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Dr. David Owen (Plymouth, Devonport) : Surely the Chief Secretary is not defending the national insurance contribution on the contributory principle. The contributory principle is a fraud in NIC terms. Surely the next step must logically be to go a stage further in each successive Budget to bring the national insurance contributions and income tax into the same relationship.

Mr. Major : I am afraid that I do not agree with the right hon. Gentleman, although I understand his argument and am familiar with the arguments in the Green Paper. I think that the contributory principle has much to commend it. The introductory entry fee is now very low at 86p, and I think it entirely right that we should sustain the principle now and in the future.

If the Opposition support the national insurance changes, the possibility of a parliamentary novelty will be opened up--that is, the Opposition actually voting for a reform that puts more money into the pockets of those on modest earnings. They voted against cuts in the basic rate of income tax in 1979, 1987, and 1988, and we shall watch with interest to see how they vote on national insurance contributions this year.

Another significant measure in the Budget is my right hon. Friend's pensions proposals. We believe that they will make an important contribution to simplicity and flexibility in pensions provision. The change follows the

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overwhelming logic of previous deregulation policies to maximise freedom and minimise Government interference. The proposals effectively take the Government out of the business of artificially limiting pension arrangements, and will leave employers the freedom to offer their employees whatever pensions they see fit to offer. No longer will their decision be determined by the tax regulations of the Inland Revenue.

The restriction that my right hon. Friend does propose is the limiting of tax relief to pensions based on earnings of £60,000, with full protection of existing rights, for existing members of occupational pension schemes. Their current arrangements will not be adversely affected. The £60,000 tax relief limit will be increased in line with inflation to ensure that it retains its value. Those earning more than that and others who find the Inland Revenue limits restrictive, will be able to receive a top-up pension without tax relief, which will not in future affect the tax privileges of the main scheme.

Mrs. Maria Fyfe (Glasgow, Maryhill) : On the matter of employers who would like to do something of benefit to their employees, why has the Chancellor not lifted the high burden of taxation on workplace nurseries? Does he not want to get more women back to work in Britain to fill the jobs gap? Does he not talk to the Secretary of State for Employment?

Mr. Major : I understand the sensitivity of that issue, but it is predominantly a matter for employers, not for the tax system. We look to employers and employees to make those arrangements.

Mrs. Fyfe rose --

Mr. Major : I have answered the hon. Lady's question and I have nothing further to say to her on that issue. I have made it clear that we will not change that tax and that it is a matter for employers and employees.

As a consequence of removing those artificialrestraints--

Mr. John Smith : The right hon. Gentleman was asked a straight question by my hon. Friend the Member for Glasgow, Maryhill (Mrs. Fyfe). He was asked to justify why workplace nurseries are the subject of taxation. That is a Treasury responsibility. Will he give us the answer?

Mr. Major : It is a benefit in kind and all benefits in kind fall into that category. We are not in the business of dividing up benefits in kind in the arbitrary fashion proposed by the right hon. and learned Member for Monklands, East. It is not a wise way to proceed.

As a consequence of removing those artificial tax restraints, my right hon. Friend has also been able to make some other worthwhile changes in the pension regime. The rules affecting those who retire or leave early have been simplified and the arrangements for personal pensions and additional voluntary contributions have been improved. Contribution limits have been increased substantially for those over 35 and, for the first time, people will be able to manage their own personal pension investments. Taken together, those reforms will increase choice and reduce bureaucracy for employers and employees. I hope that these and earlier pension reforms will remove much of the complexity and mystery in pension provision.

Last year, the Inland Revenue published a consultative document setting out three main options for reform of the

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life assurance industry. As a result of the representations made, my right hon. Friend has accepted that reform was necessary but that it should be achieved within the existing system. The measures he proposes have three advantages : they remove current anomalies ; they enable my right hon. Friend to reduce the rate of tax on policy holders' investment income from 35 per cent. to 25 per cent. and the rate of 30 per cent. on capital gains to 25 per cent ; and they also enable him to abolish entirely life assurance policy duty. We believe that those measures will result in a fairer and more effective tax regime as well as removing uncertainty and anomalies and establishing a stable regime for a unique industry.

