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Committee pointed out, when we are constrained by the ERM from acting in the way that we are now acting, it is all the more important to have active fiscal policy in order to manage the economy efficiently.In that context, to answer the point made by the right hon. Member for Bethnal Green and Stepney (Mr. Shore), I am glad that the Government have resisted Mr. Delors' attempts to force us into a fiscal deficits straitjacket.
I share many of the concerns that have been expressed, but I still believe that the Budget is prudent and appropriate. It will provide a firm basis for the Conservative Government when they return to power in a few weeks' time. I regret that the Treasury and Civil Service Select Committee will not be able to take evidence from the Chancellor, when we could have gone into greater depth and at a more sophisticated level. None the less, my overall feeling is that this is the right Budget at the right time and I believe that it will help to improve the economy, to the benefit of my constituents and those in the country as a whole.
5.44 pm
Mr. A. J. Beith (Berwick-upon-Tweed) : It is always a pleasure to follow the right hon. Member for Worthing (Mr. Higgins), who is Chairman of the Treasury and Civil Service Select Committee. I work with him on that Committee and have much respect for his fairness and objectivity. However, I cannot remember a single occasion during the period of the Conservative Government when he has not felt that, broadly speaking, the Chancellor's Budget judgment was sound and that it was the right Budget at the right time--even the 1988 Budget introduced by the right hon. Member for Blaby (Mr. Lawson), which helped to get us into this recessionary mess. Perhaps I can excuse the right hon. Member for Worthing on the grounds that he will shortly be off to Worthing to fight an intense election campaign, but his analytical and objective skills are not brought so obviously to bear in debates on the Budget.
It is a pleasure to begin a speech on the Budget by welcoming the inclusion, in virtually the first sentence of the statement, of Liberal Democrat policy--the sensible proposal to integrate the Budget in a single revenue and expenditure statement. I wonder why it has taken the entire life of the Government to persuade the Treasury that that is feasible. Even at this late stage, I am glad that the conversion has been made. No party will want to go back on that proposal. I assume that it will proceed with general support. There are other measures in the Budget that I can welcome and support. It was obviously right to index alcohol duties and obviously sensible--we had argued for it--to take steps to deal with the business rate. We argued for the cancellation of this year's 4.1 per cent. increase. The Government chose a slightly more complicated method which amounts to something short of, but on the way to, the same level of relief as we propose. It will be appreciated that that will be helpful, especially after the enormous increases in the business rate last year. Its main benefit may be stopping some small businesses going to the wall, but it is none the worse for that and I am glad that it was included in the Budget.
It was useful to have some first steps on the problem of small and large business debts. That issue may have to be reconsidered in the context of the charging of interest.
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I broadly accept that there was a strong argument for some measures to be taken for the car industry, although the Government did not choose to do so in an environmentally helpful way. They halved the special car tax, so a high fuel-consuming Rolls-Royce Corniche will have £12,400 knocked off its sales price while a much more fuel- efficient Metro City with an 1,100 cc engine will be cheaper by only £482. In changing car tax, it might have been possible to send a signal in favour of more energy-efficient cars and greater fuel efficiency. The Chancellor could have taken the opportunity to use more effective environmental measures as part of such a substantial change.The Government are increasing petrol prices through petrol tax by an average of 5.4p per gallon for unleaded and 10.4p per gallon for leaded petrol on the pump price. That means that since 1979 the Conservatives have increased petrol tax by more than 50 per cent. in real terms. According to the Automobile Association, the petrol tax will cost the average rural household more than £60 extra per year. Conservatives often accuse Liberal Democrats of being ready to increase petrol prices ; indeed, they think that we are almost keen to do so. They now find that senior Ministers are pointing out that energy prices will have to rise to deal with the environmental consequences of the way in which we use energy. The Secretaries of State for the Environment and for Energy and the Chancellor of the Duchy of Lancaster have argued publicly for higher energy prices. As that is the way things are going, it is important to consider the problems of rural areas and to look for ways of compensating rural motorists--who are not the main contributors to the pollution problem and who do not contribute at all to urban congestion--and also disabled drivers. The Government must address that issue if they are going to make steady increases in petrol prices, of which the Budget is an example.
There are disappointments in the Budget for various groups of people. It contains nothing on tax relief for child care. Many campaigners thought that, after we had pressed for that in one Finance Bill after another, we were reaching the point where it would be accepted by the Government. That has not happened this year. The Budget contains nothing for merchant shipping. All hon. Members will be aware of the concern about the state of the merchant shipping industry and its apparently disadvantageous position compared with the shipping industries of other countries. That will cause considerable disappointment.
The real shock of the Budget was the scale of the public sector borrowing needed merely to fund the recession. The Chancellor's announcement of the figure of £28 billion was greeted with gasps from all parts of the Chamber. There were gasps from behind the Chancellor from the seat in which the right hon. Member for Finchley (Mrs. Thatcher) sits and gasps from the Opposition parties.
