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Investment in the regions, where there are unused resources and unemployed people, would certainly be non- inflationary.

Public investment is not only vital to strengthen the economy but, for most of us, it is the key to improving the quality of our lives. Across the range of public services--health, education, water, the environment and transport--the effects of under-investment and penny-pinching over the years of this Conservative Government have reduced quality, safety and efficiency.

There are one or two items in the Budget that we welcome. Some 10 years after it was promised, the Chancellor has abolished the earnings rule for pensioners. He has given a tax preference to the use of lead-free petrol. He has reduced national insurance contributions at the lower end of the earnings scale.

[Interruption.] It is of particular benefit to people on the lower earnings scale. Of course it helps people throughout the earnings scale, but perhaps some of them do not deserve as much benefit as those at the bottom end of it.

The Chancellor of the Exchequer (Mr. Nigel Lawson) : The right hon. and learned Gentleman is being censorious.

Mr. Smith : The Chancellor says that I am being censorious, but I am only being fair. I have old-fashioned notions about relating taxation to the ability to pay. I can tell the Chancellor that I do not mind being censured for holding those views ; indeed, I am rather proud to accept such censure.

The Chancellor should have done much more for the lower paid. He increased income tax personal allowances by the bare minimum he was obliged to give, as opposed to the minimum he dared to give, and by an amount less than the present rate of inflation, and below the increase in average earnings. As a result, as he knows well, the proportion of income paid in income tax, even for the lowest paid, will increase.

For many others, the Chancellor has done nothing at all. The freezing of child benefit at £7.25 a week is a scandal. Child benefit replaced the children's tax allowance, which would have been updated every year if the Conservatives had kept to an all-party agreement to do so.

While we are on the subject of taxation, I should say that one of the more sedulously spread myths of this Administration is that the tax burden has been reduced. It should be well enough known that the burden of tax as a percentage of national income is substantially higher now than it was before the present Government came to office. But I regret to say that that is still not widely enough appreciated, and I am always on the lookout for pieces of evidence in the presentation of the Government's own statistics that reveal this important fact yet again. I found one of some interest on page 18 of the "Financial Statement and Budget Report"--the Red Book. In table 2.5 the Government approached this matter by assessing non-oil taxes and national insurance contributions as a percentage of non-oil-money GDP. They can do it any way they like, but it is the same question that is being asked : what percentage of income is going on taxation?

We discover that, on the basis of this analysis, the tax percentage of GDP in the six years of the present Chancellor's period of office has moved from 37.75 to 37.5-- a reduction, over six years, of 0.25 per cent. The same table tells us helpfully that in 1978-79 the percentage,

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under the Labour Government, was 34.25. Clearly the Chancellor has some way to go to catch up with the percentage under the last Labour Government. Indeed, at this rate of progress--one quarter of 1 per cent. every six years--it would take the Chancellor 78 years to reach that level. Perhaps I should counsel the Chancellor against an excess of prudence and caution in this matter.

When we look at the effects of these tax changes and at the failure to increase benefits, we see how sad they are for many people in this country. Every time the Conservatives refuse to uprate child benefit they deny even modest help to the poorer families. We proposed that the Chancellor should increase child benefit to £8.35--what it would have been if it had been increased in accordance with inflation. We said that he should also increase personal income tax allowances above the increase in earnings, particularly for the low paid, and make radical reforms in national insurance contributions to make them fairer. Had he done so, a family with two children, earning £190 a week, would have gained over £6 per week--and it is worth remembering that nearly half the wage earners in Britain earn less than that amount. That would have been a real help to the lower-paid. Of course, the living standards of the most vulnerable people in our society will fall still further this year because the Chancellor has chosen to increase pensions and unemployment benefit by less than 6 per cent., even though, as he told us yesterday, inflation will reach 8 per cent. But it is hardly surprising that this Government overlook the less well-off. Last year the Budget was followed by the savage cuts in social security benefits caused by the new regime for income support and housing benefit. Regrettably, the effects of that continue to be with us.

