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House of Commons

Thursday 6 July 1989

The House met at half-past Two o'clock


[Mr. Speaker-- in the Chair ]


Associated British Ports

(No. 2) Bill-- (By Order) Order read for resuming adjourned debate on Question--[23 May] --That the Bill be now read the Third time.

Debate to be resumed on Thursday 13 July

British Railways (Penalty Fares) Bill

[Lords] (By Order) Order for further consideration, as amended, read.

To be further considered on Thursday 13 July.

Buckinghamshire County Council Bill

[Lords] (By Order)

London Local Authorities Bill

[Lords] (By Order)

London Regional Transport (Penalty Fares) Bill

[Lords] (By Order)

British Railways Bill

(By Order)

Bromley London Borough Council (Crystal Palace) Bill

(By Order)

Orders for consideration, as amended, read.

To be considered on Thursday 13 July.

London Regional Transport (No. 2) Bill

(By Order) Considered ; to be read the Third time.

London Underground (Victoria) Bill

(By Order)

British Film Institute Southbank Bill

(By Order)

Vale of Glamorgan (Barry Harbour) Bill

[Lords] (By Order)

Hayle Harbour Bill

[Lords] (By Order)

Queen Mary and Westfield College Bill

[Lords] (By Order) Orders for Second Reading read.

To be read a Second time on Thursday 13 July.

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Oral Answers to Questions



1. Mr. Denzil Davies : To ask the Chancellor of the Exchequer whether it is the policy of Her Majesty's Government to resist a devaluation of the pound sterling.

The Chancellor of the Exchequer (Mr. Nigel Lawson) : The Government are determined not to allow the firmness of their monetary stance to be undermined by a depreciation of the exchange rate.

Mr. Davies : May I remind the right hon. Gentleman that since he became Chancellor the pound has been devalued by 25 per cent. against the deutschmark? Whatever the Government's policy, is it not now obvious that with the balance of payments deficit likely to be horrendous for some considerable time, with foreigners now depositing £25 billion in very short-term money in the City of London--a figure which exceeds the Government's foreign currency reserves--and with the Government having vetoed entry to the European monetary system, which could have stabilised those reserves, the stage is now set for a major run on the value of sterling? Is the Chancellor aware of that?

Mr. Lawson : Well, in the first place I would like to thank the right hon. Gentleman who is, of course, a former Treasury Minister, for supporting the policy of the Government when he said last month :

"Mr. Lawson has got no option to what he is doing. The Labour Party idea that you should have credit controls is rubbish. There is no way you can control credit except by controlling the price of credit, and the price of credit is Bank Rate.

The Opposition Front Bench, in short, is all over the place." He is quite right, so I would like to congratulate him on that. As for the question of what has happened to sterling, it is true-- [Interruption.] It is not the case that entry to the EMS has been vetoed. My right hon. Friend the Prime Minister reaffirmed, at the Madrid European Council, our intention to join the exchange rate mechanism of the EMS. I do not think that it is really very helpful for the right hon. Gentleman to try to talk the pound down. It makes him look particularly silly in a week in which the pound has been rising.

Mr. Beaumont-Dark : Does my right hon. Friend agree that it is important to ensure that the pound finds its own true value? Does he further agree that, in the end, the most important factor for Britain will be its export potential? Is it not true that with the pound at present levels British industry, at long last, has a chance to compete? If the pound is too high, there is difficulty with imports and exports. My right hon. Friend's policy of allowing the pound to find its own level is right, as long as he stops interfering.

Mr. Lawson : I have noted, of course, a certain asymmetry in my hon. Friend's views. He is very anxious that the pound should find its own level when he thinks the pound is likely to go down ; he is very anxious that

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everything should be done to prevent any movement when he thinks the pound is likely to go up. I have noticed that there are a number of hon. Members on the other side of the House and also some outside this House who take that rather asymmetrical view. [Interruption.] What I do tell my hon. Friend is that he is absolutely right that the present climate is one in which British exporters have every chance of doing very well in world markets, and indeed I am glad to say that they are doing well. Exports are well up, and that was shown particularly in the most recent trade figures.

