House of Commons Hansard Debates for 12 May 1993

Mr. Nicholas Brown (Newcastle upon Tyne, East) : I beg to move amendment No. 48, in clause 52, page 30, line 34, leave out sections 257 and' and insert Section'.

The Chairman of Ways and Means (Mr. Michael Morris) : With this, it will be convenient also to discuss the following amendments : No. 49, in page 30, line 34, leave out personal and'.

No. 50, in page 30, line 35, leave out allowances' and insert allowance'.

No. 51, in page 30, line 35, leave out amounts' and insert amount'.

No. 12, in page 30, line 37, after 1993-94', insert

in respect of the married couple's allowance only'.

No. 52, in page 30, line 38, after 1993-94', insert

so far as relates to section 257A of that Act.'.

No. 13, in page 30, line 38, at end add

in respect of the married couple's allowance only'.

Mr. Brown : The amendments tabled by the Labour party would have the same effect as those tabled by the Liberal Democrats--although I see that no Liberal Democrat is here to speak to those, so it would probably be for the convenience of the Committee if I spoke to their amendments as well as ours. Fortunately, the amendments have been grouped together.

Mr. Tim Smith (Beaconsfield) : Where are they?

Mr. Brown : The hon. Member for Beaconsfield (Mr. Smith), who I understand will not be with us in the Standing Committee--that is a source of enormous regret to the Opposition--asks me to explain where the representative of the Liberal Democrats is. As the right hon. Member for Berwick-upon-Tweed (Mr. Beith) has just entered the Chamber, I can say, "There he is," or, "He is there, he is there," as the Prime Minister would point out in that inimitable style that he has made his own.

The other inimitable element of style that the Prime Minister has made his own is, of course, concealed tax increases, which we are discussing today. In case anybody has overlooked it--I am sure that no one in the Chamber has --I must explain that what is before the House is a massive increase, but a back-door increase, in direct taxation. [Interruption.] The Financial Secretary to the Treasury giggles at that idea. I do not know whether he giggles nervously or out of sheer physical exhaustion ; after all, he has had to deal with the Maastricht legislation as well as with the Finance (No. 2) Bill. I should be a great deal more sympathetic to the Government's concealed tax increases if some of them were being spent on procuring the landing platform helicopter vessel from Swan Hunter. I understand that the Treasury is taking the credit for the fact that the order has

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gone to Barrow-in-Furness rather than to Swan Hunter. If that is an opening shot in the negotiations, it is not a worthy one. The tax increases before us are of substantial significance. The changes that the Budget invites us to make in personal allowances are designed, as the hon. Member for Dover (Mr. Shaw) will be well aware, to bring in an extra £2.5 billion for the Exchequer in 1994-95 and an extra £2.7 billion in the following year. Those are substantial sums.

That Tory trick has been tried before. In 1981, the then Chancellor froze all the allowances and gained an extra £2 billion. What I think will anger the electorate--last week's election results show the extent of public anger with the Conservative party--is not just the breaking of pre- election pledges about tax increases but also the sneaky way in which the Chancellor has gone about the increases. It is clear that Treasury files have been scoured for tried and tested ways of raising taxes that at least the Chancellor hopes the taxpayers will not notice. Clearly, however, they have noticed. Let us take the obvious example. Although an increase of a penny in the pound in income tax would have been more progressive than a 1 per cent. increase in employees' national insurance contributions, the Chancellor chose the latter. This is not because such a move provides more help for the poor--obviously it does not--but because the Chancellor clearly believes that it does not look so much like a tax increase.

Mr. Tim Smith : Will the hon. Gentleman give way?

Mr. Brown : When I finish this point, I shall of course give way to the hon. Gentleman, who is a firm favourite of mine and of other Labour Front-Bench Treasury spokespersons.

Exactly the same sort of thinking as that to which I have just referred applies to the extension of valued added tax to domestic fuel and charities. It is pretty clear that the electorate have seen through these devices and are even more angered at the attempted deceit than at the tax increases themselves. What the Treasury team has given us are the methods of Arthur Daley, used by those who clearly regard Alan B'Stard as a role model.

I give way to the hon. Member for Beaconsfield (Mr. Smith), without the obvious implication.