Many pensioners receiving transitional payments, which were to protect them from some of the effects of these changes, will receive no net increase in payments this year. Their transitional addition will be reduced by the amount of any uprating. My hon. Friends and I see such people at our surgeries every week. I had an unfortunately large collection at my most recent surgeries. For them, the uprating will be not just insufficient--it will be non-existent. They will have to face the relentless rise in prices caused by 8 per cent. inflation, without any help at all from the Government.

But there is one proposal, which was mentioned only briefly by the Chancellor yesterday and with which we shall deal when we consider the Finance Bill, which we believe to be not only wrong but grotesque. I refer to the strange idea that the taxpayer should find a subsidy for private medical insurance for people over retirement age.

It may be that that was not the Chancellor's idea. There was a rumour when it emerged during the health review that it was being resisted by the Chancellor and the Secretary of State for Health. But, as we know, resistance to the Prime Minister does not last long in this Administration. In what we might well imagine as an exercise in the adopted royal perogative, the gentlemen concerned would have been told, "We have decided." In an exercise of a distinctly non-royal we, they would conclude, "We had better do as we are told." I am confirmed in the impression that the Prime Minister was

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the author of the scheme because, after all, she is one member of the Government whom we know could benefit personally from it. I confess to having listened with some impatience over the years to lessons in the virtue of targeting benefits from the Prime Minister, the Chancellor and nearly every occupant of the Government Benches, but I confess that it is not immediately evident to my hon. Friends or to me that we should subsidise from our taxes the private medical insurance of people such as the Prime Minister who are already well provided for.

Mr. Ian Taylor (Esher) : Since many thousands of trade unionists benefit from private health insurance, why is the right hon. and learned Gentleman trying to deny pensioners the same rights?

Mr. Smith : As far as I know, neither trade unionists nor non-trade unionists have been the beneficiaries of tax privilege in pursuit of private medical care until this suggestion was made in the Budget. My constituents, many of whom, I am sorry to say, are in the poor category, when they apply for income support or housing benefit are subjected to the most rigorous tests of income and capital. For even small and modest amounts of savings, they are completely excluded from any assistance from the taxpayer because, we are told, benefits must be strictly targeted.

Why does the same principle not apply in this case? What is the justification for an open-ended subsidy for private medical care. Bear in mind that we are talking about payments made not simply by pensioners but by those who make them on their behalf, many of whom will be paying tax at the higher rate. Why should the rest of us who pay our taxes and depend, and are happy to depend, on the NHS for our medical care subsidise by 40 per cent. the private medical bills of the hon. Gentleman, the Prime Minister or anyone else in Britain? No test of income or capital is applied in this case. There is no invidious inquiry into means. We know that every time Conservatives want to advance their own interests they forget about targeting, particularly when it helps the better-off and the object is privilege. Indeed, the arrangements are extremely convenient. People do not even have to fill in a form to ask for tax relief. According to BUPA advertising in today's newspapers, it will be deducted directly and the Treasury will then pay. That advertisement may be familiar to the Chancellor. It is a slightly unfair depiction of the right hon. Gentleman--

Mr. Neil Kinnock (Islwyn) : Sumo Lawson.

Mr. Smith : --as he wrestles with his difficulties. All I can say is that he is in this pickle because the Prime Minister insisted that this particularly daft scheme be put into his Budget.

We know that this is not a Budget of much substance. None the less, it is highly revealing. It reveals how fearful and defensive the Chancellor has become as he contemplates the results of his misguided policies. He has been forced to promise to maintain high interest rates for as far ahead as he can see. But with falling growth, rising inflation and a worsening deficit in our overseas trade, our economy is clearly not under wise or prudent supervision.

The Chancellor yesterday did not dwell on the perils which lie ahead, but he knows only too well the dangers of being dependent on the good will of the foreign holders of

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short-term money, whose financing of the balance of payments deficit he requires to secure by his policy of high interest rates, and on whose appreciation of their own interests the future of sterling depends.

