PERSONAL AND MARRIED COUPLE'S ALLOWANCES

§ Mr. Nicholas Brown (Newcastle upon Tyne, East)

I beg to move amendment No. 48, in clause 52, page 30, line 34, leave out 'sections 257 and' and insert 'Section'.

§ The Chairman of Ways and Means (Mr. Michael Morris)

With this, it will be convenient also to discuss the following amendments:

§ Mr. Brown

The amendments tabled by the Labour party would have the same effect as those tabled by the Liberal Democrats—although I see that no Liberal Democrat is here to speak to those, so it would probably be for the convenience of the Committee if I spoke to their amendments as well as ours. Fortunately, the amendments have been grouped together.

§ Mr. Tim Smith (Beaconsfield)

Where are they?

§ Mr. Brown

The hon. Member for Beaconsfield (Mr. Smith), who I understand will not be with us in the Standing Committee—that is a source of enormous regret to the Opposition—asks me to explain where the representative of the Liberal Democrats is. As the right hon. Member for Berwick-upon-Tweed (Mr. Beith) has just entered the Chamber, I can say, "There he is," or, "He is there, he is there," as the Prime Minister would point out in that inimitable style that he has made his own.

The other inimitable element of style that the Prime Minister has made his own is, of course, concealed tax increases, which we are discussing today. In case anybody has overlooked it—I am sure that no one in the Chamber has—I must explain that what is before the House is a massive increase, but a back-door increase, in direct taxation. [Interruption.] The Financial Secretary to the Treasury giggles at that idea. I do not know whether he giggles nervously or out of sheer physical exhaustion; after all, he has had to deal with the Maastricht legislation as well as with the Finance (No. 2) Bill.

I should be a great deal more sympathetic to the Government's concealed tax increases if some of them were being spent on procuring the landing platform helicopter vessel from Swan Hunter. I understand that the Treasury is taking the credit for the fact that the order has 814 gone to Barrow-in-Furness rather than to Swan Hunter. If that is an opening shot in the negotiations, it is not a worthy one.

The tax increases before us are of substantial significance. The changes that the Budget invites us to make in personal allowances are designed, as the hon. Member for Dover (Mr. Shaw) will be well aware, to bring in an extra £2.5 billion for the Exchequer in 1994–95 and an extra £2.7 billion in the following year. Those are substantial sums.

That Tory trick has been tried before. In 1981, the then Chancellor froze all the allowances and gained an extra £2 billion. What I think will anger the electorate—last week's election results show the extent of public anger with the Conservative party—is not just the breaking of pre-election pledges about tax increases but also the sneaky way in which the Chancellor has gone about the increases. It is clear that Treasury files have been scoured for tried and tested ways of raising taxes that at least the Chancellor hopes the taxpayers will not notice. Clearly, however, they have noticed.

Let us take the obvious example. Although an increase of a penny in the pound in income tax would have been more progressive than a I per cent. increase in employees' national insurance contributions, the Chancellor chose the latter. This is not because such a move provides more help for the poor—obviously it does not—but because the Chancellor clearly believes that it does not look so much like a tax increase.

§ Mr. Tim Smith

Will the hon. Gentleman give way?

§ Mr. Brown

When I finish this point, I shall of course give way to the hon. Gentleman, who is a firm favourite of mine and of other Labour Front-Bench Treasury spokespersons.

Exactly the same sort of thinking as that to which I have just referred applies to the extension of valued added tax to domestic fuel and charities. It is pretty clear that the electorate have seen through these devices and are even more angered at the attempted deceit than at the tax increases themselves. What the Treasury team has given us are the methods of Arthur Daley, used by those who clearly regard Alan B'Stard as a role model.

I give way to the hon. Member for Beaconsfield (Mr. Smith), without the obvious implication.

§ Mr. Smith

I am sure the hon. Gentleman knows that the principal reason for increasing national insurance contributions is that the national insurance fund is now in substantial deficit. Indeed, it will still be in substantial deficit after the increase. I imagine that the hon. Gentleman supports the contributory principle on which it is based. Contributions must be increased when outward payments are rising.

§ Mr. Brown

It would have been more helpful if the hon. Gentleman had reminded us which party had scrapped the Treasury's contribution to the national insurance fund. If his case is based on hypothecation, why, a few years ago, did not the Government think that that was a very strong argument? The Standing Committee will miss the hon. Gentleman, as he brings to the arguments a quality that one does not necessarily find in all his hon. Colleagues. In making that comment, I do not intend to cast aspersions.

I should like to move on to the real topic of this debate— not just tax rises, but sneaky tax rises. Taken together, 815 the Government's changes in allowances and the change to the lower rate band, which, in fairness, has also to be considered, will result in a net gain to the Exchequer of £2.7 billion by 1995–96. Of course this is significant. We should discuss the lower rate band as a reform, as a means of giving back to taxpayers more of their own money, alongside the freezing of the personal allowances, which is a means of taking from taxpayers more of their own money.

Let me state the brutal arithmetic. In 1995–96, the Chancellor will gain about £96 million from freezing all the personal tax thresholds, and another £1,170 million through further restriction of the married couple's allowance. On the last point, hon. Members will recall how thoroughly the Labour party was denounced during the 1987 general election campaign for proposing to do something similar. The present Prime Minister denounced our proposals, and then adopted them. To offset the substantial inflows to the Exchequer that I have just described, it is right to consider the cost of about £850 million to which it is said the lower rate band will give rise in the same financial year. That money goes back to the taxpayer.

However, the changes to mortgage tax relief gain an extra £870 million for the Exchequer. Here again, the Chancellor probably hopes that people will not notice or will not mind so much, as mortgage interest rates have come down following his spectacular policy of leaving the ERM and reducing interest rates. However, long-term interest rates are rising, and are certainly higher than short-term rates. We all know what that probably means for the future, although I am not sure that I agree with the Chancellor that letters to him urging rises in interest rates are a lead indicator.

§ Mr. David Shaw (Dover)

As one of the more sensible members of his party, does not the hon. Gentleman think that it is sensible for the Government to raise revenue to reduce a deficit which has been caused by a recession, not just in the United Kingdom, but worldwide? As he has raised the issue of the long-term rate of interest, surely he recognises that, by reducing the deficit, we will secure a better future, with a reduced long-term rate of interest. Does he not feel, in the national interest, that raising additional revenue in that way is good?

§ Mr. Brown

The hon. Gentleman certainly knows how to launch a wounding attack. Being described as one of the more sensible members of the Opposition Front Bench by the hon. Gentleman is designed to do me enormous damage on Tyneside, or at least among those who follow the debates in Committee on the Finance Bill.

The hon. Gentleman has obviously been following my speeches, including my reply to the Second Reading debate and my earlier speech on economic affairs, when I drew attention to the deficit and to the dangers inherent in it. The deficit is a problem. It would be a problem for us in government, as it is for the Government, but let us not forget how it came about. It was the Government who said before the general election that it was safe to reduce taxes and who say that recovery is happening, but yet have had to reduce, rather than increase, their growth forecasts.

