House of Commons Hansard Debates for 26 Mar 1990

Mr. Barry Field (Isle of Wight) : Will the right hon. Gentleman tell us the productivity of those 5,000 engineers compared with the 20,000? In most cases they now have multiple-headed machines and computerised lathes which have increased output.

Mr. Sheldon : The difficulty is that total output has fallen in those engineering companies. Their output is not what it used to be. More important, companies are crying out for skilled engineers. There is a shortage.

If there is a permanent improvement in the standard of living, how is it achieved? North sea oil revenues are £85 billion which has an effect on the balance of payments. We have to borrow to maintain our standard of living and sell our assets--£5 billion a year--to maintain our standard of living. Is that a permanent improvement? What happens when there are no assets to sell? The average family paid 35 per cent. in income tax in 1979, whereas now it is 37 per

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cent. Is that a permanent improvement? In 1979 unemployment was just over 1 million whereas today it is 2 million.

According to the Prime Minister recently, France is an economy to aspire to. In 1979 we would have been insulted if it was suggested that we should aspire to the French economy. We now find that, according to the European Commission and the Organisation for Economic Co-operation and Development, Italy has a greater level of production than Britain. Will we have to aspire to Italy? Are we going to continue to go down and to aspire to the performance of countries that we thought we had long since overtaken, in the 17th and 18th centuries? The permanent improvements, in the underlying economy which the Government boast about do not exist. Industry has suffered. There is no doubt that it has suffered in my constituency, and I feel it greatly.

If we had made those sacrifices for the benefit of permanent improvements, we could have borne them and accepted them willingly, but we find that the sacrifices have been in vain. We have wasted years and this Government will shortly come to an end.

6.30 pm

Mr. Terence L. Higgins (Worthing) : I join those hon. Members who have congratulated my right hon. Friend the Chancellor on his presentation of the Budget. He is a new Chancellor, the Budget was being televised for the first time, and he had remarkably little scope for manoeuvre in the Budget, but he performed his task with considerable distinction and he put forward his proposals with great cogency. I join those hon. Members who have wished him well. In his opening remarks the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) referred to a statement by the late Iain MacLeod--with whom I had the privilege of sitting on the Opposition Front Bench and on the Government Front Bench before his untimely death--to the effect that if a Budget looked good on Budget day it was often viewed differently by Second Reading. He also said that it worked both ways, and that if a Budget did not look good on Budget day it might look better by Second Reading. Since my right hon. Friend's Budget was received with reasonable appreciation, it will continue to be so received in future.

I welcome a number of my right hon. Friend's proposals, in particular the abolition of the composite tax rate for building society accounts, which will mean that many of my poorer constituents who have previously been paying income tax in that form but in no other will no longer be subjected to it. Those people who ought to pay the full rate of tax will do so.

I welcome what my right hon. Friend the Chancellor said about savings and the proposals that he made on that subject. I also welcome the fact that he raised the lower threshold for income tax but not the higher rate threshold. That shows a regard for people on low pay, despite the fact that many people, in anticipating the Budget, did not believe that he would do such a thing.

I welcome the increases that my right hon. Friend has made in indirect taxation, particularly on tobacco and alcohol. On social grounds there is a case for that increase. Those taxes were not increased last year. My right hon. Friend has more than adequately coped with inflation since then. Also his action is a clear sign to the European

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Community that we do not propose to go along with its proposals for the harmonisation of indirect taxation. My right hon. Friend's decision was a clear move in the opposite direction, and I welcome that because, as the Treasury and Civil Service Select Committee has pointed out, there is no argument for going along that road, particularly in regard to value added tax, to achieve the benefits of the single market in 1992. Therefore, the increase in indirect taxation should be welcomed as much for the implication of the change as for the change itself.

The major change taking place in the United Kingdom with the introduction of the community charge is in the system of local government finance--both in taxation and in expenditure. Clearly a number of anomalies exist that need to be straightened out in the light of experience. Some of them arise because local authorities have been given too much authority, for example, over the level of tax that should be applied to second homes. Some of the definitions of second homes have been nothing short of bizarre. Other anomalies need to be straightened out.