This country has, under Conservative rule, not only seen the dissipation of North sea oil revenues which could have been used to rebuild our industry and achieve civilised standards of service and opportunity ; we have also seen this country move from a position of oil strength to a position of dependence on short-term hot money. For that unfortunate outcome the Government will be held to account. 4.21 pm

The Chief Secretary to the Treasury (Mr. John Major) : This is my right hon. Friend's sixth Budget. In these Budgets his measures have dramatically improved the supply performance of the economy and simplified the corporate and income tax system to an extent that few people anticipated. He has reduced the rates of tax and the number of taxes. He has abolished more taxes than any other Chancellor this century. He has reduced tax distortions and tax breaks and moved steadily towards a much simpler and more efficient tax structure. No Chancellor for generations has so reformed our fiscal structure, and that work has continued in this Budget.

The right hon. and learned Member for Monklands, East (Mr. Smith) said, correctly, that the tax burden has gone up. He is right about that, and I will tell him why. It has gone up because we are repaying Labour's borrowing-- [Interruption.] --which, had we not done so--

Mr. Kinnock : Really!

Mr. Major : The Leader of the Opposition would learn something if he listened ; it would be a novelty for him.

As I was saying, had we not done that, it would today amount to a PSBR of £25 billion in today's terms. That is not a burden that we are prepared to have and to pass on to the next generation, even though Labour Members were prepared to do so.

The right hon. and learned Member for Monklands, East may not believe it, but perhaps he does not understand these matters. Indeed, he has as much likelihood of understanding how the economy works as Donald Duck has of winning Mastermind-- [Interruption.] I see the hon. Member for Glasgow, Garscadden (Mr. Dewar) leaving the Chamber. If that Donald returns, he at least will be extremely welcome. The right hon. and learned Member for Monklands, East has noticed none of these developments. He has also ignored many of the effects of the changes that have been brought about--the increased growth, the dramatic increase in investment, the greater prosperity, the rise in the number of people in work and the falling numbers of people who are unemployed.

Mr. Harry Ewing (Falkirk, East) rose --

Mr. Major : I will give way later in my speech.

Mr. Ewing rose --

Mr. Major : The hon. Gentleman will have an opportunity to speak later. I am anxious to make some progress now.

Mr. Ewing rose --

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Mr. Speaker : Order. The hon. Member for Falkirk, East (Mr. Ewing) has been a Member for a long time. He knows the rules.

Mr. Major : The hon. Gentleman has been here a long time. We welcome his presence and I promise to give way to him later. The right hon. and learned Member for Monklands, East has been disparaging about the Budget. He thinks--I believe he has said so in explicit terms--that it is a missed opportunity. It is far from that. It is a prudent Budget, as my right hon. Friend said, and it is the right Budget to help bring down inflation, with the strong fiscal and monetary stance that the Government now have.

It is a Budget that is good for savers, is good for those in work--with a £3 gain for the vast majority of employees from the national insurance changes, is good for the elderly, is good for small companies and is good for the environment.

When in office, the Labour party produced Budgets--several a year, as I recall. People combed through them to see if anybody did not lose. One has to comb through this Chancellor's Budget to find someone who does lose. That is the significant change, and most people understand that only too well.

The right hon. and learned Member for Monklands, East had some critical things to say about my right hon. Friend's stewardship. Of course, it is the right hon. and learned Gentleman's job to be critical, and he spares no effort in being critical. He makes even less effort in being accurate. He accuses my right hon. Friend of losing control of demand, yet I return to a point that we have debated before. After the stock exchange crash, there were genuine fears of a widespread recession. At that time, my right hon. Friend relaxed monetary policy, as everybody advised him to do, but the right hon. and learned Member for Monklands, East and his colleagues urged both cuts in interest rates and large increases in public expenditure. If we had done that--we did not increase public expenditure--the growth in demand about which the right hon. and learned Gentleman now talks would have been far worse.