Ms. Short : Does the Chancellor agree that the balance of payments problem shows that the pound is over valued? I thought that he believe in market forces. Why does not he stop intervening, allow the pound to drop and then join the EMS? Is not that the answer to our problems?

Mr. Lawson : I am interested to hear the hon. Lady, who does not normally support her Front-Bench spokesmen, on this occasion supports the inflationary policies that they are putting forward, including a substantial devaluation of the pound. That would not be helpful to the British economy ; least of all would it be helpful to the struggle against inflation. The Government have no intention of following that policy.

Value Added Tax

2. Mr. Amess : To ask the Chancellor of the Exchequer what representations he has received about zero rating of value added tax for hospital radio broadcasting equipment.

The Economic Secretary to the Treasury (Mr. Peter Lilley) : My right hon. Friend has received one letter since the reply I gave to my hon. Friend on 6 April this year.

Mr. Amess : Will my hon. Friend join me in congratulating the national associations of hospital broadcasting organisations on their magnificent work throughout Britain in broadcasting to people who are unwell? Will my hon. Friend consider giving them further help by zero- rating VAT on hospital radio broadcasting equipment, treating it in the same way as talking books for the blind?

Mr. Lilley : I am sure that the House will want to join me in paying tribute to the marvellous work done by hospital broadcasting in many of our constituencies, not least my own, and in paying tribute to my hon. Friend the Member for Basildon (Mr. Amess) for his consistent support for hospital broadcasting. As he knows, under EC law we are constrained in our ability to introduce new zero rates. We got away with extending the zero rates on printed matter to newspapers for the blind because of the analogy between the two, but that would not work in the case of hospital broadcasting equipment, which is not specialised and is not provided for hospitals alone. I hope that the hospital broadcasting movement will benefit from the many other moves that we have made to encourage increased support for charities.

Rev. Martin Smyth : I welcome the Minister's response in paying tribute, but bearing in mind that in the scriptures tributes are the same as taxes, will he keep pressing to give them the benefit of that tribute?

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Mr. Lilley : We shall continue our efforts to encourage charities in every way that we can, and we believe that the primary way in which to do that through the fiscal system is to encourage people to give more and to increase support. In that we have been successful, and charitable giving has more than doubled in real terms.

Mrs. Peacock : I appreciate what my hon. Friend says about the work of hospital broadcasting, but will he recognise the difficulties of many of those stations, particularly when they move to magnificent new hospital premises and have to re-equip completely, as my hospital radio station has had to do? What words of encouragement can he give to enable them to face the massive VAT bills that they will undoubtedly have to pay?

Mr. Lilley : As I have said, there is no prospect of our altering the VAT treatment of hospital radio equipment, but I hope that the great support that the movement has in the House will be reflected in the support that everybody gives such organisations in our constituencies so as to ensure that they are properly funded to carry on the great work that they do for patients.

Economic Policy

3. Mr. Martyn Jones : To ask the Chancellor of the Exchequer what representations he has received from institutions in the City of London about United Kingdom economic policy.

17. Mr. Win Griffiths : To ask the Chancellor of the Exchequer what representations he has received from institutions in the City of London about United Kingdom economic policy.

The Chief Secretary to the Treasury (Mr. John Major) : My right hon. Friend often receives advice from the City, most of it unsolicited.

Mr. Jones : From that reply I take it that the Chancellor may not have seen the Chase Investment bank report which stated that inflation was likely to peak at over 9 per cent. this year and that 18 per cent. interest rates would be needed to bring inflation down to 4 or 5 per cent. by 1992. Bearing in mind that the report was based on the Chancellor's Treasury model, will the Chancellor confirm that his young friends in the City are correct and that he would be prepared to put interest rates up to 18 per cent. by 1992?

Mr. Major : If my right hon. Friend had seen that report--I am not sure whether he has--he would certainly not have agreed with it.

Mr. Griffiths : Has the Minister received any representations from the City about how to deal with the problem of directors' huge pay increases? He may have seen the report that five of the top 100 company directors had increases of 50 per cent. and 91 had on average a 28 per cent. increase in their pay? Bearing in mind the Chancellor's views on pay and inflation, has he proffered them any advice on how to bring those increases down to a reasonable level, or does he believe in allowing wages to go up and keeping interest rates high?

