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Last night I watched the "Panorama" programme--I suspect that many other hon. Members also watched it--on the slump and the way in which it is spreading. I saw the Secretary of State for Trade and Industry say that he was certain that

"industry is poised to respond to a growth in demand".

How can he say that? It did not happen last time. When the Government's policies wiped out 20 per cent. of Britain's manufacturing capacity in the early 1980s and then let credit rip in the mid-1980s, British industry could not respond to the rise in demand. The result was, as the Secretary of State for Trade and Industry should understand, that Britain had its first ever deficit in manufactured trade, a huge balance of trade deficit and then, of course, a gigantic balance of payments deficit--so big that it remains at the figure that the Chancellor gave us this afternoon, despite two years of pressing deflationary policy. We still have a balance of payments deficit that would have been utterly unacceptable in any previous period--although in previous periods our economy never had the benefit of North sea oil and self-sufficiency.

Yet again today the Chancellor did nothing to stop history repeating itself as tragedy. There is no strategy to this Budget--merely expediency. There is no effort in this Budget--or in any other of the Government's policies-- to help to create an environment in which productive industry can thrive and become more competitive. There was no sign--not so much as a hint--of any significant policy for promoting industrial investment in research and development and technology transfer. The best that we got was a way--a welcome way--of trying to help companies that have hit particular difficulties as a result of the Government's policies. There was no commitment to--and certainly no practical means were proposed for-- maintaining macro-economic stability. In 12 years the Government have never managed to achieve the sustained low interest rates that are essential to that. The only way in which they have ever got inflation down is by throttling the economy with high interest rates--the opposite of stability.

In 12 years, the other critical ingredients of competitiveness and of combating inflation--sustained improvements in the transport system, training and education--have never been afforded the necessary priority by the Government. They were certainly given scant attention today. It appears that education--the cause of great anxiety among parents, the public and industry--is now made into a poll tax plaything, and the cuts go on. Let me give an example. Last week, 17 Conservative-controlled local education authorities announced £54 million-worth of additional cuts in education--the only reason being that they wanted to try to stay within the limits set down by the Government, who are supposed to have education close to their heart. Now, if the Government have their way, education is to be balkanised into a tangle of opted-out schools and underfunded colleges as the chaotic experiments of the 1980s are extended into the 1990s. Now we know what the Prime Minister really meant when he told The Times a few weeks ago that, although education was "closest to his heart", his thoughts were not yet "fully worked up". "I approach this issue,"

said the right hon. Gentleman,

"with an instinct that something needs to be done and we are trying to determine exactly what it is."

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While the Prime Minister is "trying to determine" exactly what he wants for education--while the Prime Minister is dithering--millions of other British people with children approaching school age and of school and college age are worrying. Industrialists and potential employers are urging a new scale of provision and performance and investment in education. All are looking at our neighbours who are making the proper investment in education and training so that their people reap the rewards of new skills and their economies reap the rewards of extra strength and competitiveness.

The Chancellor of the Duchy of Lancaster seems to think this funny. He is going to have to explain how it is that, after 12 years of Tory Government, Britain still has skill shortages in the middle of a deep slump. He will have to explain why numerous industrialists and employers--people who are his political allies--hotly condemn the Government's absolutely miserable record over all these years. From this Government and in this Budget, we get no commitment comparable to that made in our neighbouring competitive countries. There never will be that commitment.

In 12 years of power, with £100 billion-worth of oil revenues, £62 billion-worth of assets sales and the highest tax burden in British history, the Government have never made the necessary investment. Just last week, we heard the Prime Minister say :

"We have been going in a particular direction for 12 years and we shall continue to go in that direction".

I suppose that that was intended to reassure the Finchley matriarch and her remaining followers. The Prime Minister's words are a warning to all those who, during these 12 years, have been engulfed by spreading poverty. It is a warning to the victims--those who have had security and success snatched from them by unemployment, high interest rates, business failure and high mortgage rates. It is the victims of industrial decline, and decay in the essential community and welfare services, who should be warned. The Prime Minister's words are a warning that the Government, who are

"going in the same direction"

as they have been for the past 12 years, will take Britain and the British people further behind.

