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Column 844it on the National Health Service. There are good tax reasons why this would not be a sensible change to make. I believe strongly in having as wide a tax base as possible and, therefore, rates of tax that are as low as possible. Before we introduce a new tax relief such as this, we need the clearest possible evidence that it would be effective and that the change is genuinely needed.
We are told that when the change is introduced in 1990-91 it will cost £40 million. Almost all of it will be a deadweight cost. In other words, the relief will go to people who are already making those payments without tax relief. The Red Book says that the Treasury has assumed that in 1990-91 the number of people paying premiums, as a result of the relief, will rise by 10 per cent. I do not believe that that is a sufficiently large percentage ; if it were a much larger percentage, there might be some justification for it. I do not believe that the case for the new relief has been proved. It sets an unfortunate precedent.
All hon. Members have received representations from constituents who believe that there ought to be tax relief on the cost of commuting into London. The only result would be that people would move even further out of London. We have also received
representations about tax relief on the cost of private education. The same argument is used--that it would relieve the pressure on the state- maintained education sector.
I am all in favour, of course, of allowing people to make a choice whether or not they use the National Health Service, but I have never understood the argument used by the Leader of the Opposition, who complains that the Prime Minister does not use the NHS. Anybody who does not use it is obviously relieving it of a certain degree of obligation and a certain amount of work.
It is quite another thing to take a further step and to use taxpayers' money--because that is what it is--to give one group special relief. Not only could we give this £40 million to the NHS, but we could give it to all retired taxpayers rather than discriminating. I do not believe the case has been made, but of course there will be a major debate on this in a couple of weeks' time, and we shall be able to explore the arguments more fully. I look forward to hearing what my hon. Friends have to say to support this in rather more detail. Finally, I make it clear that, subject to that one proviso, I support this Finance Bill. I support all the measures in it. Many of them have been welcomed, particularly those which help old people and charities. Many of them make further changes which will help the performance of the economy. I therefore support Second Reading. 6.10 pm
Mr. Robert Sheldon (Ashton-under-Lyne) : The hon. Member for Beaconsfield (Mr. Smith) made two points which interested me particularly. We can admire him for his stand on medical insurance and look forward to his further contributions on that. This kind of tax law is wrong, as he rightly says, as well as the other things which we on the Opposition Benches also believe to be wrong. However, he left out stamp duty. After all, if there were a tax I would have expected this Government to do something about, the £2 billion raised by stamp duty might have been one of the front runners.
The Chief Secretary today broke a long-standing tradition, which has been going ever since the Treasury and Civil Service Committee came into being, of
Column 845congratulating the right hon. Member for Worthing (Mr. Higgins) on his work. We heard neither the congratulation nor any mention of the report, which was quite surprising, particularly since the Order Paper for today says :
"Finance Bill : Second Reading
The Second Report of the Treasury and Civil Service Committee of Session 1988-89 on the 1989 Budget (HC288) is relevant."
However, it was not relevant to the Chief Secretary to the Treasury, who did not mention it at all. What we have had instead of useful discussion and debate is a mammoth Finance Bill. I believe one always gets a mammoth Finance Bill when a Government run out of ideas. Experience over 25 years has taught me that.
Such a Bill deals with the boring detail at which a Government start looking when they do not know what else to do. The Inland Revenue pours out representations which would produce a Finance Bill of thousands of pages if they were all accepted, but what a resolute Chancellor of the Exchequer, Chief Secretary and Financial Secretary should say is, "This is nonsense. We cannot have this," and run the Finance Bill according to the wider policies. It did not happen on this occasion.
I support the Chancellor of the Exchequer strongly on one matter. I supported entry into the Community but, like the right hon. Member for Worthing, I am wholly against economic and monetary union as proposed in the Delors report. If we were to get it--and that is a very big if at the moment--the question would arise as to who controls it, who implements the decisions, who really decides these matters. We had the argument right up to 1945 with the Bank of England. We had the gold standard. The bankers were in charge. They ran the whole show, because no Government knew very much about it, and the Bank of England was a powerful body with that level of expertise ; it knew how markets operated, and in the end generally got its own way. The crucial thing we learned was that banking decisions are political decisions. Exchange rates and interest rates are not decisions for bankers alone. To control the banks with a strong, united British Government even now is not an easy matter, as any Chancellor of the Exchequer or Treasury Minister will confirm, but to control a Eurobank, with inevitable disunity among the 12 states, means in effect that the bank will make the decisions. There is no other central body powerful and knowledgeable enough to contend with such authority.
In Britain it is thought that the Government decide and the bank influences. That is far too simplistic a view. In fact, there is an inter- relationship with the power of the Chancellor of the Exchequer, who, after all, can appoint the governor and has many other powers as well. This inter -relationship is very complicated. It is only in recent years that we have had in the Treasury a level of expertise which can take an overview of the bank's problems and involvement. Until the last 10 years we did not even have that ; the governor view was the only view based upon experience and understanding. We now at least have in the Treasury something that contends with that view ; not wins but contends. As a result, there is a more useful dialogue than there used to be when the bank jealously protected its power through the knowledge and understanding it had.
