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cabling Britain and so on, are all essential not just in the interests of northern regions seeking to attract resources away from the south-east but because of the competition that our industry will face in 1992 and beyond with the implementation of the Single European Act.It is not true to say that investment in the south-east has centered on the entrepreneur alone. One has only to think of arms procurement, on which £8 billion is to be spent. The success of the M4 corridor--the silicon valley of the United Kingdom--has been born out of public sector-led financing, especially in arms procurement. Transport is another example ; again, a disproportionate amount goes into the south-east. The vast majority of the £6 billion in mortgage interest charges is going into the south-east.
Entrepreneurs have fed off public sector-led investment. There may be nothing wrong with that but it is worth comparing with the system operating in the Lander. Public sector-led investment has been dispersed around the Lander and the country. The Germans have invested in areas of growth and centres of excellence and the development of wealth creation has been more evenly spread around the country. Germany is not suffering from the overheating that the south-east is experiencing, which is no good for the south-east and certainly no good for the northern regions.
In the not too far distant future, decisions on investment will be influenced by the existence of the Channel tunnel. Investors will not come to the south-east because it will be too costly. They will not come to the north of England because we do not have the infrastructure--the means to get goods in and out of the area, the training, the technology or the cabling. Investors may well decide in favour of northern France or northern Europe, which will have built the infrastructure necessary to sustain an advanced economy. Yesterday's Budget will do nothing to regenerate the north of England. I make my plea for the regeneration of the north not just on behalf of people in the north, but because it is in the interests of the economy as a whole. An opportunity has been missed. Partnerships exist in many areas of England ; there is one in my own city of Sheffield, where there has been development in the transport infrastructure. An investment bank has been set up and work is being done on combined heat and power. Yet that partnership, and all the others like it, are struggling in the absence of central Government support.
In 1991, Sheffield is to host the second biggest sporting event in the world--the world student games. The event is to be three times bigger than the Commonwealth games, with 125 countries and 7,500 sportsmen participating. Sheffield will be a window to the world, yet we have already been told that no money will be made available from central coffers. The Government say, "We are not prepared to put in any cash. You must do it all through the private sector." No other country in western Europe would take such a negative attitude. Let me compare the problems with which British industry must contend with what happens in one of the richest parts of West Germany. I was recently in Badenweiler and I spoke to the Conservative Leader of the Lander government. An innovation technology company has been set up which commands about 2,000 experts on a consultancy basis--a service paid for by the Lander itself. The Lander is spending 21 million deutschmarks on innovation technology to be matched by technology transfer units and again to be supported by the Lander.
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When the innovation has been developed and the technology transfer has taken place and the company goes into production, it can go to the Lander bank and borrow at subsidised interest rates of 4 or 5 per cent. over 8 to 10 years. At federal level, the reconstruction bank of Germany will also put money in at 5 per cent.Compare those rates with the figures in the venture capital statement and with the experience of any company in the United Kingdom seeking money to develop new technology. British companies pay 12, 13 or 14 per cent. The examples that I have given come from one of the richest parts of Germany. I asked the mayor the simple question, "Why do you do it?" After all, it is, in effect, a Conservative administration. They said, "We must keep ahead of the game. Entrepreneurs do not always deliver and we have to push them. To that end we are prepared to support our industry, either from the Lander bank or from the federal bank." The support for industry extends not only to hardware but to training, to the development of transport infrastructure and so on.
If we ask our industry--particularly small and medium-sized businesses--to take part in technology transfer schemes from our academic institutions with the necessary training without central Government support, we are tying not one of the entrepreneur's hands behind his back, but both. The Budget will be seen as a missed opportunity, especially as we move into the much more competitive era following the implementation of the European Act in the 1990s. The Budget will have failed the nation.
8.58 pm
Mr. Michael Irvine (Ipswich) : This year's Budget has produced even more confusion of thought and mind than is normal on the Opposition Benches. Some have reproached the Government for allowing inflation to gain the upper hand ; others, totally ignoring the inflationary implications of what they are suggesting, have called upon us to spend some of the massive surplus that has been accumulated. The hon. Member for St. Helens, North (Mr. Evans) asked, "Why cannot some of that enormous surplus be spent?"
The confusion reached its apogee during the speech of the Leader of the Opposition yesterday afternoon. In the course of one and the same speech he reproached the Government, claiming that last year's Budget had allowed inflationary pressures to build up, and then went on to call for the spending not of part of the surplus, but, as I understood him, of the entire £14 billion.