In the depth of recession, we needed a Budget to build out of recession. We needed a Budget that helped to lay foundations for future economic strength. Instead, we got a Budget from a Government who will not learn from their own failures and--even worse--will not learn from the success of others. The British people know that that is true. They know, too, that this Government ruled over the wasted decade of the 1980s. When the Government call the general election and give them the chance, the British people will stop them wasting the 1990s.

5.16 pm

Mr. John Biffen (Shropshire, North) : The Leader of the Opposition has an enviable record as a Welsh rugby union coach, but as I watched him at the Dispatch Box this afternoon it was more in the discipline of cricket that I judged him. He resembled nothing so much as the batsman who had found that the wicket had turned overnight. He has discovered--and it is much to his distress--that the Conservative party does not intend to limp across the election battlefield with the ball and chain of the

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community charge. To the right hon. Gentleman's discomfort, the Conservative party has taken a radical way out of the dilemma and met the challenge.

Mr. John Lee (Pendle) : We have shot his fox.

Mr. Biffen : I do not think that the Leader of the Opposition has ever been on a horse in his life--and if he has been on a horse, he has certainly never been hunting, so we can now return to the more relevant analogy afforded by the cricket field to describe the proposals for changes in the financing of local government. The right hon. Gentleman showed his irritation because the debate has shown the striking reality that so much of local government is conducted at the behest and under the control of central Government. From my study of the life of Aneurin Bevan I have always judged that to be the case. It was Aneurin Bevan who told the story of his pilgrimage from the meanest local authority in Monmouthshire up to Westminster--always looking to discover where the reality of power lay. I say that for the benefit of Welsh Labour Members, who know in their hearts that it is true.

What has been adduced today is an attempt to bring about a better balance between the forces of finance and authority. Anyone who has any doubts about where authority has always sought to be in this matter need only think of Shirley Williams who, as Secretary of State for Education and Science, tried to require universal comprehensive education throughout England and Wales. That is an indication of the underlying realities.

The Chancellor's remarks about the future financing of local authorities will form the basis of a very relevant debate, and I believe that the balance of judgment will conclude that wise decisions have been made. Given the way in which the judgment has been presented, one could suppose that it involves a hypothecated increase in value added tax for the replacement of the community charge or part thereof. Of course, that cannot be so--it is merely the point at which the debate opens. We are talking about the use of the wider resources of central Government taxation for the financing of local authorities, not about any particular aspect of central Government taxation.

Mr. Kevin Barron (Rother Valley) : Why did the right hon. Gentleman serve in a Government who reduced the percentage of money provided for local government by central Government?

Mr. Biffen : I am happy to answer that question at once. It was--

Mr. George Foulkes (Carrick, Cumnock and Doon Valley) : A mistake.

Mr. Biffen : Yes, it was a mistake. I am prepared to appear before any audience with the hon. Gentleman : I will plead my mistakes and he will plead his certainty, and I know who will get the vote. The issue of the public sector borrowing requirement has returned to our Budget debate after an absence of some time. I feel no joy at it once again being part of the Budget debate, but I accept that, with the general state of the economic cycle, it is reasonable to budget for a certain amount of borrowing. That also places a restraint on our rhetoric about and our objectives for income tax. From now on income tax, with other central Government taxation, will have to bear its responsibility in the financing of local government. That does not mean that we

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cannot have as our objective an income tax rate of 20p in the pound, but it will be a considerably more difficult objective to secure, and our rhetoric must adjust to that.

I wish to touch on just two or three points because many other hon. Members wish to take the great debate forward. I do not pretend that there is a great theme running through my speech. I cannot deny my initial appreciation that the right hon. Member for Islwyn (Mr. Kinnock) should be so discomforted about the replacement of the community charge.

My right hon. Friend the Chancellor rightly laid great emphasis on the need for a business revival. I declare an interest, and my business interests are listed in the Register of Members' Interests. I hope that when the Finance Bill goes into Committee, some thought will be given to the current levels of investment allowances. I did not hear that matter feature in my right hon. Friend's speech, but I hope that it is not out of his mind.