One matter which gives particular cause for concern is the substantial increase in local government exenditure. It is shown in the Red Book as a clear increase in the percentage of public expenditure in relation to gross domestic product, despite the fact that the estimate for GDP has been raised. That gives considerable cause for concern. It is uncertain to what extent the increase has been balanced by an increase in local government taxation in the form of the community charge, but its effects, in terms of controlling public expenditure, give cause for concern. Whereas previously the extra money would have come out of reserves, both expenditure and taxation are now increasing as a result of local authorities' actions. We have to consider that carefully. I hope that the Treasury and Civil Service Select Committee, when it studies the Budget and takes evidence from my right hon. Friend the Chancellor, will be able to consider that unfortunate development and its implications for the Treasury's control of the economy.

The community charge sets the context in which the Government's overall budget is made. The changes I have mentioned in regard to the community charge may have a significantly greater impact than the Budget. Protests about the community charge have had considerable publicity, and it has been extremely difficult for anyone to put over the positive case for the tax. I strongly believe that it is a much fairer tax than the old rating system. Previously only 18 million of the electorate of 36 million paid any local taxation, and that was unfair. The community charge is a significant improvement. A slogan appeared outside my town hall a little while ago saying, "The duke and the dustman pay the same". That is not the case. People at the bottom of the income scale will have substantial relief from the community charge. People with higher incomes may pay just the community charge, but they will still pay far less than the cost of the services provided to the community by the local authority. That is not an unfair arrangement. More than the cost of local services will be paid by people who are better off, for the simple reason that, taking the country as a whole, only a quarter of the cost of the services comes

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from the community charge, a quarter comes from business and something like a half from general taxation, which is levied on a progressive basis.

I hope that my right hon. Friend the Chancellor and his colleagues will be able to get across the fundamental arguments in favour of the change. Frankly, those arguments have not been adequately explained.

Mr. Alex Salmond (Banff and Buchan) : Will the right hon. Gentleman give way?

Mr. Higgins : No, because there is little time and I wish to make a number of other points.

On the Budget judgment, the way in which the grant system works also gives me grave concern. That is part of the problem. I greatly welcome the transition from rates to the community charge, but I have serious doubts about the way in which the grants system works. The change in local government finance is subject to Higgins first law of politics, which states that when there is any economic change the people who suffer will scream much louder than the people who benefit will cheer. That is a fact of political life and there is nothing we can do about it. However, we need to emphasise the fundamental case for the charge, and suggest that if people use local authority services they should pay something towards the cost. If people pay the community charge but not general taxation, they will still pay way under half of the cost of those services, but even that will improve accountability.

The Treasury and Civil Service Select Committee has had difficulty in finding suitable catch phrases for the Budget judgment. When the Chancellor of the Exchequer last appeared before the Committee, he suggested that he was a surfboarder in perilous waters. We have long used the analogy of balancing on a tightrope between inflation and recession. I believe that this time my right hon. Friend's Budget judgment was right. But not only is he on a tightrope ; he is also on a tightrope in a very thick economic fog. This means that caution is an appropriate response.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak) : Will my right hon. Friend give way?

Mr. Higgins : No. I am sorry, I do not have much time left. The statistics upon which my right hon. Friend had to rely in formulating his Budget were in many ways seriously defective, in particular the retail sales figures. No one doubts that the high streets are considerably depressed by the action that my right hon. Friend has taken. That is, rightly, having an impact on the economy. However, it is not coming through yet in the statistics. That is creating real problems for him.

Apart from the impact of the change from rates to the community charge and the corresponding increase in public expenditure, the change is also likely to have an uncertain impact on consumption. Those who gain from the transition may save the proceeds, whereas those who now have to pay something towards the cost of local services will not have money to spend on something else. The precise impact on the economy is at this stage uncertain.

Finally, it is likely that there will be increased pressure on interest rates worldwide. Recent Japanese experience has suggested that that will be so. The transition in Germany, with the integration of the two currencies, may

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also raise the general level of interest rates. In those circumstances, I doubt whether my right hon. Friend, who until now has, rightly, resisted further interest rate increases in the United Kingdom, will be able to continue to do so, if interest rate increases overseas are significantly large. If that happens, it will have a significant depressing effect on the United Kingdom economy. Against the uncertain background that I have described, and in the face of this potential threat, if my right hon. Friend had introduced a tough Budget of the kind that some City commentators wished him to introduce, there would have been a serious risk that in two or three months we should have been driven into a severe recession, with considerable implications for output and unemployment. That would have been particularly dangerous, at a time when wage settlements continue to be significantly inflationary. The two opposing forces would project a conjuncture not dissimilar from that in 1980-81, when the consequences for unemployment were very serious.

