budget with their changes to the mortgage income tax relief. For many years I have argued that housing finance has not only aggravated our housing problems, but caused major problems for the British economy.
Our housing crisis need not have arisen. The cuts that the Conservative party made to the provision of council housing were supposed to be designed to allow other houses to be made available for the private rented sector. That did not happen. The private sector represented 14 per cent. of the rented market when the Conservative party inherited it from the Labour Government, but it has now fallen to 7 per cent. The private rented sector is collapsing even though the Government have claimed that they want to enhance it. It is collapsing, and will continue to do so, because of mortgage income tax relief, which has always been a subsidy designed to make buying and selling houses attractive and renting housing, either as a landlord or a tenant, unattractive.
The collapse of the private rented sector has had important consequences and, to be fair, the Government now seem to recognise that, because the Chancellor is now phasing out mortgage income tax relief. That was the clear message from his decision, last year, to get rid of it for top rate taxpayers, as it was from the Government's refusal to upgrade that relief from £30,000 and their decision, yesterday, to reduce it from 25 per cent. to 20 per cent. It is clear that they are phasing out mortgage income tax relief. That is the right thing to do, but I wish that the Government would admit it. The President of the Board of 323 Trade admitted it when he was on the Back Benches and said some six years ago—I have a copy of his speech somewhere—that that relief should be abolished except for first-time buyers. He also said that, in any event, it should be abolished after the first 10 years. I happen to know that a number of people on the Government Front Bench share that view.
When the late Lord Ridley was Secretary of State for the Environment I said that it would be possible to revive the rented sector if all the parties agreed to phase out mortgage income tax relief. At that stage, however, the Government did not want to bite on the bullet, mainly because Lady Thatcher supported the subsidy. It is a common mistake to believe that Lady Thatcher was against subsidies; she was a strong supporter of them for private sector education, private health or house purchase. She would not allow it to be cut. If the late Lord Ridley had had his way, he would also have phased it out. We should have had all-party agreement to phase it out. But the big mistake that the Government are now making is to phase it out without putting anything in its place, which is equally stupid. A subsidy is necessary to help people to buy houses.
The reason why the earlier rescue package failed disasterously was that the Government refused to change the subsidy system. Just over a year ago—I think that it was 18 December 1991—the Government said, in response to fears that they had about the coming general election, that they would introduce a mortgage rescue scheme to rescue 50,000 families. I checked relatively recently and found that the number of families who have been rescued under that scheme is about 140, compared with the 50,000 promised. The reason for the failure is that the Government did not place money in the system to protect people with genuine difficulties over paying their mortgage.
Mortgage income tax relief is a problem and I would support the Government in saying that it should go—the Government should say that it needs to go urgently. Mortgage income tax relief has added about two percentage points to the inflation rate. Every time the Chancellor or a Government Member appears on television to talk about the inflation rate they use the phrase, "excluding mortgage income tax relief or house prices". What they mean and what Lord Lawson said some time ago is that mortgage income tax relief adds about two percentage points to the inflation rate.
The increase in the inflation rate is serious enough in a time of housing boom, but it becomes more serious when added to the other factors of housing finance. Those factors include the equity release that came in the artificial boom years of the mid-1980s, which were thought to be the Thatcher miracle years. At that time about £20 billion a year was released from housing equity as people borrowed money on the value of their houses. However, that process fuelled the import problem as they spent that money on imported goods as we had destroyed our manufacturing base. In doing so, we fuelled the boom. Lord Lawson's big mistake in his Budget was to believe that that boom was based on the real wealth of Britain, rather than artificially engendered manufacturing wealth.
Much of that equity relief came from homes that had been bought under the right-to-buy policy. It is not well known, but the total amount brought into the Exchequer under that policy was £25 billion—equivalent to all the other privatisations put together. If even a significant part 324 of that had been channelled into housing investment, this country would have had not only better housing stock, but a more effective construction industry which was not on the rocks as it is today. Such investment would have produced the other manufacturing advantages that flow from house repairs, maintenance and new-build. It would have helped the furniture and window industries and all those sectors that constitute a large part of Britain's manufacturing base, which is linked to the construction industry and is so important to the underlying base of the economy.
In other countries where there is a healthy rented sector people do not save by buying houses and waiting for house prices to rise so that they get rich. That has not happened here in the past few years, but has normally happened in Britain. In those other countries people save money in banks and investment societies that invest in industry. People in this country have historically relied on house price inflation to make them wealthy. People in our income group—I am referring to those who rely solely on a Member of Parliament's salary, which may not apply to many Conservative Members—rely on getting rich and securing an investment for the future by buying a house that will increase in value over the years. That does not constitute investment in industry or manufacturing—it is the sort of investment that can be released and developed in other ways.
Mortgage income tax relief is also important in relation to the mobility of labour. One problem of the mobility of labour in Britain is the lack of an effective rented sector. Mortgage income tax relief restricts the rented sector so that it is not easy for people to move around. A Welsh miner in the Welsh valleys who loses his job because the Government close a mine can sell his two-bedroomed house for about £10,000, move down the road about 100 miles to Reading—not a big move—where there is some available work and buy a similar house for £100,000. The Government will not achieve mobility of labour in this country until they do something about housing finance.
I regret that the Labour party did not make as much of the housing issue as we should have done in the period leading up to the general election. If we had concentrated on the subject of housing finance we could have won the arguments, not merely on housing, but on finance and the British economy. At that time, I had developed policies designed to reform housing finance and create a level playing field for the rented sector and the ownership sector. Banks and building societies were queuing up to talk to me about how to do that.
I believed that a key issue was the need for a housing investment bank. Initially, I suggested that the Government should set up a housing investment bank into which money released from capital receipts could be invested. The sum involved would then have been about £6 billion or £7 billion, which would have provided a good package on which local authorities could draw over a period. It would also have attracted private sector money to create expansion in the rented sector.
Initially, I thought that the Government would have to set up that bank, but one major building society and two or three banks came to me and said, "Don't bother—we'll do it for you." They said that if the capital receipts were invested in the bank and they were given a guarantee on the risk factor of about 1 per cent., they would also invest in it. The construction industry was also interested in investing money in the bank as it could see the advantages 325 to be gained for itself. It would have been a long-term investment bank that would have attracted funds from people wanting ot make a long-term investment as they do with pension funds.
There was a possibility of constructing the sort of bank that exists in other countries in Europe, some states of the United States and elsewhere. It would have attracted extra private money to invest in housing. Such investment would be good, not only for the housing stock, but for the construction industry. Such a bank provided an opportunity that we have lost. The Labour party should have made a strong case for it. If the Government want to steal a march on us, they should say to the building societies and banks that, although the Labour party did not give them the chance to take advantage of such a policy, they could do so under the Conservatives. At least that would take some of the homeless kids off the streets—a phenomenon that we have not seen in this country since the 1914 period—and would take families out of bed-and-breakfast accommodation.
Such a policy would also allow the Government to do something that they want to do: move towards market rents. There have been arguments about market rents, against which I have no argument as long as they are affordable. It is their affordability that matters. Market rents are made affordable by having a level playing field for owner occupation and the rented sector within the housing finance structure. If that does not exist, it inevitably follows from the economics of the policy that the market rents will be unaffordable. That is precisely what is happening. That is why housing associations are experiencing so much difficulty and the private sector will not invest.
Before the election I said what we should have done. I now repeat that and say that, in the Budget, the Government should have given private landlords tax breaks. They should have done so only on the basis of an exchange for registration so that landlords would have to be registered in order to receive that subsidy. The registration would ensure that they delivered a proper standard of housing and did not harass tenants or provide bad service. The private rented sector has always produced the worst abuses in the rented sector generally. I was quite happy to say to landlords wishing to enter the system that, in exchange for the subsidy, they should give guarantees about management standards. In that way, we could revive the private rented sector, which would benefit the economy as a whole.
§ Mr. William Ross
Many of us who are listening with great interest to what the hon. Gentleman is saying know that one of the great costs involved in building a house is the price of the land on which the house stands. How would the Labour party and the hon. Gentleman have dealt with that issue in terms of planning law?
§ Mr. Soley
I could refer the hon. Gentleman to a document that I produced on that subject—I also spoke on planning matters—and while the land issue is important, it is not as crucial as it is made out to be. Even so, I accept that we need a social use class order for planning, which would help matters considerably.
A much wider argument involves the role of local government. We needed to allow local government to 326 designate areas for social housing. I will not go far down that road, although it is not a million miles from the Budget in that if, for example, we had had a Greater London authority and said that we wanted a certain amount of docklands land used for affordable housing, for rent or for sale, we would not have the housing problem that now exists in London. The same could have applied in other areas. That is the way to use the planning system to deal with planning provision generally.
There are many areas in which the Government could have intervened by way of the Budget to reform the housing finance system in a way that would not only help people get homes, but would help the British economy out of its structural problems.
Apart from Belgium, we are the only country with anything resembling mortgage income tax relief. It is a straight subsidy of about £5 billion which does not go to those who most need it. It does not save people from being repossessed, and when they are repossessed they go into bed-and-breakfast accommodation and everybody paying the council tax contributes to that accommodation for them. It is a ludicrous system, which is why about a year and a half ago I put to the Government a mortgage rescue scheme directed at preventing people from going into bed-and-breakfast accommodation by keeping them in their own homes.
I could speak at length on that subject. I leave it by reminding the House that throughout the 1980s the Conservatives produced a disaster in housing policy to the extent that, for the first time in 70 years, we have homeless teenage British children begging on British streets. That has come about in part, though not wholly, through a failure to address the housing finance system. The present system in Britain not only distorts housing but distorts the economy, and unless we address it more effectively we shall continue to fail in housing policy and in dealing with some of our wider economic problems.
§ Mr. John Townend (Bridlington)
Before dealing with the Budget, I must challenge some of the remarks of the hon. Member for Hammersmith (Mr. Soley) about the myth that is being fostered that the economic policies of Lady Thatcher were a disaster in the 1980s. For the first two Parliaments of her rule, we had the most successful economic policy Britain had witnessed this century.
As the Chief Secretary said, we saw the creation of 3 million jobs and an explosion of enterprise and initiative. We reformed the industrial climate—the trade unions—we reformed the tax system, and we created an enterprise society, all based on two pillars of economic policy—fiscal rectitude, moving progressively to a balanced budget, and bringing inflation down by controlling the money supply with a floating exchange rate.
The tears started to fall when we abandoned those two policies. We started giving in to the demands of people who wanted us to spend more on this and that, and the budget deficit began to rise. Lord Lawson abandoned his monetary policy—he caught the European bug; he tried to shadow the deutschmark and began dropping, when he should have been increasing, interest rates—and the economy overheated.
That was the cause of our problems today, so I am delighted that the Government have now accepted that they should go back to the earlier principles. We have left 327 the ERM and have a floating exchange rate, we are controlling inflation by our monetary policy and, hopefully, this year's Budget is the beginning of the control and reduction of the budget deficit.
I strongly support the broad thrust of the Budget. I was looking for three things from it. First, I wanted a Budget for recovery; secondly, I wanted a Budget that sent a message to the markets that the British Government really were serious about dealing with the problem of the deficit; and, thirdly, I wanted a Budget that would be welcome on these Benches and would form the basis for a fifth election victory. The Chancellor has succeeded on all three counts.
We wanted a broadly neutral Budget with no massive tax increases in 1993–94, which could have snuffed out the fragile recovery which is taking place. We have a package of help for industry, small business and the long-term unemployed. I have been interested in small business throughout my political career. Indeed, I started out as a small business man, so I am particularly pleased with the measures to help small businesses.
The reduction in the cost of the loan guarantee scheme will be helpful. At a time of recession, the speeding up of the repayment of VAT on bad debts is long overdue, and I am delighted with the reform of the VAT penalty regime. It was unacceptable previously that relatively small errors—even clerical errors—that could be made by any small business man should result in heavy penalties.
Certainly my hon. Friends will be delighted that there is to be no real increase in business rates this year. There will be 10,000 more places on the business start-up scheme, which is good news because, as we appreciate, jobs in the future will come from small businesses. The new manufacturing factories will create wealth, but with their robots and automation they will not create many jobs.
Further moves towards deregulation are wanted by virtually everybody. Help for industry, particularly exporting industries, is vital and it is good to see export credit cover increased and the cost decreased. The racing industry was liable to be driven to Ireland, but it, too, has been helped. We have also dealt with the problem of surplus advance corporation tax.
I am pleased that the Government have appreciated the problems of the City of London. I have been worried about the City. We felt that, with the single market, we might not do as well as Germany in machine tools and other manufactured products. But in banking, insurance and financial services, such as dealing in stocks and so on, we thought that we would sweep Europe. Unfortunately, we have suffered some disappointments in that respect.
The management of our banks has not been as good as it might have been, to say the least. Their capital has been undermined with large bad debt write-offs. The insurance industry has been badly hit. In Lloyd's there has been incompetence and, in some cases, dishonesty, and now we have the problem of TAURUS. The City is struggling. I am pleased—I say this unashamedly, being a member of Lloyd's—that the Chancellor has grasped the nettle and is helping insurance, Lloyd's and the industry as a whole to have a level playing field, with a tax allowance for reserves to deal with future claims. That will be helpful to the City. It is vital that the insurance industry survives and prospers.
All those many changes, which improve the lot of business, show that we have a listening Government. The Budget contains many measures, some of which may not seem important individually, but put together they represent a significant and helpful package.
328 Even so, I have some reservations, the first being in respect of excise duty. My family has been in the wine and spirits trade for generations. I am delighted that my business is in the north of England, although I am not affected personally. We are faced with the single market. The degree of increased imports by private people, duty-free, of beers, wines and spirits is extremely worrying.
I was delighted that the Chancellor decided not to increase the duty on Scotch whisky. He is aware of the problem. The brewers estimate that 10 per cent. Of packaged beer consumed here is coming in duty-free. Wines and spirits are also pouring in. The Treasury estimates that it will lose £250 million in duty this year. That means a loss of business to the British industry of getting on for £1 billion. We are exporting jobs in retailing, wholesaling, brewing and packaging. It is estimated that one in six off-licences will close, with the loss of thousands of jobs.
The Chancellor said in his Budget speech:But there is a natural concern as well about the impact of an increase in cross-border shopping, and the effect that it might have on British businesses, particularly in the south-east. In considering what changes to make to excise duties, I have had to balance that against the need to raise revenue. I have therefore decided to raise the duties on most alcoholic drinks by only 5 per cent."—[Official Report, 16 March 1993; Vol. 221, c. 176.]I have to say that that is double the rate of inflation. It is a higher level than usual. Experience in other countries—especially in the United States of America, where different states have different regimes for sales and excise taxes—has shown that, provided that differences in retail prices do not amount to much more than 5 per cent., there is no serious damage. However, once the difference increases to higher levels, damage is done.
The duty on a bottle of wine in France is 3p. We have now put up our duty to £1, so hon. Members can appreciate the enormous difference. Far from increasing the gap, surely my right hon. Friend the Chancellor should have kept the duties the same for at least this year, and then progressively brought them closer to the French and Belgian levels. As the spokesman for the Brewers Society said today, there will be a growing black market in beer and wine, imported and sold to the trade. It is a charter for the wide boys.
§ Mr. Martyn Jones (Clwyd, South-West
As someone employed in the brewing industry for 19 years, I have to agree with the hon. Gentleman. Does he agree with me that the Chancellor has given himself a tremendous problem over the next couple of years, as he will have to equalise the duty in the United Kingdom with that of our EC partners? He has increased the duty, and he will have to bring it down from about 40p on the pint equivalent to 4p on the pint equivalent.
§ Mr. Townend
My understanding is that there will be complete harmonisation. As I have said, the increase will distort the market and export jobs. I do not advocate that we reduce our duties to 3p for wine and 4p for beer, as that would result in the Exchequer losing virtually all the revenue. However, if the duty was brought down to 50p on a bottle of wine, although the difference would still be significant, the incentive would be much less.
I want now to move on from this Budget to the second Budget in November, and to the November 1994 Budget. My right hon. Friend the Chancellor has spelt out large and specific tax increases. He has made it clear to the 329 market that the Government have returned to a policy of fiscal rectitude, and that they are serious about dealing with the deficit. I strongly welcome and support that move. I do not like increases in taxation, and, let us be frank, the increase in the burden of taxation is substantial—£6.5 billion in 1994–95 and £10.5 billion in 1995–96.
There was a worrying omission from the Budget statement. There was no mention of a contribution to cutting the deficit through a reduction in public spending. I was hoping and expecting my right hon. Friend to say that the Government and the public sector would be sharing the burden with the long-suffering taxpayer. I was hoping that he would match the reductions, and that in the autumn he would cut the control total for 1994–95 by £6.5 billion and that for 1995–96 by £10.5 billion, to reduce the Budget deficit still further.
I agree with my right hon. Friend the Member for Westmorland and Lonsdale (Mr. Jopling) that the problem of the budget deficit is very serious and will last a long time, dragging down the economy. If we are to solve the problem, it must be attacked from two sides. We must accept rather high increases in taxation, but also reductions in public expenditure. As can be seen from page 73 of the Red Book, the settlement for the coming year is very generous. We will have a fiscal stimulus in 1993–94. If we take out interest charges and cyclical social security—so we are not taking in the costs of recession—the control total will rise by no less than 5.58 per cent., with underlying inflation standing at about 3 per cent.
We must remember that one of the most significant elements of public expenditure is the cost of wages and staff, which is limited to 1.5 per cent. Therefore, in volume terms it means that expenditure is rising by about 4.5 to 5 per cent. Spending has increased at a frightening speed, and that is a significant cause of our budget deficit. It is not right to blame it all on the recession.