Mr. Smith : I am sure the hon. Gentleman knows that the principal reason for increasing national insurance contributions is that the national insurance fund is now in substantial deficit. Indeed, it will still be in substantial deficit after the increase. I imagine that the hon. Gentleman supports the contributory principle on which it is based. Contributions must be increased when outward payments are rising.

Mr. Brown : It would have been more helpful if the hon. Gentleman had reminded us which party had scrapped the Treasury's contribution to the national insurance fund. If his case is based on hypothecation, why, a few years ago, did not the Government think that that was a very strong argument? The Standing Committee will miss the hon. Gentleman, as he brings to the arguments a quality that one does not necessarily find in all his hon. Colleagues. In making that comment, I do not intend to cast aspersions.

I should like to move on to the real topic of this debate--not just tax rises, but sneaky tax rises. Taken together,

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the Government's changes in allowances and the change to the lower rate band, which, in fairness, has also to be considered, will result in a net gain to the Exchequer of £2.7 billion by 1995-96. Of course this is significant. We should discuss the lower rate band as a reform, as a means of giving back to taxpayers more of their own money, alongside the freezing of the personal allowances, which is a means of taking from taxpayers more of their own money.

Let me state the brutal arithmetic. In 1995-96, the Chancellor will gain about £96 million from freezing all the personal tax thresholds, and another £1,170 million through further restriction of the married couple's allowance. On the last point, hon. Members will recall how thoroughly the Labour party was denounced during the 1987 general election campaign for proposing to do something similar. The present Prime Minister denounced our proposals, and then adopted them. To offset the substantial inflows to the Exchequer that I have just described, it is right to consider the cost of about £850 million to which it is said the lower rate band will give rise in the same financial year. That money goes back to the taxpayer.

However, the changes to mortgage tax relief gain an extra £870 million for the Exchequer. Here again, the Chancellor probably hopes that people will not notice or will not mind so much, as mortgage interest rates have come down following his spectacular policy of leaving the ERM and reducing interest rates. However, long-term interest rates are rising, and are certainly higher than short-term rates. We all know what that probably means for the future, although I am not sure that I agree with the Chancellor that letters to him urging rises in interest rates are a lead indicator.

Mr. David Shaw (Dover) : As one of the more sensible members of his party, does not the hon. Gentleman think that it is sensible for the Government to raise revenue to reduce a deficit which has been caused by a recession, not just in the United Kingdom, but worldwide? As he has raised the issue of the long-term rate of interest, surely he recognises that, by reducing the deficit, we will secure a better future, with a reduced long- term rate of interest. Does he not feel, in the national interest, that raising additional revenue in that way is good?

Mr. Brown : The hon. Gentleman certainly knows how to launch a wounding attack. Being described as one of the more sensible members of the Opposition Front Bench by the hon. Gentleman is designed to do me enormous damage on Tyneside, or at least among those who follow the debates in Committee on the Finance Bill.

The hon. Gentleman has obviously been following my speeches, including my reply to the Second Reading debate and my earlier speech on economic affairs, when I drew attention to the deficit and to the dangers inherent in it. The deficit is a problem. It would be a problem for us in government, as it is for the Government, but let us not forget how it came about. It was the Government who said before the general election that it was safe to reduce taxes and who say that recovery is happening, but yet have had to reduce, rather than increase, their growth forecasts.

Above all, it was the Government who in 1988 said that it was right to cut the top rate of income tax. The Labour

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party voted against that, after a huge fight about it during the passage of the legislation that year. I think that the hon. Gentleman served on the Standing Committee, so he will recall the events with some affection. It would be better if he showed sorrow and repentance, although those emotions and characteristics are not normally associated with him.

Moving to the Chancellor's tax hike, obviously he thinks that he can slip through this substantial tax increase--clearly that is what it is--without people noticing or objecting. He has allied to the changes on mortgage tax relief changes to car tax allowances, which will bring in an extra £370 million in 1995-96, and changes to the tax treatment of relocation expenses, which we will examine in detail in Committee, which will bring in an extra £206 million, not an insignificant amount.

When we add the gains from freezing all the tax thresholds and eroding personal allowances, and deduct the much smaller cost of the lower rate band, we arrive at a net gain to the Exchequer for the financial year 1995- 96 of £2.7 billion. Expressed as a proportion of all revenues for the Government, that is an increase of 4 per cent. It is significant because of the way it is constructed. Particularly seriously for the Opposition, it is significant because it is also regressive.

