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Column 829the jury was out on the Chancellor. That was almost six months ago. Three weks ago the Governor of the Bank of England said that the jury was still out.
The jury has been out for a long time now. It has been out so long that the Chancellor has had the benefit of one of the longest trials in recent experience and undoubtedly, for the nation, one of the most expensive. It is about time that the jury returned. Is the verdict not now overdue? Perhaps the verdict on the Chancellor's performamce will be delivered in the expected Cabinet reshuffle. Perhaps the best that he can hope for is leniency and that he may get off with a suspended sentence or probation under the personal supervision of Sir Alan Walters, who is due to provide what he calls his "independent advice" on 1 May.
Inflation is twice what it was a year ago and twice what it was when the Chancellor took office and pledged to eliminate it. It is 7.9 per cent. in Britain, 1.4 per cent. in Japan and 2.6 per cent. in Germany. Despite the freezing of excise duties, which will prevent the rate rising by 0.5 per cent., the inflation figures have yet to show the nine price rises that came in the first weeks of April, for most of which the Chancellor was directly responsible. Those include the 7 per cent. rise in electricity, 3 per cent. rise in gas, 10 per cent. to 30 per cent. rise in water, rate and rents, prescription charge rises, television licence fee rises, the new health charges and the petrol price rises, about which the Chancellor has been strangely silent when faced with the behaviour of oil companies as they push up petrol prices.
Perhaps the Chief Secretary regrets saying in the Second Reading debate last year :
"What is vital, and unusual for post-war recoveries is that this sustained growth in the economy has been achieved without a resurgence of inflation." --[ Official Report, 26 April 1988 ; Vol. 132, col. 215.]
The tragedy is that the inflation that he did not forecast is the inflation that he and his Ministers caused. Last July
Mr. George Walden (Buckingham) : The hon. Gentleman paints a bleak picture of the British economy. If, for the sake of argument, one accepts his analysis, will not the position grow even worse than he describes it if higher-than-inflation wage settlements are reached? What would the hon. Gentleman advise those unions seeking higher-than-inflation wage settlements?
Mr. Brown : The hon. Gentleman is joining me in criticising the 26 per cent. post-tax rises for directors and the 47 per cent. rises to senior directors. I shall tell the hon. Gentleman how the Chancellor could begin to tackle inflation. He could postpone the electricity and water price rises, imposed for one purpose only--to fatten up the industries for privatisation. When the hon. Gentleman looks at the figures, I think that he will agree with me and others that the Government have been responsible for most of the inflation from which we now suffer.
Mr. Brown : The hon. Gentleman shows a strange misunderstanding of what has been happening to central Government expenditure in relation to local authorities. Over the past 10 years the Government have not only cut
Column 830their contribution but cut their proportionate contribution to local authorities so that rates have been forced up for those local authorities trying to maintain services. In Scotland, we now have the final result--the poll tax, which is basically a flat rate charge, and is being imposed against the wishes of the vast majority of people in Scotland.
Our case against the Chancellor and the Government is not merely that we have the highest inflation and interest rates, and the worst trade deficit, or that we have returned to stop-go economics even before North sea oil has run out. It is not only, although this is bad enough, that the Chancellor's solution to the problem--creating high interest rates and by discouraging investment--is part of the problem rather than the solution. Our case against the Chancellor is more than that. It is that, having made all these mistakes by engineering a consumer boom that was not properly backed up by adequate investment, he has no greater desire in life than to keep his job and to repeat them at a later stage.
Mr. Yeo rose--
Having engineered a consumer boom that was preceded by high interest rates, and having used for tax cuts resources that should have been used for investment, the Chancellor intends to engineer another pre-election boom, preceded by the present high interest rates, which are so damaging to investment. He will use the Budget surplus not for investment in our future, but for tax cuts. That is the mistake that the Chancellor makes when planning the long-term future of the economy. The result is--
Mr. Yeo rose--
Mr. Brown : The result is that we end the 1980s in the astonishing position in which household consumption has increased by 30 per cent. during the past 10 years, but industrial production has increased by only 10.5 per cent. The obvious result is that imports have had to increase by 50 per cent., giving the trade deficit that is causing all the problems that the Chancellor will sooner or later have to face.
Even more astonishing is the fact that in the past 10 years manufacturing production has risen by only 8 per cent., while manufacturing imports have risen by about 100 per cent. That is the position to which the Chancellor's policies have brought us. The problems are due to the neglect of investment over a long period, the inability to prepare our industry for the future. We face the 1990s and the harsher marketplace of 1992 with the worst trade deficit in our history and a Chancellor who has no policy for sorting it out. Our complaint against the Chancellor does not stop there. Even when he has a Budget which he claims will help the low paid, he ends up, as usual, helping the higher paid. National insurance changes mean that there is nothing for anyone earning less than £43 a week. There are about two million people in that position. There is £1.50 less in some cases, far less than £1.50 a week for those earning less than £115 a week. None of that will be paid until October, whereas the Chancellor was very keen to give his top-rate tax cuts of last April in April. The figures show that those at the top benefit far more than those at the bottom.
