House of Commons Hansard Debates for 20 Mar 1989

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eases. Having said that, however, I must say that the combination of interest rates and fiscal measures reinforces the overall anti-inflationary stance, and for that reason, as well as for the reason that I gave earlier--the benefit of the specific tax change for pensioners--I welcome the Budget very much indeed.

Several Hon. Members rose --

Mr. Deputy Speaker (Sir Paul Dean) : I remind the House that the 10- minute limit on speeches is in operation.

7.6 pm

Mr. Alex Salmond (Banff and Buchan) : The hon. Member for Staffordshire, Moorlands (Mr. Knox) began this debate by thanking the Leader of the Opposition--I am sure that he was speaking for all Conservative Members--for saving the timing of the Chancellor's Budget speech. It was indeed a generous and highly unusual gesture by the Leader of the Opposition. Most Leaders of the Opposition on acquiring that role have as their ambition to serve as Prime Minister ; the present Leader of the Opposition seems to content himself with serving the Prime Minister. Most Leaders of the Opposition see it as their role to create procedural difficulties for the Government ; this Leader of the Opposition sees it as his role to solve the procedural problems of the Government. At any rate, he has committed a political blunder that will haunt him for many years to come in Scotland.

My hon. Friend the Member for Glasgow, Govan (Mr. Sillars) had the best of last Tuesday. He was lucky enough to miss the Budget speech, which was well worth missing. If last year's Budget speech contained the sins of commission, this year's was about the sins of omission. Never has a Chancellor with so much available given so little to so few, and kept the unhealthy concentration on those who have been so favoured by his past largesse.

I wonder if the right hon. Gentleman appreciates the nausea that is felt by many Opposition Members when they see that, with so much to do, no fewer than nine paragraphs of the Budget speech are devoted to the attempted resuscitation of his pet scheme for personal equity plans. The real task is to rebalance the economy, to unfasten the straitjacket in which the Chancellor's past mistakes have put him. First, there is the task of rebalancing the economy between rich and poor. Like many other Scottish Members, I faced my constituents this weekend--people who have received their poll tax demands. The reality is of people on tiny incomes qualifying for tiny rebates of poll tax, and, in some cases, no rebate. Young people earning £60 a week will face the full blast of the poll tax on 1 April. On Saturday I spoke to a constituent in Turriff, who faced a doubling of the rates bill. He did not qualify for any rebate whatsoever, although he had been sent a very helpful note to the effect that he could always apply for family credit. To a family in receipt of only £6,000 or £7, 000 a year, what comfort is it to tell them that the limit for personal equity plans has been increased to £2,400? Such people get nothing but the crumbs from the table of this Chancellor's largesse. I say to Labour Members that it is a very dangerous tendency--the hon. Member for Hackney, South and

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Shoreditch (Mr. Sedgemore) illustrated it tonight--to try to outflank the Conservatives as a tax-cutting party. Let me mention something from today's Evening Standard. I am not claiming that the Evening Standard has the best interests of the Labour party at heart, but it was very interesting that even that newspaper was attempting today to remind the Labour party that it should be the party which represents the poor and the under-privileged. Our position on this side of the House should be that fair taxes are a just return for fair public expenditure.

The second rebalancing of the economy should be between north and south, between Scotland and England. The Chancellor of the Exchequer has been engaged in Treasury sabotage of regional policy. If we are to believe his public statements, not content with sabotaging regional policy within the United Kingdom, his ambition is to sabotage regional policy throughout the European Community. The Treasury has been conducting a fight with the European Commission over the past few years--one which it has unfortunately won--to spend less in the regions of the United Kingdom by not obeying the rules of additionality.

The Chancellor and the Treasury ignore the massive "regional policies" which are implicit within the United Kingdom economy, for example, in mortgage interest tax relief. Thirty per cent. of the United Kingdom population are in the south of England but obtain 50 per cent. of the mortgage interest tax relief--tax relief which is spiralling, with the Chancellor's high interest rates policy, to a level this year of some £6 billion. That is additional regional spending in the south of England of £1,000 million a

year--approximately equal to the entire regional development grant budget for the rest of the United Kingdom.

Then we have regional policy in the defence procurement budget. A parliamentary answer to me on 22 February revealed that, of the defence procurement budget of £10,000 million, no less than 62 per cent. was spent in the south-east and south-west of England. That is a "regional policy" which dwarfs the official regional policy of the United Kingdom.

We have a regional policy in transport spending. British Rail's announcement that it will contemplate an additional £500 million, perhaps even £1,000 million, of spending in taking the Chunnel underground towards the coast is a massive regional preference for that area. It matters not whether that is funded by the public or the private sector. If it is funded by the public sector, it will come from the burden of taxation on all of us. If it is funded by the private sector, it will come from the charges levied on that transport and paid by the whole country for its communications with Europe.