Above all, it was the Government who in 1988 said that it was right to cut the top rate of income tax. The Labour 816 party voted against that, after a huge fight about it during the passage of the legislation that year. I think that the hon. Gentleman served on the Standing Committee, so he will recall the events with some affection. It would be better if he showed sorrow and repentance, although those emotions and characteristics are not normally associated with him.

Moving to the Chancellor's tax hike, obviously he thinks that he can slip through this substantial tax increase —clearly that is what it is—without people noticing or objecting. He has allied to the changes on mortgage tax relief changes to car tax allowances, which will bring in an extra £370 million in 1995–96, and changes to the tax treatment of relocation expenses, which we will examine in detail in Committee, which will bring in an extra £206 million, not an insignificant amount.

When we add the gains from freezing all the tax thresholds and eroding personal allowances, and deduct the much smaller cost of the lower rate band, we arrive at a net gain to the Exchequer for the financial year 1995–96 of £2.7 billion. Expressed as a proportion of all revenues for the Government, that is an increase of 4 per cent. It is significant because of the way it is constructed. Particularly seriously for the Opposition, it is significant because it is also regressive.

The very poorest are not affected. One fifth of all adults do not pay income tax, even at the 20 per cent. rate, because they are too poor. They way to target help on the poorest is not through the tax system but through the social security system. However, I suspect that the Chancellor and the Chief Secretary were even less receptive to that point than usual when they came to construct this year's Budget. Of course, on past form it is not a point that one would expect the Secretary of State for Social Security to have raised or pressed with them.

The Institute for Fiscal Studies, in its green budget for this year, draws attention to the gains and losses from restricting allowances and from expanding the reduced rate band. For its calculation, it used a figure of £1,000 rather than the Chancellor's £500—the broad flow gives a similar distributional effect. The institute's work shows that the very poorest are not affected, because they are too poor to be affected by any change in the construction of the tax allowance system. The next poorest—those in the third, fourth and fifth deciles, who have below ordinary or medium means—are adversely affected by the change. People in the sixth, seventh, eighth and ninth gain slightly from the change, and the wealthiest 10 per cent. are also slightly adversely affected because they come into a higher rate band.

We are concerned, of course, about the regressive effect of the change—particularly the way in which it will impact upon those who are not the poorest in our society, but next to them. They are typically persons in work but earning £100 a week or less. The freezing of allowances and the expanding of the lower rate must cumulatively have a regressive effect.

Single people with incomes of £3,535 up to a level of £5,535 are £18 worse off because of the changes, but everyone with an income of less than £5,895 must be worse off with the lower rate band than they would have been with the indexation of personal allowances.

Because of this, the parliamentary Labour party has tabled an amendment whose intention is to restore allowances. By this means, we wish to help those in our society who are on poor wages. We object very strongly to 817 the dishonesty of the construction of the Government's tax policies. We also object very strongly to the use of the lower rate band and the freezing of allowances to make changes which are demonstrably regressive.

§ Mr. Tim Smith

It is a matter of considerable regret to me that I shall not be serving on the Finance Bill Standing Committee and shall not have the opportunity of hearing the entertaining words of the hon. Member for Newcastle upon Tyne, East (Mr. Brown).

It is worth recalling the background to any debate on the indexation of personal allowances, especially as the hon. Member for Birmingham, Perry Barr (Mr. Rooker) is present in the Chamber. Hon. Members will recall that in the 1970s there was no obligation on the Government of the day to index personal allowances. When inflation reached 25 per cent., in 1975, there was pressure, not only from the Opposition of the day but also from the hon. Member for Perry Barr and his colleague who is now the hon. Member for Preston (Mrs. Wise), to change the law.

This was successful, and that change has been one of the most important and radical changes to tax law in the last 20 years. It is now incumbent on the House, if it does not want to index, to make a positive decision in that sense. The change was more important in those days, the late 1970s, when inflation was running at an average of about 15 per cent. per annum, than it is today. None the less, it is important even today.

A decision not to index these allowances should not be taken lightly. I would be the first to recognise that, if one does not index allowances, one is increasing the tax burden on those people on the lowest incomes. That was precisely the concern of the hon. Member for Perry Barr when he pursued this issue so assiduously, and ultimately so successfully, in the late 1970s. I am very glad that at that time the Conservative Opposition supported him in that endeavour, because it was a very important change.

§ The Financial Secretary to the Treasury (Mr. Stephen Dorrell)

I agree with what my hon. Friend is saying, and he is making an important point. I wonder whether he is aware of the statistical background against which this argument is taking place. Over the five years between 1974 and 1979, the Labour party cut the real value of the single person's allowance by 21 per cent. In the period since we have been in office, including this year's proposals, the single person's allowance has risen by 25 per cent. in real terms.

§ Mr. Smith

I am grateful to my hon. Friend for reminding the Committee of the background to the decision, but I was not surprised at what he had to say.

The concern of hon. Members at that time was not only that there had been substantial increases in tax rates in the Budget of March 1974—when Denis Healey had increased the standard rate of income tax from 30 per cent. to 33 per cent.—and in the following year's Budget of March 1975, when the standard rate was increased again from 33 per cent. to 35 per cent. In addition, we had 25 per cent. inflation and no indexation of tax allowances. As a result, not only was there a massive increase in the tax burden for every income tax payer, but his bore down particularly heavily on people on low incomes. That was the concern of the hon. Member for Perry Barr. By that time, much of the damage had been done, because changes were not made until the Finance Act 1977.

§ Mr. Jeff Rooker (Birmingham, Perry Barr)

It was 14 June 1977.

§ Mr. Smith

It was 14 June, 1977. The hon. Gentleman has that date etched on his memory—rather as I do 28 April 1977 when, partly as a consequence of the huge changes in taxation, I was elected to the House for the first time. I remember the miners of Ashfield showing me their pay slips and telling me of the massive increase in the tax burden they had suffered under Denis Healey, the most unpopular Chancellor ever in Britain. We will never again have such an unpopular Chancellor because of such a massive increase in the tax burden.

§ Mr. Rooker

Will the hon. Gentleman give us a forecast of when he thinks the tax burden will once again be reduced to the level that it was left by Denis Healey?

§ Mr. Smith

At that time, people were concerned about direct taxation. Funnily enough, and it is a rather strange thing, most people have a good idea how much tax they pay—for example, in local taxation. My post suggests that people have a pretty good idea of how much council tax they pay. It is a tax with a high profile, as it should be. So is income tax. People get a pay slip every week and they can see how much income tax and national insurance is being deducted. However, if the average person in a pub was asked how much tax he had just paid on a round of drinks, fortunately, he would probably have no idea.

