§ [Relevant documents: The Third Report of Session 1997–98 from the Social Security Committee, on Tax and Benefits: Pre-Budget Report (HC 423), and the First Report of Session 1997–98 from the Environmental Audit Committee, on the Pre-Budget Report (HC 547).]4.42 pm
§ The President of the Board of Trade and Secretary of State for Trade and Industry (Mrs. Margaret Beckett)
It is both a great pleasure and an honour to open the final day of debate on this, the first full Budget of the new Labour Government: a Budget that starts to shape our future; a Budget that is radical and reforming. It begins to heal the divisions in our society and to tackle the weaknesses in our economy—a bold Budget from a Government who, I remind the House, have held office for less than a year.
We came to office pledged to promote economic stability and sound economic management, to restore our public finances and to repair our damaged and divided country. This Budget makes further progress on all those aims. The announcement of a long-term framework for business taxation, following the steps last July to place interest rates in the hands of the Bank of England, contributes to the economic and policy stability that helps British business to plan ahead and which business called on us, when we were in opposition, to promote should we become the Government.
As we have been in office for less than a year, we must remind ourselves and the country of what led the business community to make that universal and heartfelt plea. I refer of course to the economic legacy of the Tory party. Business failures reached all-time highs; more than 24,000 businesses went bust in 1992 alone. Manufacturing investment was at an all-time low. For the first time ever, 42 we had a manufacturing trade deficit. Interest rates soared to a peak of 15 per cent., and inflation was in double figures. Hundreds of thousands of homes were repossessed, and millions were condemned to a lifetime of hopeless unemployment.
What about the public finances? National debt doubled under the Government led by the right hon. Member for Huntingdon (Mr. Major), with interest alone costing income tax payers about £1,000 a year. This was the burden that we were all forced to carry because of the sheer incompetence of that Tory Administration. When we came to power, the Tories were spending far more repaying the interest on their debts—the cost of their failure—than they were investing in our schools.
All week, the Conservatives have been boasting of what they claim is our golden legacy—but what about their golden dowry? They ran up all these debts despite having the full benefit of the biggest windfall gain in our long history. To them and them alone fell the full bounty of North sea oil—£139 billion at today's prices. That was on top of income from privatisations that yielded further billions for the Exchequer. From those two sources alone, the Conservative party had well in excess of £200 billion at today's prices—approaching £30 million every single day for 18 years. What should have been a great opportunity to invest in all our futures and prepare for the next century was instead frittered away on incompetence and dogma.
So much for the idea that the Tories are the party that knows how to run a tight ship. One would think that they would learn from their mistakes—to say nothing of the verdict of the British people on those mistakes—but the same blithe indifference and ignorance still apply. The same rhetoric is deployed about the wickedness of the minimum wage or the social chapter, as if the British people had rejected, not endorsed, those policies.
The same sleight of hand is displayed in the Tory pretence that we are breaching policy promises which in fact exist only in the fevered imaginations of Conservative Members. In this vein, the Leader of the Opposition claimed to be quoting me when I was attacking certain Tory proposals in 1988 as being the same as the measures in this Budget—when almost the only thing they have in common is the use of the word "credit".
§ Mr. John Redwood (Wokingham)
Does the right hon. Lady think that DM3.06 to the pound is a good rate for British industry? Does she fear that it will mean big reductions in exports, a big surge in imports and a lot of factory closures?
§ Mrs. Beckett
I am glad that the right hon. Gentleman raised that matter. I shall come to interest rates and the exchange rate later on. I am looking forward today to hearing from the right hon. Gentleman what the Conservative party proposes that the Government should do—
§ Mrs. Beckett
I am very pleased to see that. We hope to hear a great deal from the right hon. Gentleman about the policies that his party now supports—because there have been some abrupt and rather surprising changes. When we introduced the competition and spectrum 43 pricing Bills, the right hon. Gentleman attacked policies that his party had broadly supported before the election. That must have come as a surprise to the Leader of the Opposition. Before I had even begun discussions with Jaguar over Government support for a new project, the right hon. Gentleman put the jobs of thousands in Halewood at risk by attempting a crass bit of interference in the negotiations. That, too, was rather awkward for the Leader of the Opposition.
Then there was the debacle over Chancellor Kohl, which would be almost hysterical were it not so serious. A senior member of Her Majesty's Opposition managed to insult both the City of London and the Chancellor of Germany, one of Britain's most important trading partners, in one fell swoop. This time, the Leader of the Opposition had had enough and hauled the right hon. Gentleman publicly over the coals—sorry about the pun. Now there seems to be a public tug of war about economic and monetary union, and whether policy on it will or will not be softened.
Today, in a fascinating article in The Times—it reads a little as if written by Conservative central office, as if preparing the ground for a policy U-turn—the right hon. Gentleman does at last observe that there will be a cost to staying out of EMU. He says that, when dealing with continental companies,The British company has to take the exchange rate risk as the pound will continue to fluctuate against the euro".As I understand it, the right hon. Gentleman will have our companies facing that type of cost for ever, on principle, which does not seem to be in the interests of British business.
The article says:The compulsory introduction of the euro in some European countries may change some business views of the balance of advantages and disadvantages of a European currency".I hope that the right hon. Gentleman intends during his remarks to explain whether, as it appears, his position on that is changing.
While the Opposition are ditching many of the policies on which they fought the most recent general election, we in government are working to deliver on our proposals, despite, not with the benefit of, their legacy. Make no mistake: whatever they say now, and however glowingly they paint the picture, we inherited what was, in many ways, a shambles. We inherited a health service burdened by bureaucracy while struggling to care for the sick, an education system that was failing our children, and an economy with fresh inflationary pressures after years of opportunistic manipulation for short-term political advantage.
When one inherits a mess, it takes time to sort it out, especially after 18 years; but from day one, the Government have been delivering on our promises. We are delivering a new deal for young people, funded by the tax on the windfall gains of the privatised utilities, opposed by both the largest Opposition parties. That new deal is up and running already in pathfinder projects, and will go nationwide before our first year in office is over.
A Low Pay Commission was established, and had its first meeting within 100 days of our taking office. The National Minimum Wage Bill is already through the House of Commons, and the wage should be in place next year.
44 We are providing more resources for health and education; we have provided £3.8 billion already.
Ours is an impressive record of delivery on our pledges. Moreover, let us not forget that not one bit of it would have been done by the Conservative party or by those on its Back or Front Benches. Now we have—
§ Mr. Deputy Speaker (Mr. Michael Lord)
Order. Someone has an electrical device that is going off. I am sure that hon. Members are aware that Madam Speaker takes a very dim view of that.
§ Mrs. Beckett
No, I am not prepared to speculate about what the recommendations of the Low Pay Commission will be. We set it up as an independent body to do its own research and come to a view and make recommendations, and those recommendations will be before the House and the right hon. Member for Wokingham (Mr. Redwood) in the not too distant future.
In this Budget, building on the one delivered in July 1997, we are taking the implementation of our pledges further forward for families, for the health service and education, and for the economy.
§ Mrs. Beckett
I shall continue a little further if I may.
This is a Budget for the long term. It moves us still further from that legacy of short-termism, boom and bust and under-investment. Under the previous Administration, Britain's record of economic instability was one of the worst among the G7 countries. Under the previous Government, Britain suffered the two deepest and longest recessions since the war, separated only by an unsustainable boom. How could industry take a long-term decision when it did not know what to expect from week to week? We are creating a macro-economic framework for long-term stability and investment, giving our companies, at long last, the opportunity to thrive.
We are not only giving the Bank of England a key role in controlling inflation, but working to follow the golden rule that Government borrow only to invest over the economic cycle—a principle of sound public finances that the Tories never even had the vision to contemplate. Moreover, we have launched the code for fiscal stability, which will be given statutory basis in the Finance Bill. That code sets out the requirement for an open, transparent and accountable approach to managing the public finances, which will ensure that fiscal policy continues to be set in Britain's long-term interests.
We have sought to promote stability in tax policy, too.
§ Mrs. Beckett
No. We did not give the pledge to which the hon. Gentleman refers. We said very specifically that 45 we would not raise—[Interruption.] Yes, I have read the record. I am very well aware of what we said, and I have no illusion about what it was. We were very clear and careful in what we said and what we promised. We promised not to raise either the standard rate or the higher rate of income tax. We promised to cut VAT on fuel, as we have done, and we promised—
§ Mrs. Beckett
No. We were most careful to say on all occasions that of course no Government could rule out making other changes, in various tax allowances and so on. We were determined not to repeat the crass errors of the Conservative party in telling the British people a pack of lies and then complaining when they came home to roost.
§ Mr. David Ruffley (Bury St. Edmunds)
Why is it that, on 20 January 1997, the present Chancellor of the Exchequer said on "Newsnight":It is my aim to get the burden down for ordinary people",yet he has increased taxes across the board, which impacts directly and indirectly on such ordinary people? What is the right hon. Lady's answer to that?
§ Mrs. Beckett
I could not quite hear all of the end of the hon. Gentleman's remarks, but I can say to him that, as he pointed out, my right hon. Friend the Chancellor made it clear that he wanted to make people on low incomes better off, and that is precisely what we are already doing in this Budget.
§ Mr. John Bercow (Buckingham)
Is the right hon. Lady saying that the statement by the then Leader of the Opposition, reported on 21 September 1996 in the Financial Times, thatWe have no plans to increase tax at all",is untrue? Is she saying that the Financial Times has given credence to an untruth?
§ Mrs. Beckett
My right hon. Friend was being asked about personal taxation. Of course—[Interruption.] What we said about tax before the general election was clear, and the British people completely understood it. We made it absolutely clear that we would not change the rates of income tax. We also made it clear that we would have a windfall tax on the privatised utilities. We made it plain that we would cut VAT on fuel.
§ Mrs. Beckett
No one believes any of this nonsense from the Conservative party, for the simple reason—
§ Mrs. Beckett
Yes, I am looking at the facts. No one believes what the Conservatives say, for the simple reason that what they say now about our proposals is as inaccurate as what they said about their own before the 1992 general election.
46 We have sought to promote stability in tax policy, too. We undertook a major review—
§ Mrs. Beckett
I am sorry; I have finished with that point.
We undertook a major review of company taxation and have already introduced reforms that remove the disincentive to invest for the future—the implicit incentive, instead, to pay dividends. By abolishing advance corporation tax, we have simplified company taxes and removed the distortions that affected our international companies.
We have heeded the comments of the business community and excluded all small and medium-sized companies—those with profits below £1.5 million—from the obligation to pay corporation tax by instalments. The main rate of corporation tax will be 30 per cent. and there will be a small companies rate of 20 per cent. Those are the lowest rates since the tax was introduced in 1965— 3 per cent. lower than they were under the Conservative party, and with the lowest main rate of any major country. Once the package is fully in place—
§ Mr. Redwood
To clarify matters for the House, can the right hon. Lady confirm that the Red Books for this and the previous Budget make it clear that, during this Parliament, there will be an increase in business taxation, including utilities tax, of £25,000 million? That is the Treasury figure. Can she confirm it?
§ Mrs. Beckett
I am not familiar with the final figure that the right hon. Gentleman gives, but I am well aware that we are proposing a package of changes in corporate taxation. That package of changes, as I am sure the right hon. Gentleman is well aware—[Interruption.] Ah; the right hon. Gentleman is including the windfall tax; that is why the figure that he gives is different from that given by most others. All I can say to the right hon. Gentleman is that we are indeed introducing a full package of changes in corporate taxation, which will make the tax system simpler and more stable, and which will encourage investment and long-term development. That is what the Government wish to achieve.
As I said, once the package is fully in place, companies will pay £1.5 billion a year less in tax. Overall, the reform of corporate taxation in this Budget is worth £9 billion to business in present value terms. We have given a commitment not to increase corporation tax rates for the lifetime of this Parliament. That is all excellent news for businesses, and it was welcomed by them. Jeremy Peat of the Royal Bank of Scotland said:The promise of a stable corporation tax framework and lower tax rates and enhanced reliefs for small and medium-sized companies … are all moves in the right direction.With the low rates of tax that we shall have in place from April 1999, a business with profits of £500,000 a year will pay £15,000 less in corporation tax than it paid under the previous Government.
Small and medium-sized enterprises that pay dividends will gain a cash-flow advantage of about £1 billion from the abolition of ACT. Small firms will also benefit from 47 accelerated capital allowances for at least another year. As a result, they will pay £300 million less in tax in 1999–2000 and 2000–01. For a typical small company investing about £100,000 in the coming financial year, that will mean £3,150 less in tax for that year.
Because this is a Budget for entrepreneurs, more people with great ideas for business opportunities will be able to turn those ideas into action. Capital gains tax will now encourage investment and enterprise, with a new effective rate of 10 per cent. or less on long-term gains on business assets. Important changes to the enterprise investment scheme and capital gains tax reinvestment relief will stimulate the provision of equity finance for smaller, higher-risk trading companies. That is an important set of fiscal changes for small firms, but we have done more.
For many small firms, the administration associated with paying tax can be very costly. That is why we have announced a new payroll assistance scheme provided by the Inland Revenue and the Contributions Agency. The service will provide one-to-one help for new employers getting to grips with tax, national insurance and benefits. By making it easier and cheaper for small businesses to take on their first employee, it will reduce one of the major barriers to setting up and running a business. It is a straightforward, practical change that should have been made long ago, but the previous Government—who claimed so loudly to be the champion of small business— failed to act in this instance, as in so many other instances.
§ Mr. Bercow
I am most grateful to the Minister for her courtesy in giving way. Will she take this opportunity to confirm to the House that small companies, many of which are technology or knowledge-based and employ highly paid staff, will face a bigger national insurance burden as a result of this Budget—yes or no?
§ Mrs. Beckett
Overall, small businesses will benefit from this Budget—as I am sure the hon. Gentleman is perfectly well aware. The changes that my right hon. Friend the Chancellor has made to national insurance contributions alongside the changes to corporation tax and all the other issues to which I have referred will mean a benefit to small business. That is why small businesses have welcomed the Budget—and obviously the hon. Gentleman wishes that they had not.
Small and medium-sized enterprises are the bedrock of the future growth in jobs and investment upon which we, as a nation, depend. A vibrant SME sector is quite simply vital to the future competitiveness of Britain, and tax changes and simplified regulation can help to promote enterprise.
§ Mr. Malcolm Bruce (Gordon)
The Minister is making a very good point about the need to encourage small and medium-sized businesses. Does she acknowledge that, although the operators in the North sea are large multinational companies, many businesses that supply and service those industries are small and medium-sized? Does she agree that an adverse change in the regime when oil prices are at an all-time low could threaten both the home market and export opportunities for those businesses?
§ Mrs. Beckett
Those small businesses, like others, will benefit from the overall package in the Budget. The hon. 48 Gentleman makes a different point about the review of taxation in the North sea. He is well aware that my right hon. Friend is continuing to examine that matter. My right hon. Friend has heard the hon. Gentleman, and we shall have his observations at the back of our minds when we consider the overall regime for the North sea.
§ Mrs. Beckett
I have given way once to the hon. Gentleman and I am beginning to be concerned about time. If he does not mind, I shall make a little more progress.
Those changes are only part of our aim to create a more entrepreneurial culture—a culture in which those who succeed in enterprise are praised and where failure does not stop people trying again. Risk taking, innovation and taking a long-term view are crucial elements of a successful economy today, and we want to encourage them. The tax measures and the initiatives to support entrepreneurs will help to create a more enterprising Britain. Other actions that we have taken in my Department—from the new Competition Bill, to a major review of corporate governance and company law, to an important shake-up of the foresight process—are part of our drive to foster an innovative economy.
This Budget, too, will support innovation and research and development. It is increasingly recognised in the business community that innovation must be a continual process, taking place throughout the economy and involving every business and every employee. All types of innovative activities have a role to play, but there is an increasing premium on the successful exploitation of new technology—something that the previous Government either did not understand or did not seem to care about.
Again, the previous Government's legacy speaks for itself. Total expenditure on research and development as a proportion of gross domestic product has fallen to below 2 per cent. for the first time in many years. The United Kingdom now ranks fifth among the G7 countries in terms of total business enterprise R and D, down from third in 1981. The latest figures released yesterday suggest that, in 1996, civil R and D spending fell as a proportion of GDP. Our R and D scoreboard shows that larger United Kingdom firms spend significantly less on R and D than their overseas counterparts. Fewer than half of all manufacturing SMEs employ qualified scientists and engineers.
The Government are determined to improve Britain's investment in research and development—of course, that is not exactly the same as innovation, but it is an important component. The framework that we have put in place to promote stability and long-termism is the seedbed upon which innovation can bloom. With the Budget papers, my right hon. Friend the Chancellor and I have launched a national consultation—in a document entitled "Innovating for the Future—Investing in R&D"—on how we can improve our R and D performance.
It will be a wide-ranging review. It will cover all aspects of the business environment that affect R and D, including sources of finance, the accounting treatment of intangible assets, the rules protecting intellectual property, how management affects firms' propensity to innovate, and access to technology. We must examine what other countries are doing in areas such as tax incentives for 49 R and D, to see whether we can apply any lessons here. We also want to ensure that our review reflects the views of business, investors, employees and outside experts, so we have announced a consultation period lasting until the end of June 1998. The results of that consultation will influence the competitiveness White Paper that I plan to publish in the autumn, as well as the preparations for the next Budget.
Our commitment to R and D and innovation also lies behind the announcement of a new university challenge fund to encourage the commercial exploitation of university research. Under that scheme—which will create £50 million in venture capital—universities will be able to compete for funding provided by the Government in partnership with the Wellcome Trust and the Gatsby Trust. Challenge winners will be expected to lever in additional funds in partnership with the private sector. The Government are also considering several other initiatives designed to promote smaller high-tech businesses, where some of the most exciting and productive R and D is carried out. For example, we are consulting on ways of attracting experienced managers to small firms through equity-based remuneration schemes. We are determined to improve the United Kingdom's performance, and this Budget marks the start.
This is a Budget for business—all business. However, when looking at the climate for British business today, we cannot and do not overlook the fact that the level of sterling—particularly against the major continental currencies—is causing difficulty and concern for some companies. Sterling has of course appreciated by much less against the dollar, so with whom one trades and in what currencies matters a great deal.
We must look at the steps taken by other countries that have faced similar problems in the past. For example, the Germans and the Japanese sought competitiveness through a drive for quality and through the pursuit of less price-sensitive markets. Those approaches lie in the hands of business, although the drive to compete on quality, high standards and high added value is part of what sharply distinguishes this Government's approach to competitiveness from the sweatshop mentality of our predecessors. Those same predecessors, now the Opposition, complain continually that there must be further action that the Government can take, and call on us to take it.
Let me at once remind the House that this Government's aim is to have a stable but competitive exchange rate. My right hon. Friend the Chancellor made it plain in his Budget speech that he understands and shares the anxieties, in particular, of exporters.
What are the steps that the Opposition are calling on the Government to take? They complain that placing interest rates in the hands of the Bank of England means that the Chancellor himself no longer decides their level. Are they planning to reverse that step—even though it has led to a drop in long-term interest rates? A comment by the right hon. Member for Wokingham in an article this weekend suggested that he did indeed think that that step should be reversed. I hope that he will tell us whether that is the case.
§ Mrs. Beckett
The hon. Gentleman will have to forgive me. I am interested in knowing the policies of right hon. and hon. Members on his Front Bench.
50 The present level of interest rates—one of the factors that will influence the exchange rate—is itself a direct result of the Conservatives' politically driven refusal to put up interest rates to tackle inflationary pressures just before the general election. The Opposition's present stance suggests that they would again take Britain on the roller-coaster of boom and bust that cost so many jobs and homes in the 1980s and early 1990s.
How else could we ease pressure on the exchange rate? Classically, by fiscal means. That means either a tight rein on public expenditure or higher taxes, or a mixture of the two. We have a tight rein on public spending—a very tight rein. Both in July and last week the Chancellor tightened the fiscal stance, and he does not believe that it needs to be tightened further.
§ Mr. Butterfill
Does the right hon. Lady accept that although the fiscal stance has been tightened a little, the tightening in the previous Budget was completely wrongly targeted, in that it attacked savings rather than attacking expenditure by the public? That is the reason for the present state of the economy.
§ Mrs. Beckett
No, my right hon. Friend did not attack savings, either in his previous Budget or in this one. As for an inadequate tightening of the public finances, I think that 2 per cent. of GDP is an extremely adequate tightening of the public finances.
If the Opposition think that the fiscal stance with regard to public expenditure should be tightened more, as the hon. Gentleman has just implied, that presumably means that they oppose the extra priority that we have given to health and education, the release of capital receipts for house building and repair, the new involvement in transport, the help to pensioners for heating bills and the help for families.
§ Mrs. Beckett
The hon. Gentleman shakes his head. Although he says that we should be doing more to tighten the fiscal stance, when it comes to saying what we should not be doing, he is silent.
What about taxes? The Opposition have made many claims that we are increasing tax on business, but they oppose all those taxes, so what are they calling for— higher VAT? We know that they wanted 17.5 per cent. VAT on fuel, and were embarrassingly defeated following a revolt among their own Back Benchers, among others.
The shadow Secretary of State, the right hon. Member for Wokingham, wrote in an article in The Birmingham Post on 20 March that we hadan overheating consumer side of the economy… Labour talk about 'hard choices', but they don't make them.I look forward to hearing from the right hon. Gentleman how he proposes that pressure on consumption should be tightened.
Are the Conservatives seeking higher personal taxation, or just less for education, health, welfare or transport? It is hard to avoid the conclusion that they are in opposition just as they were in government—incompetent, short-sighted and irresponsible. Neither their policies nor their numbers added up then, and they clearly do not now.
§ Mr. Kenneth Clarke (Rushcliffe)
The right hon. Lady says that we were politically irresponsible. Our measures 51 are producing an inflation rate of 2.6 per cent. She says of the present strong exchange rate that it is entirely a matter for the Governor of the Bank of England, but does she not accept that the exchange rate will not begin to ease until the markets expect that the next movement of interest rates will be downwards? Does she further accept that the narrative that she has just given explains why the Chancellor's fiscal policy will do absolutely nothing to create the climate in which that movement might begin? The Chancellor has raised taxes on business and on savings, and he has done so for populist reasons, because as she has just revealed, the Government think that short-term political reasons rule out taking any other step.
§ Mrs. Beckett
For the right hon. and learned Gentleman to complain about people taking decisions for short-term political reasons is truly a case of the pot attempting to call the kettle black. Everything that he has said about the present position in the economy is certainly not due to the inheritance that he left us, which left the country in a position of some instability. My right hon. Friend is taking steps to redress that, and those steps will, I believe, work in the longer term.
By promoting stability and enterprise, the Budget helps to underpin the three pillars upon which our future competitiveness is based: strong markets, modern companies and an enterprising nation. Open and fair markets are good for business as well as for the consumer. Bad regulation should not hold them back. The Budget cuts the burden of red tape on large and small firms, freeing them to compete and to prosper.
By simplifying tax, reducing compliance costs and recognising the importance of R and D and innovation, the Budget works to build a framework in which innovative modern companies can emerge. It is an important step to creating an enterprising nation that encourages entrepreneurs, backs good ideas and is alive to the opportunities of the future.
It is also a Budget built on partnership. An important element in that partnership is that we have a Budget combining fairness with economic efficiency, a Budget that is alive to business needs and to the new challenges and opportunities that business faces. That is how it has been received.
Dr. Andrew Sentence of BA called the Budget "cautious and responsible." The British Chambers of Commerce said that it wasa valuable Budget for enterprise and employment.Even Tim Congdon of Lombard Street Research said:On balance this is an impressive Budget. If the Chancellor continues in this mode, Britain will have a strong economy in the early years of the next century.Above all, it is a Budget for a new nation—a new Britain. It delivers a great deal for those out of work, and it moves us to a position where work pays. Taken together with the minimum wage, it will transform the prospects for many families in or at present out of work. It transforms the prospects of mothers who have not been able to work because of the lack of affordable child care; they will have increased opportunities to take work.
52 The Budget makes it easier—and cheaper—for firms to take on more employees, especially for smaller firms. The improvements to national insurance will be a great boost to them.
§ Mrs. Beckett
I am sorry—I am almost finished.