Column 831The Budget was not one for low income Britain, but one which compounds last year's errors by giving most to upper income Britain. It does not do anything for people faced with high mortgage repayments, many of whom as a result of building society decisions saw their mortgage rates rise on April 1, on the annual basis used by companies such as the Halifax building society.
In a lecture, the Governor of the Bank of England said that it was unlikely that last year's experience with mortgage arrears would be sustained. He said that building societies were already reporting an increase in short- term arrears and that the full impact of higher mortgage rates was yet to be felt. Last year, for the basic rate taxpayers, those who are home owners, tax cuts amounted to about £1.5 billion in a full year, but the mortgage rises for that period would be about £4.5 billion. For 118 out of the 120 months of the Chancellor's period in office, mortgage rates have been above 10 per cent. As we work out the figures, we realise that for the vast majority of home owners the tax cuts have already been clawed back by the mortgage rises and the vast majority of people are already worse off and suffering a deterioration in their standard of living as a result.
What do the Government say about this? Far from helping home owners or the majority of pensioners--although we welcome the changes in the earnings rule and age addition--and far from unfreezing child benefit, about which there was a debate last night in which the Government took a hard line, the Finance Bill gives far more to those who have than to the majority of people who have not. It seems that the Chancellor is not content with the £2 billion that he gave to the top 1 per cent. in last year's Finance Bill, the £26 billion that he has given over 10 years, the £10,000 each that those in the top 1 per cent. have received each year, or the £100,000 that he has given cumulatively in tax cuts to the typical person who falls within the top 1 per cent.
The Finance Bill contains a series of changes which can only be said to raise the incomes of those who are already rich, without doing anything for those on low incomes. The changes in inheritance tax will cost £35 million but will cover only 39,000 taxpayers. There are changes in capital gains tax, from which any personal possession that is sold off and is worth up to £6,000 is exempt. The Government have closed the obvious and glaring loophole in closed company tax relief in relation to the business expansion scheme, but have not made the change retrospective although they have been aware of the abuse for some time. They have not dealt with the fundamental flaws of the business expansion scheme, which provides rented housing at a far greater cost than if local authorities or housing associations were given the same money to build.
We shall support the Government's attempts to implement the recommendationss of the Keith committee. We regret that they have not faced up to a number of its recommendations, such as the power of entry and inspection of business records in respect of transfer pricing. We might have expected them to act on the taxation of non-residents as well, especially after the Treasury paper issued last summer which said that the current loopholes
"encourage the setting up of arrangements overseas which can be more or less artificial."
There is nothing of substance in the Bill to deal with that abuse, and we shall press the point in Committee.
Column 832What justification have the Government for failing to sign the OECD agreement on an international campaign to clamp down on tax evasion?
Mr. Brown : A number of countries are very concerned that the agreement be signed. Why has Britain refused to sign it? Why have the Government given us the explanation that they are doing quite enough about tax evasion already, when all the available evidence suggests that massive evasion on an international scale is taking place and is not being properly dealt with, and that international agreements are required for it to be so dealt with? When that matter is raised in Committee, I believe that the Economic Secretary will be persuaded of the need for further action.
Another proposal that the Chief Secretary said had achieved a false importance in debates on the Budget and the Finance Bill is the proposal for private medical insurance. We shall, of course, discuss that at length later, as we are entirely opposed to the relevant clause. Last week the Treasury issued an explanatory memorandum, although the regulations which are vital to an understanding of how the scheme will work have yet to be issued in full. The Treasury said that the test for private medical insurance was that the £40 million or more--we believe that it is more --would
"relieve pressure on the National Health Service".
I will tell the Minister the best way of relieving pressure on the National Health Service--give the money to the National Health Service. Is it not clear that the best way of providing health care for anyone is to provide it for everyone? That is the proper way in which to use the available resources.
We shall debate all these matters in Committee, both upstairs and on the Floor of the House. It is interesting to note, however, that this Finance Bill ends a 10-year period under the present Government in which Ministers have claimed that there has been an economic miracle and an industrial resurgence, and that Britain has been transformed by their policies. The Chief Secretary started to say that earlier this afternoon.