§ Mr. Alan Milburn (Darlington)

Fortunately.

§ Mr. Smith

It is extremely fortunate, and it is true for all Governments.

There is no doubt that some ways of raising tax are less painful than others, simply because they have a lower profile. Some taxes have the advantage of being buoyant, some do not. There are many different considerations when one is deciding on the most sensible tax structure, but all those factors need to be taken into account.

At that time, people were concerned about direct taxation, and they are still concerned. They are concerned principally, but not exclusively, about tax rates, but they are also concerned about tax allowances and the point at which their income starts to be taxed. The minimum amount that one can earn before one has to pay tax is an important question, and we are considering it this afternoon. It is not a decision to be taken lightly to decline to increase the tax thresholds. One needs to give that serious consideration, and it is precisely what we are doing in the debate.

The hon. Member for Newcastle upon Tyne, East referred to the 1981 Budget. I am probably right in saying that it was the last occasion on which such a decision was taken. That may not be so, but it certainly involved a large increase in taxation. He referred to a figure of £2 billion, and I believe that was the figure by which taxes were increased in 1981.

Although the circumstances were not the same in 1981, they were similar in some ways. There is no doubt that the Budget in 1981 was extremely unpopular—of course it was; no one likes having their taxes increased, it is as simple as that—but it was also a very courageous Budget, which established the foundations for economic recovery throughout the 1980s, because it tackled the problem of the public sector borrowing requirement. The Chancellor, 819 Lord Howe—Sir Geoffrey Howe, as he then was—made a clear commitment to sound finances on the part of the Conservative Government.

We had to deal with the difficult problem of the PSBR, and my right hon. Friend the Chancellor has done the same this year. This, too, is not a popular Budget, and we do not have to look far to see why. If we look at page 6 of the Red Book, we find that taxes are to rise by nearly £500 million in the current financial year, by more than £6.5 billion next year and by more than £10 billion the year after. Of course such measures are never likely to be popular.

§ Mr. Nicholas Brown

It would help my understanding of these matters if the hon. Gentleman could explain why —if the Government were as committed as he said to sound finances in 1981—the situation has since deteriorated to such an extent that it is necessary to have tax rises to reaffirm the same commitment that was given then? What has happened over the last 10, 11 or 12 years? Why have matters deteriorated in such a way that we need to hear the same speech?

§ Mr. Smith

I do not want to leap about like a grasshopper in what is a carefully prepared and thought out discourse. I will come to why we now face such a large PSBR, to which the hon. Gentleman referred in his speech.

The decision not to index personal allowances must be seen in the broader context of the important need to raise revenue to tackle the PSBR. The point that I was making is that Sir Geoffrey Howe in his 1981 budget did exactly that. It was extremely unpopular at the time, but it established a basis for economic recovery throughout the 1980s. It will not be long before we think the same about the 1993 Budget.

§ Mr. David Shaw

My hon. Friend says that this is not a popular Budget. Will he consider that very carefully? It has been popular with overseas holders of sterling, who have seen that the pound is worth supporting and that the Government have been running the finances well; it has been popular with overseas purchasers of gilts; the Government's borrowing requirement has been well met by support from overseas purchasers; it has been popular with business men, who feel that it is the basis on which recovery can be built; it is clearly popular with overseas investors, who still intend, as far as one can see, to locate their businesses here; it is clearly popular with the people who can help us create jobs in this country. Perhaps my hon. Friend will consider that it is a popular Budget with all the people who count, but what we must do is explain it to the people better—

§ The Chairman

Order. The hon. Gentleman is not being popular with the Chair. We are supposed to be discussing personal and married couples' allowances.

§ Mr. Shaw

I understand your point, Mr. Morris, but if I can make the key point—

§ The Chairman

Order. No.

§ Mr. Smith

I have to say that I was taking a rather narrow view of popularity: I was referring to the voters in my constituency. I accept what my hon. Friend says—he makes an important point—because, in the long run the Budget did appeal to the people he is talking about. They 820 too recognise that the decision not to increase the personal allowances was not an easy decision to take. It was a difficult decision, but the right decision in the circumstances. In the long run, it will have very great benefits. There are two different contexts.

§ Mr. Clive Betts (Sheffield, Attercliffe)

The hon. Member is comparing the 1993 and 1981 Budgets, and he is saying that the latter laid the foundations for what he seems to think was a recovery in the 1980s, and that the former will do the same for the 1990s. But surely in 1981 it was unnecessary for the Government to freeze the uprating of personal allowances in line with inflation. Why then is it necessary in 1993, given that he has drawn the comparison between the two Budgets?

§ Mr. Smith

I think that I am right in saying that the Government did exactly that in 1981. The hon. Member for Newcastle upon Tyne, East (Mr. Brown) also confirmed that that was the case. That is why I was drawing a parallel with 1981. I was saying that on both occasions difficult decisions had to be made in order to provide a sound basis for economic recovery.

I want briefly to deal with a point raised by the hon. Member for Newcastle upon Tyne, East. He asked why the Government did not increase the standard rate of income tax, rather than, for example, increasing national insurance contributions. It is an important point that needs to be addressed. I suggested to him that it was because the national insurance fund is a separate fund. Some people tend to trivialise the matter and say that it is of no consequence, but I attach importance to this and to the contributory principle, for many reasons that it would be wrong to go into in the present debate. I accept what the hon. Member says about the Treasury supplement. I would like to see us get back to a national insurance fund which is properly funded.

What I wanted to say about the decision not to index the tax allowances was that it needed to be looked at in two contexts. The first is that of increasing taxes overall. That is what will happen. I have already quoted the figures to the Committee. It is one of a number of different measures, some of which could be described as more progressive than others. We could have some debate about which taxpayers will be hit hardest by this. I think that the figures that the hon. Member for Newcastle upon Tyne, East quoted earlier, from the Institute for Fiscal Studies, were prepared before the Budget. At least, it sounded like it to me, because he referred to an increase in the 20 per cent. band of £1,000 whereas, as I understand it, the 20 per cent. band will be increased by only £500.

§ Mr. Nicholas Brown

That is what I said.

§ Mr. Smith

Yes, the hon. Gentleman made that point, but I was suggesting that, as the figures from which he was quoting referred to £1,000, they must have been prepared before the Budget, or, if they were prepared after the Budget, they must have been prepared by someone who had not read the Budget properly.

§ Mr. Brown

rose—

§ Mr. Smith

Whichever it was, they were not very helpful figures, because they did not refer to what had actually happened.

§ Mr. Brown

The hon. Gentleman knows perfectly well that I said that I was quoting from the IFS's green budget, 821 which was prepared in advance of the Budget. It is a document with which he is perfectly familiar. The graph on the distributional effect was prepared on the basis of £1,000, and I acknowledged that the band had been expanded by only £500. But it does not affect the broad distributional effect, the fact that the poorest neither gain nor lose because they do not pay tax, the next poorest lose and the people who are slightly better off may gain a little, but not a lot.