Let us not be fooled by those who will tell us we should have our own voice in the central bank and we will all be part of the decision-making process. It will be another
Column 846British banker's voice, and my guess is that it will be indistinguishable from that of the others who will find a dominant role as a consequence of the transfer of functions. We should be aware that there is no power to give the politicians in any of these countries the ability to operate the bank for the interests of the Community as a whole and of the individual member states. So I welcome the strong views expressed by the Government and support them fully.
Turning to the balance of payments, my criticism that what the Government did was wrong was not to do with the consequences of the stock exchange fall. What they did was right but too late. There should have been a credit squeeze last autumn. It was a terrible mistake. They could have introduced credit controls. Of course, we know that none of these measures is perfect. Nothing a Government ever did is perfect. They take certain actions which are better than others, but they could have had an immediate impact.
We all know, of course, that they can borrow from overseas banks, but the question we have to ask ourselves--the sensible political question which, after all, we are here to ask--is what the ordinary person would do if, having been told by Curry's or some other high street store that there was a deposit to be paid on a new video, he was told that his British bank would not allow the loan. Would he go straight to an overseas bank and negotiate a dollar loan? Of course not. We are politicians ; we see our constituents. How many of them would do that?
Mr. Sheldon : Over time of course there would be some ; there would be some like the constituents of the hon. Member for Dover (Mr. Shaw), who would go straight to the overseas bank, but that is not true of my constituents. Over a period of time they would begin to learn and understand about these things, but by that time something would have been done. There would have been an immediate impact. It is no use coming seven months later, when we still have those high levels of sales in the high street. It is a disgrace. The Chancellor of the Exchequer has failed miserably in doing now what should have been done seven months ago, and it is because he had a simplistic approach. Of course, we all know that if exchange rates are kept long enough and high enough they will reduce the level of economic activity. But they do not discriminate.
There were methods by which the Chancellor could have brought about a quicker change. Every month we have delayed, the adjustments to high spending have made the landing much more likely to be hard. This should have been the overriding principle : the sooner we act, the softer the landing is. The Chancellor of the Exchequer ignored that, and the results are there for us to see.
As my hon. Friend the Member for Dunfermline, East (Mr. Brown) and others pointed out, we have not heard much about the economic miracle today. We heard a little about it, but not much. We know that the economic miracle was based on North sea oil, which produced the balance of payments surplus.
We can forget about the revenue, as that is small stuff compared with the balance of payments surplus which allowed the Government a profligate spending spree and permitted the elevation of financial services, with money passing from hand to hand with bits sticking to fingers on
Column 847the way. It allowed us a stature in excess of our true position and it allowed us to scorn our manufacturing industry. The Government call it an economic miracle. North sea oil solved the balance of payments problem for the seven fat years, but now we may have to prepare for the seven lean years. Obviously, North sea oil will continue but it will not provide the cushion or the feather bed that it has provided so far, and we do not have the manufacturing industry that we once had.
Ten years ago things were very different. The Government destroyed one third of the companies in my constituency, which had levels of pay and employment far better than most parts of the country, and high skills and medium technology industries which, alas, exist no longer. If I were superstitious I would instance the curse of oil--the way in which so many countries have abused that wondrous gift. Iran, Iraq, Libya and Mexico have reacted to the unexpected arrival of the fortunes of oil by abusing their good fortune. It might have been expected that a mature economic and political power would have had the good sense to avoid folly when arriving at great fortuitous wealth by using it to prepare for the future. Well, the future has arrived and the Government do not know how to deal with it because they did not prepare for it.
The memorial to the Government's lack of foresight is our balance of payments deficit, compounded by our dilapidated society with unmade roads and railways, where accidents happen and schools are not properly maintained, while countries such as Germany, Japan, Italy and France have flourished without the oil. The oil revenues have some of the characteristics of capital rather than income, which can be renewed and increased. Through depletion, our oil rigs and the fuel they provide represent a finite resource which, like the nationalised industries being privatised, can be sold only once. In the selling-off we should have obtained true lasting value for those precious assets, rather than the meretricious goods we have obtained.
What should have happened is that our industry--our main renewable source of wealth--and the educational advancements which are its main protection should have been the beneficiaries of the capital windfall. But we face the future in a worse position than when North sea oil was just a gleam in the eye of the Treasury.
I shall deal briefly with the monetary mania which we do not hear quite as much about as we used to. I have noticed with amusement the changing patterns of sterling, M3, M1 and MO. It is like a person trying to lose weight who changes his diet at every meal and then is surprised and confused when he remains overweight. But M3, M1 or MO have been dealt with with unbelievable naivety. Those hard-headed men and women of the world are supposed to be knowledgeable about markets as well. I would not trust them in the Petticoat lane market let alone the Chicago futures market or the London metal exchange. That view was reinforced when the former Chancellor of the Exchequer had his trousers stolen on the London to Manchester sleeper. Despite their formidable presence at international meetings, the Government are naive in their adulation of what they do not understand--the way in which the market system operates.
When the Government applied those naiveties to public expenditure, first they aimed to cut total expenditure, but they did not. Then they decided to stabilise public expenditure in real terms, but they did not achieve that either. They then decided that public expenditure as a
Column 848proportion of national income should fall. It moved from 43 per cent. in 1979 to 47 per cent., although it is coming down now. None of those crucial elements of the operation of the economy-- whether crucial is defined by the Opposition or by the Government--has been at all successful. I am not sure whether the presence of Alan Walters will improve matters. It is rather humiliating to have as one's next-door neighbour someone who has been brought in to examine the way one is running things.