What sort of economic miracle is this? Despite all our revenues, the growth rate of the British economy has been only 2 per cent. a year in the 10 years since 1979, half that of Japan. It has been 2.5 per cent. in Italy, 2.5 per cent. in the OECD countries as a whole, 2.7 per cent. in America and 4 per cent. in Japan. What sort of economic miracle is it when manufacturing output has grown by 1 per cent. a year in Germany, by 1.5 per cent. a year in Italy, by 2.5 per cent. a year in America, by 4 per cent. a year in Japan and by 2.2 per cent. a year in the OECD countries, but by only 0.8 per cent. a year in the country that the Chancellor claims is hosting an economic miracle? What sort of miracle is it when exports have increased by 3 per cent. in Italy, by 4 per cent. in Germany, by 5 per cent. in America and by 7 per cent. in Japan, but by only 2.8 per cent. in Britain?
On all those indicators, Britain is not leading the world ; it is very near the bottom of the table--and the reason is that the policies of the Chancellor and his predecessors have been wrong.
Yesterday the Government voted to freeze child benefit for 7 million mothers and 12 million children. In the past
Column 833few weeks, half a million pensioners and others on benefit have been denied any uprating at all. This month, destitute teenagers who have already lost their unemployment benefit are now losing many of their housing benefits. Pensioners faced with price rises that are way above their pension rises are seeing their living standards fall.
On top of that, this month has brought the new health charges. We have already experienced housing benefit cuts, and, in Scotland, the imposition of the poll tax. Yet at the same time--as the British Institute of Management confirmed yesterday, and as was pointed out by my hon. Friend the Member for Bolsover (Mr. Skinner)--huge windfall bonuses have been paid to people who are already rich as a result of tax changes made last year which the Government have been prepared to maintain this year.
For directors the average pay rise, with the tax cut included, has been 26 per cent. According to the survey, the increase for those in the senior directors' grade has been 47 per cent. For those with unearned income--the top 1 per cent.--it has been 86 per cent. I can think of no occasion in this century when the living standards of pensioners and others on fixed benefits have fallen at the same time as there has been such a huge and disproportionate increase in the benefits of those at the very top.
In this Finance Bill, the Chancellor had a unique opportunity to correct last year's errors and to introduce a truly radical element into Tory Budget policy--fairness. By failing to apply that test the Bill compounds rather than corrects those errors, which is why we shall vote against it this evening.
Mr. Terence Higgins (Worthing) : On Second Reading of the Finance Bill, every Chief Secretary faces the dilemma of whether to be extraordinarily dull by going through every single clause or whether to be highly controversial. Given the experience of my right hon. Friend's predecessor, who tried the second course, I well understand why he thought it right this afternoon to take a more balanced approach.
None the less, my right hon. Friend did not resort entirely to going through the Bill from clause 1 to the end. He made a number of points at the beginning with which I certainly agree. He was right to stress that the Bill is of substantial importance to the elderly, and also to point out the extent to which the Government have succeeded in repaying the national debt, and the scope that that will provide in future years in relation to taxation or public expenditure on priority items.
I do not wish this afternoon to concentrate on the details of the Bill. Let me just say in passing, in reply to the points that my right hon. Friend stressed about investment in equities and shares, that it is important to strike a balance between them and more institutional forms of saving.
This is a mammoth Finance Bill, with 250 pages. The Select Committee on Procedure, which I chaired some years ago, considered whether we should have a separate tax Bill--perhaps in the autumn--which would be dealt with at a more leisurely pace than is necessary under the Provisional Collection of Taxes Act 1968. We must consider carefully whether it will be possible for any
Column 834Standing Committee to give the Bill the attention that it needs if our financial legislation is to be properly scrutinised.
The report of the Select Committee on the Treasury and Civil Service is based on evidence given to us by the Chancellor, the Governor of the Bank of England and officials. It is undoubtedly the case that the evidence we now get subjects the Chancellor, the governor and officials to far more intensive scrutiny than was ever the case. That is an advantage for this House when it comes to consider matters connected with this Bill.
The Select Committee report is unanimous. It brings out the various problems inevitably being faced at present. The report also draws attention to matters affecting the origin of the present financial situation. The hon. Member for Dunfermline, East (Mr. Brown) referred to the remarks made by Mr. Banham about the 1930s. We must be clear that many of the present problems are the direct result, as the Chief Secretary pointed out, of action taken by the Chancellor in conjunction with other Finance Ministers, with virtually unanimous support--with the exception of perhaps one of my hon. Friends--to prevent a world slump of the 1930s type after the stock exchange crash in autumn 1987. As we make it clear in paragraph 11 of the Select Committee report--and we quote the Chancellor and the governor-- mistakes were made at that point in relation to monetary policy. In a way, we are now suffering a hangover from the stimulus which was given to the economy in 1987, for the reasons that I have explained. In that context, hon. Members must appreciate the point stressed by the Select Committee again and again, that the statistical basis on which the Government and, indeed, Parliament are taking decisions is seriously defective. I welcome the fact that an inquiry has been conducted and that the Government have responded, but the statistical situation must be improved, otherwise inevitably mistakes of the kind recorded in the Select Committee's report will be made.
