House of Commons Hansard Debates for 30 Apr 1991

Madam Deputy Speaker (Miss Betty Boothroyd) : Order. A great many hon. Members wish to speak in the debate, so brief speeches would be very much appreciated.

5.15 pm

Sir William Clark (Croydon, South) : Following the speech of the hon. Member for Derby, South (Mrs. Beckett) one thing has been made quite clear--that the Labour party's top rate of tax would not exceed 59 per cent. for any individual. I am delighted that she confirmed that fact.

This was a good Budget. My right hon. and learned Friend the Chief Secretary was right to draw attention to the fact that, during the last few months, interest rates have come down from 15 to 12 per cent. Some of the forecasts--whether from the Confederation of British Industry or the various chambers of commerce--have overdone it. I do not know whether that was in an effort to stampede my right hon. Friend the Chancellor of the Exchequer into a precipitate reduction of interest rates. I am absolutely convinced that he is right to take the reduction of interest rates step by step and to do nothing drastic, which would set off a consumer boom and put us back to square one. The CBI has said today that the recession is flattening out. I agree with the Chancellor of the Exchequer that, after the second quarter of this year, we shall probably come out of it. Come the autumn and next year, the economy will be in very good shape. Before I come to the points that I really want to make, there is one small question that I ought to raise. At the moment, farmers are having a fairly hard time. I cannot understand why the vehicle excise duty on tractors has been increased from £16 to £30. That increase is mistimed for the farming industry.

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In an otherwise excellent Finance Bill, I believe that clause 29 is petty. I do not know whether my colleagues on the Treasury Bench realise that mobile telephones are now a business tool. Particularly those people who work away from head office find that they are essential. I am the chairman of a company that insists that those of its employees who do not work at head office should have a mobile telephone so that we can get hold of them.

I was encouraged by the remarks of my right hon. Friend the Prime Minister when he opened a factory in Worksop the week before last. Somebody tackled him about the value of mobile telephones. My right hon. Friend turned round to him and said, "I couldn't do my business without them." He is not alone. A lot of people in business need a mobile telephone, so this clause is very petty. It will produce £10 million, yet one is talking about a Budget amounting to well over £200 billion.

We are playing around with a business tool. Let us not forget that the United Kingdom leads the world in mobile communications. It would be wrong to tax it. If the employee repays the employer for any private use of the mobile telephone, the employee becomes exempt from the tax. How will employers check on how many private telephone calls have been made on a mobile telephone? If that is the logic used by the Government, why are they stopping there? Why not surcharge private calls made by people who work at desks? I hope that my right hon. and learned Friend will look again at the tax, because it really is nonsense.

If it were a matter of saving face, we could introduce self-certification. We have introduced it for the taxation of married couples. One's wife can certify that she is not liable to tax, and consequently the bank or building society must pay her interest gross. We have a precedent, so an employee could certify that he or she did not use the mobile telephone for more than 1 per cent. of phone calls.

Mr. Robert Sheldon (Ashton-under-Lyne) : Having read the clause dealing with mobile telephones, it is not clear that avoidance of the charge will be the easiest thing in the world, and does that not make it likely that £10 million could be an overestimate of the revenue to be raised?

Sir William Clark : I agree with the right hon. Gentleman. Although the Exchequer might raise £10 million in revenue, the tax puts a burden on business by making it necessary to check whether an employee is using a mobile telephone for private calls. If we must tax mobile telephones, we might as well tax private calls made by people who work at desks.

I was interested in the exchanges between my right hon. and learned Friend the Chief Secretary and my hon. Friend the Member for Brentwood and Ongar (Sir R. McCrindle). The Government must look again at clause 50. Despite the Government's statements, there is no question but that it is double taxation. If one has paid one's assessment for 1985-86, no more tax is payable for that year. However, more tax could be paid depending on the accounting date of the building society. If the building society's accounting year ends on 31 March, there is no tax to be paid, but if it ends on 30 September, tax would be charged not only on the full year 1985- 86 but on another

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six months' interest. If the building society accounting year ended in May, there would be considerable extra tax to pay.