The very poorest are not affected. One fifth of all adults do not pay income tax, even at the 20 per cent. rate, because they are too poor. They way to target help on the poorest is not through the tax system but through the social security system. However, I suspect that the Chancellor and the Chief Secretary were even less receptive to that point than usual when they came to construct this year's Budget. Of course, on past form it is not a point that one would expect the Secretary of State for Social Security to have raised or pressed with them.

The Institute for Fiscal Studies, in its green budget for this year, draws attention to the gains and losses from restricting allowances and from expanding the reduced rate band. For its calculation, it used a figure of £1,000 rather than the Chancellor's £500--the broad flow gives a similar distributional effect. The institute's work shows that the very poorest are not affected, because they are too poor to be affected by any change in the construction of the tax allowance system. The next poorest-- those in the third, fourth and fifth deciles, who have below ordinary or medium means--are adversely affected by the change. People in the sixth, seventh, eighth and ninth gain slightly from the change, and the wealthiest 10 per cent. are also slightly adversely affected because they come into a higher rate band.

We are concerned, of course, about the regressive effect of the change-- particularly the way in which it will impact upon those who are not the poorest in our society, but next to them. They are typically persons in work but earning £100 a week or less. The freezing of allowances and the expanding of the lower rate must cumulatively have a regressive effect.

Single people with incomes of £3,535 up to a level of £5,535 are £18 worse off because of the changes, but everyone with an income of less than £5,895 must be worse off with the lower rate band than they would have been with the indexation of personal allowances. Because of this, the parliamentary Labour party has tabled an amendment whose intention is to restore allowances. By this means, we wish to help those in our society who are on poor wages. We object very strongly to

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the dishonesty of the construction of the Government's tax policies. We also object very strongly to the use of the lower rate band and the freezing of allowances to make changes which are demonstrably regressive.

Mr. Tim Smith : It is a matter of considerable regret to me that I shall not be serving on the Finance Bill Standing Committee and shall not have the opportunity of hearing the entertaining words of the hon. Member for Newcastle upon Tyne, East (Mr. Brown).

It is worth recalling the background to any debate on the indexation of personal allowances, especially as the hon. Member for Birmingham, Perry Barr (Mr. Rooker) is present in the Chamber. Hon. Members will recall that in the 1970s there was no obligation on the Government of the day to index personal allowances. When inflation reached 25 per cent., in 1975, there was pressure, not only from the Opposition of the day but also from the hon. Member for Perry Barr and his colleague who is now the hon. Member for Preston (Mrs. Wise), to change the law.

This was successful, and that change has been one of the most important and radical changes to tax law in the last 20 years. It is now incumbent on the House, if it does not want to index, to make a positive decision in that sense. The change was more important in those days, the late 1970s, when inflation was running at an average of about 15 per cent. per annum, than it is today. None the less, it is important even today.

A decision not to index these allowances should not be taken lightly. I would be the first to recognise that, if one does not index allowances, one is increasing the tax burden on those people on the lowest incomes. That was precisely the concern of the hon. Member for Perry Barr when he pursued this issue so assiduously, and ultimately so successfully, in the late 1970s. I am very glad that at that time the Conservative Opposition supported him in that endeavour, because it was a very important change.

The Financial Secretary to the Treasury (Mr. Stephen Dorrell) : I agree with what my hon. Friend is saying, and he is making an important point. I wonder whether he is aware of the statistical background against which this argument is taking place. Over the five years between 1974 and 1979, the Labour party cut the real value of the single person's allowance by 21 per cent. In the period since we have been in office, including this year's proposals, the single person's allowance has risen by 25 per cent. in real terms.

Mr. Smith : I am grateful to my hon. Friend for reminding the Committee of the background to the decision, but I was not surprised at what he had to say.

The concern of hon. Members at that time was not only that there had been substantial increases in tax rates in the Budget of March 1974--when Denis Healey had increased the standard rate of income tax from 30 per cent. to 33 per cent.--and in the following year's Budget of March 1975, when the standard rate was increased again from 33 per cent. to 35 per cent. In addition, we had 25 per cent. inflation and no indexation of tax allowances. As a result, not only was there a massive increase in the tax burden for every income tax payer, but his bore down particularly heavily on people on low incomes. That was the concern of the hon. Member for Perry Barr. By that time, much of the damage had been done, because changes were not made until the Finance Act 1977.