The second theme that runs through this and previous Budgets is the Government's determination to widen the ownership of property and capital. In this Budget my right hon. Friend has proposed a number of measures to encourage saving and capital growth through wider share ownership. Ten years ago, share ownership by individuals appeared to be a dying habit. There were only 3 million shareholders of equities, and the number was dwindling. As a result, companies found it increasingly difficult to raise equity capital from individuals. All that has changed. Partly as a result of the extensive programme of denationalisation--that is what privatisation is--there are now 9 million shareholders, one fifth of the adult population. Becoming a shareholder in industry and commerce and building up capital is now much more commonplace, and that is a welcome trend.

The Budget proposes a range of measures to give further encouragement to share ownership again building on schemes already in place. The most important of those is the personal equity plan scheme which is to be expanded by increasing the annual investment limit from £3,000 to £4,800 and by relaxing the limits on investment in unit and investment trusts. Furthermore, shares from new issues can now be held in a PEP. The scheme has been simplified and better tailored to small investors.

A further characteristic of the Budget is that it removes a number of fiscal injustices and anomalies. The most obvious example is the ending of the cliff-edge steps in the national insurance system, but there are others as well. In particular, there are two measures which will remove anomalies affecting elderly people. First, we have fulfilled the single unredeemed pledge from the 1979 manifesto and abolished the pensioners' earnings rule. As a result, pensioners who choose to go on working will no longer be penalised for doing so. It is simply not wise to inhibit pensioners from working if they wish to do so. Overwhelmingly, they have a great deal to contribute and, in future, they will have every encouragement to do so if they wish. Secondly, we are reducing to well below 40 per cent. the marginal rate of tax in the short band of income where age allowance is withdrawn. That was the subject of many representations last year, not least from hon. Members who served on the Finance Bill Committee. I hope that the change will be generally welcomed. At the same time, we have extended the higher level of age allowance, which my right hon. Friend introduced in 1987 for all those aged 80 or over, to those aged 75 or over. As a result, those aged between 75 and 79 will be significantly better off, with a gain of £1.73 a week for a single person and £2.55 for an elderly couple. Moreover, three quarters of those in that age group will now pay no income tax at all. That is a welcome measure which matches the social security

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increase in income support of £2.50 for individuals and £3.50 for couples over 75, which comes into effect in October.

The Government's economic and fiscal objectives are clear, and the Budget reaffirms them. We wish to ensure growth without inflation and to minimise tax rates to enable the greatest possible degree of taxpayer choice. We do not believe that the Government know better than the taxpayer how to spend the taxpayers' money. We continue to move towards our objective of a basic rate of income tax of no more than 20p in the pound as soon as it is prudent to do so.

By way of contrast, the Opposition are committed to increasing tax in every way they can. They are committed to increasing tax for basic rate taxpayers, abolishing the ceiling on national insurance contributions, increasing contributions by 9 per cent. on earnings over £17,000, imposing a wealth tax and much else. All that is well documented.

In this Budget we have further reformed the tax system. We have helped pensioners by abolishing the earnings' rule. We have removed high marginal rates for those on low incomes by reforming national insurance contributions and further measures have been put in place to widen share ownership, including substantial improvements to PEPs. The taxation of pensions and life assurance has been modernised. All that has been done within a prudent and cautious fiscal framework in which we plan to make a further massive repayment of debt next year, thus providing a fiscal stance which will buttress monetary policy in its task of bringing downward pressure on inflation.

Mr. Kinnock : The right hon. Gentleman has referred several times to the great virtue of using the Budget surplus to repay the national debt. Can he confirm that that will continue to be an objective of the Government, should they have surpluses, and that it will continue until the next general election and not be impeded by any desire that the Government may have to make a tax cut before the next general election?

Mr. Major : Clearly, the right hon. Gentleman is aware of the danger to his party as the high-tax party and the support for us as the low-tax party. He is aware that we are enjoying the longest period of growth since the war, latterly combined with dramatic falls in unemployment. He does not care that our policies are working. The Budget sticks with our policies and I commend them to the House.

Mr. Dennis Skinner (Bolsover) : On a point of order, Mr. Deputy Speaker. You will be aware of the Royal Commission on standards of conduct in public life, especially as it applies to Ministers. I see that Rambo-- the Chancellor of the Exchequer--is leaving. Recommendation No. 8052 says :

"Ministers must so order their affairs that no conflict arises, or appears to arise, between their private interests and their public duties."

In today's Evening Standard, there is an advertisement using a picture of Rambo--the Chancellor of the Exchequer. I wondered how much he had been paid for it, whether he had posed for it and whether he will give the money to charity. Is that where the manufacturing surplus

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has done? Does the suggestion of enlarged breasts imply the use of steroids? Can you investigate the matter, Mr. Deputy Speaker?