Page 74 of the Red Book shows that Government general expenditure as a proportion of gross domestic product rose from 42 per cent. in 1991–92 to 45.5 per cent. this year. Even with the tax increases, it will decline by only 1.5 per cent. in the next two years. As the figure for 1988–89 was only 39.25 per cent., it is obvious that the increase is significant. It is vital that the Government give a commitment to bringing down spending as a proportion of GDP, and back to less than 40 per cent.
Overall, taxation at the next general election should be no higher than it was at the last election. There is a real political imperative, which is why the Government must turn their attention to public expenditure. There are two reasons why we won the last election. The first is that the public decided that my right hon. Friend the Prime Minister would be a better Prime Minister than the former Leader of the Opposition, the right hon. Member for Islwyn (Mr. Kinnock). Secondly—above any other consideration—the public thought that, if they voted Labour, they would be voting for a party of high taxation.
Although I support the increases in taxation to get the deficit down, as soon as the recovery is under way, we must cut spending and reduce taxes. I suggest that the Government look at what happened in America with President Bush, and at what happened in Australia last 330 week with Mr. Hewson. I do not think that we will be returned at the next election if we go into it with significantly higher taxes.
We are on the right track. I am sorry that my right hon. Friend the Chief Secretary is not here because there is no doubt that he carries a heavy load. We have dealt with one leg—taxation. The future of the Government and of the Conservative party depends on whether my right hon. Friend can get the support of his Cabinet colleagues to deal with the other leg—public expenditure. I look forward to the first Budget in November that deals with both taxation and spending. I hope that by then my right hon. Friend will have been successful, and that there will be at least £5 billion to £10 billion off the control target.
A great deal of money is being wasted in many areas. I intend to table some parliamentary questions about that. I do not think that anyone appreciates the increase in the costs of financing care in the community for people who are mentally ill. A case was brought to my attention this week of a rather difficult patient who has been decanted from a large hospital into care in the community. The revenue cost for that one person is £100,000 a year. It is being paid by direct grant from the Welsh Office. I have figures that show that previously the cost for a patient in a large hospital was £20,000 to £22,000 a year, but when they go into care in the community it is well over £30,000.
It is the same with law and order, where the costs are very high. The county council in my area was very upset because a youngster was sent to a special detention centre at a cost of £2,000 a week, or £100,000 a year. That cost is unacceptable, and there are many areas that we need to study.
One of my hobby horses is the question whether, in our current state and with a large budget deficit and a large balance of payments deficit, we can really afford to be spending £2.25 billion a year on overseas aid. I am not opposed in principle to overseas aid, but when we have to borrow from the foreigner to give it away and then repay the foreigner with interest, surely that is not good business. Therefore, I am happy that the Government have two pillars of monetary control to help bring the budget deficit under control.
I have great faith in my right hon. Friend. I support fully the broad strategy of the Budget and hope that, when I speak in the next Budget debate in November or December, I shall be able to congratulate my right hon. Friend on dealing with the other leg of the problem.
§ Mrs. Jane Kennedy (Liverpool, Broadgreen)
I wish to direct my first comments to the short passage in the Chancellor's speech that has direct implications for hundreds of my constituents and those of my hon. Friends representing seats in Liverpool, Glasgow, Cardiff and London where employment in the pools industry is likely to be affected by the introduction of a national lottery. Hon. Members who shared with me the distinction of serving on the Standing Committee that examined the National Lottery Bill will be relieved to hear that I propose not to refer even once to a level playing field.
Taxation of the lottery is of great interest to many people. Charities and voluntary organisations and sports and arts organisations had hoped to see no taxation at all, which would have increased the anticipated benefit from the lottery. Football pools companies involved in the sale 331 of soft gambling products, who will see some erosion of their market share, hoped for a reduction in the pools betting duty. Neither has materialised in the Budget.
The Chancellor's proposal to start taxing the lottery in the first year at 12 per cent. will disappoint many, including Conservative Members who had hoped that it would escape taxation. The consequences of that level of taxation for the good causes will be a reduction in the expected benefits.
In a press release yesterday, Customs and Excise predicted a turnover of about £1.5 billion in the first year. We must treat all such predictions with caution, but that is revealing. It would leave an approximate pay-out to each of the five good causes of about £78 million per year. On that prediction, for every £1 spent on the lottery 12p will go to the Chancellor, compared with 5p to charities. I hope that the Advertising Standards Authority will monitor closely the marketing hype that will surround the launch of the lottery. A lottery whose tax take is more than twice the amount going to charity can hardly be described as a lottery for good causes. European lotteries are taxed at levels of up to 30 per cent. I wonder how long it will be before the Chancellor or his successor finds lottery proceeds too tempting to resist.
Football clubs will also be disappointed that the Chancellor missed the opportunity to extend the 2.5 per cent. concession on pools betting levy, which ends in two years' time and which allows pools revenue to be ring-fenced for the Football Trust and the Foundation for Sport and the Arts. Much work has been done through the Football Trust to help clubs meet the requirements of the Taylor report, making stadiums safe and more attractive for supporters. There is still a long way to go and I hope that there will be an amendment to recognise the continuing role of the Football Trust.
The 12 per cent. duty to be levied on the lottery will allow up to 50 per cent. of turnover to be paid back in prizes. Without the further reduction in pools betting duty, the pools will be limited to their current 25 per cent. prize level. That differential between the lottery and the pools will make the pools a relatively less attractive proposition. The smaller companies such as Zetters and Vernons will be particularly disadvantaged. Vernons' employees on Merseyside will continue their campaign to see fair competition established.
Fairness would be good for the lottery as well as the pools. A healthy pools industry would help stimulate interest in soft gambling which would in turn promote sales of the lottery. The collapse of the pools would not only lead to further unemployment in my constituency but would damage the lottery. The lottery promoters would be forced continually to modify their gains to maintain public interest. The Parliamentary Under-Secretary of State for National Heritage, the hon. Member for Salisbury (Mr. Key), would find it increasingly difficult to stick with his "very British lottery", a concept which has won widespread support. Pools workers would also benefit from a more secure future. One of my biggest fears—further unemployment in my constituency—would be removed if the Chancellor would consider that point further.
Past economic performance on Merseyside has been among the worst in Britain. The sustained decline in employment in Liverpool, especially in port-related industries, in transport and in manufacturing, has frequently been much faster than the national average. I 332 endorsed fully the comments of my hon. Friend the Member for Hammersmith (Mr. Soley) when he talked about the decline in manufacturing industry being a direct result of the policies of the Conservative party.
The service industries were heralded by Baroness Thatcher as the engines of economic growth in the '80s. That policy has the Prime Minister's tacit endorsement, no matter how much he now protests that he did not support the perverse logic inherent in it, because he remained a member of the Cabinet that espoused it.
The Budget will do little to arrest the decline on Merseyside. It is devoid of any strategy to put people back to work or to give young people throughout the country, the 6,713 unemployed in my constituency, where one in four men are out of work, or the 1 million long-term unemployed nationwide some hope of a decent future. They cannot look to the Government for any imaginative or effective policies to alleviate their hardship.
The Chancellor said yesterday that he wants tax decisions to be made here and not in Brussels. I suspect that he believes that economic matters more generally should also be determined here. But economic policy made here has done nothing for the people of Merseyside. They have to look to Europe for help.
The recent nomination of Merseyside by the European Commission for objective 1 status—the status reserved for the regions whose development is lagging behind that of others in the Community—will provide grant aid via the European regional development fund for a range of projects to facilitate regeneration and will give a glimmer of hope to those of us engaged in the task of turning Merseyside's economy round.
As I have said, the Budget does nothing for jobs. The measures announced to help the unemployed are insufficient to cure the malaise. In any case, they are too late and on too small a scale to have any real effect. They are nowhere near proportional to the problem. Only one in 10 of the long-term unemployed will be helped by the measures.
More generally, the Chancellor said that supply-side measures were vital in the long term. For 13 years he and his predecessors have been saying that, yet their supply-side reforms have failed to produce a dynamic economy. Instead, there has been a failure to invest in infrastructure, new technology and capacity, much of which has been scrapped in any case because of the recession.
Unlike the hon. Member for Brigg and Cleethorpes (Mr. Brown), I am unable to describe the advantages of the Government's policies for my constituency. However, there are some spectacular success stories, including one on Merseyside that I wish to describe to the House. GEC Plessey has recently completed a massive programme of investment in its Edge lane plant, resulting in a world-beating centre for the development of new communication technology. Unfortunately, that success story is the exception to the rule. GEC Plessey's successful development of high technology has resulted in a shake-out of hundreds of jobs in the plant, where engineers are no longer needed and production jobs are increasingly scarce. The victims of the shake-out need to be re-skilled to enable them to turn their hand to other work, which has to be available for them. Government provision of such training is woefully inadequate and condemns many to long-term unemployment.
333 It is surely a sign of a failure of economic policy when, after 13 years of supposed supply-side improvements and at the height of a recession, the current account of the balance of payments is over £12 billion in the red and growing rapidly. In my limited experience of economics, that flies in the face of conventional economic wisdom.
The devaluation of the pound following black Wednesday gave an important boost to the economy's tradeable sector, and the Prime Minister's much publicised interview in The Independent on 4 March implied that devaluation was one element that made Britain uniquely competitive. I seem to remember—this was not long ago—the Government telling us that devaluation was completely ineffective because any competitive gains from a lower pound would be wiped out by higher prices.
Looking back, the misguided financial deregulation of the 1980s ensured the credit explosion that fuelled asset price inflation. Many people, perceiving that their wealth had increased, spent more—and everything seemed rosy. In March 1988, however, the Government lowered income tax when it was clear that consumer spending was running out of control. Inflation was inevitable, as was a ballooning balance of payments deficit. Manufacturing, which had been pushed to the side but which is so vital for economic prosperity, was simply too small to sustain our import needs.
With increasingly shambolic monetary policy and the failure of monetary targeting, entry into the exchange rate mechanism was seen as the panacea. With exorbitant interest rates dampening domestic demand and propping up the pound, recession was inevitable. The depth and length of the recession produced the low inflation in which the Government place such faith and for which they take credit. They pin hopes of recovery on lower interest rates, which have only been made possible because the ERM—major plank of Government policy—failed.
The irony is that the forces for recovery defined by the Government—low inflation, low interest rates and a competitive currency—have been put in place because of a catastrophic failure of Government economic policy.
Some of the measures announced yesterday must be welcome and they suggest that the Government have at last woken up to the plight of manufacturing industry. I refer in particular to the extension of export credit cover. I am told that the reforms to advance corporation tax are also of great benefit, but, like the right hon. Member for Berwick-upon-Tweed (Mr. Beith), I cannot comment further. I await the views of hon. Members who know more about that subject than I do.
The Chancellor was silent on tax breaks for capital investment—which was strange, considering that if he anticipates recovery, measures to encourage investment are essential. The temporary measures introduced in the autumn statement are not being extended, which will disappoint many.
A further measure that may help Merseyside is the abolition of petroleum revenue tax in the case of new fields, which we hope will encourage development of the Liverpool bay oil and gas field.
For the majority of my constituents, however, the Budget is profoundly depressing. The prospect of higher personal taxes over the next few years will do nothing to encourage consumer spending now. Higher fuel costs 334 through the imposition of VAT on previously zero-rated gas and electricity supplies—despite Tory promises—will hit families on the edge of poverty the hardest.
The hinted benefits increase will have to be seen to be believed, particularly given the clearly stated objective of reduced Government spending in the next few years, described at column 175 of yesterday's Official Report. Savage cuts will inevitably hit the Department of Social Security. Unlike the hon. Member for Bridlington (Mr. Townend), I do not urge the Government to cut spending on care in the community. That is not an expensive option, and it is agreed by all to be the proper way of caring for the mentally ill and those with mental health problems. Neither do I urge the Chancellor to cut expenditure on law and order or overseas aid.
While it is true that the economic slump is felt world wide, it began sooner here and has lasted longer, and we are in a weaker position to recover in terms of our manufacturing base. The Chancellor has done nothing to overcome the United Kingdom's structural economic problems, and I have little confidence that my constituents will more easily find work as a result of yesterday's announcements.
§ Mr. Douglas French (Gloucester)
I sympathise considerably with the remarks of the hon. Member for Hammersmith (Mr. Soley), who has just left his place—not as they relate to my noble friend Lady Thatcher but as they relate to the phasing out of mortgage interest relief. He elaborated on views expressed earlier by the right hon. Member for Berwick-upon-Tweed (Mr. Beith). Both see considerable merit in phasing out mortgage interest relief, and yesterday's Budget offered a golden opportunity to abolish it altogether. There could scarcely have been a better opportunity, with interest rates as low as they are, and when the maximum benefit to each family is only around £600 a year. That figure is not significant compared with the fall in mortgage repayments resulting from recent interest rate reductions.
The abolition of mortgage interest relief could have been significantly cushioned by adjustments to the 20 per cent. band. More importantly, it would have saved a considerable amount of revenue—a sum approaching £5 billion—and revenue saving ought to have been the key to yesterday's Budget.
The Budget acknowledges that the deficit problem is enormous, but not that it is enormous enough to warrant immediate action. I would prefer the Budget to face up to the need to start a deficit-reducing programme now, and not delay it. Tackling MIRAS would have been a good start.
I find it difficult to have full confidence in a judgment made in 1992–93 that assesses a need to raise additional revenue of £6.5 billion in 1994–95 and £10.5 billion in 1995–96. Such figures assume a level of recovery which should come and which we all hope will come, but the time scale is uncertain—as we know from the past two years. They assume also a level of recovery which will be deeply affected by events in Europe and in the United States, and a forecasting accuracy that has seldom if ever been achieved in the past.
There is a sound reason why Budgets have historically been held at annual intervals. Usually, the intervals have been less than annual only at times of economic difficulty. 335 We have not before attempted Budgets less frequently than at annual intervals, but it seems from yesterday's approach that the likely future practice entails the forecasting of figures, and particularly of tax takes, far in advance.
The deficit levels confirmed yesterday were worse than the majority of commentators expected—at £35 billion for 1992–93, rising to £50 billion in 1993–94. Much City opinion was surprised by the £50 billion figure. Those who watched television coverage of the Budget know that, when my right hon. Friend the Chancellor referred to it in his speech, the chief economist of James Capel, Keith Skeoch, reacted with the words, "That must be a mistake." This indicates the extent to which the figure of £50 billion, while expected and anticipated in the course of time, was not expected this early.
At the time of the last autumn statement, a forecast by Goldman Sachs predicted on current trends a deficit in 1996–97 of £80 billion. That figure was viewed as ridiculous at the time. If it had been forecast in the knowledge that the 1993–94 figure was already £50 billion, the chances are that the Goldman Sachs prediction of six months ago would have been not £80 billion but somewhat higher.
The document "The Budget in Brief-, which was published yesterday by the Treasury, says:The Public Sector Borrowing Requirement (PSBR) in 1993–94 is projected to be £50 billion, equivalent to 8 per cent. of GDP. But the Government's objective is to bring it back towards balance over the medium term. The discretionary increases in tax revenues announced in the Budget will build up over time, and together with the public expenditure plans in the Autumn Statement will ensure that this happens.Those are very fine words, but for many people they are not very convincing, and they will not be convincing until the next public expenditure plans are revealed in November. Thus, we are to have eight months of uncertainty, eight months during which we shall not know how satisfactorily the Government will tackle the public expenditure problem.
§ Dr. Lynne Jones (Birmingham, Selly Oak)
On the question of public sector spending, surely the credibility of the Government's PSBR policy will depend on whether they get growth back into the economy so that tax revenues can start to rise again, with people now unemployed back at work.
§ Mr. French
I accept the hon. Lady's point in theory, but it would be very risky indeed to base all action on the assumption that growth will return within a particular time. Naturally, one hopes that it will, but it would be extremely imprudent to make such an assumption. As we have seen in the past, assumptions do not always prove to have been justified, however well based they may have been.
The position becomes even more disconcerting when we read in the Red Book that the Treasury projects that the PSBR for 1996–97 will be £35 billion. That is the same, in cash terms, as the figure for 1992–93. My right hon. Friend the Member for Westmorland and Lonsdale (Mr. Jopling) was absolutely right to draw attention to this problem. Over a period of five years, in cash terms, no progress is to be made, yet revenues are expected to rise because of the recovery from recession. The indication is that there is to be no significant progress in reducing Government expenditure, in cash terms, during this period.
In 1992–93, the PSBR was 5.75 per cent. of GDP, and in 1995–96 it will go down only to 5.5 per cent.—hardly any worthwhile change at all. As my hon. Friend the 336 Member for Bridlington (Mr. Townend) pointed out, the same sort of pattern is to be found when one compares spending as a percentage of GDP. In this regard, I refer hon. Members to page 74 of the Red Book. In 1995–96, Government spending will fall only to 44 per cent. of GDP. That is not the progress we need: it is too slow.
Why did the Chancellor reach the view that, in this respect, no immediate action should be taken? Why is the majority of significant action to be deferred? Clearly, the Chancellor has asked himself how fragile the recovery is and how much it could be harmed by revenue-raising measures designed to reduce the deficit. The fact that the current year is virtually revenue-neutral implies that the Chancellor has concluded that the recovery is very fragile indeed.
Why is the recovery so fragile? It is fragile because market confidence is so low, and confidence is low because the commitment to curbing the deficit and putting finances on a proper footing is inadequate and lacks credibility. What will give it credibility is action, not words—action now, as opposed to action later. I very much regret the fact that the Chancellor seems to feel that well chosen words now are a reasonable substitute for action. I simply do not believe they are.