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Mr. Jeff Rooker (Birmingham, Perry Barr) : It was 14 June 1977. 4.30 pm

Mr. Smith : It was 14 June, 1977. The hon. Gentleman has that date etched on his memory--rather as I do 28 April 1977 when, partly as a consequence of the huge changes in taxation, I was elected to the House for the first time. I remember the miners of Ashfield showing me their pay slips and telling me of the massive increase in the tax burden they had suffered under Denis Healey, the most unpopular Chancellor ever in Britain. We will never again have such an unpopular Chancellor because of such a massive increase in the tax burden.

Mr. Rooker : Will the hon. Gentleman give us a forecast of when he thinks the tax burden will once again be reduced to the level that it was left by Denis Healey?

Mr. Smith : At that time, people were concerned about direct taxation. Funnily enough, and it is a rather strange thing, most people have a good idea how much tax they pay--for example, in local taxation. My post suggests that people have a pretty good idea of how much council tax they pay. It is a tax with a high profile, as it should be. So is income tax. People get a pay slip every week and they can see how much income tax and national insurance is being deducted. However, if the average person in a pub was asked how much tax he had just paid on a round of drinks, fortunately, he would probably have no idea.

Mr. Alan Milburn (Darlington) : Fortunately.

Mr. Smith : It is extremely fortunate, and it is true for all Governments.

There is no doubt that some ways of raising tax are less painful than others, simply because they have a lower profile. Some taxes have the advantage of being buoyant, some do not. There are many different considerations when one is deciding on the most sensible tax structure, but all those factors need to be taken into account. At that time, people were concerned about direct taxation, and they are still concerned. They are concerned principally, but not exclusively, about tax rates, but they are also concerned about tax allowances and the point at which their income starts to be taxed. The minimum amount that one can earn before one has to pay tax is an important question, and we are considering it this afternoon. It is not a decision to be taken lightly to decline to increase the tax thresholds. One needs to give that serious consideration, and it is precisely what we are doing in the debate.

The hon. Member for Newcastle upon Tyne, East referred to the 1981 Budget. I am probably right in saying that it was the last occasion on which such a decision was taken. That may not be so, but it certainly involved a large increase in taxation. He referred to a figure of £2 billion, and I believe that was the figure by which taxes were increased in 1981.

Although the circumstances were not the same in 1981, they were similar in some ways. There is no doubt that the Budget in 1981 was extremely unpopular--of course it was ; no one likes having their taxes increased, it is as simple as that--but it was also a very courageous Budget, which established the foundations for economic recovery throughout the 1980s, because it tackled the problem of the public sector borrowing requirement. The Chancellor,

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Lord Howe--Sir Geoffrey Howe, as he then was --made a clear commitment to sound finances on the part of the Conservative Government. We had to deal with the difficult problem of the PSBR, and my right hon. Friend the Chancellor has done the same this year. This, too, is not a popular Budget, and we do not have to look far to see why. If we look at page 6 of the Red Book, we find that taxes are to rise by nearly £500 million in the current financial year, by more than £6.5 billion next year and by more than £10 billion the year after. Of course such measures are never likely to be popular.

Mr. Nicholas Brown : It would help my understanding of these matters if the hon. Gentleman could explain why--if the Government were as committed as he said to sound finances in 1981--the situation has since deteriorated to such an extent that it is necessary to have tax rises to reaffirm the same commitment that was given then? What has happened over the last 10, 11 or 12 years? Why have matters deteriorated in such a way that we need to hear the same speech?

Mr. Smith : I do not want to leap about like a grasshopper in what is a carefully prepared and thought out discourse. I will come to why we now face such a large PSBR, to which the hon. Gentleman referred in his speech.

The decision not to index personal allowances must be seen in the broader context of the important need to raise revenue to tackle the PSBR. The point that I was making is that Sir Geoffrey Howe in his 1981 budget did exactly that. It was extremely unpopular at the time, but it established a basis for economic recovery throughout the 1980s. It will not be long before we think the same about the 1993 Budget.