My conclusion is that, in the circumstances, my right hon. Friend's judgment was right. On reflection, I believe that it will be recognised as having been a sensible judgment. It might have been much easier to introduce the Budget in three months' time, by which time many of the present uncertainties may have been resolved, but no Chancellor of the Exchequer has such an option. I hope, therefore, that the Treasury and Civil Service Select Committee will be able to investigate the matter in detail.

My right hon. Friend referred to the passages on funding policy in the Red Book. As the right hon. Member for Ashton-under-Lyne said, it is difficult to appraise just how tight or tough the Budget is and precisely what is the fiscal stance. At all events, however, we are still running, and are projected to run, a massive Budget surplus compared with previous times. It is important to take into account the fact that up to now the Government's policy of so-called "full unfunding" has meant that much of the money that was taken out of the economy has been put back by back-door means. With a surplus, therefore, my right hon. Friend has considerable scope for tightening the reins, if that seems appropriate in the weeks and months to come.

In all the circumstances, what my right hon. Friend has done is right. He has introduced many excellent specific measures, as well as taken an overall view of the economy, which is the right one to take in present circumstances.

6.44 pm

Mr. Giles Radice (Durham, North) : I am delighted to follow the right hon. Member for Worthing (Mr. Higgins), who is such an excellent Chairman of the Treasury and Civil Service Select Committee. I want to follow up what he said about the poll tax and the Budget judgment, but I shall not do so at the moment. I noted his remark about the Chancellor of the Exchequer being on a tightrope in an economic fog. If one is on a tightrope in an economic fog, there is a great danger that one will fall off. Perhaps the right hon. Member for Worthing was warning the Chancellor that he is about to fall off the tightrope.

I felt some sympathy for the Chancellor of the Exchequer when he spoke on Tuesday. By any standards, he has been dealt an exceptionally weak hand. He inherited from his predecessor an economy which is severely out of balance, with a high inflation rate, relative

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to our competitors, a large balance of payments deficit and crippling interest rates. However, he was also faced with a difficult political situation. The Chancellor's dilemma was compounded by the Government's political plight. It is difficult to make the right economic decisions if one is already 20 points behind in the opinion polls, with only two years to go before the next general election. Until last Tuesday I thought that the Chancellor, at least in terms of style, was not making too bad a job of it. Sensibly, he has adopted a demeanour that is far more appropriate to the current problems than was the brash approach adopted by his predecessor. The right hon. Member for Blaby (Mr. Lawson) was never a credible Chancellor of the Exchequer of the bad times. At least the right hon. Member for Huntingdon (Mr Major) has had the nous to admit that mistakes have been made, something which his predecessor could never bring himself to do. In contrast to the previous Chancellor, the right hon. Member for Huntingdon consulted relatively widely when preparing his Budget. However, we all waited to find out whether the Chancellor's economics were as good as his style. Sadly, his Budget proved to be a disappointment--so much so that on Tuesday it was rejected by the Scots, on Wednesday by the markets and on Thursday by the voters of Mid- Staffordshire.

The Chancellor would be able to shrug off the hostile reception as a short- term setback if he could convincingly demonstrate that his strategies are likely to be successful in the longer term. I very much doubt, though, whether he can. To be effective, the Chancellor's policies have to achieve the following objectives. They must slow down the economy, reduce inflation and shift resources from imports to exports without, at the same time, clobbering output and investment and undermining productive potential, thus leading to new unemployment. In the meantime, the Chancellor must keep the markets happy, despite our relatively poor inflation record, our very large balance of payments deficit and a very uncertain European and international situation. Finally, because the Chancellor is a politician, his policies must succeed enough for him to be able to present the voters with at least a passable prospectus in time for an election in late 1991 or in 1992.

My judgment is that the Chancellor's Budget strategy will not achieve those objectives. It will not do enough to get the economy back into balance, it will fail to satisfy the markets in the longer term, and, because it will continue the pain without producing satisfactory evidence that it is working, it will also be a resounding political failure. In short, we shall get the worst of all worlds.