To that extent, I find myself totally in agreement with one member of the Treasury panel of independent forecasters, Professor Tim Congdon, who is regarded as the maverick. I should like to refer to the March issue of The Gerrard and National Monthly Review in which Professor Congdon has published his now-infamous "Open Letter to the Treasury Panel". Before getting to the extremely complex part, I should like to quote these words:Since everyone agrees that the Budget deficit must be reduced in the medium term, there is, in my opinion, no advantage in deferring tax increases. The longer the tax increases are postponed, the higher will be the future costs of servicing the national debt, and the larger will be the tax increases that are eventually necessary.I totally endorse that judgment. In fiscal and economic policy, it has been shown time and time again that, if tough action has to be taken, it is better to take it early rather than late. Deferred action causes uncertainty, even if it is designed to be informative and to show commitment, and is undertaken with the best of intentions. I can think of nothing more certain to dampen the capacity of an economy to spring into life than an announcement that, whatever happens, heavier taxes are on their way but they are not to be imposed just yet.
Leaving aside the overall tax take, what is the effect of announcing tax levels in advance? That is something of a novelty. I do not recall any Budget in which it happened to anything like the same extent. It is an innovation, possibly inspired by the Clintonesque approach, but there are very considerable dangers in it.
Taxpayers cannot reasonably assume that the rates being announced will apply when the time comes. Everybody knows how unreliable economic forecasts are, how frequently they are wrong. If forecasts are wrong and have to be changed, the tax rates depending upon them may also need to be changed. As I understand the situation, these rates are to be included as an integral part of the Finance Bill. It seems to me that this makes the situation worse rather than better. If rates have to be changed subsequently, further difficulty will be created, and more explanation will be required.
337 In my opinion, such a practice also fetters the judgment of the Chancellor. My right hon. Friend may be fettering his own judgment for future Budgets—I very much hope so—but, on the other hand, he may be fettering the judgment of subsequent Chancellors. One has to ask whether the rates being announced for future years run with the existing Chancellor or whether, in the event of his moving on, they will fetter the judgment of any successor.
It is fairly certain that the precise rates being specified at the moment will not, in the event, be applied. It is almost certain that future Budgets will have to show why figures that were announced so far ahead have had to be altered. As a result, a measure designed clearly with the best of intentions—to provide continuity and certainty of policy—is far more likely to breed uncertainty. In my view, it is therefore self-defeating and extremely imprudent.
I am also very uneasy about the practical effects on the conduct of the individual taxpayers of announcing tax increases so far in advance. Indirect tax increases are one thing. Advance announcements may have the effect of bringing expenditure forward, although that is not very likely to be possible in respect of domestic fuel and power, but direct tax increases announced so far ahead freeze taxpayers into inaction.
Many taxpayers are currently having to hold back on discretionary expenditure, although they have cash to spend as a result of the recent mortgage rate reductions. A natural fear of unemployment, and the painful experience of running a tight household budget—which is all too recent a memory—lead them to consider it prudent not to spend any surplus they may have. The prospect of direct tax increases will continue to restrict their spending, and thus will not achieve what might be expected of such a policy.
If the decision to increase taxes had been implemented now, it could have been balanced by further action on interest rates. The United Kingdom's interest rates may be the lowest in Europe, but the gap between interest rates and inflation is still too large. The decision to increase taxes next year and in the following year implies a further fall in interest rates, but the decision to impose no tax increases in the current year clearly diminishes the chance of lower interest rates in the short term.
I want to say something about the Chancellor's small business package. I was surprised that he should seek to breathe life back into the loan guarantee scheme. If he is to succeed in his strategy, he will have to lean fairly heavily on the banks: the practice of banks throughout the country is to steer clear of the loan guarantee scheme if they possibly can. There are many stories of potential bank customers who have sought to bring the scheme into play, only to be discouraged from doing so. That, I think, is because the scheme has a central flaw: it invites banks not only to set aside normal banking criteria but also to lend on terms which will ultimately cost the borrower more. That has always struck me as inherently contradictory.
I consider it unfortunate that, insofar as the Chancellor decided to make any tax concessions—I believe that a considerable tightening of the fiscal stance was necessary—he opted to hold the inheritance threshold at £150,000. I found that profoundly disappointing. A minimal amount of expenditure could have gone some way towards 338 fulfilling my right hon. Friend the Prime Minister's declared aim of enabling wealth to cascade down the generations.
The present system of inheritance tax reliefs, which encourages capital to be passed to the next generation in dribs and drabs, puts the older generation in an iniquitous position. They must decide to what extent they will seek to avoid the taxman by giving away money, when they do not know how long they will live, what their financial requirements may' be and what they may need for health and geriatric care: for fiscal reasons, they are required to decide whether to divest themselves of the capital that they have saved over their lives, or to deprive the next generation of the benefit of their work. They are being required to place themselves at risk by not retaining sufficient funds for their own needs in old age. The sooner the threshold can be raised, the better.
In conclusion, however, I give my right hon. Friend the Chancellor full marks for the broader measures relating to business, and for the package of employment measures. The two are closely related. The stronger the cash flow available to businesses, and the more tax and regulatory burdens are removed from them, the easier it is likely to be for them to employ new people, and the greater will be the likelihood of business growth and permanent job creation. I suspect that the need for new jobs will prevail for much of the 1990s; I fear that it is an intractable problem, but I hope that it will prove less intractable than the deficit appears to be at present.
§ 7.5 pm
§ Mr. Robert Ainsworth (Coventry, North-East)
I have listened to most of the debate, and I wish to develop three themes. First, the Budget is an absolute betrayal of every policy that the Government put to the electorate only a year ago; secondly, the measures proposed in it—supposedly to help the economy—are ill directed and will be ineffective, because they are so minuscule in comparison with the problem itself; and, thirdly, despite the massive difficulties in which we find ourselves, the Government have yet again taken the opportunity to protect those at the top of the income scale at the expense of everyone else. I do not think that many Opposition Members are surprised by that.
The betrayal could not be deeper. If the Budget has achieved anything, it has brought about a substantial increase in the cynicism that the country must feel about the entire democratic process—or, at any rate, about the Government whom it elected only a year ago. Listening to Conservative Members, I can hardly believe that they are the same people who put their party manifesto to the country such a short time ago: the promises that were made then have been thrown away.
Hon. Members may recall the exiled Conservative party leader's aversion to U-turns, and her famous remark:You turn if you want to; the lady's not for turning.We have seen some U-turns from the Government—U-turns on public spending, on Europe and on monetary policy. People felt betrayed before, but the phenomenal U-turn in the Budget takes the biscuit.
The Conservatives did not use the language of George Bush, but their promises were made as clearly as his promises to the American electorate, and they have been reversed as clearly as his were. Their first pledge was made by the Prime Minister in the run-up to the general election: 339We are the only party that understands the need for lower taxation".The second wasWe will maintain mortgage tax relief".No caveats or hidden retreats were involved then. Thirdly, the party hadno plans and no need to extend the scope of VAT".Now, a massive wedge—as the Chancellor put it—of new taxation is to be introduced over the next three years. In one respect, at least, the Budget was an innovation: effectively, we were presented with three Budgets, involving tax increases next year and in the following year.
I do not believe that the British people will be conned by the Conservative party again. It is clear that the political intention behind the Budget is to drag forward the bad news, demanding a post-dated cheque from taxpayers in the hope that they will have forgotten what happened when the time comes for them to judge the Conservatives once more. The Government will not get away with it because people now treat with cynicism everything that the Conservatives say. I promise the Government that we shall never let them forget their betrayal.
There is one issue on which the Conservatives have been consistent. Despite the difficulties that we face, the Conservatives have again attempted to enhance the position of the highest earners at the expense of everyone else. The Government claim that they are a Government of low taxation, but, when one examines what has happened in the past 14 years, one finds that that is not true.
There has been a massive shift in the burden of taxation from the rich to the poor. There can be no doubt that the shift was systematic and deliberate. When the Government first came to power, the poorest 10 per cent. of the community even then paid 40.4 per cent. of their income in taxation in one form or another, either direct or indirect. That had been pushed up to 46.3 per cent. in 1990. Whether they paid it through VAT, income tax, national insurance contributions or any other form of taxes, in one way or another they paid almost half of their incomes in tax. At the same time, the richest 10 per cent. have seen their proportion of taxes fall from 35.6 to 32.2 per cent. The rich pay a third of their income in tax while the poor pay half of their income in tax. That is a deliberate policy, the reverse of the principle that Robin Hood was supposed to have supported. The Government systematically take from the poor and give to the rich.
The proposals in the Budget are an extension of that policy. Almost every increase in personal taxation is designed to hit those on average or below average incomes but not to hit those who can well afford to make a small contribution to solving the problems that the Government have created. Instead of raising income tax, the Government have chosen to freeze personal allowances. They did so deliberately because it will hit those on lower incomes to a far greater extent than those at the top. The married couple's allowance has also been frozen.
The worst proposal—the extension of VAT to fuel—has been dressed up in green clothes. The Chancellor cannot have his cake and eat it. The Chancellor and the Chief Secretary told us that this was an environmental measure which would save billions of tonnes of carbon in the next few years. If it is to raise tax revenue, as explained in the figures before us, how on earth is it to reduce carbon consumption? The measure has been cynically dressed in green. There is no intention of saving carbon; it is a 340 measure for clawing back revenue. Again, it will hit the poor, and ordinary people, to a much greater extent than the better off.
If the Government want to prevent carbon consumption, they should be promoting home insulation and further investment in new technology for vehicles. They should have pursued such ideas with some vigour, instead of putting VAT on fuel bills. The move is a deliberate and cynical betrayal of all that the Government said during the general election campaign, when they pledged not to extend VAT.
Another proposal that will deliberately hit those on average or below average incomes is the extra 1 p on national insurance contributions rather than on income tax. Anyone earning above the threshold figure will not pay that 1p, which means that those who could well afford to make a contribution are protected while others bear the full burden. We need to assess how much further that proposal will take the trend of taxing the poor to protect the rich.
Politics, pre-election promises and the distribution of tax are all important, but the overriding issue facing us all is the state of the economy. Does the Budget do anything to get people back to work or to lift the economy out of the doldrums? The proposals are minuscule and ill directed. The big issue confronting us is not the plight and dilemma of the Lloyd's names. There are many Lloyd's names among Conservative Members, and I understand that they consider their plight to be of profound importance. However, in view of the Prime Minister's recent statements, and if he wishes to maintain any credibility, he should be agreeing that manufacturing industry is the way to get out of the mess we are in.
Where in the Budget were the capital investment allowances which could encourage British industry and lift us out of the difficulties that exist in so many of our trading partner countries? There were none. Where was the commitment to infrastructure to give the British economy the boost that it needs? The Budget contained two proposals for infrastructure. The first involved 6 miles of railway line between Paddington and Heathrow. What a wonderful and profound piece of work. It will really set people alight. The second, dressed up as a commitment to infrastructure, was the announcement that the St. Pancras rail link to the channel tunnel would go ahead. What does that mean exactly?
It meant that the Government were considering the St. Pancras option as opposed to the King's Cross option. It meant that the decision will automatically be delayed for at least two years because of the change in policy. It meant that even if it is agreed and financed—although the commitment was not for public but for private funding, which has not yet been arranged—we shall have a cheaper and, I believe, inferior scheme to the one that had been stressed before. It meant that our effective transport links with the European markets via the tunnel and for the country north of Watford will be at least 10 years behind the opening of the tunnel. That is a complete disaster.
In other debates in the House we have heard Conservative opinions of our position in Europe, and the economic consequences of our membership. They justify their refusal to embrace the social chapter of the Maastricht treaty on the basis that we have to offset the disadvantage of our geographical position, compared with that of our neighbours, by keeping our wage costs and non-wage social costs below those in Germany, Belgium, 341 northern France and elsewhere. Because we are on the periphery of Europe, we apparently have to take lower wages, lower social security provision, lower levels of health and safety at work and all the other features that add to manufacturing costs.
Yet at a time when there is a massive need for investment in the infrastructure that will help the economy to grow, support our manufacturing industry and help to solve the problem of our not being at the geographical centre of the market, here we are deliberately kicking into touch the one proposal for a major piece of infrastructure investment that would largely solve the transport problems and give manufacturing industry, especially in the west midlands, a major boost. We are copping out, deliberately kicking the ball up the park. We refuse to take a decision, and then dress up that refusal as a decision that will help the economy. I suggest that that is a deliberate lie.
I do not believe that the Budget will solve our problems. Some Conservative Members have explained that, despite the £10 billion in tax increases proposed, which will form a wedge over the next two years, there will still be a substantial problem at the end of it all. By the way, I estimate that £10 billion in tax is the equivalent of 7p on the income tax rate. So all the supposed reductions in tax that the Government have introduced over the past 14 years have just been effectively undone by the Chancellor's imposition of those tax increases yesterday. Yet they will not solve the problems; they will not even shut the gap that has opened in our public sector finances.
We have heard some proposals by Conservative Members. I listened to the hon. Member for Bridlington (Mr. Townend), who is a little more straightforward than some of his colleagues. At least we know exactly where the man stands, and what he proposes. In his opinion, more massive cuts in public expenditure are needed—that is his only answer.
Public expenditure means hospitals, policemen and teachers. The hon. Member for Bridlington was honest enough to accept that. He said, "Let us get rid of the community care burden. Put people back into Ramptonstyle hospitals. That was cheap. Community care is far too expensive." Everyone who has seen the budget provisions made for local government knows that community care is massively underfunded. People are being decanted from institutions—that is a diabolical expression to use about human beings, but that is what is said—and there is no provision for them. They are walking the streets. Everyone knows that community care is already hopelessly underfunded. When we talk about cutting public expenditure, that is the sort of thing that we mean.
The real problem is that our economy is not big enough to support the standards of living that we all want to enjoy, or the public sector proposals. That is because of the policies pursued by the Conservatives over the past 14 years. Our manufacturing output grew by 12 per cent. between 1979 and 1990, yet our consumption grew by 40 per cent. Anybody, even a 10-year-old schoolchild, could tell us that that divergence could not be sustained.
What are we doing? Do we actually intend to take action to start the economy growing, and to catch up with our partners again? Or shall we simply try to close the gap by more public expenditure cuts that exacerbate the growing rift in our society, the gap between the rich and 342 the poor, and increase crime and lead to all the other problems that we have seen grow so massively already? The Government are totally bankrupt of ideas about how we can take ourselves forward and get ourselves out of the mess into which they have taken us.
§ Mr. Gerald Malone (Winchester)
I shall not follow the hon. Member for Coventry, North-East (Mr. Ainsworth), except to say a word or two about business initiatives. I shall devote my remarks to the initiatives on capital gains tax that my right hon. Friend the Chancellor announced yesterday.
The attack by the hon. Member for Dunfermline, East (Mr. Brown) was nothing short of extraordinary. He made not a single positive suggestion about what the Labour party might intend to do about the country's economic situation. The Labour party and its official spokesman espouse a series of public spending measures that outstrip anything that would be proposed by the Government, yet fail to confront the difficulty caused by the deficit in the economy today. Furthermore, they decry the fact that there is a deficit, say that we should reduce it more quickly and then, rather absurdly, say that there is no scope for doing so by raising taxation.
I thought, as I expect Ministers did, that the rather unusual practice followed by the hon. Member for Dunfermline, East, when he loaded the Dispatch Box with several significant and threatening tomes at the beginning of the debate, might provide us, for the first time, with a solution. I thought that those weighty documents might be Labour's solution to the economic problems, and might tell us how to get out of recession. Sadly, the tomes only threatened; they provided no clue or aid to the hon. Gentleman's argument. They were as worthless a prop and addition to his speech as were other Labour Members' arguments about the economic situation.
I welcome my right hon. Friend's announcement on capital gains tax. Over the past 14 years, the Government have been building an enterprise economy. Trade union powers have been curbed, restrictive practices have been swept away—one of the latest to be got rid of is the dock labour scheme. As a result of our enterprise economy, Britain is now a magnet for investment. In 1991, 40 per cent. of Japanese investment and 30 per cent. Of United States investment in the European Community came to this country, because we are an enterprise economy. One of the essential elements in the enterprise economy is that small businesses, which are so crucial to its survival, must be encouraged. One of the ways to do that is to reform capital gains tax.
Capital gains tax is Labour's envy tax. It was introduced in 1965, just as the white heat of Harold Wilson's technological revolution was turning into a rather dull socialist glow. Since then, the tax has become more complex. A huge range of exemptions and anti-avoidance provisions have been built up over the years, as one Government after another have decided that the tax is basically unfair.
I was attracted by a remark by Lord Wilberforce, who said of capital gains tax in the other place last year:It is absolutely impossible for the ordinary citizen to understand. It is impossible for many accountants to understand…it is also impossible for the officials of the Inland Revenue to understand."[Official Report, House of Lords, 14 January 1992; Vol. 534, c. 119.]343 I echo his remarks, because it is also extremely difficult for politicians to understand.
Capital gains tax is dealt with in 291 sections, 12 schedules and more than 300 pages. The legislation has become unmanageable, and I am delighted that some steps have been taken in the Budget to change all that. I must confess that this is a personal grudge match for me. The tax was introduced in the 1960s, when I was a law student at university, so I had to try to cope with it. I did not. It was the one subject that held back my qualification as a practising lawyer for a number of years, until I borrowed somebody's understandable notes and managed to pass the examination. I assure the House that, after 30 years or so, my sense of vengeance is not quelled; I am delighted at last to have art opportunity to strike back.
Capital gains tax does not raise a lot of money. The forecast yield for 1992–93 from individuals and trustees is only just over £1 billion, and in 1987–88, 60 per cent. of CGT payers paid on average only £1,800 each. No wonder there are so few rich taxpayers and so many rich tax lawyers and accountants.
