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endorsed fully the comments of my hon. Friend the Member for Hammersmith (Mr. Soley) when he talked about the decline in manufacturing industry being a direct result of the policies of the Conservative party.The service industries were heralded by Baroness Thatcher as the engines of economic growth in the 80s. That policy has the Prime Minister's tacit endorsement, no matter how much he now protests that he did not support the perverse logic inherent in it, because he remained a member of the Cabinet that espoused it.
The Budget will do little to arrest the decline on Merseyside. It is devoid of any strategy to put people back to work or to give young people throughout the country, the 6,713 unemployed in my constituency, where one in four men are out of work, or the 1 million long-term unemployed nationwide some hope of a decent future. They cannot look to the Government for any imaginative or effective policies to alleviate their hardship.
The Chancellor said yesterday that he wants tax decisions to be made here and not in Brussels. I suspect that he believes that economic matters more generally should also be determined here. But economic policy made here has done nothing for the people of Merseyside. They have to look to Europe for help.
The recent nomination of Merseyside by the European Commission for objective 1 status--the status reserved for the regions whose development is lagging behind that of others in the Community--will provide grant aid via the European regional development fund for a range of projects to facilitate regeneration and will give a glimmer of hope to those of us engaged in the task of turning Merseyside's economy round.
As I have said, the Budget does nothing for jobs. The measures announced to help the unemployed are insufficient to cure the malaise. In any case, they are too late and on too small a scale to have any real effect. They are nowhere near proportional to the problem. Only one in 10 of the long-term unemployed will be helped by the measures.
More generally, the Chancellor said that supply-side measures were vital in the long term. For 13 years he and his predecessors have been saying that, yet their supply-side reforms have failed to produce a dynamic economy. Instead, there has been a failure to invest in infrastructure, new technology and capacity, much of which has been scrapped in any case because of the recession.
Unlike the hon. Member for Brigg and Cleethorpes (Mr. Brown), I am unable to describe the advantages of the Government's policies for my constituency. However, there are some spectacular success stories, including one on Merseyside that I wish to describe to the House. GEC Plessey has recently completed a massive programme of investment in its Edge lane plant, resulting in a world-beating centre for the development of new communication technology. Unfortunately, that success story is the exception to the rule. GEC Plessey's successful development of high technology has resulted in a shake-out of hundreds of jobs in the plant, where engineers are no longer needed and production jobs are increasingly scarce. The victims of the shake-out need to be re-skilled to enable them to turn their hand to other work, which has to be available for them. Government provision of such training is woefully inadequate and condemns many to long-term unemployment.
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It is surely a sign of a failure of economic policy when, after 13 years of supposed supply-side improvements and at the height of a recession, the current account of the balance of payments is over £12 billion in the red and growing rapidly. In my limited experience of economics, that flies in the face of conventional economic wisdom. The devaluation of the pound following black Wednesday gave an important boost to the economy's tradeable sector, and the Prime Minister's much publicised interview in The Independent on 4 March implied that devaluation was one element that made Britain uniquely competitive. I seem to remember--this was not long ago--the Government telling us that devaluation was completely ineffective because any competitive gains from a lower pound would be wiped out by higher prices.Looking back, the misguided financial deregulation of the 1980s ensured the credit explosion that fuelled asset price inflation. Many people, perceiving that their wealth had increased, spent more--and everything seemed rosy. In March 1988, however, the Government lowered income tax when it was clear that consumer spending was running out of control. Inflation was inevitable, as was a ballooning balance of payments deficit. Manufacturing, which had been pushed to the side but which is so vital for economic prosperity, was simply too small to sustain our import needs.
With increasingly shambolic monetary policy and the failure of monetary targeting, entry into the exchange rate mechanism was seen as the panacea. With exorbitant interest rates dampening domestic demand and propping up the pound, recession was inevitable. The depth and length of the recession produced the low inflation in which the Government place such faith and for which they take credit. They pin hopes of recovery on lower interest rates, which have only been made possible because the ERM--a major plank of Government policy--failed. The irony is that the forces for recovery defined by the Government--low inflation, low interest rates and a competitive currency--have been put in place because of a catastrophic failure of Government economic policy.
Some of the measures announced yesterday must be welcome and they suggest that the Government have at last woken up to the plight of manufacturing industry. I refer in particular to the extension of export credit cover. I am told that the reforms to advance corporation tax are also of great benefit, but, like the right hon. Member for Berwick-upon-Tweed (Mr. Beith), I cannot comment further. I await the views of hon. Members who know more about that subject than I do.