As the Forum of Private Business commented:Cutting the cost through cutting employers national insurance on the lowest paid workers is a good way of encouraging small firms to take people on.This Budget is ambitious because we are ambitious for Britain. It had a widespread welcome. The Confederation of British Industry welcomed it, saying that it wasencouraged by the overall fiscal balance and the prudent approach to public spending together with the continued control of public borrowing.However, there was one endorsement that I found particularly interesting. I thought that in view of the keen interest of the right hon. Member for Wokingham in all things German, he might like to be reminded of some of the comments of the German press.
Bild Zeitung, the largest-circulation paper in Europe, in an editorial on the UK Budget headed "Great!", commented:Britain was in the lead when industrialisation began. Germany took a hundred years to catch up. Now the British are dashing away again.Handelsblatt described it as a "complete success".
A good press is always nice, but what matters is not what newspapers or pundits say a few days after a Budget. It is whether our strategy improves Britain's competitiveness in the long term that really counts, and whether we use the fruits of that success to build a fairer and better country.
This is a Budget for a new nation—a nation that fosters ambition and enterprise at the same time as valuing fairness; a nation that is as innovating as it is caring; a nation where each of us works for the good of all. It is a Budget to stimulate and support all who are ambitious for our country and ambitious for themselves and their families. It is the Budget that Britain needs.
§ Mr. John Redwood (Wokingham)
New speech writer, new Labour, but I think that we need a change of script. Three deutschmarks six pfennigs to the pound; that is the truth today as we meet to debate the plight of manufacturing industry. The Chancellor's policy is hurting, but it certainly is not working. Week by week, we see imports up, sterling up and consumer spending up. Week by week, we see exports down, manufacturing output down and savings down. That is the very opposite of what the Chancellor sought when he was in opposition, full of good ideas but with no responsibilities.
The Chancellor's forecast shows us that there will be much more of the same gloomy outturn. He states in his Red Book that, over the year ahead, imports will surge; I fear that the right hon. Gentleman is right. He tells us that exports will come under pressure; again, I fear that he is right. He says that manufacturing industry will come under severe pressure from a strong pound; he is 53 undoubtedly right. The right hon. Gentleman tells us that savings will fall and that consumer spending will continue to increase.
What does the President of the Board of Trade and Secretary of State for Trade and Industry tell us about all this? She says that business should be grateful because there is a long-term framework for business taxation. Well, business has stability in the plans for ever-higher business taxes. I see no reason for gratitude when business will have to pay so much more over the next three years of this Labour Government.
The right hon. Lady then tells us that we should feel grateful because there is a long-term framework for monetary policy and sterling. That, she says, is bringing stability. The stability which it is bringing so far is that day by day, week by week, the value of sterling goes up against the currencies of some of our major competitors on the continent, making it extremely difficult—ever more difficult—for exporters. The right hon. Lady then tells us—
§ The Minister for Science, Energy and Industry (Mr. John Battle)
What would the Opposition do?
§ Mr. Redwood
The Minister wants to know what we, the Opposition, would do in power. I shall tell him in a moment. I wish first to finish my analysis of the President of the Board of Trade's extraordinary statement that the long-term framework is to be welcomed and that it is delivering stability. It is not delivering stability and it is certainly not welcome to manufacturers.
There is no stability in the exchange rate. The right hon. Lady should watch it: the rate is going up day by day. She should understand that, as a result, business cannot adjust at the necessary pace. The right hon. Lady tells manufacturing business, which has done a great deal to raise its productivity and efficiency over many years, that it must now keep up with a devaluation of the deutschmark and the franc of one third over a period of 18 months. Good, efficient businesses cannot achieve that pace of adjustment in that short a time frame because they were already trying extremely hard to make good products at a commercial price. The right hon. Lady should understand that things are not well.
The Government ask the Opposition for ideas on how they could get out of a mess of their own creating. The Opposition are not short of ideas on how pressures could be alleviated or removed. I shall give the impatient President of the Board of Trade and the Chancellor of the Exchequer the benefit of our advice. First, the Chancellor should promote savings; he should not undermine them. When there is a danger that a consumer boom will get out of control, the right hon. Gentleman should be encouraging people to save rather than to spend. Instead, he threatens to remove the tax relief from personal equity plans and tax-exempt special savings accounts. He makes a modest U-turn, but he leaves a system of savings taxation less favourable than the one he found, instead of making it more generous, which would have been the right response at this stage of the cycle.
More important, the Chancellor completely undermines pension saving by a huge, swingeing tax on people's pension prudence. That is a great disincentive for more people to come out of a state pension scheme to set up their own savings funds for their retirement. The Chancellor should be promoting saving for retirement now, not undermining it.
54 Next, the Chancellor should remove the burden of extra taxes on manufacturing businesses, which will bear the brunt of many of the taxes in his two Budgets to date. They will pay the bulk of the huge sum that I mentioned in my exchanges with the President of the Board of Trade. I noticed that she did not deny the figure that I put into the record—the £25,000 million of additional taxation that is the result, for this Parliament, of the Chancellor's Budget efforts so far. We have the impact on business of the windfall tax, the pensions tax, corporation tax changes and all the other back-door stealth taxes by which the right hon. Gentleman is hitting business activity and motoring.
§ Mr. Butterfill
Will my right hon. Friend confirm that the Red Book shows not merely that our taxes are increasing but that the proportion of gross domestic product taken in taxes—that is the important factor—will rise every year for the lifetime of this Parliament?
§ Mr. Redwood
That is right. My hon. Friend makes an extremely powerful point. We have a Chancellor who is out to tax people heavily, especially business. I notice that there is silence from on the Government Front Bench, because they know that what we say is true. The figures are in the Red Book. We have not invented them; those we have extracted them from a rather complicated document in which they were well concealed. They were there, however.
§ Mr. Ian Bruce
Has my right hon. Friend noticed that the Labour party has always said that it is against people in business who are successful subsidising the low payers? Has my right hon. Friend noticed also that national insurance changes mean that those who pay their staff good, high wages are subsidising those who pay low wages? I thought that the Labour party was against that sort of thing.
§ Mr. Redwood
My hon. Friend makes a powerful point. He might discover that there is a division of opinion between the President of the Board of Trade and her Department of Trade and Industry Ministers on the one hand and the Chancellor on the other. The Chancellor is trying to make it cheaper to employ people on lower income levels, whereas the President of the Board of Trade and her colleagues are trying to make it dearer. That is the purpose of the national minimum wage and the likely pay awards which will result. I shall come to that tension a little later.
§ Mr. Clive Soley (Ealing, Acton and Shepherd's Bush)
In the event of a future Conservative Government, would the right hon. Gentleman repeal our national minimum wage legislation?
§ Mr. Redwood
I have often been asked that question. Labour Members will have to restrain their impatience. My right hon. and hon. Friends and I will come to a decision nearer the time when we write our manifesto, on which of the many bad and damaging Government measures we are able to offer immediate relief. It would be foolish to set out now which of the large list of measures that we would like to repeal we shall definitely be able to repeal. We shall take a sensible judgment at the time. In the meantime, we shall offer strong opposition to the items that we think are wrong, in the hope that the 55 Government, which have about another three years ahead of them before we hope to displace them, will listen to our arguments in the interests of better national success.
It is a great pity that the Chancellor did not work out last year in his first Budget the consequences for manufacturing. I warned then, with my right hon. Friends, that manufacturers and savers would take the hit of his first Budget. Now the damage is becoming visible even to the Treasury when we read the small print in the Red Book.
Earlier this week, I was passed comments from the British Leather Confederation. It set out what this Budget and the previous one mean to a manufacturing sector. It is one of many that I could have chosen. I am told in the confederation's communication that, in the past six months, two of the largest tanneries in the United Kingdom have closed. Even the most successful companies in the industry have been losing export business and shedding labour.
Another example which is given in the letter is that one tannery had more than 70 per cent. of its output exported, but that had been slashed to 30 per cent. and might well fall further. Those are the difficulties faced by individual industries.
§ Mr. Austin Mitchell (Great Grimsby)
The right hon. Gentleman may well go on about tanning, after the way in which the Conservative party was tanned last year.
The right hon. Gentleman is not dealing with the point that he raised at the opening of his speech, which is that the pound is overvalued. None of the piddling measures that he has given us will have any effect on the valuation of sterling. Will he tell us what he would do to get the pound down? What was the advice that he gave to the then Government from 1979 to 1982 and from 1989 to 1992, when we were in a similar situation?
§ Mr. Redwood
I was not a great fan of the exchange rate mechanism in the latter period to which the hon. Gentleman referred. I was much in favour of the then Chancellor intervening and securing lower interest rates at that stage because of the damage that the then rates were undoubtedly doing. We learned from that experience. The policy was recommended by the Labour party in opposition as well as by my right hon. Friends. We hoped that this Government might have learnt from it as well.
A collective decision was taken by the House, with the Labour and Liberal parties in full support. It is— [Interruption.] The Chancellor laughs. We are talking about the only economic policy that the Conservative Government followed that the right hon. Gentleman supported. He supported ERM and therefore must have had some responsibilities for the consequences. It was a good example of how at that point it would have been better to have left earlier, and to have had lower interest rates earlier, to avoid some of the damage.
The Chancellor is underestimating the impact of a strong policy of promoting saving. If we were successful in promoting a lot of saving, it would take some of the heat out of the economy, and the adjustment through sterling and interest rates would not have to be so strong on the manufacturing sector. He should also remember 56 that my right hon. Friends and I opposed his idea of giving away the power to settle interest rates which he thinks are correct for British manufacturing industry. That is another part of the problem.
I do not blame the Governor of the Bank of England. Given the awful Budgets that the Chancellor has announced, the Bank of England has had no choice but to increase interest rates. It would have been much better if more of the strain of adjustment had been taken in the Chancellor's Budgets instead of in interest rates. Labour Members say that that must mean higher taxes; it means higher saving. If the savings ratio were not plummeting under the Chancellor's proposals, there would not be so much strain on the exchange rate and the interest rate.
Just look at the damage forecast by the Chancellor. When the Conservatives left office in 1997, the Labour Government inherited a £4,500 million trade surplus. Their forecasts say that next year there will be a £6,500 million trade deficit. The price of Labour so far, on their numbers, is an £11,000 million plunge into the red on our trade account. When we left office, people were saving 11 per cent. of the nation's income. The Government's forecast for next year is that it will be only 9.5 per cent. The price of this Chancellor is a one-sixth reduction in savings as a proportion of national income.
Meanwhile, the President of the Board of Trade sits smugly in her grace-and-favour apartment and does nothing to stand up for British manufacturers, British exporters or British savers. When I asked her to defend the £25,000 million tax hit on British business over the lifetime of this Parliament, she had the audacity to tell me, "Well, the rate of corporation tax is down." People are not interested just in the rate of corporation tax. They want to know how much in total they will pay, and, in total, business will pay a great deal more tax because of this Chancellor.
Government figures show that business will pay £4,600 million more corporation tax as a result of the changes. I have Inland Revenue press release No. 9. It shows modest reductions to business because of the drop in the rate to 30 per cent. However, it then shows much bigger increases because of the change to instalments and the abolition of advance corporation tax. The overall net Exchequer effect is £1,000 million in 1999, £1,300 million in 2000–01, and £2,200 million— £2.2 billion—in 2001–02. That is a massive £4,600 million increase, from 1998 to 2002.
If that were not enough, there is Inland Revenue press release No. 6—one on which the Chancellor did not dwell much in his statement—about much greater taxation of company cars and car fuel.
We have Inland Revenue press release No. 12, "Taxation of Income from Property", with a £50 million one-off increase in tax. We have Inland Revenue press release No. 15, "Formal Consultation on the North Sea Fiscal Regime". Will the Chancellor promise the House today that, as a result of that review, there will be no increase in oil taxation? I shall give way to him if he wishes to confirm or deny that. The fact that the Chancellor will not intervene shows that the Government intend to up oil tax as a result of Inland Revenue press release No. 15. We then have Inland Revenue press release No. 30, which is about introducing tax on construction workers. Again, that means that more tax will be imposed.
57 Only the President of the Board of Trade could not have noticed that all that represented a series of tax rises. Can she really believe that the Chancellor has cut business tax? How does she explain the fact that business will be so much worse off following the Chancellor's Budget? Or does she wish to leave the House with a misleading impression on this matter?
Of course, Labour want the headline "Corporation Tax Rate Down", yet companies pay more. Labour wants the headline "Advance Corporation Tax Abolished". It all means that companies will pay more corporation tax as a result of the Budget.
When is a tax cut not a tax cut? When it comes from the present Chancellor. It was a miserable Budget. It was a miserable speech delivered in a miserable voice for a miserable purpose: taxing, taxing and taxing again. When the Chancellor was in opposition, he was Mr. Post-neo-classical-endogenous-growth-theory. We all loved that one and would like him to play it again. Now that he is in government, he might still be endogenous, but he is forgetting the growth. We now see endogenous mess theory.
I have not always thought that Matthew Parris observed things entirely accurately, but I was in total agreement with him when he said, after the Budget:Tony Blairlookedso dreadful… Sallow and drawn, his face puckered by anxiety and a cartoon frown".It is no wonder the Prime Minister and the Chancellor have fallen out, because the Chancellor has not lived up to his own star billing. His Budget had to be watered down by an apprehensive Prime Minister.
It was a bits-and-pieces Budget with little left alone, but little changed decisively for the better. It is true that there were a couple of welcome U-turns. I see that the Chancellor needs to be cheered up. We are delighted that he gave in over existing personal equity plans and tax-exempt special savings accounts, but he should not have mugged them in the first place. The dirty deed said then now does damage that lingers on. It puts people off saving. It makes them more worried than they should be about saving, because they can never be sure what the Government will do to their existing saving plans.
We are glad that small businesses will be let off some of the extra corporation tax that the Chancellor had planned to heap on them. They do not have to be grateful for relief from an imposition that they should never have had to face. It does not make them better off than they would have been under a Conservative Government. It just means that they have been relieved of some of the burden that other businesses have to suffer under a Labour Government. It is a great pity that the Chancellor will not do the same for bigger businesses, especially for manufacturers caught by high sterling.
The Chancellor has warned that growth will falter if wages go up too fast. I agree that there is a danger that wages going up too fast could do damage. He may be right. Why, then, is the President of the Board of Trade passing legislation to make wages go up faster? Why can the two of them not agree a rate now, in a democratic and civil way, and tell the House before the legislation is completed? It is most extraordinary to put a measure through both Houses recommending a minimum wage and 58 not tell anyone in the House of Commons or the other place what that minimum rate will be. That rate will have huge consequences for the Chancellor's Budget and for the cost of public services and public borrowing. As the Chancellor himself admits, it will have big consequences in due course for the rate of growth and inflation—but he and the President of the Board of Trade cannot agree the rate, so we all have to wait while they sort out their disagreements.
The Chancellor's views are clear. We read in the press, courtesy of his spin doctor, that he wants a low rate, probably below £3.50 an hour. In the Red Book he says clearly:Responsible pay bargaining, combined with the Government's welfare to work measures, would allow faster growth and higher levels of employment over the next few years.I welcome that statement. It shows that the Chancellor has understood that, if the Government boost wages too much, even for the best of reasons, it will be destructive of the very jobs that they need to give hope to people with few skills, and the younger people who need jobs. It would be a cruel policy. Yet the Chancellor cannot persuade his colleagues in the Cabinet to come straight out with a sensible rate from his point of view and end the tension around the Cabinet table.
§ Mr. Butterfill
Would it not also be profoundly inflationary, thereby ensuring that interest rates would have to remain high, and the pound would remain uncompetitive?
§ Mr. Redwood
It would certainly mean that interest rates would have to remain high or go higher if the Government lose control of wage settlements. I am sure that, privately, the Chancellor is apprehensive about that. It is important, therefore, that he gets some sense into his colleagues over their wages policy.
§ Mr. Bercow
My right hon. Friend just informed us of the Chancellor's view about the potentially damaging impact of a high minimum wage. Is my right hon. Friend aware that the Chancellor's view is in conflict with that of the Minister of State, Department of Trade and Industry, the hon. Member for Makerfield (Mr. McCartney), whose McCartney curve tells us that a higher minimum wage is good for the economy because it will boost consumer expenditure? Is that another example of the splits in the Government?
§ Mr. Redwood
My hon. Friend has put his finger on an important point. His example also shows a breakdown of collective responsibility. On this occasion, the Chancellor is right. He is clearly the senior Minister in the argument; he should instruct the Minister of State that the official Government line is that higher wage settlements are unhelpful, and that a realistic minimum wage is crucial to the attempt to retain some control over wage settlements.
If the President of the Board of Trade introduces a minimum wage that really does lift wages at the bottom, everyone will want a pay rise to protect differentials. I hear that members of the Cabinet, including the right hon. Lady, wish to retain their differentials over junior Ministers. If people on £100,000-a-year packages want to keep their differentials over others who are fairly well paid, surely people on £15,000 or £20,000 a year will 59 want the same, and they will have a better case. The Chancellor must be very worried that he will have to face not just the cost of rises at the bottom of the income scale, but the understandable request of many higher up the income scale for a similar percentage increase in their pay, with all the consequences that he identified.
Both the Chancellor and the Prime Minister say that we need flexible labour markets to compete successfully. The Confederation of British Industry agrees, and, again, I find myself in agreement with the Chancellor. Why, then, is the President of the Board of Trade doing all that she can to make our labour markets less flexible? When will she make up her mind about compulsory union recognition? Will she give in to the union bosses, and say that 50 per cent. of those voting should decide the issue, or will she be more cautious and leave it at 50 per cent. of the work force?
It will be a defining moment for the right hon. Lady when her left-wing friends discover whether there is any of the old crusader remaining in her, or whether she is selling out. Her silence again today on that crucial issue speaks volumes about her unhappiness in this Government of the spin doctors, by the spin doctors, for the spin doctors.
The Chancellor, the great meddler, is en route to becoming the great betrayer. When his party was in opposition, he huddled in the House of Commons Library, ransacking the statistics for any bad figure that he could alight on. That would make his day: it was being so miserable that kept him going. It is normal for Ministers to whistle a happy tune, even if they are whistling in the dark. Now, it seems, this dour Chancellor sits in the Treasury, out of sight, still dissecting every statistic and, like Jeremiah, rubbing his hands at every piece of bad news.
The Chancellor warns us that, if we drink, it is bad for us, so he will tax it. He warns us that, if we drive, it is bad for the environment, so he will tax it. He tells us that, if we save for the future, it is bad for social justice, so he will tax it. He tells businesses that, if they make profits, it is bad for inflation, so he taxes that too.
Of course all Governments must impose some taxes, but sensible Governments do not enjoy imposing them. The only point at which the Chancellor cheered up during my speech was when I was talking about higher taxes: he obviously gets a kick out of them. Nor do a sensible Government moralise over every tax that they do impose. This Government like taxing. They enjoy the sense of power that it gives them. They would tax more and more if they thought that they could get away with it, and they use taxes to meddle endlessly in our lives and those of our businesses.
Even when it comes to reforming welfare, it is industry that is asked to do the work. I do not believe that business can cope easily with working out and implementing family tax credits. People in hard-pressed companies do not want to become a different kind of Child Support Agency, and to make all the inquiries that they would need to make to meet the Chancellor's requirements.
The bottom line of this Budget, added to the Government's first Budget, is that we are all worse off. Companies are much worse off; families with mortgages and cars are worse off; people relying on pension savings 60 are worse off. The typical family is more than £1,100 a year worse off following the five mortgage rate rises, the cut in mortgage interest relief at source—the Chancellor hangs his head in shame, as well he may, but this is all true—the petrol taxes that he has increased, and the pensions tax.
Less than a year ago, in that golden age, a litre of petrol cost 54.9p in a good garage. Today, it costs 65.9p, despite a big drop in the oil price. That is all the Chancellor's own work. He does not know, because he now has his tank filled on the firm, but if he had to go out and fill his own tank he would find out. He is lucky that we no longer hear about the price of a gallon, because he has put that up by a massive 40p.
I am told by those who smoke that last May a packet of 20 cigarettes cost around £2.95. Today, it costs £3.35. Again, that is all the Chancellor's own work. Today, a young person saving for a pension must put aside £120 a month, while £100 did the job last May. That is a huge increase in the cost of taking a prudent view of the future and wishing to make provision.
The Budget sandbags the farmer as well as the industrialist. Labour moves seamlessly from having high sterling to banning T-bone steaks. It is determined to destroy rural businesses. [Laughter.] I am glad that Labour Members find that amusing. The butchers to whom I have spoken do not find the ban on T-bone steaks at all amusing. It has cut away a piece of their business when they are already under pressure. Labour Members representing rural areas should listen to what businesses are saying in those areas.
What do villages say about Labour? The pharmacist fears for his business as the Competition Bill threatens to knock his prices. The butcher struggles to stay out of gaol when his customers demand beef on the bone. The newsagent wants to know if Labour Members are going to abolish the newspaper boy. The publican can get no sense out of the Department of Trade and Industry on what business he can do with the brewer under the new competition measures that the right hon. Lady proposes. The farmer whose income has already been halved faces an even grimmer year with high sterling and high petrol prices.
Country dwellers need their cars, and they are particularly hard hit by the petrol price rise. The Chancellor's £50 million sop for regional transport will do little to help. In his haste to attack car owners and manufacturers, he appears not to have understood the difference between engine size and fuel omissions, and is still in a muddle about exactly how to raise all the money that he wants. And what about the tax on new cars which was announced in a press release in January? The Leader of the House told the Opposition that it would appear in the Budget, but it has not—yet manufacturers have been told by letter that it will apply.
That is the reality of Labour government—tax by stealth; no stability, just permanent uncertainty. Then we are all meant to feel grateful because income tax rates have not gone up. Under the Conservatives, they used to come down Budget by Budget. The standard rate fell from 33p in the pound to 23p. Why should anyone feel better as a result of this Budget, which contained no such welcome change?
The exporter struggling with the pound at DM3.06 still has to struggle after the Budget, and cannot now look forward to a change of policy: he has no hope. The 61 manufacturer struggling against ever-cheaper foreign goods now knows that he must cut his operations, as the Government have nothing to offer him. The unskilled person seeking a job knows that he must hurry before the minimum wage starts to price people out of work, according to the Chancellor's own statements. The home owner knows that the five mortgage rate rises are here to stay, and that he may be in for more. The saver knows that saving for pensions will remain a dearer business. Labour is not making it better; it has made it worse. Labour is bad for business.
The media strategy of the Budget was handled better than the economic strategy. That is not good but dangerous, and people should not be taken in by the weeks of bombardment threatening every industry and individual in sight with higher taxes. They will discover that some will be spared, while some will face the ordeal of consultation before the extra taxes are imposed. There have been threats to the house building industry, threats to the sand and gravel industry, threats to the oil industry, threats to savers, threats to home owners and threats to car owners. There are to be all sorts of extra taxes, and people do not feel especially grateful that some of them have been dropped—at least temporarily—from the Chancellor's Budget strategy.
We should not feel grateful for what the Chancellor has not done; we should look at what he has done. We should remember what he said in opposition about manufacturing and the importance of industry. In a chapter of his book "Where There is Greed", entitled "Manufacture or Die", he wrote:It is our ability to produce manufactured goods and compete in our own and in world markets that is central to our industrial and economic performance".Those are fine words, but he has not lived up to any of them. The very people whom he praised in that book now bear the brunt of his Budgets and his failed strategy.
The Chancellor says that he gave the Bank of England its independence so that it would be free to control inflation, that high sterling is the Bank's problem, and that he has done his bit. He certainly has: his Budgets and his refusal to take a Chancellor's responsibility for the pound are destroying exports, manufacturing and agriculture, and damaging savings and jobs. Far from being the Chancellor for manufacturing, savings and investment, he will go down as the Chancellor who stood by as people were laid off and factories were closed. The main memory from this Budget will be of a Government who do not care about industry at all.
§ Mr. Robert Sheldon (Ashton-under-Lyne)
The right hon. Member for Wokingham (Mr. Redwood) says that we are worse off as a result of the Budget. I do not know how often he visits his constituency at weekends, but that is not the position as I see it. People think that this is not a bad Budget—they have not got everything that they wanted, but that is the nature of life. This is certainly a reforming Budget. As with all major reforms, it will take time before we are able to assess its full impact and the extent of changes to the conduct of our economic affairs.
The highlight of my right hon. Friend the Chancellor's work is undoubtedly the welfare-to-work programme. In my constituency, I have frequently met unemployed young men who live next door to houses where the 62 windows are rotten and the doors are falling off. Our inability to bring together people who want to work and jobs that need doing, and our failure to address what is being done and what needs to be done, is disgraceful.