We sat through the speech, waiting to find out how the Chancellor was going to spend the largesse. Would there be a 3p giveaway, with some additional investment spending? As the Chancellor reached the end of his speech, we realised that there was no giveaway because the £28
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billion public sector borrowing requirement was necessary as a direct consequence of the recession and the resulting higher cost of benefits and lower tax revenues.When we received a copy of the Red Book, we found that the PSBR will be £32 billion next year, all without any significant tax giveaway--or one of only 1p on income tax, or £2 billion--and without any additional investment. That was a genuine shock to most hon. Members. It was an admission by the Government that the recession is much worse and that its effects will last longer than they had previously forecast. That means that the Government have moved from forecasting that they would repay £19 billion of debt to telling us that we would be borrowing £28 billion--a pretty wide margin of error by any standard.
We must act to get out of the recession, but the Budget offers no hope of that. It is not a Budget for recovery. Perhaps it was not intended to be a Budget for recovery. There are three possible objectives for the Budget. First, it could have been intended to make voters feel better off, thus putting them in a better mood to support the Government at the election. Secondly, it could have aimed to kick-start recovery. Of course, the Chancellor said early on in his speech that he was not going to do that.
Thirdly, it could have been designed to wrong-foot the Labour party. If that is so, it is ingenious in one sense because it includes the lower rate band proposal, which is an expensive way to try to bring relief to the low- paid. I quoted the hon. Member for Enfield, North (Mr. Eggar), the Minister of State, Department of Education and Science and who clearly ridiculed such a proposal last time round.
The lower rate band proposal is an issue on which every party has changed its mind. The Conservative party is different because it changed its mind twice during its term in office. The Conservatives abolished the band, but have now decided to restore it. It is an expensive way of helping the low paid, as the Government themselves argued previously. If there is no spare revenue for investment, now is not the time to introduce such a proposal.
The Government's image of the voter after the Budget is clearly that of the happy citizen, making his or her way to the polling station in a newly purchased British-made car, stopping on the way to buy some British-made goods from a major department store and going to vote Conservative. All that is based on a £100 tax cut, which is not even enough to buy a copy of the Daily Mail every day for a year. Of course, the Daily Mail and The Sun believe that this is a wonderful Budget. One could just about manage to buy a copy of The Sun every day for a year with the tax cut, but one could not afford the News of the World on Sundays as well. That would be no loss for anyone, but it reveals the limited scale of the cut.
Mr. Kenneth Hind (Lancashire, West) rose --
Mr. Beith : I see an enthusiastic hon. Member leaping to his feet to defend one or both of those newspapers.
Mr. Hind : The point that the hon. Gentleman is making shows clearly that it is nonsense to suggest that the cut is a bribe because clearly it is not. The hon. Gentleman is showing that the amount that the Chancellor has pumped into the economy is fairly small. The Budget is well targeted and very prudent, which perhaps undermines some of the hon. Gentleman's arguments.
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Mr. Beith : If I was Tammany hall boss and I wanted to engage someone to bribe the voters, I would not engage the Chancellor of the Exchequer because he is not very good at it although he thinks that he is. He has fallen between the devil and the deep blue sea. The Budget will not engender recovery or make people feel that they are substantially better off. Rather than the enthusiastic driver on his way to the polling station having bought extra goods leading to a consumer recovery, the likely voter will be someone who is already unemployed, or who fears the loss of his job or who fears that someone in his family will not get a job, whose children will not receive an adequate education because of school cuts or will not get adequate training because of training cuts. People are very aware of those deficiencies in our system, just as they are aware how little they can do with £100. Indeed, the voter may not be driving a new, British-made car to the polling station but wasting hours struggling to work on an inadequate public transport system, or a pensioner just above the income support level. When Conservative hon. Members return to their constituencies to fight the election, they will meet an awful lot of pensioners just above the income support level who receive neither income support nor any of the other benefits which automatically go with it. They will tell hon. Members how hard the going is.Investment is clearly a more appropriate subject for whatever resources can be gathered, and the Treasury model shows that. If one runs the alternatives of tax cuts and investment measures through the Treasury model, one finds that investment measures have a much more rapid effect on the economy. In addition, investment does not create a public sector borrowing requirement in subsequent years. Any tax cut must be paid for the following year and the year after. If recovery is slow, one must continue borrowing to pay current expenditure, which is no way to run the country.
If the Government invest and get a return on that investment, they can pay debts in the future. That is the Government's objective. The idea is to have a balanced Budget over the cycle, but this is the longest cycle I have ever heard of. Even if one believed the optimistic forecasts in the Red Book about the PSBR for later years, by the end of the next Government's tenure of office we would still not be at the end of this amazing cycle. We have to spend quite a few years making up for the PSBR level of the preceding years. I have heard of a stretched Mercedes, but this is the longest cycle anyone has ever attempted to describe.
Investment is best made when the construction industry is in its weakest condition--that is how one gets the most favourable prices for repairing schools and hospitals and for railway construction and work on rolling stock--not when the economy starts to heat up, which is when public expenditure has to be reined in because at that point the economy may begin to overheat and generate inflation.