Reductions of CGT levels and a change in the rules would encourage greater realisation and mobility of capital. Especially when there is clearly a capital shortage following the recession, it is important that we introduce new regulations which allow capital to become more mobile and to increase. That is why I extend a warm welcome to the changes announced by my right hon. Friend the Chancellor.
I hope that my right hon. Friend will bear in mind experiences elsewhere of reforming capital gains tax, and that he will not just relax the rules, as he announced yesterday he intended to do. When the United States cut CGT rates in two years—in 1978 and in 1982—realisations went up, in 1979 by 45 per cent. and in 1983 by 11 per cent. Government revenue actually increased. That suggests that such capital taxes are extremely stultifying, that they are avoided as a result of the many exceptions that Governments build into the rules, and that they are regressive.
When my hon. Friend the Financial Secretary looks at capital taxes in the future, perhaps he will take a leaf out of our own book. I refer to the time when we considered taxation on personal income. When we got rid of penal rates and made the tax fair, overall receipts increased. I am certain that, if my hon. Friend took that approach to capital taxes, and especially to capital gains tax, the experience would be repeated.
I encourage my hon. Friend to look at the body of evidence, which shows that, when capital taxes are reduced and the rules are modified, more venture capital can be raised. In the United States, when the rate was cut to 20 per cent. in 1982, $12.5 billion was suddenly raised by public offerings of shares. When the rate went up in 1986 to 28 per cent., there was a fall of $2 billion.
Similar evidence and similar statistics are available for the venture capital sector. Venture capital will be extremely important, as we move out of this recession into a period of growth, in sustaining the recovery and building a strong future. I suggest to my hon. Friend that, when he considers the tax, one useful change would be completely to exempt shareholdings in unquoted companies. So many of those companies are the result of personal enterprise and of the build-up over a period of years of capital that 344 people should be entitled to realise. I hope that my hon. Friend the Financial Secretary will build on our right hon. Friend's reforms.
I very much welcome the retirement relief measures, and especially the reduction in the qualifying shareholding from 25 per cent. to 5 per cent. That will benefit the growing number of firms in which the founding investors have reduced their equity. That often happens during the lifetime of a company when outside equity is introduced.
My right hon. Friend's deferment provisions are also welcome. They will allow entrepreneurs to move their investments between companies in the marketplace. It is crucial that, when fresh capital is to be moved from one business that is successful to another within a group which is ailing, it should be moved without the burden of taxation. That is a sensible reform, and I welcome it very much.
The importance of my right hon. Friend's measures is that they will ensure that small businesses benefit from maximum flexibility. No longer will conventional entrepreneurs who buy and sell companies attract CGT. In contrast, there are other absurd rules that enable people who realise some capital assets to invest elsewhere. It may interest my hon. Friend to know that, if a farmer selling potatoes under quota happened to reinvest the money in a space station, one of the strange anomalies in the system would mean that he would not be required to pay CGT on the transaction.
I should like the exemption to be extended to more conventional business enterprises, and I am sure that that is precisely what my hon. Friend has in mind. The reform is very welcome. I am certain that it will be welcomed not only in the House, but in the broader business community, and I am sure that it will underpin the economic revival that is under way.
I address my next remarks to Opposition Members. Of course Conservative Members do not like to see an increase in taxation. However, if Labour's policies and not the Government's were being implemented, the changes in taxation that a Labour Budget would bring would be enormous and damaging, and would stop growth in its tracks.
By targeting domestic fuel, we are not merely introducing a sensible environmental measure. Over the course of privatisation, prices—especially gas prices—have been reduced in real terms by 20 per cent. The regulator has insisted that that should happen, and he has now set new parameters for increasing the cuts in prices by another 6 per cent. below the retail prices index. The important point is that, once the transformation has taken place and once the policy is fed through, the bills in people's pockets will be reduced by far more than would have been the case if taxes had been levied in another sector where prices had been increased.
I welcome the Budget, and I look forward to hearing what my hon. Friend the Financial Secretary says in support of the measures on capital gains tax reform. I look forward to hearing his response to my few suggestions tonight.
§ Mr. William Ross (Londonderry, East)
We all realised when the Chancellor made his Budget statement last year that he was introducing an election budget. That was widely recognised in the House at the time and the point 345 was made to him often enough by Opposition Members. In those circumstances, the Chancellor painted a picture of fairly rosy prospects for the coming year. However, he was constrained at that time by membership of the exchange rate mechanism which meant that he could not reduce interest rates. There were many things that the Chancellor would have liked to have done which he simply could not do. In September, as a result of the market forces that Conservative Members so much admire, he was freed. Black Wednesday set him free to introduce his own Budget this year for the first time. He has done so, but it is a year late.
The Chancellor has introduced the Budget after setting spending targets last November for the next year of two. Those targets are fixed—they cannot be reduced. A few months later, therefore, the Chancellor has found himself in a firm bind because he faces public expenditure which he must meet although tax revenue will come nowhere close to meeting the figure required. There is an old saying that hope deferred is hope denied. On this occasion, it is a matter of tax deferred being revenue denied, in a year when it is very much needed because the public sector borrowing requirement, with which I shall deal in a moment, is far too high.
I am sure that the Financial Secretary will recall that when the Chancellor made his autumn statement on 6 November 1991, I asked him about the rise in public expenditure, which he told us would be £53 billion over the next three years. The Chancellor replied:It is an extremely important point that our intention and our policy are to balance the budget over the cycle… As he knows, corporation tax is paid a year in arrears and corporation tax receipts, therefore, lag very much behind the cycle. That is why I expect the public sector borrowing requirement to continue to be high next year, even though the recovery will be well under way. The plans that I have announced today and what I have said about the PSBR are consistent with our firm policy of balancing the budget over the cycle."—[Official Report, 6 November 1991; Vol. 198, c. 461.]We are now moving into the third of those years, and that £53 billion increased expenditure appears as a £50 billion deficit—not quite what the Government and the Treasury had in mind at the time, I suspect. That £50 billion is a horrifying figure.
One wonders exactly what the public sector debt is. I intervened in the speech of the right hon. Member for Westmorland and Lonsdale (Mr. Jopling) to say that I thought that it was over£200 billion. I have found a number of figures one way and another. It is the one figure that no one seems too willing to broadcast. It is, however, self-evident that, whatever our public sector debt is—and my figures vary from just under £200 billion to £240 billion—this year, we are adding £50 billion to it. We are increasing the public debt by anything up to 25 per cent. in one year.
That figure is based on the Treasury forecast. I do not think that, given the record of the past few years, any hon. Member will be prepared to take any Treasury forecasts—of expenditure, revenue or anything else—with anything other than a great big fistful of salt. Last year, a £28 billion deficit was forecast. That was in March. By November, the figure was £37 billion. Now March dawns again, and it is down to £35 billion. One would need better 346 figures than those if one wanted to reach sensible conclusions about what the situation will be in November this year or March next year—never mind in 1997–98.
On 12 November last, the Chancellor told us in his autumn statement, at column 1004 of Hansard, that the deficit was about 6 per cent. of GDP—far too high, he said—and that next year it would be 8 per cent. That 6 per cent.—never mind the 8 per cent.—was well over the Maastricht trigger point for substantial cuts in public expenditure. This Budget is not exactly in keeping with the spirit or the letter of European union—not that we on these Benches will weep about that.
Why should we believe the Chancellor's forecasts? He is probably doing his best, but that is really a question of reaching in the dark and pulling down a figure. The forecast is a wild educated guess—if that makes sense—and it must be treated with a fair degree of suspicion.
The right hon. Member for Westmorland and Lonsdale drew attention to the public sector borrowing requirementߞ£35 billion this year; £50 billion next year; £44 billion the year after; £39 billion in 1995–96; £35 billion in 1996–97; and £30 billion in 1997–98. We are talking about a total of £233 billion or a doubling of public sector debt over six years. That is not a prospect that anyone who has the future welfare of this country at heart will view with pleasure.
We need to ask ourselves what percentage of GDP the total public debt will be at the end of 1997–98. I suspect that it will be 50 per cent. or possibly higher. The Financial Secretary may be satisfied with that, but he will find many on the Conservative Back Benches who are not. It is not a figure that anyone can view with pleasure—and I certainly view it with great concern.
We were also told in the autumn statement that the broad money target was 4 per cent. to 8 per cent. The scale has expanded at both ends: it is now 1 per cent. to 9 per cent. With a broad range like that, I am not sure that the target means anything any more. It is a general target at which to aim. It is as big as a barn door and, if we hit it anywhere, I suppose someone will be able to say, "At least we are within target". That is not really quite what one expects from a Conservative Government who claim financial rectitude.
In November, the Chancellor also expressed concern about the amounts being paid in interest charges on Government debt. At the time I thought that that figure was £18 billion or £19 billion. But according to the table on page 20 of the Red Book, it is £17.5 billion this year. It will be £19.5 billion next year, and keeps right on increasing—to £29.5 billion in 1997–98. In other words, in that year, we will have to borrow sufficient to cover our debt interest. No householder or business would like to do that.
If the forecasts are anywhere near right, and with the total of public debt being well over £400 billion, I do not see us getting away with an interest charge of £29.5 billion. We would need to find someone to lend us a lot of cheap money if we wanted to do that. I think that we shall be paying considerably more than that. In fact, I do not think that the Government can allow us ever to reach that position. Whether the hon. Member for Winchester (Mr. Malone), to whom I listened with great interest, or anyone in the House or the country likes it or not, there will not 347 only be swingeing tax increases but considerable public expenditure cuts—unless, that is, the Chancellor gets a lot of people back into profitable work very fast indeed.
The Chancellor stated that he would balance the budget over the cycle—at the time, he was talking about 3 per cent. above and 3 per cent. below balance; it is a lot more than that now—but he did not ever tell us how long the cycle was. He did not tell us when it started or finished. It is starting to look to me like a 30-year cycle. I do not think that the Financial Secretary, who is smiling from the Treasury Bench, wants to finish his days in the House, after a long and honourable career, wrestling with the end of this cycle. Perhaps he will deal with that in his reply.
Having been told by the press and others that the Chancellor is not exactly in favour of the straitjacket of the Maastricht agreement and the rest, and that he sings in his bath, I have not been quite as critical of him as many in the newspaper world and in the news media generally. The poor chap is doing his best no doubt. He and I entered the House at the same time and he has climbed to much greater heights than I am ever likely to attain. I like the Chancellor; he is quite a nice chap. But he has a really hard task ahead of him if he is to get the country's finances back on to some sort of stable footing. He now has the freedom of movement to take remedial action.
I have also noted—as, no doubt, have other hon. Members, although no one has mentioned it yet—the dangers of a structural deficit appearing. It seems to me that, if we are not already suffering from a structural deficit, we are half way through the door, and I think that the Chancellor knows that perfectly well. As a result, he started yesterday on the construction of a structure to deal with that emerging difficulty.
There is no short-term salvation. The Chancellor must get more people back to work. He must help small business—he made some efforts in that direction yesterday—because small businesses can involve an awful lot of labour. He knows quite well that there will be increased output in this country for some time—perhaps a considerable time—before there is a marked drop in unemployment.
There is one matter on which I must express severe disappointment. The Chancellor did not use the Budget to help shipyards. I wish that he had taken a careful look at early-day motion 1225 signed by 210 Members from all parties. He will be aware that since 1970 United Kingdom shipbuilding has been reduced by some 75 per cent. while in the EC there has been a reduction of only 53 per cent.
I hope that when the President of the Board of Trade next meets the European Commission he will demand the removal of the hidden state subsidies paid to shipbuilders in other member states and that he will provide the same assistance to our shipbuilding, ship conversion and ship repairing industries as our competitors in Europe receive from their Governments. There is a great deal of heavy engineering in shipbuilding and many skilled people could be put back to work.
Especially in view of the problems which were brought to light by the terrible incident in the Shetlands a few months ago, which was thankfully averted by a storm, the Chancellor could have earned himself some kudos with the green movement if he had done something to help shipbuilding. Something must be done and the sooner the better. It would be helpful to the economy of Britain.
The Chancellor must also raise some revenue in the short term—in the coming year. So what has he done? 348 Sadly, not very much. He told us that the Budget was broadly neutral, as if that were something to be applauded. It could have been applauded if the national finances were in equilibrium, but they are not. So the Chancellor hit the pockets of the drinkers and smokers. I must confess that I am happy that he did something with the ad valorem aspect of tobacco tax. That will certainly help what remains of our cigarette manufacturing industry, a fair chunk of which is in Northern Ireland. It will help our industry compete with the cheap imports from elsewhere. I do not smoke so no one can say that I am gaining any personal benefit out of that measure.
The Chancellor hit fuel and power, especially domestic fuel and power. Many people in rural parts of the United Kingdom, north, south, east and west will not be happy with the changes in the fuel tax on vehicles. In rural areas there is no public transport worthy of the name so people depend on a personal vehicle. It will make life difficult for lower paid members of the population in those areas, not least in my constituency.
The right hon. Member for Berwick-upon-Tweed (Mr. Beith) said that the 17.5 per cent. increase in fuel bills over the next two years would apply to standing charges for gas and electricity. I hope that that is not so, but I fear that it will be. What will be the effect on bottled gas? We do not yet get gas down a pipeline in Northern Ireland, although it is coming. The people who use bottled gas might well escape the increase in standing charges because they do not pay them.
However, in Northern Ireland we have the highest costs of fuel and energy in the United Kingdom and the 17.5 per cent. increase will hurt our constituents badly. Large increases are also in the pipeline for large users of electricity in the next year or so as a result of privatisation. That will not help job prospects in the Province. We cannot afford to allow job prospects to worsen in any part of the United Kingdom in the coming year. In Northern Ireland we face other possible increases in domestic electricity prices. So our domestic consumers will suffer a great deal more than the 17.5 per cent. increase in the next year or two.
By way of an aside, there used to be a spade factory at Templepatrick. I suppose that it is still there. One of its products was spades for cutting peat. It may well find that there is increased demand for its product. Not that I advise cutting peat as a job even for the Minister. I did it and it is pretty hard work. I am not sure that peat is all that cheap a fuel in any case.
If the imposition of VAT on fuel is a gesture to the environmentalists' demands, it is a costly one for the country. More seriously, it has broken through the zero VAT barrier. Once a barrier is broken down, one must expect others to pour through afterwards, so undoubtedly we shall see further extensions of VAT in future years.
The Chancellor hit car owners twice. That was explained to us carefully in the autumn statement so we cannot complain about that. We knew that it was coming. What he has taken with one hand, he has taken back twice over now that March has come round.
The Chancellor hit mortgage payers. They are a captive tax constituency so for them there is no escape. That measure will not be popular. Although mortgage interest is low at present, tradition proves that that does not necessarily hold for long. I suspect that it will increase. Then we shall really hear the noise.
349 The Chancellor tried to avoid thumping house sales—in the eyes of some people—by offsetting the changes in mortgage interest tax relief by increasing the exemption from stamp duty to £60,000. However, that helps only people who are going out to buy. It does not help the existing borrowers, who will find their mortgage payments increased for every month.
In his effort to create a new tax structure, the Chancellor must consider ways of creating immediate income for the Revenue. He does not seem to have done that. He gave everyone two bites of a very sour and bitter lemon. He told folk that the abolition of the special car tax was coming. Now he has done it. Now he has told people what he will do next year, the year after and the year after that. Every time that he comes back to the House to explain that the new taxes will come into operation, he will receive another hammering from everyone in sight.
I assume that one of the reasons why the Chancellor has had to give such long notice of the tax changes that he spelt out yesterday is that it will take time to make them. But unfortunately for him and for the public finances, it is all revenue tomorrow, not today when the Chancellor needs it to reduce the huge deficit. So when he grasped the nettle of raising income tax by 1 per cent. via the national insurance contribution and froze the personal allowances, why did he not go a little further and bang income tax up immediately? It would not be popular but it is not popular anyway. So why not get most of the pain over in one fell swoop? After all, as others have said, a penny on income tax brings in about £1.7 billion and 3p would bring in £5 billion.
From what I was told by the better-off in my constituency, many people in the United Kingdom would have been prepared to put up with an increase in income tax to see us through this tough period in our economic life. The Chancellor will have to do it sooner or later. Income tax has great benefits. It is a sensitive tax. Increasing it has an immediate effect. It is easy to increase it and easier than any other tax to reduce. He could do it immediately. The Chancellor should have gone down that road. It is not a happy or welcome measure but it is a necessary one and one which people would have accepted.
If the Government are to apply harsh measures, they should get it over with in one fell swoop. If the Chancellor had done it this year, he would have been a year further away from the next election. We would all have called him the most terrible names, but if Chancellors are doing their job, they can never be popular. He admitted that last night. Chancellors should not be popular people; they should just do what is right. In any field of human endeavour, that leaves one out of sorts with many of one's neighbours.
The Budget maps out the way ahead but does not address the immediate problems of our huge deficit. I wish the Chancellor and the Government well because if they do not succeed, heaven help us all. However, I believe that we shall be back here in November with real tax increases.
§ Mr. David Shaw (Dover)
Many people will say, "What a Budget!" It was sensible, fair and skilfully delivered and the phasing of tax increases was a masterstroke. The 350 Budget was good for jobs and especially good for small businesses—I say so as chairman of the Conservative Back-Bench smaller businesses committee.
The Budget contains some measures to help small businesses. The loan guarantee scheme has been successful, but has not been as widely taken up as one would have liked. By extending the scheme to cover 85 per cent. of the total loan, and to a total amount of £250,000, the Government are effectively implementing a radically new guarantee scheme, which will be able to service the needs of virtually every business apart from the largest.