The Budget should have entailed a massive expenditure and investment programme on the infrastructure of the north of England, Wales and Scotland. That spending would not have been inflationary. It would have had a low import component and would have prepared those areas for the challenges of the European market and 1992. Today in Scotland we debated Scottish enterprise in the Scottish Grand Committee. It was an arid and sterile debate because, even in Scottish Committees which are not packed by English Tory Members, there is no decision-making power at the end of a debate. The debate was also misdirected because we were debating the supply side of the Scottish economy. Obviously, that is important

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and improvements could be made, but the debate was out of focus. The basic economic problems of Scotland lie in a deficiency of demand.

The real level of unemployment in Scotland is some 400,000, or 15 per cent. of the total work force. There is little capacity constraint within the Scottish economy and no real inflationary pressure. We know that total revenue over total expenditure is running at some £2,000 million, yet, in the face of deficient demand, we have interest rates, as a by-product of policies which are being pursued in the interest of overheating elsewhere in the economy, at 13 per cent. Moreover, there is no increase in public spending which is necessary to meet the problems of the Scottish economy. Not only do we have an inappropriate monetary policy as a by-product of inflationary pressure in the south-east, but that policy hits the Scottish economy harder than many other areas. The Scottish economy relies heavily on investment expenditure, capital goods, exports and construction expenditure, so high interest rates are particularly damaging to Scottish industry.

The Government often claim consistency in their economic policies. It is true that interest rates have been consistently high, although the underlying reason for that has been changing substantially over the past 10 years. At the outset of their term of office, we had high interest rates because the then Chancellor of the Exchequer was in hot pursuit of sterling M3. Eventually that was given up as being immeasurable. Some years ago, the present Chancellor hyped interest rates to stabilise the currency and latterly we have had high interest rates to stop the so-called "overheating" in the economy. That phrase has a bitter irony for the regions of England and Scotland and Wales, whose economies are still just coming out of the deep freeze.

The Chancellor's Budget, and his management of the economy, are biased towards the south of England where he has concentrated power, income and wealth, and which just happens to hold the friends, supporters and voters of the Conservative party.

7.15 pm

Mr. David Davis (Boothferry) : I do not intend to follow the hon. Member for Banff and Buchan (Mr. Salmond) down his antiquated route, as expenditure per head in Scotland is second only to public expenditure in Northern Ireland, with all the troubles that the Province has. His analysis falls on that alone.

Mr. Salmond : Will the hon. Gentleman give way?

Mr. Davis : No, with all due respect, I cannot give way as I have only 10 minutes.

This is a Budget for the future, not the past. In cutting the national debt the Chancellor of the Exchequer is cutting tomorrow's taxes and enhancing tomorrow's prospects. It is a Budget for the poor. In reforming national insurance, amending the age allowance and abolishing the earnings rule, the Chancellor is allowing some of the least well-off the chance of significantly improving their lot. In the past 10 years we have built and developed a successful enterprise strategy. From listening to my right hon. Friend the Secretary of State for Employment, I have some hope that the Budget is the first stage of a new strategy for enhancing the enterprise culture's impact on

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the poorest. Our first duty to the poorest is to maintain the impetus for prosperity that we have developed in the past 10 years. Prosperity increases job opportunities--500,000 in the past 18 months--enhances earnings, which are up 25 per cent. in the past 10 years, and allows the nation to pay for the welfare benefits of the least well-off among us. Therefore, there is an overwhelming need to maintain policies that promote prosperity. The first of those policies is to reduce the tax burden on the nation. I am a little disappointed that we did not see a further reduction in income tax, but things cannot be perfect all the time.

Having assured that prosperity, we can turn our minds to ensuring that the combination of taxes and welfare benefits creates the sort of nation that we seek. We want to see a nation of self-reliant people, free from the heavy hand of government. We have achieved that for the vast majority of the population but, I fear, not yet for the very poor. Some of them face high rates of tax combined with benefit withdrawal. The worst case that I can find involves a 97 per cent. marginal rate of taxation and benefit withdrawal. That is higher than the highest rate of taxation on any earnings under any Government of any persuasion.

While 97 per cent. is a rare occurrence, half a million of our people face a tax and withdrawal rate of 70 per cent. or more, which is worse than the old, top-rate taxes. Such a situation creates not just a dependency culture, but a despondency culture. Why on earth, then, do a Conservative Government, of all Governments, tolerate what is both economic idiocy and economic injustice?