Despite what has been said, the outlook is not rosy, the economic miracle has not happened and the optimism is ludicrously misplaced. The Finance Bill has failed to deal with a truly serious position, and we shall have to return once again to our basic economic problems.
Mr. James Arbuthnot (Wanstead and Woodford) : I thought at the time that last year's Budget was the best Budget I had ever heard. This year's Budget continues what has now become an established tradition--sound financing of the economy, sensible, far-reaching tax reform, repayment of some of the national debt to the benefit of future generations, and more help to pensioners, particularly through the abolition of the earnings rule.
I shall concentrate on two points, one a major matter and the other less so. The major matter concerns the thresholds of taxation, the points at which low earners enter tax. It is important to make sure that the thresholds of taxation do not bite too hard. The higher the thresholds, the greater the incentive to work and the less damaging the effect of the poverty trap. So the Government were absolutely right gradually to increase the thresholds of income tax over the years in a way which has removed or at least reduced the poverty trap. But this year my right hon. Friend the Chancellor of the Exchequer increased the thresholds by introducing a major and welcome reform of national insurance thresholds.
National insurance is a quite extraordinary animal. In the past two years I have called on my right hon. Friend to abolish it outright, and perhaps my hon. Friend the Member for Beaconsfield (Mr. Smith) should add it to his list of taxes which should be abolished. Nevertheless, my right hon. Friend the Chancellor severely weakened my case for abolition by removing the steps between 5 per cent., 7 per cent. and 9 per cent. and by reducing the initial payment of national insurance from £2.15 to 86p a week, while preserving the entitlement to contributory benefits which result from paying national insurance.
As so often, my right hon. Friend has found a solution which seems obvious but which had eluded us for a long time. I believe that there are still grounds for examining the long-term value of national insurance and whether we need to keep it separate from income tax with separate bureaucracy and paperwork. I join the hon. Member for Birkenhead (Mr. Field) who yesterday hoped that my right hon. Friend the Chancellor would not rest on his laurels. Nevertheless, I warmly welcome the Government's latest move, which is a major step forward which will benefit the low paid and improve the economy.
And now to minor matters, as Lady Bracknell would say, although the point I wish to raise is not so minor. It concerns clause 167 which limits the value of instruments of variation for the purpose of inheritance tax. I should declare an interest as I am a Chancery barrister and see quite a few wills and applications to the court by
Column 849dependants who feel that they have not received sufficient or reasonable provision from someone's estate. I see a number of these instruments of variation, or deeds of family arrangement as they used to be called. They are agreements between the beneficiaries of a person's estate to rearrange the way in which that estate is divided between those beneficiaries. As the law stands, that rearrangement is given retrospective effect, as though the testator had included that rearrangement as part of the provisions of his or her will. It has been said that people have been using these instruments of variation to avoid tax, and in a sense they have. But the great value of instruments of variation is that they allow people to be relatively relaxed about the contents of their wills. They do not have to keep updating their wills to keep up with changing tax legislation or changing family circumstances.
If people do not have to change their wills every six months or so, they do not have to incur significant legal fees, and I wonder whether we want to produce the effect of childen prodding their 80-year-old parents into rearranging their wills every six months or every year. As each grandchild is born, a new will may be needed ; and as each Finance Bill is published, people may have to consult their lawyers--the lawyers always benefit ; I admit that--to see whether a new will is needed.
As a Chancery barrister, I shall do well out of it, and perhaps I should not complain, but as one who hopes to see the Finance Bill as a whole become law, I question whether what is proposed is a sensible way of going about what the Chancellor wishes to achieve. If people begin to change their wills more often, the natural effect must be that clause 167 will not produce the yield of £15 million which was suggested in the press release. It is a small enough yield anyway in some respects, and if it does not materialise the whole business may be pointless. Not only will people have to change their wills more often, but it will be unacceptable for a person to die intestate. That was previously acceptable because one could simply rearrange one's affairs if the provision on intestacy were irrelevant or if it were not advantageous from a tax point of view.
Further, the clause as drawn will be easy to avoid by the skilful--indeed, even by the not very skilful--drafting of a will. Disclaimers, for example, have been left untouched by the clause. One can think of extraordinary ways of including in a will contingencies by the use of a disclaimer. That would have exactly the same effect as an instrument of variation, yet would produce no tax benefit for the Inland Revenue. The only benefit would be for the lawyers, who, as usual, would earn their fees.
We should be sure that new legislation will have some effect and will hit the target at which it is aimed. If it does not, it will not produce the yield expected of it. If it does, it will produce that yield only from those who are not properly advised. That will mean that the relatively poor will suffer and the rich will not, and that is not a sound basis for changing our tax law.
The Bill says that the change will not affect certain variations, being variations which are ordered by the court, which are bona fide settlements of applications to the court or which could have been ordered by the court. Those provisions are, if not absolutely meaningless,
Column 850verging on meaningless. In any event, they will be the cause of an enormous amount of litigation. Again, those who will benefit will not be the Inland Revenue.