The Chancellor was silent on tax breaks for capital
investment--which was strange, considering that if he anticipates recovery, measures to encourage investment are essential. The temporary measures introduced in the autumn statement are not being extended, which will disappoint many.
A further measure that may help Merseyside is the abolition of petroleum revenue tax in the case of new fields, which we hope will encourage development of the Liverpool bay oil and gas field. For the majority of my constituents, however, the Budget is profoundly depressing. The prospect of higher personal taxes over the next few years will do nothing to encourage consumer spending now. Higher fuel costs
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through the imposition of VAT on previously zero-rated gas and electricity supplies--despite Tory promises--will hit families on the edge of poverty the hardest.The hinted benefits increase will have to be seen to be believed, particularly given the clearly stated objective of reduced Government spending in the next few years, described at column 175 of yesterday's Official Report. Savage cuts will inevitably hit the Department of Social Security. Unlike the hon. Member for Bridlington (Mr. Townend), I do not urge the Government to cut spending on care in the community. That is not an expensive option, and it is agreed by all to be the proper way of caring for the mentally ill and those with mental health problems. Neither do I urge the Chancellor to cut expenditure on law and order or overseas aid.
While it is true that the economic slump is felt world wide, it began sooner here and has lasted longer, and we are in a weaker position to recover in terms of our manufacturing base. The Chancellor has done nothing to overcome the United Kingdom's structural economic problems, and I have little confidence that my constituents will more easily find work as a result of yesterday's announcements.
6.44 pm
Mr. Douglas French (Gloucester) : I sympathise considerably with the remarks of the hon. Member for Hammersmith (Mr. Soley), who has just left his place--not as they relate to my noble friend Lady Thatcher but as they relate to the phasing out of mortgage interest relief. He elaborated on views expressed earlier by the right hon. Member for Berwick-upon-Tweed (Mr. Beith). Both see considerable merit in phasing out mortgage interest relief, and yesterday's Budget offered a golden opportunity to abolish it altogether. There could scarcely have been a better opportunity, with interest rates as low as they are, and when the maximum benefit to each family is only around £600 a year. That figure is not significant compared with the fall in mortgage repayments resulting from recent interest rate reductions.
The abolition of mortgage interest relief could have been significantly cushioned by adjustments to the 20 per cent. band. More importantly, it would have saved a considerable amount of revenue--a sum approaching £5 billion--and revenue saving ought to have been the key to yesterday's Budget.
The Budget acknowledges that the deficit problem is enormous, but not that it is enormous enough to warrant immediate action. I would prefer the Budget to face up to the need to start a deficit-reducing programme now, and not delay it. Tackling MIRAS would have been a good start.
I find it difficult to have full confidence in a judgment made in 1992-93 that assesses a need to raise additional revenue of £6.5 billion in 1994-95 and £10.5 billion in 1995-96. Such figures assume a level of recovery which should come and which we all hope will come, but the time scale is uncertain--as we know from the past two years. They assume also a level of recovery which will be deeply affected by events in Europe and in the United States, and a forecasting accuracy that has seldom if ever been achieved in the past.
There is a sound reason why Budgets have historically been held at annual intervals. Usually, the intervals have been less than annual only at times of economic difficulty.
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We have not before attempted Budgets less frequently than at annual intervals, but it seems from yesterday's approach that the likely future practice entails the forecasting of figures, and particularly of tax takes, far in advance.The deficit levels confirmed yesterday were worse than the majority of commentators expected--at £35 billion for 1992-93, rising to £50 billion in 1993-94. Much City opinion was surprised by the £50 billion figure. Those who watched television coverage of the Budget know that, when my right hon. Friend the Chancellor referred to it in his speech, the chief economist of James Capel, Keith Skeoch, reacted with the words, "That must be a mistake." This indicates the extent to which the figure of £50 billion, while expected and anticipated in the course of time, was not expected this early.
At the time of the last autumn statement, a forecast by Goldman Sachs predicted on current trends a deficit in 1996-97 of £80 billion. That figure was viewed as ridiculous at the time. If it had been forecast in the knowledge that the 1993-94 figure was already £50 billion, the chances are that the Goldman Sachs prediction of six months ago would have been not £80 billion but somewhat higher. The document "The Budget in Brief", which was published yesterday by the Treasury, says :
"The Public Sector Borrowing Requirement (PSBR) in 1993-94 is projected to be £50 billion, equivalent to 8 per cent. of GDP. But the Government's objective is to bring it back towards balance over the medium term. The discretionary increases in tax revenues announced in the Budget will build up over time, and together with the public expenditure plans in the Autumn Statement will ensure that this happens."