The reason unfortunately is a Gordian knot of logic that at first sight allows no answer. The paradox is that in reducing the marginal rate of withdrawal, we drag more and more people into the welfare net. In doing so, costs are dramatically increased, which in turn pushes up taxes, which depresses incentives, and thereby destroys the very enterprise culture that we are trying to create. Targeting, tax cuts and prosperity go hand in hand. Targeting and welfare incentives are logical opposites.

The effect of reduced withdrawal rates is best demonstrated by example. My right hon. Friend the Chief Secretary will not need this particular example, but I shall give it anyway. To understand we must imagine a family --say two parents and two young children--on about £100 a week, who receive £40 a week in benefit. With a withdrawal rate of 80 per cent.- -which is about the present rate--80p is lost for every pound of extra earnings. Their benefits drop to nothing when their earnings climb to £150. That is close to reality for many families. With a withdrawal rate of 40 per cent., their benefits drop to nothing at £200 and of 25 per cent. at £260. My right hon. Friend the Chief Secretary will realise immediately that I am leaving out the taxation component. If I added that to my last calculation, the level would be £400.

If we consider the effects of the withdrawal rate on the number of people who receive benefits, the current withdrawal rate leads to all families with incomes of £150 or less being on benefit. If the rate was 40 per cent., all families on incomes under £200 would be on benefit, which is between 3 million and 5 million more households. That is a significant cost increase of more than £5 billion. A 25 per cent. withdrawal rate would take us up to having the majority of the households on benefit, and, if we took tax into account, the vast majority.

That is the paradox. Targeting creates a poverty trap, but not targeting incurs massive costs and sucks a massive

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number of people into dependence on the state. The question is whether the problem can be unpicked. The key that will unlock the problem is time and earnings growth. Already the Government operate welfare benefits and their qualifying income level in line with inflation. Since average earnings have grown by about 2 per cent. per annum above inflation during the past 10 years because of the Government's policies, qualifying levels for support should become a smaller and smaller fraction of average earnings. Thus the gap between the welfare benefit level and average earnings increases. To illustrate this, I shall return to our example. Dropping the withdrawal rate to 40 per cent. would mean that benefit would be paid up to earnings of £200 a week--that is £50 more than today. However, in 10 years time the average wage will be significantly more than £50 higher. As a result, a 40 per cent. withdrawal rate then would bring slightly more people into the net than 80 per cent. does now. Therefore, over 10 years it should be possible gradually to reduce the withdrawal rates from 80 per cent. to 40 per cent. as real incomes grow.

The income improvement arising from our incentive policies creates the leeway to improve the withdrawal rate, to combine incentives and targeting. The strategy must be seen as a whole to be understood. I would say to my right hon. Friend the Chief Secretary that most of it is already Government policy. It requires four parts--first, to continue the downward pressure on basic rates to maintain the initiative and drive that underpins growth in earnings, which is the key to the economy ; secondly, to maintain basic levels of benefit at constant levels in real terms, which is Government policy ; thirdly, gradually to increase tax thresholds with the aim of ensuring that people and families who receive welfare benefits do not incur tax at all, which is why I used the non-taxed numbers ; and, fourthly, to increase the earnings level at which zero benefit is paid by the same percentage as wages each year ; which is to say that the taper should be lifted by the same percentage as wages each year--say about 2 per cent. above inflation.

Over a period of 10 years or so that would force down the marginal rates significantly without increasing the proportion of GDP that goes into welfare payments--in fact, it would probably reduce it. What would happen is that the balance of targeting and incentives would reach a rational basis that has not been seen in this country for 25 years.

Churchill once described the ideal modern state as one having "a net beneath which no man may fall and a ladder up which any man might climb."

We have spent the past 10 years repairing the net and rebuilding the ladder. In the next 10 years, it would be an honourable objective to lower the rung at which that ladder starts.

7.24 pm

Mrs. Alice Mahon (Halifax) : I am grateful for a chance to speak briefly and to follow, though not immediately, the excellent speech of my hon. Friend the Member for Hackney, South and Shoreditch (Mr. Sedgemore). I believe that he paid a great service to the House and to the people of this country when he exposed the gigantic con

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trick of the so-called Thatcher miracle. It is a sham, and my hon. Friend eloquently exposed the Chancellor as wearing no clothes, which was not a pretty sight.

The truth is that by every major economic indicator the Government's policies have failed. Unemployment is still at more than twice the 1979 level. As my constituency reels under the hundreds of redundancies since Christmas, I can understand why the Secretary of State would not allow me to intervene. When I give the figures, the House will also understand. The trade deficit is still more than £14 billion and rising, and we have the highest interest rates and inflation of any of the major industrialised nations.