We need a programme of investment in an economy that is firmly anchored with a proper anti-inflation policy, including an independent central bank, a proper commitment to Europe and entry into the single currency, a real commitment to free enterprise and the promotion of competition--not the rigged market of massive privatised monopolies that the Government have created--a Government stimulus to research and development in industry, a savings target to ensure that we rein in public expenditure when its effect would be damaging, and social
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justice in the tax and benefits system. Neither the voters nor I will take promises or lectures about lower taxation from the Government who gave us the poll tax and who increased VAT to 17.5 per cent. Their days are numbered.5.58 pm
Mr. Robert Boscawen (Somerset and Frome) : I thank you, Madam Deputy Speaker, for calling me at this early hour. The only thing that I can say about the previous speech is that the Liberal Democrats seem to be united only about one idea, and that is that they would greatly increase the public sector borrowing requirement. The hon. Member for Berwick-upon-Tweed (Mr. Beith) could say only that we should spend more. When he and the other Opposition parties talk about investment they should realise that what matters is the investment made five years ago, four years ago or three years ago. Investments made now, next year and the year after will not assist recovery now--it will assist the post-recovery period.
My right hon. Friend, our Chancellor, faced the most difficult and daunting task that any Chancellor has faced for a long time--a serious recession, with an election on top of it--and he has come out of it extremely skilfully and prudently.
The Budget was carefully constructive. My right hon. Friend has not given away too much ; in fact he has given away far less than anybody expected. As for the public sector borrowing requirement, in my time I have listened to Labour Chancellors of the Exchequer, Labour Prime Ministers and other Labour Ministers telling us time and again their Keynesian theory that in times of high unemployment it is right to borrow, and that if one does not borrow unemployment will increase. I find it strange that the Labour party has reversed all that it tried to teach years ago.
We shall not take lessons in deficit financing from the Labour party. Labour Governments used deficit financing to purchase all the nationalised industries, and year after year those industries ran on immense deficits, which had to be taken on as part of the public sector borrowing requirement. It was not until the Conservative Government came to power in 1979 that we changed that, got to grips with the nationalised industries and started selling them off, making them into profitable companies and corporations in the private sector. So it is pretty rich to get lessons from the Labour party on high public sector borrowing requirements.
The Budget was good because it helped where the shoe pinches. Unfortunately, we have high rates of inflation, and in those circumstances the shoe pinches hard on certain groups of people. Those people have been helped by the 20 per cent. income tax band, and also by increases in income support. I find it surprising that the Labour party wants to vote against that, after all that it used to tell us about trying to increase help for those very people--the people who come to our surgeries and tell us how difficult life is. For the Labour party to oppose those measures is quite wrong, and out of character.
The Government have helped the industries in the sort of area that I represent, in southern England, where--unusually--unemployment is higher than it has been in the past. In many cases the reasons for that are not really due to the recession. Let us take the defence industry as an example. Who could have foreseen the climatic change in
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the world order that has taken place in the past five years? Although we shall not need so much highly sophisticated defence equipment, I am glad to say that in the past two or three years my right hon. Friend the Secretary of State for Defence has been helping the defence industries in our part of the world--those industries are concentrated in southern England--by giving sensible orders for re- equipping our forces so that, although they may be smaller in the future, they will be very good, right into the next century. That is the other side of the Budget--the public expenditure side, which I am glad to say that my right hon. Friend the Chancellor now intends to merge with the raising of the money. In future we shall be able to see at the same time how much money will have to be raised, and how it is to be spent. That change has long been needed, and I am delighted that the Chancellor has suggested it.My right hon. Friend has helped farmers in my constituency. That is a difficult thing to do in the present uncertain times. It has been wrong to take so much capital out of farming through inheritance tax over the years- -but we know that the Labour party has always hated the idea of private ownership of property. My right hon. Friend will help many owner-occupiers and tenant farmers by keeping that capital there, to enable farmers' sons and families to restock the farms--that is, perhaps, their most expensive necessity.
Many measures to help small businesses were announced in the Budget--not least the fact that money, albeit a small amount, will be put into the hands of those who need it most. Those people will spend that money quickly in local shops and businesses, where it means so much to have a little more trade. Too many shops are empty at present, and we want to see them filled.
This will certainly be the last time that I shall speak in the House. Since I have been in Parliament there have been two enormous changes. I come from the generation born within five years of the first world war ; we were just old enough to be cannon fodder almost throughout the second world war. In those days, when we could find time to think about serious things, we used to ask each other, "How the devil can we ever stop this damn stupid thing from happening again ?" I have always remembered those conversations. Many thousands of my contemporaries did not survive that war, and I believe that those of us who were fortunate enough to have lived happy and long lives since then owed something to them. We owed it to them to do something about trying to stop those stupid things from happening again.
The first step was that the European nations came together and realised that they had to co-operate, and trade together to improve each other's economies. During the time that I have been in Parliament we have entered the European Community, which cements the relationship between France and Germany, whose past hatred of each other was the basis for those two terrible wars.
The second thing that has happened is that while my right hon. Friend the Member for Finchley (Mrs. Thatcher) was Prime Minister the Governments of this country and of the United States demonstrated to the Soviet Union that it could never win. By their firm resolve
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in demonstrating that, those Governments helped to bring about the most enormous change for the future better peace and prosperity of the world. Let us not forget that.It would be churlish to say that the whole of the Labour party has been slow to come round both to Europe and to standing up to the Soviet Union, because many individual Labour Members whom I have known have taken a strong stand on both those issues. But on the whole the Labour party does not have a good record either on Europe or on standing up for the defence of the western world against the Soviet threat. Now that that threat is a thing of the past, let us be sure that it never happens again.