I do not think that any hon. Member expected interest rates to feature in my right hon. Friend's statement. I can remember Budgets, even from this Government, which concealed interest rate changes. I see the author of one- -my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) --sitting not so far from me. There have been other diversions this afternoon, but continuing and substantial reductions in interest rates would be most advantageous of all to the business community.

It is obvious that we are under the shadow of a general election. We should not be too sensitive about that--it is expected that we should so react. I have noted a certain reticence by Opposition spokesmen. I do not say that the Labour party has a hidden agenda, but there are certain aspects of the development of economic policy that it would prefer to elaborate beyond the electoral chasm

Mr. Allan Rogers (Rhondda) : What are they?

Mr. Biffen : It is a process of education--a sharing of knowledge with the hon. Gentleman. I have a document

Mr. Kinnock : It is the 1979 manifesto.

Mr. Biffen : I assure the right hon. Gentleman that it is much better than that. It comes from the Institute for Public and Policy Research--a recently furbished intellectual hothouse that is part of the redesigning of the Labour party to make it fit for alliance with the Liberal Democrats. It is presided over by Lady Blackstone and Lord Donoughue, the aristocrats of Labour. They have commissioned a Mr. John Grieve-Smith who worked in the economic section of the Cabinet Office and the Treasury--what a lineage.

With that background, the document has been presented by that body, which moves so closely with the Leader of the Opposition and his Front Bench--

Mr. Derek Foster (Bishop Auckland) : No, it does not.

Mr. Biffen : The hon. Gentleman should not deny it--that would upset Lord Donoughue's day.

The Times said :

"A report by the Institute for Public and Policy Research says that Britain's entry into the exchange rate mechanism has made the case for a co -ordinated pay strategy even more urgent Mr. Grieve-Smith says that the government must reach agreement on pay policy with the CBI and the TUC not as a short-term expedient but as part of a long-term strategy for economic management."

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Well, there are none like the old ones. Those of us who recollect the 1960s and 1970s will feel a certain nostalgia about that. I hope that I am giving a little good-natured guidance to the Leader of the Opposition. I promise him that I will be a better friend to him than most of those who sit around and about him. I want to know why those distinguished academics were scooped out of the Treasury and put under the wing of Lady Blackstone. The process is intellectual beyond belief. It is dotty. They want the TUC to carry out an incomes policy backed by Government statute. Yet only 38 per cent. of employees belong to trade unions. There has been a remarkable fall of about 25 per cent. in the unionised work force since 1979. The very forces which could not deliver in the 1960s and 1970s are being invoked now by the intelligentsia who flank the Leader of the Opposition. This time, they offer the prospect of success from an even more rickety machine.

I tell the Leader of the Opposition that that is not part of the hidden agenda--it will be part of the open debate at the coming election. There will be a growing interest, especially among the Liberal Democrats, to know where the right hon. Gentleman stands on these issues. He has had a comparatively easy time with endless good-natured discourse across all the affairs of the nation and the world without ever having to reveal very much. I must tell him that his salad days are over. We are approaching an election and a debate, and I look forward to that.

Several Hon. Members rose--

Mr. Deputy Speaker (Mr. Harold Walker) : Order. A large number of hon. Members who have sat through the debate so far want to take part. Brief speeches would be appreciated.

5.27 pm

Mr. Stuart Bell (Middlesbrough) : Thank you, Mr. Deputy Speaker, for calling me so early in the debate.

My right hon. Friend the Member for Islwyn (Mr. Kinnock) was right to draw the attention of the House to the fact that 3,000 jobs are being lost and 100 businesses being liquidated every day. That contrasts with the Chancellor's speech, which lasted one and a quarter hours, but did not once use the word "unemployment". The right hon. Gentleman said that his Budget was intended to assist business to recover from the recession in the short term and to invest in the long term. The Government have had 12 years to provide such a Budget, but they have not done so, and they did not do so today.

We hear a great deal from the Tory party about recessions being due to economic cycles. We know all about the cycles of the Tory party. We can go back to Anthony Eden in 1957, who introduced a Budget in the April that reduced income tax by half a crown, and another in the autumn, after an election, that increased it. We can go back to the great dash for growth by Anthony Barber in the early 1970s, which gave us the inflation that Labour inherited in 1974.

