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Mr. David Shaw : As someone slightly experienced in business, may I offer the hon. Gentleman a suggestion? Today, if one is to succeed in business, it is a positive disadvantage to have gone to Eton and to have been in the Guards.

Mr. Battle : I will deal precisely with that point later. In this article there was a portrait not of the hon. Gentleman but of Mr. Ian McGlinn, a Sussex garage owner who, at joint 158th place in the league of the 200 richest people,

"proves that hard work and an eye for the main chance can catapult ANYONE into the jet set."

Did he do it by building up his car business? Sadly, he did not. The article says that in 1976 he

"dabbled in shares. He put £5,000 in Anita Roddick's fledgling Body Shop firm--now that it has been floated on the stock exchange he's worth £40 million."

That view--that share and equity ownership is the key to personal wealth in Britain today--was emphasised today by the Chief Secretary to the Treasury.

To return to the question put to me by the hon. Member for Dover (Mr. Shaw), The Sunday Times put an entirely different interpretation on the wealth story. It said :

"The very limited success of the Thatcher revolution in transforming British society is graphically and grimly illustrated by the league table of wealth published in The Sunday Times Magazine today. Of the 200 richest people in the country we have identified, old Britain still looms large : more than half the list is made up of inherited money. Some 57 of the 200 are landowners, 55 went to one school and 25 even served in the same regiment No wonder Japan, America and West Germany continue to beat the pants off us in the league table of economic performance. In these countries people have grown rich through industry ; in Britain the rich still come disproportionately from those who have managed to hold on to their ancestors' land and property The bias towards old money is not just bad for the balance of payments. A country in which people can grow rich through industry is also a country which creates jobs. But there are precious few jobs in simply passing wealth on from one generation to another and the only industry involved is in avoiding the taxman."

There is another flaw in the tabloid approach that is often adopted by Conservative Members. Those in poverty do not have the choice whether to be rich or poor. They do not have £5,000 to put down on a shares gamble. That is not an option for the 15 million people who are living in poverty. It is not true that anybody can make himself a millionaire. He cannot.

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The trickle-down theory has run dry. Real incomes have increased on average by 6 per cent. in the last 10 years, but the poorest 20 per cent. have seen their share of household income fall from 6.1 per cent. to 5.6 per cent. How does that contrast with the richest 20 per cent.? Their share has risen from 40 per cent. to 43 per cent. The trickle-down theory is not working ; nor is the myth of the average wage that is peddled by those who sit on the Conservative Benches. Their view is that if the average wage increases, everybody will get that increase. However, those on the lowest incomes do not find that their incomes increase if the average wage rises. The average wage may rise as a result of those at the top end getting even more. The Government are involved in all kinds of contortions in an attempt to present their economic efforts as a success. Yesterday they claimed that they were celebrating a rising average wage. However, all their noises about the need to keep down inflation mean that they have to insist on wages being kept under control. I make no apology for returning to the British Institute of Management and Remuneration Economics survey of wages that was published in the Financial Times on 23 April 1989. It said :

"Britain's directors last year received their biggest increase in take-home pay for 16 years The survey found that the reduction in the top rate of taxation in the 1988 budget had helped to increase directors' take-home pay by 26 per cent. Their gross earnings, before tax and national insurance contributions increased by 13.9 per cent."

The Government's tax policies are manufacturing tax inflation. Emerging wage inflation is the product of last year's economic mismanagement when the rich were given back so much.

If the Government's economic policies have led to an illusory sleight of hand in the management of taxes and wages, the same is true of the Government's previous claim that the National Health Service is safe in their hands. The introduction of tax relief for private health care represents a serious breach in the principles of the National Health Service. The Government are clearly going down the road of tax subsidies in the Finance Bill. Its provisions are the first steps down the road towards tax subsidies. They will lead to tax relief on direct payments for health care, to special tax-free savings for private health care and eventually to tax relief on all such schemes, regardless of age, need or type of operation. An article in The Independent on 15 April was headed

"Clarke urged to extend tax relief to over-60s."

The article spelt out how key advisers to the Government, when formulating their White Paper proposals--such as Dr. Michael Goldsmith, the medical director of Medisure, the medical insurance advisers, and David Willetts, the director of the Centre for Policy Studies--are urging the Government to go even further. According to the article, Mr. Willetts said :

"I hope that tax relief will not cover just insurance, and that it will cover any direct payment mechanism."