Mr. David Shaw : My hon. Friend says that this is not a popular Budget. Will he consider that very carefully? It has been popular with overseas holders of sterling, who have seen that the pound is worth supporting and that the Government have been running the finances well ; it has been popular with overseas purchasers of gilts ; the Government's borrowing requirement has been well met by support from overseas purchasers ; it has been popular with business men, who feel that it is the basis on which recovery can be built ; it is clearly popular with overseas investors, who still intend, as far as one can see, to locate their businesses here ; it is clearly popular with the people who can help us create jobs in this country. Perhaps my hon. Friend will consider that it is a popular Budget with all the people who count, but what we must do is explain it to the people better--

The Chairman : Order. The hon. Gentleman is not being popular with the Chair. We are supposed to be discussing personal and married couples' allowances.

Mr. Shaw : I understand your point, Mr. Morris, but if I can make the key point--

The Chairman : Order. No.

Mr. Smith : I have to say that I was taking a rather narrow view of popularity : I was referring to the voters in my constituency. I accept what my hon. Friend says--he makes an important point--because, in the long run the Budget did appeal to the people he is talking about. They

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too recognise that the decision not to increase the personal allowances was not an easy decision to take. It was a difficult decision, but the right decision in the circumstances. In the long run, it will have very great benefits. There are two different contexts.

Mr. Clive Betts (Sheffield, Attercliffe) : The hon. Member is comparing the 1993 and 1981 Budgets, and he is saying that the latter laid the foundations for what he seems to think was a recovery in the 1980s, and that the former will do the same for the 1990s. But surely in 1981 it was unnecessary for the Government to freeze the uprating of personal allowances in line with inflation. Why then is it necessary in 1993, given that he has drawn the comparison between the two Budgets?

Mr. Smith : I think that I am right in saying that the Government did exactly that in 1981. The hon. Member for Newcastle upon Tyne, East (Mr. Brown) also confirmed that that was the case. That is why I was drawing a parallel with 1981. I was saying that on both occasions difficult decisions had to be made in order to provide a sound basis for economic recovery.

I want briefly to deal with a point raised by the hon. Member for Newcastle upon Tyne, East. He asked why the Government did not increase the standard rate of income tax, rather than, for example, increasing national insurance contributions. It is an important point that needs to be addressed. I suggested to him that it was because the national insurreasons that it would be wrong to go into in the present debate. I accept what the hon. Member says about the Treasury supplement. I would like to see us get back to a national insurance fund which is properly funded.

What I wanted to say about the decision not to index the tax allowances was that it needed to be looked at in two contexts. The first is that of increasing taxes overall. That is what will happen. I have already quoted the figures to the Committee. It is one of a number of different measures, some of which could be described as more progressive than others. We could have some debate about which taxpayers will be hit hardest by this. I think that the figures that the hon. Member for Newcastle upon Tyne, East quoted earlier, from the Institute for Fiscal Studies, were prepared before the Budget. At least, it sounded like it to me, because he referred to an increase in the 20 per cent. band of £1,000 whereas, as I understand it, the 20 per cent. band will be increased by only £500.

Mr. Nicholas Brown : That is what I said.

Mr. Smith : Yes, the hon. Gentleman made that point, but I was suggesting that, as the figures from which he was quoting referred to £1,000, they must have been prepared before the Budget, or, if they were prepared after the Budget, they must have been prepared by someone who had not read the Budget properly.

Mr. Brown rose--

Mr. Smith : Whichever it was, they were not very helpful figures, because they did not refer to what had actually happened.

Mr. Brown : The hon. Gentleman knows perfectly well that I said that I was quoting from the IFS's green budget,

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which was prepared in advance of the Budget. It is a document with which he is perfectly familiar. The graph on the distributional effect was prepared on the basis of £1,000, and I acknowledged that the band had been expanded by only £500. But it does not affect the broad distributional effect, the fact that the poorest neither gain nor lose because they do not pay tax, the next poorest lose and the people who are slightly better off may gain a little, but not a lot.