People spend a great deal of money to go out to work. It was not always an expensive business: when the cotton industry was the mainstay in my constituency, we had one of the highest levels of working women in any industrialised country, and they did not need encouragement to work. The work was down the road, earning a living cost hardly anything, grandmothers and aunts looked after children, there were no transport costs and income tax was only for the better off. Those are now large expenditures that, together with the tax-benefit mismatch, have great disincentive effect.
Fundamental changes have been necessary for a long time. Ideally, transport costs, which are a major expense, would be tax deductible, but problems are associated with that. Child care allowance is an acknowledgement of work-related expenditure and, although I am not sure that I understand the way in which child care centres will be set up and accounted for, I applaud my right hon. Friend's determination to implement the necessary changes.
When I was at the Treasury, the replacement of child tax allowance with child benefit recognised the extra cost of raising a family and their reduced taxable capacity. We acknowledge taxable capacity to only a limited extent, such as in working tools allowance and some working clothing allowances. Income tax allowance did not benefit parents who did not pay income tax, but for once the two major parties agreed on a fundamental issue and changed tax allowance to a benefit. The Government and the Opposition reached a sensible decision together, and there was 20 years of agreement on it. I wish that such long-term agreement was more frequent: it should be the basis for everything other than a one-Administration reform that the Opposition intend to repeal. Such reforms are a disgraceful waste of time and effort and should be avoided wherever possible. Although I understand the needs of the Revenue, I support the recognition of the cost of child rearing.
The Government took office accepting that manufacturing industry faces problems, and I had hoped that they would help by improving capital allowances and making the pound competitive. Figures in the Red Book suggest that the future does not look good. The forecast growth in manufacturing output is 0 per cent. to 0.5 per cent for 1998, against an increase in gross domestic product of 2 per cent. to 2.5 per cent; 1 per cent. to 1.5 per cent. for 1999, and 2.25 per cent. to 2.5 per cent. for 2000. The conjunction of those figures with forecast balances of payments of minus £6.5 million for 1998, minus £6.75 billion for 1999 and minus £6.5 billion for 2000 shows the importance of manufacturing industry.
Manufacturing industry is important not for the number of people it employs, but for the wealth it creates and for its foreign earnings. I welcome improved capital allowances and the 40 per cent. rate, although I am sorry that we have not continued with the short-term capital allowances. I had hoped that the rate would be 60 per cent., which would have been worth while in the light of the difficulties that manufacturing industry faces with the high pound and high interest.
The right hon. Member for Wokingham must have forgotten the wanton damage that the previous Government did with their $2.40 pound and their 63 17 per cent. interest rates. I shall never forget it, because more than 30 per cent. of the firms in my constituency closed their doors in two years. Germany and Japan—indeed, every country in the world—have similar medium-tech and high-tech firms. The sacrificing of manufacturing industry on the altar of dogma was disgraceful, and the previous Government should never be forgiven for it. Current exchange rates and interest rates are nowhere near such levels, but service industries are able to ride them out, which is why GDP is still increasing respectably. Manufacturing industry has suffered most. Having given control of interest rates to the Bank of England, my right hon. Friend the Chancellor has to take account of their requirements in the running of the economy. His Budget strategy is bound to be limited by that, and he will therefore be judged not so much on demand management, as he would have been in the past, but on the important tax and other measures that he has introduced.
The quickest way to reduce unemployment is through aggregate demand, but that is not easily open to the Chancellor. However, my right hon. Friend's redistributive approach is clear, and I look forward to it featuring prominently in future decisions.
How does the Budget fit in with the forthcoming single European currency? The consequences of our self-exclusion from monetary union cause me great unease. Britain is the only major country that will not participate. Sweden, Denmark and Greece have the luxury of not joining, because they would not influence the shape of the union to any important extent, whenever they joined.
Britain is in a different position. If we had joined at the outset, we could have made an important contribution to the development of economic and monetary union. Latecomers to institutions are at a serious disadvantage in determining rules and outcomes. Sweden, Denmark and Greece would not have affected the rules, but Britain could and would have done. We have failed to join institutions at the outset again and again.
I should have wished ardently for a postponement of EMU, which is too precipitous. It will take place, and we should have placed ourselves where the action is. There may be problems with the euro. My right hon. Friend the Chancellor of the Exchequer was well received in York on Saturday. He explained what needed to change in the European Union. His advice would more likely be taken to heart if we were participating members of the single currency. The difficulties facing the participant countries are obvious. We should not underestimate the will to make changes within the European Union to deal with problems as they arise. There may be some mush and fumble, but problems will be dealt with, because member countries will not want to admit defeat and face the enormous turmoil that the collapse of the single currency would create.
We may not like some of the solutions, and I am worried that we shall not be properly involved in the initial decisions or in the subsequent changes that will affect us. Historically, we have always paid a price for our hesitancy: our voice should have been heard. We could have at least announced that we intended to join, 64 which would have given us a foot in the door. If it were known that we intended to join, we should perhaps be listened to more seriously.
The major advantages of the City of London have been affected. We have lost some of the financial services market to Frankfurt as a result of our indecision. What saddens me most is that we should have been the bridge between the United States and Europe, sharing the language of the one with the geography of the other.
We must decide on the arrangements for the pre-entry stage to membership of monetary union. Some companies have never had to operate dual currencies to anything like the extent that will soon be required. Daily euro transactions will be a major part of their business. Even the retail trade will have to cope with those changes. Some shadowing of the euro will be necessary, and I should like to be assured that the Chancellor is developing plans to deal with that.
It is clear to me that the cost of the national health service will rise faster than the rate of inflation or growth in the economy. The population is aging and, as wants are met, the health service will require increasing expenditure. The time will come when we shall have to consider private medicine, which I do not favour, or a special national health service tax.
Anyone who has served in the Treasury has a visceral feeling about hypothecation: it burns inside us. The road fund licence still casts its shadow 70 years later. An important weakness of hypothecation is that it does not take into account the changing patterns of priority and expenditure. One certain aspect of health is that demand will increase into the indefinite future. If people can see the consequences, they may be more willing to accept a national health service tax than other taxes that disappear in the vast generality of public expenditure. Despite the hostility aroused by such a proposal, it should be freshly examined, and I hope that my right hon. Friend will consider doing so.
Meanwhile, we have had the first instalment of the reforms that my right hon. Friend will continue. We look forward to his later contributions.
§ 6.3 pm
§ Mr. Kenneth Clarke (Rushcliffe)
The Chancellor's Budget speech was commendably short in length and disgracefully short on detail—to an unprecedented degree—but it was long on rhetoric. I did not totally disapprove of some of his rhetoric: my theme was always that we should have no return to boom and bust. The trouble is that the Chancellor is not quite aware of the risk he is running of a return to boom and bust; nor does he know what to do about it.
I enjoyed the Chancellor's repetition of our slogan of welfare to work. I agree with him that one of the best solutions to the problems of poverty and social exclusion is work and the opportunity of work. Unfortunately, I am not at all sure that his repackaging of our measures is wise, and his Budget will not make it easier for businesses to create jobs.
The Chancellor added some new, portentous rhetoric about being a tax reformer, and about how this was the most tax-reforming Budget for a generation. I agree with my hon. Friend the Member for Bury St. Edmunds (Mr. Ruffley), who spoke on Thursday, that this grandiloquent language was not matched by the measures it announced, which were a ragbag of tax reforms.
65 Several of my right hon. and hon. Friends have made the point that the overall effect of the Chancellor's tax changes is to continue the practice of putting a considerable burden of extra taxation on the very businesses that must create jobs if more people are to move from welfare into work. When the President of the Board of Trade explained some of these tax changes, she seemed totally oblivious to the overall upward effect they will have on the businesses for which she has departmental responsibility. She was partial in her selection of examples to illustrate the changes.
In less than one year in office, the Government have increased the burden of corporate taxation by more than £20 billion. My right hon. Friend the Member for Wokingham (Mr. Redwood) could get no denial of his figure of £25 billion; I thought that the figure was £22 billion. Whatever the figure, the President of the Board of Trade obviously does not want to intervene to rule between us. It is certainly an enormous additional burden.
Considerable change has been made to capital gains tax. It is already our most complicated tax, and the most difficult to comply with and to collect, and it will be even more complicated in future. I happen not to agree with the theory that, if people produce a given capital gain on a sum of money in two years, that is bad, and if they make the same capital gain but take 10 years doing so, that is better. I was never attracted by the taper idea, which distorts the figures and is not wholly consistent with making the best use of resources for investment. The complications that will now face any taxpayer who is so reckless as to want to go in for self-assessment, or who needs the advice of his accountant, will be bewildering.
§ Mr. Ian Bruce
I am sure that my right hon. and learned Friend was proud of the fact that capital gains relief was given to people who retire. Did he think that the Chancellor had improved the position? Has not the Chancellor decided to phase it out and to apply capital gains tax?
§ Mr. Clarke
The Chancellor has made the position less attractive for the owner-manager and people who are building up their own business: my hon. Friend makes a valid point.
Even more important are the changes made to employers' national insurance contributions. I concede that simplification is desirable in principle, because the aim of tax reform should be to make the system more simple and not more complex. However, the effect of making these changes now was brushed aside by the President of the Board Trade.
The cost of creating employment for employers whose employees are largely low paid is reduced, but the cost of providing jobs for employers whose employees are well paid—not very well paid, but on average earnings or above—is much increased. At this difficult time for many an industry, the effect will be arbitrary.
It may be good news for the retail and hotel and catering industries, and I have no objection to that. It will be extremely bad news for people who employ large numbers of professional or highly skilled staff. The total effect of the Budget on a medium-sized, high-tech business is particularly unattractive: the burden of creating jobs will be made worse, especially when the increases in corporation tax are also taken into account.
66 The way in which the Chancellor and the President of the Board of Trade explained the effect of the changes in corporation tax was disgraceful. It was an attempt to mislead the casual listener. We are constantly told that the rate of corporation tax is being reduced, but the method by which it will be collected from the bulk of British business will produce a very heavy flow from business to the Treasury.
I had understood that there was to be consultation on that issue after the green Budget in November. After the trailing of the proposal, it took about 24 hours for everybody to realise that it would bring the Treasury at least £8 billion over the lifetime of this Parliament. The response to the consultation in the Budget was one sentence, which made it clear to those who were interested—but not to anybody else, because it was tucked away—that no change of mind was taking place.
I welcome the fact that the new system of advance payments will not apply to small and medium companies, but it will be burdensome on the rest, and I think that the benefits will accrue only to those who make profits of £1.5 million or less a year. What about a company with profits of £2 million a year, which will not be a giant company? It may be a hi-tech company located in a science park of the type that I have described. Such companies are adversely affected by the Budget, and the overall effects are severe.
Disingenuous arguments are still being used. The President of the Board of Trade repeated that, when the full effects come through, which will be in about 2002 according to the Government, business will start to save about £1.5 billion a year. That assumes that the lower rates of corporation tax will continue for that time until the benefits begin to flow.
However, the commitment to the lower rates is only for the lifetime of this Parliament. The Chancellor is committed to them for as long as he needs them to sell the bogus proposition that he is helping business while raising a large sum from it. If there is a threat that the cash flow will reverse from the Treasury back to business, the Chancellor may use the latitude he has left himself to start raising business taxation.
On the basis of what he has done so far, the Chancellor is eager to raise business taxation, for entirely populist reasons. The President of the Board of Trade gave that away when she gave her list of alternatives that might upset the public if the Government resorted to them.
I will not burden the House with the argument that I used before. The Chancellor did not need to raise taxation on such a scale, because the public finances are altogether healthier than he constantly describes them. He continues to give pessimistic forecasts of the public sector borrowing requirement. As we said at the time, he gave pessimistic forecasts in November, but he will get into balance very quickly.
I agree with the policy aim of moving people from welfare dependency into work. I commend any move in that direction. I was in favour of doing what we could to improve the previous family credit system, and we introduced a generous disregard for child care to help women with obligations to provide care for their children so that they could, if they chose, take low-paid work and cease to depend on benefit. There has been an elaborate repackaging of family credit and child care allowance into the new system of the working families tax credit.
67 My hon. Friend the Member for Bury St. Edmunds worked with me on several Budgets. Anybody who is interested in the subject is aware of the system in some countries of earned income tax credits. Like so many of the Government's policies, that one has been taken from the Clinton Administration. I remain to be persuaded that the Government, who are anxious to present a policy that they could claim to have invented and to dissociate themselves from the policies of the previous Conservative Government, are wise in importing a system that is not regarded by everybody in the United States as an all-fired success.
In any event, there are big differences between the systems in America and Britain. The Americans lack two British policies. First, they do not have our system of pay-as-you-earn: everybody in America is required to submit an annual tax return. Secondly, America does not have our system of separate taxation for a woman and a man as a couple. They are at a disadvantage compared with us in not having either of those systems, and that makes it difficult to bring earned income tax credit into this country. A great cost is involved in bringing it in, some of which is due to increased take-up and some of which will be incurred by taking people further up the scale into benefit. It is more than that, because, under the new system, there are PAYE complications for the employer. There is also the administrative complication of turning the Inland Revenue into a department that will pay out money to people with children.
Many supporters of the new system are shocked to discover that it cannot be introduced before October 1999. A great deal of money and administrative time will be spent trying to hit that deadline. The Inland Revenue does not know anything about children. Under our tax system, it does not know whether taxpayers have children, because there is no child care allowance. The Inland Revenue has never paid out money by itself or indirectly through employers in its experience. The Department of Social Security has always done that, but now the two systems are to be amalgamated. The cost of the complication will be considerable.
In future, an employer will know all about the circumstances of each employee. When we made family credit more generous, Labour Back Benchers said that we were subsidising low-paying employers, and that that was terribly wicked. It was said that we were subsidising low pay, but that was not true. Under the family credit system, many employers do not know that an employee is drawing family credit. The snag under the new system is that every employer will know exactly how much each employee is getting on top of his pay.
Another issue is the transfer from the mother to the father. What happens if a benefit for the mother is taken as a tax credit by the father if he is the principal earner? When the Government started to trail the idea, that matter was raised by a number of commentators, including me. The Financial Secretary to the Treasury joined in the debate about the purse-to-wallet problem—I do not like the jargon—that that transfer posed.
The Government's answer—that people are given a choice—is absurd. The mind boggles. Of course some will make a sensible choice, but one can visualise a discussion between a mother and father about the 68 comparative advantages of one taking a benefit or the other taking a tax credit. No doubt the Chancellor fondly imagines that such people will take their accountant's advice. People who contemplate moving from benefit dependency to low-paid work may not be able to do it, and that is another complication.
I approve of the objective of concentrating on subsidising low-paid jobs to widen the gap between earnings from them and the long-term receipt of benefit. The previous Government and this one appear to share that objective, but for the sake of originality, and to enable them to use grandiloquent phrases about transforming the tax system, the Government have wished upon us an extremely complicated new arrangement of dubious value.
I have said how much I agree with the Chancellor, but I wish that he would not overdo the way in which he sells his policies. Sometimes, he makes it sound as if the creation of jobs is essentially a function of the relationship between the tax and benefits systems.
New Labour seems to agree with some of my right-wing colleagues who are no longer in the House and who thought that the whole problem was the feckless poor. It was said that out there were many jobs, and that people were unemployed only because they had consulted their tax advisers and had decided that the marginal rate of reduction was too great to make it attractive for them to take advantage of the employment.
That is not the case. The reality is that the northern part of my county, where the coalfields collapsed, and Doncaster and Barnsley a bit further south, are not full of single women who would take jobs if only the cut-off rate was not so sharp. We simply have not reached the stage where, with the development of the real economy, these jobs are being created in sufficient quantity. Vis-a-vis my previous point—no return to boom and bust—we were going in that direction.
The Chancellor appears to have no interest in the real economy. He prefers social reform to macro-economic policy. He has left macro-economic policy to the Governor of the Bank of England. I remember being in the House when everyone complained that demand management and control of inflation were entirely a function of monetary policy. People used to complain about one-club golfers running the economy. The Chancellor is a one-club golfer, but he has given the club away to the Governor of the Bank of England, and he now says, "What goes on out there in terms of managing the economy has nothing to do with me."
§ Mr. Malcolm Bruce
Is the right hon. and learned Gentleman's party in favour of taking this power back, and then handing it over to the European central bank?
§ Mr. Clarke
I am in favour of this country's authorities, for which the Chancellor took sole responsibility when he took over, taking a proper view of their responsibility for the macro-economy. Our jobs and living standards depend on that.
Governments do not create jobs. The tax-and-welfare system does not create jobs, except in the relevant offices. It is the duty of Government to try to create the conditions in which people in industry, business and commerce find it easier to create jobs and to raise people's living standards. In his speech, the Chancellor made it clear that 69 he has no interest in that, and the President of the Board of Trade appeared to take only a passing interest in that aspect today, giving a wholly rosy view of where we are.
The fact is that business generally is faced with a combination of higher taxation, higher interest rates, an overvalued pound and a Chancellor, President of the Board of Trade and Government who do not believe that their fiscal policy has anything much to do with that. They are more concerned with social reform and the affairs of the Department of Social Security, in which the Chancellor likes to interfere. As long as we have the present Secretary of State for Social Security, it may be a good idea for him to interfere in that Department, but he should take a broader view of his fiscal measures in deciding what impact they are having out there.
There is not a direct read from monetary policy to fiscal policy. It should not, in my view, be the case that, when we tighten fiscal policy, monetary policy is relaxed, and when we tighten monetary policy, fiscal policy is relaxed; but the Chancellor and the Governor have to work in harness and at least have some common analysis of whether consumer demand is too strong or too weak, and whether it is likely to go up or to go down. They may not be able completely to control the exchange rate, but one or the other has to ask himself why it has gone up to a level that is crushing manufacturing industry, and whether either of them is going to do anything about it. At the moment, it does not seem that either of them will.
The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) talked about the problems of manufacturing industry, particularly exporters. Our export orders are going down rapidly. Manufacturing industry is about to go technically into recession. A recession is euphemistically described as negative growth for two successive quarters. This country has had five months of declining industrial production. The sixth is about to come up. Manufacturing is going into recession, and, even though service industries are thriving, the whole economy is slowing down at a remarkable rate.
Unemployment is still dropping, but at a much lower rate than 12 months ago. The turn is about to come, and we are simply waiting to see when, not whether, unemployment starts to rise again. That will put back into proportion all this rhetoric about getting people from dependency into work by playing around with their marginal rates of deduction.
The reason that the pound remains so strong—it is not the sole reason—is that we have raised interest rates in successive little steps, every time leaving the message that they are about to go up again. The reaction to the Chancellor's Budget was that the Monetary Policy Committee of the Bank would put them up again, and immediately the pound soared miles above DM3. The minutes of the last committee meeting showed that it was poised to put them up again.
The Chancellor plainly never even addressed the question whether he could do anything about that. He remains completely oblivious to what the solution might be. In his speech, the only contribution he could make to tackling the threat of future growth was, "We must control our earnings." That is all part of his rhetoric about the frightfully inflationary inheritance when he took over.
One of the good features about the British economy at the moment is that the increase of earnings has been flat for 12 months. The latest statistics about earnings growth 70 are exactly the same as those 12 months ago. The Chancellor was arguing about a shadow. He was missing the substance of the threat that our economy faces.
The Chancellor's own Red Book has to concede that the economy will slow down. I think that the Red Book is optimistic. I think that the economy will slow down faster than he says. The Red Book says that the savings ratio will fall. That is partly a result of what he has done to pensions and savings. Even as revised, thanks to the Robinson factor, individual savings accounts are far less attractive than personal equity plans and tax-exempt special savings accounts. Savings ratios are coming down.
None of the messages in the Budget does anything to dampen the belief that our high interest rates are going to remain in place and might go up again, or that the exchange rate will therefore remain strong against the deutschmark and the franc; of course, it is about to be very strong against the euro for some unknown period.
The Budget was well received. I agree with all the people who say that most Chancellors should have a sinking heart when Order Papers are waved behind them. When the Order Papers are waved on the instruction of the bleeper, it is perhaps a little less worrying than when they are raised spontaneously at the wrong moment in response to previous Budgets.
I do not think that all Labour Members are rejoicing about the Budget. I did a television programme at the weekend when I found that the right hon. Member for Chesterfield (Mr. Benn) and I were nearer to agreement on some of the analysis than at any time in our entire political lifetime. I do not take as much comfort from that as I do from the right hon. Member for Ashton-under-Lyne and quite a lot of sensible Labour Members, who know perfectly well that this country's economic well-being is being put at risk.
As the actual content—the tax reform—of the Budget was so comparatively inconsequential, its lasting legacy will be that the Labour party has come into power and completely neglected the prospects for sustained growth with low inflation, which it should have been pursuing.
§ Mr. Deputy Speaker
Order. Before I call the next hon. Member, I remind the House that, although there is no time limit on speeches today, many hon. Members are seeking to catch my eye, and it would be helpful to everyone if speeches could be moderately short.
§ Mr. Clive Soley (Ealing, Acton and Shepherd's Bush)
It is a great pleasure to follow the right hon. and learned Member for Rushcliffe (Mr. Clarke), the ex-Chancellor of the Exchequer. I remember hearing one of his first speeches from the Dispatch Box and thinking, "That man is a future leader of the Tory party." He came very close to it. Like Chris Patten, with whom he has much in common, he is the exiled wing of the Tory party. Precisely because he can be such a formidable opponent, let me make it clear that he should not hide his light under a bushel, but should consider making a leadership bid. If he does so, I shall do everything that I can to encourage him.
The reason why I was so anxious to get an answer from the right hon. Member for Wokingham (Mr. Redwood), the shadow President of the Board of Trade, about the 71 national minimum wage is precisely that he, more than anyone else in the Conservative party, has led a formidable, determined and persistent opposition to the introduction of the minimum wage. The idea that he could be a member of a Government who continued with the national minimum wage beggars belief. It would be the political equivalent of discovering, after 20 years, that Mary Whitehouse had been the marketing manager of Red Hot Dutch. It is impossible to think that he could be a member of a Government who wanted to keep the national minimum wage.
The Conservative party seriously underestimates the view that the British public have taken about its capacity to manage the economy either firmly or efficiently. When a number of Conservative Members intervened on my right hon. Friend the President of the Board of Trade to criticise our taxation policy, I remembered two things. First, I remembered the clear commitment that we gave before the general election on direct taxation, that we would not increase income tax levels—we made exactly the same comments that the Conservative party made about other forms of taxation. Secondly—and more importantly—I remembered that over the 18 years from 1979 to the collapse of the Tories at the election, the burden of taxation imposed, as a percentage of gross domestic product, was higher for almost all those years than it had been under a Labour Government. When the Tories left office in 1997, it was about one to one and a half percentage points higher than under the previous Labour Government.
The Conservative Government increased the tax take— largely through a switch from direct to indirect taxation— and thereby dramatically increased the tax burden at the same time as they caused phenomenal problems in Britain's investment policy, not least by the doubling of value added tax in 1979. That caused the first of the two Tory slumps that did immense damage to the manufacturing base of this country, from which it has yet fully to recover.
§ Mr. Ruffley
On the point about rising tax burdens, what does the hon. Gentleman have to say about the fact that the Red Book shows that for the last financial year that the Conservative Government were in power, the tax burden was 38.1 per cent., compared with an anticipated figure of 40.1 per cent. for the financial year 2002–03? What is his explanation for that?
§ Mr. Bercow
I am grateful to the hon. Gentleman for his courtesy in giving way. Will he clarify whether he is 72 saying that the Prime Minister, when Leader of the Opposition, never said,We have no plans to increase tax at allin September 1996, or whether he is admitting that the Prime Minister said it, but did not mean it? Which?
§ Mr. Soley
Yes it was. The hon. Gentleman's memory is faulty. Throughout the election and during the period leading up to it, we were very clear on direct taxation. The answers that we gave on other forms of taxation were precisely the same as those that the Conservative party gave for 18 years—that no Chancellor of the Exchequer would ever say what he would do with other tax rates. That position has always been maintained by both parties.
The Budget is excellent for British industry and for stability. Its general structure and balance are right, so I want briefly to deal with just two issues. The first is the family and children. I welcome, most of all, my right hon. Friend the Chancellor's recognition of that issue as an essential part of the structure of the state in the running of the economy. At times, we try to run the tax structure as if the old economic system still existed.