It is time that the Government made absolutely plain what their attitude is to private health care. It is no use the Secretary of State for Health and the Minister of State saying, in an aside, that they believe that the changes in the Finance Bill are minor, interesting details. They may undermine the principles of the National Health Service.

If there is to be a tax break on private health care, it will lead to an erosion of the tax base, to a loss of income to the Exchequer and in turn to a reduction in the funds available to the National Health Service.

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In July 1988 the Select Committee on Social Services reported : "In our judgment the creation of a new tax subsidy on all private health insurance cannot be demonstrated to extend the total availability of health care."

The Finance Bill will undermine the National Health Service. It reinforces the Government's past policies and demonstrates that the Government are undermining their own stated intentions.

8.27 pm

Mr. Andrew Mitchell (Gedling) : In contrast to the hon. Member for Leeds, West (Mr. Battle), whom it is always a great pleasure to follow, I must make it clear that I believe that the 1989 Budget and Finance Bill will be seen in retrospect as fundamental to securing good economic performance and rising living standards in the 1990s, as well as to securing a soft landing later this year.

I have read with great interest the report of the Treasury and Civil Service Select Committee. It refers to the loose monetary policy adopted in the wake of the October 1987 stock market crash and says that it is now clear that nearly all conventional wisdom underestimated the tremendous strength of the British and other economies. However, it certainly did not look like that at the time. Perhaps the Select Committee allowed itself just a touch of the Monday morning footballer syndrome.

Earlier in the debate the Chairman of the Select Committee, my right hon. Friend the Member for Worthing (Mr. Higgins), seemed to concede as much. I hope that my right hon. Friend will not mind if I quote his words to the House on 5 November 1987 in the debate on the financial markets. In stressing the importance of effective action he said :

"The response of the Chancellor in reducing interest rates following recent events was the right one."

He then went on to say :

"However, there is still further scope for us to reduce interest rates "-- [ Official Report, 5 November 1987 ; Vol. 121, c. 1134.] I make that point to underline the fact that to have done otherwise at that time would in the short term have been extremely dangerous, would have flown in the face of conventional wisdom, and might well have precipitated a yet greater and more prolonged crisis of confidence in the market.

Clearly we still live with the effects of that decision, but we also live with the specific difficulties of a dynamic economy whose supply side has been transformed and where progress has been so rapid and marked that change and growth pains are endemic and unavoidable. Unemployment has been markedly reducing, yet we now face serious skill shortages. The problem is turning on its head as a result of the growth in our economy.

We should be very wary of knee jerk and over-simplistic reactions to the size of the deficit. Certainly it is extremely high and we want to see a change in trend. I have no doubt that change will come as a result of our very high current interest rates, but the present high level of demand and credit is a consequence of other aspects of our economic success. We should be very wary of further rises in interest rates before the present level has been allowed time to achieve the necessary result.

Much has been said in this context about the performance of the Government's statistics office. I welcome the intention now to get to grips with these difficulties by placing at least part of the Central Statistical

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Office under the wing of the Treasury. I am sure that this will lead to more accurate statistics being made available. However, the inability to explain the £15 billion hole in the accounts is rather disturbing. Perhaps much of it is unrecorded exports. There is a revaluation at the end of each year of the export figures ; they are adjusted and normally turn out to be much more favourable. The various measures of gross domestic product simply do not add up. Tomorrow dealers in the City will be staring lugubriously at their screens awaiting the trade figures and subsequently making judgments about our economic performance based on unreliable figures. We should pay far less attention to those figures and accept that a deregulated, dynamic, free enterprise economy such as ours is extremely difficult for the CSO to monitor effectively.

Following last year's Budget, which accomplished so many historic necessities at one go--the tax emancipation of women, the ending of confiscatory income tax rates, the translation of the PSBR into a PSDR--it was inevitable that this year's Budget would be lower key and more technical.

This year's Finance Bill underlines that. It can hardly be described as a user-friendly document--perhaps it never is--but it is certainly a considerably more challenging document than last year's Finance Bill, which I had the good fortune to examine in Committee. I fear that its comprehension and interpretation will provide a very good living for many City lawyers and accountants for the next few years. Nevertheless, if its complexity was foreshadowed, many of the Budget's measures themselves were not.

I believe that there will be radical effects on the savings market as a result of this Budget. The Chancellor has made a major contribution to the development of employee share ownership by allowing the contributions of a company towards an ESOP to qualify for corporation tax relief. It is encouraging to know that our representations to the Chancellor last year during the Committee stage, and particularly those of my hon. Friend the Member for Esher (Mr. Taylor), who is currently detained overseas on parliamentary business, have been noted and heeded.