Therefore, despite my general support for the Bill and for another excellent Budget, I urge the Chancellor to reconsider the clause about which I have been speaking, because it is aimed at a mischief which, rather than being a mischief, is a benefit ; because it does not stop even the supposed mischief at which it is aimed ; because it penalises those who cannot afford good advice, while leaving richer people untouched ; and because it will represent an absolute bonanza for lawyers.
Mr. Giles Radice (Durham, North) : For all its length and detail, the Bill can hardly be described as epoch-making. For that reason, and because I am a member of the Treasury Select Committee, I shall devote my remarks to the economic background to the Bill. As usual, I begin by congratulating--I almost called him my right hon. Friend--the right hon. Member for Worthing (Mr. Higgins) on his chairmanship of the hearings and proceedings which led to the Select Committee report, which was unanimous. We owe our unanimity, at least in part, to the Chairman's skill. Another reason is the concern felt by all members of the Committee about the seriousness of the economic situation which faces the country, and I was surprised that the Chief Secretary did not refer in his speech to the report.
I wish to underline what I see as the three most important messages of the report. The first is that the country now faces difficult problems in two connected, though separate, areas--the rate of inflation and the balance of payments deficit. The Chancellor and the Government accept that our inflation rate, which is the worst of the major industrial countries, is far too high.
But there has been a great reluctance, particularly on the part of the Chancellor, to admit that the balance of payments deficit represents any difficulty at all. The report makes it clear that the Treasury Select Committee considers that a current account deficit of over 3 per cent. of GDP--not only in 1988 but in 1989 and probably in 1990 as well--is an extremely serious matter which cannot be shrugged off.
The second message of the report is that the Chancellor is, at least in part, to blame for what has happened. As we say in the report, in the months leading up to the 1988 Budget, domestic demand was allowed to become unsustainably high, in part because of excessive monetary relaxation. The 1988 Budget then added fuel to an already overheated situation. As we point out in paragraph 50, "the combination of intense competition in retail credit and the expectations generated by the announcement of tax cuts seem likely to have added to the growth of credit and had a powerful effect on demand through its effect on consumers' confidence."
The Chancellor himself admitted to us that mistakes were made in monetary policy in the period leading up to the Budget and that the four months' grace allowed before the ending of multiple mortgage relief gave a large boost to borrowing. Had the Chancellor come completely clean, he would also have accepted that his fiscal prudence of 1989 was in itself an admission of the malign impact of his 1988 Budget.
It is often said that the Chancellor's critics are speaking only with hindsight. That is factually incorrect--here I
Column 851disagree with the right hon. Member for Worthing--because many economists and City commentators, as well as Opposition spokesmen, urged the Chancellor last year not to make tax cuts.
I hesitate to quote my own speeches, and I do so only to demonstrate that those who adduce the hindsight argument are wrong. On 14 January 1988, before last year's Budget, I warned the Chancellor that if he cut taxes imports would be sucked in at a time when our balance of payments was already beginning to deteriorate. In the Budget debate in March, I criticised the Budget as being not only morally repugnant but economically risky. I pointed out that tax cuts, coming on top of a consumer boom, fuelled by an explosion of credit, would make the balance of payments deficit worse.
I also remind hon. Members that the Treasury Select Committee warned in paragraph 24 of its report on the 1988 Budget that tax reductions could contribute to overheating and, therefore, to our trade deficit. In paragraph 29, we also stressed the risks of allowing the balance of payments deficit to deteriorate. The Chancellor cannot claim that he was not warned about the gamble that he was taking with the direction and balance of the economy in his 1988 Budget.
The third message from our report is also an uncomfortable one for the Government. We are frankly sceptical about the Government's predictions of a rapid slowdown in inflation or a reduction in the current account deficit. On prices, we point to the underlying inflationary pressures in the economy, including those from labour costs, increased prices in nationalised industries and other Government-induced prices. On the current account, we find the Chancellor's prediction of accelerated export growth in manufactured goods over-optimistic. As the right hon. Member for Worthing mentioned, the Chancellor is over-estimating the so-called "adjustment effect" by which, as demand is squeezed, firms automatically switch from domestic to external production. Our witnesses could provide little evidence of that process taking place.
As a Committee, we have been criticised for not coming up with any firm policy recommendations drawn from our agreed analysis--that the Chancellor is on a tightrope between a recession and a collapse of the currency. It would be wholly unreasonable to expect a Committee drawn from such a wide variety of opinions to agree on solutions, especially when they go to the heart of the party political debate. The fact that we have agreed broadly on what is happening to our economy and what is wrong with our economy should, in itself, be a benefit to the House and a warning to the Government.
I shall now turn to policy recommendations and I shall concentrate on one of the main aspects of the problems facing the Government--the balance of payments deficit. I accept that one cannot isolate the balance of payments from other aspects of the Chancellor's policy, especially his strategy for inflation. As my right hon. and hon. Friends have pointed out, the Chancellor is now in a cleft stick. On the one hand, he has stressed the importance of raising interest rates and maintaining a strong pound to bring down inflation. On the other hand, as our report points out in paragraph 31, there is no evidence that it is possible to bring about an improvement in the current account without either a currency depreciation or rising unemployment and falling output.