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Mr. Major : I do not support unjustified pay increases from any source, including directors--and neither does my right hon. Friend. While I have no intention of defending them, they are not under our control.

Mr. John Townend : Does my right hon. Friend agree with the remarks made yesterday by the Governor of the Bank of England, when he commented that aggressive advertising by the banks to persuade people to borrow more so that they can spend more makes him feel uncomfortable?

While credit controls are neither desirable nor practicable, does my right hon. Friend agree that the clearing banks and big City institutions should act responsibly? Would it be a good idea for the governor to invite the chairmen of the clearing banks to the delightful garden behind his office and--over a long, cool summer drink--tell them that it is in their long- term interests to act in the long-term interests of the country?

Mr. Major : I share the governor's instincts, but what action he takes is a matter for him. I certainly do not believe that credit controls would be the answer.

Mr. Charles Wardle : Is it not imperative for the City and for industry alike that my right hon. Friend's chief and abiding priority continues to be controlling inflation--even though, in the short term, that remedy may be painful to borrowers--because inflation threatens competitiveness, erodes savings, and threatens jobs?

Mr. Major : My hon. Friend is entirely right. That is the central proposition before the Government at present, and my right hon. Friend has put in place the policies to bring down inflation.

Mr. Beith : Is it not widely recognised in the City that London would be the obvious centre for a central European bank, and that Britain should be in the European monetary union of which that central bank would be a part? From a counter-inflationary point of view, would it not be better if that central bank had more of the independence enjoyed by the Bundesbank, rather than the relationship that the Bank of England has with the Government?

Mr. Major : These are matters that will have to be addressed in the future, but I am bound to say that others may hold views that differ from the premise of the hon. Gentleman's question.

Mr. Latham : Before my right hon. Friend throws the unsolicited junk mail that he receives from the City into the wastepaper basket, will he ask some of the teenage scribblers to send him a table showing their predictions of economic outcome in the last five years compared with the actual outturns?

Mr. Major : I shall be very happy to study those projections and the eventual outcome. It is undoubtedly true that over a run of years, Treasury forecasts have been the most accurate.

Mr. Gordon Brown : As the Chancellor spent yesterday attacking the railmen, will the Chief Secretary take the opportunity that I am giving him today to condemn the pay increases which have given Sir Jeffrey Sterling a rise of £160,000 in one year alone, Lord King of British Airways £100,000 in one year alone, and the head of Warburg

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£350,000--on top of the top-rate tax cuts awarded to them last year? Will the Chief Secretary explicitly comdemn such pay rises--yes or no?

Mr. Major : Yesterday, my right hon. Friend condemned the strike, not individual railmen. If the hon. Gentleman had listened, he would have heard what I said earlier about unjustifiable pay demands. They are unjustifiable whether they are made by directors or by workers.

Income Tax

4. Mr. Summerson : To ask the Chancellor of the Exchequer what is his estimate of the extra yield of income tax if the basic rate were raised to 33 per cent.

The Financial Secretary to the Treasury (Mr. Norman Lamont) : An 8 per cent. increase in the basic rate of income tax to 33 per cent. would yield about £13.5 billion extra in a full year at 1989-90 income levels, assuming that there were no behavioural effects.

Mr. Summerson : Will my right hon. Friend confirm that it is no part of Government policy to increase the burden of income tax, whereas, so far as anyone can tell, that is precisely the policy of the Labour party?

Mr. Lamont : As my hon. Friend knows very well, we have reduced the burden of taxation and shall continue to do so. Judging by the expenditure plans put forward by the Labour party, if the Opposition ever came to power they would be well on the way to putting tax up to the level it was when they were last in office, which was 33p. Every day we hear of Labour policies such as a pensions increase equal to 1p on income tax, an increase in overseas aid equal to 1p on income tax, increased child benefit, a carer's allowance, renationalisation of the water industry and of British Telecom, and the introduction of a minimum wage. They would all have only one result, which would be to increase the basic rate of income tax to all taxpayers.