The measures which affect profit-related pay and employee share schemes will also be extremely helpful in promoting genuine employee participation in the enterprises for which they work. It is this Conservative approach to encouraging harmony and productivity in commerce and industry which is itself a landmark in industrial relations and which will have the most far- reaching and profound effects over the long term.

The measures for promoting personal equity plans are equally significant. They too will not only encourage savings and share ownership but will have a significant effect on the mortgage market. The financial institutions may well be able to demonstrate that a PEP mortgage is at least as competitive as an endowment mortgage and thereby wake up a rather sleepy corner of the market to the great benefit of the consumer both in terms of choice and competition. As the reasonable man surveys this Bill and the Budget which forms its foundation, it will be hard to find much wrong with it. Certainly the abolition of the earnings rule and changes in national insurance contributions are

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pivotal. I particularly salute the Economic Secretary in his work on the promotion of lead-free petrol. I am delighted to see Gedling, as so often in other matters, leading the way in this. In my constituency now practically all garages supply lead-free petrol ; one petrol station has 16 out of 20 pumps supplying it.

I do not wish to insult the ingenuity of the shadow Opposition Treasury team but, with the exception of the health proposals, there is very little they will be able to complain about in Committee. Yet those health proposals were announced in January and their announcement was therefore not part of the Budget. More important surely is the overall perspective on health. Our successful economic policies have provided for unprecedented increases in health spending, but throwing money at the Health Service is not a sufficient discharge of our public duty. We are now reforming its structure to ensure value for money and value for the taxpayer. That surely is our duty.

It is because the 1980s have seen such a fundamental change in our economic performance--indeed, it is no exaggeration to say that the 1980s are the decade of the supply side revolution--that the future needs of the National Health Service, and indeed of the rest of the public sector, can continue safely to be met by this Government. I support the Bill and look forward to its rapid implementation. 8.36 pm

Mr. Pat Wall (Bradford, North) : According to the radio today, the CBI sees some signs that high interest rates are beginning to slow down the economy and hopes that will bring down the rate of inflation, which, even excluding mortgage payments, means we have the sixth highest of the seven major European countries. It is interesting to note that in real terms, excluding inflation, interest rates are the highest they have been in this country since the Napoleonic wars. Perhaps that gives a clue to how the Chancellor sees his present role, as the Napoleon of the British economy, the revolutionary tax reformer. Like Napoleon, the right hon. Gentleman normally stood with his hands in his jacket. However, Napoleon Bonaparte won real victories before his eventual defeat and exile. The Napoleon of Blaby's victories have been somewhat illusory, though he also, I suspect, will go into political exile.

The CBI also sees prospects of a reversal in the rising rate of inflation and--with illusions--holds on to the belief that it can contain the increase in ex-factory prices to 5 per cent., the present rate. That is in conflict with the evidence of the retail sales figures and the money supply figures. However, even the CBI has no faith whatsoever in the Chancellor's ability to tackle the balance of payments problem. It makes the point that a decrease in the rate of inflation will lead to further losses of manufacturing jobs and in the wealth-creating section of the economy. Already the figures from the textile industry, which is often a barometer for the rest of the economy, show a growth in redundancies in the knitwear and other sectors.

The Chief Secretary today boasted yet again of the Government's achievements in economic growth, productivity and production. I would like to look at each of those aspects of the British economy. The British economy has grown less than its major competitors since 1979, despite the bonus of North sea oil,

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which was worth about £18 billion a year in the mid-1980s and is worth about £7 billion a year now. Since 1979 the average annual rate of growth has been 1.8 per cent.--a miserly figure, even compared with the 2 per cent. rate of growth under the last Labour Government which has been much maligned by Treasury Ministers. Manufacturing output fell by 14 per cent. between 1979 and 1981 and did not return to its 1979 level until 1987. In the same period manufacturing output increased by 38 per cent. in Japan, 25 per cent. in America, 16 per cent. in Italy and 12 per cent. in West Germany. Although the 4 per cent. increase in output in the past two years is above that of our major competitors, the figures I have quoted illustrate that Britain has a long way to go to compete with our major competitors. The Chief Secretary boasted a productivity growth rate of more than 4 per cent. between 1979 and 1988--which is higher than that of our major competitors. But Britain is still 25 per cent. behind the EEC average in terms of productivity and still further behind Japan and America.