§ Mr. Smith

rose—

§ Mr. Dorrell

My hon. Friend might like also to ruminate on the fact that, although the hon. Member for Newcastle upon Tyne, East quoted from an IFS report on what might happen on the basis of its green budget, he very noticeably did not quote from the IFS analysis of what will happen as a consequence of the Government's actual Budget. It has analysed the distributional effect of the Budget, and the evidence that it has produced shows almost precisely the same tax take all the way up the income scale. Decile by decile, the effect of the Budget is the same, according to the IFS.

§ Mr. Smith

I am very grateful to my hon. Friend for confirming what I was about to say, which was that the hon. Member for Newcastle upon Tyne, East had, first of all, quoted from a document prepared before the Budget and, secondly, had looked at two measures in isolation rather than looking at all the Budget measures together.

Let me take one example, the taxation of company cars. We all know that the amount of benefit in kind which is subject to taxation if one has a company car has been increased year by year for the past five years or so, and has now reached the point—I fully support this, I may say —at which taxpayers are now required to pay tax on the full economic benefit of having a car. We also know that most people who drive company cars are on higher salaries, and we must take account of that in assessing the overall distributional effects of the Budget.

I am therefore most grateful to my hon. Friend the Financial Secretary for confirming what I believe—that it is important to look at all these cases together, although we are just debating the one change at the moment, the decision not to index tax thresholds. If we do that, we find that the effect is reasonably fair for everyone. We must all bear a bit of pain, and all income tax payers must pay a bit more.

One of the more important of the difficult decisions made by the Government to raise more revenue was not to increase the tax rate. Some people have said that it would have been more straightforward to do so, and they have asked why the standard rate or the higher rate of income tax was not increased. I believe that it would have been a mistake to do so.

4.45 pm

To increase either of the tax rates would have been a major disincentive for people, a step backwards. What my hon. Friends at the Treasury have done is to take another major step forward to a tax rate of 20p in the pound. That is very good news indeed. It is our ultimate objective, and we have taken another small but important step towards it in this Budget. In the long run, it will be a very popular decision. At the time of last year's Budget, the decision was derided by some. They said that the Chancellor had got it wrong, but only a few weeks later, the electorate decided 822 that the Chancellor had got it right. It was the right decision to introduce a 20p tax band. It was a decision that I supported, and I very much welcome the present decision to increase the tax band.

I want to have a look not just at the need to fund the public sector borrowing requirement, although I feel that it is incumbent on Opposition Members, if they object to every tax increase, to say where they would get the money from. It was noticable in Monday's debate that the hon. Member for Peckham (Ms Harman) consistently refused to say how a Labour Government would increase taxes. That is not a responsible action. With a large PSBR, some decisions to increase taxes are necessary, and we should be told what the Labour party's alternatives are. But I do not suppose that we will hear anything about that in this debate. [Interruption.] Does the hon. Gentleman wish to say something? If so, it is normal practice here to stand up.

§ Mr. George Howarth: (Knowsley, North)

If the hon. Gentleman is trying to tempt my hon. Friend the Member for Peckham into responding, perhaps he could say how he thinks the Chancellor should fund the PSBR next year. If he cannot do so—and I suspect that the Chancellor cannot —how can he expect my hon. Friend to say how she would do it in two or three years' time?

§ Mr. Smith

There are published proposals that take us through to March, 1996, three years away. They are projections, but what else could they possibly he? They cannot be statements of faith.

I will tell the hon. Gentleman something. The Treasury has been widely criticised for failing to forecast what the PSBR is likely to be, but I refer the hon. Gentleman to a table in the Red Book—which I will probably be unable to find now because of the size of the Red Book and the fact that I need to keep on talking while I look for it. Because we now have a panel of independent advisers, somewhere in the Red Book—my hon. Friend the Financial Secretary may be able to find it for me—is a very interesting table which shows that each of the independent forecasters has made a separate forecast for the PSBR, and that in 1995–96 the discrepancy, if I remember rightly, is between £20 billion and £50 billion.

That demonstrates the difficulty of forecasting a figure which is itself the difference between two very large figures. It is like trying to forecast the balance of payments. So what the hon. Member for Knowsley, North (Mr. Howarth), who keeps intervening from a sedentary position, should appreciate is that forecasting is an extremely inexact science.

While the Treasury has got it wrong, so has every other economic forecaster. The table, which I now learn from my hon. Friend the Financial Secretary is on page 54 of the Red Book, shows that Mr. Wynne Godley has the highest forecast of PSBR, at £60 billion, in 1994–95. It is only next year that we are talking about, less than a year away. Mr. Godley is forecasting £60 billion, whereas Mr. Congdon is forecasting £38 billion, a difference of £22 billion in the forecast of the PSBR for next year. That illustrates the difficulty in forecasting the PSBR.

§ Mr. Robert Ainsworth (Coventry, North-East)

Would the hon. Gentleman care to make a few comments on the forecast immediately before the last election of tax decreases year on year, made by the Chancellor—and the Prime Minister, I think?

§ Ms Harriet Harman (Peckham)

That was not a forecast; it was a promise.

§ Mr. Smith

Unfortunately, I do not have last year's Red Book with me, so I cannot say what tax decreases were forecast. But, of course, the main tax decrease that was proposed in last year's Budget was the introduction of the innovative 20p tax band to which I have already referred, which was opposed by Opposition Members but was widely supported by the electorate only a month later in a general election.

§ Mr. Jim Cunningham (Coventry, South-East)

I accept what the hon. Gentleman said about the 20p or 20 per cent. tax band, but does he not agree that that was offset last year and this year—last year by the increases in VAT and this year by the proposed increases in VAT?

§ Mr. Smith

I have already said that increases in taxes are unpopular, but Governments have to make unpopular decisions sometimes, in the national interest. That was an unpopular decision that will form the basis for sound economic recovery.

§ Mr. David Shaw

My hon. Friend is talking to an amendment on revenue raising and the issue whether we should be raising additional revenue. He drew attention to the fact that the Opposition spokesman, the hon. Member for Peckham (Ms Harman), refused to detail how alternatively she would raise additional revenue. Does he conclude that, if she proposes to keep the PSBR the same, she now really wants to reduce public expenditure? Is that not a major change for the hon. Lady and the Labour party? Does the Labour party now want to cut public expenditure significantly, if it will not raise additional revenue?

§ Mr. Smith

I am very sorry to disillusion my hon. Friend, but I recall that, in her speech on Monday, the hon. Lady's solution to the PSBR was to cut taxes and increase spending. She said "Let's have more spending on education and training, and let's have more investment allowances for companies." That means lower business taxes and higher public spending. I am only a simple accountant, but if one cuts taxes and increases spending, I think I am right in saying that one adds to the PSBR. So I do not think that the hon. Lady's solution is the right one.