The Chancellor heaped great praise on his predecessor, the right hon. Member for Blaby (Mr. Lawson). He talked of economic miracles. He was proud of the fact that there were economic miracles. At the Dispatch Box, he read press cuttings from Germany, the United States and Japan showing how Britain was having an economic miracle. Today, we have had some of the truth from the new

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Chancellor of the Exchequer who said that he did not believe in miracles. It has taken us 12 years to get such an admission. The Chancellor said that inflation would be down to about 4 per cent. in the autumn, and no doubt there is a plan to bring interest rates down as well so that by the autumn they are about 10 per cent. We see how the Government and the Chancellor have lost control of the economy, to such an extent that the Chancellor was unable today to announce a reduction in interest rates. We will have to wait until tomorrow in this three- instalment plan--the Budget today, a cut in interest rates tomorrow and the abolition of the poll tax on Thursday. It is not surprising that the Prime Minister is tired. I have every sympathy with him. To have to preside over such a week must be trying for him.

We know all about the cycles of this Government. The first cycle from 1979- 81 gave us inflation of 21.9 per cent. We have been here before. In 1981- 83, unemployment was 3 million. Again, we have been here before. We see the simple equation between high interest rates, lowering inflation and unemployment. Again, the unemployed are taking the full strain. Only recently, Barclays bank announced 4,000 lay-offs countrywide, and the Midland bank announced 5,000 lay-offs during the year. Years ago, joining the bank meant a job for life. That is no longer the case. One of the consequences of the past 12 years of Thatcherism has been the end of the security of a job for life in the service industry, just as happened in the early days in manufacturing industry.

Those of us who try to speak early in the Budget debate each year have argued all along that the consequences of a single club policy would be high interest rates. We said that jobs would be destroyed, and jobs have been destroyed. We said that firms would be destroyed, and firms have been destroyed. We said that tax receipts would be reduced, and we have seen that again in today's Budget. We said that social security payments would be increased, and we have seen that again in today's Budget.

It is hardly surprising that falling receipts and rising social security payments mean that the public sector surplus, of which the Government were so proud for so long, is now on the increase, and we have a PSBR of £8 billion. The Chancellor did not tell us from the Dispatch Box what the PSBR was forecast to be in the year ahead. No doubt that again is a consequence of the fact that we shall have to wait until Thursday to discover the true consequences of the abolition of the poll tax.

Opposition Members have consistently said that squeezing inflation out of the economy cannot be the only goal of an economic policy. There has been no industrial strategy, no training strategy and no planning for the future. All we have had is the encouragement of a never-never land of gearing and credit which reminds me of Oscar Wilde who, when he died in Paris, said that he was dying as he had lived--beyond his means.

The British consumer has, for the past 12 years under the Tory Government, been living beyond his means, encouraged by a Government who do not believe in planning, in intervention or in steering the economy towards manufacturing. On the one hand, they said that the citizen must cut excess borrowing and spending, but on

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the other they encouraged him to borrow more and to spend more, to live for today as if there were no tomorrow. Such a policy can clearly be described as short-termism.

The medium-term financial strategy, the Government's great strength in the early years, their great policy on which everything was based, gave us short-termism. We have heard nothing today about soft landings. We have had a variety of definitions of a recession. One was that a recession occurs when economic growth falls for two quarters in succession. Dr. John Bridge, chief executive of the Northern Development company, has described it as negative growth. I prefer the more mundane and earthly description of a former President of the United States, President Truman, who said :

"It's a recession when the man next door loses his job. It's a slump when you lose yours."

There is no prospect, Mr. Deputy Speaker, of you losing your job, but we can see clearly where the Government have taken us. Between 1979 and 1981, Teesside lost so many jobs that the unemployed could have filled Ayresome Park football stadium twice over. As my right hon. Friend the Leader of the Opposition said, the recession is in the south and in the midlands, but it is creeping into the north. We have seen that over the past few weeks. British Steel has told the public on Teesside that it will be shedding 360 jobs in the next financial year. The unions claim that the figure is more likely to be between 500 and 600. Smaller firms are going into liquidation- -50 jobs here and another 50 jobs there.