Those are very fine words, but for many people they are not very convincing, and they will not be convincing until the next public expenditure plans are revealed in November. Thus, we are to have eight months of uncertainty, eight months during which we shall not know how satisfactorily the Government will tackle the public expenditure problem.
Dr. Lynne Jones (Birmingham, Selly Oak) : On the question of public sector spending, surely the credibility of the Government's PSBR policy will depend on whether they get growth back into the economy so that tax revenues can start to rise again, with people now unemployed back at work.
Mr. French : I accept the hon. Lady's point in theory, but it would be very risky indeed to base all action on the assumption that growth will return within a particular time. Naturally, one hopes that it will, but it would be extremely imprudent to make such an assumption. As we have seen in the past, assumptions do not always prove to have been justified, however well based they may have been.
The position becomes even more disconcerting when we read in the Red Book that the Treasury projects that the PSBR for 1996-97 will be £35 billion. That is the same, in cash terms, as the figure for 1992-93. My right hon. Friend the Member for Westmorland and Lonsdale (Mr. Jopling) was absolutely right to draw attention to this problem. Over a period of five years, in cash terms, no progress is to be made, yet revenues are expected to rise because of the recovery from recession. The indication is that there is to be no significant progress in reducing Government expenditure, in cash terms, during this period.
In 1992-93, the PSBR was 5.75 per cent. of GDP, and in 1995-96 it will go down only to 5.5 per cent.--hardly any worthwhile change at all. As my hon. Friend the
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Member for Bridlington (Mr. Townend) pointed out, the same sort of pattern is to be found when one compares spending as a percentage of GDP. In this regard, I refer hon. Members to page 74 of the Red Book. In 1995-96, Government spending will fall only to 44 per cent. of GDP. That is not the progress we need : it is too slow.Why did the Chancellor reach the view that, in this respect, no immediate action should be taken? Why is the majority of significant action to be deferred? Clearly, the Chancellor has asked himself how fragile the recovery is and how much it could be harmed by revenue-raising measures designed to reduce the deficit. The fact that the current year is virtually revenue-neutral implies that the Chancellor has concluded that the recovery is very fragile indeed. Why is the recovery so fragile? It is fragile because market confidence is so low, and confidence is low because the commitment to curbing the deficit and putting finances on a proper footing is inadequate and lacks credibility. What will give it credibility is action, not words--action now, as opposed to action later. I very much regret the fact that the Chancellor seems to feel that well chosen words now are a reasonable substitute for action. I simply do not believe they are.
To that extent, I find myself totally in agreement with one member of the Treasury panel of independent forecasters, Professor Tim Congdon, who is regarded as the maverick. I should like to refer to the March issue of The Gerrard and National Monthly Review in which Professor Congdon has published his now-infamous "Open Letter to the Treasury Panel". Before getting to the extremely complex part, I should like to quote these words :
"Since everyone agrees that the Budget deficit must be reduced in the medium term, there is, in my opinion, no advantage in deferring tax increases. The longer the tax increases are postponed, the higher will be the future costs of servicing the national debt, and the larger will be the tax increases that are eventually necessary." I totally endorse that judgment. In fiscal and economic policy, it has been shown time and time again that, if tough action has to be taken, it is better to take it early rather than late. Deferred action causes uncertainty, even if it is designed to be informative and to show commitment, and is undertaken with the best of intentions. I can think of nothing more certain to dampen the capacity of an economy to spring into life than an announcement that, whatever happens, heavier taxes are on their way but they are not to be imposed just yet.
Leaving aside the overall tax take, what is the effect of announcing tax levels in advance? That is something of a novelty. I do not recall any Budget in which it happened to anything like the same extent. It is an innovation, possibly inspired by the Clintonesque approach, but there are very considerable dangers in it.
Taxpayers cannot reasonably assume that the rates being announced will apply when the time comes. Everybody knows how unreliable economic forecasts are, how frequently they are wrong. If forecasts are wrong and have to be changed, the tax rates depending upon them may also need to be changed. As I understand the situation, these rates are to be included as an integral part of the Finance Bill. It seems to me that this makes the situation worse rather than better. If rates have to be changed subsequently, further difficulty will be created, and more explanation will be required.