British industry did not invest enough in the early oil-rich 1980s and we are paying the price. My constituency is a good example of an area where imports have been sucked in to the detriment of the local economy. There was not one proposal in last week's Budget which would help manufacturing. In a constituency such as mine, one can see the situation becoming worse. Because no attempt has been made to bring down interest rates, there is a high pound, high water and energy charges and the Government have deliberately forced up rates by starving councils of rate support grant. This has led to a lower demand for goods, which has been graphically demonstrated in my constituency.

Mr. Janman : Will the hon. Lady give way?

Mrs. Mahon : No, the hon. Gentleman can make his own speech. Since Christmas, in Halifax and in the Calder Valley which covers the Calderdale council area, 850 jobs have been lost in manufacturing--in textiles, engineering, the food industry and bed manufacturing. This morning I heard of a further 34 redundancies in textiles at an excellent hosiery and knitwear firm with a good record--the Wolsey socks division of Courtauld. The textile industry is not noted for its militancy and certainly not for its high pay. The reward to the textile industry and to engineering has been a kick in the teeth from the Government.

The hon. Member for Boothferry (Mr. Davis) spoke about increased prosperity and then shed crocodile tears for those caught in the poverty trap. That really made me sick. How can he pretend to care when he walks through the Lobby with a Government who have persistently cut benefits, held down wages and bashed the unions to the extent that they have over the years?

West Yorkshire is the lower-paid capital of this country. On too many occasions in the House I have highlighted what is happening to the local economy in my constituency. Our once highly skilled manufacturing jobs have been replaced by the sweat-shop type of economy towards which the Government have been urging us. I have been heavily involved with the problems of home working, which is on the increase. The average pay for a home worker is 50p to 60p per hour, and average pay in many of the factories in my constituency--this is borne out by the Government's own figures--is less than £2 an hour. I still have many thousands of constituents employed in the textile industry, which is an area of grave concern to me. Had I not been limited to 10 minutes I should have liked to quote what captains of the textile industry are saying about the Government's policy. I could have quoted letters from mill owners in my constituency who are deeply concerned about water privatisation because

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the textile maufacturing process uses a great deal of water. They have already seen unfair increases in energy costs, compared with their competitors, and they have seen the results in terms of imports. The Government have let them down badly.

The right hon. Member for Old Bexley and Sidcup (Mr. Heath) highlighted the need for the Government to invest in real training. Whatever the Secretary of State for Employment may say about employment training, it has been an utter failure. A fortnight ago a young graduate, Michael Pickles, came to my surgery. He has been unemployed since last June. He has an extremely good degree and in desperation he went on employment training for three months, but in that time he has had just two weeks placement with a firm. For the rest of the time he has been kicking his heels. He told me that if I got the chance I should tell the Government that they are just wasting the taxpayers' money on a rubbish scheme that was no good for him and no good to anyone else.

In 1988 a survey of the local economy of Halifax showed that we are moving towards a two-tier labour market with a widening gap between the professional and skilled occupations and those workers concentrated in low- status, low-skill and unskilled jobs. The latter groups are often part of the flexible work force. Such people need training. In Halifax we fought back and tried desperately to help. We were involved with the business in the community initiative, which used the combined resources of the local council and the local trade unions, with the help of excellent officers who guided us through it. The chamber of commerce sulked, however, and would not join the regeneration committee. We used the small amount of European money available to us to try to train people for the future, but what have the Government done for us in return? They have done absolutely nothing--we are the hole in the middle of the doughnut. The Government have kicked us in the teeth. In the early 1980s the Government took assisted-area status away from Halifax, followed by urban programme area status. Recently Calderdale has been told that no derelict land grant will be given for the only piece of flat land available for industrial development.

We have been betrayed by the Government. They are not putting our area forward for objective 2 status for the EC structural fund. The Government have ignored our pleas and representations, although we have pointed out that thousands more jobs are about to be lost. Last week, with two officers of the council, I made representations to the Department of Trade and Industry to get objective 2 money from Europe. We were given the impression that the Department was doing all that it could to press our case, and the Minister told us that our case was being flagged up in Brussels. Unfortunately for the Minister, however, the new Commissioner--Bruce Millan --told us the truth. The Government have not represented Calderdale and they have not highlighted the new unemployment levels in the area. The Commissioner told us that the Government were doing absolutely nothing for us. I have written to the Chancellor of the Duchy of Lancaster to say that if his Department wants to help Calderdale, Halifax and the Calder valley to get that money, we should have assisted area status.

I see nothing in the Budget to help manufacturing. When the oil runs out-- the income from that oil is already sliding--I wonder how we shall pay our way. What is happening in my town is a sign of things to come. I know

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why the Secretary of State for Employment would not allow me to intervene--since Christmas nearly 1,000 jobs have been lost in my constituency and it would be difficult to explain that away in the so-called boom economy.