The Chancellor's policy is flawed in three crucial respects. It relies far too heavily on interest rates ; it is not supported--as was pointed out by the right hon. Member for Blaby (Mr. Lawson)--by a credible exchange rate strategy ; and, as my hon. Friend the Member for Sedgefield (Mr. Blair) said in a notable speech, it ignores the long-term requirements of the economy.

Like the previous Chancellor, the right hon. Gentleman has confirmed his faith in interest rates as "the key lever". However, the Chancellor's lever is a very blunt instrument. In his column in The Independent on Sunday yesterday, Christopher Huhne quoted Professor Paish's description, which is worth repeating : "It is like pulling a brick across a table top with a piece of elastic : nothing happens for ages, and then the brick hits you in the eye."

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That is the problem with high interest rates. As we all know, there are also some unpleasant side effects on the way. Quite apart from the impact on mortgage holders, there are already signs that the welcome investment boom of the past two years is being choked off. Inevitably, mortgage rate increases will be reflected in wage bargaining, thus adding to the inflationary spiral. In other words, the result of slowing down the economy through high interest rates is likely to be unpredictable and disruptive.

There is a case to be made for alternative monetary measures. The Chancellor is belatedly urging the financial institutions to restrain their marketing of credit facilities. It is about time. Page 18 of the Red Book contains a note on the practice in France and Germany of imposing minimum reserve asset ratios.

However, the case that I wish to make concerns not the alternative monetary arrangements, but the fact that the Chancellor should have been prepared to use fiscal policy in his Budget. Like his predecessor, the Chancellor says that he is against fine tuning. I suspect, however, that his apparent opposition in principle amounts to little more than a debating point. Despite the previous Chancellor's unprovable assertions about the improvements to the supply side, he was not averse to some fiscal fine tuning in the form of tax cuts in the run-up to the 1987 election--or, indeed, in 1988. A more serious counter-argument is that the economy is already heading towards recession, which was the point made by the right hon. Member for Worthing. A tighter fiscal stance, it is argued, would merely pile on the agony, and it is better to wait and see what happens. That appears to be the Chancellor's strategy. In my view, such fiscal Micawberism is mistaken. Like the right hon. Member for Worthing, I predict that the Chancellor will be forced to raise interest rates again quite soon, partly in reaction to what is happening in Germany and Japan. That would be disastrous. A further rise in interest rates will clobber the real economy and bring in its wake precisely the recession that the Chancellor says that he is trying to avoid.

If the Chancellor had been prepared to act on the fiscal front in the Budget, he would have been in a better position to resist recession in the coming months. Even a modest increase in the tax take--between £1 billion and £2 billion--would have been a psychological signal both to the market and to consumers. And, because it would assist in dampening demand directly, raising taxes would help pave the way for a reduction in interest rates at the right time, and thus relieve pressure on companies and enable them to concentrate on winning orders in export markets. In that way it would be possible to maintain output, investment and employment, while at the same time bringing the economy back into balance more speedily by reducing inflation and cutting the trade deficit.

I suspect that the real reason why the Chancellor did not feel able to raise the overall yield from taxes by more than £500 million was that the Government have almost totally lost their political authority. An administration who were foolish enough to introduce the uniquely unpopular poll tax this year could not afford at the same time to increase national taxes.

Mr. Ashdown : I have listened to the hon. Gentleman's speech with some interest. He is making more sense from

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the Opposition Back Benches about what the Government might have done than any Opposition Front-Bencher whom I have heard. Can he tell the House whether raising taxation is Labour party policy?

Mr. Radice : I was speaking for myself ; I do not commit my Front Bench. It is easy enough for the right hon. Member for Yeovil (Mr. Ashdown) to speak for himself, because there are not many people behind him ; indeed, at the moment there is no one alongside him. There are proposals in Labour's alternative Budget to raise taxes--for instance, on company cars-- such as the Chancellor introduced. There are also some green Budget proposals

Mr. Major : In not committing his Front Bench to anything the hon. Member for Durham, North (Mr. Radice) is wise, and he is following precisely the practice of his own Front Bench. I have here a quote from a distinguished economic correspondent, who said that my "decision to go for a broadly neutral budget was finely judged, but a good one.

The extra £1 billion or so of fiscal tightening the City had been calling for would have made little difference Major was probably right to resist such tightening, which would have been fine-tuning of the worst sort."