My hon. Friend the Member for Dover (Mr. Shaw) is entirely right. There are only two possibilities: one has either to increase taxes or to cut public spending. Those are both difficult and unpopular decisions that Governments have to take.

The second yardstick by which this matter should be considered is the decision in the Budget to devote what help was available to business ensuring that the tax cuts that could be made went to business. That was the right balance, I think, at the present point in the economic cycle.

As my hon. Friend the Member for Dover said, as a result of that, this Budget was widely welcomed by business. If we look at the table on page 6 of the Red Book, we can see why. The decision not to increase business rates by more than indexation will cost the Exchequer £370 million this year, but that decision has been widely welcomed by business, as has the decision debated last night to improve VAT relief on bad debts. That will cost £150 million in the current year, but it will bring immediate relief to many companies that have cash flow difficulties.

824 There is an important balance here between business taxes and personal taxes. I believe that the Government have that balance right, too, so it was right in the Budget to make some increases in personal taxation, and that is why I support the clause.

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

The trouble with the small, but important, steps towards the 20p band to which the hon. Member for Beaconsfield (Mr. Smith) referred is that individually they often have the effect of not helping the poorest and lowest earners. That is a point to which I shall return in a moment. To be in favour of a general objective is not necessarily the same as supporting proceeding to it by steps which do not in themselves help the people it is supposed to help.

We have on the Order Paper two amendments with the same objective as the amendments that the Labour party has put forward today. They would stop the Government from failing to increase the personal tax allowance, but continue the freezing of the married couple's allowance. By a neat bit of gazumping, the Labour party in the course of the past three days put down more amendments, thus widening involvement in this debate.

The freezing of the personal income tax allowance brings more people into tax. I remember speech after speech by Chancellor after Chancellor and Financial Secretary after Financial Secretary saying how many people the Government were taking out of tax. If one freezes personal income tax allowances, one brings more people into tax, and they are by definition people at the lowest levels of income.

The married couple's allowance is not in the same category. Some people regard it as an anomaly because it is not related to whether there are children in the family. Freezing it seems to have become quite a common practice and to enjoy reasonably widespread support, but we would support that only so long as child benefit continues to be uprated annually, at least by the rate of inflation.

The Government are selling their 20p tax rate as if it is helping those on low incomes and is in some way a better measure than indexing the tax allowance. That is patent nonsense. The small steps taken towards the 20p tax rate, such as the one taken in this Budget, are not a significant way of helping those on the lowest incomes. It is, indeed, a kind of deception of the British people.

If steps to the 20p rate are paid for by not indexing the basic rate, one hurts the people the policy is supposed to assist. Every person with income above £3,445 will lose £18 a year, because the personal allowance should have been uprated by 2.6 per cent.—using the December 1992 RPI—to £3,535, which is £90 higher, and since they would have paid tax at 20p on that £90, the loss is £18.

Instead of uprating the allowance, the Chancellor has widened the 20p band, but this applies only to people with incomes above £5,445, so the income tax deduction from the new wider 20p band begins to offset the tax increase from not indexing only for people who have annual incomes above £5,445. It is only at incomes above £5,805 that the income tax cut from the wider band offsets the increase from not indexing the allowance, so from the point of view of those on the lowest incomes it is a poor bargain; they would have been much better off if the tax allowance had been indexed. The Chancellor continues to boast that the extension of the 20p rate is assisting the poorest in society, but in fact it does not have that effect.

825 The Budget shows the real reason why the 20p band method appeals: it can bring in more revenue by sleight of hand than it costs. The cost of extending the 20p rate by £1,000 will be £710 million in 1994–95 while the revenue raised from restricting mortgage tax relief to 20p in 1994–95 will be £820 million. The revenue raised from restricting the married couple's allowance to 20p in 1994–95 will be £910 million while the revenue raised from restricting the taxation of dividends to 20p will eventually be nearly £1 billion in a full year. So the gain to the Exchequer is larger than the cost. One begins to smell a rat when one sees that happening; one discovers that it is not a measure to help the lowest paid and it is also a revenue-raising measure.

The Chancellor, nearer the next election, will announce that he is widening the 20p band yet again. I use the word "Chancellor" in the way in which the Prime Minister now uses it, to denote whoever happens to hold that office. I say that advisedly because I have been passed a note saying that the Chancellor, speaking elsewhere, is announcing at this very moment that he does, after all, have some regrets. I have no information about which matters he regrets—we shall discover that on another occasion.

When his successor, whoever that may be, announces that he is widening the 20p band again to give millions of people a tax cut, will he point out that that 20p band has cost people money? The numbers will work out in favour of what the Chancellor claims to be his policy only if he fully replaces the 25p rate by the 20p rate. Given the PSBR forecast, there cannot be any serious possibility of that happening.

5 pm

The hon. Member for Beaconsfield (Mr. Smith) referred to the basic decision in the Budget not to increase the standard rate, but instead to use the national insurance contribution as the means of raising the equivalent of a penny, or somewhat less than a penny, on the standard rate of income tax. The hon. Gentleman justified that by reference to the national insurance fund and to the fact that the insurance fund will be in deficit if that is not done. But it will still be in deficit even if that is done. This action is not a balancing act or an actuarial balancing of a contributory national insurance fund, but the Government raising a penny on income tax without breaching the doctrinal objection to raising a penny on income tax which their election commitments represent.

As the Government have broken so many of their other election commitments in the tax area, I think that we, as Opposition parties, could now absolve them from any further commitment or responsibility at all. Nobody believes that the Government are bound by any of those promises any more, so they are entitled to start assessing what might be good for the country as opposed to which of their promises they are prepared to break and which they are not prepared to break.

If the Government are to raise the equivalent of a penny on the standard rate, they should do it by the standard rate system and not by a system which fails to tax higher levels of income, fails to tax benefits and perks and fails to tax investment income. That is not a sensible route to take.

§ Mr. Tim Smith

Will the right hon. Gentleman confirm that it is Liberal Democrat policy to increase the standard rate of income tax?

§ Mr. Beith

We are in a rather different position from that of the hon. Gentleman's party. At the general election, we told people that in some circumstances we would raise the standard rate of income tax, and we defined those circumstances. The hon. Gentleman, who said that he would never raise the standard rate, can hardly criticise me when he now represents and appears to support the actions of a Government who have done so, and who have done it through the national insurance route and have used a quite spurious argument for doing so.

§ Mr. Dorrell

Would the right hon. Gentleman make it clear that he is distinguishing his position from that of the Labour party by saying that he is still bound by the commitments that he gave to the electorate at the general election?

§ Mr. Beith

That is an odd question from a member of the Government: I cannot fathom its intricacies, particularly in reference to the Labour party. I shall seek to uphold the policies and ideas that we put forward at the election. I hope that the Conservatives, like most political parties, will have the sense to notice if they are occasionally wrong. The Chancellor has announced that he now has some regrets, but so far I see no reason to change any of the policies that we advanced at the election.