In 1988 investment per worker stood at £3,000 per head--lower than all our major competitors and only half the investment per worker in Japan. Even if we had a slave society worse than the restrictions that the managerial counter-revolution have placed on the conditions under which people work in recent years, investment in new machinery and new methods would always win and that is lacking in the British economy at present. Between 1979 and 1987 investment in industry rose by only 9 per cent.--less than half the increase in consumer spending. Manufacturing investment is still slightly below the level it reached in 1979. The annual rate of growth in capital stock--that is machines and plant--between 1979 and 1986 was only 1 per cent. which is about half that of Britain's major competitors.

The Government's investment in real terms in schools, hospitals, housing, roads and general economic infrastructure has fallen by 50 per cent., and is likely to fall by a further 6 per cent. in the next two years. Without taking into account the decline in oil and energy revenues between 1985 and 1988, manufacturing exports rose by 23 per cent. while imports increased by 48 per cent. That created the balance of trade deficit, which is continuing to run at an annual rate of more than £20 billion per year. The net outflow of private capital of £6.3 billion in the first nine months of 1988 plus a further outflow of £5.6 billion in portfolio investment abroad amounts to almost £12 billion in nine months. That, in addition to the balance of trade deficit, shows that if there were a run on the pound--which could happen given the general rise in world interest rates and the poor performance of the British economy--even the Chancellor's much -vaunted currency reserves of £30 billion would be under serious threat within a year.

The Finance Bill and the Government's economic prospects cannot be considered in isolation from the rest of the world. The massive $155 billion America budget deficit, the further $130 billion American trade deficit and the massive surpluses in Japan and West Germany have created a total imbalance in the world economy. In America there is the added problem of corporate debt to finance huge takeovers. Many American loan banks have gone into default and in the next five or 10 years could cost the American Treasury anything between $50 billion and $150 billion. The world's major capitalist economies are in a far from rosy position. In addition, there is a continuing problem of Third world debt with a net outflow from poor

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countries to rich countries of $46 billion last year. Therefore, the situation is very different from the picture that the Government have painted of the British economy and the major world economies. Although the world economies avoided a recession after the stock exchange crash more than a year ago, by cutting interest rates and priming the economy, that policy is now being reversed. Interest rates are rising and productivity and growth are falling. That brings us back to the situation which one would normally have expected to follow the stock exchange crash--the possibility of a growing trade war and a recession and all that means in terms of human misery. I conclude by drawing a comparison between the Government's claims and what really happened which was so well explained by my hon. Friend the Member for Leeds, West (Mr. Battle). The top 100 millionaires in Britain gained more from last year's Budget than the bottom 1 million people in Britain. Under this Conservative Government the top 1 per cent. of people in Britain received a 55 per cent. increase in income while the bottom 10 per cent. have lost 8 per cent. of their income. The Government represent a class-divided society. The world economy is split so that, even in so-called boom years, billions of people live in absolute poverty and a tiny handful live in riches. I believe that that is becoming increasingly apparent and that a democratic Socialist society which controls and shares its wealth evenly will become more and more desirable in this country and throughout the world.

8.46 pm

Mr. David Shaw (Dover) : It is always interesting to listen to the hon. Member for Bradford, North (Mr. Wall). I remember his previous speeches on the economy which covered many world issues. He reminds me of the man with a sandwich board who goes round proclaiming that the world will end tomorrow. Unfortunately, his speech that the world was due to end tomorrow which he delivered last year appears to be wrong. The world is still around, the United States economy is still growing, the British economy is still growing and the only notable failure in the world economy in recent years is the Marxist-Leninist and Socialist economy in the Soviet Union.

The Finance Bill has been introduced against a background of a good economic position. The good news is that inflation is nowhere near as high as it was in 1979, earnings are much up on 1979 and economic growth is considerably higher than it was in 1979. Manufacturing productivity is a key statistic because of the very statistic that the Opposition always quote. The fact that we have lost 2 million jobs in manufacturing industry is good news because the 5 million people now employed in manufacturing are producing more goods than the 7 million people who were producing under Labour. Manufacturing productivity has increased by 50 per cent. since 1979 --

[Interruption.] The Opposition should listen and learn from those statistics so that if they ever get into government, which is extremely unlikely, they will know what to do.