I have nothing to do with the Woolwich, but that building society won its case in the High Court in July 1986. The case went to the Court of Appeal in April 1988, and the Woolwich lost. Last October, the case was taken to the House of Lords, and the Woolwich won. If my right hon. and hon. Friends on the Treasury Bench cannot convince the highest court in the land that there is anything wrong, why was the Woolwich repaid £44 million? The money was repaid simply because the Law Lords said that it was double taxation and therefore should be repaid. An example of the anomalies and unfairnesses concerns the Leeds building society. Again I stress that I have no connection whatsoever with the Leeds. The Leeds and the Woolwich were working in harness, although the Woolwich brought the test case. Any lawyers in the House will know that, when there is a test case, anyone in similar circumstances benefits from that judgment. The Woolwich was repaid £44 million, but the Leeds remains £57 million out of pocket. That must be wrong, and the Government must look again at the matter.

My right hon. and learned Friend the Chief Secretary said that it would be a windfall for the building society but would not affect its members. I should have thought that, if the Leeds building society were to receive £57 million tomorrow, that money would go into its reserves. Those reserves do not stand idle ; they are invested. All the money in a building society belongs to the 30 million investors, so there is no difference between the building society and the investors ; they are one and the same, and all the money belongs to them.

Mr. Peter Bottomley : I agree with virtually everything that my hon. Friend has said, but he should make it clear that the House of Lords said that the subsequent regulations allowed for retrospection and therefore legalised the double taxation. The relief to the Woolwich turned on the rate of taxation, but the real issue is that Parliament did not expect to be imposing double taxation, yet the House of Lords said that it was double taxation. That is why the House of Commons has a rightful grumble, and that is why we want Treasury Ministers to think again.

Sir William Clark : I remind the House that counsel for the Government said in the House of Lords :

"Even if this amendment does impose double taxation, that is nothing to do with you because Parliament has willed it." My hon. Friend the Member for Eltham (Mr. Bottomley) is quite right. Parliament willed it, but it did so on the understanding that there was no double taxation. That is why we must go back and think again.

Mr. Tim Smith (Beaconsfield) : Is my hon. Friend aware that, when the Income Tax (Building Societies) Regulations 1986 that were made under the 1985 Finance Act were challenged by the Woolwich building society, the Government introduced a new clause at the Report stage of the 1986 Finance Bill. The matter was fully discussed and the Government said that it was not intended that there should be double taxation. The House of Lords has now found that Parliament approved double taxation by

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agreeing to that new clause, so we approved something that we understood would not arise. That is the cause of the present difficulties.

Sir William Clark : I am grateful to my hon. Friend for making that point so clearly.

The philosophy of the Conservative party has always been against retrospection. It is a one-off case, so it cannot be said that we thought the law applied in a certain way and we are now putting it right. Since the House of Lords said that the Woolwich must get its money back, I am absolutely certain that the Leeds and every other building society will do the same. I am sure that my right hon. and learned Friend the Chief Secretary will realise that I am not in favour of wasting Exchequer money, but when unfairness has cost £250 million, we must do something about it.

I regret this note of discord, but we should not be petty about mobile telephones or abandon the Conservative party's anathema to retrospective legislation. We have a strong economy and we must do all that we can to help businesses, both small and large, but we must always be fair to the taxpayer.

5.30 pm

Mr. Robert Sheldon (Ashton-under-Lyne) : The right hon. Member for Croydon, South (Sir W. Clark) spoke about mobile telephones. It is rare that I agree with the right hon. Gentleman, but he made an important point. It will be a difficult tax to collect and, as one can see from reading the clause, it will be easy to avoid. The Treasury and Civil Service Committee has again produced its report, and the House is grateful. I have just one comment on the unanimity of the Committee, which I welcome. The Committee can be powerful or influential only when it looks at the facts and comes to a decision based upon them. I am pleased to see that it has achieved nearly new records of unanimity, and I welcome that. It is important, and I look forward to that standard continuing.

On the Chief Secretary's arguments, I have been reading some of the economic debates of the 1920s and 1930s. They are remarkably similar to the arguments heard from the Treasury Bench today. There are many selective statistics, lots of clutching at straws and lots of hopes for recovery. That went on year after year. The Treasury Bench should look at those debates to see how the Government are copying so many of the errors of the past.

In his Budget speech, the Chancellor said :

"My central economic aim is to bring inflation down and keep it down."-- [ Official Report, 19 March 1991 ; Vol. 188, c. 163] I have heard that before. I went back to my valued Red Book of 1980. The medium-term financial strategy for that year said : "The Government's objectives for the medium-term are to bring down the rate of inflation and to create conditions for a sustainable growth of output and employment."