Column 852I will deal with the balance of payments deficit because it represents the most immediate danger. We shall need to tackle our enormous balance of payments deficit much sooner than the Chancellor seems to envisage. If we do not, we run the danger of allowing our economic policy to be dictated by the holders of sterling, who may start to lose patience with the Government's handling of the economy. A run on the pound and a precipitate fall in the value of currency could follow, with all that that could mean for inflation and the economy. Our problem is that the balance of payments deficit reflects not merely an overheated economy, but a growing lack of competitiveness and, possibly, a fundamental gap in the range of goods that this country now produces.
The director general of the National Economic Development Office has pointed out recently that our current account may be suffering both from an overvalued currency and from not producing the kind of goods that people want to buy. There is evidence of that in table 3.2 and chart 3.4 of the Red Book, for example. There is evidence both of lack of competitiveness-- or loss of competitiveness--and of growing import penetration. Those are serious matters. It will clearly take some time to improve the range of our goods, but it is possible, by depreciation, to compensate for our lack of competitiveness. I want to quote what I consider to have been wise advice : "our problem is that, taking the trade cycle as a whole imports have a persistent tendency to rise faster than exports. We are, as a nation, uncompetitive in the only economically meaningful sense of the word : namely, that if we are to expand our national wealth at the rate of which we are physically capable, then our balance of payments is in deficit Conservatives may feel that this is a field in which market forces and the price mechanism may ultimately be preferable They may feel, in short, that the chronic imbalance in our international payments is best dealt with by altering the price of the pound in the foreign exchange markets of the world." That was written by a well-known teenage scribbler called Nigel Lawson, writing in 1966. The House should take note of his wise advice.
I accept that there are inflationary risks involved in devaluation and that is why we should consider not only devaluation, but joining the exchange rate mechanism of the European monetary system, which could act as an effective counter-inflationary discipline. Is the Chancellor now the right person to carry out the shift in policy and direction required if we are to bring our economy back into balance? I admit to a sneaking admiration for the right hon. Gentleman. He is a clever man who is at home with economic issues. I also find his boundless self-confidence, especially when he is making up economic theory on the run, quite engaging. But I doubt whether his particular qualities are what is required now.
The problem for the Prime Minister is that there are no obvious replacements for the Chancellor on the Government Front Bench. Judging by his performance as Secretary of State for Energy, I do not find the right hon. Member for Hertsmere (Mr. Parkinson) to be a credible candidate. In many ways, there are now more obvious candidates for the Chancellorship on the Government Back Benches. If, for lack of suitable successors, the right hon. Gentleman is made to soldier on, he will have to learn to change his tune. He will have to learn to become the Chancellor of the bad times, which we are now experiencing.
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Sir Peter Hordern (Horsham) : I agree with the hon. Member for Durham, North (Mr. Radice) in one respect : the Chancellor is in an extremely uncomfortable position. It appears that he is caught in a cleft stick, while sitting on a tightrope while the jury is out interminably. The jury has not been out at all. Whenever the Select Committee on the Treasury and Civil Service issues a report, it is free with its criticisms and that is its verdict. However, I have noticed, especially from the criticisms of the Opposition parties, that it tends to be wrong.
The hon. Member for Durham, North puts his finger on it. He pointed out the balance of payments deficit and he said that it represented a potential threat to the economy and to the Government. But I draw his attention to this difference. In sharp distinction to what has happened in previous years, the Government are operating a substantial Budget surplus. Foreign holders of sterling take real account of the internal balance within an economy when deciding whether to support it. They would observe, as my right hon. Friend the Chancellor has observed in the past, that we are suffering at the moment from an excess of demand which is going rather higher than our productive capacity can meet. That is a serious matter in itself, but I do not agree with the hon. Gentleman that it represents a threat in the sense of a balance of payments run.
Nor do I agree that we should devalue the pound, which has been the recipe followed by virtually every Labour Government. It would be just as unpalatable now as it has been in the past and would be the surest way to create inflation. I am dead against it.
As my right hon. Friend the Chief Secretary said, the Bill is the largest on record. Like my hon. Friend the Member for Beaconsfield (Mr. Smith), I could have done without clauses 51 to 53, which I understand we shall be debating later. Private medical insurance does not seem to be the most obvious cause for tax concessions. One of my right hon. Friend's great achievements in successive Budgets has been to broaden the tax base and to reduce sharply the levels of direct taxation. That is exactly what we said we would do, and we have done it.
However, the tax concessions that we have given have generally been acknowledged to be in the national interest, whether in helping to promote the property-owning democracy, share savings schemes of one sort or another, or, through the business expansion scheme, to assist in finding rented accommodation, and so on. Those schemes have benefited the country. I wait with interest to see how clauses 51 to 53 are explained, but this proposal seems to be of a rather different order. It is a tax relief not just for the elderly but for those who may be well off to encourage them to assist their parents. It may be that those who are well off need education and some incentive to help their elderly parents, but many of us are in that position and this is not the most obvious candidate for tax cuts. I regret that this measure has appeared.