I hope that no hon. Member will refuse to draw the scheme to the attention of all the small businesses in their constituencies. I hope that Labour, Conservative, Liberal and Northern Ireland Members will draw its benefits to the attention of businesses in their areas. The extension of the scheme is good for small businesses, it is a valuable measure and it should be welcomed by the House.
I also wish to draw hon. Members' attention to the deferral of the uniform business rate. Many small businesses were badly upset when the change to UBR was introduced, not because the change was wrong but because it incorporated about 17 years of non-revaluation. As we did not bite the bullet and revalue business premises, there was a considerable increase. Businesses were rightly concerned about their future as we entered a worldwide recession. As a result, many business men were worried that they would lose their businesses, but the Government listened and deferred the increase in UBR—apart from inflation—last year and for the coming year. That was a major achievement for the Government and it has benefited small businesses significantly.
The third measure that I shall draw to the attention of the House is really a series of mini-measures, which will be of inestimable benefit to small business men who are fed up with filling in forms for Government officials. Sensible changes will be made to value added tax. Various measures will take many businesses out of the VAT registration requirements and some sensible measures will relieve businesses of the penalties and problems that they face because of innocent delays or errors in completing VAT. Those penalties and difficulties have been magnified during the recession and have been unfair on many small businesses. It is good to know that the Government have a means to listen to those concerned, that they have listened to people such as myself who have brought such worries to the attention of Ministers, and that they are adopting sensible changes.
I pay tribute to Customs and Excise for no doubt being prepared to help Ministers to implement the changes. All too often recently, the small business community has been concerned that as the Inland Revenue has shown more flexibility and understanding, Customs and Excise has become the bugbear of the small business community. I welcome the changes and the recognition by Customs and Excise that its principles for implementing the VAT regime can sometimes be onerous for small businesses.
The Budget has successfully tackled the big issues. A deficit of £50 billion could not be allowed to continue of long as the effect on, and increase in, our national debt would have been enormous. By tackling the deficit in such a way we know that, as we come out of recession, there will be a significant reduction in the annual increase in our national debt.
There are also good signs that we are already coming out of recession. Industrial production was up in the 351 fourth quarter, and productivity has increased significantly during the past 12 months, making our country attractive for more overseas investment of which we already attract a significant amount.
I hope that further measures to reduce public expenditure will be included in the Budget in November, but I disagree with Opposition Members who think that one can reduce public expenditure only by cutting hospital building programmes. That is the Labour way to do things. If we have to reduce or curtail public expenditure, we do not do as Labour does. We do not cut school building programmes, as Labour did in the 1970s, and we do not have to cut the capital hospital building programme—we look to other areas.
I hope that my right hon. Friends on the Treasury Bench will take note of my proposal that we should study civil service numbers. In recent years the private sector has had to reduce numbers and we should do so, too.
The skill of the Budget will be appreciated at the next general election because by then we should have achieved, or be on the doorstep of achieving, a 20 per cent. basic rate of income tax. I hope to be fighting the next election campaign on a manifesto pledge for a 15 per cent. rate of income tax by the year 2000; it is within our sights and we have to go for it.
In the longer term, I hope that the Government will seriously consider abolishing the 40 per cent. rate of income tax. I remind hon. Members that the Victorian era, when income tax was 5p in the pound, was the last time that large amounts of risk capital were available for investment in small businesses. People had 95p in every pound in their pockets and many more people could afford to risk much more of their income on capital investment in risk projects to start businesses.
I also hope that we shall consider measures to help the shipping industry. During the Finance Bill and at every other opportunity I shall continue to advocate a continuation of the 40 per cent. first year allowance for that industry, as that would help shipping, would not cost a fortune and should certainly be continued. I lobbied heavily for the increase in the capital allowance writing-down regime and I hope that it will continue.
I congratulate Treasury Ministers on their incredibly skilful handling of the surplus advance corporation tax problem. For technical reasons, the solution to the problem defied the imaginations of many people. It has been solved not only with considerable skill, but in a way that should encourage many international companies to base their headquarters here. In that way, we can attract many companies to locate here and to employ more people in this country and to bring skilled people to this country, who are capable of employing them.
Let us consider the implications of applying VAT to energy and the effect that that will have on pensioners and those on income support. I was shocked by the extension of VAT to energy—I am always shocked by any tax increase, because I should prefer not to have increases. For the reasons I mentioned earlier, however, this Budget required some measures to deal with our deficit. The Labour party's expression of shock was utterly false indignation. Labour's proposals would have cost the nation even more, would have damaged businesses and would have involved increased regulation. Labour did not say what regulations would stop people and businesses from consuming energy. Regulation can be more damaging to the economy than tax increases.
352 An important issue was raised earlier. Yesterday my right hon. Friend the Chancellor said:Social security benefits will, of course, rise automatically to reflect the price effect of this change"—[Official Report, 16 March 1993; Vol. 221, c. 183.]—that is the increase in value added tax.
It is important that the words "price effect" are qualified. I take them to mean the full price effect, because they do not specify a half, a quarter or one third. The words are not clear.
Opposition Members, and in particular the hon. Member for Dunfermline, East (Mr. Brown), have tried to frighten pensioners on income support about the future real level of that support. I will have no difficulty in going through the Lobby in support of the Government next week because I know that the Conservative Government will not let down pensioners on income support. Only the Labour party has a history of doing so. It is the Labour party which has put the stiletto knife into the backs of our pensioners. I remember when the Labour party refused to pay the Christmas bonus for two years in the 1970s. It was the Labour party, when Barbara Castle was Secretary of State for Social Security, which in 1975–76 fiddled the inflation rate in such a way that the inflation rate for 10 months was left out of the increase in the old-age pension.
The Labour party has fallen into a trap carefully constructed by my right hon. and hon. Friends on the Treasury Bench, because, by raising the issue of old-age pensioners, it has drawn attention to its record of failings in the 1970s when it fiddled the retail prices index calculation, as it affected pensioners. We will have the opportunity to say that we will not let down the pensioners or those on low incomes; it was only the Labour party, desperately in hock to the International Monetary Fund, which was forced to do that.
The extra money for the training and enterprise councils, the community action programme, the business start-up scheme and the educational allowance will help more than 100,000 people towards finding work. It is the unions' attitude which has damaged job prospects in this nation. The Labour party tie up with the unions did enormous damage. Lord Scanlon, Hugh Scanlon as he was in the 1970s, admitted that in a massive recantation of his beliefs in a recent article in the Financial Times. He admitted that the Labour party and the trade unions of the 1970s destroyed our car industry. We have rebuilt it.
One special measure missing from the Budget, which I believe should be given careful consideration, is one that I have designed especially for trade union officials. I advocate that special financial help should be given to trade union officials who want to start businesses. Those officials are organisers of men and women and, instead of organising strikes and causing problems for businesses, they could organise them in new businesses.
Why can we not give special help to trade unionists to become entrepreneurs? I believe that such help is needed because if 10,000 experienced trade union officials became entrepreneurs and employed 30 people each, 300,000 people could be taken off the unemployment register. That would be a significant change. Such special help should be given to trade union officials and committee members—we could even include Labour Members and other active members of the Labour party. They could all join in helping to get the nation going through the establishment of small businesses. I have read Labour's alternative 353 Budget programme and I therefore realise how much the Labour party and the trade unions need that special assistance.
I welcome the help that has been given through capital gains tax relief for entrepreneurs who, having got their first businesses going, want to invest in others. Under the old system, tax relief was only available to a successful entrepreneur, who sold out his first business, if he went abroad. The new system means that that person can stay in this country and help to start new businesses. The change has long been advocated, and responsibly so, by the British Venture Capital Association. I support what the Government have introduced.
The Budget is good for jobs, good for small businesses and good for the nation. It is wonderful, and the only problem with it is that faced by the Labour party, because it points up its deficiencies, lack of policies and ideas. It is an excellent Budget from our point of view and from that of the nation.
§ Mr. Alan Milburn (Darlington)
The traditional bluster from the hon. Member for Dover (Mr. Shaw) cannot conceal the fact that yesterday's Budget was a disaster for Britain. The country was looking forward to a Budget for jobs, but I am afraid that it was served a diet of broken promises and steep tax rises.
Opposition Members have already alluded to the fact that the Conservative election pledges of no tax rises and no VAT rises have been broken. If the Governor of Hong Kong were in his seat tonight, he would be able to say, accurately, that the Government have served up a double whammy of VAT and tax rises.
Yesterday's announcement amounts to one of the biggest tax rises in British history. The extension of VAT to domestic fuel bills, the 1 per cent. increase in national insurance contributions and the freezing of personal allowances will hit every family.
Conservative Members have made much play of the fact that the Budget is good for the poor. The changes mean, however, that a further 200,000 people will be dragged into paying tax for the first time because of the freeze on personal allowances. Yesterday's announcement also means that 4.5 million people who currently pay tax at the 20p rate will lose out, once again, because of that allowance freeze. Because the national insurance contribution is more regressive than income tax, about 500,000 people who are too poor to pay income tax will instead pay higher national insurance contributions.
The Chancellor's window dressing cannot hide the grim reality. Once again, those least able to afford to pay will be penalised. The extension of VAT to fuel bills is not a green tax—it is a vindictive one, levelled against the poor, the elderly and the disadvantaged. After 14 years, however, I suppose that we should be used to that.
Since 1979, the poorest 20 per cent. of households have seen their tax bills rise while the richest 20 per cent. have seen theirs fall. I have never been convinced by the argument that the wealthiest people in our society need the carrot of lower taxation while the poorest need the stick of higher taxation in order to contribute to our economy.
Since 1988, the top rate tax cuts have given the very rich some £10 million. We were promised that that tax-cutting 354 bonanza would provide a long-running, sustainable economic miracle, but that has proved as illusory as the Prime Minister's general election commitments of April 1992.
The Budget means that we are all now paying for the mistakes of the past, without being given a basis to build for the future. In particular, the Budget will do nothing to help the regions, such as my own, to get back to work.
In April last year, the Prime Minister promised that a vote for the Conservatives would be a vote for economic recovery, but since then the economy has gone from bad to worse. The economy, indeed the country, is tottering on the brink of collapse. The north, more than any other region, is paying the price for the broken election promises of the Conservatives.
The facts speak for themselves. Since the Prime Minister usurped his predecessor, a further 40,000 people have joined the dole queues in the north. The region has the highest unemployment rate in Britain, with 32 people chasing every job vacancy. Unemployment affects every person in my region and throughout the country. It costs the taxpayer £9,000 for each man and woman who is unemployed. The north's dole bill amounts to a staggering £1.5 billion.
Yesterday's Budget presented a unique opportunity for that money to be put to work stimulating recovery and creating new jobs, but it failed the most crucial of all tests. It will not make one single person feel any more secure about his or her future employment prospects; nor will it create a single new job. The Government's policies will ensure that unemployment continues to rise relentlessly. According to independent forecasters, unemployment is due to rise by a further 200,000 this year alone.
The Budget represents no basis for sustained recovery. The Chancellor admitted as much yesterday, when he said that our trade deficit would widen to £17.5 billion. It will do so because of the Government's lamentable failure to tackle the investment gaps that hold our country back. We are now paying for the neglect of 14 years of Government inactivity and mismanagement. Since 1979, the gap between the United Kingdom's economic output and that of the rest of the industrialised world has grown to £250 billion. If our growth had managed to keep pace with the European Community average, we would be £65 billion better off today.
Closing that gap should be the Government's key priority, but to close it requires a concerted strategy, diligence on the part of Ministers and, most important, investment. It requires investment in our infrastructure, our skills base, our manufacturing and our regions. It requires more than fine words from the Prime Minister, who has apparently rediscovered the importance of manufacturing; it requires action. But yesterday's Budget promoted inactivity, not activity, in the manufacturing sector.
Yesterday's Budget contained not a jot to stimulate economic recovery or put manufacturing industry back on the road to success. Yesterday's Budget once again signalled that the Government have simply given up the ghost and are not ambitious for Britain to succeed. They clearly believe that we cannot compete against the successful industrialised economies, such as Germany's, and the only way of competing is on the basis of lower and lower wages. The Government are not only talking down Britain, but actively dragging down the British people.
355 The Budget contained only a few training gimmicks, which cover only one in 30 of the nation's unemployed. According to our estimates, the gimmicks would mean a derisory extra £1 a week for each person on the dole register. Apart from those gimmicks and some rehashed project announcements, the Budget contained next to no new investment in the nation's infrastructure and skills base.
Where was the commitment to my region to restore the £21 billion-worth of training cuts that the training and enterprise councils are having to suffer this year? It is the economics of the madhouse to cut training budgets in the region with the highest level of unemployment, but that is precisely what the Government have done. We have the worst training record, not just among our European partners, but among the newly industrialising countries such as Taiwan and South Korea. Yesterday's Budget did not prove an opportunity for the Government to correct that training deficit.
The Chancellor announced a number of capital projects, which were mainly rehashed, and all in the south-east or London. He threatened to cut off the north from the rest of Europe by locating the chunnel link at St. Pancras instead of King's Cross—[Interruption.] The Financial Secretary to the Treasury may scoff, but that is the reality. When the letters start to flood in to his office, as they will in the next few weeks, I hope that he will have a suitable response to them.
Our region, on the periphery of Europe, requires through trains, through traffic and through ticketing to allow us to compete effectively in the single European market. There is no lack of skill, no lack of enterprise and no lack of ideas among the businesses and people of the north. They require a helping hand from Government, but I am afraid that they received nothing yesterday.
Allowing the regions to wither through inactivity means a massive loss of productive capacity, but that is what we have been witnessing for a decade or more. According to the statistical supplement to the autumn statement, in the period 1987–92, the peripheral regions suffered Government disinvestment, while the south and East Anglia received an enormous level of additional investment. In the period leading up to the 1992 general election, the Government bought votes in Conservative regions on the back of active disinvestment in Labour regions.
The late 1980s boom in the south of England was based on massive levels of state subsidy for housing, transport and industry being diverted from the peripheral regions. That policy did not work for the north or the south, as it resulted in under-resourcing in one instance and overheating in the other. The brakes had to be slammed on, with all the consequences about which we now know.
We also know from the supply estimates that the Government are pledged to cut further the regional aid budget, to the tune of £10 million during the next financial year. The Government should be sowing the seeds of regional prosperity. Investment today will pay dividends tomorrow. Instead, they are laying fallow a tract of this country. Their failure to realise the potential of Britain and its people is holding our country back; it constitutes a massive waste. Regions such as the north have the skills, the enterprise and ideas to make a vital national contribution to reviving our manufacturing industries. 356 Yesterday, the Conservatives decided to ignore that potential, and their Budget has written off the regions, particularly the north.
§ Mr. Barry Legg (Milton Keynes, South-West)
I join my hon. Friends in welcoming the fundamental economic principles contained in my right hon. Friend the Chancellor's statement yesterday. We all recognise the primacy of monetary policy in pushing forward recovery in this country. All Conservatives firmly believe in the need for sound public finances.
The Budget contained many measures to lead us in the right direction. The Opposition's response to the Budget has been disappointing. It seems that no level of public expenditure satisfies Opposition Members; whatever the circumstances, they always want a higher level. In addition, there is no level of public borrowing that satisfies them; they always require a higher level—
§ Mr. Legg
I agree that the hon. Member for Londonderry, East (Mr. Ross) is an exception, and his speech today was a welcome breath of fresh air in the Chamber.
My right hon. Friend the Chancellor drew some wise international parallels yesterday. He said that recovery was coming in the United States, but not in Europe. Britain is now leading the recovery in Europe, and the projections that the European Commission has made of growth for the coming 12 months show that the United Kingdom will take the lead among the European Community countries. My right hon. Friend the Chancellor was wise to draw parallels with the United States, where there has been a strong and substantial recovery.
We need to look at how that recovery has been generated. It has been generated basically by monetary means—by reducing interest rates and relieving the burden of interest rates on consumers and businesses. That process is also taking place in the United Kingdom. In addition to the Budget measures, there has been a reduction in the costs to business of about £4 billion as a result of reductions in interest rates since white Wednesday.
I also welcome the changes set out in the Budget concerning the monetary framework, particularly in the full funding rule. Again, there are parallels with the United States, where in recent years the Federal Reserve, an independent central bank, has been underfunding the deficit and providing support to financial institutions and banks in that country. We need the same mechanism to operate here because our financial institutions have been hard hit during the United Kingdom's membership of the exchange rate mechanism.
The results of the main clearing banks and building societies announced in recent weeks show bad debt provisions totalling £6 billion, equivalent to 1 per cent. of GDP. So the change of abandoning the full funding rule in respect of British monetary policy is absolutely vital, since it will substantially strengthen our banking system, which must be in a position to lend to businesses and aid the recovery.
The Chancellor has made some changes in the monetary indicators that he is using to monitor the 357 economy. I am glad to note that he has downgraded the MO indicator—the indicator of growth in coins and notes in circulation—to a monitoring range and has put it on the same level as the M4 indicator. He was right in his comments about wishing to see some growth in M4 in present circumstances. But the range that he has set, of 3 to 9 per cent. for growth of M4 over the whole of the medium term, like many of the policy indicators, leaves too much to discretion.
The indicators for a broad money range must be adjusted from year to year as financial conditions change. To allow oneself such discretion over monetary indicators, and to have such a wide range of indicators—including asset prices, broad and narrow money and the exchange rate—will not add greatly to confidence in the marketplaces. Markets wish to see some certainty in the instruments by which the Government are guiding the economy and how changes in interest rates reflect those indicators.