The only difference is that the events are separated by 12 years. That was why we had three years of unparalleled austerity. We assumed that that phase of the operation to reduce inflation had finished. We thought that the Government had won that limited objective. The right hon. Member for Shropshire, North (Mr. Biffen) told us of those three years of unparalleled austerity. I wonder

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whether anybody in the present Government will be equally straightforward and candid and tell us how many years of austerity we shall have to endure this time.

In 1979, the Government were confident that monetarism would solve the problem. They believed that that nonsense would be the solution. They were going to reduce public expenditure and so on. In fact, North sea oil provided the Government with their real assistance to overcome the problems of those years. As a result of their policy, the country suffered. Thirty per cent. of my industrial firms closed and many others suffered as well.

Twelve years later, the same problem confronts the Government as confronted them when they set out. Why is that? Inflation is still with us, but it is more severe in one respect. We may be in a slump rather than a recession. We are still not in balance in our external payments. Despite the enormous downturn the external payments position is still a major indictment of economic policy. What is to happen when there is some sort of recovery? If we cannot achieve balance of payments equilibrium now, when will we achieve it? Some say that this is a slump. If it is not a slump, what are the circumstances in which one uses that word, or should it be excised from the English language? I speak to many industrialists, and their major concerns are credit control, insolvencies and so on. They are all increasing their employment in those areas and are watching carefully. They have daily figures to show how many people make payments and how long the payments are being delayed. The old certainty of payments, even from respectable firms, is no longer with us.

As my hon. Friend the Member for Derby, South (Mrs. Beckett) pointed out, it is easy to reduce inflation if there is a single target. One can deflate the economy by high interest rates and, for good measure, add a high exchange rate. One then reduces consumption and companies are destroyed indiscriminately, good and bad. Exports are hard to get with a high exchange rate and imports take advantage of that to compete with our own industries. However, inflation does come down as high interest rates restrict some forms of spending, although not all. Some individuals with high levels of savings profit from high interest rates.

What will happen when there is an upturn? What happens to our balance of payments? There will be an £8 billion deficit next year, and we must wonder where the exports will come from when manufacturers have been so badly damaged by a Government who gave them little consideration and even less assistance. The problem is compounded because, far from the boom being investment-led, as some unwise commentators and Treasury Ministers affirmed, it was consumption-led. The boom was in finance, credit and consumption, none of which helped our long-term trading performance.

The trouble with relying on interest rates is that some people gain and some lose. It is much harder to control the economy through interest rates alone now that so many people have such a high collateral in the houses that they occupy. So, in the middle of a slump, banks and finance houses are still anxiously trying to lend money to those with secure assets. We are paying the penalty of a housing boom fuelled and ignited by the former Prime Minister's dedication to absurdly lavish incentives to home ownership. Coupled with that, the Conservative party's attitude to pay claims has been farcical. First, the Government said

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that it did not matter. They said that sterling M3 would take care of it and that controlling the money supply would remove money that might be used for pay increases. If companies paid high claims, they would be squeezed, and if they persisted, they would be eliminated by the operation of the iron hand of monetarism. So far did they believe that nonsense that they thought that they could raise VAT from 8 per cent. to 15 per cent. without affecting inflation. It is absurd even to consider that today, but those were the arguments used then. A year after coming to office, without the external trauma provoked by the oil price rises of 1973-74, the Government produced the self-inflicted retail prices index rate of 21.9 per cent. in May 1980.

Eventually, all Governments learn something, and monetarism dropped out of their agenda. They then resorted to exhortation--pleading with industry to restrain pay increases. Their friends in the City responded by awarding themselves the £1 million salaries that have been a feature of this Government. Finally, the Government took refuge in the embrace of the exchange rate mechanism. They are now seeking to discipline employees by threatening them with a fixed and unalterable exchange rate. As if that were not enough, some people are producing the bogey of an independent Bank of England. I am not against fixed exchange rates. In the past few weeks, we have seen currencies varying by up to 15 per cent. and more, which can play havoc with a company's trading arrangements. When we had a fixed exchange rate up to the early 1970s, such a movement was considered catastrophic--a major devaluation, with all that that implied then. Now, I would wish to see fixed exchange rates that could be changed when the disparities were clear and consistent. I wish to see what I would call fixed but not immutable rates, as was the position in the late 1960s.