7.32 pm

Mr. John Townend (Bridlington) : The hon. Member for Halifax (Mrs. Mahon) comes from the west riding, but the story is different in east Yorkshire. I represent a constituency in the hinterland of Hull ; anyone visiting Humberside today will see nothing but expansion and the development of the manufacturing industry, which is taking on more labour.

The Budget tax changes, modest though they were, have been universally approved. I particularly support the radical reform of employers' national insurance contributions, which will remove some of the stupid anomalies that created the poverty trap in the previous system.

I represent a constituency with an above average number of old people, so I particularly welcome the removal of the earnings rule. That is a particularly useful supply-side measure when one considers that in the next few years there will be a fall in the number of school leavers coming on to the market. In common with my right hon. Friend the Member for Worthing (Mr. Higgins) I also approve of the reduction in the age limit for the higher rate of age allowances. I am chairman of the Back-Bench small businesses committee and I naturally welcome the 50 per cent. increase in the band for small company corporation tax to £150,000. Mainly that will help medium-sized firms, not small firms. I am disappointed that my right hon. Friend the Chancellor was unable to accept the recommendations of our committee, which would have been of enormous help to small businesses that have just started. We suggested that the first £5,000 of taxable profit retained in a business should be tax-free. That would be particularly helpful to small businesses desperate for capital in the early years.

Another suggestion that we made and which I commend to the Chancellor for next year's Budget is roll-over relief for inheritance tax on private businesses or shares in private businesses until the disposal of the business or the shares. There would be no loss of revenue in the long term and in the short term it would stop smaller businesses being bled of much- needed capital to pay the Revenue's inheritance tax.

In formulating this year's Budget, the Chancellor faced a completely different situation from any faced by a Chancellor this century. He not only balanced the Budget, but had a surplus of almost £14 billion. That is a clear sign of the success of the Government's handling of public finances. In the coming year, based on no changes other than indexation, my right hon. Friend has a surplus of £15.5 billion. At one bound, he could have achived his stated ambition of reducing the standard rate to 20p --at a cost of some £7 billion--still leaving him a further £8.5 billion for further tax cuts.

In this century we have not had a Chancellor as successful as my right hon. Friend the Member for Blaby (Mr. Lawson) at introducing tax reductions and tax reforms to help the supply side of the economy. Therefore, it must have been terribly frustrating for him to be unable

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to use the enormous surplus to continue that policy. My right hon. Friend was unable to use that surplus because of the current economic situation.

In the event, my right hon. Friend is repaying another £14 billion of the national debt. That means that in about three years he will have repaid one sixth of the debt which has accumulated in the past 200 years. I do not believe that we should overlook what is, without doubt, an enormous achievement. For many years, the Government and their predecessors have increased the burden that will be bestowed on our children and grandchildren. The one exception to that practice which was brought to the attention of the House was not a budgeted surplus but one achieved by accident at the end of the year. It is truly wonderful that, at last, we are reducing the burden on future generations.

Let us consider our economic difficulties. As my hon. Friends have said, it is always easy to be wise after the event. It could be argued that pumping more money into the economy and reducing interest rates prevented a world economic collapse. It could also be argued that the growth in the world economy was so strong that those measures were unnecessary. There is no doubt, however, that our current problems stem from pumping too much money into the system and reducing interest rates. This monetarist Government were not monetarist enough, and they paid the price. Our monetarist stance was too lax even before the October crisis. Therefore, for two years the economy had been growing at an unsustainable rate. It is nonsense to blame the Budget of 1988. That Budget produced a £14 billion surplus, which was fiscally tight.

The main culprit is monetary policy. To be fair to my right hon. Friend, he has only done what his critics on the Opposition Front Bench have demanded for years--reflated the economy and reduced unemployment. To combat inflation, the Chancellor had to suppress his natural desire to cut taxes in this Budget, and he had to introduce a prudent and cautious Budget. He had to convince everyone, not least the markets, that when he said that the Government's No. 1 priority was to reduce inflation he really meant it. That is the only justification for sacrificing more than £1 billion in revenue by not valorising excise duties.

We required a Budget for the markets this year and I believe that my right hon. Friend the Chancellor has succeeded so far. The Budget was far more cautious than many people expected. I am sure that the Chancellor hopes, if he gets the right response from the markets, that he will not have to increase interest rates any further. We will have to see whether that happens. However, I am heartened by the fact that my right hon. Friend has made it clear that, if necessary, he will raise interest rates further.

My right hon. Friend the Chancellor is faced with two significant problems- -inflation and the balance of payments deficit. The Budget will undoubtedly help, but it will not solve those problems. The only way to reduce inflation is through further monetary policies. It is a tragedy that, when the Government managed to reduce inflation to 3.5 per cent., they did not continue their policy to get it down to zero. They traded off reflation to bring down unemployment. I hope that the Government have learnt a lesson and will not be diverted from their main aim in future.