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In my opinion, such a practice also fetters the judgment of the Chancellor. My right hon. Friend may be fettering his own judgment for future Budgets--I very much hope so--but, on the other hand, he may be fettering the judgment of subsequent Chancellors. One has to ask whether the rates being announced for future years run with the existing Chancellor or whether, in the event of his moving on, they will fetter the judgment of any successor.It is fairly certain that the precise rates being specified at the moment will not, in the event, be applied. It is almost certain that future Budgets will have to show why figures that were announced so far ahead have had to be altered. As a result, a measure designed clearly with the best of intentions--to provide continuity and certainty of policy--is far more likely to breed uncertainty. In my view, it is therefore self-defeating and extremely imprudent. I am also very uneasy about the practical effects on the conduct of the individual taxpayers of announcing tax increases so far in advance. Indirect tax increases are one thing. Advance announcements may have the effect of bringing expenditure forward, although that is not very likely to be possible in respect of domestic fuel and power, but direct tax increases announced so far ahead freeze taxpayers into inaction.
Many taxpayers are currently having to hold back on discretionary expenditure, although they have cash to spend as a result of the recent mortgage rate reductions. A natural fear of unemployment, and the painful experience of running a tight household budget--which is all too recent a memory--lead them to consider it prudent not to spend any surplus they may have. The prospect of direct tax increases will continue to restrict their spending, and thus will not achieve what might be expected of such a policy.
If the decision to increase taxes had been implemented now, it could have been balanced by further action on interest rates. The United Kingdom's interest rates may be the lowest in Europe, but the gap between interest rates and inflation is still too large. The decision to increase taxes next year and in the following year implies a further fall in interest rates, but the decision to impose no tax increases in the current year clearly diminishes the chance of lower interest rates in the short term.
I want to say something about the Chancellor's small business package. I was surprised that he should seek to breathe life back into the loan guarantee scheme. If he is to succeed in his strategy, he will have to lean fairly heavily on the banks : the practice of banks throughout the country is to steer clear of the loan guarantee scheme if they possibly can. There are many stories of potential bank customers who have sought to bring the scheme into play, only to be discouraged from doing so. That, I think, is because the scheme has a central flaw : it invites banks not only to set aside normal banking criteria but also to lend on terms which will ultimately cost the borrower more. That has always struck me as inherently contradictory.
I consider it unfortunate that, insofar as the Chancellor decided to make any tax concessions--I believe that a considerable tightening of the fiscal stance was necessary--he opted to hold the inheritance threshold at £150,000. I found that profoundly disappointing. A minimal amount of expenditure could have gone some way towards
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fulfilling my right hon. Friend the Prime Minister's declared aim of enabling wealth to cascade down the generations.The present system of inheritance tax reliefs, which encourages capital to be passed to the next generation in dribs and drabs, puts the older generation in an iniquitous position. They must decide to what extent they will seek to avoid the taxman by giving away money, when they do not know how long they will live, what their financial requirements may be and what they may need for health and geriatric care : for fiscal reasons, they are required to decide whether to divest themselves of the capital that they have saved over their lives, or to deprive the next generation of the benefit of their work. They are being required to place themselves at risk by not retaining sufficient funds for their own needs in old age. The sooner the threshold can be raised, the better.
In conclusion, however, I give my right hon. Friend the Chancellor full marks for the broader measures relating to business, and for the package of employment measures. The two are closely related. The stronger the cash flow available to businesses, and the more tax and regulatory burdens are removed from them, the easier it is likely to be for them to employ new people, and the greater will be the likelihood of business growth and permanent job creation. I suspect that the need for new jobs will prevail for much of the 1990s ; I fear that it is an intractable problem, but I hope that it will prove less intractable than the deficit appears to be at present. 7.5 pm
Mr. Robert Ainsworth (Coventry, North-East) : I have listened to most of the debate, and I wish to develop three themes. First, the Budget is an absolute betrayal of every policy that the Government put to the electorate only a year ago ; secondly, the measures proposed in it-- supposedly to help the economy--are ill directed and will be ineffective, because they are so minuscule in comparison with the problem itself ; and, thirdly, despite the massive difficulties in which we find ourselves, the Government have yet again taken the opportunity to protect those at the top of the income scale at the expense of everyone else. I do not think that many Opposition Members are surprised by that.
The betrayal could not be deeper. If the Budget has achieved anything, it has brought about a substantial increase in the cynicism that the country must feel about the entire democratic process--or, at any rate, about the Government whom it elected only a year ago. Listening to Conservative Members, I can hardly believe that they are the same people who put their party manifesto to the country such a short time ago : the promises that were made then have been thrown away.
Hon. Members may recall the exiled Conservative party leader's aversion to U-turns, and her famous remark :
"You turn if you want to ; the lady's not for turning." We have seen some U -turns from the Government--U-turns on public spending, on Europe and on monetary policy. People felt betrayed before, but the phenomenal U-turn in the Budget takes the biscuit. The Conservatives did not use the language of George Bush, but their promises were made as clearly as his promises to the American electorate, and they have been reversed as clearly as his were. Their first pledge was made by the Prime Minister in the run-up to the general election :
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"We are the only party that understands the need for lower taxation".The second was
"We will maintain mortgage tax relief".