The Government made the country pay a terrible price by reducing inflation by a means that caused great unnecessary damage to our economy. Having done that, why did they squander the one gain that they had achieved? After three years of unparalleled austerity and the seven fat years of North sea oil, why did they not look to the industrial investment which could alone prepare us for the rigours of the seven lean years?

The truth is that they thought that our economic salvation lay in the City and its financial organisations. They are only dimly beginning to perceive that financial centres follow wealth creation, which comes mainly from manufacturing. That is why London became such a prominent financial centre ; it rose on the backs of Manchester cotton and Birmingham metal industries. The enormous production of the United States created New York's financial centre, and Frankfurt and Tokyo have risen to challenge both older financial centres because of the dominance of manufacturing.

Financial skills are more easily transferable than manufacturing skills. That, more than any of the market operations, threatens the valuable role that is still played by our City institutions. The lesson is that manufacturing industry is the principal begetter of financial institutions. To assume that finance can exist on its own is a folly that only the Government have entertained.

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What are the Government doing to help our industries? They have made some concessions in corporation tax. I remind them that, in many cases, the reduced tax does not compensate for the tax paid on inflationary profits. If inflation is 10 per cent., companies are taxed at 3.3 per cent. of the stock that they held at the end of their financial year. Inflation on corporation tax extracts that wrongful penalty from them. For many companies, the reduction in corporation tax, although welcome, will not compensate them for the tax imposed on them because of the Government's failure to control inflation.

The further failure of the Government has been to deal with the drying up of investment. There is no question but that investment is drying up--we can forget the past and the uncertain forms of investment that we had-- because the Government did not raise capital allowances. Depreciation of 25 per cent. in the first year is nonsense for many forms of investment, and at a time of stringency they should have been increased. I should have wished capital allowances to be better targeted to manufacturing industry. I should raise the difficulty of ensuring that people pay the correct amount of tax. The Treasury, quite rightly, and the Inland Revenue certainly, used to oppose the claiming of expenses incurred at work because they thought that it would open the floodgates. I understood that and defended it many times, but now the costs of travelling to and being in work are higher than before and are growing fast.

It would have been absurd for me, 20 or 30 years ago, to say that transport was a major cost of employment. Workers walked up the road to the mill or factory and that was it. They wore the same clothes and slipped back home for lunch. Many of my constituents travel 30 or 40 miles to work but receive no allowances for that. The clothes they wear must be a little better than in the past. They must eat in the canteen, and even a sandwich costs quite a lot. Women particularly, but many men as well, must consider the care of young children. Those major costs must be deducted from take- home pay. It is a serious matter and is becoming more so.

We used to tax investment income from capital at a higher rate. It was argued that it was right to do so, because it was a more secure form of income than earning a living by taking a job. The problem today is not the investment income surcharge but the charge on the individual who must travel to work. Somebody who has investment income pays only for the journey to deposit his money at the bank. The case for an investment income surcharge is made stronger today by the many expenses that are incurred in earning a living.

I welcome the changes in the Bill to excise duties. The retail prices index has been too prominent in keeping down duties on tobacco and alcohol. I would have preferred annual increases, at least to take account of inflation, rather than the Government, quite rightly, having now to try to make good those past lapses. An amendment like the Rooker-Wise amendment for personal allowances would be sensible for excise duties.

I am happy, too, about the move to tax car benefits in kind, but I find the mobile phone tax hard to understand. The wording of the Bill is quite peculiar, but the Standing Committee will have to unravel that.

A higher VAT rate of 17.5 per cent. means that the importance of the anomalies in the boundaries between 17.5 per cent. and zero rate will increase. There were

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problems when VAT was 8 per cent., such as the size of the hem of a skirt for clothing allowances. Such anomalies will increase, and the Minister responsible for VAT will be heavily occupied trying to defend them.

I welcome the provisions on mortgage interest relief and the PAYE quarterly payments scheme. VAT bad debt relief and the recognition of the role of child benefit are a move in the right direction. The Government started with a plan for inflation, and they will end with a plan for inflation. In the meantime, they will regret those years when they fooled around. The next Government, which I hope will be a Labour Government, will look to industry, which will be the only wealth creator. That is the only way of sustaining a prosperous and thriving economy.