One thing that the Labour party has to learn—and which the country also has to learn—is that the economic structure changed fundamentally in the 1960s, 1970s and 1980s. That first came dramatically to my attention when I noticed that in the late 1980s in south Wales, the primary carers for more than 50 per cent. of children at home were the fathers. In other words, the heavy industries had collapsed and women were going into part-time work, leaving the men at home to look after the children.
That process has moved on and we now expect, almost automatically, that parents will have different roles throughout their lives. They may work part time or full time; they may work for short periods or for long periods. We have to develop a tax and benefits system that recognises that. Of course, it is much easier to recognise the problem than it is to determine the shape of the solution. However, I am sure that the shape of the solution includes the sort of benefits for families and children that my right hon. Friend included in the Budget. It is right to focus on the children, on child support and on parenting rather than on marriage as such. The structure of families changes, and it is difficult to come up with a definition that works.
We need to do more, which is why I should like the long-term thinking shown in the Budget to be taken further. We need to recognise that companies need to be part of the changing structure, in which parents need support at certain times if they are to work. We need to find ways to help companies to become, in the current phrase, family friendly. Again, it is easier to recognise the problem than to find the solution. However, there are companies—not least Midland bank, which took the initiative in this area—that recognise that they need to make special arrangements for parents who want to work part time and for those who leave employment for a time and then want to return to work. We should give additional support to companies that make those special arrangements.
73 We need also to recognise that as the nature of work changes so, too, does the nature of the tax and benefits system. I received a letter today from a constituent who was made redundant and so became self-employed. Her work takes her away from home for a period of time, and then she is back at home with her child and might work from home for a few weeks. When she is at home, she might not need child care; when she is away, she does. Because there are no effective means of recognising that and creating a structure to help her, she has to employ a full-time nanny, even though she needs one only when she is away from home or when the work she does at home is such that she needs to devote all her time to it. She actually needs a more flexible system than we have been able to provide.
My final point relates to the big issue that must be dealt with in the near future—housing finance. The Conservative Government got it disastrously wrong. I remember warning them on many occasions, when I was shadow Housing Minister, that if they went ahead with market rents, the cost of housing benefit would spiral out of control—and it did. By going to a market rent system, plus the individual support of housing benefit, there was no way to impose a cap without causing distress and difficulty for those who needed affordable accommodation. From a cost six or seven years ago of £1 billion or £2 billion, housing benefit has now risen to £12 billion—twice as much as mortgage income tax relief cost four or five years ago, when we considered that to be a problem.
If we simply cut housing benefit, the effect would be dramatic. It would be appallingly difficult for housing associations, private landlords and councils. We have to reform housing finance so that it recognises the importance of the housing market to the economy as a whole. I would prefer a bricks-and-mortar subsidy to keep rents down, rather than an open-ended subsidy on income. We also need some innovative ideas in the short term to deal with some of the housing benefit problems. I would be prepared to accept tax breaks—perhaps total tax breaks—for private landlords in exchange for guarantees about the quality of management of their properties. I see nothing wrong with indirect subsidy on that basis, as long as there is a guarantee of quality.
The three factors that matter to people in regard to housing are affordability, quality of management and— for tenants—tenants' rights. We have not got those right, nor have we got right assistance on mortgage interest for people who are in and out of work—the benefits system will pay the interest on some occasions but, unless we do something further, people will continue to be left vulnerable to indebtedness to their mortgage companies. That is a time bomb ticking away under not only the whole structure of housing, but the wealth and strength of the economy, so I believe that the Government must give it urgent consideration.
§ Mr. Malcolm Bruce (Gordon)
I say at the outset that my party and I welcome a number of measures in the Budget, not least the ambitious welfare reform package and the important reforms in macro-economic policy, such as the fiscal responsibility legislation, for which we called—it is designed to complement the operationally independent central bank, about which the Conservatives seem to be more than a little confused. Nevertheless, I 74 hope that the Government will understand that my speech, inevitably, will concentrate on our concerns about the Budget, particularly about the funding of public services and the weakening in Labour's position on the environment.
The extra money for education and health was little and late. I do not believe that it will prevent an increase in hospital waiting lists and class sizes. Even if it does, the way in which it is targeted means that that can be only at the expense of other important aspects of health and education, as the extra money was offset by an upward revision to inflation—the gross domestic product deflator. That will mean a real-terms cut in public spending next year of about £750 million, which cancels out nearly all the extra money for health and education.
That extra inflation—combined with the black hole that we identified in last year's Budget as being caused by higher inflation—has resulted in a real-terms cut of £6.8 billion in the public spending plans for 1998–99 in comparison with the original forecasts of the right hon. and learned Member for Rushcliffe (Mr. Clarke), to which the Government claim to adhere. The Red Book confirms that we were right to claim that the Chancellor of the Exchequer is building a huge war chest of funds, and that cyclical adjustment does not change the vast size of that war chest.
The Budget is bad for the environment, especially as the Government have backslid on their CO2 reduction target. There is neither an energy efficiency scheme nor a carbon tax, and the fuel duties are still being used simply as a tax increase, with no switch from excise duty.
Of course it is good that the Government have at last come clean and produced estimates showing the cyclically adjusted current balance—we have been asking for that for months. In effect, that represents the Government's estimate of the war chest of cash surplus that will result from their borrowing rules.
As a result of incorporating the Tory spending plans in their previous Budget, the Government have produced new cyclically adjusted projections of their fiscal position that give a war chest of cash of some £123.4 billion over the five years 1998–99 to 2002–03. That excludes our claim—which the right hon. and learned Member for Rushcliffe has confirmed—that many of the Chancellor's economic assumptions are deliberately cautious, so that he can disguise the size of his war chest. That figure of £123.4 billion is almost exactly the same as the figure— £124 billion—that was calculated by the House of Commons Library in January, which the Government sought to refute.
The Chancellor still seems determined to hide the size of his war chest, even though the figures are available for everyone to see. Excluding the windfall tax, it is assumed that the public sector borrowing requirement will fall by only £1.1 billion this year to £3.9 billion, and by a mere £2.2 billion in 1999–2000, to £1.7 billion. In the 1997 Budget, the PSBR was expected to fall by £17.7 billion between 1997–98 and 2000–01; now, the assumed fall in the PSBR is only £7.9 billion over the same period. Those figures may be found in table 1.2 on page 11 of the Red Book.
What are the reasons for that? Table 1.2—the first main table in the Red Book showing the PSBR—assumes that the war chest is already being spent. Tucked away in note 3 is the admission that the growth of public spending that 75 is assumed in the table is 2¼ per cent. per year in real terms, which is fully three times the rate that was allowed for in the Tory spending plans—it raises the PSBR by £4.5 billion in 1999–2000, and by £9.1 billion in 2000–01.
The Chancellor may want to treble the growth rate that was assumed in Tory spending plans—indeed, some hon. Members may think that a reasonable option. However, he should not in such an underhand way massage down the PSBR and distort discussion of the options that are open to him. Indeed, we have been trying to have an honest and open debate about what is available and what options and priorities should be reasonably pursued—we should not let the Chancellor control the process entirely, without, it seems, consulting the Cabinet or his party, let alone the wider public or the House of Commons.
We believe that the Chancellor continues to take an extraordinarily pessimistic view of revenues. We noted in November that he had attempted to massage down VAT receipts—the hon. Member for North Durham (Mr. Radice) will recall that we had an exchange about that in the Treasury Committee, of which he is Chairman—by having the National Audit Office rubber-stamp his decision to assume that VAT receipts as a proportion of consumer spending would fall, although that contradicted an effective Customs and Excise equation showing that VAT receipts would rise.
On page 118 of the Red Book, the Treasury is forced to admit thatit seems likely that the ratio of VAT receipts to consumer spending has increased in 1997–98Nevertheless, its projections continue to assume a modest downward trend in the VAT ratio. Income is rising, but the assumption is—despite experience to the contrary— that income will fall. If that assumption were corrected and the figures predicted by the Customs and Excise equation were accepted, we should find that VAT receipts alone would provide some £3 billion extra to the war chest by 2002–03—some £8.2 billion extra over the period from 1998–99 to 2002–03.
The Budget includes a further adjustment of the GDP deflator for 1998–99, from 2¾ per cent. to 3 per cent. As I said, that cuts the real value of public expenditure by £750 million for 1998–99. Because of an additional upward revision to the GDP deflator for 1996–97, the real value of planned public expenditure in 1998–99 is now £1.4 billion less—in constant 1995–96 prices—than was estimated in November.
The £5.4 billion black hole in public spending for 1998–99, which we were the first to identify, has now grown to £6.8 billion. If one compares the new public spending plans with those set out by the right hon. and learned Member for Rushcliffe—even taking into account the Chancellor's extra cash allocations—one finds that Labour plans to spend £6.8 billion less in real terms in 1998–99 than the previous Government planned in their final Budget. The Chancellor's public spending plans allow for no real-terms growth in public spending for the three years from 1995–96 to 1998–99.
§ Mr. Ian Bruce
Is not the hon. Gentleman being too generous to the Government? Surely all the figures assume that public sector employees—such as those who work in education and the health service, both of which 76 we want to expand—will accept a pay rise at the rate of inflation rather than the real rise that people who work in the rest of the economy are enjoying.
§ Mr. Malcolm Bruce
The hon. Gentleman anticipates the development of my speech. I am explaining what the figures suggest, although I am not sure whether things will turn out that way in reality. I say as an aside that it is unreasonable for a Government who say that they are committed to the development of education and health to deny the people on whom those services depend a real increase—or, indeed, even a maintenance of living standards—when the economy is growing. That is unlikely to be sustainable.
The Chancellor has not kept to his pledges. The Labour manifesto said:For the next two years Labour will work within the departmental ceilings for spending already announced.That pledge was broken in 1997, when Labour reallocated moneys within budgets. We have no quarrel with that, as we pushed the Government to do it, but they broke a specific pledge.
In November 1997, the Chief Secretary made another pledge that has been broken. He said:The Government are committed to holding to the Control Totals for 1997–98 and 1998–99."—[Official Report, 13 November 1997; Vol. 300, c. 622.]Yesterday, the Government had to acknowledge that public finances for 1998–99 are so tight that they have increased the 1998–99 control total by £1.5 billion, using a carry-over from 1997–98 caused by slower growth. That is not necessarily wrong, but it makes a mockery of the Government's claim that they are sticking to the established spending plans. In reality, there has been a continual redefinition of Labour's election pledge on spending, demonstrating how ridiculous and arbitrary the whole process has been.
Only an extra £500 million has been allocated to the national health service in 1998–99: much less than the £2.25 billion identified in our alternative Budget. [Laughter.] Hon. Members may snigger but, when he was Chancellor, the right hon. and learned Member for Rushcliffe chided Labour for not having the courage to produce an alternative Budget, which the Liberal Democrats have consistently done. He said that any Opposition worth their salt would produce alternative proposals, but of course the Conservative party has not done so, now that it is in opposition.
Taking the GDP deflator effect into account, the Budget is worth only about £400 million more for the national health service. The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) put his finger on it. Given the huge pressures from the recent below-trend funding for the health service, and the millennium computer problem, which will definitely prove serious for the national health service, the extra funding is entirely inadequate to substantiate the Government's claim that they will save the service and deliver a cut of 100,000 in hospital waiting lists. We do not think that that Red Book promise is likely to be fulfilled. If it is, it can be only at the cost of severe cuts elsewhere in the NHS, with damaging consequences.
With the higher inflation expected in 1998–99, the NHS will receive only about 2.5 per cent. more in real terms. Under the Conservatives, the average real-terms increase was 3.1 per cent., although the last two years were not 77 quite so good. The present Chancellor, in his 1988 autumn statement response to the then Chancellor, Nigel Lawson, said:Opposition Members welcome any additional resources for the National Health Service and any plan to break down the appallingly high waiting lists. However… When health costs are rising faster than even ordinary inflation, the sum that the Chancellor has provided today will barely cover the basic inflationary pressures that the health authorities face, far less deal with their huge backlog of structural repairs."—[Official Report, 1 November 1988; Vol. 139, c. 826.]We expect waiting lists and waiting times to go on rising, breaking Labour's early pledge, which in any case has become merely a long-term aspiration.
The £2 billion extra that the Government boast will be spent on health is to be spent over two years and, taking inflation into account, represents only about £650 million more than the Tory plans. Judging by his outbursts, I know that those figures and that analysis have irritated the Prime Minister. He seems to take the view that the Government live in a changing world where figures can be adjusted, adapted and updated, but that Opposition parties cannot respond in kind.
If the Prime Minister wants to compare like with like, he might consider that the Labour party's pledge for spending on health and education, at the time of the general election, was for £100 million on each. We welcome the fact that the Government have approved that spending, but it is not enough to deliver on their pledges.
The Budget announced £250 million extra for education, £100 million of which is to be directed towards tackling skills shortages in key areas and promoting lifelong learning. Those are worthy aspirations, but schools are to receive only £100 million extra. Taking the deflator into account, the Budget gives education a net real addition of only £150 million.
That cannot reverse the decline in the percentage of GDP spent on education under Labour, in breach of its manifesto commitment. The manifesto said:We will increase the share of national output spent on education",but planned Government spending on education as a percentage of GDP is set to fall, from 4.5 per cent. in 1996–97 and 4.4 per cent. in 1997–98 to 4.3 per cent. in 1998–99. That is simply a betrayal of the manifesto pledge.
The additional funding is woefully inadequate. It will not tackle immediate needs and certainly has no real ambition for a Government who claim that education is their top priority. The Government talk about £2.5 billion extra for schools, but that is what they propose to spend over the entire five-year Parliament, when they should spend it this year if they have any ambition to deliver quality education.
Not only the Liberal Democrats have spotted the Government's U-turns on the environment. On Budget day, Charles Secrett, executive director of Friends of the Earth, said:This was a major missed opportunity. Labour is rapidly forfeiting its claim to be a green government … this Budget is about as green as a smog alert. The Government cannot meet its manifesto and Kyoto promises with this Budget.78 Friends of the Earth was offended by the Government's U-turn in committing themselves only to the European Commission's 8 per cent. carbon dioxide emission reduction target by 2010, rather than to the 20 per cent. target in the manifesto.
§ Mr. Bercow
The hon. Gentleman appears to endorse the comments of Friends of the Earth, so we could be forgiven for thinking that he believes that the Government did not increase road fuel duty enough. Will he clarify whether the Liberal Democrats support the increase in road fuel duty or believe that it was too little?
§ Mr. Bruce
Like the hon. Member for South Dorset (Mr. Bruce), the hon. Gentleman anticipates my speech. If he has a little patience, he will get the answer.
The Government made a clear promise to produce a Green Book alongside the Red Book. The Financial Secretary repeated it when she said:We have every intention of keeping that promise from the first full Budget."—[Official Report, 10 July 1997; Vol. 297, c. 1062.]That commitment seems to have re-emerged as a single green page—page 78—in the Red Book.
The Budget contained no serious environmental measures: no carbon tax or home energy insulation scheme, and a cut in VAT on home energy insulation materials limited to certain Government grant schemes. That may be welcome, but it is very small.
The Government have made proposals to reduce vehicle excise duty for fuel-efficient cars, but those proposals are still on the drawing board. The Government propose a reduction of £50 per annum, which is probably not enough to make much difference. According to the Red Book, the Government are "interested in introducing" a lower rate for the least polluting cars. That is a very vague statement.
The Liberal Democrats proposed recycling money from higher petrol duty into cuts for smaller-engined cars. Had the Government made that connection, we might have taken a different approach to that aspect of the Budget. However, the Government have done nothing in that direction—they have merely talked about it—and they have increased fuel taxes by an extra £1.1 billion in 1998–99 or £3.3 billion over three years. That is simply a blow to rural motorists and a tax for everyone, and there are no offsetting fuel efficiency incentives or, as we would wish, tax cuts elsewhere.
I should like to clarify the situation for the hon. Member for Buckingham (Mr. Bercow), following his intervention. We Liberal Democrats have a rule in our environmental tax policy that environmental taxes should be offset by corresponding tax cuts elsewhere. Under the Conservatives and now under Labour, such measures are simply another way to raise taxes and pretend that they are being green. We do not support such deception.
The extra £500 million over three years for public transport is welcome, of course, but it will not revolutionise our transport system, and I doubt whether it will offset the cuts in local authority transport budgets. Today, £4.5 million of rural initiatives was announced for rural transport in Scotland. People are pointing out that local authorities do far more than that to support rural transport, and it is not at all clear whether those initiatives can make a difference. I urge people to bid for the schemes but, if they are successful, to put pressure on the Government to put in a lot more before too long.
79 As time is pressing, I must say that we welcome the welfare reform package, but are disappointed that nothing is being done for pensioners-not only we, but pensioners, are disappointed. We commend to the Government our proposals, which would not deal with the whole problem, but giving an extra £5 per week to those over the age of 80—up from the present derisory 25p— would at least show a commitment to helping the most elderly and vulnerable pensioners. We shall want to probe the details of some of the other measures in the Budget, but we genuinely applaud the Government's direction and hope that the delivery will match the rhetoric.
The £ 1.4 million for working families tax credit is a substantial injection, but not everyone will be better off. Indeed, the Red Book points out that the number of families with high marginal deduction rates of 60 per cent. or more will increase by 33 per cent., to more than 1 million, which demonstrates the difficulties when one moves the thresholds. One may help people at the bottom end, but unfortunately one creates another category that needs help further up the scale. I hope that the Government will ultimately find ways to deal with that. When we debate the l0p rate of tax, we might be able to engage on more efficient ways to help people on low incomes.
At this stage of the Budget, it has to be said that there are some losers, for example, a married man with no children will lose part of his married couple's allowance with no corresponding benefit, but Budgets do not please everyone, I guess.
There are concerns about how fraud can be avoided and how the working families tax credit will be evaluated. It has been suggested that people might get round the system by taking in each other's children and finding a way to claim benefit in that way.
Finally, on a macro-economic point, I found the exchange on exchange rates interesting. The right hon. Member for Wokingham (Mr. Redwood) clearly enjoys opposition. He has a talent for it—after all, he only has to attack. He is not so good at telling us what he would do. How cheerfully the right hon. Gentleman disowns the Conservative party's policies both in government and in opposition. Obviously, he has been practising for opposition for the past 10 years. He opened his comments by saying that the exchange rate was too high, but gave no idea of how the Conservatives would bring it down. He tried to explain that they would not have got there in the first place.
The right hon. Member for Ashton-under-Lyne hit on the one issue that the right hon. Gentleman ignored, which is the euro effect. That we are not committing ourselves to the euro is an additional factor that encourages people to hold sterling and to force it up. I would not have expected the right hon. Member for Wokingham to endorse that policy, although I was interested that the right hon. and learned Member for Rushcliffe was not keen to answer my question about the operation of the independent central bank either. On that issue, the Conservatives would do best to keep quiet. Being the party of devaluation is a new role for them.
We want sensible economic policies, to provide stability in the long term. I plead with the Government seriously to consider a clear timetable for British entry 80 into the single European currency, as that would do more than anything else to give manufacturers confidence. It would do so for two reasons. First, it would almost certainly reduce the immediate pressure on the pound and, secondly, in the long run, it would reduce the exchange rate risk for 60 per cent. of our foreign trade—something that seems to be lost on the Conservative party, or at least on its official leadership.
We shall support some aspects of the Budget, but it has a big hole at its heart, and the Government will not deliver on health and education unless they are prepared to tackle that.
§ 7.4 pm
§ Mr. Giles Radice (North Durham)
The right hon. and learned Member for Rushcliffe (Mr. Clarke) made a characteristically sturdy speech. Indeed, he showed why it was a mistake for the Conservative party not to have elected him as leader. He was a little reticent about his contribution to the overheating of the economy before the last election—I chided him about that before that election—but he certainly showed up the right hon. Member for Wokingham (Mr. Redwood). I give the right hon. Gentleman some advice—the shriller the tone, the less likely he is to be listened to. In the long term, the right hon. Gentleman's knockabout stuff will not do. It may be all right for a couple of years of opposition, but it is not persuasive, and he will have to do better.
I agree with the hon. Member for Gordon (Mr. Bruce) and my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) about a single currency. However, some of my hon. Friends will be glad to hear that I shall not follow that line tonight as I want to concentrate on the Budget.
This is a good Budget, and it deserves the widespread praise that it has been given. To begin with, it has proved that consultation is a good idea. The pre-Budget report and the consultation that followed it improved a couple of measures. First, it made individual savings accounts a more effective system. The Government can no longer be accused of retrospective taxation, as they might have been had they not listened to the consultation. Secondly, the new working families tax credit has answered some of the criticisms of the right hon. and learned Member Rushcliffe precisely because there has been a debate about the issues and the Chancellor has answered most of the questions. That is why it will be an effective system. More generally, it is better for the Budget process to be open and for there to be a system whereby one can discuss policy details before those policies are announced. That is a plus and a good thing for our policy making.
I welcome some of the supply-side measures that the Chancellor introduced. I welcome the fact that he has managed a significant redistribution between the better and the worse-off without clobbering the middle classes, which is what people in some Conservative newspapers feared. I also welcome the fact that he has introduced measures to make work to work and employment pay— the working families tax credit, the reform of the national insurance contribution and the expansion of the new deal—and that he has helped children through the promise to increase child benefit next year and the extra help for younger children in poorer families. Incidentally, and sotto voce, the latter compensates for what happened with lone parent families before Christmas and I also welcome the Budget for that reason.
81 The Budget also contains extremely useful increases for education and health on top of the increases already announced for 1998–99. At times, the hon. Member for Gordon has been churlish about those increases, because they are a good sight larger than we promised and we shall be doing that in every Budget. The fact that a war chest is being built up at least means that there will be extra resources for health and education in every Budget. The hon. Gentleman should welcome that rather than rubbishing it.
The economy faces an uncertain outlook, hovering uneasily between overheating and recession. There are inflationary signs, a tightening of the labour market, and shortages of skilled workers. The Budget forecasts 3 per cent. inflation during the year. On the other hand, a slowdown in the economy is forecast; it is down by 0.25 per cent. on the pre-Budget forecast. That has been caused by the interest rate hike and budgetary policy but above all by the 25 per cent. rise in sterling. There is also the possible impact of the Asian crisis. It is an uncertain situation. Added to that, we have two economies: a depressed manufacturing economy and the service economy, which is still expanding. An interesting graph in this month's Goldman Sachs report shows that clearly.
How is the Chancellor reacting? He believes in long-term stability, which is a worthy objective, given what has happened in the recent past. We all remember the Lawson boom, which led to the Major-Lamont recession. The right hon. and learned Member for Rushcliffe remembers it well because he had to clear up some of the mess. It is right to want to get rid of stop-go and to turn our back on fine tuning, and I have heard the right hon. and learned Gentleman say that.
I support giving the operation of monetary policy to the Bank of England because, in the end, I do not think that politicians can be trusted. Even the right hon. and learned Member for Rushcliffe could not be trusted in the run-up to the general election. He knows that he should have put up interest rates, but he did not. It would have been done if the Bank of England had been in charge.
The Chancellor has imposed on himself the code for fiscal stability. First, there is the golden rule of borrowing only to fund investment. The second rule is that debt should remain at a sustainable level. Those are sensible rules. The Chancellor has been criticised—we have heard echoes tonight—for not taking enough out of the economy, for not having done enough to help the Monetary Policy Committee. We must examine that. The right hon. Member for Wokingham made that criticism, but he was clearly trying to evade the issue. He attacked the Government for increasing taxation but he also said that the Government had not taken enough out of the economy. That was a weak argument. As the Chancellor has said, there has been a 2 per cent. fiscal tightening over the past year, the biggest tightening of fiscal stance since Geoffrey Howe's 1981 Budget.
Part of that is the tightening that comes at the top of the cycle, when more VAT comes in. Interestingly, self-assessment has produced more money for the Treasury. As someone put it euphemistically, people have taken the opportunity to bring their affairs up to date. I do not know what they were doing before, but it is good news for the Treasury. The Chancellor has imposed consumer taxes, such as the two petrol tax increases, the tobacco and alcohol increase, and the two stamp duty increases for houses costing more than £250,000. There is 82 also the mortgage tax relief reduction announced in July, which takes effect on 1 April, and the reduction of married couples' tax allowance from 15 to 10 per cent., which comes into effect next year.