The Chancellor said today that the car industry was growing in strength, but Minories is closing a garage with a loss of 25 jobs. Even ICI, the great provider of work in our area, is introducing local working arrangements which will reduce jobs. This is a recession by 1,000 cuts.

Mr. Richard Holt (Langbaurgh) : The hon. Gentleman likes to give the downside on Teesside, but perhaps he would like to give the upbeat side with the number of new jobs that have been provided by MTM, a growing and expanding chemical company. Our local chamber of commerce has said that the real problem is that we will not have enough skilled people in future rather than a shortage now. I understand that the hon. Gentleman has unemployment problems in his constituency, but my constituency has not, and that is in Teesside as well.

Mr. Bell : I anticipated the hon. Gentleman's question, and I have the unemployment statistics for his constituency of Langbaurgh, where 4,532 people, or 6 per cent. of the work force, are out of work. In Stockton, South, another constituency close to mine, 4,507 people, or 10 per cent. of the work force, are out of work. The hon. Gentleman might soon have to address the question of those 4,532 people who are out of work. When he says that there is a shortage of skills, he must ask who, after 12 years of a Tory Government, is responsible for that. I shall be glad to give him the Labour party's programme, worked out by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith), which shows clearly the Labour party's training policy so that those skills will be provided in future. The Chancellor mentioned some benefit to football last season and some new scheme for sport in his Budget today. He reminded me somewhat of the super- sub who had been brought on to the field with only 10 minutes to go, whose aim was to score the spectacular goal. There he

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was, hovering on the touchline. There he was down by the corner flag. There he was afraid to be caught offside. There he was running away from the ball--anywhere but where the action was.

This is the Chancellor's first Budget but it may well be his last. We have had a one-club policy, and it may be that we shall have a one-term Chancellor. He was timid and unimaginative. He did not produce a Budget for jobs or for people. He has lost control of the economy. As I said, he could not even tell us whether interest rates would be reduced tomorrow. He will be relieved of his job as soon as the referee blows the whistle and ends the game, when we have a general election. Then, and only then, will he and the rest of his team be put out of their misery.

5.39 pm

Mr. David Knox (Staffordshire, Moorlands) : In the Budget debate last year I followed the hon. Member for Middlesbrough (Mr. Bell) and it is my good fortune to do so again today. The factual bases of the hon. Gentleman's speeches are usually accurate, but I detected two inaccuracies today. First, he said that the Chancellor did not refer to unemployment, when he did. Secondly, he suggested that R. A. Butler had reduced income tax by 2s 6d in the pound in 1955 ; in fact, it was only 6d, which is a fifth of 2s 6d. We tend to forget those values now that we are on a different system.

I congratulate my right hon. Friend the Chancellor on his Budget--the first, I hope, of many. His two predecessors set high standards with their Budget speeches which were well constructed, to the point and commendably brief, and my right hon. Friend maintained those standards.

At this stage in a Parliament it is inevitable that the Budget will be judged on its likely electoral consequences rather than on its economic consequences. My right hon. Friend got it right on both scores. It is an extraordinarily good Budget.

I agree with my right hon. Friend the Member for Shropshire, North (Mr. Biffen) about the increased proportion of local government expenditure which is to be met in future by central Government. That is long overdue. Taxes raised locally have been contributing far too much to local government revenue for too long, because most of the real decisions about local government expenditure are taken in the House rather than locally.

The reduction of £140 in the poll tax--I call it the poll tax although I appreciate that my right hon. and hon. Friends on the Treasury Bench have to use the term "community charge"--will be very welcome in my constituency, as it will be throughout the country. It is unpleasant that VAT will have to go up by 2.5 per cent. to finance the reduction in the poll tax. The Labour party has been criticising the Government for some time because too much local government expenditure has been met locally. If it is to be met centrally, the consequence is that it has to be paid for, either by increasing taxation or by reducing expenditure on other things. The Opposition outburst when my right hon. Friend the Chancellor announced the 2.5 per cent. increase in VAT suggested to me that they were dodging the task of facing the real issues and the hard decisions that have to be taken by any Government.

Mr. William Ross (Londonderry, East) rose--

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Mr. Knox : I am not giving way--Mr. Deputy Speaker asked us to be brief.