It is also important to appreciate the speed with which the economy accelerated following the stimulus given to it. As the Select Committee's report points out, the Government and the House are now on a tightrope, with a real danger on either side. On the one hand, if the measures the Chancellor has taken on interest rates have a rapid and too dramatic effect the country could fall into recession. On the other hand, if those measures take too long to produce an effect, confidence in sterling will weaken, and the decline in the value of sterling will generate inflationary pressures. The essence of the problem, as the report makes clear, is essentially one of timing. The dilemma is that we do not know at what rate the increase in the interest rate will actually have effect. As the report makes clear, this situation is likely largely to affect those who have mortgages, having borrowed on an appreciation of house prices. Therefore, there is a lagged effect. It is important that the Chancellor should therefore seek to maintain the balance that he is presently achieving. He should take appropriate action as the occasion arises.
We need to ensure that we do not rush hastily into other measures that push the economy on one side or the other of the tightrope to which the Select Committee has drawn attention. In that context, what is clearly needed is significant evidence that a slowdown in the economy is taking place. In his evidence to the Committee, the Chancellor referred both to house prices and the extent of house purchase transactions. He also referred to the
Column 835indicator MO on the money supply. I hope that action will be taken to ensure that such evidence as we have on these matters is also improved.
It is also of grave concern that we are likely to suffer from the actions of foreign Governments. Against the background of international monetary co -ordination, which the Chancellor has played a prominent role in fostering, I hope that there will be some co-ordination. The hike in German interest rates last week was unfortunate. The response of the international community generally to that development seemed rational in the circumstances.
The Committee's report also brings out clearly the fact that, in addition to treating interest rates as its main instrument, the Government have taken appropriate action on the fiscal front. We are undoubtedly running a budget surplus of totally unprecedented size. My personal view is that it does not seem reasonable to argue that last year's Budget was too slack if we end up with an all-time budget surplus. However, the Committee's report brings out the fact that we are operating against a background in which consumers are being inundated with appeals to borrow more money. So last year's Budget created an air of confidence that had a greater effect on the economy than could easily have been predicted. I believe that the Chancellor's monetary measures are likely to have an effect. Labour Members have rightly pointed out that interest rates have been increased successively to a very high level. It is right and proper that we should maintain that position.
In many respects, we are in a dangerous position. The balance of payments situation certainly gives cause for concern. Unlike some members of the Select Committee, I do not believe that the solution to the present problems is to be found in a depreciation of the exchange rate. I believe that the Chancellor's attitude in this respect is correct. If we were to have a sterling depreciation when the economy is operating close to capacity, the danger would be that the inflationary pressures would become quite uncontrollable. A policy of no depreciation of the currency combined with deflation will inevitably take a considerable time to have effect, and this is a cause for concern. The deflation in this case is against the background of very high profit levels, so that the resistance to wage settlements by the private sector is likely to be a rather lengthy process. Overall there are causes for concern, but I believe the Chancellor is right to say that the exchange rate should be maintained at the present level. None the less, he should take deflationary action to deal with the inflationary pressures and bring the economy back into equilibrium.
I believe that the stress the Chancellor is putting on the ability of capacity effect to improve the export side is likely to be an over- estimate. The Select Committee seeks to bring out this point. There are likely to be effects with regard to the import side of the equation.
Basically, I believe that we must hope that international events do not disturb the present equilibrium. We shall need to maintain the exchange rate and keep interest rates at a very high level for a considerable time. None the less, my hope is that it will be unnecessary to increase them further against the background I have just outlined.
Mr. Tim Smith (Beaconsfield) rose--
Column 836I want to make one final point in a wider context about the Delors committee report. The argument has been put forward by Delors that we should progress from 1992 into a situation where we eventually end up with monetary and economic union. Once we have begun going down that path there is to be no turning back. I feel bound to say, in the context of a debate on Second Reading of a Finance Bill, that the whole basis of authority of this House has always rested on the control of money--the control of taxation on the one hand and of expenditure on the other. The ultimate aim sought to be achieved by the Delors committee report is one where there are constraints on the budgetary policies of national Governments. In that context the Chancellor is right to have responded as he has to the Delors committee report. The matter is of great importance. It does not mean that we should not proceed to 1992 and seek to make progress and, if need be, go along with some of the other proposals-- for example, the exchange rate mechanism--at whatever may be an appropriate speed. But we should not commit ourselves to a course of action that is explicitly designed to take from this House the fundamental authority that it has in respect of money matters. I hope that my right hon. Friend will put that point clearly to his colleagues in the European Economic Community. I find it extraordinary that the French Prime Minister should attack us for going too slowly when we abolished exchange controls about 10 years ago, and when France still has a considerable way to go in that regard.