Apart from that, I warmly commend the Bill and my right hon. and hon. Friends' general approach to the economy. We have a substantial revenue surplus, yet there have been no tax cuts on this occasion and that is a responsible attitude to adopt. We are in as sound a fiscal position as we could be, but I am confused about what is happening to demand. I see what is happening in the south-east. House prices are falling. However, I also see
Column 854the evidence of a shortage of labour, and skilled labour in particular, not just in the south-east but in other parts of the country. Wage rates are increasing and one-day strikes are just beginning. The BBC is not the most obvious candidate, but we had the Underground strike. These people feel that they will obtain more money and pressures are still building up.
The question is whether that pressure and the higher increases in borrowing will sustain domestic growth and keep imports too high. I agree with my right hon. Friend the Member for Worthing (Mr. Higgins) that it looks as if we are stuck with a high level of interest for some time to come because that is the only way of reducing demand to make room for more exports and to reduce inflation and to correct the balance of payments deficit.
Some economic commentators say that economic growth will have to fall to 1 per cent. if we are to reduce the balance of payments deficit to 1 per cent. in terms of GDP--a deficit of £5 billion. We do not have to be too precise about those figures, but there is no sign of the economy slowing down to such a rate of growth. Yet we might have to raise interest rates still further in order to provide room in the economy to achieve more exports. If we were to do that, we might once more see all the harmful effects, such as the soaring rate of exchange, that the economy and manufacturing industry experienced in 1981-82, and that would be damaging.
There was a strong reason for that in 1981-82, because inefficiencies were built into the system. The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) made a charming speech, looking back on the 1970s when Ashton- under-Lyne was a great manufacturing centre. But the world has moved on since then. We are still a great manufacturing country, but fewer people are engaged in manufacture. There has been much greater efficiency in the past few years, but I doubt whether we can withstand another large rise in the exchange rate.
We need a different attitude and policy, and that is the one that my right hon. Friend the Chancellor has suggested before--to align our currency with the deutschmark and, necessarily, to enter the European monetary system. That would not have any quick effect, but I ask the House to understand the difference that would make in dealings on the foreign exchange markets. While the pound is loose and unhitched, all companies with overseas interests have to protect their interests every week, look at their position and renegotiate or switch their loans from one currency to another. The demand for such foreign exchange operation would diminish substantially if we were to announce a formal link with the EMS, and the deutschmark in particular. I do not see why we should wait any longer. It would take time, but interest rates would not have to be as high as they are if we were firmly fixed within the EMS. In due course, interest rates would approximate to German rates.
Having joined the EMS, that is where we should stop. Despite what Mr. Delors said, we do not need a common currency, still less a European central bank. The Bundesbank is effectively a European central bank and we should lend it every support. Together, the deutschmark and sterling would become the Euro-currency. There is a lot to be said for the ecu, but, in reality, traders, business men and companies would deal in the strongest currencies, and they would remain the deutschmark and sterling. Those are the currencies in which most business would be done.
Column 855We should not be wet about Europe. We need to be involved. Indeed, we need to be in the driving seat. Our interest has always been the balance of power. We should not be isolationist or integrationist. We must do our best to stop this Euro-Socialism and Euro- bureaucracy which is suggested by Mr. Delors. The way to stop it is not to build Euro-bureaux for bureaucrats to man. It is a necessary part of Socialism to create a tightly enclosed, inward-looking, small band of nations, but that is not in the interests of the United Kingdom, still less in the interests of world trade.
The purpose of the EC should not simply be to be anti the United States, as it so often appears to be, but to reflect the increasing internationalism of finance and manufacture. A report which says that we are not manufacturing enough of the goods that we wish to buy has been mentioned, but one reason for that is the increasing internationalism of manufacture and distribution. That can be seen in the motor industry. We make parts here, but some of the biggest companies in Britain are buying and assembling agents rather than manufacturers, and that process will not stop. Britain is too small a base to manufacture everything and we are rapidly coming to the time when Europe may also be too small. Therefore, it is in our interests to open Europe to more investment and competition. We have seen that already in the amount of investment that the Japanese are bringing in.
We should expand the borders of the EC to include the European free trade area countries and then look wider still, beyond the European free trade area, to countries such as Hungary. This is a most exciting time. We are talking not just of arms and disarmament but of trading blocs. In the words of General de Gaulle, we can imagine a Europe sans frontier, extending from the Atlantic to the Urals. None of that will come about without willing it, and without our close involvement. We must take a grip on our affairs and engage ourselves in a common cause in Europe and the world beyond.
Mr. Denzil Davies (Llanelli) : This Second Reading debate has shown that the House can discuss the tax details of the Bill and look at the changes in the economy and the effect upon the economy of the Chancellor's Budget in the time between that Budget and now. The Chief Secretary chose the former course. Wisely, he dealt with the tax changes and hardly touched upon the economy.
I agreed with much that the hon. Member for Horsham (Sir P. Hordern) said, except for his opening remarks when he seemed fondly to believe that we do not have a run on sterling because of the great confidence of the international financial community in Her Majesty's Government. The reasons are baser. The interest differential is just about sufficient to enable them to keep their money in this country. If interest rates go up, the Chancellor will have to put them up again as well otherwise there will be a run on sterling.