I thank you, Madam Deputy Speaker, and Mr. Speaker and your two fellow Deputy Speakers for all the courtesy and kindness that you have shown me. It is greatly appreciated.
I also thank my constituents in Somerset--the lovely part of the country which I represent. I have represented two constituencies, and I thank all my constituents for having sent me here for such a long time. I am very grateful indeed to them.
6.9 pm
Mr. Denzil Davies (Llanelli) : I am sorry that the hon. Member for Somerton and Frome (Mr. Boscawen) made some pejorative remarks about the Labour party towards the end of his speech. Despite that, it is a pleasure to follow him and to record his distinguished service, about which we all know, both to his country and to the House. My right hon. Friend the Member for Morley and Leeds, South (Mr. Rees) has also given distinguished service to his country and to the House. The hon. Member for Somerton and Frome mentioned Europe and I have no intention of following him on that. My right hon. Friend the Member for Morley and Leeds, South mentioned the problems of the world slump. He may be a gloomy Celt and perhaps the Chief Secretary would endorse the view that here is another gloomy Celt speaking. However, I believe that my right hon. Friend expressed a fear that the slump, or depression, may not disappear as quickly as we think. When I consider the Maastricht treaty, for example, I am concerned that we are enshrining or codifying certain economic principles, such as price stability, and that we may find ourselves in difficulties. It may have been Hoover or William Jennings Brian who said that we must not crucify mankind on a crock of gold. Perhaps we should not do things that may crucify mankind on price stability, as codified in the neo-European Bundesbank if it ever comes about.
My object is to consider the Budget resolutions. As we have been reminded, this debate comes almost 13 years since the forerunner of the Government came to power in 1979. I remind the House and the Financial Secretary--I am sure that he does not need reminding--that the Government were elected in 1979 preaching the virtues of sound money, of monetarism and even of a balanced budget. The image was given of the grocer from Grantham--I mean no personal disrespect--who demanded cash on the nail and who gave credit to no one. There was the image of the housewife from Grantham who managed the household finances and who looked after the pennies so that the pounds would look after themselves. It has not worked out.
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Thirteen years and many Budgets later, the ideology is in tatters and with it the British economy which suffered from that ideology. The finances of the public sector are heavily in debt and the finances of the private sector, both individuals and companies, are heavily in debt. The balance of payments is heavily in the red even at a time of recession. Unemployment is rising and, if its growth next year is 1 per cent., will continue to rise. Our manufacturing base has been decimated by 30 to 35 per cent. over the past 13 years. Some £100 billion of oil money has been dissipated, swept away in a sea of imports and crushed under the mountain of debt.The Chancellor announced yesterday a public sector borrowing requirement of £28 billion, twice what it was last year. For next year, it will be £32 billion. I should have thought that it was extremely difficult to prophesy what the PSBR would be from one month to the next. Next year's PSBR is apparently to be £32 billion on the basis of a growth in gross domestic product, for the first half of next year, of 3 per cent. I do not know whether we can go from 1 per cent. growth in the coming year to 3 per cent. growth in the first half of next year. If we cannot, the PSBR for next year will be higher than £32 billion. Such is the order of borrowing on which the Government have now embarked.
The requirement of £28 billion this year and £32 billion or more next year is the epitaph on the ideology with which the Government's predecessors were elected in 1979. Ministers are doing their best to distance themselves from that ideology and they are desperately trying to justify the claim that they are all Keynesians once more. Despite the seriousness of the economic situation, I have derived a certain amusement from the build-up to the Budget when I have listened to Ministers and especially to their apologists in the City and in the media trying to justify the massive change. It is not a U-turn but a gyration of 360 degrees in Government policy and ideology.
Some ideologists have prayed in aid Europe and the exchange rate mechanism. Others have resorted to cliche s--or to clich after clich, as Ernest Bevin would have said. I will deal first with the Europe excuse. The other day, I was listening to the "Today" programme, the fount of all wisdom and knowledge. A rather teenaged pundit from one of the right-wing think tanks argued that borrowing was all right now because, as we were in the ERM, there was a bigger pool of savings from which to draw. He implied that that meant that we could borrow money without interest rates going up. The trouble is that there are piranhas in the pool which are quite as big as the British Government--one or two are bigger, believe it or not. Those piranhas will also look for some goodies out of the pool. The idea that because we are in Europe or in the ERM we can now borrow without interest rates going up is ridiculous, and the Government know it. I believe that we shall win the election. However, whichever party come to government, the cost in interest rates of borrowing for a £28 billion or more PSBR is certain to go up.