Finally, as the Treasury Select Committee report makes clear, as does the evidence from my right hon. Friend the Chancellor and the governor, we are in a difficult economic situation. I hope that as a result of the policies now being pursued we shall see our way out of the present difficulties, albeit that they are very considerable. 5.40 pm
Mr. A. J. Beith (Berwick-upon-Tweed) : It is a pleasure to follow the Chairman of the Treasury Select Committee, who guides that Committee so well. There was an indication in his comments that we disagree on some matters. I disagree with the right hon. Gentleman about the need for a move towards economic and monetary union in Europe. The illusion that the House has autonomy and that the Government possess sovereignty over many economic matters is at the root of many of our difficulties. What sovereignty is there when a 0.5 per cent. rise in the Bundesbank's interest rate sends tremors through the whole of our system? We are very interdependent. However, it remains the case that a Select Committee whose members hold many different views as to what precisely should be done analysed the situation and arrived at common, shared conclusions on some of the weaknesses and dangers that exist. The Chancellor of the Exchequer cannot be as dismissive of that as he originally sought to be. The Finance Bill is lengthy, but that is not a tribute to its gravity or radicalism. The Bill does not achieve any of the radical, tax-reforming changes that remain to be effected. I refer to proper integration of the tax and benefit systems, for example. The Bill does not even integrate properly the tax and national insurance systems. Instead, it turns aside from elements of normal taxation policy, such as indexation of excise duty on alcohol and tobacco.
Column 837We all know why that was done--because the Chancellor was so terrified of what might otherwise happen to the retail prices index. My right hon. and hon. Friends and I, along with others, will seek to amend the Bill in a number of respects. We shall strongly oppose tax relief on health care, which the Chief Secretary to the Treasury said is not as important as has been widely suggested. It is like the housemaid's baby--just a little baby. But it is intended that that baby will grow. It is certainly the Prime Minister's intention that it will be the starting point of a much wider system of encouraging people to get out of the National Health Service and to provide for their health needs by private insurance. That is being done in the knowledge that that will be a wholly inadequate way of providing for the health care of many people, and one that will fatally damage the Health Service itself.
We shall seek also to correct other faults in the Bill. The Chief Secretary made mention of the clauses dealing with charities. I still believe that more can be done under the European ruling to ease the position of village halls, for example, without completely defying that ruling. I hope that the Government have not closed their minds to the charitable aspects and that they will be examined in more detail.
We want to close some of the loopholes in the business expansion scheme. One wonders whether anybody will use that scheme to invest in manufacturing while it is so heavily loaded towards property investment, which is protected from serious depreciation by the value of the property itself. The use of the business expansion scheme in manufacturing is no longer seriously attractive and it needs to be modified.
We want to consider also the matter of nursery care, where we believe there is scope for tax relief--particularly as we enter a period of potential labour shortage.
Most right hon. and hon. Members view this not as an occasion to debate Committee points but to examine the background to the Finance Bill and the Budget. Had the situation not changed so dramatically, we might have expected an announcement from the Dispatch Box as to the current state of the economic miracle. That is what the Government used to talk about, but there was nothing miraculous about the Chief Secretary's comments. The "Oxford English Dictionary" defines the word "miracle" as
"A marvellous event exceeding the known powers of nature an act exhibiting control over the laws of nature, and serving as evidence that the agent is either divine or is specially favoured by God." We now clearly see that control over the laws of nature is not within the grasp of the Prime Minister and that she is not a divine agent.
As was seen last year, too much money chasing too few goods produces classic inflation. High interest and high exchange rates increase the difficulty for industry in its efforts to improve exports and achieve the turn-around that the Chancellor requires. None of those laws of nature has been changed. It is time to examine the miracle.
We start with the Government's strong point, which is said to be productivity. That is where the Government say they have achieved the greatest transformation. The Government have a tendency to choose the base year for their statistics very carefully. In 1979, productivity fell by
Column 838more than 2 per cent. Last year it increased by only 1 per cent. Average growth in productivity since 1979 is only 1.8 per cent., compared with 2.2 per cent. in the previous 20 years. The improvement in productivity has been nothing like as good as the Government suggest.
There have been certain improvements, but some of them are the painful results of a recession that the Government themselves brought about. Others are associated with the ending of restrictive practices and with changing much of the climate of wage bargaining. The situation is not all bad, and there have been some significant improvements. However, the end result is not a more competitive industry. Unit labour costs have not been reduced as a result of productivity gains, and British industry is still not sufficiently competitive. So the Government's productivity record, which is said to be their strongest point, is not really very good.