§ Mr. Thomas Graham (Renfrew, West and Inverclyde)

The right hon. Gentleman will remember that, just weeks before the general election, the Conservatives were accusing the Labour party of proposing a £36 billion PSBR. Yet the Conservatives are now introducing proposals similar to those advanced by the right hon. Gentleman. After one year of this Conservative Government, the country is in an economic mess. I am sure that if we had a good look at the books any one of us could do a better job than the Government are doing.

§ Mr. Beith

It is nice to have such robust help in Committee. The hon. Gentleman makes a fair point.

I wanted to argue the merits of being straight about using the standard rate rather than disguising standard rate increases through national insurance increases which do not bear fairly on people and do not raise so much revenue. The reason for that is that they do not apply to levels of income above £420 per week, they do not apply to benefits and perks, and they do not apply to investment incomes. We have proposed ways in which we could move from the present system to the wholesale amalgamation of national insurance with the income tax system. If the Government propose to add to the tax take, they should at least do so by using the standard rate income tax system.

There are huge costs to the Government and even greater costs to business from our persistence in running the two systems side by side. I do not share the belief of the hon. Member for Beaconsfield that we can somehow resurrect the contributory system which, in effect, has been destroyed. There is no actuarial balance in the fund; it is all a myth. The hon. Gentleman knows that perfectly well; otherwise, he would tell me that there was not a £2 billion deficit in the national insurance fund and that it was all covered. He knows perfectly well that it is not covered and that the fund is not in balance.

§ Mr. Tim Smith

Entitlements to benefits depend on contributions. That is a good thing. Is the right hon. Gentleman saying that he would sweep all that away as well?

§ Mr. Beith

The hon. Gentleman must also know that most of what is paid out in the form of benefits is not based on contribution entitlements. The contribution side now plays a small part. The hon. Gentleman should reflect sometimes on the extraordinary position in which people such as his constituents find themselves. As Members of Parliament, we have to give them a letter which explains that their failure to make two contributions in 1956, of which they were unaware at the time, has left them unable to claim a benefit now. The whole system is creaking and groaning, and it is time for it to be replaced by one which streamlines the two measures. However, that takes us wide of the clause.

I am arguing that the Government are trying to use a variety of other devices to avoid doing what they would otherwise be doing in the circumstances. They would be saying, "We got it wrong; the economy was in far worse off a mess than we said; the PSBR is appalling and will continue to be appalling; we must raise more tax and we shall therefore raise the standard rate." That is what the Conservative Governments might have done in previous years, but they do not do it now because they have made a fetish of never raising the standard rate of income tax.

When we think about the allowances, we are bound to reflect on the strange perks and loopholes which still exist in the system. At the moment when the Government are exacting from people the extra costs of not indexing the allowance, Ministers appear still to enjoy the perk of having cars to drive them from their homes to their Departments. They still appear—I say "appear" because I get very evasive answers from Ministers—not to be paying tax on a benefit which is taxable for anyone in an equivalent position.

All sorts of mysterious perks and hidden benefits are still tucked away in the tax system. Such perks never work to the benefit of people at the lowest levels of income. Those people are hit by the full force of the pay-as-you-earn system, and if they are at the bottom of the scale they are hit far more forcefully than those at higher levels of income who do not have to bear the higher cost of national insurance contributions.

§ Mr. Milburn

The right hon. Gentleman says that he receives evasive replies from Ministers. I do not know whether he had an opportunity to read The Guardian this morning. The Financial Secretary is quoted there and I thought that his reply was far from evasive. He made it clear that, if he had to pay the full tax that was due on the perk, he would get up and walk.

§ Mr. Beith

Not only did I read the article, but there is a quotation from me in it, as the hon. Gentleman may recall. I do not remember those words being attributed directly to the Financial Secretary. A number of other interesting comments were attributed to other Ministers, or were said to have been made by unnamed Ministers.

In the course of the day, it has been drawn to my attention that, when the basis on which the concession appears to exist was introduced—it was part of a change made by Denis Healey when he was Chancellor which was intended to bring all journeys to work within the tax system—Ministers were told that it would not affect them and that it might be a good idea if they occasionally gave their civil servants a lift because that would help to emphasise the fact that the car was for business use and not a perk.

§ Mr. Tim Smith

Did Denis Healey say that?

§ Mr. Beith

I do not know who gave the advice, but I believe that such advice was given.

The clause and the amendments relate to those at the bottom of the tax scale who get none of the little let-outs and loopholes. They bear the full brunt of tax, and in a number of respects they will be disadvantaged by the small steps towards a 20p band if those small steps are financed by tax allowances not being indexed.

The work done by the hon. Members for Preston (Mrs. Wise) and for Birmingham, Perry Barr (Mr. Rooker) in the famous amendment was an important part of tackling poverty. It was a measure to ensure that the Government did not continue without statutory or parliamentary authority to scoop tax from those least able to bear additional tax burdens. In any year in which the Government fail to abide by the Rooker-Wise principles, they deserve to be challenged and tested, because the case that they have advanced for gaining extra tax income to deal with the PSBR is not improved when elements of that tax income seem to be earned unfairly from those least able to bear it.

The case is undermined by the fact that the failure to spend money on various investments has prolonged the recession and, therefore, increased the PSBR. If the Government want to come to the House and say, "Yes —we made a mess, we have a problem and we have a huge public sector borrowing requirement; as the Red Book shows, we shall have a huge public sector borrowing requirement even if we get growth; yes, we need to raise tax revenue to get that growth," why do they not use known, fair and trusted parts of the tax system to raise that revenue instead of raising it by the back door?

§ Mr. Milburn

My hon. Friend the Member for Newcastle upon Tyne, East (Mr. Brown) described the freezing of personal allowances as a sneaky measure. He is absolutely right, because the freezing of personal allowances is a tax rise in all but name. The measure will hit both ends of the income scale. It will bring more people on middle incomes into paying tax at the higher rate. It will have a serious impact on poorer families in my region—hon. Members will know that my region has the greatest concentration of low-paid people in the country. It will ensure that they pay a hefty price for the Government's economic mismanagement.

I was taken by the speech of the hon. Member for Beaconsfield (Mr. Smith), who managed to dig himself into a substantial hole by arguing that, in 1981, it was necessary to do exactly what is being done now, in the hope that it would never be done again. However, 12 years later we have more unemployed people, a bigger public sector borrowing requirement and graver economic circumstances than ever before. Who was in charge during that period? It was certainly not the Labour party. The Minister and his hon. and right hon. Friends got us into the current mess. Frankly, the poorest people in the country are now paying the price for that mess.