One must make allowances. Rapid economic growth and a massive budgetary surplus are not characteristics associated with the financial stewardship of Labour Governments. It is not particularly surprising that Opposition Members, finding themselves in a new and unfamiliar landscape of high economic growth and a massive Budget surplus, become somewhat disoriented and confused. No doubt they feel more at home with high interest rates and a large balance of payments deficit, but there are major differences between the high interest rates and large balance of payments deficit prevailing now and those associated with Labour's term in office.
The current interest rates squeeze has crucial characteristics which mark it out from earlier interest rate squeezes under Labour Governments. When Labour was in government, interest rate squeezes ravaged industry and
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led to sharp and immediate cuts in industrial investment. Not so this time. During this interest rate squeeze, exactly what the Chancellor intended is happening. Interest rates are having their principal effect on the personal sector. The corporate sector- -and certainly the larger companies--has ample cash balances. Investment by our main-line companies is holding up well. That investment by main-line companies is the key to our industrial success. High levels of investment have continued for some six months after interest rates were raised substantially. The adverse balance of trade we are now experiencing is characterised by a large element of imported capital goods. That is a reassuring feature.Table 3.4 of the Red Book sets out the percentage increase in the volume of manufactured goods year on year. The table shows that in 1987 and 1988 imports of capital and intermediate goods have recorded substantially greater percentage increases than consumer goods. In the short term, those imports of capital goods place a strain on our balance of payments, but in the longer term they mean that British industry is putting on muscle and becoming better equipped to meet demand in future.
It has been claimed that the Chancellor has been forced to rely solely on interest rates to curb inflation. That is not so. The massive Budget surplus is in itself disinflationary. I have no doubt that in the particular circumstances of this year it is right to run a Budget surplus of such a size because it restrains domestic demand, helps maintain confidence overseas and reduces the interest on the debt that the Government will have to pay in future years. However, I am glad to see that paragraph 2.29 of the Red Book states :
"The Government intends to move gradually from the present surplus towards a balanced budget over the medium term."
A substantial surplus is absolutely right for now, but it will not always be so. We do not want the Government to fall into what might be termed the GEC syndrome. The time will come when it will be appropriate to use that surplus for cuts in direct taxation which increase choice, act as incentives and help to generate the economic growth which augments Government revenue. In addition to tax cuts, I hope that future Government plans for reducing the surplus will include increased public capital expenditure. I stress the word "capital". Public sector investment is needed to complement rising investment in the private sector.
My right hon. Friend the Member for Shropshire, North (Mr. Biffen) mentioned expenditure on education and health. I have in mind expenditure on transport. Economic growth manifests itself rapidly in increased traffic movement and congestion. If our economic growth is to be sustained, we need to ensure that our transport infrastructure can cope. Otherwise, growth will be held back. Industrialists in my Ipswich constituency and in other parts of Suffolk are already telling me that their operational efficiency is being hampered by inadequate transport infrastructure.
Running a budgetary surplus and determining how to apply it is a novel experience for a post-war British Chancellor. It shows just how far we have travelled on the road to economic success. For the moment the watchword is and should be "caution". A massive budgetary surplus is clearly right--but as the Government move towards their medium-term target of a balanced Budget, what is required is a judicious mixture of income tax cuts to
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increase incentives, combined with increased capital expenditure carefully targeted where it will best assist continued economic growth.9.6 pm
Mr. Stuart Holland (Vauxhall) : An effective Budget should combine social justice and economic efficiency, and this Budget does neither. It starts with the junk statistics that we have come to expect from the Treasury, to which attention has been drawn by advisers to the Select Committee. The Chancellor claimed :
"we have experienced the longest period of strong and steady growth since the war."
We note that he made no international comparisons. That is not surprising, because at 1980 prices the average annual growth of GDP between 1979 and 1987 was 1.8 per cent. for the United Kingdom and 2.6 per cent. for the rest of the OECD. In Japan, with which the Chancellor is glad to make comparisons on productivity based on a few years' figures, the average growth in GDP was 4.5 per cent. The Chancellor claimed :
"Between 1974 and 1979 inflation had averaged more than 15 per cent. Over the past six years it has averaged 5 per cent.". If we put that on a comparable basis for the lifetime of the Government, between 1979 and 1989 annual inflation averaged 6.7 per cent.--more than one and a half times the figure quoted by the Chancellor. We now know that it is set to rise again, so the long-term trend is not moving towards zero but is heading for 8 per cent.