Added to those taxes, there is a very tight position on spending. The hon. Member for Gordon accepted that. We have stuck to Tory spending plans in a way that no one expected us to—no one thought that it was possible. I hope that that means that we shall have a lot to spend in future, but we cannot be accused of having too lax a fiscal stance now. If we had taken the advice of some City columnists and some speakers tonight and put more taxes on the consumer, we could have plunged the economy into recession. The Chancellor was right not to do that.
To some extent, that policy leaves the strain on interest rates and the decisions of the Monetary Policy Committee. I support that idea. We have already rehearsed the difficulties that the committee faces with the economy overheating but also showing signs of going into recession. It is not surprising that that should produce divisions in the new committee. It is good that they are out in the open, so that we can read about them. They are in the inflation report and the minutes that are published six weeks after every meeting. I think that they should be published one week after. The delay is an unnecessary block to our knowledge.
There are three points of view in the debate. One lot argues that priority should be given to the danger of inflation and that interest rates should rise immediately. They are the hawks. Another lot—I think that it comprises only one person—says that the greater danger is tipping the economy into recession and that there should be no rise in interest rates. The third argument is the most difficult to sustain: the committee should give priority to the dangers from inflation but should wait and see. That is wrong because if, according to the inflation report, there are really dangers from inflation, the committee must act now. It will get into the worst of all worlds by waiting and seeing. That would mean only that those who wanted to hold sterling would buy even more and the pound would go higher, which, as everyone agrees, damages manufacturing industry. It may also mean that we would need higher interest rates later. We may have to do more later and so increase the danger of a so-called hard landing. We want to slow down the economy enough to slow inflation, without tipping it into recession. That is the trick.
It may be that, in April, the committee will say that recession is more likely and that inflationary pressures are being damped. However, if it really decides that the dangers lie more on the inflation side, it should put up interest rates and make people understand that interest rates will not rise further. That would be doing a service to the country and the economy.
This is a an excellent Budget. It is the Chancellor's second skilful Budget. I welcome the supply-side measures. If we are to get their full benefit, the policies need to be sustained by an appropriate macro-policy. The Chancellor has done his bit; his policies now need to be supported by wise decisions by the Monetary Policy Committee.
§ Mr. David Davis (Haltemprice and Howden)
It is a great pleasure to follow the hon. Member for North Durham (Mr. Radice). If I may return his slightly 83 back-handed compliment to my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), it is only a pity that he spoke from the Back Bench rather than the Front Bench. No doubt, that will come.
The hon. Gentleman made again the much-reiterated point that the Budget was originally billed as a once-in-a-generation, radical, reforming Budget. I believe that it is somewhat less than that. Indeed, given the comments of the hon. Member for Ealing, Acton and Shepherd's Bush (Mr. Soley) in a rather good speech, it will have less long-term impact than, for example, the early Geoffrey Howe Budgets or—I shall ignore his embarrassment—those of my right hon. and learned Friend the Member for Rushcliffe. Not only that, but what long-term impact it has will not necessarily be all good—anything but.
I do not wish to be over-harsh about the Budget, and I recognise that there are some commendable aspects to it, on which I shall speak shortly. I shall focus on employment and, in particular, the central policy proposal in the Budget—picked out by the right hon. Member for Ashton-under-Lyne (Mr. Sheldon)—the combined reform of national insurance, tax rates and benefits in an attempt to improve the incentives to work and to escape poverty.
That reform is not cheap: the first year of its operation will probably cost about £2.8 billion and the cost seems likely to grow thereafter. However, the unemployment trap and the poverty trap are undoubtedly the plague of modern European economies and it must be right to try to eliminate the monstrosity of people losing more as a result of taxes and lost benefit than they get in pay. The Budget attempts to tackle that and, according to the Red Book figures, reduces by 100,000 the number of low-paid families who face the loss of more than 80 per cent. of increases in pay and by a further 400,000 those who lose more than 70 per cent. All that is to the good—at least at face value—but I shall make some criticisms shortly both of how it is structured and of how it is paid for.
I agree that there is great moral and economic force in reducing the marginal economic taxes facing the poor, but my congratulations are limited and should not give much comfort. We should not miss the fact, already mentioned in the debate, that now more than a million families face marginal deduction rates of more than 60 per cent..—in fact, in most cases, 68 per cent. or 69 per cent.—under the new proposals. On the Chancellor's own figures, the policy puts a total of 250,000 more families in the poverty trap than were there before the reforms. In effect, the wage earner in each of those families, when he looks at his overtime pay, his bonus or his pay rise, must say to himself, "£1 for me and my family, £2 for the Government. £1 for me, £2 for the Chancellor."
That high 69 per cent.-plus marginal deduction, that loss of more than two thirds of poor families' increase in income, applied before the Budget reforms to people on gross pay of up to about £250 a week; now, that 69 per cent. marginal deduction rate applies to families with two children and an income of up to £320 a week. Again, those figures come straight from the Red Book. For those families, the depressing prospect of giving the Chancellor two thirds of any pay increase that they achieve will in future apply to families whose breadwinner, on the basis 84 of a 40-hour week, earns up to £8 an hour, which is more than double any conceivable or plausible minimum wage level.
Put in simple terms, the poverty trap is being made a little less deep, but a great deal wider. More people will fall in and getting out will be a slightly less steep but much longer climb. All those people—more than a million families—still face that prospect under the new proposals. Few things provide a more dismal demonstration of the depressing arithmetic of the dependency culture than that reform. Those high rates of withdrawal are, of course, a disincentive to work and we face them for the foreseeable future under the Government's strategy. The reasons are hard and uncomfortable and are demonstrable by testing the working families tax credit strategy against its numerical limits.
High benefit withdrawal rates arise from two factors: high means-tested levels of benefit for the poor and low differentials between benefit levels and average earnings levels in society at large. Unless there is a massive change in the basis of our taxation, it is reasonable to assume that means-tested benefits to a worker on average earnings are zero; anything more than that creates a ridiculous dependency arrangement. That is true in most western societies—for example, the American earned income tax credit, on which the Government have based their policy, falls to zero at almost exactly the American median earnings. That means that the maximum range of income over which benefit is withdrawn is the difference between the earnings level from which the credit starts to be withdrawn, which the Budget proposes should be £90 a week, and the average wage, which in Britain today is about £370 a week. A family with two children receives £78.50 of working families tax credit. If the taper were extended right up to £370 a week, the net effective withdrawal rate would be 28 per cent. which, when added to tax and national insurance contributions, would give a withdrawal rate of 61 per cent.
What I have described would be hugely expensive, would drag more than half the population into the benefits system and would still have a withdrawal rate of more than 60 per cent. In other words, the laws of arithmetic— I have used nothing else—virtually dictate that, under the system that the Government have designed, the total tax and withdrawal rate for poor people cannot get below 60 per cent.; therefore, the strategy is flawed.
There are possible solutions. One is to allow the differential between average incomes and benefit levels to widen, but that is unlikely to commend itself to the Government. The second theoretical option would be a massive redistribution using higher taxes on the top half of the population to reduce them on the bottom half, but Labour tried that in the 1970s and it did not work. Finally, the Government could attempt to reduce underlying income tax rates in general by transferring the tax burden to indirect taxes, but they clearly do not intend to do that, as the Red Book shows the percentage of gross domestic product being taken in income tax climbing from 9.5 to 11 per cent. by 2002—by far the biggest proportion of the increasing tax burden is to be raised in that way.
Without any of those changes, it is impossible to get marginal deduction rates for a million poor families below 60 per cent., so while there are good aspects to the 85 changes, which I hope that I have picked out, the overall strategy is certainly very limited and potentially fatally flawed, because it will not deliver enough in the long run.
§ Mr. Jim Cousins (Newcastle upon Tyne, Central)
The right hon. Gentleman sets out an undoubted problem, but does he not regard the situation that he describes as being far better than a situation in which 750,000 people keep 7p in every extra pound because the marginal withdrawal is 93 per cent. and a further 650,000 people are better off if they stop working? That is the inheritance from his Government.
§ Mr. Davis
The hon. Gentleman's figures do not tally with what appears in the Red Book—the 7 per cent. gain is certainly not right. What I am trying to point out is that, although some of the work in reducing the very high levels of withdrawal affecting around 100,000 people is worth while, the rest of the exercise has been to trade away the rights of a further 250,000 people by pulling them into the poverty trap. That cannot be a good long-term strategy.
Working families tax credit is based on the American EITC. It would be wrong of me to leave the subject without flagging up some critical practical problems that afflict the policy where it has been used, even though my right hon. and learned Friend the Member for Rushcliffe has already mentioned some of them. In America, the EITC is known for its administrative complexity, its weakness as an incentive provider and its proneness to fraud—it is the most fraud-prone benefit in the United States. Those three weaknesses are intertwined: complexity of the policy leads to administrative weakness, which leads to policy failure and to fraud. In this country, fraud takes between 6 per cent. and 16 per cent. of any welfare budget other than pensions, which amounts to between £4 billion and £5 billion of taxpayers' money lost each year. It would be a tragedy if, on top of its other problems, that problem were to afflict the WFTC as well.
The arguments on that subject in the Budget papers are very thin indeed. They recognise the problem, but do not make it at all clear how the complexity, delay and fraud issues are to be addressed. My right hon. and learned Friend the Member for Rushcliffe has pointed out that the apparently long delay between now and the initiation of the policy will probably not be enough for the tax authorities to deal with all the issues.
I have long argued that it is necessary to design fraud out of welfare systems at the point of policy creation. That does not appear to have been done yet, but it is vital even to the partial success of this policy that it be done. Therefore, I hope that the Chief Secretary will tell us how he intends to achieve it when he winds up the debate.
I shall return briefly to the funding of the reforms and to the macro-economic impact of that funding. To a large extent, the reforms have been funded in the medium term by the cash-flow effects of tax changes to the corporate sector. It is now widely understood that one impact of this and the previous Budget has been to damage pensions and savings—and incentives to pensions and savings—as well as to damage investment directly. It is no surprise that the impact of the two Labour Budgets, according to Treasury forecasts, is shown as reducing investment growth rates from 7.75 per cent. in 1997 to 3 per cent. by 2000. That is not a very good indicator of investment long-termism; nor will it help fundamental economic or employment growth.
86 That leads us to a rather awkward weakness of Labour's economic strategy, about which the argument has gone to and fro all evening. Last year, the Chancellor made the Bank of England independent. The primary characteristic of independent central banks is a focus on inflation almost to the exclusion of everything else. That has generally created a better-than-average inflation record in countries with independent banks—but it does not come cost free. All the studies show that such countries have sharper and deeper recessions than do countries with other arrangements. In other words, there are higher unemployment consequences.
The Chancellor has failed to design his Budget strategy in such a way as to take that into account: just the opposite in fact. By funding welfare increases—in effect, by abstracting cash from the corporate sector—he is moving a significant quantity of money from saving and investment into consumer spending. The response of the Bank is predictable. While it is theoretically independent of government, and no doubt calculates its money supply figures carefully, it does not operate in a vacuum and is not independent of what is happening all around it. It is far less likely to reduce interest rates when the newspapers are full of accounts of consumer spending booms. So this Budget is designed to encourage higher interest rates in the long term—with the consequential effects, as several of my hon. Friends have pointed out, on the pound.
As we know, the level of the pound will have a serious impact on manufacturing. My right hon. and learned Friend the Member for Rushcliffe has detailed some of the recent monthly figures. It takes a year or more for hedging and margin-cushioning effects on manufacturing to work their way out of the system. That means that the full impact is by no means yet visible. There may turn out to be a very sharp downturn—much sharper than the figures that we have heard may suggest.
Opening the debate, the President of the Board of Trade, in a remarkable polemic, argued that the problem would be dealt with by competing on quality. British industry has done a remarkable job of improving quality over the past 18 or 20 years, and that does not owe a great deal to any Labour Government. However, all our competitors also compete on quality. Where there are two quality competitors, the lowest price will win. That is a fact that our engineering firms understand all too well; I hope that we shall not suffer because of it in the immediate future.
Both this and the previous Budget have had the advantage of five years of economic growth greater than that of any comparable European country—twice that of France and Germany. We have also had the advantage of inflation and interest rates at 30-year lows, and of lower tax and regulatory burdens than those enjoyed by any other country in Europe—in short, the golden inheritance that has allowed the apparently healthy finances of this Budget.
Those finances should not be taken for granted. We have been talking in precise terms of fractions of a billion pounds. If the economy turns down badly, £2 billion or £3 billion surpluses will turn into £20 billion or £30 billion deficits. Unemployment, which was falling by 50,000 a month last year and by 18,000 a month this year, could be climbing by 50,000 a month in a couple of years' time. If that happens, the Budget's arithmetic will fall to pieces.
87 More than any other country, we in Britain depend on our ability to compete in world markets. Without markets, there are no profits to tax or jobs to take. Welfare to work will certainly fail if there is no work. The Chancellor's golden rule on borrowing would turn to lead in his hands if tax buoyancy vanished and demand-led expenditure soared.
I opened by saying that the Budget was less radical and dramatic than its billing. It would be a tragedy if its principal impact turned out to be the crippling of the economic engine on which all this welfare reform properly depends. The President of the Board of Trade said that this is a Government for the long term. I hope that British manufacturing industry will not have reason ruefully to remember Keynes's comment that, in the long term, we are all dead.
§ Lorna Fitzsimons (Rochdale)
I want to speak in the debate, not because I set myself up as someone who knows much about the economy but because what was announced in the Budget on Tuesday is having a real impact in my constituency. I want to make four points. One concerns the Budget process, which will be crucial to ensure that many people who used not to be enfranchised in Government Budget-making mechanisms now become enfranchised. That will surely be healthier for everyone. Secondly, I want to touch on the gains to poor people on benefits. Thirdly, I want to mention those in the benefit trap—the working poor. Many of my constituents find themselves in that situation. Lastly, I want to discuss small and medium enterprises. I came to the Chamber last Tuesday thinking that at least one of those groups would get something in the Budget. I certainly did not expect all of them—they make up a large part of my constituency—to benefit from the Budget.
The right hon. and learned Member for Rushcliffe (Mr. Clarke) discussed some of the problems that were discovered when we first floated the idea of the working families tax credit. Everyone can say what Canada and the United States do, but the green Budget allows people inside and outside Parliament to debate the merits of what has been learned from other models across the world, and to say how we want to develop our own. That is why we did not end up with a transfer from the purse to the wallet; nor will we end up with some of the worst aspects of the Canadian and American systems. hon. Members need not take my word for this; after all, I am no expert on economics. They have only to read Jeffrey Liebman, the renowned US public policy expert, who expressed the same ideas in the Financial Times last Wednesday. Hence the importance of the green Budget, delivered sufficiently in advance to enable us all to engage in debate, formulate policy and think about the issues.
I have the privilege of chairing the Back-Bench women's group, which felt able to participate in the debate. We welcome the approach that the Treasury and related Ministries adopted to consulting us on the consequences of the policies that they were initiating. The Budget will have a phenomenal impact on women and children—not to mention small businesses. For the first time, we can truly say that, behind the Budget, there 88 is a genuine understanding of the working lives of women and of child poverty. Child poverty is our direst legacy from the past 20 years. That is why this Budget is phenomenal. It manages not to squeeze people who are trying to do better, and it also manages to redistribute to people who need a helping hand.
The Budget redistributes to parents—single parents or couples—who, for whatever reason, want to stay at home, looking after their children, and enables them to do so. The way in which we have increased child benefit—one of the biggest increases in child benefit in two decades— recognises the importance and the cost of nurturing children, and acknowledges the in-built cost of children under the age of 11. That aspect deserves to receive credit, because, as was said when we had the debacle of the single-parent benefit debate, there is an important cost, and a knock-on cost to children, of rearing younger children.
Conservative commentators talk about increasing the poverty trap. Do they really understand what the poverty trap means? In my constituency, it means that people genuinely cannot afford to go out to work because there is no way—because of the way in which the intricate calculations are done in the benefit system—that they can afford to take the job that they are skilled enough and lucky enough to be offered.
With the working families tax credit and all the related help, including the increase in the level above which employers' national insurance contributions become payable, for the first time ever lots of my constituents can afford to stay in work and not penalise their families for choosing to do so. They welcome the moves in the Budget to start to make work pay for the previously work-poor.
§ Mr. Ian Bruce
I am grateful to the hon. Lady for giving way in such a passionate speech, but I am sure that she would not want to mislead anyone. Apart from the changes to single-parent benefits, which date from April 1998, the changes that the Government have announced will not be made until October 1999. I hope that she will ensure that her constituents realise that they must wait almost until the next century before any of those changes are introduced.
§ Lorna Fitzsimons
Yes, but no claimant loses anything now, and my constituents would never take lectures from Conservative Members about anything that they did for women and children in poverty. The Budget clearly says to my constituents—they have told me so, because I have had several meetings with large groups of them since the Budget statement was made—that, for the first time ever, the Government are no longer stigmatising them for being in poverty or trying to do better.
Some of my constituents have been allowed a real choice—whether to stay at home with their children or to go out to work. They feel that this is the first time that, in a Budget, a Chancellor has helped them by allowing them to make such a choice.
The other indicative policy change in the Budget was small, but important—the allocation of £10 million to a scheme to ensure that partners of jobseeker's allowance claimants, who previously were unregistered, under the Treasury rules, and in the unemployment statistics, get assistance in seeking work. For the first time ever, the Treasury has recognised that women's patterns of work 89 very much depend on their partner's pattern of work, and that, if they happen to be a partner of an unemployed JSA claimant, they get no help. There are roughly 11,000 women in that position.
That is one of the single biggest changes in the Budget. It shows that, for the first time ever, we have a Treasury that is no longer, in the glib phrases of some commentators last week, a "boy's zone", but is starting to conduct a gender impact analysis of the—[Laughter.] Conservative Members think that this is very funny, but their Front-Bench spokesperson on women, the hon. Member for Chesham and Amersham (Mrs. Gillan), was desperately trying to say that your Treasury actually invented it, so it is not that funny—you speak with forked tongue. The reality is that, if you are going to laugh at gender impact analysis—
§ Mr. Deputy Speaker (Mr. Michael J. Martin)
Order. I am enjoying listening to the hon. Lady, but may I say to her, I do not have a Treasury—I honestly do not have one—so perhaps she will remember that.
§ Lorna Fitzsimons
I am sorry, Mr. Deputy Speaker. You will be well aware that, as women make up 52 per cent. of the population, it would be smart to have some form of analysis of how Government policy and Treasury policy affect them. Therefore, although some people would choose to laugh at it, I think this would be a very dim economic thing to do. That is why I welcome the Chancellor's move to change the focus of the Treasury and study the effect on 52 per cent. of the population of the Budget measures.
The measures affecting small and medium employers were very much welcomed. Rochdale—at least the portion of the borough that lies in my constituency—has more than 2,500 small and medium enterprises, the majority of which are small, and they very much welcome the Budget measures.
As most people know, Rochdale has a very strong manufacturing tradition and manufacturing base. Many of the small employers managed to duck the worst aspects of the second recession by changing their business focus to exports. One or two big businesses in Rochdale have been the pioneers of a superb export drive. They used a lot of their clout and a lot of their experience to re-educate many of the small employers into the benefits of exporting. Obviously, they are now suffering because of the strength of the pound, but the thing—
§ Lorna Fitzsimons
No. May I just finish my point?
The one thing that employers are saying to me is, "Can you please get the Chancellor to make more positive statements about the single currency?" That is the point that my right hon. Friend the Member for 90 Ashton-under-Lyne (Mr. Sheldon) was making. They wanted us to go ahead and make positive noises about the single currency.
§ Mr. Ruffley
If Government economic policy is so successful, can the hon. Lady explain to the House why manufacturing output has fallen for five successive months?
§ Lorna Fitzsimons
No. The point that I was making was the point that manufacturers in my constituency have asked me to make to Ministers. Those manufacturers understand the problem that the Government have in terms of the economy and the high pound. They are saying to Ministers, "We want you to make more positive comments about the single currency." The majority of small and medium employers in my constituency are subcontractors to big companies. They will need to be ready to deal with the single currency in 1999, because it will be a clause of their contract to do so—
§ Lorna Fitzsimons
No; I will not. This is important.
Those manufacturers will need to be ready, even if we do not join the single currency. They are saying, "If the majority of us will have to be ready, why are we, as a country, not making more positive noises about joining the single currency?" In their estimation, it would make the problem of the strength of the pound less damaging to them and it would give them ease in terms of long-term planning and in their relationships with their banks, their investors, and so on.
All I am doing is passing on a heartfelt message from the majority of employers in my constituency. That message is, please have the confidence to make more positive noises about the single currency.
There have been a lot of good points—
§ Lorna Fitzsimons
I will not, because I am just about to wind up.
Eminent Labour Members have made many good points about the strengths of the Budget. I welcome the fact that we have been able to do something about making work pay for the majority of my constituents, and about helping small and medium enterprises. Most of us did not hope to be able to do both in the same breath, in the same Budget, and we are very grateful. We want to work to ensure that the next Budget builds on that success.
§ Mr. John Butterfill (Bournemouth, West)
The Budget is like the curate's egg—good in parts. Some parts are very good indeed; I shall say something about those. Some parts are muddled; others are addled; others are downright bad.
91 I am worried about the general thrust of the Government's taxation policy. The Chancellor seems to be constantly trying to find ways of raising taxation without anyone noticing. The worst possible example was the advance corporation tax change last year, which attacked the country's pension funds severely. Nothing in the Budget has remedied that.
This time, the Chancellor is announcing nominal reductions in corporation tax rates, but the cash flow changes in the tax system mean that there have been substantial increases in the tax that companies pay.
One aspect of the Red Book and the Budget speech that I find rather sinister is the reference to a review of the North sea oil tax regime. The hon. Member for Gordon (Mr. Bruce) mentioned that matter earlier. There is a real concern that, in looking for ways of raising taxes without anybody noticing, the Government may do serious damage to one of our most important industries. The problem is that the finds left in the North sea are not huge and easily exploitable; they are much smaller, complex oil deposits which are more expensive to mine. If it is much more expensive to operate in the United Kingdom, the oil companies could easily go elsewhere to Uzbekistan or wherever. I caution the Chancellor not to pursue that route because, although it may appear an attractive way of raising moneys in a manner that people will not notice, it will do much damage to the United Kingdom economy in the long term.
The Chancellor introduced one or two welcome measures for small business, and it would be churlish not to welcome them. For example, it is helpful that small businesses will be exempt from stage payments. We also welcome the fact that small businesses will receive 40 per cent. capital allowances in the first year. However, that is not always a tremendous asset—particularly for new and emerging businesses that do not have profits to shelter. Therefore, the impact of that measure will be very much less than the Chancellor would have us believe.
I also greatly welcome the changes to venture capital. I must declare an interest in that subject as I have been an adviser to the venture capital industry for many years—as the hon. Member for Delyn (Mr. Hanson) knows. The Government have made some worthwhile changes to an industry that does a great deal for the British economy. I am particularly pleased about the technical changes to transfer pricing and the enterprise investment scheme improvements. The Government have also introduced a £50 million venture capital fund for universities— although that is a rather small sum.
More important still is the Chancellor's commitment to look at ways of developing share incentives in order to attract executives into smaller, growing companies. A principal problem in the economy is that small companies that need to grow cannot attract quality people. Many such people are comfortably ensconced in their established jobs and do not wish to take the risk of moving to a smaller company, even though they could have an enormous impact on its development. I hope that that consultation will bear fruit in the future.
Unlike my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), I am keen on the idea of capital gains tax reform, and I have for many years advocated a taper for capital gains tax. It has always 92 seemed totally mad to have a tax system where the marginal rate of tax is the same for someone who has built up a business over 10 years as for someone who has made an overnight gain on the currency market. That position could not be sustained. Therefore, I believe that the introduction of the taper is worth while.
I have some reservations about the way in which the taper is supposed to operate. I believe that 10 years is too long, because it will hold investment in existing patterns and, in a dynamic economy, we may wish to change those patterns. Another effect of the taper, combined with the withdrawal of indexation, is that some entrepreneurs will pay more than they do under the present arrangements. For example, the withdrawal for non-business assets will reduce by 16 per cent. over 10 years—or 1.6 per cent. per annum—on a flat rate. The real rate is less than 1 per cent. per annum. If we take away indexation, we can see that the situation will be worse than if there were no taper and only indexation.