Mr. Frank Field : Why do the Government put so much effort into boosting the nanny welfare state for taxpayers? Will the right hon. Gentleman confirm that if the Government phased out all tax benefits we could have a standard rate of tax of between 12p and 15p in the pound? Would that not be a radical tax policy and, if so, why do the Government not introduce it?

Mr. Lamont : As the hon. Gentleman knows, in the Budgets this year and last year the Government blocked a significant number of loopholes. In last year's Budget, some £800 million was raised by the blocking of loopholes. We have taxed the use of company cars and blocked the forestry loophole. I agree that we should get marginal rates down and get average rates up.

Sir William Clark : Does my right hon. Friend agree that, historically, a reduction in taxation has meant that there has been a greater take for the Chancellor of the Exchequer? Does my right hon. Friend agree that if taxation were increased, revenue to the Exchequer would decrease?

Mr. Lamont : That, of course, was the point to which I referred when I spoke of behavioural effects. There must be some tax maximising rate. It cannot be true for ever

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that, however much taxes are cut, more revenue will be raised. What we have done, especially at the top end, has increased the tax take.

European Monetary System

5. Mr. Simon Hughes : To ask the Chancellor of the Exchequer what is the latest figure that he has for the rate of inflation in the United Kingdom ; and what is the average inflation rate for countries who are full members of the European monetary system.

Mr. Lawson : Excluding owner-occupier housing costs in order to put the figures on a more comparable basis, United Kingdom inflation currently stands at 6 per cent. compared with an average of 4 per cent. for the countries which are full members of the European monetary system.

Mr. Hughes : Given that the other inflation figure is 8.3 per cent. and not 6 per cent., when will the Chancellor say that our inflation will be low enough to allow us to join the exchange rate mechanism? What figure does he put on that inflation rate to allow us to join, given the conditions that he laid down before the Treasury and Civil Service Select Committee and that the Prime Minister laid down in Madrid?

Mr. Lawson : On the first point that the hon. Gentleman has made, I have to tell him that he is mistaken. Of the other countries that he mentiooned, only one has mortgage interest payments in its index, and a great many of them--in fact, about a half of them--have nothing at all for owner-occupier housing costs, nothing at all. Therefore, the only way to have a truly comparable figure is to take owner-occupier housing out, which is what I did, and that is a very different comparison between the 6 per cent. and the 4 per cent. As for the second question that the hon. Gentleman put to me, the answer is : lower than it is today.

Mr. Dykes : Does not the impressive experience of the EMS and the ERM show that it makes the vulnerable currencies in the system stronger rather than weaker? Are there not good lessons to be learnt for the pound sterling?

Mr. Lawson : Certainly, it is true that all those countries that are members of the exchange rate mechanism of the EMS to my knowledge believe that this has been beneficial to them, but it is a mistake to infer from that that all one has to do to run a successful economic policy is to join the exchange rate mechanism of the EMS. That is very much not the case. The same hard choices that have to be taken outside the exchange rate mechanism have to be taken inside it as well.

Mr. Foot : As it was obviously a major event in the control of our economic policy and inflationary policy, would the right hon. Gentleman care to tell us the exact terms of the apology that he received from the Prime Minister?

Mr. Lawson : I have no wish to comment at all on private conversations that may or may not have taken place between my right hon. Friend the Prime Minister and myself. We are at one on the subject of economic policy.

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6. Mr. Couchman : To ask the Chancellor of the Exchequer what is his estimate of the number of people who would face a higher marginal rate of tax and national insurance if the top rate of income tax were raised to 50 per cent. and the employees' national insurance limit were abolished.

19. Mr. Jacques Arnold : To ask the Chancellor of the Exchequer what is his estimate of the number of people who would face a higher marginal rate of tax and national insurance if the top rate of income tax were raised to 50 per cent. and the employees' national insurance limit were abolished.

Mr. Norman Lamont : If the higher rate of income tax were raised to 50 per cent. and the employees' upper earnings limit for national insurance contributions were abolished, about 3.4 million single people and married couples, about 15 per cent. of the total, would face higher marginal rates of income tax or national insurance.