That was written in yesterday's Sunday Times by Professor David Currie, who has from time to time advised the Labour party Front Bench.

Mr. Radice : Different advisers give different views. In the Treasury Select Committee we have a wide range of advice from advisers giving different views on different matters, but the majority of commentators argue that the Chancellor should have taken tough fiscal measures in his Budget.

Mr. Nicholas Budgen (Wolverhampton, South-West) : The question is whether the Government are prepared to use any of the weapons available to them. If the view is taken that for political reasons the Government are not prepared to use the interest rate weapon, it may be necessary to use a less attractive weapon, namely taxation.

Mr. Radice : I entirely agree. We must get away from the mumbo-jumbo that says that the fiscal weapon cannot be used in the short term. That is the doctrine enuciated by the previous Chancellor, and it is wrong. It is time to get away from it. We must examine the position seriously, which is what I have been trying to do. The Chancellor ducked the issue because he lacked the political authority. This was primarily a political and not an economic judgment.

Mr. Robert Sheldon : It is No. 10.

Mr. Radice : It may be No. 10.

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

Mr. Radice : I will not give way. I have already given way four times, which is unusual for a Back Bencher.

The Government's lack of authority is also a problem in financial markets. Most City commentators--rightly, I think--expect the value of the pound to continue to drift down during 1990. As the right hon. Member for Blaby said, that will make it more difficult to reduce inflation.

If the Chancellor had been able to announce that Britain would be joining the exchange rate mechanism in the near future, he might have been able to keep the pound steady over the next few months. However, as everyone

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knows, the Prime Minister has veteod British membership. I do not know whether she will gradually succumb to pressure from the Chancellor and his right hon. Friends over the coming months. She may, or perhaps--as the right hon. Member for Yeovil suggested--it will be necessary to get rid of the Prime Minister before changing the policy. Only the Conservative party can answer that conundrum. British membership of the exchange rate mechanism is not a panacea, but it would greatly assist a British Chancellor to maintain a stable exchange rate in difficult circumstances. It would also provide a useful counter-inflationary discipline for both industry and Government. In time, as our inflation rate came down to nearer to the German level--as the French rate has done--it would probably lead to a reduction in interest rates as well. So it would have positive advantages and the sooner we join the better.

The Chancellor's strategy also ignores the long term. Apart from a token gesture towards training, neither the Autumn Statement nor the Budget offers anything constructive to improve education and training, to strengthen our research and development or to reduce our regional imbalance. Yet the skill, research and all-round effort of people in the north as well as in the south represent the real supply side of the economy. As my hon. Friend the Member for Sedgefield said, we neglect those areas at our peril. I suspect that this year's Budget will be remembered-- if it is remembered at all--as a short-term Budget with short-term objectives by a short-term Chancellor.

Madam Deputy Speaker (Miss Betty Boothroyd) : Order. We are now into the 10-minute limit for speeches and wise hon. Members should keep an eye on the clock for themselves so as not to allow the Chair to ruin the last minutes of their speeches by the inevitable guillotine that will be imposed by me.

7.1 pm

Sir Peter Hordern (Horsham) : Every Opposition Member who has spoken has suggested increasing the rates of income tax. I know that that is the result of their experience in government as that was their custom, but there is one considerable difference between the position today and that under successive Labour Governments : we do not have a financial deficit ; in fact, we have had a substantial financial surplus for the past two years, and that is unique in the experience of the past 20 years or longer.

The case for increasing income tax has not been made because our position is fundamentally different. Moreover, my right hon. Friend the Chancellor was not averse to putting up taxation, because, as hon. Members have recognised, he raised the excise duties by more than the rate of inflation. That does not show any lack of authority, still less any lack of courage, on the part of my right hon. Friend. I know that many in the City felt that the Budget should have done more to take demand out of the economy, and many of them sought increases in direct taxation. I recollect that 365 economists wrote a letter to The Times in 1981, after the Budget of my right hon. Friend the Leader of the House, saying that it would result in rapid inflation, but they were all proved wrong. The proposition put forward by those in the City and by economists that we

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should have taken more out of the economy by increasing direct taxation was also wrong. I do not believe that we have a choice between increasing direct taxation and reducing interest rates. Our interest rates are extremely competitive, and it is by no means certain that had we increased taxation we should thereby have been able to reduce interest rates later. I very much doubt whether that would have been the case. One has only to look at what is happening now in Japan, and to a similar extent in West Germany, to realise the truth of that observation.