Inflation is the Government's highest priority, but the picture there is appalling. We have inflation of 7.9 per cent. under a Government who think that they have removed all the basic causes of inflation. The situation is bound to worsen. Wage inflation has seriously taken off. Average earnings last month rose 9.25 per cent., and the danger of a wages spiral is clear. Commodity prices internationally are strong, and the Government themselves are increasing public sector prices. Water charges, transport costs, electricity costs and many other increases are dictated by other Government policies. They are not the result of increases in costs to those industries but of the Government's desire to restructure the water industry, for example. Water industry chairmen--particularly those already in the private sector--are imposing increases of 20, 30 or even 40 per cent. on the basis that they are necessitated by Government changes rather than by cost increases. It is estimated that without North sea oil inflation would be 11 per cent. higher than it is. The Government rely on the benefits of North sea oil to hold at bay a very worrying situation.
The Government's high interest policy may have become a necessity because of their fear of what would happen to inflation if the exchange rate fell. It may not slow the economy enough, or may take so long to do so that the prescription will be worse than the cure. The monetarists within the Government face something of a crisis. Traditionally, they are both monetarists and free marketeers. That was all very well when one could attribute inflation to a high public sector deficit. Then, the monetarists could say, "We shall deal with that. It is in the public sector." But when monetary expansion occurs mainly in the private sector, it is difficult to sustain a monetarist policy and to apply remedies. The Government are frightened of applying remedies to monetary expansion in the private sector. The Chancellor's fears are illustrated by the extent to which he concentrates on the instrument of high interest rates. We argue that Government policy should be more broadly based. We say that they should drop those public sector price increases that are dictated other than by inevitable cost increases and take steps to stop by persuasion the aggressive marketing of credit. Having advanced that view several times in debates, I have at last evoked some response from the Financial Secretary, who told the Finance Houses Association that its members' advertising gives the impression of "profligate and imprudent" lending. The Government are moving towards
Column 839what the Japanese call firm administrative guidance. Why not? Why should not the Government exert some pressure on banks and other lenders to improve the situation?
We have argued that the Government, as an obvious anti-inflationary discipline, should have already got Britain into the European monetary system, and we argue that there is still scope for improving the attractions of saving in order to reduce the rapid credit expansion in the private sector. There is scope for increasing saving. The Government themselves concede that what they have done on the PEP scheme, for example, is more likely to "deepen" than to "widen" share ownership. I quote the Chancellor's words. The Economic Secretary to the Treasury is so used to my pressing this argument that he must recognise that there is no real sign that the measures in the Budget will bring about a wide increase in savings. In addition, the Government have scope to use investment in prudent, non-inflationary ways to tackle the trade deficit problem. Unless they do something like that, there is no sign that anything else will do so. The Government's prophecies about the trade deficit are really quite extraordinary. Having moved from a forecast of a £4 billion trade deficit, they now recognise that we will have a trade deficit of at least £14.5 billion. But they see it going down to £3 billion by 1991. That is the implication of the figures that they have given us. The assumption is that there will be a massive switch in capacity from the home market to exports. There is no evidence to suggest that anything like that is beginning to happen, or is likely to happen, at a time when world trade growth is forecast to slow down, and United Kingdom cost competitiveness is likely to slow down as well. Indeed, there is some danger that the United Kingdom now has a structural deficit, which cannot be changed unless other measures also are taken. It requires far more of a miracle than there has been any sign of so far to bring about that change in competitiveness.
The other star point of the Government's miracle is supposed to be the surplus--the ability to repay public sector debt on a considerable scale because of the budget surplus. But this surplus is derived, in very large measure, from asset sales. Certainly, half of it can quite clearly be attributed to asset sales. It cannot be sensible steadily to diminish our national public investment at such a rate, and on such a scale, when there are obvious needs that the public sector can meet. Maybe those needs are different from those that the public sector has traditionally met.
I would go some way with the Government in saying that there is, indeed, a logic in releasing resources trapped in earlier forms of public investment, and shifting them into other forms, and, indeed, arguing each case on its merits. But there is clearly an urgent need for investment in training, in transport, and in communications--in things that can help to make industry more competitive. The Government should be identifying the areas of difficulty--areas like skills shortages and transport costs arising from weakness in the transport system--and directing public investment into those areas. Of course, one of the illogicalities of the present system, to which the Treasury Select Committee has pointed in previous years, is that we never consider these things at the same time. If there is any stronger reason for considering expenditure and revenue at the same time than suddenly finding a surplus far greater than the Government themselves predicted we would have, it is hard to find. When the Government find themselves with an immensely
Column 840larger surplus, surely there is a case for considering again the expenditure decisions that were made at the time of the Autumn Statement.