There are probably some dangers in relying too much on forecasts. The Chancellor has set up his panel of independent forecasters and has drawn attention to the fact that the forecasts by the Treasury are not too far from those made by the independent forecasters. But many of those independent forecasters use similar economic models, and the fact that the Treasury model is close to the average does not mean that its forecast will be accurate. In recent years, there have been too many attempts to set and guide policy according to forecasts. We must have a set of clear financial principles by which we guide the economy—there were many indications in the Budget statement of an awareness of that.
Much concern has been expressed from the Government Benches, and by the hon. Member for Londonderry, East, about the size of the public sector borrowing requirement as revealed in the Red Book. Those concerns are well founded. The Chancellor has changed his policy on the deficit. The policy has been to try to balance the deficit over the period of the cycle. We now have a vague phrase about trying to move the deficit towards balance over the period of the cycle.
There is some disagreement and uncertainty about the length of the cycle. If we take the length of the parliamentary cycle—one might imagine that five years should cover an economic cycle—then, looking to the end of this parliamentary cycle in 1997, one sees a Budget deficit of 4.5 per cent. Not only is that well outside the criteria laid down in the Maastricht treaty, but it is probably well outside the criteria that Conservatives who believe in sound public finance should be supporting.
Further measures will probably be needed in the coming years to make sure that the deficit is set at a much lower level. I still believe that the deficit should be balanced over the cycle, which means that in the good years we run a surplus, and in the more difficult years we run a deficit. But we must balance it over the cycle to get the level of public debt down. As many hon. Members have pointed out, running up the level of public debt runs up interest costs for future years and burdens succeeding generations with too high a debt burden. Let us return that principle firmly to the forefront of our economic policies.
There are some interesting changes in the Budget by way of tax reliefs, and I detect some movement afoot to 358 move more towards tax neutrality. If we can go in that direction, with the downgrading of the value of allowances, and, at the same time, reduce overall direct tax rates, we shall be undertaking a beneficial move.
I welcome the changes in mortgage interest relief. Like my hon. Friend the Member for Gloucester (Mr. French), who is no longer in his place, I believe that this is a good time, with interest rates falling, to reform mortgage interest relief. I am concerned about the effects of its having been put off by the Chancellor for a full year. In the coming year, we should be driving recovery through monetary means, and reducing interest rates if recovery does not come through. I fear that waiting a further year may mean interest rates rising slightly in 12 months' time, when we shall be reducing tax relief on mortgage interest. So the timing could have been better, with the changes being made in the current fiscal year.
Considering the other tax changes, I am glad that the Chancellor has given high priority to reducing the deficit. Without that priority, the financial markets would have waned in their confidence that the Government could meet their deficit financing requirements. What will be the effect on confidence and recovery of delaying that step for a further year? If consumers know that tax increases are coming 12 months hence, they will undoubtedly factor that into their spending patterns in the current year. They will know that tax increases are coming, but will not have the certainty of knowing exactly how much of their income will be taken by those tax increases.
There are benefits from achieving certainty, and addressing the deficit, at an earlier date. It would strengthen the Government's finances. In political terms, it makes more sense to address the deficit at an earlier stage. We need in the coming two or three years to get the economy back on to a sound financial basis, after the deep recession we have gone through. Once that has been done, we must change the balance of taxation and make sure that our pledge to reduce the basic rate of income tax to 20 per cent. becomes a reality. The increases in the 20 per cent. band of £500 for the two coming years can be only a gesture at this stage. We must redefine our fiscal priorities, and the sooner we do that the better.
I welcome the development of the unified Budget in December; much will need to be done at that time. The level of public expenditure must be given much thought. The reduction of public expenditure must be the other element balancing the increases in taxation that have been made. I hope that my right hon. Friend the Chief Secretary will look at housing matters. In reducing the tax benefits of mortgage interest relief, there is also the opportunity to consider housing benefits in the public sector. We need to ensure that they are more closely directed to those who need them, rather than indiscriminate subsidies being directed towards properties.
I welcome the comments of my hon. Friend the Member for Winchester (Mr. Malone) about capital gains tax. I took examinations in capital gains tax when I was studying to be a member of the Institute of Taxation. Unlike my hon. Friend, I enjoyed the capital gains tax sections, which I managed to pass on my first attempt. I welcome the changes introduced in the Budget, but I fear that the sections and schedules of the Capital Gains Tax Act will increase. It would be better to have a wider-ranging reform of capital gains tax in due course, probably with the introduction of a tapering system. 359 Although I enjoyed taking the examinations, over the years I have not enjoyed paying substantial amounts of tax on capital gains.
Several hon. Members have commented on the changes in advance corporation tax. They were certainly one of the most interesting technical sections of the Budget, but we should be quite clear about the businesses and companies that are affected by surplus ACT. The Chancellor appeared to suggest that the United Kingdom should be a mecca for international companies investing here. I agree with that, but the companies with the problem of surplus ACT are, in fact, companies resident in the United Kingdom which are investing overseas, which do not have sufficient income from trading in the United Kingdom to absorb their ACT or sufficient foreign dividend credits to absorb it. Therefore, I do not believe that making those changes is a high priority. I welcome the other changes in the ACT system, especially the ACT reduction for pension schemes, which currently have very substantial tax privileges.
Other measures that will be helpful over the coming months and years include the loan guarantee scheme and the further extension of the export credits guarantee system. These will be especially important because the detail of the Red Book shows that growth in the United Kingdom will not be a repeat of the 1980s. It will not in the main be generated by British consumers, who will be under some tax pressures over the coming years. Therefore, it is important to ensure that businesses export more and take full advantage of export opportunities throughout the world. The widening of support for that is very welcome.
The Budget gives us some principles on which to work, but there is a long road ahead. A great deal of financial change will be necessary over the coming years to ensure that the British economy is rebalanced so that it can take full advantage of being outside the ERM; so that it continues to be a mecca for overseas investment; so that Britain will be not only the country with the highest growth rate in Europe in the coming 12 months, but the country that will achieve the highest level of growth throughout the 1990s, just as we so successfully achieved in the early and middle 1980s.
§ Mr. Peter Hain (Neath)
The Budget is a triumph of hype over hope. The Chancellor has been preoccupied with protecting his own job, not the jobs of more than 3 million unemployed. He should forget the autocue and tackle the dole queue with a credible strategy for sustainable growth, without which shipyards will continue to turn into scrapyards and the wheels of British industry will remain clamped to a standstill.
To tackle the underlying structural weakness of the economy, we need a major and permanent shift from consumption to production. On present policies, high unemployment will become a permanent feature of the British economy and living standards will go into long-term decline. The stark fact is that Britain still consumes far too great a proportion of its national income. The so-called Thatcher miracle was a mirage. The 1980s boom was a consumption boom. Real living standards for most of us rose on the back of the squandered £100 billion North sea oil revenues and an explosion of credit.
360 During the 1980s, consumption increased by an average of 2.5 per cent. per year, whereas gross domestic product increased by an average of 1.6 per cent per year. Since 1979, consumer expenditure rose by 37.2 per cent. and GDP by only 22.3 per cent. That catastrophic gap was bridged by increasing debt as the Government virtually incited the nation to live on tick. Consumer credit has more than doubled. At current prices, consumer credit was £512 per adult in 1979 and £1,147 per adult in 1992—that excludes the impact of negative equity affecting some 1.5 million households. Whereas, in 1981, for every £100 of disposable income household debt was £57, by 1990 that had doubled to £114.
The so-called Thatcher miracle has bequeathed a debt mountain that is crippling the prospects of long-term sustainable recovery, and the Chancellor has not even begun to address that. British consumption as a proportion of GDP is already the highest in the industrialised world, and is completely unsustainable. That has to be turned round as a matter of extreme urgency, but the Budget does not begin to deal with the task. Even the Government's preoccupation—some would say obsession—with low inflation is unsustainable. Some time next year, given Britain's ravenous appetite for imports, rising import prices will inevitably push inflation above 4 per cent., and it will remain there.
In those circumstances, what can the Government do? Either they slaughter their sacred cow of low inflation by abandoning it, or they go back to spending squeezes and slow growth—no U-turn, no policy reversal, just contra-flow Conservatism again. Indeed, from the Government's view the prospects are even more catastrophic than that. The huge budget deficit will soar to £50 billion and will stay at that level, as the Red Book figures show. The Chancellor is tackling it by slashing public services and public investment and by tax rises. That is not only hitting the poorest the hardest and damaging the quality of life for us all; it is self-defeating, because it undermines the real economy that cries out for investment.
The problem is also that, under the Conservatives, Britain has become allergic to Government intervention and investment, which it so desperately needs. We must overturn the suffocating conventional wisdom of Thatcherite and non-Thatcherite economics, otherwise the Budget will be another instance of where the operation was pronounced a success, but the patient died—another stage in a process of Britain's historic economic decline.
We need massive public investment and a radical programme on institutional reform. First, a £20 billion programme of public expenditure-driven investment in infrastructure, training and skills is essential. That should be financed partly by increasing borrowing and partly by mobilising wasted or idle resources, such as the £8 billion in housing capital receipts and the £27 billion cost of maintaining more than 3 million people on the dole. Japan showed the way with that sort of package only last year. The £43 billion Japanese recovery package in August 1992 was , designed to boost output by 2.5 per cent., concentrating upon public investment and leveraging the banking system. We can do that kind of thing as well.
Beyond the immediate programme, the City needs complete restructuring. The Chancellor has merely fiddled at the fringes of the problem. Britain's financial institutions have to be forced off their chronic addiction to 361 short-termism. We must make a break from casino capitalism, where the City conducts its affairs without any regard for the national interest.
We should begin by establishing new public banks with the specific remit of mobilising private debt: a housing and construction bank, a national investment bank and a small business bank. Their capital base would be funded by the Government and, equally important, by the financial institutions. Pension funds and insurance companies own some two thirds of the shares in British industry. They could be required, if necesssary by legislation in the absence of voluntary co-operation, to buy multi-billion pound bonds for the new banks.
The housing and construction bank would pioneer cheap mortgages to those on low incomes. The national investment bank would not simply provide cheap, long-term loans; it would also take equity stakes and force the commercial banks to do the same, so altering the whole relationship between loan finance and industry. This needs restructuring along the lines to be found in Germany and Japan, for example, where banks become positive actors in the industrial economy, not simply pursuing short-term returns.
The small business bank would provide cheap long-term loans. The Government could subsidise bank loans to small businesses and give tax breaks to individuals who provided equity finance, or they could provide a tax incentive to banks to take an equity stake in client companies, as happens abroad, especially in Germany.
Radical tax reforms are also needed to go further in phasing out tax relief on mortgages, which will cost £4.3 billion this year, and on personal pensions, which will cost a further £1.6 billion. That money should be used to sponsor and redirect resources into investment and production.
Credit controls of the kind widely adopted in more successful competitor countries are also essential. We need reserve asset ratios to curb liquidity leakages which merely increase indebtedness and consumption. To manage our exchange rate, we also need curbs on speculation. Some 95 per cent. of foreign currency transactions are not in support of international trade but simply speculative gambles which enrich the speculators.
In short, our overriding aim must be to promote industrial growth through Government intervention and expansionary macro-economic policies which are nowhere to be seen in the Budget and which the Government are incapable of and unwilling to produce. We have to break with a tradition of failure—of under-producing corporate Britain, over-indebted household Britain, parasitic financial Britain and collapsing public Britain.
§ Mr. Richard Spring (Bury St. Edmunds)
Yesterday was a happy day in my constituency because I have the great honour to represent the town of Newmarket, the historic racing capital of the world. The Chancellor's announcement will give hope to thousands employed in the horse racing industry and will help secure the future of the reputation of that industry as the finest bloodstock industry in the world.
Therefore, I thank my right hon. Friend the Chancellor, and most particularly my right hon. Friend the Paymaster 362 General, who spent many days working out a successful scheme. Yesterday was a memorable day for British racing. I hope that the Chancellor's announcement will spur on the revival of a great and long-standing British industry.
Someone recently told me that being in favour of small business was like being in favour of motherhood and apple pie. If so, I plead guilty, and I am glad to welcome the Chancellor as well to motherhood and apple pie.
Parts of the press have described the Budget as a Budget for jobs. The 1980s saw a flowering of entrepreneurial activities that resulted in growth, in rising living standards and in repayment of national debt. It is significant that, in the period 1987–89, when unemployment fell so rapidly, fully 70 per cent. of net job creation was accounted for by firms with fewer than 100 employees. Similarly, firms with fewer than 20 employees accounted for half the new jobs.
Therefore, I am grateful to my right hon. Friend the Chancellor for the range of measures which will be welcome to the small business community. Those measures will help enormously small business men at a difficult time.
All countries have suffered recession. In Britain, company liquidations rose two and a half times in the period 1988–92. The number of smaller companies registering for VAT fell last year, for the first time since 1979. What clearly emerges from that is the need to revive the enterprise culture and to underline the importance of small business in the whole process of job creation.
In East Anglia in the 1980s, the number of businesses registered for VAT rose by the second largest percentage in Britain. It is estimated that, in my constituency, up to 85 per cent. of the work force are employed in small businesses. In villages in rural west Suffolk, there are dozens of small manufacturing businesses employing perhaps only half a dozen people each.
t is not only the recession that has so severely damaged small businesses; the growth in bureaucracy and the cost of compliance, as well as the difficulties of obtaining finance and acceptable terms for that finance, have also played a part. My right hon. Friend sought to address that in part yesterday. The lack of viable long-term finance has been hugely difficult for small business. Many hon. Members have alluded to that. All of us have had to deal with distressed constituents who have suffered the consequences.
The banks are under severe pressure. It is instructive that the big four clearing banks have recently increased their provision for losses and bad debts to a monumental £5.8 billion, as my hon. Friend the Member for Milton Keynes, South-West (Mr. Legg) pointed out. That is an increase of £0.5 billion from last year. I welcome a specific fund launched by one of the big four clearing banks in my constituency this week to help small businesses. However, we are talking about a major, continuing structural difficulty which may bedevil small businesses in future.
In boom times, the friendly bank manager is awash with cash and generosity. In recession, the unfriendly bank manager is seeking to restore his employer's battered margins precisely when the business man needs him most. Do I exaggerate? I think not. At the heart of the matter is the worldwide recession, yet it is clear from bankers themselves that, following their recent traumatic experiences, they are reluctant to lend to small businesses without the restructuring of lending practices as such.
363 No one is more ill-disposed to involving the state in lending money or making business decisions than I am. The results in our own country and of our own history manifestly have proved that to be disastrous. Nevertheless, the business community—the lifeblood of our economy—has been beset by a roller coaster ride of interest rates, which has been deeply damaging over the past 20 years. I therefore greatly welcome the prospect of limited fixed interest rates announced yesterday.
The loan guarantee scheme introduced in 1981 has undoubtedly been helpful. To its credit, 30,000 guarantees have been issued for loans of nearly £1 billion—a gap for companies lacking a history or track record has been closed by the scheme. Its extension is good news. The reduction in premiums is also welcome. The increase in the size of eligible and the higher proportion guaranteed will be most helpful.
However, given the banks' attitudes in the present climate, will that be enough—or should we look to a different structure to help finance our small business community? After the war, under the Marshall plan, the KfW was born in Germany. It is now self-financing, and that is critical. Essentially, the KfW's role is to pass on to small German companies the low interest rates at which it can it borrow in international markets. It is not the German Government who lend the money but the guarantor and owner of the majority stake.
By its construction, the KfW does not even appear in the German budget or impose on the public sector borrowing requirement. Does that impinge on free market principles? Yes, possibly it does—but given Britain's unique reliance on the lending institutions and the unsatisfactory experience of them, that alternative is one that we should explore.
The KfW operates in a way similar to the World bank. It has established a good credit rating over the years, and thereby attracts loan capital. It is a wholesale operation that affords smaller companies the opportunity to borrow on terms similar to larger companies. Any comparable institution here should not be based on access to loans but on the terms.
Interest rates are no more than 1 per cent. above long-term rates and loans are for up to 10 years. The emphasis is on the long term. Although commercial banks make the actual loans, the KfW is not in competition with them because it does the refinancing.
The Small Business Bureau has made that a central pillar of its thinking, and that has to be the logic of yesterday's announcements by my right hon. Friend the Chancellor. I urge him to consider such an arrangement in the months to come. The German experience is regarded as excellent—and such a scheme need not be part of the PSBR.
As we on this side of the House know so well, this country's ability to survive and prosper is dependent on the goods and services that we produce and sell. My right hon. Friend the Chancellor was right to emphasise growth over the next 12 months, to effect speedier economic recovery. However, I appeal to my right hon. Friend, as a number of my hon. Friends have done this afternoon, if growth is faster than expected, to attempt to reduce the £50 billion deficit projected for the next financial year. Fiscal restraint will inevitably afford opportunities for further monetary relaxation. I wholeheartedly support the review by my right hon. Friend the Chief Secretary to 364 examine critically every aspect of Government expenditure. Control of state spending is not only an economic but a moral issue.
Recovery, particularly for smaller businesses, will be spurred on by the relaxation in the full funding rule, which will help the liquidity of banks and their ability to finance smaller business needs. The last three years have been extremely difficult. We can now see light at the end of the tunnel when our competitors can see only darkness. As we continue to recover and apply fiscal rectitude, we can put in place the regeneration of the British economy. The foundations are now in place. I greatly welcome yesterday's Budget.
§ 9.3 pm
§ Mr. George Howarth (Knowsley, North)
Before making my substantial points about the Budget's economic consequences, I will mention one or two positive aspects. The first concerns the loan guarantee scheme, and I declare an interest as an unpaid director of Pendleton's Ice Cream in my constituency, which is in the process of trying to put together a package to create jobs in the ice cream industry.