The Chancellor claimed :
"our productivity growth in manufacturing has exceeded even that of Japan." --[ Official Report, 14 March 1989 ; Vol. 149, c. 293-94.] That is true for certain years, but its aggregate productivity growth is not the issue when comparing our manufacturing performance with that of Japan. The key comparison is with the exporting sector in Japan which, as is well known, accounts for only about 12 per cent. of the economy. The amazing productivity of Japan's giant companies, the Kairetsu, is beating us hands down in world markets and in our own market. If there is such an economic miracle, why is the regeneration of the British Motor industry being carried out in Sunderland care of Nissan, and in Austin Rover care of Honda? The Japanese are efficient. Our productivity is rising, but some of the rise is due to Japanese companies in this country.
The Chancellor continues to claim that he has effected a miracle, but a miracle means helping the sick take up their beds and walk, not helping to walk off with the beds of the sick. A miracle means sustained domestic and export growth and full employment--not a go-stop growth of 2.7 million people unemployed, a balance of payment deficit of £14 billion and a currency standing only with the crutch of an interest rate of 13 per cent.
The Chancellor claimed yesterday :
"The role of fiscal policy is to bring the public accounts into balance and to keep them there, and thus underpin the process of re-establishing sound money."
He said :
"Inflation is disease of money ; and monetary policy is its cure."--[ Official Report, 14 March 1989 ; Vol. 149, c. 293-4.] That sounds fairly familiar. Perhaps the Chancellor is trying to prove that he is still a monetarist. He certainly echoes the claims made by Milton Friedman :
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"Inflation starts in one place and one place only--national treasuries"No doubt the Chancellor has read that--he certainly seems to believe it.
Away from the footlights and television cameras, in a major statement in 1969 Professor Friedman said of the correlation between the money supply and inflation :
"changes of money income mirror changes in the normal quantity of money. But it tells us nothing about how much of any change in income is reflected in real output and how much in prices."
In other words, there is no cause and effect but it is all done with mirrors--that is the essence of the monetarists' claim to superior scientific status above the derided economics of Keynes. Mirrors are hazardous. If an ass looks into one, how can a brilliant Chancellor look out? Yet the Chancellor is doing precisely that--he is trying to do it by mirrors in a "now you see it, now you don't" type of policy. We can judge from the junk statistics. Since 1979 there have been 24 changes in the unemployment figures and only the first change put the figures up. Publication in British Business of the share of multinational companies in our export trade, or the share of leading firms in our export trade has stopped. The last figures were published in 1981. No wonder there is a problem about the nature of the balancing item. When 75 firms account for half our trade and 220 firms for two thirds of our trade, when 85 per cent. of our exports are by multinationals, the transfer pricing which those multinationals can employ is likely to be one of the major factors in that grotesque balancing item, which is bigger than the Budget deficit.
Another example of the mirror policy was the Government's attempt to revise the trade deficit just before the Budget and to take the mortgage rate out of the RPI. This is not the economics--
Mr. Lilley rose--
Mr. Holland : I am taking a note from the book of the Chief Secretary who accepts interventions in his time.
Mr. Lilley : Did the hon. Gentleman say he was following my right hon. Friend's good example? I am extremely grateful to the hon. Gentleman for giving way. The hon. Gentleman has just suggested that the balancing item is due to the understatement of the value of exports by multinational companies. Is he saying that the balancing items should be largely attributable to reducing the balance of payments deficit?
Mr. Holland : I do not know why the Economic Secretary had so much trouble making his point. Transfer pricing by multinational companies, which dominates our trade, means that our trade statistics are opaque. A standard means of transfer pricing is to inflate and overstate import prices. We should expect economic integrity from any Government and should be able to trust their figures, but such integrity is absent from this Government. Their economic policy is one not of integrity but of a massage parlour. They massage the figures to reduce the number of unemployed, to disguise the trade deficit and to understate the real trend in inflation. They massage the rich to get them to work and massage foreign investors by putting interest rates at a level that will support the pound.
Does the Chancellor remember the cost-push, demand- pull debate which was taking place when he was a student?
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Does he not know that the simple argument on demand-pull is that of too much demand chasing too few goods? Does he not recognise that this is precisely what is happening in the economy today-- irrespective of money supply--because he did not slow down his pre-election boom last year?Has the Chancellor forgotten the basic principle of cost- push inflation, which is that pressure on capacity enables firms to push up prices because other firms are willing to pay a premium for components, rather than find their own production grinding to a halt? Has he never read Adam Smith's "The Wealth of Nations" which states :
"people of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices"?
Does the Chancellor of the Exchequer not realise that market forces are at work and that inflation cannot readily be wrung out of a booming economy by macro policies alone? Does he not know that coping with inflation in an overheated economy demands other measures, involving not only the structure of costs but also the regional and social distribution of demand and supply?