5.46 pm

Sir Peter Tapsell (East Lindsey) : I agreed with the emphasis that the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) placed on the importance of wealth creation. Having spent most of my working life in the City, I also agreed that in the long term the City will not maintain its important place in international finance unless we improve our wealth creation. We must create more capital more rapidly and spread it more widely.

In my lifetime, there has been an enormous improvement in our standard of living. Many more people own their own homes or are in the process of doing so and many more either have an occupational pension or are gaining entitlement to one than when I was young. Beyond that, amazingly few people have much disposable capital. Their capital is mainly locked up in their house or pension fund. It is extremely difficult, even with the considerable tax reductions made by the Government, for people who start without any money, as I did, to acquire capital.

One of the main differences between this country and the United States is that it is easier to acquire capital in the United States. Someone can arrive in the United States from a third-world country with no English or qualifications, but after 20 years will have acquired a certain amount of disposable capital. One meets such people all over the United States. We do not have nearly such a dynamic economy. One reason for that, apart from the national temperament, is capital gains tax.

I shall confine my brief remarks entirely to the capital gains tax aspect of the Finance Bill. I argue, as I have for a great many years, that we should abolish capital gains tax in the long term, although it may be necessary to have a short-term capital gains tax for, say, six or 12 months to make income tax avoidance difficult. People often forget that we have had a capital gains tax for only a short period of our fiscal history. Even Sir Stafford Cripps did not introduce a capital gains tax.

I was in at the start of it in a funny way because, when he was Chancellor, Mr. Selwyn Lloyd asked me to talk to him about bond washing. I was a stockbroker and he assumed that I would understand how bond washing was done although my firm never did it. He told me that he wanted to stop it. I went along to the Treasury and tried to explain how bond washing was carried out although, as I was cross-questioned by Selwyn Lloyd and his senior civil servants, it became clear to me that I did not really understand how it was done. Selwyn Lloyd introduced a short-term capital gains tax in the 1962 Budget--primarily to stop bond washing.

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In 1960-61, Britain had just had a mini- boom. It was nothing like as big as the boom of 1987-88, but it was a mini- boom with a certain amount of speculative land activity and a good deal of bond washing, out of which some people were making large sums at the expense of the general taxpayer. That was why a Conservative Government introduced a short-term capital gains tax. It was not intended as a general tax ; it was a special tax to clobber the spivs, which is why it was supported by the Conservative parliamentary party at the time, but with some misgivings. In 1965, the Labour Government turned it into a permanent capital gains tax, although Selwyn Lloyd's short-term capital gains tax was not repealed until the 1971 Budget. This country has had a permanent capital gains tax of 30 per cent. since 1965 and I have always though it a bad thing.

About 20 years ago, I remember asking Mr. Lee Kuan Yew, the Prime Minister of Singapore, how he accounted for the fact that his country, which had such an interventionist industrial policy and such high rates of income tax, had such a dynamic economy. He said that it was because Singapore did not have a capital gains tax. Last year in his economic report to Congress, President George Bush sent the same message--that if he was to make the United States economy more dynamic, he would like to see the CGT rate in the United States reduced from its present level of 28 per cent. He expressed the hope that he could get rid of it altogether.

I do not think that anybody who has ever considered capital gains tax in any advanced country has denied that it has a bad effect on entrepreneurial activity. It distorts all sorts of markets. It dissuades people from selling shares and other things in an attempt to avoid capital gains tax when, on normal economic criteria, they would think that it was right to do so. A great many people nowadays have second homes, but because the principal home is excluded from capital gains tax, elderly people defer selling their second home, thinking, "When I die, the second home will not attract any capital gains tax." Capital gains tax means that, over a huge range of activity, people take decisions on disposals not on the merits of the disposal or its timing, but primarily because of the tax considerations.

However, worse than all that is the appalling complexity of the tax which has worsened with every passing Budget. Governments are always tinkering with it. I have not checked, but I doubt whether there has been a single spring Finance Bill since 1965 in which capital gains tax has not been amended in an attempt to remove the anomalies that were created by previous amendments. This Finance Bill is no exception. The country's accountancy industry and tax lawyers spend a disproportionate amount of their time on capital gains tax. This Bill, for example, refers to overseas trusts, which have been legislated on in previous Finance Bills. People who become involved with overseas trusts do so primarily to avoid CGT.