With the ERM, the poor monetarists cannot practise monetarism. The great Satan of ERM now stalks the land, so the monetarists cannot practise the old religion. I heard one argue the other day that the only thing that the monetarists could do would be to become Keynesians and to borrow money because they could not reduce interest rates. The monetarists have all gone to the Keynesian chapel next door because they cannot worship at the shrine of monetarism as a result of the terrible ERM. I suspect
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that, for most Conservative Members, the reason for borrowing is not to save the economy or the country, but to try to save their seats at the forthcoming general election.Others have resorted to cliches. We heard one from the Chancellor yesterday, from the Chief Secretary today and from other hon. Members in the debate. They have found the old economic cycle. I suppose that it was somewhere in the Treasury basement in Great George street and that it has now been brought out again. It is an endearing--if one can use the word "endearing" in respect of the Chief Secretary--image to think of the Chancellor of the Exchequer practising before the Budget along the long corridors in the Treasury with the Financial Secretary watching and an officious permanent secretary ensuring that the Chancellor does not fall over. One can imagine him practising on the old economic cycle with the ghost of John Maynard Keynes keeping an eye on everything.
As has been said, the problem is that we do not know how long the life of the economic cycle is. We are told that everything will be all right over the economic cycle. What is its life? There was an economist with an unpronounceable name--
Mr. Davies : My right hon. Friend, who went to the London School of Economics, knows the name. Kondratieff thought that the economic cycle was 250 years
Mr. Davies : I thank my right hon. Friend. I did not go to the LSE. I am the product of a Welsh Sunday school and I am a great authority on the Bible, if not on Kondratieff. The bible talks about seven lean years and seven fat years, which is a kind of economic cycle. Perhaps we should settle for that. I do not know what the length of this economic cycle will be. It certainly looks more like a Tour de France than a 100m sprint. I have no idea when the balanced Budget will be balanced, and neither have the Government.
Let us move on to the next cliche , which is the automatic stabiliser, about which we have heard again today. I thought that it was something to do with motor cars, but apparently the automatic stabiliser is a higher being or higher spirit which looks over Treasury Ministers and Chancellors, keeps an eye on them and makes sure that the free market operates smoothly along the byways and the freeways. The automatic stabiliser is looking over everything. There is nothing stabilising about a £28 billion or £32 billion PSBR. I should have thought that that would be destabilising rather than stabilising. There is nothing very automatic, either, about items of public expenditure that cause a £28 billion or £32 billion PSBR. Most of the items are as a result of Government decisions on public expenditure and taxation. I suppose that there was an element of automaticity. It is the Pavlovian automaticity which makes the Tory Chancellor instantly reach for the printing presses when the Tories look like losing an election.
The Government's ideology is in tatters. What went wrong? It is not for politicians to answer such questions ; they are matters for political philosophers, historians, and perhaps even for theologians. However, I make one brief
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suggestion. There was always an inherent-- perhapsMarxian--contradiction in their ideology. In 1979, the Government came to power preaching a desire to control the money supply. However, they wanted a free market in money. I could not see how the control of money and the deregulation of money could march hand in hand for very long. To his credit, the right hon. Member for Blaby (Mr. Lawson) recognised that fact, because he gave up that practice. He left the monetarist chapel, shut the door, went off and listened to false prophets, followed false gods and started to shadow the deutschmark, and we ended up in the ERM, because the system could not work. A system that wants to control money on the one hand and wants to free everything on the other hand and treat it as any other commodity is inherently contradictory. In fact, it destroyed the Government's ideology.
All that is history. Unfortunately, the people of Britain will have to live with the consequences of much of the nonsense that occurred. At least there is one consolation. The children of the ideology of 1979--no doubt the Financial Secretary is one of them--will also have to suffer some of the consequences. Many of them will not be in the next Parliament, and those who are in the next Parliament will have the pleasure of sitting on the Opposition side of the House and watching my right hon. and hon. Friends clearing up the mess that they have created.
6.22 pm
Sir Ian Stewart (Hertfordshire, North) : I compliment my hon. Friend the Member for Somerton and Frome (Mr. Boscawen) and the right hon. Member for Morley and Leeds, South (Mr. Rees) on their speeches. They have both been Members of the House for many years longer than I have. It is sad for me that I, too, am probably making one of my last contributions to the proceedings of the House. I am profoundly grateful to the constituents of Hertfordshire, North for having returned me in five elections. I had much hoped that I should be in a position to ask them to continue to do so for at least another Parliament or two, but that was not to be. I was impressed and moved by the contributions by my hon. Friend and the right hon. Gentleman about their many years in this place.
I mention one oddity in passing, and that is the difficulty which we put in the way of retiring Members in maintaining even the most tenuous connections with this place. I am not a nostalgic person--I would not want to hang about the Lobbies and look over the shoulder of my successor--but it is an oddity that, although I have the privilege of being a Privy Councillor and have automatic right of access to listen to debates in another place, I have no such automatic right of access to the Palace of Westminster to listen to debates in this House. That seems anomalous. Not long ago, when we passed a resolution whereby right hon. and hon. Members who had been here for 15 years or more could enter the Palace of Westminster or certain parts of it as a matter of right, we attached a strange condition that they had also to be in receipt of a pension. Unfortunately, because I injured myself before I reached pensionable age, that will not apply to me. I do not want to make a personal point, but I use those examples to illustrate the strange way in which, although many of us may spend many years in the House, we find
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those odd and perhaps irrational obstacles to our maintaining even a tenuous connection, as we might wish to do.My constituents will have looked at the Budget, in particular for the way in which it deals with the problem of economic recovery, and indeed the matters of unemployment which were mentioned by the right hon. Member for Morley and Leeds, South. I assure him that many hon. Members have great concern about the situation in different parts of the country and the uneven distribution of jobs and prosperity. That is something which all Governments find it difficult to deal with, but it does not mean that we are not conscious of them. My grandfather's brother was commissioner for the distressed areas in the 1930s. It has always been a point in my family to be acutely conscious of those matters--certainly such matters have been in my mind since I have been in the House and have had to consider economic and related matters.