As for the argument that inflation should take priority over all else-- which hon. Member would thank a doctor for reducing a patient's temperature if it resulted in rigor mortis? Why should we thank the Chancellor for his counter-inflationary measures which, through penal interest rates, will kill off many small and medium firms? Let us consider interest rates. Is the Chancellor really unaware of the unequal impact which his policies have? The wealthy can invest their savings and therefore benefit by higher income at higher interest rates, while the less well-off--who accepted his invitation to join the democracy of property owners but then lost their jobs or the family wage earner or fell ill--could not meet their mortgage payments and were dispossessed.
Is the Chancellor unaware of the inequality of the cost of borrowing at higher rates on big and small businesses? Unequal competition for funds means that bigger businesses can borrow at lower rates than smaller businesses. The price-making power of the big firms gives them the ability to pass on higher interest rates in the form of higher prices. High interest rates may be not disinflationary but inflationary. Big businesses can operate self-financing to cover the major part of their investment needs--often up to 85 per cent.--without access to external finance. Small and medium firms cannot do that. Higher interest rates will not hit the big league but will penalise the small firms--that is quite apart from pricing techniques which are used to understate real profits, to which I have already referred.
Is the Chancellor or his Treasury team unaware that interest rates are both unequal, and relatively ineffective, as the major instrument of demand management? Does the Chancellor not realise that in using them to choke off demand he is strangling many small and medium entrepreneurs--the serving of whose interest once appeared to be the Tory party's main mission in government?
The Chancellor does not face simply the problem of fiscal drag, and whether he is a fiscal drag artist. The Government did not, at first--between 1979 and 1981--succeed by raising interest rates. Their subsequent policy of fail, fail and fail again is no way to run the economy. By raising interest rates nine times, the Government have
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shown that their fiscal stance is really horizontal. The Chancellor is no longer the go-go Chancellor of yesteryear but the full stop Chancellor of today and tomorrow. His Budget was less a baleful admission from yesterday's whiz kid of the need for a soft landing than an ignominious belly flop. As several hon. Members have said, the Chancellor has the money but he cannot spend it.Yesterday, using a vivid metaphor, my right hon. Friend the Leader of the Opposition asked why the Chancellor could not spend the money and referred to the numbers on the notes. Number 1 dealt with overheating. Where does that occur? It occurs in the south-east and parts of the midlands but not-- as several of my hon. Friends have said--in the north-west, north-east, Northern Ireland or Scotland. An uneven and unbalanced regional distribution of growth is an essential part of the problem.
The Chancellor said that how soft or hard the so-called landing would be was not in the hands of the Government alone. One thing that the Government are clearly not prepared to handle is an effective regional development policy. They blithely abolished location controls through industrial development certificates ; they blithely reduced regional development grants. They then cut the ground from under regional enterprise boards such as those in Lancashire and the west midlands. The result is that, while half the country is overheating, the other half is left out in the cold. The massive resources of the regions are being wasted, while the economy as a whole grinds to a halt.
Let us examine the numbers on the other notes. Let us take capacity utilisation. Of course there is pressure on capacity for some companies in some areas. For all the rhetoric about the supply side, the Government have no real supply side policy. Like President Reagan, the Chancellor appears to have fallen for the so-called economic theory behind the words "supply side"--used by Mr. Laffer, who drew a curve on the back of a napkin in a restaurant for President Reagan which claimed that people would work harder and pay more tax at lower tax rates.
The incentive effect in the Laffer curve is simply laughable : it is a bad joke. As John Kenneth Galbraith has rightly pointed out, first the argument assumes that the rich are idle, not working hard enough--some Opposition Members may share that premise. Secondly, in the United States the already rich could not find real investment outlets for their windfall tax gains and simply put those gains, through lower taxes, on the stock market. The result was a massive inflation of stock market prices, contributing to the crash of October 1987.
The fact is that the Chancellor cannot increase capacity use in the short term because the Government deny the relevance of a medium-term industrial strategy. In short, they will not plan. Yet every enterprise plans, more or less, the broad balance of its income and spending. Every manager plans if he deserves to survive the annual meeting with the firm's accountants. All our leading competitors plan--whether they use that wording, as France, Italy and Japan do, or whether they use words such as "investment co- ordination" as West Germany does.
Only our Government, with the worst structural deficit on the non-oil visible account of nearly £25 billion, fail their own industry, management and workers, because "She who must be obeyed" thinks only that "plan" is a four-letter word.