No caveats or hidden retreats were involved then. Thirdly, the party had
"no plans and no need to extend the scope of VAT".
Now, a massive wedge--as the Chancellor put it--of new taxation is to be introduced over the next three years. In one respect, at least, the Budget was an innovation : effectively, we were presented with three Budgets, involving tax increases next year and in the following year.
I do not believe that the British people will be conned by the Conservative party again. It is clear that the political intention behind the Budget is to drag forward the bad news, demanding a post-dated cheque from taxpayers in the hope that they will have forgotten what happened when the time comes for them to judge the Conservatives once more. The Government will not get away with it because people now treat with cynicism everything that the Conservatives say. I promise the Government that we shall never let them forget their betrayal.
There is one issue on which the Conservatives have been consistent. Despite the difficulties that we face, the Conservatives have again attempted to enhance the position of the highest earners at the expense of everyone else. The Government claim that they are a Government of low taxation, but, when one examines what has happened in the past 14 years, one finds that that is not true.
There has been a massive shift in the burden of taxation from the rich to the poor. There can be no doubt that the shift was systematic and deliberate. When the Government first came to power, the poorest 10 per cent. of the community even then paid 40.4 per cent. of their income in taxation in one form or another, either direct or indirect. That had been pushed up to 46.3 per cent. in 1990. Whether they paid it through VAT, income tax, national insurance contributions or any other form of taxes, in one way or another they paid almost half of their incomes in tax. At the same time, the richest 10 per cent. have seen their proportion of taxes fall from 35.6 to 32.2 per cent. The rich pay a third of their income in tax while the poor pay half of their income in tax. That is a deliberate policy, the reverse of the principle that Robin Hood was supposed to have supported. The Government systematically take from the poor and give to the rich. The proposals in the Budget are an extension of that policy. Almost every increase in personal taxation is designed to hit those on average or below average incomes but not to hit those who can well afford to make a small contribution to solving the problems that the Government have created. Instead of raising income tax, the Government have chosen to freeze personal allowances. They did so deliberately because it will hit those on lower incomes to a far greater extent than those at the top. The married couple's allowance has also been frozen.
The worst proposal--the extension of VAT to fuel--has been dressed up in green clothes. The Chancellor cannot have his cake and eat it. The Chancellor and the Chief Secretary told us that this was an environmental measure which would save billions of tonnes of carbon in the next few years. If it is to raise tax revenue, as explained in the figures before us, how on earth is it to reduce carbon consumption? The measure has been cynically dressed in green. There is no intention of saving carbon ; it is a
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measure for clawing back revenue. Again, it will hit the poor, and ordinary people, to a much greater extent than the better off. If the Government want to prevent carbon consumption, they should be promoting home insulation and further investment in new technology for vehicles. They should have pursued such ideas with some vigour, instead of putting VAT on fuel bills. The move is a deliberate and cynical betrayal of all that the Government said during the general election campaign, when they pledged not to extend VAT.Another proposal that will deliberately hit those on average or below average incomes is the extra 1p on national insurance contributions rather than on income tax. Anyone earning above the threshold figure will not pay that 1p, which means that those who could well afford to make a contribution are protected while others bear the full burden. We need to assess how much further that proposal will take the trend of taxing the poor to protect the rich. Politics, pre-election promises and the distribution of tax are all important, but the overriding issue facing us all is the state of the economy. Does the Budget do anything to get people back to work or to lift the economy out of the doldrums? The proposals are minuscule and ill directed. The big issue confronting us is not the plight and dilemma of the Lloyd's names. There are many Lloyd's names among Conservative Members, and I understand that they consider their plight to be of profound importance. However, in view of the Prime Minister's recent statements, and if he wishes to maintain any credibility, he should be agreeing that manufacturing industry is the way to get out of the mess we are in.
Where in the Budget were the capital investment allowances which could encourage British industry and lift us out of the difficulties that exist in so many of our trading partner countries? There were none. Where was the commitment to infrastructure to give the British economy the boost that it needs? The Budget contained two proposals for infrastructure. The first involved 6 miles of railway line between Paddington and Heathrow. What a wonderful and profound piece of work. It will really set people alight. The second, dressed up as a commitment to infrastructure, was the announcement that the St. Pancras rail link to the channel tunnel would go ahead. What does that mean exactly?