It is probably too late for that company to take advantage of the enhanced loan guarantee scheme possibilities that the Budget creates, but as someone who has just gone through the process of trying to fund a business, I acknowledge that improvements to the scheme are to be welcomed. In that instance, it is not the case of an individual but of a group of workers who intend to own 51 per cent. of the company's equity. Nevertheless, the financing opportunities for small businesses are welcome.
Secondly, I echo a point that was made by my hon. Friend the Member for Hammersmith (Mr. Soley). Ironically, this concerns the withering of mortgage interest tax relief. Let us recognise that that is what the Government are embarked on. One of the ironies here is that, during the last general election campaign, I was castigated by my Conservative opponent for having at one time had the temerity to advocate such a thing. Indeed, my opponent circulated to all owner-occupiers in the constituency a leaflet saying that if this dreadful socialist man were re-elected, mortgage interest tax relief would be whipped away. How strange that the Government of whom he wanted to be a supporter here should be doing that very job without my help. In any case, this is a move in the right direction.
The final positive point to which I wish to refer is the way in which the export credits guarantee scheme is being extended. In this regard, I shall say only that I am sure I was not alone, over the past few years, in making approaches to the Department of Trade and Industry on behalf of firms. This has been a major problem for exporting companies—particularly those in the machine tool industry, but undoubtedly for others as well. Unfortunately the move is a bit late. For instance, I know of a £5 million order that failed to go ahead in my constituency because of the lack of export credit guarantees. None the less, this long-overdue reform is welcome.
I wish to refer now to the problems that the Government have not resolved. The key question, which Ministers and many other hon. Members have acknowledged, is this: how are we to achieve growth in the economy, and, with growth, how are we to resolve the 365 problems of unemployment? Time does not permit me to go into all the consequences of unemployment for individuals, but I have to point out that my constituency is probably one of the economic black spots of Europe. I do not say so with any pride; this is a simple fact of life with which we have had to deal over the past 15 years or so.
Unemployment has enormous economic and public finance consequences. For example, benefits alone cost £30 billion a year, and lost output and lost income amount to £60 billion a year. Unemployment cannot be lightly brushed aside in economic termsߞto say nothing of its effect in human terms. What sort of growth is needed to stop the growth of, and then reverse, unemployment? I listened with close attention to much of the debate yesterday. The hon. Member for Worcestershire, South (Mr. Spicer) spent some time discussing this matter. His estimate, with which I more or less agree, is that it is necessary to have growth rates above 2 per cent. before one starts to eat into the problems of unemployment. Yet the Chancellor admitted yesterday that the Government expect a rate of only 1.25 per cent. this year, rising to 1.75 per cent. next year. Thus, we shall not begin to reverse the tide of unemployment that is sweeping the country. If we are to start to take the long-term unemployed off the register, we must have growth rates of about 2.5 per cent.
As I expect even Ministers would concede, there are several constraints. The most pressing of these is the horrendous balance of payments situation. If the Government achieve the wrong sort of growth—if, as was intended up until yesterday's Budget, growth is led entirely by the consumption of private individuals—the balance of payments problem will simply be exacerbated, as happened in 1987, 1988 and 1989, and the deficit will again spiral to £20 billion or thereabouts.
That is not the most appropriate means of achieving growth in the economy. It strikes me that there is only one sensible way out of our problems—public borrowing and public spending. I do not want to specify a target figure over and above the £50 billion, but it seems to me that, in so far as that amount will produce a growth rate of only between 1.25 per cent. and 1.75 per cent. and will therefore fail to eat into the unemployment problem, we need to think in terms of a higher rate of public sector borrowing. The PSBR must be pitched at a level that will lead to a growth rate of 2.5 per cent. The ultimate failure of the Budget is the fact that it will not achieve that, and thus will not begin to solve the problems of unemployment.
The Government will say that recent history shows that such solutions are no longer possible. The Labour Government of 1964–70 have been much denigrated—certainly by Conservative Members—but that Government achieved a consistent growth rate averaging 2.8 per cent. throughout their period of office. It is no accident that, during much of that period, virtually full employment was achieved.
That strikes me as a sensible target. The only way to achieve it is to devise capital expenditure programmes that do not necessarily have large revenue implications—and, my goodness, any of us could find dozens of such projects in our constituencies. Creating demand in the private 366 sector is surely the most sensible way to create growth: it would minimise problems relating to the balance of payments.
The Budget contains some useful innovations, but its ultimate failure lies in the fact that it will not begin to solve the problems of unemployment. Any measure that does not solve those problems must, in the end, be deemed a failure.
§ Mr. Michael Ancram (Devizes)
I am grateful for the chance to speak, if only to congratulate my right hon. Friend the Chancellor on what I consider to be a courageous Budget. I use the word "courageous" advisedly: I think that my right hon. Friend had to make an immensely difficult decision. He had to decide between financing an enormous deficit and preventing the undermining of the recovery that has begun. I do not envy his position, and I respect the decision that he made. Until yesterday, I believed that financing the deficit was a priority; following my right hon. Friend's Budget speech, however, I accept that—having had to balance those two factors—he concluded that it was essential to give the recovered economy a chance to flourish, at least for a year.
For that reason, I am amazed by the reaction of Opposition Members. All that they have done is call for more and more expenditure; with one honourable exception, none of them has suggested how that expenditure should be paid for. The honourable exception is the hon. Member for Neath (Mr. Hain): his recipe was not one to which my hon. Friends or I would subscribe, but at least he tried.
Do Opposition Members live in a fantasy world? I think that it was Lord Healey who once said, "If you find an elephant on your doorstep, it is worth recognising the fact." I should have thought that a £50 billion deficit was a very large elephant, however it was measured; but the Opposition seem to think that such a deficit can be ignored, and that we can proceed as though it did not exist—that it is possible to continue to get something for nothing. The truth is that, in this world, we never get something for nothing, and that is certainly not possible in terms of my right hon. Friend's Budget.
Over the next few months, my hon. Friend must seriously consider the question of the deficit. I agree with what many other Conservative Members have said today: my right hon. Friend the Member for Westmorland and Lonsdale (Mr. Jopling), for instance, made an important point about the cumulative effect of the deficit over the years, and the need to start financing it as soon as possible. I join my hon. Friends in hoping that a large part of that financing can be achieved through substantial public expenditure cuts.
I believe that the programme must be advanced as soon as possible, and I hope that Ministers will be courageous. There is enormous scope: examination of the universality of benefits, for example, could produce dividends, and I consider that it would be difficult for any hon. Member on either side of the House to argue against such action in the long run.
It is interesting to hear the Opposition call the Clinton experiment in America far-sighted and courageous, but, when we are doing essentially the same thing on this side of the Atlantic, they say that it is dishonourable.
367 I believe that the imposition of VAT on energy and domestic fuel is necessary, but do the figures for the take from the charge allow for the fact that we expect energy consumption to decrease as a result of the charge? The answer should be an important part of the presentation of the Chancellor's strategy.
I have been surprised that, yesterday and today, we have heard nothing about what the Chancellor did not do. In the lead-up to the Budget I received countless letters saying that we must not levy VAT on newspapers, books, adult education, children's clothes or food. My right hon. Friend yesterday announced that he would not be levying VAT on those items and that he had listened to the representations. I should have thought that at least those who had been speculating or making accusations in the past few months would recognise that my right hon. Friend had taken proper account of their representations.
The Budget has been greatly welcomed in my constituency, especially for its proposals for small businesses of which there are many in my constituency. They welcome the freezing of the effect of the business rate and the changes in the loan guarantee scheme of which they will take great advantage in the coming months.
I join my hon. Friend the Member for Bury St. Edmunds (Mr. Spring) in welcoming, on behalf of my constituents, the announcement about VAT on blood-stock. I was interested to hear the leader of the Liberal party on radio yesterday suggesting scathingly that the Budget was good for racehorses but bad for everything else. I can tell him that many people in my constituency and in neighbouring constituencies such as Newbury rely on the bloodstock industry and racing for a living and will not take kindly to his scathing remarks.
§ Mr. Ancram
I heard the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) calling for them in the Chamber just after the vacancy in Newbury became known. I was surprised because I have lived in his constituency and I know that the racing industry does not play a very large part in it.
There are, of course, worries in my constituency about elements of the Budget and I hope that the Chancellor will take account of them. There is a feeling that some measures could discriminate against rural areas. I am referring especially to the increases in petrol prices. I know that it is very difficult to talk to petrol producers about pricing differentials for remote, rural areas. There is a difference between buying petrol at a motorway filling station as opposed to anywhere else. I hope that my right hon. Friend will join me in approaching petroleum companies to see whether the discriminatory effect on rural areas of increases in petrol prices can be mitigated.
As for VAT on domestic fuel and power, we must take account of the fact that in rural areas there is much less ability to choose the power source for heating one's home. Perhaps we could find a way of dealing with that anomaly.
Having listened to all the arguments, I believe that the key to the Budget did not appear in the Budget: it is to be found in the word "confidence". Whether or not my right hon. Friend's strategy succeeds depends on restoring 368 Confidence in the economy. I view the recession as being like a circle, with many people facing each other's backs and all waiting for the person in front to start moving before they move. I believe that we are beginning to see the first signs of movement within that circle. If my right hon. Friend's strategy is to succeed, we must inspire in people the confidence to go out and invest, and to feel safe to spend their money again. Only when that begins to happen shall we see the circle beginning to move, and the growth that my right hon. Friend wants beginning to occur.
That, above all, is why I found the speech of the hon. Member for Dunfermline, East (Mr. Brown) so intensely depressing. Again, all we heard from him was a litany of despair, and of talking down this country, its economy and its workers. It almost seems to me now as if the hon. Gentleman and his colleagues do not want the recovery to occur. They are going out and telling people, "Don't spend, don't buy, don't invest,"—because they know that if people start spending, buying and investing, the recovery will come, and their chances of ever being elected as the Government of this country will be gone.
I support my right hon. Friend the Chancellor of the Exchequer, I congratulate him on his courage, and I shall certainly support the Budget in the Lobbies.
§ Mr. Peter Mandelson (Hartlepool)
The aftermath of the Budget is inevitably dominated by its immediate effect on taxes, excise duties and national insurance. I do not want to dwell on those, except to say that, despite the efforts of the Tory good news machine, which is clearly not what it used to be, the public's verdict on the Budget was best expressed by the Sun today. I am not known for my devotion to that newspaper, but it is becoming increasingly shrewd and perceptive, for on its front page it summed up the Budget with the headline, "Nightmare on Norm Street". That clearly shows that the Sun increasingly intends to make an honest paper of itself at last.
It is clear from the public response, and from today's newspaper coverage of the Budget, that the price that the Chancellor has paid on behalf of his party and the Government is that the Tories are now indelibly stained as the party of devaluation, high taxes and broken promises. That has tremendous political significance. As we know—the Opposition have a special reason for knowing it, to our cost—the Tories have had a remarkable run of good luck on the subject of taxation. That subject dominated the 1987 election and the end of the 1992 election campaign—without justice, but I am afraid that the Tories managed to do us a fair amount of damage. As a consequence of the Budget, the Tory tax spell is now lifted, not only for now but for ever. I suspect that Conservative Members realise that, even if they dare not acknowledge it in public.
I shall put the short term on one side and concentrate, if I have time, on one or two comments on the fundamental question about the Budget—whether it makes Britain's economy stronger or weaker in the long term. First, the Budget should have squared up to the scale of unemployment, which is sapping the economy's strength. Clearly it did not do that, with the pathetically inadequate direct measures that the Chancellor proposed to combat unemployment. If he had been less concerned and preoccupied with the threat to his own job, he might have devoted more energy to creating jobs for others. Lamentably, he did not do that.
369 Instead, the Red Book reveals not hope but despair about unemployment. It makes an average forecast that 200,000 more jobs will disappear this year—and that is coupled with what, although it is gloomy enough, I fear is an understatement:it will be some time before it"—that is, unemployment—starts to fall again.None the less, the measures described offer opportunities for only one third of the people who have been made unemployed since the Tory election victory last year. That is only a pin prick in the Government's own total of 3 million. I do not say that the schemes are wrong in principle and I do not think that the measures proposed should be damned by anyone because of their association with the Prime Minister's utterances on workfare. However, I believe that they are woefully insufficient. Leaving so many people out of contact with work for so long means that there is a risk of never being able to recruit many of them back to productive work. That is the long-term danger to our economy.
Unemployment is not just a social evil. On this scale and with so little possibility of an early reduction under present policies, it is an economic calamity. When people are laid off, their skills are unused and dissipated, and productive capacity is scattered and lost for ever. The unemployed lose and the country loses. The Budget has simply failed to square up to that reality and to offer a way out.
My next point concerns industry and British manufacturing capacity in the long term. Although the Government now mouth words about the importance of manufacturing, there are no signs that the attitudes of the Thatcher years are being reversed. There was no trace of that in the Chancellor's speech or in the Red Book. Why is this point so important? If anyone has any doubt about the importance of the manufacturing sector, they need only to have read The Sunday Times this week which contained revelations about the Government's secret report on the state of British manufacturing.
There is a unique feature in this recession. Unlike the recession of the early 1980s, this recession is cutting into the productive capacity not only of old industries, but of modern, hi-tech, precision-goods engineering industries—the manufacturing of the future. Crucially, along with that loss of capacity comes the loss of skills and the loss of a presence in vital areas of engineering, in micro-technology and in other sophisticated, new markets of services and of manufacturing. That is the biggest dagger in our economic heart in the long term. We shall never be able to conjure back the industrial capacity lost in the past, yet we now face the destruction of modern, productive capacity which is desperately needed if our economy is to succeed in future.
The threat to our future is confirmed in a highly pessimistic forecast of growth and trading performance in the Red Book. That forecast is all the more remarkable because on page 37 the Government claim that there is an "underlying improvement in competitiveness" in many sections of the economy and of manufacturing industry. The Red Book says that our competitiveness has improved—that improvement is, no doubt, from a very low base and is insufficient in comparison with the improvement of 370 our rivals—but that economic growth will be slight. Our competitiveness, despite the claims for it, is not, in the Government's view, leading to economic growth.
The damning explanation is that, despite improved competitiveness, industrial capacity has shrunk so much that we simply do not have the size, the diversity and the versatility of tradeable manufacturing activity to take advantage of the opportunities available to us. That is the crushing indictment of the Tory record which is exposed in the secret report published in The Sunday Times The report candidly admits:the flaws in British industry will take decades to remove.The Budget fails to address that point and it fails to present any measures to deal with it.
Uniting the point about work and unemployment and the point about industry and manufacturing is the absolute necessity of investing in and developing human potential, and thereby genuinely transforming the competitiveness and size of Britain's trading sector in goods and services. We need a fresh ambition and purpose to achieve that. I have a suggestion that the Government may like to consider. We need to introduce a new target to spur Government and to galvanise the nation, and to turn this decade into a genuine investment decade.
The new target for the real economy should be investment, defined as an annual proportion of gross domestic product and including investment in people as well as investment in technology and the infrastructure. It would be a target that the private sector and the public sector would work in partnership to achieve and, if private investment fell back, it would be right for the public sector to fill the gap. I hope that the Government will consider putting in place that target and indicator for the real economy, alongside the nominal and monetary targets that they follow at the moment.
Until we put investment and the development of our people, as our essential economic resource, at the centre of economic policy, I fear that we shall continue on a path of long-term economic decline—a path which is all the more tragic because it is so clearly avoidable.
§ Mr. Alistair Darling (Edinburgh, Central)
People need a sense of where the country and its economy are going. After yesterday's Budget statement and today's debate—or, at least, Conservative Members' contributions to it—they have no such sense. People need to have confidence in the Chancellor; they have none. They need to believe that the Prime Minister, who has drifted from one problem to the next, has some clear vision of where he wants to go. Today, they are no wiser than they were last week.
Neither the Chancellor nor the Prime Minister has managed to salvage his position. They are linked together in devaluation and tax increases. We are told that the Budget is modelled, at least to some extent, on President Clinton's approach. The difference is that President Clinton inherited the economic problems in America whereas, in this country, the Prime Minister and the Chancellor created the problems that they are now trying to tackle.
The Chancellor has drained every last drop of his credibility. This is the same Chancellor who said:we will not have to increase taxes. I cannot see any circumstances in which that will be necessary.This is the same Chancellor who told us that he saw green shoots, among other things, when we now know that, at 371 the time when he said it, there was every sign that the economy was continuing in recession. We know that the Conservatives won the last election on a fraudulent prospectus. We are talking either about gross incompetence—they did not see what was happening to the economy—or about a calculated deception of the people of this country.
It is not as though this is a Budget for investment in the future. The tax increases that the Chancellor announced yesterday were to pay for mistakes made by the Government over the past 14 years. It was an interesting Budget, because, for the first time, the Chancellor has attempted to tie his successor—whoever that may be—for the next three or four years. The hon. Member for Gloucester (Mr. French) made an interesting point—I say that not just because he is my pair—when he asked whether the commitments and tax increases promised by the Chancellor yesterday ran with the Government or with the Chancellor. We shall have to see. The Government have no vision; for them, "long term" means some time next week.
Credibility As important not just for the markets but to show that the Government have a strategy for recovery in the long term. Credibility is also important if politics is not to be further debased in the eyes of men and women in Britain. It is important that, when politicians make promises, they should be prepared to keep them. It will be emphasised again and again over the next few years that the Government said that they would introduce no new taxes. We watched their lips. It was interesting to see the Chief Secretary squirming this afternoon when he protested and spluttered, "We have no plans—honestly. That's the plain truth." When people resort to that form of words, it is quite obvious that what they are saying is not the case.