The return to the Revenue in the yield from capital gains tax is wholly inadequate when compared with the damage that it does to the economy and with the amount of time that some of our top professional brains spend on it. According to this year's Red Book, the yield for the current financial year is expected to be £1.4 billion. That is quite a large sum, but only a small element in the Budget. Last year, the yield was £1.9 billion. The yield has been decreasing steeply since CGT was indexed. The indexation of capital gains tax removed some of its considerable

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injustices because until the introduction of the 1982 and 1985 provisions, people were paying tax not on any real gain, but on the nominal gain of inflation. With inflation at 10 per cent. last year, one must deduct 10 per cent. from the rate of CGT. Obviously, therefore, the CGT yield is likely to come down unless capital values keep pace with the RPI.

When the Tory party was in opposition and I was a Front-Bench Opposition spokesman--

Mr. Robert Sheldon : And a very good one.

Sir Peter Tapsell : The right hon. Gentleman and I had many debates then.

At that time, the Tory team all agreed to get rid of capital gains tax. I was the only member of the team who thought that we should keep even a short-term capital gains tax. My right hon. Friends the Members for Finchley (Mrs. Thatcher) and for Blaby (Mr. Lawson), my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) and all the subsequent Chancellors of Conservative Administrations thought that it should be completely abolished. I am amazed that after 11 years of Conservative Government we have still not got rid of CGT. Since 1979, I have written to every Financial Secretary to the Treasury well before each Budget urging that we should get rid of it. They have always written back most sympathetically and taken me to one side in a corridor or bar and said, "Yes, what a good idea, but the Inland Revenue does not want to get rid of it." The Revenue does not want to get rid of it because CGT is regarded by it as an essential means of preventing people from turning income into capital and thus avoiding income tax.

Mr. Mellor indicated assent.

Sir Peter Tapsell : I am glad that the Chief Secretary is confirming that. No doubt the Inland Revenue is still saying the same thing to him--

Mr. Mellor : At least it is consistent.

Sir Peter Tapsell : Yes, consistently wrong. There may be considerable strength in its argument that, without any capital gains tax, rich people with good professional advisers would try to avoid paying so much income tax and would try to turn as much as possible of their income into capital gains. Even if that is true--and it is true, up to a point-- the fact is that capital gains tax has not done the prevention job for the Inland Revenue. If it had, it would not be necessary in Finance Bill after Finance Bill to pass special provisions that are separate from CGT to deal with the loopholes by which people seek to avoid income tax by turning income into capital gains and then seek to avoid that capital gains tax by moving into overseas trusts and other devices.

I hope that CGT will be abolished. As a result of my conversations with successive Financial Secretaries I thought that it would eventually be abolished, so I was astonished and dismayed to find that instead of the reduction to a rate of 20 per cent. which I urged, or abolition, in the Budget of 1988 my right hon. Friend the Member for Blaby increased the rate from 30 per cent. to

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40 per cent. to link it to the top band of income tax. He thus introduced an entirely new principle into our fiscal system. It had always been accepted by all Governments--going back to the time of Sir Stafford Northcote when we began discussing such matters--that income and capital were different and should be treated and taxed differently. With the apparent support of all members of my party, my right hon. Friend the Member for Blaby introduced the concept of treating capital and income in the same way and he increased the rate of CGT from 30 per cent. to 40 per cent. Given that we had earlier reduced the rate of income tax from 83 per cent. to 25 per cent., and 40 per cent., and indexed the CGT structure, that move to 40 per cent. would not have been so bad were it not for the establishment of that dangerous principle. Even in opposition, Labour Members now say openly that were they to take office they would increase the top rate of income tax to 50 per cent. and add a national insurance surcharge--as it were--9 per cent. So the top rate of tax would go straight from 40 per cent. to 59 per cent. We have not heard about it from them today or in their document, but I hope that we shall be told whether they would do the same with CGT. Once we have accepted the principle that the rate of CGT is linked to the top income tax rate, there is a tremendous danger that, if income tax rates are increased to, say, 50 per cent., Labour would say that when the Conservative Government were in power they accepted the principle of parity between the two, so they have automatically increased CGT to the same level. If the rate of CGT was 50 per cent. or 59 per cent., we should have one of the highest--if not the highest--rate in the advanced world.