It meant that the Government were considering the St. Pancras option as opposed to the King's Cross option. It meant that the decision will automatically be delayed for at least two years because of the change in policy. It meant that even if it is agreed and financed--although the commitment was not for public but for private funding, which has not yet been arranged--we shall have a cheaper and, I believe, inferior scheme to the one that had been stressed before. It meant that our effective transport links with the European markets via the tunnel and for the country north of Watford will be at least 10 years behind the opening of the tunnel. That is a complete disaster.
In other debates in the House we have heard Conservative opinions of our position in Europe, and the economic consequences of our membership. They justify their refusal to embrace the social chapter of the Maastricht treaty on the basis that we have to offset the disadvantage of our geographical position, compared with that of our neighbours, by keeping our wage costs and non-wage social costs below those in Germany, Belgium,
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northern France and elsewhere. Because we are on the periphery of Europe, we apparently have to take lower wages, lower social security provision, lower levels of health and safety at work and all the other features that add to manufacturing costs.Yet at a time when there is a massive need for investment in the infrastructure that will help the economy to grow, support our manufacturing industry and help to solve the problem of our not being at the geographical centre of the market, here we are deliberately kicking into touch the one proposal for a major piece of infrastructure investment that would largely solve the transport problems and give manufacturing industry, especially in the west midlands, a major boost. We are copping out, deliberately kicking the ball up the park. We refuse to take a decision, and then dress up that refusal as a decision that will help the economy. I suggest that that is a deliberate lie.
I do not believe that the Budget will solve our problems. Some Conservative Members have explained that, despite the £10 billion in tax increases proposed, which will form a wedge over the next two years, there will still be a substantial problem at the end of it all. By the way, I estimate that £10 billion in tax is the equivalent of 7p on the income tax rate. So all the supposed reductions in tax that the Government have introduced over the past 14 years have just been effectively undone by the Chancellor's imposition of those tax increases yesterday. Yet they will not solve the problems ; they will not even shut the gap that has opened in our public sector finances. We have heard some proposals by Conservative Members. I listened to the hon. Member for Bridlington (Mr. Townend), who is a little more straightforward than some of his colleagues. At least we know exactly where the man stands, and what he proposes. In his opinion, more massive cuts in public expenditure are needed--that is his only answer.
Public expenditure means hospitals, policemen and teachers. The hon. Member for Bridlington was honest enough to accept that. He said, "Let us get rid of the community care burden. Put people back into Rampton-style hospitals. That was cheap. Community care is far too expensive." Everyone who has seen the budget provisions made for local government knows that community care is massively underfunded. People are being decanted from institutions--that is a diabolical expression to use about human beings, but that is what is said--and there is no provision for them. They are walking the streets. Everyone knows that community care is already hopelessly underfunded. When we talk about cutting public expenditure, that is the sort of thing that we mean.
The real problem is that our economy is not big enough to support the standards of living that we all want to enjoy, or the public sector proposals. That is because of the policies pursued by the Conservatives over the past 14 years. Our manufacturing output grew by 12 per cent. between 1979 and 1990, yet our consumption grew by 40 per cent. Anybody, even a 10-year-old schoolchild, could tell us that that divergence could not be sustained.
What are we doing? Do we actually intend to take action to start the economy growing, and to catch up with our partners again? Or shall we simply try to close the gap by more public expenditure cuts that exacerbate the growing rift in our society, the gap between the rich and
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the poor, and increase crime and lead to all the other problems that we have seen grow so massively already? The Government are totally bankrupt of ideas about how we can take ourselves forward and get ourselves out of the mess into which they have taken us. 7.25 pmMr. Gerald Malone (Winchester) : I shall not follow the hon. Member for Coventry, North-East (Mr. Ainsworth), except to say a word or two about business initiatives. I shall devote my remarks to the initiatives on capital gains tax that my right hon. Friend the Chancellor announced yesterday.
The attack by the hon. Member for Dunfermline, East (Mr. Brown) was nothing short of extraordinary. He made not a single positive suggestion about what the Labour party might intend to do about the country's economic situation. The Labour party and its official spokesman espouse a series of public spending measures that outstrip anything that would be proposed by the Government, yet fail to confront the difficulty caused by the deficit in the economy today. Furthermore, they decry the fact that there is a deficit, say that we should reduce it more quickly and then, rather absurdly, say that there is no scope for doing so by raising taxation.
I thought, as I expect Ministers did, that the rather unusual practice followed by the hon. Member for Dunfermline, East, when he loaded the Dispatch Box with several significant and threatening tomes at the beginning of the debate, might provide us, for the first time, with a solution. I thought that those weighty documents might be Labour's solution to the economic problems, and might tell us how to get out of recession. Sadly, the tomes only threatened ; they provided no clue or aid to the hon. Gentleman's argument. They were as worthless a prop and addition to his speech as were other Labour Members' arguments about the economic situation.