The right hon. and learned Gentleman has forgotten that. Indeed, he has forgotten it to such an extent that last night on "Newsnight" when I specifically asked him, he categorically denied having called for public expenditure increases and said that he had called only for interest rate cuts. As my hon. Friend the Member for Beaconsfield (Mr. Smith) pointed out, the right hon. and learned Gentleman not only called for increases in public expenditure but moved a motion to that effect. [Interruption.] Last night the right hon. and learned Gentleman denied it. Last night he neglected to remember--I remind him in case he has forgotten--that he had twice issued news releases calling for increased public expenditure and increased demand : "Smith Urges Action to Avert Recession"


"Smith Calls for Boost to Real Economy".

That was immediately after the stock exchange crash. If that action had been taken then, the growth in demand and inflation and the trade gap which the right hon. and learned Gentleman attributes to the crash would have been far worse.

The right hon. and learned Gentleman's critcisms were met fairly and squarely yesterday in my right hon. Friend's Budget. My right hon. Friend explained the origin of our trade gap. Exports are at an all-time high, but imports

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have risen much faster as a result of rapid growth in general and a massive investment boom in particular. It is interesting that fully three quarters of our imports of manufactures now consist of production and investment goods. Consumer goods are only a small proportion. The trade gap is not driven by a public sector deficit ; it is investment led, and that investment is the source of future growth in production, exports and jobs. That is the difference between this trade gap and its predecessors, and the right hon. and learned Gentleman should understand that.

Having explained the cause, my right hon. Friend the Chancellor explained the remedy. The right action has been taken. The only effective way to slow excessive demand is to put up the cost of borrowing. That worked before and it is working now. It will choke off inflation and the trade gap will in due course diminish, and meanwhile we have no difficulty in financing it. There is no credible alternative.

The right hon. and learned Gentleman has also been criticial of my right hon. Friend's forecasts. He had some fun with them. That reminded me of something, and I wonder whether the right hon. and learned Gentleman remembers who said this in defence of Government forecasts of the trade gap :

"Obviously these are matters which are extremely difficult to forecast. I do not think that getting them right or wrong is the prerogative of any particular Government."--[ Official Report, 12 March 1979 ; Vol. 964, c. 18.]

Does the right hon. and learned Gentleman remember who said that? I shall tell him. [An Hon. Member-- : "Disraeli."] It was not Disraeli. It was the Secretary of State for Trade in 1979--the right hon. and learned Gentleman himself.

Mr. John Smith : Can the Chief Secretary tell me whether at any stage in my previous career I forecast a balance of trade deficit that was over four times wrong on a rate of inflation that was over twice wrong?

Mr. Major : I can tell the right hon. and learned Gentleman what happened. As I recall, he was a very distinguished Secretary of State for Trade for five months. During that period, we moved from a surplus to a deficit, inflation rose by 3 per cent. and heaven alone knows what happened to export performance : it did extremely badly. Mercifully, the general election cut off the right hon. and learned Gentleman's career at that stage.

Mr. Harry Ewing : I know that the Chief Secretary's hat is in the ring for the Chancellor's job. Given the choice that the Prime Minister must make, I would say, "Better the devil you know than the devil you don't."

The Chief Secretary waxed eloquent about repaying the national debt. Will he make it clear whether it is now part of the Government's economic policy to repay the national debt rather than investing in education, research, industry, the Health Service, the environment and everything else that improves the quality of life?

Mr. Major : I refer the hon. Gentleman to my right hon. Friend's Budget speech, in which he made it perfectly clear that our policy in the medium term was a balanced Budget but that it would take a period to achieve that balanced budget.

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On public expenditure, the hon. Gentleman may care to recall that as a result of the public expenditure round last year there was a real increase of more than 3 per cent. in the priority programmes. That is a far more substantial increase than has taken place for many years and it was particularly well targeted. Capital expenditure rose--or, at least, it is to rise in the year beginning in April--by a record amount, particularly expenditure on the National Health Service. I should have thought that the hon. Gentleman would welcome that. [ Hon. Members :-- "Answer."] The position is as I have described it and as my right hon. Friend the Chancellor explained yesterday.