Mr. Harry Ewing : Further to that point of order, Mr. Deputy Speaker. That appears to be a very authentic picture of the Chancellor of the Exchequer. Can it appear on his security pass for circulating round the House of Commons?-- [Laughter.]

Mr. Deputy Speaker : Order. I do not accept any responsibility for anything that appears in the Evening Standard.

5 pm

Mr. John Evans (St. Helens, North) : In my maiden speech in the Budget debate on 1 April 1974, I said :

"I have always been puzzled by the mystique which has surrounded an annual Budget."--[ Official Report, 1 April 1974 ; Vol. 871, c. 946.]

Fifteen years and umpteen Budgets on, the only point that still puzzles me is why we still carry on with the pompous nonsense. But yesterday's Budget was not only the usual nonsense. It was at times boring nonsense, but more importantly, it was an affront to the impoverished in our society who have suffered so grievously at the hands of this Government and for whom this Budget does nothing. Nothing that the Chief Secretary to the Treasury has said this afternoon has changed my views about what the Chancellor said yesterday.

It will come as no surprise to the Chancellor that my constituents in St. Helens have not welcomed the Budget. He knows well that the Government's policy does not put at the top of the agenda the interests of the low-paid, the unemployed and the poor, of whom there are, unfortunately, a disproportionate number in St. Helens. He knows that the interests of poor people take second place in his order of priorities to the interests of the rich, of whom there are disproportionately few in St. Helens. There is no need for argument ; let us look at the facts.

Last year, the Chancellor cut the highest rates of tax for each member of the wealthy elite in this country. He gave out more than £1.6 billion to people who were already swimming in cash. This year, another year of misery for the poor, he has the effrontery to give just a fraction of the poor a few crumbs from his £14 billion surplus in reduced national insurance contributions. He calls

thatbenevolence. It is the height of audacity to suggest that this is a Budget for the low-paid.

The litmus test of the honesty of the right hon. Gentleman's claims for this Budget is that the Government are, at this very moment, forcing through the Social Security Bill, which will force unemployed claimants to accept any low-paid, unskilled job which is offered to them, no matter how humiliating. Tory Ministers know that the people who will be forced to accept those low-paid, unskilled jobs will come from areas of the country such as mine. The Government have also made it clear that they intend to abolish the wages councils, the only protection for the low-paid in Britain and for hundreds in my constituency who are covered by wages council agreements. The Chancellor's effrontery almost beggars belief. Even the worst tinpot dictator could not conjure up a more reliable recipe for a low -wage and low-skilled economy in areas such as mine.

In St. Helens, half the population are living on or below the poverty line. Almost one in 10 people, even on the

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Government's corrupt unemployment figures, are still out of work. Hundreds more are on half-baked training schemes devised by the Government at minimum cost. Real apprenticeships are a thing of the past. Investment in manufacturing, on which the triumph of the north -west economy and this country's industrial success were built, is now stagnant. On the last available figures, the fall in north-western manufacturing investment shows a net loss of one-third since 1979--33 times the loss suffered in the south-east.

Mr. Keith Mans (Wyre) : Does the hon. Gentleman agree that, although manufacturing in the north-west may have declined, that is more than compensated for by the huge increase in the service sector?

Mr. Evans : I agree that there has been a savage decline in manufacturing industry, but the hon. Gentleman knows as well as I do that the jobs in the manufacturing sector were highly skilled, highly paid jobs. Unfortunately, some of the jobs created in the service sector are low-paid, part-time and unskilled.

The United Kingdom's balance of trade in manufactures has been in deficit since 1983 and nothing in any of the Chancellor's past six Budgets has addressed the regional disparity which that has created. Almost 40 per cent. of manufacturing jobs in the north-west have disappeared since the Tory party took power--a third more than the loss in the south-east and Britain as a whole. The point is that the demand which he is now trying desperately to contain has been import-led and the consumer demand comes not from constituencies such as mine, but from the affluent south-east. He has done much to promote that demand by sweeping tax cuts for the rich. High interest rates are now hitting my constituents before they have even started to enjoy any economic upturn.

We are told that the Budget deals with revenues. I shall talk briefly about the revenues in the pockets of some of my constituents. At the social security offices in St. Helens, the amounts paid to the very needy have dropped dramatically since the Government introduced the social fund. Those people will not be affected by the changes to national insurance contributions.