The most important point that the constituents in Hertfordshire, North and elsewhere will look for from the Budget and its aftermath will be a return to confidence. There is no doubt that after a period of recession there are widespread anxieties as to how the process of recovery will be generated and how the measures that Governments can take through Budgets and so on can assist the process. The measures in the Budget dealing with the uniform business rate, VAT, and inheritance tax for family businesses will contribute significantly to restoring the necessary confidence.
I do not wish to make a particularly partisan speech, but I must say that one of the factors which are retarding the recovery of confidence is the inherent belief of most people in the business community that the return of a Labour Government would mean higher taxation and higher borrowing costs. Neither of those things is needed at present. I shall leave it at that because other right hon. and hon. Members have already made those points, and no doubt many others will also do so. However, I do not underestimate the nervousness in the business community about what a Labour Government might bring, because in the past year or two Opposition Members have been expressing commitment to a substantially increased range of public expenditure without giving any clear idea of how they would finance them. The difficulty with their proposals may be made clear next Tuesday when the Budget debate is over--that is a pity--but, so far, nothing has been made clear about how that finance would be provided. Inevitably, the business community has held back on investment and increasing activity for that reason.
I am sorry that I shall not be here in the next Parliament to debate economic matters with the right hon. Member for Llanelli (Mr. Davies). As he and I have often faced each other on the subject, on a personal basis I sincerely hope that he will find himself on one or other of the Front Benches. His speech this afternoon was typical in that it was penetrating, witty, showed insight on several matters and was more powerful than we sometimes hear from the Opposition Front Bench.
The public sector borrowing requirement and the level of borrowing proposed in the Budget is one of the matters that has attracted the greatest attention. I shall make only two main comments because there is no point in repeating what others have said. First, the structural changes in the tax system which were introduced in the 1980s have had the practical consequence of tending to increase revenue
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when the economy is growing above its trend and to decrease revenue more substantially when the economy is below that trend.I instance two factors. The first is the switch to some extent from taxes on income to taxes on spending. That tends to exaggerate the revenue in times of economic boom because of higher expenditure in the high street and so on and the greater level of activity in industry. As we now see, with retail sales depressed until the past few months, it tends to create a sharp reduction in the level of the economy as a whole.
The other factor is perhaps even stronger. The change in the structure of corporation tax from a high basic rate with a large number of allowances to a much lower basic rate with significantly fewer allowances means that the profitability of the companies sector is reflected more substantially and directly in the levels of corporation tax revenue than under the previous structure. There is a time lag of perhaps two years between the performance of a company and the time when that performance shows up in dividends and corporation tax payments. That is because a company pays tax on a basis which is calculated historically. That time lag led to an overemphasis of the amount of revenue available to the Government at the end of the 1980s. It leads now to an underestimate of the level of revenue available to the Government as the economy recovers in the next few years. The time lag factor has exaggerated the swing. I suspect that five or 10 years ago not many people in the House or elsewhere expected that the Government would go into substantial surplus two or three years ago. We had double figure billions of pounds of surplus and a substantial level of repayment of debt. In the same way, the scale of the PSBR has caused some surprise. But I believe that those wide swings are caused by structural changes in taxation which are likely to continue to operate in the future and must therefore be taken into account in the formulation of economic and budgetary policy.
On this occasion, I cannot avoid saying something about interest rates and the exchange rate mechanism. A few years ago, I was invited by my right hon. Friend the Member for Blaby (Mr. Lawson) to speak in a debate on the European monetary system and to make my speech as boring as possible. Not long ago, I looked back at that speech. It was marvellously boring. I obviously carried out my instructions with great efficiency. At that time, my right hon. Friend was anxious that the subject should not be given too much prominence. I believe that I managed to soothe the House into a mood of almost complete disinterest in the subject. Given the attempts of some other hon. Members to do the opposite, I felt that my speech was one of the more important, if less dramatic, achievements of my time in Parliament. As a result, I became extremely interested in the exchange rate mechanism and its interaction with monetary policy. I caution the Goverment about being over-hasty in going into the narrow band of the exchange rate mechanism. I am not one of those who are absolutely opposed to economic and monetary union, but I have a greater degree of scepticism than many others--purely because the lessons of history are not strongly supportive of monetary union when not accompanied by political union. I am far from believing that the states of Europe are prepared and ready to undertake the degree of political commitment that would be necessary to make monetary union effective in practice. I hope that we shall not take
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any particular further steps in that direction unless and until we are satisfied that there is the greater degree of cohesion, and political cohesion, which is necessary if the thing is not to end in serious tears.I have once before quoted an historical example in the House to illustrate my point. I repeat it only because so many colleagues in the House have mentioned it to me as being of interest. When the Crowns of Scotland and England were united in the person of James VI at the beginning of the 17th century, the coinages of the two countries had previously been entirely separate. They were united and put on a standardised basis under James VI in 1603. Although for the most part the coinages managed to keep approximately together during the next half century, increasing strains were felt. By the end of the 17th century the currencies had significantly diverged. They were brought back together only when political union was achieved in 1707. That illustrates the fact that before the countries of Europe make any commitment to monetary union they must understand all the democratic implications of it and that it would not work, certainly in the medium and longer term, unless it was part and parcel of a much greater degree of political union than the leaders of most of the countries of Europe have yet contemplated.