Just before the election last year, the Prime Minister said:we have no plans to increase VAT…there will be no VAT increase.For the Chief Secretary to characterise a tax increase as a green tax is absolute nonsense. Taxes do not become green simply by the addition of the word "green" above the proposals in the Budget paper. The Chief Secretary also said that the Prime Minister put his signature to the treaty at Rio and that the VAT increases were part of that process. The Prime Minister also put his signature to the manifesto, so that does not prove very much. The Prime Minister said:we have no plans and no need to extend the scope of VAT.The Prime Minister flies by the seat of his pants.
The chairman of the Conservative party—perhaps the next Chancellor, from what we are told—said that increased national insurance contributions were a "stealth" tax. If he says that they are a tax on income, surely they are a tax on income.
The Chief Secretary told us this afternoon that he was not in favour of direct taxation. Surely an increase in national insurance is an increase in direct taxation. It is one which will hit low-paid people particularly hard because of the ceiling on national insurance contributions.
People know that Tory Governments mean more tax for most people. Let us examine the Tory record since 1979. Most people are paying a bigger tax bill. Indeed, the poorest 10 per cent. of people pay the most tax. The richest 372 10 per cent. pay the least. We knew that the trickle-down theory of tax would never work. That has now been demonstrated beyond a shadow of doubt.
When we examine what the Government propose this year, we find the same pattern yet again. The top 10 per cent. of earners will lose about 1.5 per cent. of their income. The bottom 10 per cent. will lose 3 per cent. of their income as a result of the Government's proposals. So, again, those on low incomes are paying and those on high incomes, who are better placed to shoulder the burdens, are let off lightly.
As for the effect that the VAT extension will have on people on low incomes and those in receipt of income support, it was instructive to watch how the Chief Secretary found himself impaled on a hook that came from behind him, rather than from the Opposition. The hon. Member for Dover (Mr. Shaw) said that he was confident from what the Chancellor had said that income support would be fully indexed to ensure that the increase in VAT would be met. The Chancellor said:Social security benefits will, of course, rise automatically to reflect the price effect of this change… My right hon. Friend the Secretary of State for Social Security will take this into account when the income-related benefits are uprated next year."—[Official Report, 16 March 1993; Vol. 221, c. 183.]There is no guarantee whatever that income support will be increased by 3 per cent. above inflation to take account of the effect of the Chancellor's announcement yesterday. He made no commitment whatever.
It was nonsense for the hon. Member for Dover to say that if the Chancellor had not meant that there would be a full increase in income support, he would have said that the increase would be only half as much or a quarter as much. Time and again, social security increases do not take account of the increased burdens that people have to meet. The Government know it and the country knows it. It is no use the Chancellor or the Chief Secretary protesting that those who will have to meet the full cost of VAT on domestic fuel will have the burden eased by increased income support. That is not the case. There is not a shred of evidence to suggest that it is the case. Indeed, if it were the case, the Government would have said so in clear and unambiguous terms.
Gas and electricity bills account for about an eighth of the expenditure of people on low incomes. The increase will hit people on low incomes and those who have no income at all especially hard, and the Government know it. As my hon. Friend the Member for Falkirk, West (Mr. Canavan) said, pensioners may be forced to make a choice between heating and eating.
As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) observed, under the Conservative Government VAT is becoming progressively regressive. The Government have described their proposals as a wedge of revenue. We are entitled to ask whether it is the thin end of the wedge. VAT has now been imposed on domestic fuel. How much longer will it be before other previously zero-rated items are brought into the scope of VAT? Perhaps the Financial Secretary will tell us when he replies.
We were told that the Budget would be a Budget for jobs. It was certainly a Budget to save the Chancellor's job. We were told that it was a Budget for investment. Look at what has happened. The House will recall that in his autumn statement the Chancellor heralded the go-ahead for the Jubilee line, now stalled. We are now told that the 373 crossrail scheme has been put off until some time in the future. The central Scotland link is at least two or three years away.
The Chancellor promised that the Heathrow Express would definitely go ahead, yet in its press notice the Department of Transport said that agreement had been reached in principle. The Heathrow Express link—the sole firm commitment in the Budget—is just six miles of railway line. That is the only commitment that the Chancellor made yesterday. The only reason why it has been held up is a dispute between accountants and the impending threat of privatisation, which is effectively blocking many schemes for rail development.
The Chancellor has promised the channel tunnel link again, 10 years late. Trains will travel between Paris and the channel tunnel next year at a speed of 180 mph. They will have to slow down slightly to go through the tunnel and then they will travel through Kent at 47.5 mph. That is an indictment of the Government's stewardship of the transport infrastructure. What about links to the north? The Chancellor had nothing to say about that.
What is the Government's strategy for the economy? We left the last century as the workshop of the world, but we are about to leave this century in the second division. We seem to have lost our ability to invest in and manufacture goods of high added value. In the 1980s, our share of world high-tech exports fell from 11.2 to 9.2 per cent. We also lost our market share of medium and low-tech exports, and not just to European or US competitions.
All the time, on the other side of the world on the Pacific rim, economies have been growing at between 6 and 9 per cent., despite the recession in the United States, to which they were supposedly linked. Those economies have mastered basic manufacturing and the ability to exploit our innovations and are now increasing research and development, to move into high added value products. The evidence is to be seen from what is happening with British Aerospace. We invented and developed the 146 aircraft, but Taiwan wants to take it over and develop it.
The Pacific rim countries are looking to low-cost countries such as Indonesia and India to assemble the goods that they have invented. The Government seem determined that we should compete with countries that assemble goods rather than with those that invent them.
The Department of Trade and Industry report seems to have fallen victim to what I would call the "Spycatcher" syndrome. Hon. Members will remember that the Government spent millions of pounds of tax payers' money trying to stop the publication of that book around the world. This is the Government who impounded copies of Pravda at Heathrow airport, so that we could not read what Russians could read if they had cared to buy a copy. Exactly the same is happening with the DTI report. Our competitors know the problems of British industry, but the Government do not want the people of this country to know—so much for the Prime Minister's commitment to open government and the citizens charter.
We have heard nothing about research and development. The temporary period granted for capital allowances in the autumn statement has not been extended. I happily welcome what the Government have done for small businesses, except that the measures only 374 ameliorate the problems that they face. For example, the relationship between banks and small businesses has not been examined. The inquiry commissioned by the Chamber has not resolved the problems that many small businesses have with their banks. I agree with the hon. Member for Bury St. Edmunds (Mr. Spring)—in times of plenty banks are happy to lend money, but at present their conduct towards many small businesses leaves much to be desired.
While I am broadly sympathetic to the problems faced by our insurance companies in competition with European insurance companies, we shall consider carefully the proposals for Lloyd's. Lloyd's is not a corporation but a collection of individuals and I do not understand why individuals should be given tax breaks and concessions unless it can be proved beyond doubt that they have alienated the money in question and are not simply receiving advantages that other taxpayers would not enjoy. I look forward to the day when Conservative Members with vested interests, as members of Lloyd's, declare their interest, not only in their speeches but by declining to go into the Lobby with the Government when we discuss that matter.
We must consider the relationship between the Government, the economy and the financing of businesses. We must also consider the availability of finance, following deregulation of the market. I do not believe that we shall ever return to a regulated market and the controls that were a feature of economies, but is is important that the Government recognise that more and more people will use financial services to provide for their short and long-term needs. That means that it is important for the Government to put in place an efficient regulatory system, which will promote confidence if we are to encourage people to make provision for themselves or simply to put their savings to good use. They must be confident that this country's financial services are in sound shape and are properly regulated. We wait with interest to see what the Government will produce next year.
The Chief Secretary to the Treasury only hinted at his plans for public spending, but he hinted that there will he hard cuts to come. The House should realise that public spending is not some sort of luxury, but in many cases means spending on essential infrastructure, on education and training, and on providing for health which is a social and economic need. Public spending means providing police, about which the Government say plenty but often do completely the opposite. Public spending cannot be cut with abandon without any consequence to the economy. I hope that, in the next few days, hon. Members will remind the Government time and again that cutting public spending is a false economy.
We must tackle the structural problems in our population. Those problems, together with immense demographic changes, should condition our economic thinking, but we have heard nothing from the Government about that. Although I welcome new technology as something to be embraced, it will mean that the number of job opportunities will decrease in the immediate future. Unemployment is a drag in economic terms as well as a catastrophe in social terms. We have heard nothing from the Government about what they propose to do as a result of those structural problems.
Tomorrow, we shall consider jobs and training. There is no point in converting employment training and youth training into short-term schemes. Many schemes already 375 endeavour to give young people the proper training and skills. To convert such schemes into six-month courses may get more people off the unemployment register and more people through those schemes, but those courses will not give those people the highly skilled, highly motivated life style that is essential for the development of our economy.
It seems that the Government's only strategy appears to be to get people off the unemployment register in order to make it more politically acceptable. What we need is a highly skilled, highly motivated work force. As my hon. Friends have said, nothing that the Chancellor said yesterday gives us any cause to believe that the Government recognise that problem. To say that we shall have competition between TECs for innovative projects debases the problem that we face. It is no wonder that training providers and trainees are becoming increasingly cynical about the Government's proposals.
The Government have been in power for 14 years. They were elected on a fraudulent and false prospectus, and they know it. People know that the Conservative party is the party of devaluation, high taxation and economic failure and that it is the architect of profound social unease. The Budget will haunt the Government for years to come.
§ The Financial Secretary to the Treasury (Mr. Stephen Dorrell)
Let us begin on the common ground that has been revealed by the debate. Every hon. Member would agree that the Chancellor's key objective in presenting his Budget was to ensure that the recovery is nurtured and that it prospers. It is widely recognised that the only way in which we can create jobs for those on the unemployment register and hold out the prospect of improved living standards and social services is by ensuring that the British economy performs well and that British business is successful.
On that front, as my hon. Friend the Member for Devizes (Mr. Ancram) said, the news is better than the Opposition would like. Today we published figures for retail sales that show that they are up by 2 per cent. on what they were this time last year. Recently, we published figures on industrial production in Britain that showed that, despite the rhetoric from the Opposition, it is nearly 1 per cent. higher than it was this time last year. I accept that that is not an enormous amount, but it compares favourably, as my hon. Friend the Member for Milton Keynes, South-West (Mr. Legg) said, with the 8½ per cent. drop in industrial production in the same period in Japan, the 6½ per cent. drop in Germany and the 3½ per cent. drop in France.
We have heard from the Opposition that the Government have no interest in industrial production, but the next time they use that argument I hope that they will analyse those figures that compare our industrial performance in the past 12 months with that of our industrial competitors.
When the Opposition are considering our economic prospects I hope that they will note that car sales have gone up 7 per cent. in the most recent quarter in comparison with the sales recorded in the previous three months. They should also bear in mind that, so far this year, new house sales have gone up 20 per cent. on the level achieved at the end of last year. That increase led the chief executive of Wimpey to say just last week, 376Demand is coming back and the affordability message is coming through. Last week was our best week for sales since 1990.I hope that they might also reflect on the fact that the chief executive of Bryant Homes, a competitor of Wimpey Homes, was quoted—accurately, I think—as saying that there was no doubt that the recovery was under way, at least in his sector.
Every recovery starts with a series of anecdotes about people doing better than they had previously expected. My hon. Friend the Member for Brigg and Cleethorpes (Mr. Brown) quoted several important anecdotes from his own constituency experience of how investment was holding out the prospect of jobs and improving output in his part of the world. Kimberly-Clark is bringing 2,700 jobs to my hon. Friend's constituency. We heard not a word of welcome for that from the Opposition today. We heard not a mention from the Labour party about how Norsk Hydro is investing in a new nitric acid plant in my hon. Friend's constituency. Recovery starts when people make investment decisions because they believe that they have found the place where their business will be able to secure economic progress for itself and its employees. That is the fundamental truth, remarkable only for its absence today from Labour Members' speeches.
When my right hon. Friend the Chancellor presented his Budget to the House yesterday afternoon he had two objectives: first, to nurture the recovery now and, secondly, to ensure that that recovery is sustained into the medium and long term. My right hon. Friend acknowledged in terms that the only means by which we can deliver the second of those objectives is to ensure that the Government's borrowing requirement—the public sector borrowing requirement—is reduced. As my right hon. Friend the Member for Westmorland and Lonsdale (Mr. Jopling) and several other of my right hon. and hon. Friends rightly stressed, unless that deficit is reduced, it is certain—not a matter of conjecture—that the recovery will run into the buffers.
The commitment to ensure that that recovery is sustained in the short term is translated into a commitment to reduce Government borrowing in the medium term as that is the only way of ensuring that the recovery can be sustained and we can hold out the realistic prospect of long-term job opportunities. That is the answer to the question posed by my hon. Friend the Member for Gloucester (Mr. French) and one or two of my other right hon. and hon. Friends as to why effective action to address the deficit is being taken in later years, not the first year.
It seems to me—my right hon. Friend the Chancellor reached the same judgment—that the key in the first year is to ensure that no action is taken now that will damage confidence and inhibit the recovery process. My right hon. Friend did not announce a set of proposals for the first year that involved inaction. Taking a neutral fiscal stance, my right hon. Friend was concerned to ensure that substantial help is provided for business in the first year of his three-year programme to ensure that the recovery gets under way and is soundly based. That is why my right hon. Friend gave a commitment that no business, big or small, need face an increase in the real level of its rates bill this year.
My right hon. Friend announced proposals which, when taken with the autumn statement proposals on the same subject, involve an increase in export credit support of £2 billion on its previous level. My right hon. Friend 377 announced complex changes in the advance corporation tax provisions that will provide a £2 billion cash inflow into the balance sheets of British industry. That series of measures—within a neutral first year overall effect—is designed to strengthen the recovery and address the needs of British business in the short term.
My right hon. Friend the Chancellor set out a clear strategy to reduce Government borrowing in later years for the reason that I have given. In doing so, he is in sharp contrast to the Labour party. Since my right hon. Friend the Chancellor delivered his Budget speech, Labour spokesmen have been repeatedly asked, both in the House and in television and radio studios, what they would do about the deficit figures published in the Red Book yesterday. Not one Labour spokesman has offered any proposals which would address that fundamental need in our economic planning to ensure that the Government's borrowing requirement is brought under control.
I can think of no factor more certain to undermine recovery, to ensure that recovery does not take place, to make sure that jobs are not created and to see that living standards do not improve than for the Government to stand back—or to run away, as the Labour party appears determined to do—from the question of how action should be taken now to reduce in the medium term the Government's borrowing requirement. My right hon. Friend the Member for Westmorland and Lonsdale and my hon. Friend the Member for Bridlington (Mr. Townend) rightly said that we must address that issue, otherwise the prospect of recovery is purely a chimera.
§ Mr. Darling
The hon. Gentleman was talking about living standards. Will he now answer the question that was put earlier to the Chief Secretary? Will the Government fund in full the cost of the increased charges following VAT on domestic fuel supplies?
§ Mr. Dorrell
The Chief Secretary answered that question by quoting the clear words of the Chancellor on the subject in his Budget speech.
The Chancellor set out our plans. Opposition Members have sought to argue that in some sense they are at variance with what was said during the general election campaign, but Opposition Members are on a very bad point—[Interruption.] The proposals that my right hon. Friend announced yesterday are absolutely in accordance with the commitments and the direction of policy that we pursued in the election campaign last year and have pursued in office since 1979, and I will explain why.
The first point that my right hon. Friend made clear is that we shall address the question of the Government's borrowing requirement by restraining Government 378 spending, and that answers the points made by some of my hon. Friends who stressed the importance of that side of the spending and revenue balance.
§ Mr. Darling
The Financial Secretary said that the Government had not given an undertaking on VAT. During the election campaign the Prime Minister said:We have no plans and no need to extend the scope of VAT.He said that in Westminster on 27 March, during the campaign. How on earth can the Financial Secretary say that what the Government are now doing is not in stark contradiction with what they said then?
§ Mr. Dorrell
We did not have plans at that time—[Interruption.] What we are doing is entirely in accordance with what we said we would do because we are determined to address the need to control Government spending. On our tax policies, we said that if necessary, if we faced the need to raise revenue—and no Government can rule out that possibility for all time—we would do it by extending the scope of taxation, not by raising the rates of tax.
That is what we did yesterday afternoon, and we took that step for a reason, the reason identified by my hon. Friends the Members for Winchester (Mr. Malone) and for Dover (Mr. Shaw). We have set out since 1979 to create in this country an enterprise economy. As the Chief Secretary said, as the result of those measures, we have created over 3 million new jobs since 1984, with 1 million new self-employed people. That led the OECD to describe Britain as having by far the best job creation record among the larger EC countries.
Throughout the debate, Opposition Members have scoffed at the proposition that the way to solve the unemployment problem and to get Britain back to work is by recognising that business men, not politicians, create jobs. The story of the Budget is that we share in all parts of the House a desire to tackle the recession. What we disagree about profoundly between the two sides of the House is how that should be done.
Labour Members believe that the answer lies in the wisdom of politicians. We believe that the answer lies in encouraging business success. We believe that jobs are created by investment in the private sector by business activity and that business men, not politicians, create jobs.
If the Opposition find a success, what do they do? First, they envy it and then they tax it. If we find a success, we admire it and then we nurture it. That is why the wish of the right hon. Member for Berwick-upon-Tweed (Mr. Beith) will come true. He said that he wanted a re-run of the 1992 general election. So do I. The Budget will help to ensure that that happens.
If I have one regret about this afternoon's debate, it is that the hon. Member for Neath (Mr. Hain) confined his remarks to eight minutes.
§ It being Ten o'clock, the debate stood adjourned
§ Debate to be resumed tomorrow.