At my advice bureau in Haydock last Friday night--significantly, the Prime Minister was in Haydock last Friday night, but was not speaking to my constituents about their problems--a 66-year-old widow produced her pension book to show me that in 1987, her weekly benefit was £42.34 a week, with the Department of Health and Social Security paying her rent and rates. In April 1988, her benefit increased to £45.75, but she then had to pay £4.87 for rent and rates. Her real income had slipped to £40.91--a drop of £1.43 a week. She will receive a rise in April and she had the counterfoils in her book to prove it. She will receive £46.10 a week--a princely increase of 35p a week. My elderly constituent, who is a sick woman, does not know which way to turn because she now owes more than £120 in rent arrears. I do not think that she will be interested in what the Chancellor offered yesterday.

Last Saturday morning, in my St. Helens surgery, a 70-year-old diabetic, who had his left leg amputated last December and whose wife is crippled with arthritis, informed me that their total income for two invalids was £80.43 a week. He had just been informed that his rent and rates had been increased by more than £7 a week and they

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simply could not afford to pay. I do not think that that couple will be interested in private medicine bonuses or personal pension equity plans.

The 4,500 unemployed in my constituency--that is the official figure, and there are far more than that in reality--will not see any increase in their weekly revenues. What has the Chancellor done for them? He has given them almost 8 per cent. inflation, but, as a Billinge pensioner protested to me on Friday night, when pensioners receive their increase in April, it will be just 5.9 per cent., based on last September's inflation rate. It has not passed them by that wealthy admirals and judges have just received their annual increase index-linked at the full inflation rate.

We are not defeatists or given to complaining for the sake of it in our region, but this Government have treated us economically like paupers in comparison with their attitude to the south-east. For all the millions of pounds spent on new roads for the south-east to ease its economic boom, pennies have gone to the north-west. Billions of pounds are to be spent on rail links in the south-east, linking the Channel tunnel to London, but apparently nothing will be spent linking the rest of Britain to the capital. That is utterly unacceptable.

New businesses have been created in the north-west, but the growth rate over the past seven years has been just 7 per cent.--half that for the rest of the nation and lower than that of any other region according to VAT registrations and deregistrations. The number of retail outlets has fallen by 6 per cent. since 1980 and there has been double that fall in the number of units in agriculture. Living standards for those in the south-east have jumped by over 20 per cent. since the Government took office, but in the north-west we have not seen even half that level.

The Government have no commitment to the regions. They have reduced regional assistance and grants by 55 per cent. in the past few years and virtually scrapped any coherent regional policy. What happened when the Prime Minister came to Merseyside last weekend? What hit the headlines? Another 1,000 workers were laid off on Merseyside. That is what Tory policy has meant to the north-west of England.

Contrary to what the Prime Minister's propaganda machine tells us, the north-south divide not only still exists : it is still growing. We are two nations in Great Britain, and the figures prove it. Why could not some of the Chancellor's enormous surplus be spent on the many schemes that local authorities, especially in the north, are only too anxious to put into operation? I refer to just one that I have brought to the attention of Ministers in the past few months. Excellent work has been done with a relatively small amount of assistance to reclaim the derelict Ravenhead glassworks site in my constituency to bring it back into productive capacity and activity. This Budget has done virtually nothing for the impoverished in our society. The Chancellor has, at long last, abolished the earnings rule for pensioners ; I welcome that, but there could have been a real effect if he had increased pensions in line with the real rate of inflation. He could have announced that yesterday, but he did not.

The Chancellor should also have increased child benefit in line with inflation, because in my constituency over 9,000 families have children who are under five and many are desperate for help. Such an increase would have been

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a real benefit to the poorest in my constituency. However, he did not, and I leave the House to draw its own conclusions.

If the quality of a nation's civilisation were judged on the basis of the care and attention it bestowed on its elderly and its children, most of the people of St. Helens would regard this Budget as truly barbarian.

5.12 pm

Sir Ian Gilmour (Chesham and Amersham) : Tactically, I think this year's Budget well judged, and I congratulate my right hon. Friend the Chancellor of the Exchequer on his prudence. Those people who gaze wide- eyed at the large Budget surplus and shut their eyes to everything else in the economy are seriously out in their thinking. My right hon. Friend was far too sensible to do the same. The hon. Member for St. Helens, North (Mr. Evans) was churlish about unemployment. Of course it is still high, but, as my right hon. Friend the Chief Secretary to the Treasury said, there has been a dramatic fall recently and I am happy to say that my constituency still has the lowest unemployment rate in the country.