I do not know what the House thinks will happen as we all have different views, but I suggest that the demand for money in eastern Europe will be extremely large in the foreseeable future. The effect of that demand will be similar to the large transfer of resources that occurred during the last hike in oil prices when so much money went to the middle east. It is no longer the case that we can envisage a gradually growing world economy in which interest rates accommodate a flow of money from surplus countries to debtor countries. There is bound to be a huge demand for money and for funds which will be attractive to investors all over the world. That brings me to the exchange rate mechanism.

The conditions we have set for joining the exchange rate mechanism are that the French and Italians should discard capital controls and that we should more nearly approximate to the rate of inflation and the interest rate in West Germany. Naturally, many people consider that that will happen over a period in which our inflation rate falls and our interest rate falls with it, but I suggest that, because of the extra demand for funds in eastern Europe, interest rates in West Germany are likely to be rather higher than one would normally expect as perhaps will be the rate of inflation, for however temporary a period. West German interest rates at 9.5 per cent. for long-term funds are extremely high, historically speaking, and it is by no means certain that the limit has yet been reached. So, by a curious twist which was in no sense expected, the convergence between our inflation rate and interest rate and those in West Germany will now occur because the West German rates are likely to increase and we expect ours to fall somewhat.

We must also consider the effectiveness of our monetary controls. I must tell my right hon. Friend the Chancellor that I have enthusiasm for almost every part of the Budget save only that part dealing with monetary policy. It may well be that I am shamefully out of date in these matters, but MO does not register with me as an indication of anything except for banks and notes in circulation and as a snapshot of the economy at any particular moment.

Mr. Budgen : Will my hon. Friend give way?

Sir Peter Hordern : No. I have very limited time.

We should have proper monetary targets for broad money and for narrow money, as almost every other European country has, and we should stick to them. It is not difficult or impossible to do so if the will and determination are there, although I accept that many sacrifices will have to be made. It is no use thinking that the exchange rate mechanism is an alternative to strict monetary policy. It is no such thing.

I recognise that Britain has to face peculiar difficulties as it is the centre of so many money movements across the exchange rates and has such a wide comprehensive

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financial market. However, it would be of great benefit to Britain if we were to have a separate and strengthened Bank of England responsible for monetary policy. I have thought that for some time, and I hope that my right hon. Friend will be able to pursue a study which I understand my right hon. Friend the Member for Blaby (Mr. Lawson) set in train.

I wholly congratulate my right hon. Friend the Chancellor on scrapping the composite rate of tax for depositors in buidling societies and for creating the new tax-exempt special savings account. I understand that £1,000 billion out of a total personal wealth of £1,860 billion is tied up in housing. Although I defer to nobody in my enthusiasm for the property- owning democracy, so much of our personal wealth being stored in bricks and mortar is not producing the supply-side revolution of which Britain is capable. I should like relief similar to the £30,000 mortgage taxation relief for those who want to start a personal savings scheme or to encourage entrepreneurs to set up in business. Taking the long-term economic view, I think that it does not make sense to freeze such a large proportion of our national assets in this way. I do not think that it is done in other countries to anything like the same degree. If one looks at the matter independently and in a reasoned way, one can only come to the conclusion that the proposition that we ought to set out to achieve such a situation is very strange.

There is competition for money because of the demand for investment in eastern Europe. That demand will certainly be met. We can expect to see in eastern Europe an increase in productivity and in production such as has not been seen since the start of the industrial revolution in the United States, when hundreds of thousands of people moved from western Europe to set in motion the biggest industrial revolution of all time. We have in prospect an economic revolution limitless in scope such as we have not seen since the beginning of the European Community. With wider European boundaries, we in western Europe can expect to see a substantial improvement.

I congratulate my right hon. Friend on his Budget, and wish him success.

7.11 pm

Mr. Denzil Davies (Llanelli) : The hon. Member for Horsham (Sir P. Hordern) has made a very interesting and a very sensible speech. Unfortunately, because of the time limit, I am unable to respond to many of his arguments.