I welcome my right hon. Friend's announcement on capital gains tax. Over the past 14 years, the Government have been building an enterprise economy. Trade union powers have been curbed, restrictive practices have been swept away--one of the latest to be got rid of is the dock labour scheme. As a result of our enterprise economy, Britain is now a magnet for investment. In 1991, 40 per cent. of Japanese investment and 30 per cent. of United States investment in the European Community came to this country, because we are an enterprise economy. One of the essential elements in the enterprise economy is that small businesses, which are so crucial to its survival, must be encouraged. One of the ways to do that is to reform capital gains tax.
Capital gains tax is Labour's envy tax. It was introduced in 1965, just as the white heat of Harold Wilson's technological revolution was turning into a rather dull socialist glow. Since then, the tax has become more complex. A huge range of exemptions and anti-avoidance provisions have been built up over the years, as one Government after another have decided that the tax is basically unfair.
I was attracted by a remark by Lord Wilberforce, who said of capital gains tax in the other place last year :
"It is absolutely impossible for the ordinary citizen to understand. It is impossible for many accountants to understand it is also impossible for the officials of the Inland Revenue to understand."--[ Official Report, House of Lords, 14 January 1992 ; Vol. 534, c. 119.]
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I echo his remarks, because it is also extremely difficult for politicians to understand.Capital gains tax is dealt with in 291 sections, 12 schedules and more than 300 pages. The legislation has become unmanageable, and I am delighted that some steps have been taken in the Budget to change all that. I must confess that this is a personal grudge match for me. The tax was introduced in the 1960s, when I was a law student at university, so I had to try to cope with it. I did not. It was the one subject that held back my qualification as a practising lawyer for a number of years, until I borrowed somebody's understandable notes and managed to pass the examination. I assure the House that, after 30 years or so, my sense of vengeance is not quelled ; I am delighted at last to have an opportunity to strike back.
Capital gains tax does not raise a lot of money. The forecast yield for 1992-93 from individuals and trustees is only just over £1 billion, and in 1987-88, 60 per cent. of CGT payers paid on average only £1,800 each. No wonder there are so few rich taxpayers and so many rich tax lawyers and accountants.
Reductions of CGT levels and a change in the rules would encourage greater realisation and mobility of capital. Especially when there is clearly a capital shortage following the recession, it is important that we introduce new regulations which allow capital to become more mobile and to increase. That is why I extend a warm welcome to the changes announced by my right hon. Friend the Chancellor. I hope that my right hon. Friend will bear in mind experiences elsewhere of reforming capital gains tax, and that he will not just relax the rules, as he announced yesterday he intended to do. When the United States cut CGT rates in two years--in 1978 and in 1982-- realisations went up, in 1979 by 45 per cent. and in 1983 by 11 per cent. Government revenue actually increased. That suggests that such capital taxes are extremely stultifying, that they are avoided as a result of the many exceptions that Governments build into the rules, and that they are regressive.
When my hon. Friend the Financial Secretary looks at capital taxes in the future, perhaps he will take a leaf out of our own book. I refer to the time when we considered taxation on personal income. When we got rid of penal rates and made the tax fair, overall receipts increased. I am certain that, if my hon. Friend took that approach to capital taxes, and especially to capital gains tax, the experience would be repeated.
I encourage my hon. Friend to look at the body of evidence, which shows that, when capital taxes are reduced and the rules are modified, more venture capital can be raised. In the United States, when the rate was cut to 20 per cent. in 1982, $12.5 billion was suddenly raised by public offerings of shares. When the rate went up in 1986 to 28 per cent., there was a fall of $2 billion.
Similar evidence and similar statistics are available for the venture capital sector. Venture capital will be extremely important, as we move out of this recession into a period of growth, in sustaining the recovery and building a strong future. I suggest to my hon. Friend that, when he considers the tax, one useful change would be completely to exempt shareholdings in unquoted companies. So many of those companies are the result of personal enterprise and of the build-up over a period of years of capital that
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people should be entitled to realise. I hope that my hon. Friend the Financial Secretary will build on our right hon. Friend's reforms.I very much welcome the retirement relief measures, and especially the reduction in the qualifying shareholding from 25 per cent. to 5 per cent. That will benefit the growing number of firms in which the founding investors have reduced their equity. That often happens during the lifetime of a company when outside equity is introduced. My right hon. Friend's deferment provisions are also welcome. They will allow entrepreneurs to move their investments between companies in the marketplace. It is crucial that, when fresh capital is to be moved from one business that is successful to another within a group which is ailing, it should be moved without the burden of taxation. That is a sensible reform, and I welcome it very much.