I cannot understand why my right hon. and hon. Friends are prepared to accept this situation. Many of them are far more enthusiastic than I about the wholly free operation of markets--it has always been my experience that the people who are most enthusiastic about the free operation of markets are those who have least practical experience of operating in them. I am a capitalist and I believe in free enterprise and in private savings. Over a 40-year period I managed, with the greatest difficulty, to acquire some savings and I should like other people to have the opportunity to do the same, but rather more quickly. If one believes in a free-enterprise capitalist economy, one must be hostile to CGT. I hope that on Report the Government will decide to abolish at least a long-term capital gains tax. If they are not prepared to do so, I hope that, for the political reasons that I have given, they will at least detach the rate of CGT from the rate of income tax and levy it at, say, 20 per cent. and make it clear that, as in the past, capital and income are different and must be treated separately.

6.3 pm

Mr. A. J. Beith (Berwick-upon-Tweed) : In his opening remarks, the Chief Secretary rightly said that there is an economic context for the debate, although his use of quotations to describe that context is slightly different from mine. I hope that we can reach agreement on the basic proposition that we are in the middle--or in the course--of a serious recession. I had better not say "middle" because that presumes that we know when the end will be. The recession is more serious than the

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Government predicted, but as serious as the Treasury and Civil Service Select Committee predicted. Getting out of the recession will be a difficult task and will not necessarily be achieved quickly. Paragraph 6 of the Treasury and Civil Service Select Committee's report states :

"Taking a longer period, the Treasury are now forecasting two half years of falling output ; and output will now be 4.5 per cent. lower in the second half of 1991 than forecast for the same period just four months earlier. Clearly this is more than a relatively short-lived and shallow recession."

The Government should stop pretending otherwise. They are in danger of being deceived by their own rhetoric. I understand why Governments confronted with elections try to make a story sound better than it is, but there are disadvantages to that. It has the effect of leading people to misunderstand the measures that might be needed and of making it more difficult for the Government to take those measures. For the Government to take some of the steps that we are urging on them might appear to be an admission of guilt on their part and an admission that things are worse than they have said. I should not want to put them in such a difficult position.

I make the same argument about inflation. As long as the Government pretend that it is not as bad as it is, they make it hard to persuade people of the importance of the measures necessary to deal with it. I shall return to that issue later.

The Chief Secretary quoted from the CBI survey and from the CBI's comments on the survey. I shall quote more fully the comments made by Mr. Wigglesworth, the chairman of the CBI's economic committee, which is responsible for the report. He said :

"Although the trend in output appears to be levelling out it is too early to speak of recovery."

That is quite different from what the Chancellor has said. Mr. Wigglesworth continued :

"The survey shows that the intensity of the downturn is slackening and we may be approaching the turning point."

The Government can reasonably claim that there is light at the end of the tunnel, but not that we have reached the turning point or that we have turned the corner.

All this language about turning the corner makes me think that what is at the back of the Chancellor's mind is the Noel Coward song which states :

"There are bad times just around the corner,

There are dark clouds hurtling through the sky,

And it's no good whining

About a silver lining

For we know from experience that they won't roll by."

[H on. Members :-- "Sing it!"] If there are any more requests, I might sing. What we do know from experience is that the Government's forecasts about the recession and about inflation tend to be inadequate. They are repeatedly inadequate and the Select Committee's report contains some useful tables showing how far that is so. I shall now deal with inflation. Language such as that used by the Prime Minister, who said that we have inflation "by the throat", also has a self-deceiving quality. We have not got inflation by the throat. The Government are making progress with headline inflation, but admit in their own forecast that underlying inflation will remain high and will be more than 7 per cent. even at the end of the year. I have listened to many lectures from Treasury Ministers about how deceptive the headline inflation figure is, especially with all the jiggery-pokery of the poll tax.

The Financial Secretary to the Treasury (Mr. Francis Maude) : If the hon. Gentleman is right and we are less

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successful in reducing inflation than we believe, why did he recommend this morning that we should loosen monetary policy by reducing interest rates?

Mr. Beith : Given the discipline of the exchange rate mechanism, I believe that it is now possible further to reduce interest rates while having an anti-inflationary policy. The Government also believe that, which is why they have made careful reductions of 0.5 per cent. at a time. I believe that they will make another reduction within the next three or four weeks.

Mr. Archy Kirkwood (Roxburgh and Berwickshire) : At the Scottish Tory party conference.