The Government have been desperately anxious to describe this as a tough Budget. Treasury Ministers repeated the phrase with Pavlovian predictability. The current Leader of the House, who was the first Chancellor of the Thatcher era, and has now acquired something of a reputation as a bull terrier of monetarism, was wheeled out a few days before the Budget to say in a speech that it was likely to be a tough Budget. I wondered at the time how he knew. I know now that he did not know. In fact, it seems that he was fed some dud information.

This is a timid Budget. I am sorry to say that it is the Budget of a frightened Chancellor. I do not blame him for being frightened. He is frightened by his economic inheritance--if "inheritance" is the right word- -he is frightened by his Back Benchers, and, quite properly, he is frightened by the British electorate. The Tory party was

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elected in 1979 mainly to defeat inflation. This it has failed abysmally to do. At the moment, inflation, as measured by the RPI, stands at 7.5 per cent., and it will probably go up to 9.5 or 10 per cent. in the next few months. That is three times as high as the rate of our principal competitors in Europe--France and Germany. The French have managed to get their inflation down almost to the German level. But the rate in Britain is three times as high as the average for the seven major economies of the world.

The Prime Minister owes the British public an explanation, but they will not get it. The right hon. Lady really ought to explain to the British public why her Government, having invested so much in the defeat of inflation, cannot do as well as the French, the Germans and our other competitors. Perhaps when she next goes to the EC Council of Ministers the Treasury could arrange for her a little seminar with Chancellor Kohl of the Christian Democrats and President Mitterrand of the French Socialists. They know the trick ; perhaps they could explain how what they have done might be done in Britain. The Budget has all but abandoned monetary targets and has loosened an already-loose fiscal stance. All monetary targets, except little MO--notes and coins in circulation--have been jettisoned. Indeed, the range of increase in MO this year is to be the same as for last year. Although, according to the last Budget, the range of increase was to be reduced from 1 to 5 per cent. to 0 to 4 per cent., it is above the 1 to 5 per cent. range already. Even last year it was above 5 per cent. Does anyone seriously believe that if, over the next few months, the Chancellor sees MO again exceeding the target of 1 to 5 per cent. he will increase interest rates? Of course he will not. The pound may go down. At the end of the day, interest rates would be increased to stop a run on the pound. But if the pound goes down slowly and gradually, the Treasury will sit back. There will be benign neglect. If it looks as if the slide is getting out of control, the reserves will be thrown at it. Ultimately, if the reserves do not do the job--because they are running out--interest rates will go up. But only then will this Chancellor put interest rates up. Only then will he use monetary methods.

As a result, I do not see that the Government have any alternative, on the monetary side, to eventually joining the exchange rate mechanism of the EMS. To put it brutally, that means allowing Herr Otto Poehl of the Bundesbank to run our monetary policy. The Prime Minister may not like it. She may kick and scream, but she will have to accept it. In the end, she will have nobody but herself to blame for the failure, over 10 years, to establish a proper and sensible monetary policy.

Then there is fiscal policy. The Chancellor tells us that fiscal policy is meant to bolster--I think "bolster" is the word he used--monetary policy.

Mr. Ted Rowlands (Merthyr Tydfil and Rhymney) : It was "buttress".

Mr. Davies : I was about to say that it was a pretty soft bolster ; perhaps I should say, instead, that it was a pretty thin and wobbly buttress.

So far as I understand it, the Government define fiscal policy as comprising three elements : the budget surplus, tight control of public expenditure, and taxation policy. Let us look at the budget surplus. It, too, is beginning to look pretty wobbly. In the last financial year it was supposed to be £14 billion, but it turned out to be £7

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billion. In the next financial year it is to be £6.9 billion. But if the privatisation proceeds are taken out of that--and there is a very good case for doing so--the figure is down to £1.9 billion. Apparently it will disappear altogether in the following year. So that element of the triad of fiscal policy does not look too sound. Let me come now to control of public expenditure. As many commentators, including Mr. Gavin Davies, of Goldman Sachs, and others have pointed out, things are not looking too good on that front either, in respect of the medium-term strategy. On the basis of forecasts of last year, public expenditure over the next three years will be up by £7 billion, £9 billion and £15 billion respectively. That is a total of £31 billion. But it is not real resources, not real money. Those are inflationary increases. So things do not look too good even on the public expenditure side of this fiscal policy. On the taxation front, the Budget raises an extra £430 million. When the £1 billion that is already going back into the economy, as a result of independent taxation, is taken into account, we have a minus figure. So the fiscal stance is not very tough. It does not seem to buttress very well the monetary policy, which itself is a shambles.