Capital investment in Britain is going up at record rates, but, leaving aside capital investment in buildings and dwellings, the investment in manufacturing plant and machinery has gone up by 25 per cent. in real terms since

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1979. That has produced the balance of payments deficit because about 22 per cent. of the growth in imports is the result of manufacturing plant and machinery having to be imported.

Machine tools are having to be imported as the British economy grows because the Labour Government in the 1970s destroyed the machine tools industry, just as they destroyed many industries. The motor car industry is a good example of that. In 1976, the balance of trade on motor cars was positive. The success of the Conservative Government in the early 1970s left Labour with a balance of payments surplus. By the time Labour left office in 1979, there was a deficit on motor cars. They had totally and utterly moved towards the destruction of that industry.

The Conservative Government have begun to reverse that decline. We have encouraged the Japanese and others to set up here. We have encouraged Jaguar and other companies to be more efficient. The way in which we have reversed the declining situation caused by Labour has been good for jobs and growth. I welcome the Finance Bill because it is a continuation of the achievements of Conservative Administrations. The Bill is part of the process of getting Britain right. It was not right under Labour.

I welcome the news for pensioners--the abolition of the earnings rule and the tax relief to be granted for contributions to private health insurance schemes. I welcome the benefits for low-paid employees through the changes in national insurance. I also welcome what is being done for share ownership. Everybody should have a stake in the community. All workers in Britain should have an opportunity to buy shares in the companies and businesses for which they work, and in other enterprises.

It is also good news to see encouragement being given to profit-related pay. Employees should be paid according to the success of the firms for which they work. It would be nice to have a Civil Service profit-related pay scheme. Indeed, we would welcome the Government defining "profit" in that sector.

I also welcome increased taxation on what I would call the car benefit. We should be taxing business perks. Indeed, there should be no need for such perks. People should be paid a fair and straight wage, not a wage with perks attached. Let us tighten up on all forms of business perks and tax them fully, with national insurance being charged on them as well. Pay should be related to the success of the firms for which people work.

I must comment on two slight disappointments--I would call them omissions-- in this year's Finance Bill which I hope will be addressed in future measures. If I am fortunate enough to be a member of the Standing Committee, it might be possible to discuss at that stage the two key areas to which I wish to refer.

The higher rate of capital gains tax at 40 per cent. is too high. It has been recognised in the United States that it acts as a disincentive to investment in entrepreneurial-based companies. The 40 per cent. rate hits the gains of the very companies we want to help and in which we want people to invest. It hits the entrepreneurs who back those companies.

The hon. Member for Leeds, West (Mr. Battle) referred to Body Shop. Had he checked his facts he would have appreciated that the success of that investment of £5,000

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has created 4,000 jobs--according to figures I have--in terms of direct employment. The degree of indirect employment is much larger. Had he examined the contribution that is made by the founding members of that organisation, he would have discovered that they contribute towards CND--not a contribution that I would recommend all business men to make--although the hon. Gentleman might have some sympathy with the views of the founding members in that respect. As I say, he should have researched his facts better.

Next, I am unhappy about the lack of help for business expansion scheme funds and the fact that the Government have not included in the Bill this year any measures for BES projects. It has been said that BES is too oriented to backing property and that we must return to a scheme which backs real companies and real investment, such as electronics and manufacturing.

In Committee last year we discussed at length the £500,000 limit and whether it should be raised for investment in BES companies in the manufacturing sector. I extracted a half promise from the Financial Secretary last year that he would look into the success that BES funds were having in attracting finance for investment in manufacturing companies. As I pointed out, funds cannot achieve tax relief at the time when investment is made in the fund. Tax relief is available only when investment is made in the company.

Some adjustment was made in the Budget last year, but I warned the Financial Secretary then that it might not be adequate. I hope that the Treasury is examining the statistics. If so, it will be found that investment in BES funds is not satisfactory now and that it is not high enough. I hope that the adjustment for which I appealed last year will be considered in terms of an amendment to the Finance Bill this year.

It would be wrong for me to conclude my remarks without referring to one aspect of the speeches by Opposition Members. We have heard a great deal of criticism from them, but they have supplied no positive answers, no policy and no solutions. Conservative Members are entitled to wonder whether there was an important economic policy announcement last weekend from the hon. Member for Oldham, West (Mr. Meacher) when he said that secondary picketing would be allowed under a Labour Government.

I hope that Opposition Front Bench spokesmen will now explain how secondary picketing would help the nation's economy; how secondary picketing would help to keep inflation at a low level and help British companies to be successful in exporting more. Let them tell us clearly whether Labour Members support secondary picketing and believe that it would improve the economy.