Mr. Beith : Most reductions in interest rates coincide with events such as debates in the House of Commons or party conferences, and the Scottish Conservative party conference seems a likely place. It is possible to reduce interest rates now without threatening the anti-inflationary policy. It would not have been sensible to make a large and sudden reduction of, say, 2 per cent. to 3 per cent. in the weeks when our position in the ERM was uncertain. However, I am sure that Ministers will agree that the circumstances are now favourable for a reduction that would help us to deal with inflation.

Mr. Tim Smith : Is the hon. Gentleman saying that we can succeed by cutting interest rates and that inflation will still fall? He has just complained that underlying inflation is going to remain stubbornly high. Is he now saying that it will fall even if we cut interest rates?

Mr. Beith : The present level of interest rates is not necessary to assist in the battle against inflation. There will come a time when the Government will need to look to interest rate policy because of further inflationary pressures in the system. I am not sure whether the Government have recognised how difficult the situation might be when recovery begins. At the point of recovery it is difficult to maintain anti-inflationary policies and that is why we argued that it would be better to place responsibility for interest rate policy in the hands of a central bank with responsibility for price stability. I was interested in the different responses of two Ministers on that subject. When I engaged in a discussion on the radio at lunchtime with the Secretary of State for Employment, he tried to dismiss the idea as ludicrous and one which no civilised country would adopt. Obviously he was totally unaware of the way in which Germany has operated for many years. When the Chancellor of the Exchequer appeared before the Treasury and Civil Service Select Committee, he was at pains not to take that view. He took what I can only describe as a holding position.

The Chairman of the Treasury and Civil Service Select Committee put the remarks of the Governor to the Chancellor, who responded to the Governor's view that a more independent role for the central bank would help in the battle against inflation by saying that countries differ in their practices in that respect. Some countries, he said, use a more independent central bank while others do not. Some have found that helpful in fighting inflation while others do not appear to need it. That was a perfectly respectable reply and one which is consistent with the Government in due course moving towards us on this policy, as they have with regard to several other policies, such as membership of the exchange rate mechanism. I

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suspect that there may be a rethink in the Treasury which has not been communicated to the Secretary of State for Employment, who does not seem to get on very well with the Treasury anyway. He was not very successful in getting a decent training programme out of the Treasury, so it would not be surprising if the Treasury had not told him about its thinking with regard to central bank independence. It is striking that inflation is always reduced in advance of an election and that is clear if we consider the statistics over several years. However, it is not consistent with a sound anti-inflationary policy. Ministers have often told us that underlying inflation is important and that the headline figure is misleading. I cannot think of a better moment for the Government to act on their suggestion that we should have a new index of inflation. What better time could there be to devise a new index that took proper account of housing costs? It would have to do that ; it could not omit all references to the effect of mortgage interest. If the Government were now to introduce such a new index, no one could accuse them of deliberately distorting the statistics in order to obtain a more favourable figure. The time is right for the Government to make an objective improvement in the way in which inflation is measured.

The time is also right for the Government to take steps to help the country with the consequences of the recession which they have caused and which stems from the mismanagement of the credit boom. The Government could invest in a significant training programme, and by that I do not mean the training relief to which the Chief Secretary to the Treasury referred. How he can possibly advance that as significant in the present context, I just do not know. It does not happen until 1992-93 ; it applies only to people who finance their own training ; and it represents only £15 million of public investment in training. It has absolutely nothing to do with the scale of skills shortages which industry is now experiencing and the contribution that training could make to solving that problem. I am surprised that the Government's traditional desire to see the unemployment statistics improved has not led to more expenditure on training. When budgets for training were first cut significantly and Ministers were asked in the Treasury and Civil Service Select Committee to explain why that had happened, we were told that it was because unemployment had fallen. That was a strange view of training, which is necessary whether people are employed or unemployed. The recession calls for a major improvement in training.

Fiscal policy must also play a more important part in dealing with the recession. The Government have accepted in the Budget and in what they have told the Treasury and Civil Service Select Committee that automatic stabilisers are an important way in which fiscal policy contributes to handling a recession. The Select Committee records its appreciation that the Government made that point clear because it has tended to be obscured in the past. However, there is further scope in the measures, that I have described for a policy actively to encourage the country out of recession without taking inflationary measures, and training and investment in transport are part of those

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