The Chancellor and the Government are now in a very tight corner--and the Chancellor knows it. If he introduces tough measures to get inflation down, the next election will be lost ; if he does not introduce tough measures to get inflation down, the next election will be lost anyway. He is in a corner, and he cannot get out of it.

Mr. Major : What would the right hon. Gentleman do?

Mr. Davies : Opposition Back Benchers do not have to make recommendations. Indeed, I commend the Opposition Back Benches to the Chancellor--it is a very comfortable place.

The present Government have had one of the easiest and most favourable 10- year periods since before 1914. They could have used those 10 years to build a foundation for the much more difficult 10 years that Britain will face in the 1990s. They neglected to do so, and for that reason, if for no other, they deserve to lose the next election, and they will do so.

7.20 pm

Mr. Barry Field (Isle of Wight) : The point made by the hon. Member for Sedgefield (Mr. Blair), who, unfortunately, is no longer present, about short-termism was entirely answered last week by my right hon. Friend the Chief Secretary to the Treasury. He pointed out that since the war we have had 17 years of Labour government and 27 years of Conservative government. Under Labour Governments, our living standards increased by 14 per cent. and under Conservative Governments by 78 per cent. There could not be a better indication of how the fiscal and financial policies of Conservative management have brought achievements of lasting benefit to our nation.

The abolition of the composite rate of taxation is welcome. It will benefit the lowest paid in society, who hitherto have been prevented from recovering the tax that they pay on building society accounts. They find such accounts useful and convenient places to deposit their money. It will also be of much benefit to children and grandchildren. More than a few grandparents have opened

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accounts for their grandchildren, and hitherto they have been prevented from recovering the tax paid on those accounts. My right hon. Friend the Chancellor said that he is mindful of the administrative and enforcement problems that abolition of the composite rate will create. Having been a director of a building society, I should point out to him that, annually, building societies send a voucher of the interest paid to each account holder. I cannot see why that should not become a tax credit voucher, which would minimise the administrative disruption that abolition will cause the Treasury.

I was pleased to hear my right hon. Friend the Chancellor express concern about how the credit and finance institutions have encouraged people to take on further debt. At a recent meeting, the archdeacon of the Isle of Wight, Tony Turner, told me that he had monitored the amount of unsolicited mail that he had received in the past year. He received 41 letters, all encouraging him to get deeper into debt. That is a matter of considerable concern, and I have suggested to my right hon. Friend that the finance industry should make some contribution to debt counselling agencies. That would be particularly welcome, and I do not think that there is a downside to that suggestion. Brewers make considerable funds available for alcoholism counselling. No one suggests that the brewing industry causes alcoholism, so I do not see why the finance industry should not make some contribution to debt counselling.

The point made by the hon. Member for Sedgefield about training in British industry is entirely answered by an article in The Echo on 13 March. Its headline read "Open Doors for Women". It announced that an additional 400 jobs will be created for women in my constituency by--and this is a name to be conjured with within the Conservative party at the moment--Westland Aerospace. It has £16 million worth of new orders from

"McDonnel Douglas of the USA, Dornier of West Germany, and Hispano Suiza, part of the French based aero engine group."

The tax allowance on training and enterprise councils and the concession for women on workplace nurseries will be welcomed. Curiously, the abolition of VAT on inshore rescue particularly affects my constituency. The Royal National Lifeboat Institution builds all its inshore rescue craft in my constituency and employs many women in its factory at east Cowes.

I should not like to congratulate my right hon. Friend the Chancellor on making a tax concession for TECs without placing on record my grateful thanks to my right hon. Friend the Member for Sutton Coldfield (Sir N. Fowler) for granting my constituency a TEC. My constituency fell outside the original parameters for TECs, but his intervention and representations from industrialists led to that decision being made.

Will my right hon. Friend the Chancellor solve a long-running conundrum about national savings? I have no ideological problem with national savings, but, having been a director of a building society and a member of the Conservative party all my life, I cannot understand how we believe in the free enterprise economy but continue to have a state mechanism for savings. Perhaps my right hon. Friend will sit me down on his knee and give me a cup of Treasury cocoa--

Mr. Major : I shall certainly give my hon. Friend the cocoa.

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