Mr. Couchman : I am grateful to my right hon. Friend for that answer. Does he agree that this would raise the marginal rate to 59 per cent. and that such a calamitous rate would encourage another exodus of the skilled and the entrepreneurial? Would it not provide fuel for that pernicious industry of creative personal accounting which was so prevalent when the Labour party was in power?

Mr. Lamont : My hon. Friend is, of course, right. That is not the only way in which the Labour party is proposing to increase taxes. As my hon. Friend said, it would put up the marginal rate for nearly 3 million people, of whom 2 million are basic rate taxpayers, and another 1 million people, half of them pensioners, would lose as a result of the reintroduction of investment income surcharge. Another 24 million people in 12 million couples would also lose as a result of freezing the married couples' allowance and on top of all that, Labour would introduce a local income tax. That would take us straight back to the policies which destroyed incentives and crippled our economy in the 1970s.

Mr. Jacques Arnold : What advice would my right hon. Friend give to the 2 million people who currently have a marginal tax rate of 25 per cent. and who would, nevertheless, be penalised by an extension of national insurance contribution? Is it not significant that 2 million families would be hit in that way if we had a Labour Chancellor of the Exchequer?

Mr. Lamont : My hon. Friend is right. I am sure that thanks to him and to my hon. Friend the Member for Gillingham (Mr. Couchman) raising these matters, the warnings will be heeded and people will think carefully before voting Labour.

Mr. Mullin : To keep the level of hyprocrisy to a minimum, will the Financial Secretary confirm that the percentage of gross domestic product consumed by taxation has increased since his Government came to power?

Mr. Lamont : The percentage has increased, but the percentage taken by income tax has decreased. What we have done--and what the previous Government should have done--is to replace borrowing by sound finance.

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Mr. Ashton : Surely, it is the people at the top who live in the biggest and poshest houses-- [Interruption.] --who will also benefit most from the poll tax. Why should they have cuts at both ends of the scale --from the poll tax and income tax?

Mr. Lamont : I am sorry that I did not hear much of the hon. Gentleman's question, except that I understand from the grin on his face that he is obsessed with people who live in the biggest and poshest houses.

Mr. Marlow : If the purpose of taxation is to raise revenue rather than to punish people, is it not the case that since the Government have reduced the higher rates of taxation they have raised more revenue?

Mr. Lamont : My hon. Friend is right. As I have observed before, the Conservative Government have found a new way of soaking and clobbering the rich.

Mr. John Smith : Following the point made by my hon. Friend the Member for Sunderland, South (Mr. Mullin), can the Financial Secretary confirm that under this Government the proportion of national income paid in taxation has increased from 34.25 per cent. to 37.5 per cent.--a substantial increase? Will he explain what sense of equity there is in imposing on a person on £100,000 a year exactly the same liability in total national insurance as a person on £16,900 a year? In the case of the lower salary, that is 8 per cent. of income whereas in the case of the higher it is 1 per cent. of income. Is that not standing fairness on its head?

Mr. Lamont : I have already answered the question from the hon. Member for Sunderland, South (Mr. Mullin). On the upper earnings limit for national insurance contributions, we have always adhered to the principle that it is important that the contributory principle should be recognised. If the right hon. and learned Gentleman wants to put up taxes, let him do so and not call it national insurance.

Corporation Tax

7. Mr. Colvin : To ask the Chancellor of the Exchequer what representations he has received on the basic rate of corporation tax.

Mr. Lamont : A number.

Mr. Colvin : I thank my hon. Friend for that very full reply. Will he confirm that over the past five years, in spite of cutting the rate of corporation tax from 53 per cent. to 35 per cent. for big companies and from 42 per cent. to 25 per cent. for small companies, the revenue actually received by the Exchequer from corporation tax has more than doubled? Although capital allowances have been reduced, investment in manufacturing industry is running at an all-time high. As the patient has responded so well to the treatment, why can we not have a bit more of the same tax- cutting medicine?