Mr. Mans : Does my hon. Friend agree that we recently had another example of the way forward by the Labour party in terms of its policy to provide fibre optic cable to every household in Britain at a cost of £21 billion to the taxpayer?

Mr. Deputy Speaker : Order. The hon. Member for Dover (Mr. Shaw) has half a minute left for his speech.

Mr. Shaw : My hon. Friend the Member for Wyre (Mr. Mans) makes a telling point. All Labour Governments have spent money regardless of benefit to the taxpayer.

We have had an important new economic indicator suggested from Opposition Members. I refer to the

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number of people who, according to them, can afford to holiday in Spain. I remind them that under Labour we had a £50 sterling limit. Indeed, under Labour people could not afford to go abroad on holiday. The statistics of the number of people who take holidays abroad under Conservative rule have gone on increasing, just as many other aspects of the nation's activities continue to improve.

I welcome this year's Finance Bill. It is an excellent measure that addresses many of the nation's problems. It is part of the Government's policy of solving Britain's real problems. The economy is improving under Conservative rule and I hope that the Government will go on introducing Finance Bills of this type in the future. 8.57 pm

Dr. Kim Howells (Pontypridd) : The hon. Member for Dover (Mr. Shaw) dealt with some important matters. I shall deal in particular with the reticence of the Finance Bill to address the question how our manufacturing industries are to be encouraged to devote greater resources to research and development and product innovation. We also have a desperate need to educate and train our work force in skills adequate to propel our manufacturing industries into the 21st century.

So dismal have been the innovative and research and development performances of certain key sectors of our manufacturing industries in the last decade that--as my right hon. Friend the Member for Llanelli (Mr. Davies) ably pointed out--in the unlikely event of Britain adopting some of the trade barriers favoured by the Japanese, our manufacturers would not be able to fill the gaps left by the prohibited imports, be they cars or wrist watches.

It is true that there has been in recent years, even in constituencies such as mine in the coalfields, a welcome influx of jobs in the electronics sector. It is also true that those jobs have the sheen of newness and modernity and that they are frequently a boon to communities that have suffered badly from industrial decline over the past decade. I hope that they are jobs that will stay, if only because, all too often, they have arrived because hard-pressed local authorities have risked precious funds to attract them in the first place. I also hope that they stay because they give constituencies such as mine a toehold on the hazardous slopes of the international electronics trade.

I am afraid that all too often, when the sheen of newness and modernity is rubbed away, constituencies such as mine find themselves engaged in a sector of the electronics industry that is dependent for its competitiveness and health not on the productivity records of its work force or on the excellence of its industrial relations record--important though those elements are--but on the innovations and development strategies worked out and decided on the other side of the world.

The Finance Bill seems to have been drawn up in the belief that there is nothing wrong in simply hoping that market forces will, somehow, resolve automatically our research and development problems. In fact, that is a belief that tends to encourage the views of an increasing number of transnational corporations that Britain is a fine place to set up assembly lines. We are often extremely generous with financial incentives for them to site here. In constituencies such as mine there is a prevailing low-wage economy and there are few pressures from the Government to source the key components of the electronics goods being assembled with United Kingdom

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producers. Of course, that is mainly because we do not produce many of the key components. All too often, those in Government whose job should be to mould and shape this country's economic environment are content to sit back and allow transnational corporations based in the Pacific ring, north America or continental Europe to draw away from us in the manufacturing innovation stakes. I hope that the Financial Secretary will agree that it cannot be in the best interests of the nation's economy to allow it to become subject to an increasing dependence on imported supplies of certain microchip technologies, the manufacture and supply of which are determined in boardrooms remote from the effective influence of our manufacturers. In the past four years alone, the trade deficit in electronic goods has risen by a staggering 40 per cent., and that is just the main story. The subtext carries an even more ominous message. It says that our ability to win for ourselves a leading place in the world manufacturing stakes over the next decade will continue to be seriously impaired unless we recognise that there are mechanisms available to us to win that place other than the manipulation of interest rates and the wholesale surrender to the notion that the free market--and only the free market--can determine the rate and nature of manufacturing innovation.