The frankness revealed in my quotation from the right hon. and learned Member for Monklands, East is refreshing, although 10 years on it seems to have deserted him. As we saw a moment ago, when the right hon. and learned Gentleman talked about the growth of credit, his frankness is not all that has deserted him ; his memory appears to have gone, or at least become selective.

I set out our solution to the trade gap a moment ago, but what was the right hon. and learned Gentleman's solution? It was a dynamic solution. [ Hon. Members :-- "What about the Budget?"] I am coming to that : it is a very important Budget. The right hon. and learned Gentleman told the House--I shall quote him whether he is embarrassed by it or not--

"We believe that the best way to do that"--

to improve the trade gap--

"is to engage the attention of the sector working parties".--[ Official Report, 12 March 1979 ; Vol. 964, c. 9.]

So that is it. All we need is a sector working party--no incentives, no productivity growth, no supply side reform, no firm fiscal or monetary stance, just a sector working party. Nor did the right hon. and learned Gentleman propose a specific remit for the working party. His ambitions were more limited. We had only to engage the working party's attention and the trade gap would disappear. Clearly, the right hon. and learned Gentleman believed in the smack of firm indecision.

Mr. John Smith : Whatever the policies for which I was responsible-- I remind the House that we then had a manufacturing trade surplus--can the right hon. Gentleman tell me why, if monetary discipline, supply side reform and so on are so wonderful, a £3 billion surplus 10 years ago has been reduced to a deficit of £20 billion?

Mr. Major : The right hon. and learned Gentleman will have noticed that as a result of our policies over the past few years there has been a more dramatic rise in the living standards of people in Britain than we have experienced for many years, and that is the final indicator of the success or failure of Government economic policies.

The right hon. and learned Gentleman proposed to the shadow Cabinet a shadow Budget package of tax cuts and spending which he costed at £3 billion. That was an odd piece of costing but I shall gloss over that for today. There is a curious feature about the costing of the £3 billion package. A day or so after unveiling that package of tax cuts and spending, the right hon. and learned Gentleman criticised my right hon. Friend's Budget of last year as the cause of the growth of credit and the trade deficit. That Budget cut taxes in the current year by £4 billion.

If the right hon. and learned Gentleman believes that the £4 billion tax cut last year created the trade deficit, why did he propose in his shadow Budget a further £3 billion

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tax cut this year? The logic of the right hon. and learned Gentleman's argument is that he should be clawing back last year's reductions, not proposing more.

If he really believes what he has said in recent months, he should not have proposed that package, or, in doing so, he should have said that it would worsen the trade gap. But he did not say that. The truth is that the right hon. and learned Gentleman has been caught out. It is now perfectly clear that he knows that last year's Budget did not create the trade gap, despite all that he and his colleagues have said repeatedly in recent months. Because he knows that, the right hon. and learned Gentleman considered it prudent to propose a tax and spending package almost as large as last year's, and larger than my right hon. Friend's proposals this year. It simply illustrates beyond doubt the sheer brass-necked hypocrisy of what the Opposition have been saying in recent months.

That brings me to the Leader of the Opposition and what he said yesterday.

Mr. John Smith : What about your Budget?

Mr. Major : I am referring to the right hon. Gentleman's speech on the Budget. Is the right hon. and learned Gentleman suggesting that the Leader of the Opposition did not mention the Budget? He said yesterday, and I agree with him :

"Governments do not have their own money Governments only have the taxpayers' money."--[ Official Report, 14 March 1989 ; Vol. 149, c.315.]