The importance of my right hon. Friend's measures is that they will ensure that small businesses benefit from maximum flexibility. No longer will conventional entrepreneurs who buy and sell companies attract CGT. In contrast, there are other absurd rules that enable people who realise some capital assets to invest elsewhere. It may interest my hon. Friend to know that, if a farmer selling potatoes under quota happened to reinvest the money in a space station, one of the strange anomalies in the system would mean that he would not be required to pay CGT on the transaction.
I should like the exemption to be extended to more conventional business enterprises, and I am sure that that is precisely what my hon. Friend has in mind. The reform is very welcome. I am certain that it will be welcomed not only in the House, but in the broader business community, and I am sure that it will underpin the economic revival that is under way.
I address my next remarks to Opposition Members. Of course Conservative Members do not like to see an increase in taxation. However, if Labour's policies and not the Government's were being implemented, the changes in taxation that a Labour Budget would bring would be enormous and damaging, and would stop growth in its tracks. By targeting domestic fuel, we are not merely introducing a sensible environmental measure. Over the course of privatisation, prices--especially gas prices--have been reduced in real terms by 20 per cent. The regulator has insisted that that should happen, and he has now set new parameters for increasing the cuts in prices by another 6 per cent. below the retail prices index. The important point is that, once the transformation has taken place and once the policy is fed through, the bills in people's pockets will be reduced by far more than would have been the case if taxes had been levied in another sector where prices had been increased.
I welcome the Budget, and I look forward to hearing what my hon. Friend the Financial Secretary says in support of the measures on capital gains tax reform. I look forward to hearing his response to my few suggestions tonight.
7.36 pm
Mr. William Ross (Londonderry, East) : We all realised when the Chancellor made his Budget statement last year that he was introducing an election budget. That was widely recognised in the House at the time and the point
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was made to him often enough by Opposition Members. In those circumstances, the Chancellor painted a picture of fairly rosy prospects for the coming year. However, he was constrained at that time by membership of the exchange rate mechanism which meant that he could not reduce interest rates. There were many things that the Chancellor would have liked to have done which he simply could not do. In September, as a result of the market forces that Conservative Members so much admire, he was freed. Black Wednesday set him free to introduce his own Budget this year for the first time. He has done so, but it is a year late.The Chancellor has introduced the Budget after setting spending targets last November for the next year of two. Those targets are fixed--they cannot be reduced. A few months later, therefore, the Chancellor has found himself in a firm bind because he faces public expenditure which he must meet although tax revenue will come nowhere close to meeting the figure required. There is an old saying that hope deferred is hope denied. On this occasion, it is a matter of tax deferred being revenue denied, in a year when it is very much needed because the public sector borrowing requirement, with which I shall deal in a moment, is far too high.
I am sure that the Financial Secretary will recall that when the Chancellor made his autumn statement on 6 November 1991, I asked him about the rise in public expenditure, which he told us would be £53 billion over the next three years. The Chancellor replied : "It is an extremely important point that our intention and our policy are to balance the budget over the cycle As he knows, corporation tax is paid a year in arrears and corporation tax receipts, therefore, lag very much behind the cycle. That is why I expect the public sector borrowing requirement to continue to be high next year, even though the recovery will be well under way. The plans that I have announced today and what I have said about the PSBR are consistent with our firm policy of balancing the budget over the cycle."-- [ Official Report, 6 November 1991 ; Vol. 198, c. 461.] We are now moving into the third of those years, and that £53 billion increased expenditure appears as a £50 billion deficit--not quite what the Government and the Treasury had in mind at the time, I suspect. That £50 billion is a horrifying figure.
One wonders exactly what the public sector debt is. I intervened in the speech of the right hon. Member for Westmorland and Lonsdale (Mr. Jopling) to say that I thought that it was over £200 billion. I have found a number of figures one way and another. It is the one figure that no one seems too willing to broadcast. It is, however, self-evident that, whatever our public sector debt is--and my figures vary from just under £200 billion to £240 billion this year, we are adding £50 billion to it. We are increasing the public debt by anything up to 25 per cent. in one year.
That figure is based on the Treasury forecast. I do not think that, given the record of the past few years, any hon. Member will be prepared to take any Treasury forecasts of expenditure, revenue or anything else--with anything other than a great big fistful of salt. Last year, a £28 billion deficit was forecast. That was in March. By November, the figure was £37 billion. Now March dawns again, and it is down to £35 billion. One would need better
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