I welcome the changes announced concerning child benefit. The initial changes are small but, most important, the Chancellor intimated that child benefit will be index-linked to inflation from next year. Some of us have been very concerned about child benefit for some time. We are delighted that in future we shall not have to rebel against the Government to show our opposition to their failure to uprate it.

I also welcome the changes in company taxation. We need only consider the state of industry to realise the necessity for a better cash flow if much of industry is to survive. Therefore, it is particularly important that the Chancellor should have proposed changes in corporation tax, an increase in the VAT threshold and the other measures. Those should be helpful in strengthening our industrial base.

On the general state of the economy, a year ago the main economic problems facing the country were inflation and the balance of payments. Now the problem that looms above all others is the recession, although the balance of payments is still a cause for concern. As a result of Government policies over the past couple of years, inflation has been largely brought under control. It has fallen in recent months and it is likely to fall to about 4 per cent. by the end of the year, as my right hon. Friend the Chancellor pointed out.

Unfortunately, the policies of high interest rates and tight credit that have been so successful in curbing inflation are the same policies that have forced us into recession. Output is falling, profits are falling, investment is falling and, alas, unemployment is rising. That is not a happy position, and action must be taken to reverse those trends. There is urgency about it because of the time lag between taking action and the action becoming effective. The economy desperately needs the stimulation to growth which only lower interest rates can bring. I welcome the action that the Chancellor has already taken in that respect. I urge him to continue the process over coming months. Lower interest rates are essential if we are to avoid a more serious recession than that of 1980-82 when the manufacturing sector was particularly hard hit ; already there are signs that it is being badly affected again.

I often wonder if the importance of manufacturing industry is fully appreciated. Obviously, it has to try to meet the domestic demand for manufactured goods and to keep imports to a minimum, but it is also important in relation to our export performance. Government figures show that, whereas about 80 per cent. of manufactured output is internationally tradeable, only about 20 per cent. of the service sector is, so if we are to have a healthy international payments position we must have a strong competitive manufacturing sector. Alas, the recent history of manufacturing gives little cause for comfort. Between December 1973 and December 1990--a period of 17 years--output in manufacturing industry rose by only 3.5 per cent. The House will note that that period covers the terms of office of the last Labour Government and of the present Conservative Government. There is, therefore, no party political capital to be made from that poor performance.

It is worth recalling that the increase of about 3.5 per cent. in manufacturing output in the last 17 years compares with an increase of about 70 per cent. in the

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previous 17 years. Of course, that sorry tale is not just the fault of the Government. The conduct of management and of trade unions has left a great deal to be desired.

The Government can and must contribute to the strength of the manufacturing sector, particularly by improving the economic environment in which it operates. In that respect, as I mentioned earlier, lower interest rates are essential for three main reasons. First, they would help to increase demand for goods produced by manufacturing industry. Secondly, they would encourage higher investment in new plant and machinery, which would improve efficiency and increase capacity. Thirdly, they would ensure that the owners of capital received a higher return from investment in manufacturing industry than from fixed-interest securities.

I mentioned earlier that we still have a balance of payments problem, although it is less serious than it was a year ago. It is pleasing to note that the figures for 1990 showed that the deficit had declined by a third compared with the previous year. But we must remember that economic growth has been held back in the past year. When that happens, the balance of payments tends to improve. The great worry is that when the economy starts to expand again, the deficit will increase once more. When we consider that we have been in deficit to a fairly substantial extent over the last four years, the worry is that we shall face very large deficits again in a year or two.

The only conclusion to be drawn is that there is something fundamentally wrong with the exchange rate of sterling and that an adjustment is needed. We are now in the exchange rate mechanism of the European monetary system. Membership of the ERM is important and stable exchange rates are important for the manufacturing sector in particular. I believe in the disciplinary effect on inflation of British membership of the ERM, and I have no desire to undermine our membership, but it would be strange if we had got the value of sterling right when we joined--indeed, it seems that we did not. I believe an early adjustment should be made, but it should be made clear that it is a one-off adjustment, so that we in no way undermine the disciplinary effects of membership of the exchange rate mechanism. It should be made clear to foreigners, and to those who are worried about confidence in sterling, that it is a one-off move and that we strongly believe in the discipline of the ERM. I believe that it is very important that we should be in the exchange rate mechanism, but at the correct level for sterling, because in that way the current account of our balance of payments can be in balance over the years. It also provides price stability to importers and exporters and anti-inflationary discipline. Moreover, if we adjusted the value of sterling within the mechanism on a one-off basis it would be possible to lower interest rates because it would not be necessary to keep them at their present high level to maintain the present value of sterling.