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I am worried whether targeting MO is sufficient. I am not certain whether we need to return to targeting broad money, despite all the problems that that would cause.

A vital factor in reducing inflation relates to wage increases. All private employers should heed the Chancellor's warning that he will not let the exchange rate fall to accommodate real wage increases which are not covered by increases in productivity. The Government also have an important part to play because they are a major employer. Regardless of the political clout of this year's special interest groups, whether they be doctors, nurses or teachers, the Government should not allow themselves to be pressured into allowing wage increases much in excess of 6 per cent.

I believe that the balance of payments deficit will right itself in due course because this deficit, unlike previous deficits, is mirrored by a private sector deficit and not a public sector one. As hon. Members have said, a considerable proportion of the deficit is made up of imports of capital goods. When they enter production, they should reduce imports and increase exports.

In the short term, the Government should take a much tougher line with countries which have free access to our markets, but which make it difficult for us to export to them. For example, for 25 years Japan has discriminated against Scotch whisky and that discrimination will be removed only after 1 April. We have a significant deficit with South Korea, but it is virtually illegal to sell Scotch whisky there, other than in tourist hotels. That is not good enough, and retaliatory action must be taken. We believe in free trade in both directions. If we open access to our markets, we demand equal access for our exporters.

Also, while we have this worrying balance of payments deficit, we should not increase overseas aid, however much the bleeding hearts brigade might plead. Indeed, we might do well to restrict it. We must all hope that "Lawson's luck" holds and that the British economy has a soft landing. The Budget has hopefully created the right environment. Backed by firm monetary control, inflation should fall and there should be a reduction in the balance of payments deficit. When that happens, I hope that the patience of the British people will be rewarded and that the Government will once more embark on their avowed policy of reducing taxation. We should have enough of a surplus then to bring the standard rate down to 20p in the pound and to make significant reductions in other areas. On that basis, I strongly support the Budget.

7.43 pm

Mr. Tony Worthington (Clydebank and Milngavie) : We have heard much from Conservative Members about the importance of incentives and I support much of what has been said. It is particularly important that the less well -off should have incentives. They should have a sense of achievement and a sense of being able to surmount their own economic problems. However, the incentives issue becomes less important when we consider the more wealthy. There appears to be an area of diminishing returns. For many reasons many people who become wealthy cannot benefit or gain any more enjoyment from increased wealth. The wealthy often have the opportunity to set their own wages and incentives and use their own power. In many cases they cannot work much harder. It is ironic that the Prime Minister who claims that it is crucial

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that the well-off should have large tax cuts does not take her own wages. It is clear that the Prime Minister, although she works extremely hard, realises that she cannot work any harder. The well-off often gain tremendous benefits from firms. They receive income which is more than a simple salary. In this Budget debate, we should be debating the Government's attitude towards different forms of taxation although I have not heard such a debate so far. Is it true, as we often hear, that the Government favour indirect taxation instead of direct taxation? If so, why? Is it true, as we often hear, that the Government favour regressive taxation rather progressive taxation? If so, why? It seems that there is a move towards more indirect and regressive taxation. That should be justified in this House.

In 1978, income tax raised one third of all revenue. In 1988-89 it will raise only 24 per cent. In 1985, the poorest one fifth of the community paid 5.9 per cent. of their disposable income in VAT. The best-off one fifth paid only marginally more--7.3 per cent.--of their income. The bottom one fifth paid 29 per cent. of their disposable income in indirect taxation, but the top one fifth paid 21 per cent. There is a built-in unfairness there.

We have heard today, as we have heard ad nauseam in the past, that we have a tax-cutting Government. If we consider the almost mythical married couple with two children on average income, we discover that in 1978-79 that family paid 35 per cent. of its income in taxation while in 1988-89 it paid 37 per cent. as a result of the shift towards indirect taxation.

The position for the less well-off is worse than that because the role of benefits is neglected. In 1988-89 a wage earner with four children earning £75 a week, with cash benefits actually received about £123 a week. To increase his income from £123 to £140--an increase of £17--he would have to earn an extra £90 because of the loss of cash benefits. That represents a taxation loss of 80 per cent.

We all welcome the minor changes in national insurance contributions, but that affects only a tiny part of the poverty trap. At the top end of the scale people are treated even more favourably than would appear from the way in which the Chancellor cut the tax rates to 40 per cent.