That is a problem as many of those who invest in developing businesses will not qualify for the business asset criterion. To qualify, people must have voting rights of 25 per cent. or more or they must be employed virtually full time in the business. I hope that the Chancellor will consider this matter in Committee, because some definitional changes must be made. For example, a financial partner will not invest in a business unless he ends up with more than 25 per cent. of the shares, which carry voting rights. That will act as a disincentive for entrepreneurs to bring in financial partners because the Government are, in effect, forcing them to give away more than 25 per cent. of the equity in return for the injection of finance. I am not sure that that is what the Chancellor intended when he drew up the rules. Therefore, I hope that he will consider an arrangement whereby someone coming in as a financial partner to a suitably qualified company will get the benefit of the business asset definition. I believe that the present definition leaves much to be desired.
I welcome the ISA changes and the regime for TESSAs and PEPs. I think that it is as well to thank a Government for changing their mind. It is easy to criticise Governments and say, "You only did it under pressure," but it sometimes takes political courage to admit that perhaps one's first ideas were not correct. It is worth paying credit to the Government for showing that courage.
I had intended to say quite a lot about the working families tax credit, but I do not think that I could improve in any way on the extraordinarily detailed and brilliant analysis of the problem by my right hon. Friend the Member for Haltemprice and Howden (Mr. Davis). The Government deserve some credit for examining the problem and for trying to do something about it. However, they are perhaps open to criticism for rushing in too quickly with a rather poorly thought-out scheme which could lead to all sorts of problems in the future. Apart from the scheme's technical difficulties and the other problems which my right hon. Friend outlined, I think that the Inland Revenue will have physical problems handling the work load. One prays that they do not recruit the people who are coming out of the Child Support Agency scheme.
I do not like the stamp duty changes in the Budget. Many Labour Members will claim that they will affect only the rich, but that is not quite true. The tax will be paid almost exclusively in the south of England, in 93 London and the home counties where house prices are very high. If you walk out the doors of this Chamber, Mr. Deputy Speaker, you will find that £200,000 will buy only a two-bedroomed flat in central London. It is by no means only the very wealthy who will pay that tax. It will lead to less mobility of labour, which is a real problem.
I am also a little concerned about the niche areas, such as tax relief for overseas giving. That sounds like a lovely idea with which we can all identify, but it means that people will be more inclined to give to charities that are involved in overseas giving and less inclined to give to domestic charities. I must again declare an interest— although it is not a financial one—as I am a member of the board of management of the People's Dispensary for Sick Animals. I predict that worthwhile domestic charities may experience problems when they find that their income has been diminished by the Chancellor's singling out a particular group of charities in that way.
Having said that, my fundamental criticism of the Budget is that it does not address the major problem in the British economy: the level of our interest rates and the impact that that has on the parity of the pound and the competitiveness of British industry and commerce as a whole.
When the Chancellor announced his proposals for perhaps joining the euro at some time, I asked him how he would approximate interest rates. Even though our long-term interest rates have come down a little, they are still virtually double those in the rest of Europe. The approximation of those interest rates is a real problem.
There are two underlying reasons for our interest rates being so much higher than those of most of our competitors. One is that there has been an historic suspicion that British Governments will not, at the end of the day, stand up to the rigours of counteracting inflation, and that, sooner or later, a Government will let things rip a little. There has therefore been a propensity for interest rates to nudge up. The other reason has been the conduct of macro-economic policy. Although the Chancellor has engaged in fiscal tightening over the past 12 months, it has been in entirely the wrong areas—not in the areas that will damp down consumer demand, but in the areas that discourage investment and saving. That gives all the wrong messages.
Unfortunately, those wrong messages which the Chancellor has been giving have not been addressed in the Budget. It is vital that they should be addressed sooner rather than later. If we continue down our present course, we will be in great danger. The Red Book makes it clear that it is not looking for the 3 per cent. level of growth in the economy that this Government inherited—indeed, it admits that next year the rate may be as low as 1.75 per cent. It says—more in hope, I think, than in reality—that the rate will go back over 2 per cent. in the subsequent years, but not much over 2 per cent. for the whole of the predicted life of the Government.
The danger is that matters could be much worse than that. There are already clear signs that manufacturing industry is going into recession, which will inevitably have a knock-on effect on the service sector. Some elements of the service sector are already finding it difficult to compete in overseas markets. We are in danger of a severe downturn in the British economy, with a real prospect of going back into recession in a year or 18 months. I hope that the Chancellor will do something to redress that.
§ 8.2 pm
§ Mr. John Grogan (Selby)
We have rightly heard much in recent days about the people's Budget, the people's priorities, the people's money and the people's Chancellor. I shall change the focus slightly for a few minutes by examining the effects of the Budget on what the Conservative Prime Minister, Lord Liverpool, referred to in the last century as the people's pleasures. Early in the 19th century he warned his party not to get too involved in the strictures of Calvinism and to leave the people's pleasures well alone. Fortunately, many of the people's pleasures that he sought to conserve are still with us today, and very robust they are—namely, beer and gambling.
I have boasted in the House before that I have more coal mines in my constituency, Selby, than there are in any other constituency in the country. I shall go a step further today and say that there is a greater concentration of breweries in my constituency than anywhere else. In the small market town of Tadcaster, there are three: Sam Smith's, John Smith's and Bass. There are no fewer than 1,700 businesses in my constituency. I have had a chance to visit only 40 so far, but by some miracle of fate I have managed to fit in visits to all three breweries.
Beer brewing and the associated pub trade employ almost 1 million people. The industry can play a crucial role for the Government in helping to implement the new deal. The increase in beer prices by 1p a pint effectively index-links beer duty in line with inflation. That has no doubt been done to protect Government revenues, and if the UK were a closed market, there would be much merit in that. However, what is obviously regarded as a catching-up measure for the Treasury further increases the differential in tax rates between ourselves and France, and produces an even greater incentive for fraud and smuggling.
The 6:1 beer duty differential, which has been increasing throughout the 1990s, is a denial of the European single market. UK duty on a typical pint is now 38p including VAT. The French equivalent is 6p—a difference of 32p a pint. Every day more than 1.4 million pints of beer are coming into Britain duty free from France. That daily invasion is equal to the weekly beer sales of 1,000 small pubs and adds up to a tax loss to the Treasury of more than £235 million.
The Chancellor referred in his speech to the review by Customs and Excise of fraud and beer smuggling. I await with interest the publication of that report, but the plain fact is that fraud and smuggling are rife. Her Majesty's Customs and Excise reports that there is evidence of organised networks that employ mules, or runners, to make several journeys each day to France to buy amounts of beer up to the level of 110 litres. Once back in Dover, the beer is transferred to other vehicles and transmitted onward all over the country.
A recent "Dispatches" programme on Channel 4 suggested that Yorkshire, my home county, is a centre for the bootlegging business. One of the key characters involved is apparently known colloquially as the Slug. As a Government we promised to be tough on the causes of crime. In the Slug's case the cause of crime may well have involved a deeply unhappy childhood, but it almost certainly also involves the massive differential in duty.
Before the election the Prime Minister, in an interview with The Licensee, discussed the merits of an independent investigation into the issue. That was a good idea then 95 and it is a good idea now. Certain economic models indicate that a cut in beer duty would increase revenues to the Government, because of the effect that it would have on the brewing industry.
As my right hon. and hon. Friends have pointed out, the Budget was historic, recasting the relationship between the tax and benefits systems, making work pay for all income levels and transforming the relationship between Labour and the business community. My right hon. Friend the Chancellor is assured of his place in history, but we on the Labour Back Benches have greater ambitions for him than that. We want him to be up there with the truly great Chancellors, so on top of what he has already achieved, if he could find it in himself to cut the price of beer in the next Budget, there would be no stopping him.
I shall say a word about buses, trains and rural transport. The Budget allocated £50 million for rural public transport and £500 million for public transport generally. That is welcome, but we must recognise that for 30 or 40 years or more, public transport subsidies have been largely weighted towards the urban areas, as opposed to the rural areas. The Tories ruthlessly cut the budgets, particularly in England, of the six passenger transport authorities in the urban areas. Even so, the authorities' budgets dwarfed support for public transport in rural areas.
In an urban area, for example, West Yorkshire passenger transport authority will spend almost £100 million next year on supporting public transport. In neighbouring North Yorkshire, the figure is just £1.6 million. Fares and concessions are much more generous in urban Britain than in rural Britain. That has some perverse effects.
For example, there are seven stations in my constituency of Selby. Instead of getting on a train at one of those stations, some commuters who live in the constituency drive across the border into West Yorkshire every morning, with all the impact that that has on the environment, and get on a train there to make a significant cost saving. Some pensioners retire to the market town of Wetherby, which is just outside my constituency in West Yorkshire, rather than to the market town of Tadcaster in my constituency, simply because of the public transport concessions. The Chancellor's statement was a welcome first step, but there are tremendous challenges ahead for the Deputy Prime Minister when he makes his statement on integrated public transport.
Finally, I shall say a word about the people's money and the exchange rate. The best thing that the Government could do to ease the pressure on the pound is to do everything in their power to make sure that the single currency and EMU are a success for the countries that join in the first wave. As holders of the presidency of the European Union, we have a crucial role to play in the coming weeks. I was delighted to see the positive efforts that were made during this weekend's ECOFIN summit in York.
If the single currency works, interest rates will fall across Europe, output will be boosted and the pressure on the pound and British interest rates will ease. Conversely, if the single currency runs into difficulties, there could be increased speculative pressure on the pound. I hope that 96 before too long Britain can join the exchange rate mechanism in preparation for a decision on the single currency early in the next century.
I think that the Budget will be remembered ultimately for two things: first, for a rejection of trickle-down economics, or the trickle-down theory, that dominated the previous Government for 20 years. They took the view that to help the poorest 20 per cent. in society we had only to wait for wealth and income to trickle down. The Budget is a rejection of that approach. Secondly, it is a recasting of the relationship between business and the political parties. Now Labour is the party of enterprise and business.
I am delighted that the right hon. Member for Wokingham (Mr. Redwood) is embarking on business breakfasts and lunches. Every English breakfast that the right hon. Gentleman has and every continental breakfast that he rejects will tell the business community that it is now only the Labour party and the Labour Government whom it can trust with this country's economic future. I think that that will be the legacy of the Budget.
§ Mr. Deputy Speaker
Order. I have no right to impose a time limit, but I would advise hon. Members to adopt a self-imposed rule of eight minutes apiece. If that is adopted, it will be possible to call almost every Member who wishes to contribute to the debate. I am in the hands of hon. Members.
§ Mr. Ian Bruce (South Dorset)
Thank you for calling me, Mr. Deputy Speaker. In the light of your advice, I shall have to speak that much quicker.
I am grateful to be able to take up the remarks by the hon. Member for Selby (Mr. Grogan), who made an extremely good speech. If I may say so—the Government Whip probably noticed this—the hon. Gentleman was somewhat critical of the Budget. However, he spoilt it all by doing the usual bit at the end, showing how sycophantic he is.
I have an opportunity to demonstrate my gratitude to the Labour party. Apparently it sent about 400 people to my constituency to have a south-west regional conference over the weekend. I understand that some Ministers and Labour Back-Bench Members attended it. As none of them wrote to tell me that he or she would be there, I was unable to write to welcome them and to tell them what they should be looking out for.
Whenever I speak in the Chamber, I sense that hon. Members rush to the statistics which set out the wonderful 77 votes that brought me into this place. I am grateful to Labour Members for smiling. It gives me great joy to know that I beat the Labour party by 77 votes.
It seems to me that many Labour Back Benchers fail to understand why they are here. They will probably get on better in their careers if they take on board what I am about to say. We are here, of course, to represent all our constituents. We are here also to hold the Executive to account. There are 17,678 people in my constituency who voted Labour, and in many ways they are more important than the 77 votes by which the local Labour party lost.
§ Mr. Bruce
It is always interesting to hear the Minister and other Labour Members say, "Next time." It was always 97 the Liberal Democrats who used to say that. They thought that they would take five of the seats in Dorset at the general election. The Conservatives went into the election with six seats in Dorset and came out with eight. I have emphasised that there are many Labour voters in my constituency, and I wish to stress that I am in this place to represent all my constituents.
There are 17,678 incredibly disappointed people who thought that the health service would be helped by a Labour Government. Throughout the 18 years of Conservative Governments—there were not 20, but we will own up to 20 if that is wished of us. Perhaps the first two years of the Blair Administration are supposed to be part of a Tory Administration, but I rather doubt that.
Every year of Conservative government showed an increase of 3.1 per cent. above the rate of inflation in spending on the health service. On education, we always did better. Our record on social services and roads, for example, has been of benefit to the people.
We must remember that at every Budget the Chancellor of the day always has something in his gift box. He will say, "Last year, I said that I would spend only this much, but this year I shall increase that spending by £X billion." We have heard from many who have analysed the miserly sum that has gone into the health services in all of our constituencies under the current Administration.
What has local government been given? As for expenditure on education, for every extra £1 that we were supposed to have £1.40 has been taken away from social services, from the elderly and from expenditure on roads. In addition, we have enormous tax rises. Increases of three or four times the rate of inflation are the norm in Dorset.
In some ways, we were looking forward to asking, "If this is a wonderful new reforming Government that will help to create jobs, what will it do for regional policy?" The South Dorset economic partnership has announced that it is closing because it receives no funds to keep it going. That partnership was causing unemployment in the area to decrease month after month. We are starting now to see the turn-round of our economy, but we need the partnership if we are to continue to go ahead.
We have not heard yet how much the defence budget will be cut in real terms. I understand that that is shortly to be announced.
I thought that I would be able to congratulate the Government on one point. I went on radio and said, "It looks very much as if I as a fat-cat business man will benefit from the nice situation of reducing capital gains tax right down to 10 per cent." What did we find? We found that the Government were doing away with the capital gains retirement relief and introducing a 10 per cent. capital gains rate. The Chancellor was saying from the Dispatch Box that he was doing something for small business men when in fact he was increasing the amount of tax that he would take off such people after they had built up their businesses, retired, and sold out. That is an interesting little twist.
What about millennium gift aid? The Government have gone to the lottery month after month, saying, "We have decided that the lottery will pay for this or that Government policy." They are even saying now, "We would like you to give to charity and, by the way, we would like you to focus on education and poverty relief." Bearing in mind their policies, the Government want people to give to charity to bail them out.
98 I have difficulty in following the logic of many people when they talk about the stability of the pound. The pound that I have taken from my pocket is stable. We can all see that it is stable. If I put it flat down on the Bench, it stays where it is. Things are more difficult if it is placed on its edge. In relation to what is the pound supposed to be stable?
It is useful to look back to the speeches of Lord Shore of Stepney. He always talked very well about these matters. In fact, he had a speech which he delivered regularly in the House. As older Members will say, "If you get a good speech, stick to it." It is interesting that in 1990, when we had just entered the ERM, Lord Shore, as he now is, was predicting everything that is currently going wrong throughout Europe and how we would have to get out of the ERM.
Against that background, the Government are saying that they want to go into the European single currency. Yet they refuse to go into the ERM. People are asking, "How can we keep the pound stable?" Of course we can keep the pound stable if we go into the ERM and insist that our partners help to keep the pound at a stable level.
Why are we not doing that? I would have thought by now that we all understood that the rush to get a stable pound is an illusion. Against what is the pound stable? We can run our economy wonderfully well but what if we decide that we want zero growth? Is that stability? Is zero growth in employment or productivity stability? We are seeking not to have boom-and-bust economics. I understand that and accept that that is something we should be going for. Every time a British Chancellor says, "I'm going for a stable pound," he is saying stable in relation to the deutschmark or the dollar, and that depends on other people and the way in which they keep their currencies going.
One will never achieve total stability in currency, but one has to manage the economy. It was Lord Shore of Stepney—when in this place, and pretty much on this Bench—who said that giving the power to the Bank of England to set interest rates was total nonsense, because bankers can always keep to the narrow requirements of keeping a stable currency, or keeping inflation down, but they do not have the responsibility of managing the economy, which is so important and which the Government gave away almost on day one when they came to power. They believe that they can simply tell people, "It's not our fault that the pound is at an unsustainable level as far as our exports are concerned." They refuse to do anything about it.
What about the change to national insurance? If people pay average wages, they will more or less not be affected, but if they pay above average wages, they will subsidise those who pay below average wages. A Labour Government are suggesting that that is a good idea. I do not understand it, and we need an explanation of what is happening.
The hon. Member for Ealing, Acton and Shepherd's Bush (Mr. Soley) refused to accept that the ratio of taxes to GDP had gone up. He said that that was because of the windfall tax. He must look at the Red Book—the "Un-Red Book" as far as the Labour party is concerned. Even without the windfall tax, taxes have risen as a proportion of GDP and will continue to rise despite the fact that we shall lose the windfall tax from the figures.
What about child care? We all understand that the social security budget needs to be kept under control. I understand why the policy is not coming into effect 99 until October 1999: the Government do not have a clue how they will introduce it. They say that they will give £5,060 a year—the 70 per cent. of the £7,800 a year that people would have to pay—to pay for child care, when an individual on a 30-hour week at £3.50 an hour will earn only £5,060. The Government will double that amount, with all the additional things in child care.
The previous Government got into a complete mess with the Child Support Agency. I have always said that and believe it to be true, but that mess was not predicted. That was not the criticism of the CSA. [Interruption.] Please look at what happened under the poll tax and the Child Support Agency. Learn from the mistakes that we made when in government. The whole idea that the state will take over child care for low-paid people is a mistake, because we tried to look at it when we were in government, and it just would not have worked.
The test of any Budget is whether it will create jobs. The Government do not even expect it to, yet that is what their policy is supposed to do. The only thing that I can see coming out of it is that nursery assistants in 2000 will have a boom. What about my farmers' incomes? What about the leisure industry, which will have to find the minimum wage? What about the defence industry? The number of its tanks will be halved, which will affect my constituents. What about pensioners, who are totally under the Government's hammer? What about education? Teachers will be sacked soon. What about health? The Government should expand the number of people in the health sector. None of that is coming out of the Budget, and I believe that we should reject it tonight.
§ Mr. Peter L. Pike (Burnley)
I am glad to have the opportunity to speak in the debate, because, for the first time in 15 years, I welcome the Government's Budget, as it is a change of direction and a positive move for the best. My constituency is in the top five in terms of numbers employed in the manufacturing sector, and a considerable number of my constituents are low paid. In 1983, Burnley elected me—by a slight majority—over the hon. Member for South Dorset (Mr. Bruce). It made a sensible decision.
The hon. Gentleman showed a £1 coin a few moments ago. It was the Tory party that said that it would allow the pound to float. We know what the floating pound did during the 18 years in which the Tories were in office— it sank. I have an old £1 note. Think about what that was worth in May 1979. Compared with the hon. Gentleman's £1 coin, there was massive inflation and erosion of the pound during the Tories' period in office.
The Budget is good for jobs, good for industry and good for Burnley. It is particularly good for the low-paid. It has to be considered with what we are doing on the national minimum wage, which is crucial in an area such as mine. The Budget must also be considered with what we have done about VAT on fuel.
The hon. Gentleman spoke about the national health service and education, and asked what we have done in the 10 months since we have been in office. People outside know what would have happened if a Tory Government had been elected on 1 May last year, and they are glad that we have a Labour Government.
100 They know what VAT on fuel would have been. Let us remember that, before the general election, it would have gone up to 17.5 per cent. We kept it at 8 per cent., and have now reduced it to 5 per cent. That is crucial to the low-paid and those on low incomes.
I welcome the move to the working families tax credit, which is long overdue. We should have done that many years ago. Many people who are eligible for family credit do not claim it. It has one of the lowest take-up rates of any benefit. It is nonsense to expect people to take up the jobs advertised in the jobcentre and the newspapers if they end up worse off than when they were on benefit. The Budget is a move in the right direction.
The change to child care is long overdue. I welcome what the Government intend to do on that.
The cuts in corporation tax to 30 per cent., and the small business tax to 20 per cent., are welcome. I recognise that we need to have industry and commerce to create wealth for this country so that the Government can have money for the social dividend, to spend on education, the welfare state, the health service and all the other things that we want to see.
Last Wednesday, the Lancashire Evening Telegraph wrote:But there was a warm welcome from shops spokesman Rita Walsh, who said the Chancellor's measure would put cash into the pockets of the poor, providing a much-needed boost for retailers.Mrs. Walsh, secretary of Burnley and District Chamber of Trade, said she had expected a balanced Budget, favouring the less well-off, and that is what the Chancellor had delivered.That is important, as we must recognise that, when the poor get additional money, they spend it, because they need to—they cannot save it. The option for the poor to save is not really there. They need the money. They need to spend it, whether on food, clothing or whatever, to improve their standard of living.
Last Friday, I visited the Potterton Myson factory in Padiham, in my constituency. It has just announced a further 125 jobs as a result of consolidation and bringing some work from Warwick. It is wary about the value of the pound—DM3.06 to the pound makes trading difficult. It is the leading manufacturer in its field in this country, and it wants to be the leading manufacturer in Europe.
Industries in my constituency believe that we need to be in the euro as soon as possible, and they condemn the previous Government for having failed to get us into a position where we could join it at the start. They will in any event have to trade in it, so it is crucial that we join as soon as possible. I visited Smurfit in the afternoon, and people there expressed exactly the same view about the European currency. They are in the paper industry and have to compete with other Europeans, and they think it wrong that we will be left on the side.
One or two Conservative Members have mentioned interest rates. The right hon. and learned Member for Rushcliffe (Mr. Clarke) spoke. I think that he is condemned particularly on two counts. First, he did not move ahead on the euro. I do not believe that he had the power or the ability to do so, because he was a minority voice in his own party. Secondly, there was the question of interest rates. I think that the right hon. and learned Gentleman should have increased interest rates long before the general election. Why did he not do so? Because he put the political interests of the Conservative party above the interests of the country: I have no doubt of that.
101 I must utter one slight criticism of the Budget. I refer to duty on liquid petroleum gas. Lucas Aerospace, in my constituency, makes gas bottles for the vehicles involved, having developed its process from making cases for the multi-launcher rocket system. It has converted that technology, in one of the best defence diversifications. It believes that the market is growing; it also believes that the Government have failed to provide a sufficient incentive to persuade people to convert to the use of an environmentally friendly fuel. Italy has 2 million vehicles on liquid petroleum gas, while this country has only 2,000.
I remind Ministers that, after the introduction of unleaded fuel in this country, the Environment Select Committee produced a report—it was produced some years ago, under the chairmanship of Sir Hugh Rossi and during my membership—recommending a differential encouraging people to opt for unleaded fuel. In their first Budget, the Government introduced a very small differential. They were condemned by an emergency report from the Committee saying that they needed to do more. They increased the differential, which speeded up the conversion. I urge my colleagues to consider the matter, because I think we should be doing more.
I think it right to move the Contributions Agency to the Inland Revenue. They have been collected together and paid together for a long time, and I think it right for us to merge them in April 1999.
Unlike the hon. Member for Bournemouth, West (Mr. Butterfill), I think that what has been proposed for overseas aid is absolutely right. It is also in line with what my right hon. Friend the Secretary of State for International Development is doing, and demonstrates the Government's belief that, although we must act in this country, we also have responsibilities in the wider world, and are prepared to put our money where our mouth is.
§ Mr. Howard Flight (Arundel and South Downs)
I congratulate the Chancellor of the Exchequer on the rhetoric of his Budget, on his press coverage, and on certain measures—particularly the increase in child benefit, which strikes me as a simple move, unlikely to cause fraud, and intended to benefit families.
What worries me is the fact that the Budget was pretty thin on long-term strategy. It was a ragbag of measures. I also fear that, in many ways, the Chancellor has washed his hands of active economic policy. Much has already been said on the subject, but I want to make my point. Effectively, the Chancellor's actions say, "Yes, use the interest rate and the exchange rate as a manager of this economy. Allow higher interest rates and a higher exchange rate to take the strain and cool down the overheating."
That risks causing much the same results as we saw in the early 1980s and the early 1990s. It is also entirely inconsistent with standing up and saying, "This is a Budget for stability—a Budget for exchange rate stability." Sterling will appreciate further, but as and when the United Kingdom moves into recession, as it surely will by 2000, the sterling trade-weighted exchange rate will depreciate, and the exchange rate will be used as the only positive economic regulator.
The Budget also involved acts of what I would describe as disingenuousness—attempts to mislead the public into perceiving something good where there was actually 102 something bad. Much has been said about that already. It was fine to reduce corporation tax rates, but accelerating payments will cost an extra £4.6 billion through to 2001, which was not so fine. As for mortgage tax relief, we had all forgotten that it had been cut to 10 per cent. only nine months ago.