5.50 pm

Dr. David Owen (Plymouth, Devonport) : The House has listened to what will probably be viewed as the first social market budget. I wish that it had been produced by a Social Democrat Chancellor, but since the Conservative

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party seems to be joining the Christian Democrats, perhaps we may agree that we are now witnessing social market economics in this country.

The social priorities spelled out in the Budget are welcome and totally new for this Government. They have not been demonstrated for eleven and a half years. For example, the emphasis upon mortgage tax relief being confined to the standard rate taxpayer is thoroughly welcome and socially correct.

The decision to increase child benefit by 12 per cent.--after its real value has fallen during the past eleven and a half years--although modest, is extremely welcome and seems to mark a major shift in social priorities because the Chancellor accompanied it with a commitment that child benefit would go up in line with inflation in future, as with all other basic benefits. We welcome that strongly. The third social element in the Budget which is extremely important is the 15 per cent. increase on cigarettes, which are a killer drug and have been treated with kid gloves for far too long by this Government. That is the right social priority, as was the courageous decision to increase petrol by 15 per cent. because, in social terms, cars are an expensive element in the transport infrastructure. I would not welcome those social changes were they not also accompanied by some worthwhile changes on the supply side of the economy, aimed at improving efficiency and competitiveness of the market economy, which is necessary for a social market to operate effectively, as one cannot finance some of the social concerns unless the market is operating efficiently.

That leads me to the crucial test of the Budget--has the Chancellor played fast and loose with inflation and with consumer spending? I acquit him of the charge of doing so. People will say that this is an election Budget, and the decks are certainly cleared for an election in June, October or next year, but given the circumstances, it is not an electoral-bribing budget. It is not as irresponsible as some of the Budgets that the right hon. Member for Blaby (Mr. Lawson) triggered off, particularly before the 1987 election, which caused a flagrant consumer boom. However, the Budget will have its electoral payback, because I would not be surprised if the international market were not prepared for a substantial cut now in interest rates. That is also the core priority.

By emphasising business, the Chancellor has chosen the right medium-term priority. My only anxiety is that by relaxing corporation tax and reducing it--although in many ways that is welcome, especially as it will give extra liquidity to companies that are being severely squeezed, which will get worse in the next few months--the corporate sector will act as it has so often done before when there has been a little relaxation, and will take the pressure off the wages front. I only hope that it does not do so, because the one fundamental that must come from the squeeze is a permanent reduction in our tendency to pay ourselves more than we earn. If we are to stay within the exchange rate mechanism--especially at present exchange rates--unit costs have to be reduced, and our competitiveness has to improve. That means wage increases at a level of 4 or 5 per cent. That is why I also welcome the incentives for more profit-related pay, which also has a social market connotation. That is also why I welcome the principle of shares for all employees and the carrot to introduce that. I welcome the Chancellor's implicit statement that he

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would not hesitate to use the stick to introduce that--and he may well have to carry that out. It has been scandalous that top executives have given themselves share options at attractive rates but have not provided similar options throughout the firm. Again, that is another welcome switch towards the social market economy. The fundamental requirement is to be bold over interest rates. If I was Chancellor, I would give the world a little time to absorb this Budget. Because of the changes in local government financing, it is more complex than it appears at first sight, but when the world has absorbed it, people will realise that the Chancellor has not taken risks with the economy, and he will be fully justified in taking 1 per cent. off interest rates now and a further 1 per cent.--perhaps in two tranches of 0.5 per cent.--during the next few weeks. If there are risks to be taken on the back of this Budget, it is urgent that that should be done by cutting interest rates quickly. For a variety of reasons, it was not easy to reduce interest rates in the late autumn last year and in the early part of this year, although the situation demanded and necessitated it. Now the room has been found for a substantial cut.