Mr. William Ross (Londonderry, East) : Would the right hon. Gentleman care to carry that analogy further by considering the situation that arose when the Irish Republic separated from the United Kingdom? The Republic tried to keep the currencies on a par, and for many years succeeded, but eventually it had to break and the currencies diverged.
Sir Ian Stewart : The hon. Gentleman makes an important point. I could draw several other analogies. The only occasions when a common currency has been applied successfully throughout Europe were under the Roman Empire, when the currency was backed by the legions of the Roman army, and 200 years later under Charlemagne when the currency was imposed by military force. No other protracted period of monetary union in Europe has worked. I offer that as a cautionary tale. I am not absolutely opposed to proceeding in the direction of monetary union, but it is necessary for the future health of democracy and Parliament--and, indeed, of other countries in Europe--that before such steps are taken the full implications are understood. It is essential that we do not take steps in the dark, only to realise afterwards what they involved.
Clearly, membership of the ERM imposes a substantial discipline on the Government's flexibility to alter interest rates. In the past year, my right hon. Friend the Chancellor has come in for considerable criticism for not having reduced interest rates more rapidly. He deserves a word of congratulation on having been cautious and responsible and not being rushed into that process. I hope that he will be able to reduce interest rates further in due course. However, given the commitment in the exchange rate mechanism, I am sure that it would do far more damage to reduce interest rates and find that they had to be raised again--the damage to confidence would be considerable--than to be more cautious in taking that step in the first place. That is my parting word to my right hon. Friend on that subject.
I must declare an interest as a director of an investment trust. I am pleased that the whole of personal equity plans
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can now be invested in investment or unit trusts. I have always believed that people beginning to invest in equities can best do so by the collective mechanism of such trusts, where expert management is available and risk is not concentrated in a small number of shares. Perhaps I may now reveal that when we were contemplating the introduction of PEPs a few Budgets ago I suggested that policy. Although it did not prevail at the time, I am delighted that it has been introduced.Finally, on income tax, I strongly support the proposal to introduce a 20p band. I do support it not merely as a band, but because it is the first stage in moving to a substantial range of income to be taxed at 20p. There are a number of ways of moving from 25p to 20p. One way is to take 1p or 2p off across the whole band. We adopted that method to get down from 33p to 25p. In recent years, I have been of the view that the starting rate of tax --even at 25p, let alone 33p or anything in between--is too high. However, I do not consider 25p to be too high on a taxable income of £15,000. By having a wide basic rate band, the starting rate of tax is bound to be higher than it ought to be for those people at the bottom of the income tax paying scale. Therefore, I especially welcome the introduction of the 20p rate for those on the lowest levels of taxable earnings, particularly as I understand that my right hon. Friend the Chancellor intends that that band should be expanded, so that a broader range of income could be taxed at 20p rather than at 25p. That gives him greater flexibility. Whereas one needs £2 billion to take one penny off the basic rate, once one has established a 20p band, one can increase it by a greater or a lesser amount, according to available revenue. That is an important reform and I hope that it will be carried forward. I hope to be able to applaud that, albeit from a distance, in future Budgets.
6.43 pm
Sir Patrick Duffy (Sheffield, Attercliffe) : It is a personal pleasure for me to follow the right hon. Member for Hertfordshire, North (Sir I. Stewart). When he was a Defence Minister, I shadowed him from the Opposition Front Bench and I always found him to be effective, impressive and, in other small ways, pleasant and entirely admirable. I have no doubt that the House will be the poorer for his premature departure.
Also, it would have given me the greatest possible personal pleasure to follow the hon. Member for Somerton and Frome (Mr. Boscawen), who will know that there are between 30 and 36 hon. Members who served in world war two. As far as I can estimate, there will only be five in the next Parliament. The hon. Gentleman and I were subject to the most prolonged post-war medical treatment. Although my condition was by no means as grievous as his, for as long as seven years after the war, I was classified as 100 per cent. disabled and my classification has never dropped below 30 per cent. That did not prevent me from contesting my first two parliamentary elections as early as 1950 and 1951.