People at the top end are looked after by their employers. It was pleasing to see the reduction in allowances relating to company cars, but that is a small part of what is happening at the moment. Recent surveys show that 84 per cent. of senior managers receive free medical insurance. Many receive life assurance policies, have their telephone bills paid for them or receive money to pay for their newspapers. According to the data, 30 per cent. have their golf club fees paid. Such benefits are not taken into account in the Budget. The Paymaster General (Mr. Peter Brooke) rose --

Mr. Worthington : I cannot give way in a 10-minute speech. All of that is a form of middle class, welfare state subsidy that is not taken into account. Others receive share option schemes, and they do not pay the market price. They receive free meals from their companies, whereas a working person will receive only luncheon vouchers to the value of 75p per week before that benefit is taxed. What is to be done about that extremely unfair system? We all need incentives, and the greatest benefits should go

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to those who are least well off. I believe in the importance of incentives to working people. I am much attracted to the scheme proposed, admittedly in embryo form, by my hon. Friend the Member for Birkenhead (Mr. Field), which seeks to re-examine the present system of tax allowances. In tonight's debate, we have heard from hon. Members who are hostile to any benefit being given to working-class people but who have urged the value of incentives for savings schemes, for example. If there is no such thing as a free lunch, there is no such thing as a free tax allowance. A free tax allowance is being paid for by someone else, who is often receiving a lower income than the person enjoying the tax allowance.

At present, about 100 tax allowances are in existence. Major allowances include mortgage relief, while others include car allowances, tax-free pension schemes, business expansion schemes, and subsidies to invest in privatisation. They are all largely biased towards the better off. The value of that tax welfare rises with one's income. There has been a great growth in tax welfare, and one of the things that that has done is to drag poorer people into the tax net.

The only way to end the drastic poverty trap, with people effectively paying 80 per cent. income tax, is to get rid of that panoply of tax allowances. If that is done, it will be possible to have a standard rate of income tax of around 12p to 15p in the pound. One could then have a progressive tax system based on fairness and linked with that rate of 12p to 15p in the pound. It would also be necessary to increase considerably child benefits, and to do more for pensioners.

The unfair divide that currently exists between those at the top who are assumed to need incentives and those at the bottom who are clobbered massively for every increase in income that they receive is totally unsatisfactory. One of the ways of ending that, as was suggested by my hon. Friend the Member for Birkenhead, is by re-examining the current system of tax allowances, which probably costs the rest of us about £50 billion. We must then return to what is surely the only fair system of taxation--a system of progressive, not regressive, taxation, under which one pays according to one's ability to pay.

7.53 pm

Mr. Neil Hamilton (Tatton) : This has been an interesting debate because we have heard from both the old and the new. It included a contribution from the newest Member of this House, my hon. Friend the Member for Richmond, Yorks (Mr. Hague), whom I congratulate on the excellence of his maiden speech. He was preceded by the oldest Conservative Member of the House--with the exception of the Father of the House--my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath).

My hon. Friend the Member for Croydon, South (Sir W. Clark) commented that he wished that my right hon. Friend the Member for Old Bexley and Sidcup sometimes said something good about the Government and that he approved of what they are doing. However, that would amount to an act of apostasy on the part of my right hon. Friend the Member for Old Bexley and Sidcup, so it is not likely that he would do such a thing. To be more even-handed might also give his opinions a spurious credibility. I am delighted that when he speaks to the House he does so only to attack, because that can only diminish the strength of his message.

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If we learned anything in the past year, the two lessons that have come home to us are that monetarism is still alive and well and that the inflation experienced in recent months is a reflection of a laxity in monetary policy, and how potentially dangerous it is to rig exchange rates by intervention in the foreign exchange markets-- and how even more dangerous it would be to tie us up in a permanent, formalised system such as the European monetary system.

I am delighted that in his opening remarks on the Budget my right hon. Friend the Chancellor of the Exchequer agreed, at least partially, with my view, when he said :

"Inflation is a disease of money ; and monetary policy is the cure."--[ Official Report, 14 March 1989 ; Vol. 149, c. 293.] I am glad that my right hon. Friend gave that ringing endorsement of what I believe to be the underlying cause of the difficulties we have recently experienced. I endorse his comments that interest rates should stay as high as necessary for as long as necessary. I do not believe that we shall cure inflation unless we adhere to that policy.

That is not a policy that commends itself to my right hon. Friend the Member for Old Bexley and Sidcup. He comes to the House only when he perceives that the Government are in some difficulty, and feasts upon perceived Government misfortune like a vampire given free run of a blood bank. However, where inflation is concerned, I dare say that we should to some extent listen to him, because he is one of the greatest experts on the causes of inflation--having himself presided over some of the worst bouts of it in living memory.

On occasions, my right hon. Friend attacked the Chancellor for his excessive reliance, as my right hon. Friend the Member for Old Bexley and Sidcup sees it, on interest rates. He says that the Chancellor has only one golf club. In the period 1972-74, my right hon. Friend used every golf club apart from the right one, played most of the time in the rough, and ended up well and truly bunkered. It ill becomes him to pose now as the club professional. It is my right hon. Friend the Chancellor of the Exchequer who deserves that description.