Mr. Lamont : I note my hon. Friend's early Budget representation and I am sure that my right hon. Friend has done so as well. As my hon. Friend says, the United Kingdom has led the world in cutting corporation tax rates. We have reduced those rates by 17 points and, as my hon. Friend has said, the yield has soared. Of couse, that is largely because of the sound economy and the great

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upsurge in profits that we have experienced. We shall certainly keep the matter under review as my hon. Friend suggests. It is also true that investment has in no way suffered. Indeed, investment has boomed since we removed capital allowances and reduced the rate.

Mr. Foulkes : Can the Minister give a clue about whether the number of representations that he has received is nearer to the real level of inflation or to the fiddled figure that is used by his right hon. Friend the Chancellor, which does not include housing costs?

Mr. Lamont : It was an extremely small number.

European Monetary System

8. Mr. Squire : To ask the Chancellor of the Exchequer what effect the entry of Spain has had on her Majesty's Government's policy on membership of the European monetary system.

Mr. Lawson : None, though we will watch Spain's progress with interest.

Mr. Squire : In our mutual enthusiasm for joining the exchange rate mechanism, does my right hon. Friend agree that Spain has an inflation rate of nearly 7 per cent. at present and will he confirm that those countries that are within the exchange rate mechanism and have not yet abolished capital controls will possibly face major pressures on their interest rates when they finally do so?

Mr. Lawson : Of course, it is very important that all membr countries of the European Community abolish exchange controls in line with the directive which was agreed last year, and as my hon. Friend will know, most of the countries have to do that by 1 July 1990, including in particular France and Italy. It will be certainly a matter--as I told the Select Committee when I appeared before it on this subject--of very great interest to see how EMS fares after this abolition of exchange controls has taken place. I believe--and the Governor of the Bank of England stated when he gave evidence his belief--that the EMS would successfully survive that. It may be that some modifications will be required, but the EMS will successfully survive the removal of exchange controls by France, Italy and others. We shall have to see. The proof of the pudding will be in the eating.

Mr. Robert Sheldon : Whatever fears we may justifiably have about the future economic policy of this country in the event of our joining the exchange rate mechanism, is the Chancellor aware that the greatest fear is that we may enter at too high a rate?

Mr. Lawson : I realise that the Opposition are always in favour of devaluation. I know that they have a policy which is in some way similar to ours, concerning the exchange rate mechanism, but in one particular respect, totally different. They too wish to join the exchange rate mechanism of the EMS and they too believe that there are one or two conditions precedent, but their conditions are to secure the most inflationary environment they can, by devaluation of sterling first, and a change in the arrangements of the EMS to ensure that there is an inflationary climate throughout Europe. That is something which we wholly reject.

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Mr. Butterfill : Does my right hon. Friend agree that to suggest that we should have to have a withholding tax as the price for the abolition of exchange controls displays an extraordinary lack of confidence in the operation of a free market? Will he confirm that he will resist that ridiculous proposal?

Mr. Lawson : I can confirm not only that I will resist this proposal, which would be totally harmful, I can confirm that I have been resisting it, and so successfully that there are now a large number of other countries that are resisting it. I am absolutely confident that no such European Community withholding tax will ever come into place.

Value Added Tax

9. Mr. Bill Michie : To ask the Chancellor of the Exchequer, what proportion of gross earnings a one-earner family on average earnings with two children paid in value-added tax in (a) 1979 and (b) 1989.

Mr. Lilley : A married man on average male earnings with two children would have paid approximately 2.7 per cent. of his earnings in VAT in 1978-79 and 5 per cent. in 1988-89.

Mr. Michie : Does the Minister agree that the £5.76 per week that the average family would have had if VAT was still at the same proportion of earnings would be welcome to those families and would help them a little to offset the extra costs that they have to pay in massive mortgage repayments because of the Chancellor's policies?

Mr. Lilley : The significant fact is that over that period, which coincides with the lifetime of this Government, the average married man has had an increase in his real take-home pay--after taking account of prices and VAT--of more than 30 per cent. I do not think that people would have been prepared to trade that for the fiscal regime left behind by the Labour Government.

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