I am not advocating a centralised Government think tank which would distribute funds to research and develop huge projects. We have seen the results of that in the disastrous Magnox and advanced gas-cooled reactor nuclear power station programmes, which swallowed up precious research and development funds at an unprecedented rate and produced little other than a troublesome, inefficient and unsaleable technology. I am advocating that the Government should reassess their priorities about where they see fit to bestow their financial blessings. In particular, they should concern themselves less with easing the tax burden of the best off and more with priming the pump of manufacturing investment and with strengthening and extending the opportunities for educating, training, and retraining those who will develop and manufacture the innovations to which I have alluded. There has been little success in reducing the lag in training in this country and there is widespread concern about the continuing decline in our comparative research and development position. Those features constitute serious impediments to the transformation of our economy to one capable of rapid growth in the long term, as distinct from rapid growth from a comparatively low base in the short term. I have no doubt that industry recognises that it could have much to gain from an increase in training, but that does not mean that industry is prepared to meet the costs associated with increased training, especially as employers perceive that there is a risk that trained personnel may choose to shift their skills, after training, to a rival. The Government will allow that situation to continue only at the peril of our manufacturing economy.

The Finance Bill gives no suggestion that the Government are paying the attention and the respect warranted to those key problems. If that policy continues, it may result in more jobs on the assembly line of the foreign transnational corporations. But it will not result in an economy that is able freely to determine its own future.

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9.6 pm

Mr. Quentin Davies (Stamford and Spalding) : My right hon. Friend the Chief Secretary made it plain when he introduced the debate this afternoon that the Government are introducing the Finance Bill against the background of the incipient overheating of the economy. That is a danger which my right hon. Friend the Chancellor correctly diagnosed almost a year ago and which he has addressed by a series of stepped increases in interest rates. I am convinced that that was the right response and that after the normal time lag of six, 12 or 18 months the increases in interest rates will begin to have an impact on the real economy. However, we need to take account not merely of the immediate problem but of the causes behind the incipient overheating.

There will be general agreement in the House that that overheating is due, more than anything else, to the precipitate decline in the net savings ratio of the household sector, which is in itself an astonishing reflection of the degree of confidence that has been generated by our prosperity in this country. If it is a problem, it is a problem of success, but, none the less, it is a problem that we must redress. In those circumstances, we should examine the Finance Bill against the three criteria that, in such circumstances, the Finance Bill must meet.

The first requirement is that the Finance Bill should be conservative. It should be clear that the Government are determined that until and unless private sector saving, especially household saving, revives there is no question of the Government reducing their own savings--that is, reducing their own surplus. There is a natural trade-off between monetary policy and fiscal policy, between the Government's surplus and the level of interest rates. The higher Government savings are, the less the need to increase interest rates to induce households to save a greater proportion of their current incomes. It is utterly fatuous for Opposition Members to argue at the same time that interest rates should be lower and that the Government should spend more of their surplus.

This Budget is conservative. My right hon. Friend is going for a surplus of around £14 billion again this year and one could hardly be more conservative than that. If the growth rate continues on its present course, the surplus is likely to be higher. Events over the past few weeks have thoroughly vindicated my right hon. Friend's essential budgetary decision. We have found that the financial markets have not collapsed, there has not been undue pressure for a further rise in interest rates and it has been possible to maintain business and investing confidence precisely because we had such a conservative Budget, which made it less likely rather than more likely that we would need a higher level of interest rates in future.

The second great requirement is that it should do something to stimulate the supply side. That is difficult when, by definition, there is no scope for a massive reduction in taxation and no scope for an immediate reduction in interest rates. Considerable ingenuity is required, and my right hon. Friend the Chancellor has displayed that.

First, my right hon. Friend has greatly increased the ceiling for the corporation tax rate for small companies--an important measure. Other most important measures in that area were incorporated in the Social Security Bill that the House discussed yesterday. There is no question but that the reduction in national insurance contributions

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for the low paid will reduce the employment trap. Other measures in that Bill which will encourage people to make an even greater effort to go back to work will also tend in that direction.

What is more, the reduction of the earnings rule previously applied to pensioners must also have not only desirable human consequences, but the desirable economic consequence of persuading many people to remain in employment longer, making their skills available to the economy and reducing the skill shortages from which we suffer and are likely increasingly to suffer during the 1990s when we move into a demographic trough.

Thirdly, in the circumstances that I have described, we must address the root cause of the overheating and do what we can to increase household and personal savings. I congratulate my right hon. Friend on resisting the considerable pressure from the Inland Revenue to burden the life assurance industry with substantially greater taxation. The regime that he has now come out with, and which is expressed in the Bill, will give renewed confidence to those contemplating taking out contractual savings schemes or increasing their existing commitment to contractual savings.