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Let us deal next with the public sector debt repayment on which the Chancellor so prides himself. Here again we see the "home economics" policy of the Prime Minister, in practice reflected in her adage that"every housewife knows that if by the end of the week you have spent more than you earned you are in trouble".
Let the Government tell that to the banks, the building societies or the investment trusts, all of which know that the role of credit is what distinguishes big business from a corner shop. Even more, it is a key difference between an advanced and a primitive society. If the expansion of an economy were limited to retained earnings, without external borrowing, no economy could fully achieve the potential increase in productivity made possible by new technology. Not least, all our leading competitors in OECD countries--other than the United States which faces similar problems to our Government in relation to competitiveness--use public sector credit institutions to ensure that their societies can invest in their own future and that low household savings, such as we now see in the Unted Kingdom, can be offset by public credit agencies.
Paying off the national debt is like putting money in the bank and telling the bank manager not to lend it. It is even worse than putting it in a current account, because once repaid it earns no interest for those who lent it. Nor does it earn real interest for society as a whole, in terms of public funds for investment in the nation's future.
The real reason why the Prime Minister wants to repay the national debt and has told the Chancellor to do it lies not simply in her ignorance of its real role but in her blatant prejudice against all things public and her gross praise of all things private. That brings us back to the real guru of the Government's economic policy, Milton Friedman--he who argued that public spending drains the private sector, and who spoke of "crowding out". In those arguments Professor Friedman is simply wrong.
Let us take the construction of council housing in the British economy. In England and Wales in the last decade, private contractors have built up to 95 per cent. of all council houses. In Scotland it is up to 98 per cent. That means that, of every £100 of public money that goes into council house building, between £95 and £98 goes straight into the pockets of private contractors. That public spending does not drain the private sector : it sustains it. Likewise, cuts in the council house building programme do not simply hit the direct labour organisations that the Prime Minister hates so much ; 19 times out of 20 they hit the private builders, the Rotarians, the local Conservative association members and the big building firms, many of which must be wondering why they put so much money into the Tory party's pocket when the Tories--with cuts of two thirds in the housing investment programme since 1979--have been taking money by the handful out of theirs.
The same applies to the National Health Service. In this country, not a hospital is built, not a ward or operating theatre equipped, not a drug prescribed that is not supplied by the private sector. Cuts in the NHS are actually restricting the growth and expansion of the private sector, not merely in the construction industry. I grant the Chancellor that he has a problem with the Prime Minister. There is certainly no evidence that she has ever opened the main volume by the man whom she most
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loves to hate among economic theorists, Maynard Keynes. Had she read it, Keynes could have warned her of the consequences of the policies that the Government are now pursuing when he wrote : "the more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance, the more our incomes will have to fall when interest rises Obstinacy can bring only a penalty and no reward."When they came to office the Government said that they would cut waste from higher education, public services and the National Health Service. In office, they have laid waste to higher education and public services, and they now plan to lay waste to the National Health Service. The Budget, with its implicit admission of errors on a massive scale, will penalise not only the poor but the entrepreneur.
Before long the electors will look back on the present Government and ask, "How could they have wasted so much that was on offer from North sea oil? How could they have missed the chance to use those funds to dynamise British industry? How could they have divided the nation so completely between rich and poor regions, rich and poor people, haves and have nots? The prejudice against public spending typical of this and the last Budget recalls the images of Eliot's "The Waste Land". It is the wasteland of our blighted inner cities, our derelict industrial areas, our closed hospital wards and our underpaid and overworked hospital staff. While for other countries 1992 means opening up Europe, this Government, with their penal interest rates and with this Budget, are closing Britain down. Much has been said, in this debate and also in the report of the Treasury Select Committee, about junk statistics. We are less concerned with junk statistics than with the Government's junk policies. If any message is to reach the gilded salons of No. 10, it should be that the Prime Minister should junk the Chancellor before the British people junk the Government.
9.28 pm
The Financial Secretary to the Treasury (Mr. Norman Lamont) : We have heard a number of interesting speeches and I was struck by the fact that hon. Members on both sides of the House managed to find aspects of the Budget to which they responded favourably. The hon. Member for Berwick-upon -Tweed (Mr. Beith) was good enough to praise the abolition of the earnings rule. The hon. Members for Burnley (Mr. Pike) and for Londonderry, East (Mr. Ross), together with my hon. Friend the Member for Bedfordshire, South -West (Mr. Madel) and others, praised the differential that my right hon. Friend established in favour of unleaded petrol. My hon. Friend the Member for Bexhill and Battle (Mr. Wardle) made a powerful speech giving strong support to what my right hon. Friend has done on company cars. I was especially grateful to him, because of his background in industry, knowing that it is not always the easiest policy to put across.