I greatly welcome the Chancellor's reform of national insurance contributions, which is an important step forward, as is the abolition of the earnings rule. If only my right hon. Friend had been able to announce the rescinding of the Government's mean and unjustified failure to uprate child benefit, tactically I could have given the Budget three cheers, but as it is, it still deserves at least two and a half.

However, strategically--unfortunately--the verdict must be different, because the Chancellor has done little or nothing to improve the competitiveness of British manufacturing industry, which should have been his main strategic objective, and because of his attitude to the balance of payments.

Once again, my right hon. Friend the Chancellor talked yesterday about the transformation of the economy, but, far from the current position being different, it is all too drearily familiar in many respects. Once again, we have a consumer boom, culminating in inflation and in a serious balance of payments deficit. We have seen that story countless times before. We are witnessing not a transformation, but yet another repeat performance.

I found my right hon. Friend's optimism difficult to square with the fact that the balance of payments deficit was 3 per cent. of GDP in 1988, rising to 4 per cent. in the second part of the year. We have had a similar deficit only once before, in 1974, when there had been a rise of over 40 per cent. in import prices. Although there has been some rise in import prices recently, there has been nothing like that rise, so there can be no such alibi on this occasion. The deficit is the straightforward result of British industry's continued failure to compete successfully, especially in its own market. Imports of manufactures have risen 12 times faster than domestic production since 1979--nearly doubling in the process.

A balance of payments deficit of the present magnitude was not foreseen by the Chancellor this time last year, and since then his response has been variously to assert that it does not particularly matter and to predict that in any case it will go away of its own accord. My belief is that he is dangerously mistaken in both those contentions.

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The view that a current account deficit of the present size does not especially matter and can be allowed to continue strikes me as reckless. In the short term, there will be the perpetual risk of a run on sterling, with dire consequences for inflation. It could also lead to even higher interest rates. In the longer term, a deficit of this size means first that we shall lose the net overseas wealth that was painfully acquired in the early 1980s and, if it were allowed to continue, that we would eventually join the company of debtor nations. In any case, what possible value can a medium-term financial strategy have if it does not even try to keep us solvent? That is the policy's fundamental defect.

The external deficit will not go away or get much better of its own accord. It is no blip : it is the result of deeply entrenched adverse trends. My right hon. Friend the Chief Secretary was right to say that it is not the result of the tax cuts last year. It has a far deeper and more entrenched basis than that--

Mr. Mans : Does my right hon. Friend agree that one reason for the deficit is the huge increase in manufacturing investment in the past few years, which contrasts with previous deficits and suggest that in the future the deficit may go down as a result of more efficient manufacturing in this country?

Sir Ian Gilmour : I am afraid that my hon. Friend is seriously mistaken--there has not been an enormous increase in manufacturing investment. In the period from 1979 to the present day, manufacturing investment has been negative. Although it has certainly increased in the past year or so--that is encouraging--over that period as a whole it has been low. I fear that my hon. Friend's optimism is not justified.

The fact is that those adverse trends are deep-seated and our competitive performance has shown little improvement. Those trends were masked for a long time by North sea oil and then by the serious depression at the beginning of the 1980s which checked the growth of imports, but the crunch has now come. The balance of trade in manufactures has gone from a surplus of £5.5 billion in 1980 to a deficit of £14.5 billion last year, rising in the last quarter at a rate of £17.5 billion.

Oil production is now falling, and property income is probably falling also as our foreign assets run down. We cannot be saved by the service industries. I cannot speak for the north-west to which my hon. Friend the Member for Wyre (Mr. Mans) referred when he intervened in the speech of the hon. Member for St. Helens, North, saying that service industries in the north-west are making up for the decline in manufacturing production. I do not know about that, but they certainly cannot make up for it nationally because the scope of any international expansion in tourism services is intrinsically limited. The Japanese or the Germany will not come to London for a haircut, so there is a limit to what can be done. In any case, the balance of trade in services has recently been falling, not rising. Manufacturing industry is absolutely vital.