Most of all in that context I welcome my right hon. Friend's provision for expanding the personal equity plan scheme, doubling the maximum amount and permitting half of it, £2,400, to be invested in unit trusts. For the first time, the PEPs will be aggressively marketed. The financial pages of the Sunday papers over the past few weeks have given us considerable evidence that that is happening. Personal equity plans are an ideal mechanism for mobilising savings on the part of the small saver and investment in unit trusts--I have no interest to declare on behalf of the unit trust industry--is particularly desirable for the small saver because they enable him to achieve a degree of diversification in his portfolio which would otherwise not be possible.

Within this apparently technical and complicated Finance Bill there is an extremely coherent nucleus of sharply focused economic policies which address very effectively the problems immediately before us. The Bill deserves the full-hearted support of the House.

9.12 pm

Mr. Chris Smith (Islington, South and Finsbury) : We should be having this debate tomorrow because it is crucial to see the Finance Bill and the fiscal decisions that it enshrines against the broader economic background, and tomorrow's balance of payment figures will, I suspect, once again emphasise how stark that background is. My right hon. and hon. Friends have in large numbers drawn attention to precisely that problem. My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) talked about the balance of payments problem and spoke of the mistakes that were made last year when it became obvious that credit was spiralling out of control. My hon. Friend the Member for Durham, North (Mr. Radice) spoke of the balance of payments deficit as the most immediate danger that we face. He rightly said that we run the risk of our economic policy being dictated by the holders of sterling. My right hon. Friend the Member for Llanelli (Mr. Davies) spoke about the deficit being likely to be far worse than predicted even at Budget time a month

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ago. He spoke of a possible deficit of £20 billion this year and he perceptively pointed out that last year's deficit was larger than the combined deficits of the previous 40 years.

My hon. Friend the Member for Kirkcaldy (Dr. Moonie) spoke of a deficit of £2 billion last year in construction materials alone. My hon. Friend the Member for Clydebank and Milngavie (Mr. Worthington) said that we had lost whole sectors of British industry over the past 10 years. My hon. Friend the Member for Bradford, North (Mr. Wall) spoke about the specific problems facing the textile industry. My hon. Friend the Member for Pontypridd (Dr. Howells) spoke movingly of the damage done to the electronics industry in his constituency and the importance of innovation, training and research to its future. All identified the balance of payments problem as one of the key issues facing our economy which the Government should be facing up to. Sadly, the same concern has not been shown by Conservative Members at any stage during today's debate.

Last year's balance of payments deficit was at a record level. All the indications are that this year's deficit is likely to be worse. The Government's predictions are hopelessly unachievable. Table 3.3 of the Red Book, which was also highlighted by the Select Committee's report which came out yesterday, gives the game away. That table predicts that export volume will grow by 7.5 per cent. in 1989 as opposed to a growth figure of 3 per cent. last year, and that import volume will grow by only 4.5 per cent. in 1989, as opposed to the staggering figure of 14.5 per cent. last year. Can such changes from domestic consumption to export orientation be achieved in such a short period, especially when interest rates are at a crippling level for small businesses wanting to invest, coupled with an overvalued pound that makes exporting more difficult? Of course not. It does not just need a shut down of major North sea production fields to throw the Government's predictions out of kilter. Those predictions are unachievable anyway. We must remember that even on the basis of those predictions the Chancellor is forecasting a balance of payments deficit of £14.5 billion in 1989. I warn the Government now that it will be worse and that will be a direct result of the Government's policies towards industry, investment, the exchange rate and interest rates.

Britain's share of world trade has fallen faster during the past 10 years than that of any other major country. That is the real economic miracle of 10 years of Thatcherism. In terms of our balance of payments and balance of trade, 10 years of the Prime Minister have produced not an economic miracle but an economic disaster. What of the other key economic factors that we should be looking at as the background to the Bill? The Government constantly tell us that their central objective is the control of inflation. Let us look at their record on that. The hon. Member for Dover (Mr. Shaw), in an entertaining speech, took time off from his researches into the net book agreement to tell us that there was good news on inflation. When the Prime Minister came to power Britain's inflation rate was 10.3 per cent., lower than that of the United States, France and Italy, and just above the average of 9.7 per cent. of all the OECD countries. It is now 7.9 per cent. and rising. It is higher than in any major industrial country and twice the OECD average.

Just to ensure that that miraculous transformation continues, the Governmment's direct decisions on water prices, electricity prices, transport fares, rents and rates,

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