I listened with interest to the hon. Gentleman's recollection of his wartime reflections. I believe that I shared them and I feel privileged-- along with my hon. Friend the Member for Walsall, South (Mr. George)--to
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have been able to play a small part in recent years in ending confrontation in Europe, in strengthening security generally and in making new structures possible.I feel that the hon. Member for Somerton and Frome and I have shared a special brand of comradeship through all those years, although we have never talked about it. The House will not be the same without him, and there is no one for whom I have entertained, at a distance, more respect and concern.
This time last year, the Government thought that they would be going to the polls against a background of economic recovery. Some financial gurus in the City were sitting back anticipating another five years of Tory rule. Although the recession is now an enormous embarrassment, the official line put out by No. 10 Downing street is that Britain is the victim of international recession. However, we all know, do we not, on both sides of the House that, in its origins and its severity, it is a home-grown recession, caused by the Government's mismanagement of the economy?
Policy mistakes, especially those made in 1987-88, have been the major cause of the recession. The latest figures show that the output of the British economy has been declining for six successive quarters. The latest gross domestic product figures confirm that the recession is the longest in post-war history. Last year's decline of 2.5 per cent. was the biggest annual fall since the 1930s. There has not yet been a slowdown in that decline.
For all the House knows, we may be in free fall, for economic recovery continues to be elusive. From time to time, one gets a fleeting glimpse of a speck of light trying to pierce the gloom, but then it disappears, just as hope begins to rise. The same is true in the United States of America.
Weighed down by prolonged recession, Britain's ailing economy seems unable to find that pathway to growth. Yet, in his Budget statement, the Chancellor made a virtue of not wishing to kick-start the economy. He expects growth to pick up gradually as the year goes on and to be reasonably strong by 1993, but his Treasury advisers have been disastrously wrong in recent forecasting and weighty authorities see continued depression, unless policy is changed radically. One problem with recessions is that they do not start and finish on a particular date. The recovery is never tidy, and we are likely to get confused signals for several months after the upturn has begun. In the United States, there have been two upturns, but they are back in a state of recession. Given previous experience, including that of post-1931--it is salutary to look at the figures--recovery from a slump of this magnitude will be delayed and prolonged and unlikely to achieve anything like full utilisation of capacity. As my right hon. Friend the Member for Morley and Leeds, South (Mr. Rees) reminded us, we were pulled out of the depression of the 1930s only by rearmament and the onset of war. He and I were brought up in mining communities which were plunged into debt as a result of the general strike. We knew many households that were only rescued from that debt, after many years, by the fuller employment that war produced.
Unemployment, inevitably, is still going up. Figures published yesterday show that the Government are continuing, although not maliciously, to underestimate it. An unemployment level of 3 million people is already in
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sight. There is little prospect of an export -led recovery, given the latest trade figures. A consumer-led alternative would risk making the trade deficit even worse.Against that unpromising background, the Chancellor was expected to deliver not merely the Budget, but the ballot. It is too late for that. The Budget will not act as a significant stimulus to the economy--all that should have been provided for last year. The deficit is almost certainly out of control, and the prospective borrowing requirement is significantly worse than expected. The Chancellor will be lucky to see growth at half the rates he has forecast, given the form. It will be a case of hard times rather than great expectations. Companies need help as cash flow and complicated reliefs to the uniform business rate are not enough. However, that is all that the Chief Secretary to the Treasury could offer when I challenged him earlier.
It is a disappointing Budget, and the Chancellor has failed to produce the election-winning trick that everyone thought he had up his sleeve. There must be a question mark over whether the measures taken are even affordable and sustainable. We all know that the City is cautious--the PSBR has undoubtedly prompted a sense of disappointment. The evidence is there and plain to see. The policy of borrowing to finance tax cuts has already come in for much discussion in the debate, but surely that can make sense only if the borrowing Government are prepared to raise taxes later with a view to restoring the balance--assuming the economy moves on.
Borrowing to finance sound and necessary long-term public sector investment is preferable, for it should pay for itself over time. That is Labour's preference. The obvious areas for such investment are our preferred ones of infrastructure--roads and railways--and, above all, industrial efficiency, with a view to improving productivity.
The latest issue of the National Institute Economic Review puts the lingering adverse productivity gap between Britain and Germany down to the fact that Germany has constantly made a greater investment in its workers and factories. I can properly apply that test to the Budget, and I naturally wish to apply it first to my city of Sheffield.
Sheffield council's employment department now finds unemployment to be as high as 17 per cent., whereas the Government figure is less than 12 per cent. I am in touch with Ministers at the Department of Employment about that.
In Sheffield, the engineering industry is a mirror of the health of the city's economy. In the past year, the Engineering Employers Sheffield Association has seen its members fighting hard to survive in a hostile trading environment. It has called for all genuine investment to be made fully and immediately tax-deductible. It has pointed out that many foreign Governments provide their manufacturing industries with support for research and development. It also believes that there is ground for greater incentives to export. It believes that perhaps the most important and far- reaching area in which the Government can encourage the manufacturing industry is by providing a better education system and raising the attainment and quality of school leavers. That is another preferred Labour objective.
This is not a Budget of recovery for Sheffield ; nor is it a Budget for recovery for the Yorkshire and Humberside region. Of the many complex issues and problems facing that region, three stand out as far as the regional and local
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