The changes in capital gains tax have already been mentioned. In my view, they are much more arbitrary than the indexation arrangement that they will replace. There is an alleged new attractive rate for entrepreneurs. As my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) said, most entrepreneurs cannot meet the criteria to qualify. I welcome the further thought that the Government will devote to the matter, but, as the measure stands, it really is empty. As for the changes to bed and breakfasting, I think that they are wrong, and will contribute to inefficiency in capital markets.
I suppose that I should declare an interest as a PEP investor as well as a PEP manager. Let me make just one simple point about that much-discussed subject. After all the hoo-hah, let us remember that it was possible to save £10,800 per annum in combined single-company and other PEPs and TESSAs; that has now been halved. In fact, the Chancellor has been very clever. He has gained credit for not implementing the £50,000 cap, but people have forgotten that the amount they can save has been halved.
Let me return briefly to the point about economic management. In the present circumstances, the only relatively painless option is to encourage savings. It would have been possible, for instance, to encourage building society windfalls to be saved last summer. That is part of the cause of the over-consumption that has got under way. As the Red Book shows, the Government are poised to produce a policy designed to reduce savings.
Let me make some points that have not already been made about welfare changes. I am worried about the way in which the national insurance changes will work. There are bunched areas within the £107 to £450-a-week wages level in which there are disincentives to employing people. I fear that we will follow the pattern of the United States, which will mean a tremendous increase in the number of companies employing part-time workers to cut national insurance costs, particularly as and when the economy turns down. That has happened in the United States for similar reasons. Although, at the lower end, the changes will be enormously welcome in creating jobs, I fear that there will be disincentives further up the line.
Much has been said about the working families tax credit. In certain American states where it appears to have been successful, there has been the stick of no benefits after one or two years as well as the carrot. I agree with other Conservative Members that these measures have been rushed in, in an attempt to copy Clinton, without having been thought through. My right hon. Friend the Member for Haltemprice and Howden (Mr. Davis) presented the situation brilliantly. He explained that the poverty trap was being increased to the limit with regard to the number of people with a 60 per cent. tax rate poverty trap.
I welcome the aims of the Budget, and hope that they will succeed, but I am worried about the increase of around 800,000 to 1.4 million in the number of people who will benefit under the working families tax credit. That strikes me as contrary to the Government's pledge 103 to contain welfare expenditure. I am sure that, unless changed, the child care arrangements will naturally result in neighbours using neighbours—after all, people are human—and that the cost is likely to be closer to £5 billion than £1.25 billion a year. That may deserve further consideration before it becomes law.
For many ordinary people, petrol and, for a smoker such as myself, cigarettes are inelastic necessities, and much will be taken in duty on such items from less-well-off people; the net position of many people at the bottom of society will not be much better.
Evidence from the past three years shows that an increasing number of married mothers or mothers who live with a partner want to stay at home with their children as soon as they can afford to do so. As the vicar of my parish church preached yesterday, the Budget is wrong to offer fiscal encouragement to bring up someone else's children. Equality must surely be ensured between the two; children are better off with their mother until they are at least six or seven.
Little has been said about the proposed anti-avoidance provisions. Every business transaction will have to be given anti-avoidance clearance by the Revenue. Canada introduced a similar provision, but its Revenue fibbed when it said that it has only 240 officers: it has 600 highly paid, top men and women, who have to make complicated assessments. Our Revenue does not have such resources, but the last thing that we want is for businesses to move their headquarters elsewhere because of massive complications in securing anti-avoidance clearances on commercial transactions.
There is a crucial difference in Anglo-Saxon culture between avoidance and evasion. No man is bound to pay more tax than he need, but not paying what he should is against the law. In continental Europe, the difference is blurred, and anyone who conducts business there will find that a problem. I believe that there is an element in the Budget, whereby it is suggested that avoidance and evasion are the same. That is unhealthy for this country's commercial integrity.
Other hon. Members have dismissed the point, but I have ground through the figures, and have found that, before the Budget, taking into account the increases in the community charge, an average family has been paying an additional £780 in taxes since 1 May, and the figure has now increased to just over £1,000. I fear that this Government will repeat our mistakes, and that the average family will have a higher tax burden, yet the average family is expected to bring up children properly, set an example, support charities and be leaders in society.
There is no merit in constantly loading taxes on the average family. Benefits must be spread broadly to help the less well-off, and they must be financed from a growing economy, and not by raising taxes on average, ordinary families.
§ Mr. Malcolm Chisholm (Edinburgh, North and Leith)
The two central themes of the Budget can be found by focusing on two pages of the Red Book: page 68, which highlights the remarkable redistributive heart of the Budget, and page 83, which describes the primary objective of increasing the sustainable growth rate of the 104 economy. The former may be more exciting, but the latter is just as important, because the Government's success in increasing the sustainable rate of growth will determine how much we can redistribute and how quickly we can expand public services.
I understand those who want a big-bang approach to public expenditure, but we must never forget the serious structural deficit that we inherited and which had to be dealt with. We shall not do anyone any favours if we increase public expenditure in an unsustainable and economically counter-productive way. I therefore welcome the first-ever framework for monetary and fiscal stability and the Budget's many specific measures to address the under-investment, instability and structural weaknesses that we inherited.
A contrary view to those positions—or, rather, a contrary confusion—was expressed by the right hon. Member for Wokingham (Mr. Redwood), who simultaneously criticised tax increases and advocated even greater tax rises. As Samuel Brittan wrote in the Financial Times,It is just not realistic to suppose that any Chancellor would increase taxes and pile up cash surpluses because of some highly debateable belief that he would enable interest rates to come down.It is difficult to be euphoric about macro-economics, so I shall leave the subject, but that word describes how I felt when I heard about the redistributive measures in the Budget. This is the first Budget for 20 years to redistribute towards the poor, especially towards poor families.
That is the exact opposite of what the Tories did for 18 years, under whom families, especially poor families, suffered most. That is clearly shown by a book, "Taxes Down, Taxes Up", which was published by the Institute for Fiscal Studies in 1994. The Chancellor understandably prefers to say that his proposal is a redistribution in favour of work, because those paying tax will begin to do so at 50 per cent. of average earnings instead of at 25 per cent. The changes to national insurance contributions and, above all, the working families tax credit, which contains a child care element, will lead to job creation and increased pay.
I was a little concerned before the Budget about the working families tax credit, and I still hope that the presumption is that it will be paid to the woman in a couple, but we all welcome the massive advance that the changes proposed in working families tax credit represent. It proposes a higher applicable amount than family credit, more support for younger children and a reduction in the problem of steep tapers.
The outstanding problem, as the Government know, is housing benefit. I urge them to make a low-rent policy a foundation of their housing and welfare-to-work policies. That must be their starting point for reform of housing benefit.
The Budget addressed many of the barriers to employment, of which child care was the greatest. This is the first Government in British history who regard child care as an essential part of economic policy as well as of children's policy and of equal opportunities policy. A lone-parent constituent told me a month ago that she had had to give up work because she was on maximum family credit and could therefore receive no child care support. Under our proposals, she and hundreds of thousands of others will have 70 per cent. of their child care costs paid.
105 Other barriers must be addressed. I welcome the introduction of a training element to the new deal for lone parents. I hope that it can be expanded in accordance with some of the suggestions of the Select Committee on Education and Employment. The gateway and other training, education, confidence-building and support measures should be opened to them.
I also welcome the linking rule, which deals with the work disincentive element of the original lone parent benefit cuts.
Not only those in work will benefit from the Budget. I particularly welcome the income-related benefits that will help children under 11. Recent research suggests that the gap between the amounts available to under-11s and over-11s is too big. The lone parent cuts in income support will be made up by next April, and for new claimants with more than one child under 11, the gap will be more than made up. I welcome the progress that has been made in that regard since December.
The problem that remains, however, is the time lag, and it applies also to lone parent in-work benefits. Changes will be made for lone parents in April, June and November 1998 and April 1999. I make the simple proposal that all the changes should be made simultaneously in April 1999. That would be more or less revenue neutral.
One other group not in work is pensioners. I welcome the large amount of money given to them in the summer Budget, but there is a problem with tenements. In certain Scottish cities, some pensioners have received £10 rather than £20 because of the way in which some tenement addresses are classified. I hope that that will not happen again, and that the Benefits Agency will ensure that the appropriate amount goes to every pensioner.
The Budget is a defining moment for the Government. I welcome its core themes of redistribution and sustainable growth. I am delighted that we are back on course to deliver old Labour objectives in a new Labour way.
§ Mr. Edward Davey (Kingston and Surbiton)
I want to focus on what the Budget tells us about the future direction of fiscal strategy. Like the hon. Member for Rochdale (Lorna Fitzsimons), I welcomed the pre-Budget report, which allowed consultation before the Budget. The amount of detail contained in the Red Book about the direction of fiscal policy is also welcome and remarkable.
The Red Book gives projections of expenditure and revenue. In his Budget speech, the Chancellor made much of the need to look forward. The proposed fiscal code will make detailed assumptions and projections about public finances. In future, we shall not need to be Mystic Megs to predict what the Chancellor is likely to say on Budget day.
An analysis of the Government's forecasts on fiscal policy shows that there is a positive story to tell. That begs the question why the Government are not taking more action on public services now. If the fiscal projections in the Red Book are correct, in the next three years the Chancellor will be able to say that there is a Budget surplus, that the Government are cutting taxes and that he wants massively to increase spending on public services. That is the message of the Red Book.
106 The number of sweepstakes on how often the Chancellor will use the word "prudent" in his Budget address will mushroom. He may be prudent in the future, but is his current approach to expenditure on public services prudent? Liberal Democrats argue that the bust-boom approach to funding of public services is imprudent, and will have a detrimental impact on the infrastructure of public services, on the lives of those who use services such as health and education, and on the careers of the professionals working in the services.
Why are the Government taking such an imprudent approach to the management of the public sector? Is it because of their manifesto pledge, about which we have heard so much? As my hon. Friend the Member for Gordon (Mr. Bruce) said, they have already broken that pledge because they have not kept to the agreed departmental ceilings. I believe that the reason has to do with the comprehensive spending review. I am glad that the Chief Secretary to the Treasury is present, because he may want to confirm or deny my contention.
The Government's approach to fiscal policy is based on realpolitik, and has damaging implications for public services. They have said to Whitehall and to the various spending Ministers, "There will be no money for you in the first two years, so you will have to concentrate on your comprehensive spending reviews." That may be a sensible pre-election strategy in the run-up to the next poll, but it is not a sensible way to manage public services.
The figures in the Red Book show that delaying the inevitable increase in funding for public services is unnecessary and ill advised. The Government are being highly pessimistic about the public sector borrowing requirement. Despite massive reductions in the PSBR in the past two or three years, it is projected to be in a small surplus in two years' time. We believe that it is likely to be in surplus next year, and in the following years there will be a much larger surplus than is projected.
The figures represent a large growth in public spending. Obscure note 3 of table 1.2 on page 11 of the Red Book says that public spending growth is assumed to be 2¼ per cent. in real terms. That is three times the growth for this year and that projected for next year. If such an increase in public spending is accounted for by the figures now, why not bring it forward a year, so that public sector managers can plan and invest properly and can make long-term decisions? Public services lack stability because the Government are not investing in them now.
Another reason why the PSBR is so pessimistically projected in the Red Book is that revenue forecasts are ridiculously low. The figures show that Customs and Excise is making incredibly low predictions for future VAT revenues. That may make a difference of more than £8 billion between now and the next election.
There is an assumption that no changes, apart from those already announced, will be made in future tax rates and allowances. As this Budget and the July Budget has shown, that is a highly unrealistic assumption.
Even if we take the Government's pessimistic approach to public finances, the figures predict a huge surplus. Between the financial years 1998–99 and 2002–03, there will be an accumulative Budget surplus of £123 billion. Despite that surplus, the Government are not prepared, for the coming financial year, to provide an extra £1 billion for health and an extra £1 billion for education. Why are 107 they being so parsimonious when their figures suggest that they need not be? We know why the Government are building up this war chest.
I welcome the fiscal code that the Government intend to introduce, the whole point of which should be to introduce stability in the management of public finances. We support such a laudable aim, but why start off with such bogus and pessimistic assumptions? Governments of whatever colour seem to be depressed and suffering from psychological disorders. At the beginning of a Parliament they are pessimistic about how things will turn out, and in the Budget before the election they become optimistic, and suddenly the growth rate has increased and the PSBR has vanished. We are on some sort of mental roller-coaster, but government needs mental stability. Perhaps that would be slightly more boring, but it would be more honest. The Government should have started with honest assumptions in the Red Book.
I should like to comment on the detail of the proposed fiscal code. The Government derive much of their thinking on the code from the experience of the New Zealand Government's fiscal responsibility legislation. However, they have missed some key elements in that legislation, one of which is vital in the context of the Government's war chest. The New Zealand measure requires the Treasury to publish four to six weeks before an election the assumptions behind the Budget and the fiscal projections. If the Government were sincere about taking politics out of fiscal policy to produce a more stable approach, they would include such a provision. I hope that they will do that in Committee.
When Liberal Democrats comment on Government policy, the Government say, "You are imprudent. It is right for the Government to be cautious. Look what happened to the Tories in the mid-1980s, when they cut taxes in the belief that they had reached fiscal nirvana. It is right for us to get away from such Victorian mismanagement." Liberal Democrats agree that the Government should not repeat Tory mistakes. We call not for £6 billion of tax cuts but for £1 billion to £2 billion extra for the public services now. That is a sensible approach and is not lacking in caution.
The Government are making a serious mistake. Trying to turn round the public services after years of mismanagement by the Tories is like trying to turn the Titanic.
§ Mr. Davey
I am afraid that the hon. Gentleman is right. The Secretary of State for Health has problems with waiting lists. The pledge to reduce them by 100,000 has not materialised: they have increased by 100,000. Time and resources are required, and if the Government delay investment in the health service, tackling the problems will be that much more difficult. The same applies to class sizes. We should reflect on the day-to-day realities of managing public services. Professional staff are the core of our schools and hospitals, and if they are not properly funded, they will go away and graduates will not go into medicine or teaching. There will be massive recruitment problems.
This morning, at a primary school in my constituency, the head teacher told me about the massive problem not just in Kingston and Surbiton but throughout the country 108 of recruiting deputy heads and head teachers. Because of the hassle of ever-growing administration, it is not financially viable. If the Government do not invest in our public services, they will lose the support of the staff, the people who make things happen. That is the danger of delaying investment.
On a slightly more positive note, the Government's approach to future fiscal policy by the use of consultation papers and comprehensive spending reviews should be supported. For example, the consultation paper on the reform of the tax and benefits system and the report from the chief executive of Barclays bank contained some welcome ideas. It is clear that the Government took the easy elements of that consultation paper and put them in the Budget, but Mr. Taylor outlined more difficult choices that the Government may have to face. I shall not go into details, but I hope that the Government will allow an early debate on those matters, so that we can get to grips with some of the tricky issues that are well set out in those consultation papers.
It is ironic that although the Government are trying to take a longer-term view of economic policy, have given control of interest rates to the Bank of England, have published a fiscal code and are trying to widen and rationalise debate on economic policy, the Budget is one of the most political Budgets of all time. There were many leaks before the Budget about the possibility of hitting the middle class, but it was not hit. I do not condemn the Government for not hitting it, but those leaks show the political tone and the background of the Budget.
The timing of the tax and spending decisions in the Budget is political. Some of the taxes will hit us now, so that the Chancellor can draw cash to the Treasury's coffers, but spending will occur in three or four years— close to the next general election. Why could not child benefit have been increased from April? The only reason for the delay is the Government's political planning. There are political calculations in the PSBR forecast and in the Government's bust-boom approach to the public services over the life of this Parliament. It will become clear that the Government's political judgment is wrong. It will take a long time to turn round the public services, but the ambition should be to have the world's best public services. The Government say that they have new ambitions for Britain, but they are not prepared to invest in our public services. Their words are hollow.
§ 9.4 pm
§ Mr. Andrew Love (Edmonton)
I listened carefully to the closely argued speech of the hon. Member for Kingston and Surbiton (Mr. Davey) and I still cannot tell whether he and his party are optimistic or pessimistic about the Budget. I am optimistic. We have been in government for almost a year, and perhaps this is an appropriate time to take stock of our stewardship of the economy and of the Chancellor's Budget judgment of where we are going.
Everyone has said that the Budget is neutral, and from the achievements so far and from the Treasury projections it is easy to see why people say that. Inflation is at 3 per cent. and is set to reduce to 2.5 per cent. in 1999 and beyond. That is the target range that has been set for the Monetary Policy Committee. The public sector borrowing requirement is £5 billion, which is some £14 billion lower than the figure that was projected by the previous 109 Government, and it is due to be in balance by the millennium. According to the Red Book, we are well on the way to fulfilling the golden rule of the economic cycle that was introduced by the Chancellor in July.
Growth is running at 2 to 2.5 per cent. and is to be held within the range of 1.75 to 2.75 per cent. over the next two years. That is at or near the trend growth rate for the economy. According to the Red Book, the debt to GDP ratio will be 52 per cent. this year and will decline to 47 per cent. by the millennium. That more than fulfils the fiscal rules that were set by the Chancellor in July. Of course, the Chancellor's fiscal stance is only one aspect of the Budget and in some respects it is not the most important. The Budget is emphatically for jobs and families and it will stand or fall on the Chancellor's judgment about refashioning the welfare state.
The signs are modestly optimistic. The headlines and the editorial comment in the press the day after the Budget were consistently favourable. Even the Daily Mail, which sees itself as the voice of middle Britain, pronounced the Budget "sound and sober". The only body that simply refuses to find anything good to say about the Budget proposals is the Conservative party, which persists with the fiction of a golden legacy, conveniently forgetting that it did not appear very golden to the electorate in May.
Critical to the success of the Budget will be the measures to deal with the poverty trap. I welcome the Chancellor's endorsement of child benefit as one of the pillars of a modern tax and benefit system. He has also reaffirmed that the benefit will remain universal and continue to be paid directly to the parent with primary responsibility for the children. That is all to be welcomed.
Many low-paid families will also benefit from the introduction of the working families tax credit, which will replace family credit and is designed to provide a minimum guaranteed income to families on low pay. In the process, it will turn a benefit into a tax credit and help to overcome the stigma that continues to ensure that around 30 per cent. of people who are eligible for family credit simply do not claim it. However, payment through the tax system brings its own problems, which have been recognised by including an option for the working families tax credit to be paid to either parent.
The third policy change that will boost the earnings of the low-paid is the reduction in national insurance contributions. That is calculated to be worth £65 a year and will benefit a significant number of the low-paid. The combination of all three changes will provide a powerful boost to the incomes of many families, but we have to recognise that the changes will interact with other benefits, notably housing benefit, and that this is but a first step—a radical and imaginative first step—in developing the new welfare state.
I should like to give a special mention to one of the smaller initiatives that is tucked away in the Budget. The announcement of a £50 million venture capital fund will be warmly welcomed in my constituency. The Lee Valley business innovation centre is sited there and, in association with Middlesex university, supports many small businesses in the area. In association with the local authority, the centre is developing a science park. The university challenge fund—to promote enterprise and high-tech growth—is just what it needs to turn scientific discoveries into commercially viable projects. It will help to unlock the talents and ingenuity in our universities and to channel them into the creation of wealth and jobs.
110 I should like to comment on the Government's long-term ambition to secure economic stability and the role in that objective of the code for fiscal stability. The code will enshrine the need for transparency and accountability in Britain's economic policy framework. It will strengthen the credibility of fiscal and debt management, much as the new monetary policy framework has done for the setting of interest rates. It will be underpinned by detailed reporting arrangements and proper accounting methods. The code demonstrates again the Government's commitment to maintaining and strengthening the credibility of their economic policies.
The Budget is both prudent and ambitious. It creates stability, but begins the task of modernising the tax and benefit system. That purpose is worth supporting, and I commend the Budget to the House.
§ Mr. John Bercow (Buckingham)
The Budget is a triumph of style over substance, yet no hon. Member should doubt for one moment that the substance is deeply damaging—to taxpayers, to country dwellers and to the economy as a whole. In the short time available, I shall deal with each of those three points.
First, let us address the subject of taxation. Earlier in the debate, we witnessed the interesting spectacle of revisionism rampant on the Labour Benches, as Government Back Benchers misrepresented the record of past promises, to distort the reality of what has transpired since the general election. We need to be explicit about what was said by Labour Front Benchers before the election.
The Prime Minister said—it was reported in the Financial Times on 21 September 1996—that there was no plan to increase taxes at all. In April 1997, an explicit statement was made by the then shadow Chancellor that Labour had no public spending commitments that would require extra taxes. Therefore, there was a reference to no plans for increases in taxes at all and a second reference to no requirement for extra taxes. It was not simply a question—as the President of the Board of Trade implied—of a commitment not to raise rates of income tax. The commitment was clear and explicit: Labour said that it had no plans to increase tax at all. Those pledges have been betrayed. That trust has been broken. The Government have reneged on the many words on this subject that were uttered before the general election.
What we know now from the Red Book is that taxes will rise from 38.1 to 40.1 per cent. of gross domestic product by 2002–03. The Budget increases taxes. The Government then positively intend to increase taxes in each and every one of the succeeding four years. That is the plan, and that is the policy that the Government will deliver. It means that the proportion of GDP raised from income tax will rise from 9.5 to 11.1 per cent. Whatever the mirrors deployed by the Chief Secretary to the Treasury in responding to the debate, he cannot gainsay the reality of the written word of the Red Book and the financial statement.
Let it be clearly understood that the Government believe that Britons are taxed too little and should be taxed more. That is what the Government intend. They believe that not only individuals but businesses are too lightly taxed. The first signal of the intention further to raise business taxes came in the Budget, which contains a 111 net increase in business taxation of £2.2 billion. That will not increase employment, it will reduce it; it will not enhance competitiveness, it will undermine it; it will not make our country more prosperous, it will make us relatively and, potentially, absolutely poorer. Those are the consequence of the Government's policies, even if they are not the intention.
The Chief Secretary should not deny for one moment the intention, set out in the Budget, to increase employer national insurance contributions for higher-paid workers. Earlier, the President of the Board of Trade was challenged to explain how that increase in taxes upon business could help the process of employing higher-paid workers, could assist their retention, and could advance the cause of high-technology and knowledge-based companies in the international marketplace as they seek to develop. Answer came there none, as the right hon. Lady was visibly under pressure, flummoxed and deprived of any coherent answer to the attack that was made. I recognise that the Chief Secretary is an altogether more sophisticated operator, so I hope that he will manage a better reply than the right hon. Lady was able to give.
That is the reality of the increase in taxation, although I readily concede that the Prime Minister was supremely ignorant of the contents of the Budget delivered last week by his Chancellor—an ignorance that he displayed not only in front of the House, but in front of millions of television viewers during Prime Minister's Question Time last week. That is the first criticism we make. Labour has two favourite sports, new Labour as much as old Labour. One is to raise taxes and the other is, by a variety of ingenious means and devices, to create new taxes.
The second criticism, specifically representing the concerns expressed to me by my constituents, is the Government's attack on country dwellers. That comes in the form of a dramatic, swingeing increase in road fuel duty. The Government have imposed an additional burden of £2.75 billion on people in rural communities who drive cars. Let no one underestimate the scale of that imposition. A rural dweller with a car, who has the temerity to drive it 20,000 miles per year—that is not uncommon or untypical—will face an increased burden of £160 per year as a consequence of the Government's measures. That is damaging; it does not provide a work incentive for those who need a car to travel to work; it does not do anything to encourage the inhabitants of rural communities. It is the latest instalment in a systematic and inconsiderate attack by an urban-dominated Government on the inhabitants of our rural communities.
If the Chief Secretary believes that that is amusing, he should think again. The number of times that Conservative Members heard that grievance expressed on the countryside march was too numerous to count. If the urban Minister thinks that that is insignificant, he is insensitive and can in no sense claim to speak for a one-nation Administration.
The Institute of Directors, in its characteristically restrained and understated fashion, said that the two increases in road fuel duty in less than a year were regrettable. How right it was. For the Chancellor of the Exchequer to offer, as a sop to those whom he has just clobbered, a £50 million rural transport fund—supposedly to bolster public transport services in the countryside— borders on an insult. If it is to mean anything, why did he 112 not set a target for the increase in public transport services that would result from that policy? How many more journeys does he expect that there will be? What decline in the reliance on the car will result from that infusion of funds?