What makes it more serious is that the crunch has come much sooner than it should have done, because at least when it came in 1974 unemployment was down to 400,000. Now, of course, it is only just under 2 million. Also, the crunch has come despite the fact that, in the whole period from 1979, the growth rate has been unusually slow. The growth of manufacturing output since 1979 has been the

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slowest of the post-war period--that is, slower than any nine-year period before 1979. The growth of total output at about 2.1 per cent. has been the equal slowest in any nine-year period.

The motor of growth has not been chiefly enterprise or efficiency, but personal consumption swelled by credit, which has risen faster than in any previous nine-year period taking up 90 per cent. of such growth in GDP as occurred. So nine years of slow growth have nevertheless driven us to the limit of our capacity to produce. Not only has the balance of payments gone into record deficit, but inflation, as we know--that judge and jury--is still climbing. It does not look like a supply side miracle.

Mr. John Marek (Wrexham) : I am grateful to the right hon. Gentleman for saying what he has. I remember the Chief Secretary not perhaps half an hour ago saying with great pride that we have been in the longest period of growth since the war. The right hon. Gentleman, however, quite rightly is painting the true picture. Would he say that the Chief Secretary was being slightly dishonest a little earlier?

Sir Ian Gilmour : Of course I would never say that my right hon. Friend was either slightly or in any way dishonest. No doubt there are different ways of looking at these matters. I am sure that everyone in the House has the highest respect for my right hon. Friend's integrity.

Not only is my right hon. Friend the Chancellor taking great risks in allowing the deficit to continue at such a high level, but I am not at all sure that the improvement that he forecasts, such as it is, will in fact take place. He appears to be forecasting a very bumpy soft landing, with growth continuing overall but with net exports steadily taking over from domestic demand. The trouble is that high interest rates act uncertainly, randomly and perhaps excessively on domestic demand, and they act perversely on net export demand by raising the exchange rate.

The worry is that the Chancellor's balance of payments forecast looks optimistic. As I understand the Red Book, he is forecasting nearly a 5 per cent. increase in exports this year and rather more than 5 per cent. in 1990, while he is forecasting only a 2.5 per cent. increase in imports in 1990. All that is well out of line with what has happened in the past decade.

If we take out oil, from 1979 to 1988 the average yearly increase in exports was about 2 per cent. and the average yearly increase in imports was about 5 per cent. So I am not persuaded that there are strong grounds for believing that the next two years will be so very different from the last nine--or that, unless there is a slump, which would certainly improve the balance of payments, this improvement will take place.

The Red Book talks about the extra capacity available from the current investment boom, but that is only recent. The total net investment between 1980 and 1987--namely, investment less capital consumption--has been 25 per cent. lower than in the 1960s and the 1970s, while net investment in manufacturing industry has been nil or even negative. Therefore, recent investment is unlikely to make up for the previous dearth.

The Chancellor appears to be taking a big risk in permitting the continuation of such a large balance of payments deficit, and he is taking a gamble in hoping that the improvement he forecasts will take place. Over the years, my right hon. Friend has been warned by many

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people, including myself, that we would be in trouble when North sea oil began to run down. He ignored those warnings and now the trouble has begun he is still refusing to act to improve our manufacturing performance. That is why the Budget, although tactically excellent, is strategically a failure.

5.23 pm

Mr. A. J. Beith (Berwick-upon-Tweed) : It is not for the first time that I have found myself in agreement with much that the right hon. Member for Chesham and Amersham (Sir I. Gilmour) has said. It is not without significance that there is a common thread of criticism of the Budget strategy from different parties on this side of the House and from Conservative Members who are looking to the longer-term needs of the country. I disagree with the right hon. Gentleman, however, on one simple point. He quoted the Red Book forecasts and regarded them as unrealistic. I believe that the Chancellor has now conceded that point. I assume that, by indicating in the Budget statement yesterday that there would be no improvement in the balance of payments, he had abandoned his Red Book forecasts and the process of improvement which it is alleged is imminent.

Sir Ian Gilmour : My right hon. Friend the Chancellor is reckoning on an improvement, because the deterioration was so great in the second half of last year that to keep it the same this year means an improvement.

Mr. Beith : The Chancellor hopes that the Red Book forecasts will therefore merely enable the appalling balance of payments deficit to remain as bad as it is now.