My right hon. Friend the Member for Old Bexley and Sidcup has the support of various bodies such as the CBI, which seems to spend all its time whining about matters that are beyond its control and ignoring those within its control, such as wage increases--which have a far greater influence upon the costs of manufacturing industry than interest rates. My right hon. Friend the Member for Old Bexley and Sidcup is supported also by Opposition Members, though the same applies to them as to him. When the Labour party comes to the House to accuse the Government over their record on inflation, that is the nearest thing that one can imagine to Satan rebuking sin. Several times during the debate Opposition Members have called for non- inflationary increases in Government spending. I should like to know what is a non-inflationary increase in Government spending, because unless one can achieve a 100 per cent. rate of return, any investment is likely to lead to an increase in total demand--and as excessive demand is the cause of inflation, such investment is likely to stoke the fires of inflation rather than dampen them.

Another mistake that has been made in Opposition Members' speeches this evening is to say that last year's

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Budget produced the upturn in inflation that we now have, and that the tax cuts it introduced must be held responsible. I do not understand the logic of that argument. Last year's tax cuts totalled £4 billion and there has been an increase in personal sector credit of £40 billion. It sems unlikely, to say the least, that £40 billion extra spending should result from a £4 billion increase in disposable income as a consequence of tax cuts. In an economy now approaching £450 billion, it is impossible to believe that last year's modest tax cuts were in any way responsible for the current inflation upturn. The problem is that credit has been allowed to expand too rapidly for too long. I agree with my hon. Friend the Member for Bridlington (Mr. Townend) : we were satisfied, when we should not have been, with inflation continuing at 3, 4 or 5 per cent. We lost the momentum of our campaign to squeeze inflation out of the system. Bank credit has trebled in the five years between 1984 and 1989, and broad money has expanded at a rate of about 20 per cent. a year.

I appreciate the problems relating to M3. World changes in the past eight years--freedom of capital movements and so forth--have made it a less reliable indicator than it was. I certainly do not think, however, that it is right to concentrate our attention on a narrow measure of money--M0-- which has nothing to do with credit, when credit is the basis of our current problems. We need a new monetary measure which balances the different kinds of money that are held. Although inflation is unacceptably high, we should not overstate the recent increases. I am a zero-inflation man myself, and I should not like it to be thought that I am being soft on inflation, but we should recognise that earnings have risen by 9 per cent. in the past year and productivity by 4 or 5 per cent. The real level of inflation in the economy is still only about 4 to 5 per cent., although it is rising, which is worrying.

We need a tight monetary policy, but I am sorry that we have such a tight fiscal policy. I believe that the supply side implications of our tax reductions have been the basis of the huge increase in prosperity at all income levels in the past 10 years, and we need to go further in that direction. I want Britain to become a tax haven, and taxation to cease to be a consideration in people's decisions about how hard to work or what jobs they do.

For all the talk by Opposition Members about cuts in spending in the past 10 years, figures in the Red Book show that expenditure has not been cut as a proportion of GDP. It has started to decline only recently, and I look forward to further falls in the coming years. Table 2.5 shows that the proportion of our national income taken by taxation also has not declined much. When we came into office in 1979 it stood at 35 per cent. of GDP, while the figure for 1988-89 is 37.5 per cent. Of course Government spending is more honestly financed today as a result of the abolition of the public sector borrowing requirement, but I believe that 37.5 per cent. is far too much for the Government to take in taxation, and that significant reductions are needed.

I recognise that market sentiment was probably against the Chancellor this year but I think that, although the markets had discounted it, there was room for a 1p cut in the basic rate of income tax, and I wish that the Chancellor had felt able to take such action. The problems that we have faced in the past year have been familiar to economic theorists and others for a long time. It is many years since

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Professor Milton Friedman pointed out the dangers of a discretionary monetary policy. Along with my right hon. Friend the Member for Brighton, Pavilion (Mr. Amery), I hope that we may think again of establishing an entirely independent control of the money supply by privatising the Bank of England.

In this as in many walks of life, it is politicians who cause the difficulties with which we must grapple. If their hands are kept off the levers, more often than not the market will ensure that the right solution emerges. That will remove the uncertainties and unpredictabilities inherent in the fickle nature of politicians' decisions.

Limited though its effects may be, I welcome this year's Budget. I regret the necessity to tread water, and I look forward to further progress on tax reductions, particularly income tax reductions, in future years. In the long run, however, the country's prosperity will be assured only if the Government keep firm control of the money supply, inflation and their own expenditure, and reduce significantly the proportion of the national income that they take out of people's pockets.

8.4 pm

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