If the Chancellor of the Exchequer and the Chief Secretary cannot estimate what the change in behaviour will be, we can deduce only that they have not got a clue and perhaps do not seriously intend a change of policy. They have patronisingly given rural dwellers a proverbial pat on the head—the fund amounts to nothing more than that. That is why the anger of rural communities will continue to be visited on the heads of the Administration.
As I said, the Budget will damage the economy. I do not expect the Chief Secretary—or the Financial Secretary, one of the great authorities on tax and excise duties, who is now present on the Treasury Bench—to take that assessment from me. I invite them instead to take it from a distinguished economist, Professor Doug McWilliams, formerly of the Confederation of British Industry and now of the Centre for Economic and Business Research, who predicted that the Government's policies would have damaging consequences. He said that there would be a 5.6 per cent. reduction in non-Government investment in our economy relative to what would have happened if the Conservative Administration had continued; that there would be a £3.8 billion reduction in gross domestic product relative to what would have been achieved under the Conservatives; and that there would be a relative decline in output. He confidently predicted that the Government's misguided and uninformed policies would, by 2002–03, result in 95,000 more people being unemployed than would otherwise have been.
In their Budget, the Government have nothing of which to be proud and much of which to be ashamed. That is why Conservative Members will take pleasure in voting against the Budget tonight. It is bad for the economy, bad for communities and bad for Britain—it deserves to be rejected.
§ Mr. David Heathcoat—Amory (Wells)
This debate, which has lasted for four days, has been very revealing. The string and the wrapping paper have come off the Budget, which now looks much less attractive than it did last Tuesday. The Economist said:The fact is that the Budget was a muddle … it lacked an organising idea.Today's debate has again failed to supply an organising idea to the Chancellor's intentions. Last Wednesday and Thursday, the Government could not even provide enough speakers from their own ranks to support the Budget, and the debate had to be carried on by a series of speakers from the Opposition.
There was much waffle in the Budget statement. The Chancellor said that it was the people's Budget—it was the people's this and the people's that. He said:The Chancellor is above all the guardian of the people's money."—[Official Report, 17 March 1998; Vol. 308, c. 1099.]That is a bit rich coming from someone who has agreed in principle—if, as he hopes, we join the European currency—to hand over control of foreign currency and gold reserves to the European central bank in Frankfurt.
113 If the Budget had an attempt at an organising aim, it was to get people off welfare and into work. We share that aim. Indeed, the social security reforms pushed through by my right hon. Friend the shadow Chancellor were all designed to make work more attractive, and when we had the money we always reduced the burden of direct taxation on the low-paid.
The difference between us and the present Government is that, in office, we did more to achieve that aim. We not only reformed the welfare state but delivered an economy—the golden economic legacy referred to by my right hon. and hon. Friends throughout the debate—in which unemployment was low and falling. One of the crucial ways in which we did that was by creating a flexible labour market.
The Chancellor claims those achievements as his own, to the extent of lecturing other member states of the European Union on the subject of the need for flexibility in labour markets. He is a cadet member of the Robin Cook school of diplomacy, and his remarks create almost as much resentment as the Foreign Secretary's. Other member states know that, when the Chancellor was in opposition, not only did he do nothing to create the flexible labour market but he opposed all the measures which we enacted over 18 years to achieve it.
European Union member states can see through the Chancellor's rhetoric and know that in practice he is increasing the burden of taxation on businesses, while relying on those businesses to supply new jobs. The Government's welfare-to-work programme will increase the demand for new jobs, but their company taxation will hit the supply.
Behind that contradiction is the lingering belief that the Government create the jobs. That point was well made by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke): it is not Government but business that creates jobs, and if we tax businesses we will damage employment.
The Red Book, and the information that we have managed to extract since it was published, shows that the burden of taxation on the business sector will approach £25 billion. Admittedly, that includes the windfall tax, about which the Government warned us before taking office, but even if that is taken out we still have more than £20 billion of extra taxation on the productive sector of the economy, on which the Government rely to provide the jobs that people will be asked to seek.
There is a further paradox over savings. Everyone should know that the only realistic alternative to welfare is private savings and long-term pension provision. Last year, the Chancellor attacked pension funds, taking out about £5 billion annually. He has done nothing to correct that in this Budget. Indeed, he has added to the problem by a botched attack on PEPs and TESSAs and, indeed, by the new annual limit on savings, which is nothing like as generous as the one that applied previously.
Under PEPs and TESSAs, a saver could put by £10,800 a year; under the ISAs, which will eventually replace them, the limit will be £5,000. It is not surprising that, again according to the Red Book, the savings ratio is due to fall further. In our last year in office, the savings ratio was 11 per cent. It is due to fall steadily to the end of the century, down to 9 per cent. That is a direct result of the very policies that the Chancellor has already introduced and did nothing to correct in this Budget.
114 There is another point about savings. Not only is it crazy to hit savings when one is trying to reform the welfare state, but, relatively, it encourages consumption, which has made the burden of the Bank of England that much heavier. It has forced the Bank to increase interest rates to compensate, which has led directly to the high pound, of which we have heard much during this debate. The Chancellor had washed his hands of high interest rates. Well, he has indeed divested himself of decisions about interest rates, but he cannot divest himself of responsibility for monetary policy—that remains with the Chancellor.
When the Bank of England Bill was considered by the House, we warned that there could be a mismatch between taxation and interest rate policy. That has happened and the victim is manufacturing and exporting industry. The confusion in the Monetary Policy Committee has added to the problem. The known splits in the committee are creating an expectation of further interest rate rises.
The Chancellor has compounded that error, or could be about to, by his attitude towards the euro. The drachma has already entered the exchange rate mechanism under the British chairmanship. Now, the Chancellor simply has to reverse his apparent attitude of weakness towards the euro by insisting on a rigid and strict application of the entry criteria. If not, the very weakness of the anticipated euro in the markets will again make the pound relatively stronger and do further damage. The damage done by the strong pound was constantly referred to in the debate, particularly on the Labour Benches. The Chancellor cannot be indifferent to that. The performance of the real economy is every bit as important as the welfare reforms that form the centrepiece of the Budget. The Chancellor cannot simply create rules for himself or divest himself of decisions and then say that the outcome of those decisions has nothing to do with him.
Against that economic background, we can assess the welfare-to-work programme and the working families tax credit in more detail. It is not at all clear that the tax credit as proposed will provide the claimed incentives, and that is the judgment not merely of Conservative Members but of the independent Institute for Fiscal Studies, which is intensely sceptical about what will happen in practice when the credit is introduced.
The Chancellor is indifferent to a lot of things—he said that he was indifferent to the family structure that the working families tax credit would promote. Conservative Members are not indifferent to it. I agreed with the remarks of my hon. Friend the Member for Arundel and South Downs (Mr. Flight). We oppose the switch from the married couple's allowance to the indiscriminate tax credit as proposed in this Budget. We are also worried about the complexity of the scheme, in particular the burden that it will place on business. Such a scheme will work only if it is comprehensible to the participants—not only the people who will get the credit, but those who will administer it in the business and small business sectors.
My right hon. Friend the Member for Haltemprice and Howden (Mr. Davis) analysed the details of marginal withdrawal rates with great skill. In particular, he drew attention to the experience in the United States, where the system is subject to much fraud. He is absolutely right. Fraud must be designed out of a welfare system, and we are in danger of creating a system in which fraud is designed in.
115 We know that the system will be expensive, although the true cost is not fully disclosed. Perhaps an example is the child care credit, which is an important element of the overall scheme. At times, it appears that the Budget is not so much a Budget for children as one for child minders. Some perverse incentives could be set up. For instance, a young mother could take a part-time job as a child minder. She would then become eligible for more than £100 a week in child care credit, so that her own children could be looked after by other child minders, perhaps in the same child care centre at which she worked. We could create a situation where everyone was paid to look after everyone else's children, which is practically the definition of a nanny state. I am sure that that is not the intention of the system, but if the history of the welfare state teaches us anything, it is that good intentions are not enough. They often lead to unintended consequences and unplanned incentives. Almost always, the cost turns out to be much higher than originally predicted.
At the end of this debate, let us finally have an answer to the question constantly posed by Conservative Members about who will get the working families tax credit if a couple disagrees about who should get it. What will happen if the mother believes that she needs it to support the family budget, but the man insists that he needs what I think Martin Taylor called the psychological incentive of having it paid through his wage packet? It is a simple system if they both agree—it can go to the mother or the father—but, if they disagree, as we know they sometimes will, who will get the tax credit? Can we have a simple, straightforward answer to a simple, straightforward question?
On public expenditure, little can be gleaned from the Red Book until more analysis is done. However, I pick up the point made by the hon. Member for Gordon (Mr. Bruce)—although I did not completely follow his figures—that the Government will spend in 1998–99, the next financial year, less in real terms than we had predicted that we would spend. He mentioned a figure of more than £6 billion, but I cannot get the amount up to that. I went to the Library, which confirmed a very significant drop in the real level of public expenditure from what we had planned because of higher inflation under this Government. The Government are not increasing total public expenditure or even maintaining it; they are cutting it. It is not surprising that NHS waiting lists are increasing and that they have broken that promise.
There is nothing in the Budget for pensioners, except, of course, the tax increases. They are the forgotten people of this Budget. All the tax increases are certainly coming their way. The fuel duty increases hit not only cars but heating oil, the duty on which went up by 9 per cent. The duty on tobacco and alcoholic drinks went up. We froze the duty on alcohol in our last two Budgets, and reduced it for spirits.
The hon. Member for Selby (Mr. Grogan) spoke graphically about the problems of smuggling. I know exactly what he is talking about. It is a genuine problem. The hon. Gentleman knows that the Government announced a study into smuggling which has not been published. He may be as keen as we are to get a copy, under the public's right to know, openness, accountability and all that, to find out what his Government are doing 116 about it. On the face of it, they are only ratcheting up even further the differential between continental duty rates, which are low, and ours, which are already high. That makes the problem worse.
There is also a problem regarding fuel, although that is not smuggled—at least not on such a scale. It is estimated that the motorist faces another £7 billion-worth of duty on road fuels during the lifetime of the Parliament. Diesel is especially badly hit; not only is that mad from an environmental point of view, because diesel produces less carbon dioxide for every mile travelled than petrol, but it is extremely bad news for industry as, yet again, industrial costs are raised. It is the same with stamp duty. The Government pretend that stamp duty is paid by people in large houses, but that is not true: three quarters of the stamp duty increase will be paid by businesses. The Government are gradually eroding the United Kingdom's strength as a low-tax, low-cost European economy.
The subject of capital gains tax was comprehensively and knowledgeably covered by my hon. Friends the Members for South Dorset (Mr. Bruce) and for Bournemouth, West (Mr. Butterfill). They are right to say that the new system will be extremely complex—there are 34 different rates—and it will probably invite many avoidance schemes. The revenue raised from it is supposed to be approximately neutral, which is to say that the changes are not supposed to be of net benefit to the Exchequer. That will happen only if inflation remains low, and we know that inflation is not remaining low, because the Chancellor, in his Red Book, predicts that he will not hit his own inflation target until at least the end of next year. If that failure on inflation persists, the capital gains tax reform will turn into a fraud on savers and investors.
I summarise the Budget as follows: it is a Budget that does nothing to correct the mistakes of last year, but actually compounds them. The mistake of taxing businesses and savings will be bad for employment, bad for inflation, bad for interest rates and bad for welfare reforms. The tax reforms in the Budget do not measure up to the absurdly inflated claims that it was a "once in a generation" Budget. It has been proved in the debate that the reforms are complex, expensive and most unlikely to achieve the desired effects. The Budget concealed as much as it revealed and, above all, it confirmed that the Labour party broke all its pre-election promises on taxation. We shall oppose it.
§ The Chief Secretary to the Treasury (Mr. Alistair Darling)
I shall start by referring to the former Chancellor, the right hon. and learned Member for Rushcliffe (Mr. Clarke), which is more than the shadow Chief Secretary has done. I apologise to the right hon. and learned Gentleman for not being able to be in the Chamber to hear his speech; as I told him earlier, I had to be elsewhere when he caught the Deputy Speaker's eye. I make the same apology to the Liberal Democrat economic spokesman, the hon. Member for Gordon (Mr. Bruce). It is unfortunate that both were called at around the same time. I also pay tribute to all my hon. Friends on the Labour Back Benches who have supported the Government, especially my hon. Friend the Member for Luton, South (Ms Moran), who wanted to speak but, unfortunately, time was against her. It is frustrating to sit listening to the whole Budget debate, only to find that one has been pipped at the post.
117 The Budget is widely recognised as being radical and reforming. It builds on our determination to deliver economic stability, which is built on a commitment to prudent monetary and fiscal rules. We have made a commitment to low inflation, because we believe that stability is the essential precondition for long-term sustainable growth. It is a Budget to encourage work and to make work pay. It is the biggest modernisation of the tax and benefits system for 20 years. We are extending the new deal and providing child care support—recognising, unlike the previous Government, that the labour market has changed dramatically in the past 20 years. The Budget encourages enterprise: we are continuing our reform of business taxation to boost investment and especially to encourage small developing businesses. We are encouraging savings, promoting research and development and helping universities to develop their research into profitable production.
The Budget builds a fairer society: it supports families, and protects the environment. Rigorous control of public spending has allowed us to invest more in schools, hospitals and transport. We are supporting families by increasing child benefit by the largest amount since its introduction almost 20 years ago. We have helped pensioners: this winter, we not only cut VAT on domestic fuel, whereas the Conservatives would have increased it to 17.5 per cent., but gave pensioners a major package of help. Pensioners received £20 and the poorest received £50, which is something that would not have happened but for the change of Government. This is also a Budget that demonstrates the new Labour Government's belief that fairness and enterprise go hand in hand. It is a Budget that delivers our political and economic objective, which is to raise the long-term sustainable growth rate, to increase employment, to promote a fairer society, and to reduce the inequality which grew during the term of office of the Tory Government.
I want to start with the question of stability. We listened to the right hon. Member for Wokingham (Mr. Redwood) referring to the golden age of Conservative rule. It seems to me that the Tory party continues to delude itself about the past. The right hon. Gentleman talked about a golden age for the countryside. People remember what the Conservatives did to the countryside: the deregulation of buses, the closing of post offices, and BSE which ruined many farmers. People also remember the 22 tax rises designed to pay for economic failure. They remember the high interest rates. So much for a golden age.
Our inheritance was a national debt that had doubled in six years because of Tory economic failure. We will not repeat the mistakes of the late 1980s, when the economic signals were misread, when a surplus became a £50 billion deficit, when inflation hit double figures, when interest rates doubled in two years, and when an "economic miracle" turned into the deepest recession since the war.
Whenever they are asked about public spending, Liberal Democrats tell us to spend more on education, transport, the police, law and order, benefits, councils and just about everything else. Frankly, their position is incredible—although I do understand it. They have decided to become the old tax-and-spend party, only without the taxation bit. There is a stateable case for tax and spend, but tax and spend without the tax is an implausible stance.
118 There is no question of our building a war chest. We are ensuring that the public finances are maintained in a stable way so that we can provide the public services that we all want. We are still dealing with what we inherited: spending £25 billion a year to service the debt that the Tories left behind. That is more than we are spending on schools.
Last July my right hon. Friend the Chancellor began the process of cutting that debt. In May of last year we found that the Tories had pledged to spend £19 billion more than they were going to get in. That was typical of their approach to the economy. We have cut that gap. We have cut the deficit this year to £5 billion and we will move into balance in two years' time.
So we are providing the stability that brings with it long-term job opportunities. We are providing low inflation. We inherited inflation heading for 4 per cent.— way above the Government's target of 2.5 per cent. That is why we had to take action to bring inflation down. Thanks to our reforms to the Bank of England, we now have the most open and accountable monetary policy framework in the world. More than that, we have the lowest long-term interest rates for 33 years. The last time they were so low was under a Labour Government in the 1960s.
We are providing a stable platform for the future. If we are to achieve an efficient and fair society we need to encourage work, to increase employability and to make work pay. Not just here, but right across the world, the same lessons are being learnt. The modern work force needs to be highly skilled, trained, motivated and adaptable. In a world where people will have many jobs between starting out in the labour market and retirement, it is the Government's job to encourage those who can work to do so, and to foster an environment where people can see the benefits of their work.
§ Mr. Kenneth Clarke
The right hon. Gentleman appears to have finished with macro-economics already, having dusted down his election speeches yet again. Before he relies too much on mythical figures, such as the £19 billion deficit to which we were supposedly pledged and the 4 per cent. inflation which was supposedly looming, will he deal with current reality? I refer to the underlying inflation rate of 2.6 per cent. which the right hon. Gentleman inherited. I also ask what he proposes to do about the considerable strength of sterling, which has dominated today's debate and which is doing great damage to our manufacturing base. What is he going to do about five successive months of falling industrial production? What does he propose to do to prevent a manufacturing recession and an excessive slowdown of the economy? Or has the right hon. Gentleman not yet noticed these developments?
§ Mr. Darling
I realise that the right hon. and learned Gentleman does not like to be reminded that he left us with a deficit that cost £25 billion per year to service, and that he left us in a position where inflation was heading to 4 per cent. and above, because he had ignored the advice of the Bank of England to do anything about it in the six months before the general election. He will also bear it in mind that sterling appreciated far more before 1 May 1997 than it has since.
Manufacturing industry will recognise that the Government are taking action to ensure that we look to the long term and achieve long-term economic stability— 119 that we do not return to the boom and bust that we inherited. In addition, unlike the previous Government, we will not be buffeted around by short-term pressures, reacting to the day's headlines.
This Government are prepared to take the right steps in the country's long-term interests, so people broadly support the stance that my right hon. Friend the Chancellor has taken. His judgment in the Budget was right. There is significant fiscal tightening, amounting to almost 2 per cent. of national income, and most commentators recognise that my right hon. Friend made the right judgment.
§ Mr. Darling
I shall give way once, but then I shall return to the subject of encouraging work—something that the previous Government did nothing about either.
§ Mr. Clarke
The Chief Secretary is extremely generous and I am indebted to him for his courtesy, but do I take that long rant to mean that he has no idea what to do about strong sterling and does not think that it has anything to do with him or the Chancellor?
§ Mr. Darling
To put it succinctly, in language that the right hon. and learned Gentleman will understand, he was wrong and we are right in the position that we are taking.
I return to the subject of encouraging people into work, because the centrepiece of the Budget is reform to the national insurance system to remove barriers to work for the low-paid, and to cut the compliance costs on business. As a result, all employees pay £66 less per year from 1999. Employer and employee national insurance contribution entry fees and the steps in employer national insurance contributions will be abolished.
We are extending the new deal for young people; for the long-term unemployed; and for the partners of the unemployed, who have been excluded from help until now. We are extending the new deal for those communities that have seen the worst, and fared the worst, in the past 18 years. We are extending the new deal to disabled people.
We are introducing the working families tax credit, which will help make work pay, and we are taking other measures to reduce child poverty.
§ Mr. Darling
Perhaps in a moment.
I find Conservative Members' attitude difficult to understand. They say that they think that the working families tax credit might be right in principle, and yet they almost seem to wish that it would fail from the start. The right hon. Member for Haltemprice and Howden (Mr. Davis) asked about the working families tax credit. If he looks at the Red Book, he will see that not only are we helping far more people than the family credit system was meant to help, but, whereas most of the people on family credit found marginal deduction rates of 70 per cent., under the scheme that we are proposing only a 120 quarter of the people have higher marginal deduction rates. In other words, we are reducing the cost that people face when they enter work.
§ Mr. Darling
In a moment.
The working families tax credit guarantees every working family an income of at least £180 a week. No family working full-time with earnings less than £220 a week will pay income tax. When people see the benefits that the WFTC will bring, they will see that working families now keep more of their money and that there is more of an incentive to enter work. When they take into account the reforms that we are making in the labour market, the increase in child tax credit and the provision of child care assistance—something that was never done under the previous Government—people will realise that the Government are taking action in ways that the previous Government never did.
§ Mr. Darling
My hon. Friends are asking why the country had to wait 18 years for this sort of reform.
We are determined to tackle child poverty. We inherited a situation where one child in three is brought up in poverty—what an indictment of one of the most industrialised countries in the world. We have introduced significant reforms, including the increase in child benefit by £2.50 from next year, that will ensure that we have a fair and efficient society.
We have also introduced a Budget for enterprise. Reform to make work pay must be accompanied by an environment that encourages jobs. It must be very galling for the Conservatives to find that, despite their criticisms, nobody outside the Conservative party agrees with them. Our reforms to company taxation have been widely welcomed inside and outside the House.
§ Mr. Darling
I shall give way in a moment. We have reformed corporation tax by cutting the rate to the lowest level ever, and we have said that it will not increase. We have cut the rates of tax being paid by small business, and we shall see major growth in employment in the small business sector in the future. We have examined ways of improving research and development and we have reformed the capital gains tax system.
I am about to give way for the last time to the shadow Chancellor. One of the things that business likes most about the Labour party is its positive and constructive attitude to Europe—something that the shadow Chancellor and his right hon. and hon. Friends will never have.
§ Mr. Lilley
I am grateful to the Chief Secretary for giving way. He said that nobody agrees with our critique 121 of the Budget. Is he not aware that the TUC has forecast that, as a direct result of the Chancellor's tightening of fiscal policy and his monetary and exchange rate policies, unemployment will rise by 100,000 during the rest of the year?
§ Mr. Darling
At last year's Tory party conference, the Tories tried to tell us that much of the past 18 years had been a ghastly mistake. They claimed that they were a caring party and that they were sorry for everything they had done. The right hon. Gentleman now says that the TUC is the friend of the Tory party, but that claim has no credibility whatsoever.
I emphasise the fact that, because we have exercised prudent control on public spending this year, we have been able to carry forward £l½ billion to next year. As we are prudent, we have allocated half a billion pounds to the reserve. However, we have also made more money available for schools, the health service and transport in the coming year. We are showing how, by conducting a root-and-branch examination of all public spending and by rooting out waste and inefficiency, the Government have been able to redirect money to our priorities in this Parliament and beyond. We shall see a great deal more of that during this Parliament.
Prudent management of public spending has allowed us to allocate more money to our priorities. An extra £250 million for schools brings the total new money invested in schools since the election to £2½ billion—that is more money than the Liberal Democrats ever promised. We have been able to increase the amount of money going to the health service by an additional £2 billion. That money would not have been available but for the new Labour Government. We have been able to put money into public transport, and we are beginning to make up the backlog of investment needed in the London underground system, which was so neglected by the previous Government.
Last July, the Chancellor took the first steps towards modernising the British economy, ensuring that we have economic stability and reducing the huge levels of debt that we inherited from the previous Government. We have reformed the Bank of England. We have yet to hear the Conservatives' position on the Bank of England, but most people recognise that that was a useful and a good reform. We are modernising the welfare state, and this Budget is a further step change along the way. We have extended the new deal, financed by the windfall levy on the privatised utilities. We are reforming the tax and benefit system and we are ensuring that work pays. We are making sure that help goes where it is needed. We are redirecting assistance to families with children, giving children the start in life that we promised them and that we know they need.
Of course, modernising the welfare state goes hand in hand with encouraging enterprise. Enterprise and fairness go together. We are helping business; we are encouraging investment; we are reducing business tax and red tape. We are redirecting public funds to where they are needed, in schools, hospitals and transport. We are making sure that spending follows this Government's priorities in this Parliament and beyond.
This is a radical and reforming Budget. We are committed to a fairer society. We are committed to reversing the inequalities over which the Tories presided.
122 We want a more productive, high-employment economy. This is a new Labour Budget and, step by step, we are delivering our manifesto promises. This is a Budget for enterprise and fairness, a Budget that has set new ambitions for Britain. I commend it to the House.
§ Question put and agreed to.
That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but this Resolution does not extend to the making of any amendment with respect to value added tax so as to provide—
- (a) for zero-rating or exempting a supply, acquisition or importation;
- (b) for refunding an amount of tax;
- (c) for varying any rate at which that tax is at any time chargeable; or
- (d) for any relief, other than a relief which—
- (i) so far as it is applicable to goods, applies to goods of every description, and
- so far as it is applicable to services, applies to services of every description.
§ MADAM SPEAKER then, pursuant to paragraph (3) of Standing Order No. 51 (Ways and Means motions), put forthwith the Questions necessary to dispose of the further motions.