He then implied, although he did not say it explicitly, that the tax burden should be reduced by taking the basic rate down by 6p, to take it to the tax burden that he believed existed under Labour. I thought that we had found a convert in the right hon. Gentleman, but that feeling lasted only for a moment. Within minutes of allocating the surplus to cuts in the basic rate, the right hon. Gentleman was allocating it to increases in public spending. He went further than ever before and allocated all the surplus £14 billion to increases in public spending. What the right hon. Gentleman had described as the taxpayers' money did not stay with them for very long. It was soon snatched back to be spent by him. But he overlooked one thing. With Labour policies, that surplus would not exist in the first place to be snatched back.

The electorate understand that very well. Labour is the party of high taxation. We are the party of low taxation and that is why we sit on this side of the House and Labour Members sit opposite and will continue to do so for a large number of years to come.

Mr. John Home Robertson (East Lothian) : Will the Minister give way?

Mr. Major : In a moment.

The Leader of the Opposition said that the Government had been a bonanza for the rich and that the top 1 per cent. --which presumably includes the hon. Member for East Lothian (Mr. Home Robertson) who sought to intervene-- has gained £16 billion since 1983 and £26 billion since 1979 in cumulative tax cuts. But he did not say that the same top 1 per cent. will be paying a higher proportion of total income tax in 1989-90 than they paid in 1978-79. That means that they will have paid £5.75 billion more in taxation. If they were not making that contribution, the difference would have to be made up by the other 99 per

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cent. of taxpayers. But that is the right hon. Gentleman's policy. The Opposition believe in increased taxation for everyone, as they repeatedly make clear.

It is not only the top 1 per cent. who provide a higher proportion of the total tax take than they did in 1979. The top 5 per cent. were contributing 24 per cent. of the total tax take then and now they are contributing more than 29 per cent.

Amazingly, the right hon. Gentleman tried to pose as the friend of the low- paid. He said that the Government has removed their rights. I shall tell the Leader of the Opposition about the rights that we have given the low- paid. We have given them the right to keep more of what they earn, and they will welcome that. We have reduced the basic rate of tax from 33p to 25p in the pound--and that is before the latest reform, which provides an extra £3 a week for most people in work.

Mr. Home Robertson : The right hon. Gentleman talks about his concern for taxpayers. May I draw his attention to what the right hon. Gentleman for Henley (Mr. Heseltine) described as the Tory tax? Is he aware that poll tax forms are being delivered to households throughout Scotland this very week? What does the right hon. Gentleman have to say about the fact that people like me, as he so charmingly put it, will end up paying less in local taxation because of that Tory tax whereas people on lower incomes throughout Scotland this year and in England next year will be paying substantially more tax?

Mr. Major : I will tell the hon. Gentleman why so many people in Scotland will pay so much in community charge--because of the reckless way in which so many Scottish labour authorities spend.

My right hon. Friend's Budget--

Mr. John Smith : I repeat the question put clearly by my hon. Friend the Member for East Lothian (Mr. Home Robertson), in case the right hon. Gentleman does not understand it. Why should people who are better off receive the same treatment as those who are much worse off? Can we have a straight answer to that question?

Mr. Major : The majority of local government expenditure--[ Hon. Members :-- "Why?"] I am answering the question and the right hon. and learned Member for Monklands, East may learn something if he listens to my answer.

The majority of local government expenditure has been met in the past, and will be met in the future, by central Government grant, which comes out of the progressive tax system. The balance is met from the community charge, and payment of this element should be according to the services received.

My right hon. Friend's Budget this year falls between the most far-reaching tax reforms for a generation and the introduction next year of independent taxation for husbands and wives. [Interruption.] The Leader of the Opposition is welcome to intervene if he wishes.

Mr. Kinnock : Get on with it.

Mr. Major : I am tempted to say, "Temper, temper." You will never lead the country if you cannot control your own temper.

Mr. Deputy Speaker (Mr. Harold Walker) : Order. I have no aspirations to lead this country.

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Mr. Major : I beg your pardon, Mr. Deputy Speaker. No one would ever suggest that you would ever lose control of your temper, or anything else.