The measure before us today is not only a tax on the poor—it is a tax on my region in the north. Across the country, 300,000 people who do not pay tax at present will be brought into the tax net for the first time. The 4.5 million people who are low-paid and who pay tax at the 20p rate at present will also lose. They will not gain a penny from the extension of the 20p band, but will lose 829 from the freezing of allowances. They will be asked to contribute to the £700 million tax bill that the freeze on allowances will cost taxpayers.

As usual, the Red Book is fairly categorical. We are talking about enormous sums of revenue that will be raised by this back-door tax rise. Inevitably, the measure will penalise those who are least able to pay. That is in keeping with the Government's record of switching the tax burden from the rich to the poor in the 1980s. The poor were certainly not invited to the tax-cutting party of the 1980s, but they are now being asked to clear up the mess. The hon. Member for Beaconsfield and his hon. Friends are to blame for that situation.

§ Mr. Tim Smith

Did the hon. Gentleman not hear the figures that my hon. Friend the Financial Secretary gave to the House? Under this Government, the personal tax allowance has risen substantially in real terms, whereas it fell under a Labour Government. If the Labour party is so committed to the eradication of poverty, why did a Labour Government so furiously resist the Rooker-Wise amendment?

§ Mr. Milburn

If the hon. Gentleman has read this Red Book and previous ones, he will know that the tax system has changed over the past 14 years, from one in which the rich paid more tax than the poor to one in which the poor paid more tax than the rich. It is a Robin Hood in reverse —and the figures are categorical. As the Financial Secretary knows, between 1978–79 and 1992–93, a typical family on average earnings has seen its tax burden rise from 35.2 per cent. to 36.7 per cent. of its income. Between 1979 and 1990, the poorest 20 per cent. of households saw their tax bill rise from 30.7 per cent. to 39.7 per cent. of their income, while the top 20 per cent. saw their tax take a fall from 37.3 per cent. to 33.5 per cent.

§ Mr. John Butcher (Coventry, South-West)

I refer the hon. Gentleman to some questions tabled by the then Labour Front-Bench spokesman, the Member for Blackburn (Mr. Straw), about the effect on the tax take of reducing the top income tax rate from 60p to 40p. What he discovered in hostile questions was that not only the cash amount from the richest section of the community increased but the proportion which the richest section of the community contributed to the total tax take increased as well. The supply side effect was real.

§ Mr. Milburn

The hon. Gentleman must have read my speech, because I am coming precisely to the effect of the top rate tax cuts and the contrast between the 1988 giveaway Budget under Chancellor Lawson and the current Budget.

The shift in the tax burden from the rich to the poor has been achieved by deliberate Government policy instruments. For the poor, it has been achieved by shifting the burden of taxation from direct to indirect taxes.

At the same time, a growing number of people on low incomes have been drawn into paying tax through fiscal drag, as their tax-free income has shrunk in relation to average earnings. For the rich, the shift has been achieved by huge cuts in the top tax rate. I shall refer to that point in a moment.

§ Mr. Robert Ainsworth

We repeatedly hear the point made by the hon. Member for Coventry, South-West (Mr. 830 Butcher). The issue is that, by putting the tax burden on the rich, we are getting more tax from them. Is it not the case that that is a deception, and that the real reason why we are getting extra taxation is that many more people pay it because the indexes have not been raised in line with inflation in the way that they should be? Is that not something that the Government repeatedly try to get away with?

§ Mr. Milburn

As always, my hon. Friend is absolutely right. It is yet another case of the Government trying to perpetrate a con on the British people. The information that I have from the Financial Secretary is clear—vast sums of money were given away in the top rate tax cuts. According to his parliamentary answers, £9.5 billion has been given away to the richest people since 1988.

§ Mr. Dorrell

So that we are proceeding on the basis of facts rather than assertions, I must point out that the top 5 per cent. of taxpayers in 1978–79 contributed 24 per cent. of the total yield of income tax. In 1993–94, that same top 5 per cent. is expected to contribute 32 per cent. of the yield of income tax. That is the top 5 per cent. of income tax payers.

§ Mr. Milburn

The Financial Secretary obviously wants to bandy statistics—I am happy to do that. Perhaps he would like to tell us how many people are in the top 5 per cent. and what the spread is in the benefits of top rate tax cuts. According to his parliamentary answers, almost 60 per cent., or £5.5 billion, of the £9.5 billion handout and giveaway went to top rate taxpayers in one region of the country—the south-east.

It is no wonder that there was a huge fiscal stimulus to the economy in the south-east but, of course, we are now suffering the consequences of overheating, shortage of skilled labour, pressure on the green belt and a huge explosion in house prices. The brakes had to be slammed on, as they were two or three years ago, and we are now paying the price. We are shivering as a consequence of a countrywide recession, which is the result of the sort of measures that were implemented in 1988 by the Minister and his predecessors.

§ Mr. Jim Cunningham

My hon. Friend referred to what the top 5 per cent. paid in taxation. Does he agree that their income also rose in that period?

§ Mr. Milburn

We have seen an explosion in the incomes of the very richest people. I described earlier how the top 20 per cent. have done so well, while the bottom 20 per cent. have done so poorly. There is no doubt that families on average earnings are, as a consequence of the Government's fiscal policy during the past 14 years, paying more of their income in tax than ever before. Those are the stark facts: the Financial Secretary cannot argue with them.

I give one example. A top rate taxpayer in the south-east of England is on average at least £10,000 better off as a consequence of top-rate tax cuts. The south-east has not been the biggest regional gainer. The south-west takes the lead in the top-rate tax cut league. It is interesting to examine which parts of the United Kingdom do least well out of top-rate tax cuts. Not surprisingly, Northern Ireland and my region, the north, received the smallest benefits as a consequence of the cuts in top-rate income tax.

831 What a contrast between 1988 and the Finance Bill that we are debating today. In 1988, there was an enormous handout and a tax bonanza for the rich. As a consequence of the measures presented by the present Chancellor in his Budget this year, there will be tax increases of £6.5 billion in 1994–95 and £10.5 billion in 1995–96.

The cost of imposing VAT on heating alone will mean £950 million in higher bills next year and £2.3 billion in the following years. The whole country is paying the price for the Conservatives' tax bonanza for the wealthy in 1988. What they gave away with one hand to the very rich, they are taking back with the other from pensioners, families, the low-paid and those on middle incomes. It is an odd reversal of the Robin Hood story when the poorest end up subsidising the richest in our community.

§ Mr. Graham

The other day I spoke to a woman in my constituency who told me that she had looked at her diary for 1979. It was faded, but she noticed that her husband was working, her two sons were working and she was going on holiday to Benidorm. Now she is not going on holiday to Benidorm, her son is not working, her other son is on low pay and her man is almost crippled with illness.

In 1979, at least they were all working and they could afford to pay tax. Now 4 million people are desperate and 3 million people are unemployed. The other night we passed a measure which will mean that 9 million pensioners will have to pay through the nose to heat their homes. The Government are proud of that record. The crisis is one of their own making. My hon. Friend has elaborated on that well tonight.