Yesterday I argued that this was the Budget of a frightened Chancellor, and my right hon. Friend the Member for Yeovil (Mr. Ashdown) added that it was a Budget of tiny measures. I shall start with the tiny measures and, of course, not all tiny measures are bad. There are a number of quite good ones that are worth commending. The first measure that the Chancellor announced was something that we had pressed upon him, which was that the smaller firms' rate of corporation tax should be the subject of a higher threshold so that it would benefit more firms and benefit them to a greater extent. Small firms have experienced greater problems as a result of the current interest rates and exchange rates than larger firms, which on the whole have been able to cope quite well by hedging. It is only a third of the way that we asked the Chancellor to go, but nevertheless I welcome it. The charity VAT reliefs are also welcome. Although long awaited, the abolition of the earnings rule is no less welcome. Although I would have liked to see a 15 per cent. differential between the price of leaded and unleaded petrol, I hope that the 10p differential will prove sufficient to encourage universal use of lead-free petrol.

We welcome the improvements in incentives for employee share schemes and profit-related pay, to which we have long attached importance. I was disappointed by the little that the Chancellor did for savings. We argued that his PEPs scheme--much loved by himself but little loved by anyone else --was a vehicle that could be built on. He tried to do that, but he still did not do enough to make it attractive to new savers. He made it administratively simpler for new savers to participate, but the primary attraction of the scheme remains for people who have

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already used up all their capital gains tax relief. It does not offer sufficient incentive to attract new savers into investing in industry, which is its purpose.

One of the Chancellor's small measures is in fact deplorable--tax relief for private medicine. He has diverted considerable funds to assist people who have already decided that they can afford to fund separately access to private health care, when those same funds could have been used in the National Health Service.

This Budget is paying for last year's mistakes. It is not simply a matter of saying that the Chancellor's tax cuts last year caused all the problems, although they contributed in large measure. It was a combination of tax cuts to those whose disposable incomes were already high and who therefore were more likely to spend their increased means on imported goods, together with the big bang, the credit expansion, the increased competition in credit, the intense salesmanship in credit in that more competitive period, and, of course, the decision to delay the ending of multiple mortgage tax relief until 1 August 1988. That clearly put a great deal of pressure on the housing market in the summer months of last year. That whole series of measures added together--some that the Chancellor was doing himself and others of which he should have been aware--led to that Budget having disastrous consequences.

The Chancellor has now sought to reconfirm that inflation is his overriding priority. One is bound to ask initially how it can be a problem. All the reasons that the Government used to advance for inflation relate to matters that they reckon to have disposed of : no longer do we have a public sector deficit generating inflation ; no longer are the unions rampaging around the country forcing unrealistic pay increases ; no longer can it be blamed on the Labour Government ; and no longer can it be blamed on those favoured villians of the piece--the preceding Conservative Government so often criticised by-- [Interruption.] --indeed, by Conservative Members. How could inflation have happened when the Government were doing what they now say they will do--monitoring the growth of broad money? Is not that precisely what they have been doing? However, with all those measures, we have inflation touching 8 per cent. and a very worried Chancellor.

That inflation has determined the shape of the Budget. The Chancellor's remarks in the early part of his speech gave the impression that he was reasonably confident that he could soon get on top of the inflation problem --but his Budget measures reveal a different picture, and we must judge the Chancellor by his actions, not by his words.

He has avoided, because of his fear of the inflationary consequences, measures that he either wanted to implement or ought to have implemented. We saw none of his cherished standard rate tax cuts, and no additions to tax allowances over and above those required by inflation. We see the extraordinary step of not putting a penny on any of the many excise duties- -for the pure and simple reason that it is a way of holding off an increase of half a percentage point on the retail prices index. There can be no other reason.

The Chancellor has received advice from within the Government and even from the Committee whose Chairman is the Leader of the House that the duty on alcohol ought at least to be indexed and that he should