As my right hon. Friend the Chancellor of the Exchequer promised, this is a prudent and cautious Budget. It makes no reduction in the overall tax burden and provides strong fiscal backing for a tough monetary stance. My right hon. Friend continues with the policies that have produced the strongest fiscal position of any leading country. As a result, we are forecasting a further fiscal surplus of £14 billion--that will be the third successive year of surplus. As a result of these cumulative surpluses over three years, we will have repaid 16 per cent. of public sector debt and saved £3,000 million in interest payments each successive year. That £3,000 million will be available for more productive purposes than paying interest on past debts, many of which were run up when Labour was in government. This strong fiscal position has been unmatched for decades and has enabled my right hon. Friend to promote several important themes which he has pursued steadily during his six years as Chancellor. The predominant theme continues to be tax reform, designed to improve and simplify the tax system, remove tax distortions and maximise the freedom of individuals and companies to spend their own money and organise their own affairs. In that context, the main reform in the Budget is to restructure national insurance contributions. We should be entirely clear as to what yesterday's reforms mean.

At present, people earning just below the steps for each rate band face a reduction in take-home pay as a result of an increase in their earnings. For example, someone whose earnings were near the threshold of £115 who received an increase of £1 would, as a result of moving to a higher rate of national insurance, find his or her take-home pay reduced by £1.37. That is clearly unsatisfactory. My right hon. Friend's reform has entirely abolished two of the three steps and goes even further to help those on lowest incomes. He retained the first step of £43 income a week--the point of entry to the whole range of contributory benefits--but at a much reduced rate. The initial contribution has been reduced by 60 per cent.--from £2.15 to only 86p. That is the cheapest entry fee to the highest contributory benefits since the Beveridge system was introduced in 1948. By any yardstick, it must be the bargain of the century.

The reform not only introduces this low cost contribution to benefits, but removes distortions and disincentives in the national insurance system and increases take-home pay for the clear majority of people in work by about £3 a week. Seventy per cent. of the total benefit goes to those earning less than average male earnings. The reform carries with it a substantial cost to the Exchequer of £2.8 billion in a full year. It provides a simple but well-structured system of contributions for the low paid.

Mr. John Battle (Leeds, West) : The Chief Secretary has said that people will gain £3, but those who are also on family credit and housing benefits will have their benefits deducted and will therefore lose. Simply increasing wages in this manner does not free people from the poverty trap.

Mr. Major : The hon. Gentleman is right about the impact on some benefits. As a result of the changes in National Insurance contributions, however, take-home

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pay will rise by £3. If we took the hon. Gentleman's view we would never either reduce national insurance contributions or raise tax thresholds, both of which the Opposition are keen for us to do.

Mr. A. J. Beith (Berwick-upon-Tweed) : By laying such stress upon the £3, the Chief Secretary has led many people to expect that they will be better off in terms of national insurance contributions. Will he confirm that someone earning £70 a week--which, by my standards and his, is surely low pay--will be only 21p a week better off?

Mr. Major : Yes. The reason for that is that--with, I believe, the hon. Gentleman's support at the time--my right hon. Friend, to help those very same people, reduced the national insurance steps in 1985. People have already been paying reduced contributions. That is why I said that the vast majority will receive another £3--as I said, 70 per cent. of the total benefit.

In his shadow Budget, the right hon. and learned Member for Monklands, East also proposed a reform of national insurance contributions, but his proposal was to abolish the upper limit on contributions. That would add massively to public expenditure on state earnings-related pensions in the long term--as I hope that he will acknowledge--unless the contributory principle was ignored, with a "shadow" upper earnings limit on pension entitlement and employees receiving nothing in return for higher contributions. The right hon. and learned Gentleman is a little unclear about that, but with a "shadow" upper earnings limit--which is presumably what he has in mind--nearly 2 million employees would immediately be worse off, with the person on about one and half times average earnings paying £3.75 a week more.

My right hon. Friend's reform maintains the contributory principle and helps the low-paid without creating losers--a much sounder system. I hope, therefore, that the right hon. and learned Gentleman and his party will support it.

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