My right hon. Friend the Member for Shropshire, North (Mr. Biffen) caused a mild frisson on the Front Bench by prophesying that Ministers on the Treasury Bench might later have to reach for their wallets. However, he made a powerful speech with his usual eloquence and he warmly welcomed the fiscal stance in the Budget and underlined the need, above all, to get on top of inflation.
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My right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) divided the Budget into two halves--a tactical half and a strategic half. At least he was able to give the tactical part two and a half cheers, and for that we are extremely grateful. However, I do not agree with everything that he said about manufacturing industry. There has been a great structural change in the country in manufacturing industry but I cannot go along with the prophecies made to my right hon. Friend.Throughout the debate there was a strong feeling, echoed on both sides of the Chamber, that it was, as my hon. Friend the Member for Bedfordshire, South-West said, a safety first Budget. The hon. Member for Berwick-upon- Tweed felt that in that respect we were making up for the mistakes of last year. That is a message and an argument that I, together with my hon. Friend the Member for Cambridgeshire, South-West (Sir A. Grant) reject strongly. Last year's tax cuts were right, they remain right and they will be seen more and more to be right. The tax cuts introduced last year will improve the competitiveness and the supply side of the economy. I have no doubt that in the long run they will also generate more revenue. I look forward to the day when we will be able to demonstrate that--I am confident that we will be able to do so--from the Dispatch Box. If last year's tax cuts had been wrong, we would have been reversing them. In fact, my right hon. Friend the Chancellor was confirming them and in his Budget, he made further remissions of some £3 a week for the majority of people in work. It seems an extraordinary view that if one does not take immediate action again this year to cut taxes, it means that last year's tax cuts were wrong. That view is obvious nonsense and the fact that it is nonsense was confirmed by the way in which the right hon. and learned Member for Monklands, East (Mr. Smith) put forward his shadow Budget, with a package of measures costing some £3 billion. He was the man who advanced the argument that last year's tax cuts were wrong. If they were wrong, surely he would not now be advocating further measures totalling some £3 billion, which is not far short of the total of which he was so strongly critical last year.
Through the years my right hon. Friend and his predecessor have altered expectations as to what Budgets should be like. It is an unusual criticism and I do not find it a fierce criticism to be told that the Budget was boring or dull. Many of us would have been happy if some of the Budgets introduced by the right hon. Member for Leeds, East (Mr. Healey) had been boring or dull. They were far from dull and they were very frequent. One of my hon. Friends turned up for me in a 1976 newspaper a cartoon of the right hon. Member for Leeds, East introducing one of his 1976 Budgets--his November Budget. The right hon. Gentleman was dressed up as Father Christmas, which is the way Chancellors tend to be dressed in cartoons. But in the cartoon, the taxpayers were queuing to give their presents to Father Christmas. That is how Budgets and Chancellors used to be seen. It is very different today, but we cannot always meet all the extravagant expectations that are sometimes built up.
Opposition Members have also complained about the increase in the tax burden. I find that a surprising line of approach for them. It is rather difficult for anybody, except perhaps for a member of the Salvation Army, to believe in overnight conversion. I find that concern with the tax burden extremely astonishing. The Opposition hooted with laughter when my right hon. Friend the Chief
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Secretary, when replying to the question of the right hon. and learned Member for Monklands, East about the burden of taxation, pointed out that in our first years of office, we spent our time reducing debt and putting Government finances on a much sounder footing. That is why the tax burden, as a proportion of GDP, went up. It has been going down since the early 1980s, but it did go up as a result of the measures that we took in 1979 and the early 1980s. We have emphatically reduced the burden of income tax as a proportion of GDP and, furthermore, we have reduced income tax as it affects the ordinary citizen.The Opposition, again, rather surprisingly, trying to have things both ways at once, like to argue that the burden of taxation has increased, although they always argue in favour of higher taxes. If the average amount of taxation has increased at all, it is only because real take-home pay has gone up so quickly under this Government. That is why average rates of tax may have increased. If we had simply taken the Labour Government's thresholds and tax rates and merely adjusted them for inflation, there is no doubt that a man on average earnings would today be paying about £18 a week more in taxation than he is doing now under this Government. If the Opposition think that the burden of taxation is too high --and I think that it is too high and we want to bring it down--why do they vote against year after year when we put forward measures to reduce the basic rate of income tax?