§ Mr. Milburn

My hon. Friend is right. He graphically describes the problems that the Government have imposed on millions of people in Britain. It is not merely a question of complacency. It is a question of the Government's inability to apologise to the British people. We saw that most graphically in the private notice question just before this debate. I will not go into that, Mr. Morris, because I can see that you wish me to move on. I will take that hint seriously.

So we are now all paying for that tax bonanza. By freezing personal allowances, the Government will force the tax burden of low and middle-income families through the roof. Rightly, people will feel betrayed by a party which in its general election manifesto just one year ago loudly declared: we are the only party that understands the need for low taxation. The Conservatives' tax-cutting credentials have been shot through by this measure and other measures in the Finance Bill. In just one month next year—April—the British people will feel the effect of the cuts in mortgage interest relief at source and the married couple's allowance, the increase in national insurance and the introduction of the fuel tax. Ministers might not be so complacent then. Certainly the crisis of confidence which the Government face will not go away, because too many people are paying through the nose for the mistakes that have been made.

§ Mr. David Shaw

The Government have had a difficult Budget to prepare when we are, as we have now discovered, at the end of a recession. As we reach the end of the recession, sadly, unemployment—the lagging 832 indicator—increases and the deficit continues to rise for some time after one has hit the bottom. There is no doubt that we are having to raise additional finance because we have an excessive budget deficit.

There are not many ways in which one can deal with an excessive budget deficit. Indeed, my accountancy career has taught me that there are only three: we can borrow, if someone will lend to us, but if the deficit is excessive, people do not want to lend to us; or we can raise additional revenue; or we can cut expenditure.

It is clear that no one in the Conservative party wanted major areas of expenditure to be cut. They did not want pensioners, invalids, or those on disability benefits to suffer and they did not want cuts in health service or education expenditure. Consequently, the Government have chosen the course of raising some additional revenue and they should be applauded for taking that courageous decision.

§ Mr. Robert Ainsworth

If the Government decided that the right course of action was to raise revenue, why did not they seek to raise it from the very people who gained from the tax cuts that they introduced a few years ago? Why are the Government seeking revenue increases from the bottom part of the earnings structure when they gave those tax breaks to the top?

§ Mr. Shaw

As my hon. Friend the Financial Secretary said, the hon. Gentleman and his colleagues are living in a mythological world. In many instances, the top 5 per cent. who received the reduction in the rate of taxation have increased their earnings and the wealth that they have brought into the country. As a result, they have paid an increased proportion of the income tax bill. That is a major achievement and we must encourage that expansion.

I want the top rate of tax to come down lower. It is sad that we wish to cut only the basic rate from 25 to 20 per cent. We should consider how to reduce the top rate from 40 per cent. We are now competing in the world to bring the wealth creators to Britain. If we could encourage more of them to come here, more revenue would be raised from income tax at lower rates. That is the great achievement of the Government.

I return to my key point. We must either raise revenue or cut expenditure. The Opposition argue that we might be in a different world if they were in office. They say that the deficit would be considerably less. They are trying to con the electorate into believing that if they were in office, we would be in a make-believe world. That is the only world that would be different. One cannot say that if Labour was in office there would be no German recession, no French recession and no American recession. We live in this world. We do not live in the make-believe world that the Labour party would like to exist if it was in office.

So revenue had to be raised in the Budget. Clause 52, with which the amendment deals, is the right clause and the right measure to raise additional revenue.

Public finances have to be prudently managed. Reference has been made to the Labour manifesto's proposals which we costed at some £37 billion. I commend the hon. Member for Renfrew, West and Inverclyde (Mr. Graham) for remembering that figure. That £37 billion was not what the deficit might have been; it was additional to any deficit that we now have. If Labour had been in office and the recession had continued—I am talking about the recession in America, Germany and France, which are 833 key export markets—we would be looking at a deficit not of £50 billion but of £50 billion plus £37 billion; a deficit of at least £87 billion, approaching £100 billion.

§ Mr. Jim Cunningham

Will the hon. Gentleman give way?

§ Mr. Shaw

I shall give way to the hon. Gentleman, who no doubt wants to explain how a Labour Government would have financed such a deficit.

§ Mr. Cunningham

I shall not explain that aspect. I should have liked the hon. Gentleman to have gone on to say that the difference between the Labour party and the Government at the time of the general election was that Labour borrowing would have been used for investment, whereas the money that you have borrowed is to pay your debts. That is the fundamental difference between you and us.

§ The Second Deputy Chairman of Ways and Means (Dame Janet Fookes)

Order. I remind the hon. Gentleman that he is addressing me when he says "you", and I am not responsible.

§ Mr. Cunningham

I apologise, Dame Janet.

§ Mr. Shaw

I disagree with the hon. Gentleman because I, like many people, studied the Labour party manifesto carefully. More significantly, I made a number of interventions in the speeches of Labour Front-Bench spokesmen in the year or two before the general election asking if the commitments that they were annoucing at the Dispatch Box were firm commitments. I started to add them up on the back of an envelope and on my calculator. They were not capital commitments to invest in Britain's future. Many of them were revenue commitments to invest in more pay, more salaries and more bureaucracy. They were the sort of commitments that would have to be funded with increased borrowing. As an accountant, I know that to fund wages and salaries with borrowing is the worst sort of deficit financing.

§ Mr. Graham

I take the point that the hon. Gentleman did his sums on the back on an envelope. I am pretty sure that everyone in the Committee and in the country will agree that the Government, too, have done their sums on the back on an envelope. The hon. Gentleman has a fond interest in Scottish affairs. In Strathclyde we have lost more than 50 per cent. of our manufacturing jobs since 1979–166,000 jobs. The Labour party planned an investment and training programme. That was what part of the sum was intended for. That was welcomed by the people of Scotland and, I am sure, by the people of Britain who wanted Scotland once again to be the engine of recovery. The £36 billion of public sector borrowing would clearly have been welcomed. It would have provided a basis from which to build on in the future and we might not have had this recession, which has clearly been created by the Government.

§ The Second Deputy Chairman

Order. The hon. Gentleman's intervention is becoming a speech.

§ Mr. Shaw

I recognise the hon. Gentleman's contribution. As he rightly says, I have a great interest in Scotland and some Scottish affairs. I am sure that he will recall that under Labour, between 1974 and 1979, not just 834 in Scotland but in the country as a whole, manufacturing output fell and we had a record number of industrial disputes and a major problem in getting enough investment in British manufacturing.

Yesterday, the Select Committee on Social Security heard from managers of the British Coal pension fund about its problems. It was notable that the deficits from the fund's investments occurred under a Labour Government who made generous contributions to compensate. The surpluses that have improved pensioners' benefits have come since the Conservative Government have been in office. Those surpluses have been earned from the success of British busin