Hon. Members of all parties have spent a lot of time over the years telling various groups of constituents that they are in favour of what those constituents suggest, that their ideas are very good, but that the nation cannot afford them. The situation now is that the nation could afford a number of things if--and only if--it could manage the economy in such a way as to ensure that the spending on those things was not inflationary and did not generate dangerous economic pressures. That is the challenge to the Chancellor, but it is a challenge that he is totally failing to meet, because he does not accept the case for public investment in those areas that could make industry more competitive.
The Treasury Select Committee report has helped to remove a lot of the flannel and waffle that have surrounded recent discussion on economic matters and has, I hope, dispelled some of the myths and fallacies. It has attributed quite a bit of blame to last year's Budget, but also to decisions that were taken last year in the aftermath of the stock market crash. To that extent, nearly all of us must accept some share of the blame, because the Chancellor had very few critics for his interest rate policy a year ago. But, having embarked on that policy of lower interest rates, he himself should have realised that to take measures which would give people the expectation that borrowing would be easier, and a very good thing for them, and at the same time to take measures that put a time limit on people rushing out to buy houses and get multiple tax relief on them, would be bound to exacerbate the situation. That is detailed and set out in the Treasury Select Committee's report, and the Chancellor cannot escape the blame for it.
I think that, for that and other reasons, the Chancellor now finds himself, in the Committee's words, "on a tightrope". But he is not alone on the tightrope ; also on it are all those people who do not know how they are going to carry on paying their mortgages, and all those people who do not know whether they will still have a job if the only way in which the economy sorts itself out is by a slump. When they fall off the tightrope, it will hurt them a great deal more than it hurts the Chancellor. It is to those issues that the Chancellor must now address himself.
Mr. Tim Smith (Beaconsfield) : When I went canvassing in part of my constituency on Friday evening--it was an area that my agent had recommended because, he said, the Social and Liberal Democrats were putting up the strongest challenge there--it was with some trepidation. Recently my postbag has not been full of letters congratulating the Government on the excellence of their policies. I have received a lot of criticism and a lot of complaint. I know very well that, as we have been told during the course of this debate, all those who have mortgages, including, no doubt, many hon. Members, have had to put up with much higher monthly mortgage payments. That can never be popular.
I was, therefore, very pleasantly surprised to discover that support for the Government is holding up very well. I believe that the reason for that is well illustrated by this debate. Although the speech of the hon. Member for Dunfermline, East (Mr. Brown) on behalf of the Opposition was effective at the most superficial level, he
Column 841told us absolutely nothing about the Labour party's alternative to the Government's policies. I believe, and I think that opinion polls show that the electorate believe, that if at present we do have some economic difficulties to cope with, it is the Conservative Government and their Treasury Ministers who are best equipped to cope with them.
In a sense, it would be a little unfair to direct that comment to the hon. Member for Berwick-upon-Tweed (Mr. Beith), who has just spoken for the Social and Liberal Democrats, because he at least put forward a number of constructive alternatives to the Government's policies. However, I have to tell him that the people to whom I have spoken are not too enthusiastic about his party, simply because it cannot agree with the other party that is supposed to be in the centre--the SDP--about anything, and because two candidates are being put up, not just in the current by-election but all round the country in the forthcoming elections. The hon. Gentleman needs to think about that, but at least he did put forward some constructive proposals. Yesterday, as I read the Treasury Select Committee's report on the Budget proposals, I felt--and I hope that my right hon. Friend the Member for Worthing (Mr. Higgins) will forgive me for saying this--that there was an element of using the benefit of hindsight about the way in which what had occurred was being looked at.
Mr. Smith : I think that the report says so, but the way in which it was portrayed in the press today was such that one would think that the Committee had been extremely critical of the Treasury's handling of policies. But anybody who listened to my right hon. Friend's speech just now will have noticed that he did not criticise the present exchange rate policy or the present interest rate policy. Although there is an element of trying to balance on the tightrope in respect of what is going on at the moment, he did not make any major criticism of the way in which the policy is being handled. Everybody needs to be a little modest, a little humble, about the present situation. As the hon. Member for Berwick-upon-Tweed has just said, there was a pretty good degree of consensus about all this just over a year ago, after black Monday. Then the concern was really that we would have a repeat of what had happened in the 1930s. We knew that if we were to make a mistake, the right mistake would be to have too lax a policy rather than a major recession on our hands. We just need to reflect a little on that as we find ourselves in the present situation. Naturally, everybody is frustrated. People want to see the effects of the present policy coming through.
We have been told that the jury has been out for an awfully long time, and people have asked whether it is not time that it came back with a verdict. Unfortunately, the verdict on these policies is that we shall have to be a little patient, because the policies will take time to work through. The danger is that we shall over-react. The Treasury should hold the line with a 13 per cent. interest rate. The policy of the last five months should be allowed to continue and to work itself through. It will eventually lead to a satisfactory outcome.