As regards the ingenious--in my view, wholly correct--massive shift in local government finance, people who think that this is a boring Budget have not yet realised the full impact of that shift. The Budget will transform local government finance and it is high time that that happened. The crucial decision by the Chancellor--which any Chancellor would make given the total mess that local government finance is in--was to raise compensating revenue by a mechanism that he knows will deliver it, by raising value added tax by 2.5 per cent. That was the right way to claw back that money.

In my judgment, increasing VAT was right in any case, as our VAT rate has been well below the average in the European Community. Although it is not necessary that everyone has exactly the same VAT rate for the proper functioning of a European common internal market, it is a distortion if there are marked discrepancies. Therefore, it was logical and inevitable that we would raise our VAT rates. Doing so at this time, with inflation decreasing fast for other reasons, is wise. It has the added advantage that the poll tax fed through to the retail prices index in a dramatic fashion, and the Chancellor has assured us that the increase in VAT will be covered by the cuts in poll tax.

The next logical step, which I imagine will be announced in the next few days, is to take three elements out of local government finances. The first two are the fire service and the police, both of which are carefully monitored and are effectively agency-run by local government at the moment, with the Home Office operating strict manpower controls, and also inspectorates. The third element has to be education. That has already been advocated by the Social Democrat party to the Secretary of State for the Environment's present review. Increasingly, SDP policy seems to be followed by the Government with a rapidity exceeding that of the Labour party.

If education comes out of local government spending--as is right--it will not be as much of a centralising measure as some people imagine, because of the greater degree of self-management in schools. It is also extremely important that that change is accompanied by a considerable strengthening of Her Majesty's inspectorate of schools. Also, a greater measure of independence, radicalism and toughness on education policy will have to

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be brought into the inspectorate. I hope that the inspectorate will not continue as a mutual support agency for the Department of Education and Science. If it had a measure of outside independence, such as through the Audit Commission, it would be greatly improved. Such a change would alter the whole structure of local government. It is logical that there should be single-tier authorities, but they should be flexible. They do not automatically have to be the same--the units of local government vary in different parts of the United Kingdom, with considerable benefit. That would lead to the question of how to raise the money. We and the Liberal Democrats would prefer a local income tax as the way of raising the revenue for the smaller number of local government services.

I believe that as far as possible local government should raise the revenue for the services that it provides with the exception of the needs element, with the extra provided by central Government to compensate for areas of low pay, where people cannot raise all the revenue themselves.

I should prefer a local income tax, but it seems that there will be a property tax. I urge the Front Benches of the Labour and Conservative parties to get together, at least informally, to introduce a property tax that they could both support. After the fiasco of the poll tax, a new property tax should not be introduced which would be subject to massive change.

Before people think about that with mock horror, they should remember that there was a moment when the Government were about to change the state earnings-related pension scheme. However, they drew back from that idea-- prudently, in my view. There are a few matters which must stick across the political divide and which must not be subject to massive change before a general election. State pensions is one such matter, and the basic structure of tax is another. It is no good the Government introducing a new property tax that is not supported. Therefore, although the Conservatives may want the element of head tax to be built into the property tax, because it means that they should not have to eat so many of their words on the poll tax, I beg the Government not to introduce it. It is clear that the Labour party will not support it, and neither shall we. Not many people believe that it would be a sensible way of introducing a property tax.

The Government should opt for the pure property tax without the add-on factor, which is merely a face-saving device. It will not lose them much, as they have had to eat nearly every word about the poll tax. They will not be able to recoup everything by this extra add-on. Definite benefits will accrue to a political party that admits that it has made a complete foul-up and has changed its policy. I say that without any particular interest. I and my party attacked the poll tax from the moment it was introduced. It was the wrong tax. It was unfair, and it was an administrative nightmare. It seems that it will fall because of its administrative costs and because of the inability to collect it rather than because of any other factor. However, it also deserved to fall because of its unfairness. The Budget matches the difficult and strained circumstances. Nobody can be certain that we shall come out of this recession in the rather optimistic time scale mentioned by the Chancellor. Much will depend on the international economy, for which the signs are reasonably optimistic. There seems to be an upturn in the United

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