We have been told that this Budget does nothing for that mythical thing, the real economy, and that it does nothing for the current account. But the main problem is not the current account, but inflation. The measures that my right hon. Friend has put forward in his Budget are consistent with the steps he has already taken to get inflation down. It is a Budget that takes no risk with the anti-inflation strategy and it underpins the measures that my right hon. Friend has already taken on the monetary front. The trade balance will be the last indicator to respond, but it will certainly eventually do so.
Mr. Andrew F. Bennett : If, as the Financial Secretary says, the real enemy is inflation, why have the Government deliberately allowed water prices and electricity charges to go up? If the Government were really keen to tackle inflation, they could have stopped both those increases.
Mr. Lamont : Both those charges are going up because of the needs of those industries for investment. The fact that particular prices go up is not inconsistent with the Government's overall determination to bear down on inflation in general and it is monetary policy and the monetary framework, whatever may be happening to individual goods or commodities, which will bring down that rate.
Mr. Holland rose --
Mr. Lamont : I want to move on because I have one or two announcements to make. However, I shall give way.
Mr. Holland : We look forward to those announcements. The Financial Secretary reminds me of President Charles De Gaulle who once said that a president should be concerned with inflation, not the price of eggs. Perhaps we have some sympathy for him there. But when will the trade deficit improve? We have had forecasts of this and
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that, but when will we get a J-curve effect on the export side--or is it really an S-bend and is the Financial Secretary going down the tube?Mr. Lamont : As my right hon. Friend made clear in his Budget statement and in the Red Book, the size of the deficit this year is expected to be broadly the same as last year's. However, as my right hon. Friend the Member for Chesham and Amersham pointed out, that is likely to mean that towards the end of the year things will begin to improve somewhat.
There is evidence that interest rates are already beginning to have their desired effect. That is obvious from the fact that the monetary aggregates, M0, and figures to be published next week, are likely to show an annualised growth rate over the past six months of below 3 per cent. It is evident from the housing market also that interest rates are beginning to have their effect.
The result of that prompt and effective action will be that inflation will come down. While getting inflation down is primarily a task for monetary policy, it is vital that fiscal policy supports it. That is why my right hon. Friend has budgeted for a third successive year of debt repayment, something unprecedented since the late 1940s. The debt that we are now repaying has been built up by years of excessive Government borrowing. Not only have we put an end to that excessive borrowing, but we are now lifting the burden of debt and the interest payments that go with it from taxpayers now and from generations in the future.
When the Leader of the Opposition responded to my right hon. Friend's answer to his private notice question, he said that it was the people's debt, not the Government's debt. Of course he is right, but repaying debt is not just an abstract idea of no benefit to anybody. It is the taxpayers who pay the interest, and as a result of the repayments in the past two years and the repayment in the next year, the Government will be saving taxpayers the equivalent in interest of £3 billion per year. That is dead money and dead expenditure--of no benefit to the citizens of this country. As my right hon. Friend the Chief Secretary to the Treasury pointed out in his Autumn Statement, he was able to give some increases to the priority areas in the public spending round because of the savings in debt interest. In that way, the programmes that Opposition Members regard as important were helped by what my right hon. Friend achieved on debt interest.
To listen to the Leader of the Opposition--no one imagines that he will ever confront the problem of a surplus--it was clear that he could not wait to get his hands on the £14 billion. Education, health, transport, pensions and welfare payments were all things on which, according to him, that £14 billion could be spent. Indeed, the right hon. Gentleman got very close to the £20 billion of extra public expenditure that only a short time ago the Opposition were denying existed in their manifesto. However, after what the right hon. Gentleman said, there can be no doubt that the Opposition are committed to a lavish and expansive programme of public expenditure. Although, for reasons that my right hon. Friend the Chancellor made clear, we have not been able to cut the basic rate of tax in this year's Budget--
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Mr. William Ross : Do the Government intend eventually to eliminate the national debt or not?
Mr. Lamont : It is not necessarily the Government's intention to do that. My right hon. Friend the Chancellor has made it clear that the objective is a balanced Budget. Indeed, my right hon. Friend explained that extremely clearly and the hon. Gentleman can read about it in the Red Book as well as in the report of my right hon. Friend's speech.
Although we have not been able to cut the basic rate this year, in this year's Budget we have been able to make a number of valuable reforms. The most costly--the one that allows people to keep more of their own money--is the reform of employees' national insurance contributions--something that has been welcomed by even Opposition Members. This year we have been able to finish the reform of employees' national insurance contributions that was started in the 1985 Budget. In that Budget we were able to reduce the size of the disincentive for people to work, but only by introducing more steps into the system.