In the short time between the Budget and the Finance Bill it would be trite to say that the economy has deteriorated even further. Inflation has got worse, interest rates may have to increase, and bank lending and the consumer boom have not abated, according to the latest figures. The balance of payments deficit is horrendous. In
Column 856his Budget the Chancellor forecast a deficit of £14.5 billion for this year. The Select Committee bore out the view that we are heading for a far worse deficit, probably £20 billion.
When the Chancellor and other members of the Cabinet were in opposition between 1974 and 1979 they never tired of lecturing the Labour Government about how the tax system and the Finance Bill should not be used for the purpose of what they called social engineering. They said that the tax system should be neutral and was there merely to raise revenue for the Government. The hon. Member for Beaconsfield (Mr. Smith) made the same point in his speech today. Once the Conservatives got into power, the story changed. Over the last 10 years the Government have used the tax system for the purpose of social engineering to a greater extent perhaps than any Government since the war, or certainly since the early 1950s.
We have some examples in the Bill. The tax system is to be used to give a subsidy to rich, elderly taxpayers for private health insurance ; that is to satisfy the Prime Minister. Also, there are a number of measures to give tax relief for investment in unit trusts and other institutions. Because popular capitalism has failed to deliver savings, the Chancellor will bribe institutional capitalism to try to save money for him. Apart from some instances like that, there is very litle social engineering this year on the main elements of income tax in the economy. The reasons are clear. The Chancellor dare not touch it because the economy is in such a precarious state. When the Prime Minister came to power, one of the vogue phrases-- perhaps even a vague phrase--which was used constantly, and is still used, was supply side economics. It is not a well thought out phrase but it conveys the impression of the need for British industry and the economy to produce more goods, better quality goods and goods that are competitive with those produced by our major industrial competitors. I think we can all agree that the phrase means that. When the Government came to power in 1979, Ministers had very little idea of how to achieve that goal except through a mystical conviction in the ability of the free market to deliver and the belief that a substantial reduction in income tax, especially in the top rates for richer people, would somehow galvanise management and production, thereby increasing supply and improving the competitiveness of home-produced goods. After 10 years the experiment has failed.
Perhaps the only indicator in international society of the success or failure of supply-side economics in the production of goods, their quality and their competitiveness is the current account of the balance of trade. The figures for British exports, for imports of foreign goods and for the penetration of the British market by goods produced by competitors leads inexorably to one conclusion--there has been no economic miracle but rather an economic catastrophe. Over the last eight years our share of world trade has fallen by 15 per cent. The deficit on the current account of the balance of payments in 1988, the year that has just finished, was larger than the total of all the deficits for the previous 40 years. In 1978, during the period of the much-maligned Labour Government, we had a surplus on the current account of the balance of payments of £5 billion, and we had no oil. We imported oil ; we could not export any. In 1988 we had a deficit of £14.5 billion on the current account when oil was still worth £7 billion.
Column 857Let us consider the figures for the imports of specific items, the goods that people buy in the shops. They tell an even more depressing story. In 1978 we imported only 18 per cent. of the colour television sets purchased in the United Kingdom ; in 1988 the figure was 40 per cent. For commercial vehicles the figure was 22 per cent. in 1978 and 40 per cent. in 1988 ; for buses and coaches, 3 per cent. in 1978 and 38 per cent. in 1988. As to electric irons, which I would have thought were simple to make, in 1978 we imported 15 per cent. and in 1988, 65 per cent. That was another triumph for Thatcherite supply-side economics. Last year 56 per cent. of our cars were imported ; for medical instruments the figure was 57 per cent. On and on the sorry tale goes.
The command economies of the Soviet Union and eastern Europe--they used to be called command economies ; perhaps they are not any more--generally were not allowed to import more goods than they could export. In other words, they had to balance not their budget but their trade. They tried to get round it by borrowing, as we are doing now. If we had had to balance our imports and our exports over the last four or five years, the queues for cars, videos, television sets and washing machines would have been almost as bad as those in the command economies of eastern Europe and the Soviet Union. The position will not get better ; indeed, it will get worse despite high interest rates. Next year the balance of trade deficit on manufactured goods is forecast at £15 billion by the Red Book. The Chancellor hopes that the position will be better in the first half of next year, which will really be about October 1990. Even that hope is not shared by many economists and forecasters. This year the deficit is running at £20 billion. We shall see what the figures bring tomorrow.
The Institute of International Economics in Washington believes that in 1992, when barriers to trade in the EEC come down, the deficit will be £45 billion. Of course, it will never come to that because long before that figure is reached the pound will have disappeared through the floor, and the Chancellor with it. The Chancellor and the Government have very little confidence in the galvanising value of income tax reductions as a way of boosting the supply of British goods. If he still believes that last year's tax cuts were not responsible for the surge in imports, why did he not do the same this year? It would have been a very good year to do it. With a massive surplus of £14 billion, with a need to produce more goods and with a need to boost the supply side of the economy, why did he not cut taxes? Perhaps I should not call them the loony Right, but some Right-wing economists, perhaps even Alan Walters himself, were arguing before the Budget that tax cuts were needed. It was argued that interest rates should be even higher so that we would have a monetary squeeze and taxes could be cut to help the supply side of the economy. That was logical in their terms, but the Chancellor did not dare do such a thing. If tax cuts boost the economy, why did the Chancellor not cut taxes this year?