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probably increase it by more than that, to make up for his failure to do so in previous years. The Chancellor's decision in that respect is a more vivid demonstration of his fears of inflation and of the inflation already built into the system than anything else. The Chancellor reaffirmed his continuing dependence on high interest rates. That dependence on high interest and high exchange rates is also about preventing the re-importing of inflation. The Chancellor is fond of saying that underlying inflation is only 5 per cent., because he does not believe that mortgages really matter in inflationary terms. We disagree with him about that. Additionally, however, underlying inflation is a far more serious problem than is shown by that 5 per cent. increase. A great deal of our inflation has been exported as a result of the pound being high. If the value of the pound were now to fall, we would see that inflation re-exported into this country and a still higher domestic rate of inflation. In addition to the factors known to be causes of inflation, if the Government's overriding priority is to tackle inflation, why are they increasing it themselves? Why have they selected measures that will increase prices and bear most heavily on the ordinary members of the community? I refer to public sector price increases relating to privatisation. Electricity charges have increased by 6.8 per cent. this year, on top of 10 per cent. last year. However, the prices that the Central Electricity Generating Board has to pay for oil and coal are down, so now is not a time when electricity prices should be increasing by 10 per cent. one year and 6.8 per cent. the next. Water charges will increase by 9.8 per cent. this year, but for nearly one quarter of the population they will increase much more than that, by an average of 22 per cent. That was announced yesterday. The statutory water companies have said that that is so that they can cope with the effects of privatisation and can fit themselves into the new regime that the Government are introducing in their privatisation measures. The private water companies have long charged less than publicly owned water companies, but point out that the increases they are implementing now are the direct consequence of the regime that the Government are introducing in the course of privatisation. Health charges are also being increased. We are seeing a series of Government-sponsored inflationary measures.

The key sufferers will be the low-paid. I remind the Chief Secretary that it is very misleading to suggest--the newspapers are more guilty of this than the right hon. Gentleman--that all low-paid people will be £3 per week better off in respect of their national insurance contributions. The Chancellor has not organised his reforms of national insurance in such a way that they will secure such an improvement. He has not turned the threshold into an allowance, like a tax allowance, but has retained the arrangement whereby someone who falls within the national insurance bracket will immediately pay national insurance on the whole of his income, rather than on the amount of his income that is over the threshold level.

The practical effect is that only those people who enjoy just below, around or just above average earnings will benefit by a £3 per week reduction. Most of the low-paid will be lucky to enjoy a £1 improvement. Most people with an income below £110 per week will enjoy a reduction of between 81p and £1.30. As I pointed out earlier, those who are earning £70 a week will be only 21p per week better off.

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As was pointed out in an intervention earlier, a family earning £85 per week will, after benefit withdrawals, be only 26p per week better off as a result of the Budget. Who can say that that is a Budget for the low-paid? A typical low-paid family will be in a ludicrous situation as a result of the Budget.

Mr. Julian Brazier (Canterbury) : The hon. Gentleman gives the right figures, but there is a very good reason for the situation that he describes. A family having an income of £1 or £2 per week less than the family he cited will be considerably better off and will enjoy the full £3 reduction. It is the anomaly of sudden steps under the existing system that my right hon. Friend's new measures are designed to eradicate.

Mr. Beith : Such a family will still not receive the full £3 reduction in their national insurance contribution. If they are lucky, they might be 61p better off, or £1.41 if they receive only £80 per week. Moreover, the figures I quoted took account of benefit withdrawals. The hon. Gentleman and the Government must consider more carefully the precise effects of the measures on people whom we all agree are low-paid. The Government have not achieved the objective that they set themselves.

None of the figures I quoted take account of the poll tax, increased council house rents or mortgages, higher water and electricity charges, and the loss of transitional payments for many people who depended on them after last year's housing benefit fiasco.

As the right hon. Member for Chesham and Amersham pointed out, the Government have failed to address the trade deficit problem. The Chancellor forecast a £4 billion deficit, but it is now £15 billion, and he forecast the same figure for next year. What has happened to the process by which that problem was to be cured? The Chancellor, Ministers and officials argued publicly and before the Treasury Select Committee that home demand would slacken and that resources would be applied instead to exports. However, in his forecast yesterday, the Chancellor recognised that if that process takes place at all, it will be sufficient only to maintain the trade deficit at its present level for the next year. That is inadequate, and the Chancellor should have addressed ways in which industry's competitiveness could be increased to cope with the trade deficit. What better position could one be in than a Chancellor of the Exchequer presiding over an enormous surplus? It is ironic that the Chancellor has more money at his disposal than any of his predecessors, but he dare not spend it because of the danger of destroying confidence in so many of his previous policies. One of the interesting points about the surplus is that about half of it is the result of asset sales. I refer to the privatisation of national industries, sales of council houses, and other disposals--much of which income should be re-invested in the economy. A business that sells off its assets looks at ways that it can re-invest, to equip itself for the future. It does not fritter that capital away, and does not necessarily use it to pay off its mortgages or existing borrowings--not if it can identify useful ways in which re-investment can help it to trade effectively in the future.

It is interesting to speculate why the forecast of the future surplus is low. Some commentators believe that the surplus will prove to be much higher than the Government

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