In the Budget my right hon. Friend has been able to complete that reform and to remove those steps. The effect is to give people at the lower end an incentive to work, or rather it avoids that trap where people actually lose money by increasing their earnings. At the same time it is a measure that has given £3 a week to everyone earning more than £115 a week, which is 40 per cent. of average earnings. In addition, we have been able to make some important improvements to the tax treatment of savings. I should like to comment on the alleged crisis that was mentioned by the hon. Member for Berwick-upon-Tweed. The total saving in the economy--that is, the private and public sector combined--is about 2 per cent. higher as a proportion of GDP than in the 1970s. It has remained unchanged since 1986. Even the fall in personal savings--about which I assume hon. Members are concerned--is more than accounted for by increased personal borrowing, which is what my right hon. Friend has already taken steps to deal with through his action on interest rates. I have said that the Government have taken a number of steps to increase savings and especially share ownership. Earlier today I announced in a written answer the results of the latest joint Treasury and stock exchange survey of individual share ownership in the United Kingdom. That shows that in the past 10 years the number of shareholders has trebled. Nine million British people now own shares, and about 10 million have either shares or savings in unit trusts. The overwhelming reason for that change is the direct result of Government policies--notably, privatisations, employee share schemes and personal equity plans. I am sure that my hon. Friends will agree that what is especially encouraging about the survey is that it shows that, despite the stock market crash, the level of share ownership--which has dramatically increased under the Government--has kept up and small shareholders have continued to be shareholders.
My hon. Friend the Member for Wyre (Mr. Mans) mentioned what the Government are doing for wider share ownership and especially employee share ownership plans. My right hon. Friend announced in his Budget a new tax relief for employers wishing to promote employee share ownership. ESOPs involve trusts set up for the benefit of the company's employees. My right hon. Friend has removed any uncertainty by providing that corporation
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tax relief will be due for payments made to ESOP trusts that satisfy certain requirements--for example, that the trust invests in shares promptly and distributes them within a reasonable time to all employees on a similar terms basis. I regard it as especially important that this tax relief is properly targeted to ensure that our objectives are met. If, therefore, the trustees fail to distribute shares within a reasonable time, or to meet other requirements, they will be taxed at 35 per cent.I should emphasise to my hon. Friend the Member for Wyre that the Government have taken a comprehensive approach to dealing with the problems of encouraging ESOPs. Company law currently restricts the extent to which companies can give financial assistance to ESOP trusts. My right hon. and noble Friend the Secretary of State for Trade and Industry expects, if some technical difficulties can be resolved, to table amendments to this year's Companies Bill to help ESOPs and to relax those restrictions.
My hon. Friend the Member for Wyre, the hon. Member for Berwick-upon-Tweed, and several other hon. Gentlemen asked what we are doing to improve the personal equity plans. The hon. Member for Berwick-upon-Tweed somewhat under-estimated PEP's impact. In 1988, 115,000 plans were taken out, and that was after the worst stock market corrections or crash--as we are now allowed to call it--since 1929, and 270,000 were taken out in 1987.
About £700 million has been invested in equities, which is not an insignificant sum of money. I am confident that by allowing the amount that can be invested in unit trusts and in investment trusts to increase, we shall make PEPs much more attractive to the market. My hon. Friend the Member for Bexhill and Battle said it is extremely important that managers should be motivated to market PEPs. The response we have received is that they will definitely do so, and I am confident that that will be so.
We introduced a number of simplifications as a result of consultations with managers. We abolished the minimum holding period, and plan managers will no longer have to maintain separate portfolios for different plan years. Other changes made as a result of those consultations include changing from a calendar year to a tax year basis, and a reduction in the degree of information that plan managers must give to the Inland Revenue. I am confident that all those changes will reduce the cost of PEPs and make them more attractive to managers.
It was interesting that when the Leader of the Opposition responded to the statement of my right hon. Friend the Chancellor of the Exchequer, he came to life when talking about PEPs and water privatisation. I was surprised that the idea that PEPs should be opened up to new issues and to privatisations, like any other new issues plainly shocked him. I can only ask, "Why not?" We want to encourage privatisation and new issues as well.
Last July, the Government issued a consultative document that considered the possibility of simplifying the rules determining residence in this country for tax purposes and of relating liability for United Kingdom income tax more closely to the degree of an individual's connection with this country.
It has always been recognised that any changes must take account of the wider economic implications and ensure in particular that our tax environment is broadly comparable with that of other developed countries. The United Kingdom derives considerable benefit from people
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