Column 842allow the policy to work itself through. People in my inner London constituency who last year took on an average mortgage are now paying £133 a month more in mortgage interest repayments. Many of them cannot meet their basic domestic commitments. How long must my constituents wait for this policy to work itself through and how high is the hon. Gentleman prepared to see interest rates go?
Mr. Smith : I have every sympathy with the hon. Lady's constituents. Many hon. Members have had to face that problem. First-time buyers mortgaged themselves up to the hilt when interest rates were relatively low. It must be very painful for them at present, but I have had a mortgage for about 17 years and I know that it gets better. It will get better for the hon. Lady's constituents, but they will have to be patient. If experience is anything to go by, the proportion of their monthly income that people spend on mortgage interest repayments reduces. The fact that people took on such high mortgage commitments last year was a reflection-- perhaps a misguided one as it turned out--of their confidence in the future. Had it been otherwise, they would not have made such a decision in the first place.
Mr. John Heddle (Mid-Staffordshire) : Does my hon. Friend not agree that the best advice that he can give to the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott) to pass on to her inner London constituents is that they should put their problem to their building society or to the institution from which they borrowed their money? They are likely to receive a very charitable and most understanding response. Their capital and mortgage interest repayments will probably be frozen ; an accommodation will probably be reached over a short-term period.
Mr. Smith : I am most grateful to my hon. Friend, who is an expert on these matters. Lending institutions of all kinds are always sympathetic. The loan will have been taken out over a long period. Lending institutions may well be prepared to consider such an accommodation as my hon. Friend suggests.
I share the concern of those who have complained about the length and complexity of the Finance Bill. It amounts to 250 pages. The House needs to reflect on how it will consider future tax legislation. It is 10 years or more since my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), who is now the Foreign Secretary but who at that time was the shadow Chancellor of the Exchequer, suggested that we should have a technical tax Bill. I understand why the Treasury does not relish that prospect. It is bad enough having to deal with one Finance Bill a year ; to have another would perhaps be a bit much. It would not fit into the parliamentary timetable. However, it will not be easy adequately to consider all the clauses in this long Bill.
The Select Committee on Procedure--if that is the right Committee--should consider how the House ought to deal with tax legislation. We want it to be simplified. My right hon. Friend the Chief Secretary told us that this measure will simplify matters, but the net result will be a substantial addition to the quantity of tax legislation. I have come to the conclusion that the best and perhaps the only way to simplify tax legislation is to abolish whole taxes. We do not seem to be able to make progress in any other way.
Column 843The Red Book shows which taxes raise the largest proportion of revenue. Far and away the largest revenue raisers today are income tax, corporation tax and value added tax.
At the other end of the scale, inheritance tax raises only £1.1 billion and capital gains tax raises only £2.1 billion. In an ideal world there would be no taxation. The only object of taxation is to raise revenue for spending. I believe that we should tackle some of the taxes that raise relatively small amounts of revenue and get rid of them, not just to simplify matters but because every tax that has ever been raised affects people's economic behaviour. Taxation changes make people change their economic behaviour. That is particularly true of capital taxes ; they have a disproportionate effect on people's economic behaviour.
I am concerned about the capital gains tax rate. A 40 per cent. capital gains tax rate is too high. Such a high rate of tax deters people from investing. If someone were to say to me, "I have £1 million in cash that I should like to invest, so can you tell me what is the most tax- efficient way to invest it?" I should say to him, "The best thing to do is to buy the largest possible house that you can afford." It is no wonder that estate agents in London still have queues of people who want to buy houses in the home counties at £1 million or more. It is because it is tax-free.
If that person then said to me, "I've still got some cash over", I should feel bound to say to him, "You had better put your money into a business expansion scheme, because you will get up front income tax and capital gains tax relief." If he then said to me, "I should really like to invest in my own business--in a high-risk, high-tech business start-up", I should have to tell him that there was no tax relief up front for his investment and that if he were successful he would have to pay 40 per cent. capital gains tax as the price of his success. That seems to me to be a crazy sense of priorities.
Mr. Boswell : I am following my hon. Friend's argument with interest and some sympathy. Does he not agree that many hon. Members have received representations from their constituents about specific proposals in the Finance Bill that are connected with the treatment of settlements and discretionary trusts and about the possibility of reallocating the affairs of a taxpayer and the settlement of a will after a death? Are these not matters that we shall have to consider carefully, together with the point that my hon. Friend has made about the high level of capital gains tax that is now in force?
Clauses 51 to 54 deal with tax relief for medical insurance. My right hon. Friend the Chief Secretary said that in some ways the debate on the subject had been inflated out of all proportion. I have major reservations about the introduction of such a tax relief. I have read the submission of the Royal College of Nursing, which many hon. Members received today. I sympathise with the view that if £40 million is available, it would be better to spend