The Chancellor and other Conservative Members have tried to play down the importance of the deficit. Neither the City nor the public are fooled any longer. First, the Chancellor said that the balance of payments deficit was of
Column 858no consequence because it balanced. That was an affront to common sense. He then said that it did not matter anyway so long as we could finance it. Then we were given the story that the deficit was really one of the problems of success. I suppose, on that reasoning, the German surplus is a product of failure. The deficit has been caused, apparently, by too fast economic growth. Indeed, it is a consequence, we have heard today, of the Thatcher economic miracle. Finally, we have another spurious reason being trotted out to us. Much of the deficit, it seems, is caused by British industry retooling and re-equipping itself, gearing itself up for a march on the markets of the world--again, of course, a consequence of the great economic miracle.
The only answer to all this is "baloney". A balance-of-payments deficit of this size is a serious matter. Even the Chancellor does not pretend otherwise. If it can be financed at all--and that cannot go on for ever--it can be done only by tripling rates of interest, which inevitably put up the costs of industry, very often causing new investment to be abandoned or postponed, thereby reducing the supply of the goods which we need to reduce the deficit.
One reason given by the Chancellor for putting up interest rates was to damp down the boom in the private housing market. But the irony is that if one borrows to buy a house, especially if one is a first-time buyer, one pays 12.5 per cent. ; while if one is a small business man trying to borrow to invest and export one has to pay 15 or 16 per cent. to the banks. High interest rates put up the value of the pound and of course make imports cheaper and exports more expensive.
With regard to the retooling argument, I suspect that we are not a manufacturing nation any longer ; we are an assembly nation. As has been said, we import to assemble ; we have to import to assemble ; and the idea that some of those imports are capital goods and are there to enable industry to retool does not accord with the facts. Obviously, this Bill will do nothing to solve the problem of the balance-of-payments deficit, because, in my opinion, it is far too entrenched. Some time the Government will have to swallow their pride ; some time they will have to put up taxes ; some time they will have to try to escape if they can through the European monetary system or its exchange rate mechanism, trying to engineer thereby what they will call a realignment of currencies but which will, in effect, be a devaluation.
The tragedy of the last 10 years is that there have been so many opportunities in terms of oil and a favourable international climate and the Government have wasted them. The British public will pay for that for a very long time to come.
Mr. James Couchman (Gillingham) : I trust that the right hon. Member for Llanelli (Mr. Davies) will forgive me if I do not follow him down the road which he has been traversing, for I wish to speak quite briefly on that facet of this year's Budget and tonight's Finance Bill which appears to have proved most contentious--the proposal to offer tax relief on premiums for medical insurance for the over-60s.
Column 859I must declare an interest, for I have lately been asked to advise a company called Denplan and I shall during the course of my speech refer to the unique service and product of that company, which I believe may well prove to be the most important financing scheme for primary health care in the private sector. Neither I nor my immediate family pay any private medical insurance.
I have long taken the view that those who pay directly or through individual or corporate provident insurance schemes for private medical care do so to the advantage, not the disadvantage, of the National Health Service. They have paid for NHS treatment through their income tax and national insurance contributions and then they pay again by way of an insurance premium so that they may unburden the Health Service of its duty to provide care in the event of illness. Without their additional payment to and treatment by the private sector they would have their malady treated eventually by the NHS. If they take away that burden from the state and in so doing receive treatment earlier than they might otherwise have done, we should rejoice in their earlier restoration to health rather than condemn them as queue jumpers, as the Opposition do.
It is unfortunate, therefore, that, at the very point where people's use of health care services begins to increase and their income falls as they near or reach retirement, the premiums for private medical insurance escalate sharply. The proposals to offset this escalation through tax relief for the over-60s means that in future fewer people will feel that the burden of premiums has become insuperable. More people who have formerly been covered by corporate schemes, either contributory or non-contributory, will feel able to pay individual premiums for themselves. Health care resources will thus have been extended by taking less tax off people than would otherwise have been the case, and thus resources for others using the NHS will have become greater.
Whatever the cost in tax relief--and my right hon. Friend the Chief Secretary gave several figures this afternoon, varying from £40 million to £70 million--that will be a direct subvention to health care generally and will make a direct contribution to reducing NHS waiting lists.
I wish now to consider dentistry. The White Paper speaks of medical insurance premiums being eligible for tax relief from April 1990. The Finance Bill that we are discussing today speaks about private medical insurance premiums in clause 51 and is specific about insurers in clause 52(8). However, clause 53(3)(a) spells out the conditions for eligibility of a scheme as follows :
"the contract either provides indemnity in respect of all or any of the costs of all or any of the treatments, medical services and other matters for the time being specified in regulations made by the Treasury, or in addition to providing indemnity of that description provides cash benefits falling within rules for the time being so specified".
That is a good piece of drafting.
Does my right hon. Friend intend schemes to provide private dentistry to be included? He must make that clear. Does my right hon. Friend intend only insurance schemes in the traditional sense to be covered? I would caution him about too prescriptive a definition on the face of the Bill in the primary legislation, for new, exciting and innovative schemes are at present developing. The traditional provident insurance has been ideally suited to discrete episodes of illness requiring perhaps periods of