Mr. Smith rose--

Mr. Dorrell : My hon. Friend might like also to ruminate on the fact that, although the hon. Member for Newcastle upon Tyne, East quoted from an IFS report on what might happen on the basis of its green budget, he very noticeably did not quote from the IFS analysis of what will happen as a consequence of the Government's actual Budget. It has analysed the distributional effect of the Budget, and the evidence that it has produced shows almost precisely the same tax take all the way up the income scale. Decile by decile, the effect of the Budget is the same, according to the IFS.

Mr. Smith : I am very grateful to my hon. Friend for confirming what I was about to say, which was that the hon. Member for Newcastle upon Tyne, East had, first of all, quoted from a document prepared before the Budget and, secondly, had looked at two measures in isolation rather than looking at all the Budget measures together. Let me take one example, the taxation of company cars. We all know that the amount of benefit in kind which is subject to taxation if one has a company car has been increased year by year for the past five years or so, and has now reached the point--I fully support this, I may say--at which taxpayers are now required to pay tax on the full economic benefit of having a car. We also know that most people who drive company cars are on higher salaries, and we must take account of that in assessing the overall distributional effects of the Budget.

I am therefore most grateful to my hon. Friend the Financial Secretary for confirming what I believe--that it is important to look at all these cases together, although we are just debating the one change at the moment, the decision not to index tax thresholds. If we do that, we find that the effect is reasonably fair for everyone. We must all bear a bit of pain, and all income tax payers must pay a bit more.

One of the more important of the difficult decisions made by the Government to raise more revenue was not to increase the tax rate. Some people have said that it would have been more straightforward to do so, and they have asked why the standard rate or the higher rate of income tax was not increased. I believe that it would have been a mistake to do so.

4.45 pm

To increase either of the tax rates would have been a major disincentive for people, a step backwards. What my hon. Friends at the Treasury have done is to take another major step forward to a tax rate of 20p in the pound. That is very good news indeed. It is our ultimate objective, and we have taken another small but important step towards it in this Budget. In the long run, it will be a very popular decision. At the time of last year's Budget, the decision was derided by some. They said that the Chancellor had got it wrong, but only a few weeks later, the electorate decided

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that the Chancellor had got it right. It was the right decision to introduce a 20p tax band. It was a decision that I supported, and I very much welcome the present decision to increase the tax band. I want to have a look not just at the need to fund the public sector borrowing requirement, although I feel that it is incumbent on Opposition Members, if they object to every tax increase, to say where they would get the money from. It was noticable in Monday's debate that the hon. Member for Peckham (Ms Harman) consistently refused to say how a Labour Government would increase taxes. That is not a responsible action. With a large PSBR, some decisions to increase taxes are necessary, and we should be told what the Labour party's alternatives are. But I do not suppose that we will hear anything about that in this debate. [Interruption.] Does the hon. Gentleman wish to say something? If so, it is normal practice here to stand up.

Mr. George Howarth : (Knowsley, North) : If the hon. Gentleman is trying to tempt my hon. Friend the Member for Peckham into responding, perhaps he could say how he thinks the Chancellor should fund the PSBR next year. If he cannot do so--and I suspect that the Chancellor cannot--how can he expect my hon. Friend to say how she would do it in two or three years' time?

Mr. Smith : There are published proposals that take us through to March, 1996, three years away. They are projections, but what else could they possibly be? They cannot be statements of faith. I will tell the hon. Gentleman something. The Treasury has been widely criticised for failing to forecast what the PSBR is likely to be, but I refer the hon. Gentleman to a table in the Red Book--which I will probably be unable to find now because of the size of the Red Book and the fact that I need to keep on talking while I look for it. Because we now have a panel of independent advisers, somewhere in the Red Book--my hon. Friend the Financial Secretary may be able to find it for me--is a very interesting table which shows that each of the independent forecasters has made a separate forecast for the PSBR, and that in 1995-96 the discrepancy, if I remember rightly, is between £20 billion and £50 billion.

That demonstrates the difficulty of forecasting a figure which is itself the difference between two very large figures. It is like trying to forecast the balance of payments. So what the hon. Member for Knowsley, North (Mr. Howarth), who keeps intervening from a sedentary position, should appreciate is that forecasting is an extremely inexact science.

While the Treasury has got it wrong, so has every other economic forecaster. The table, which I now learn from my hon. Friend the Financial Secretary is on page 54 of the Red Book, shows that Mr. Wynne Godley has the highest forecast of PSBR, at £60 billion, in 1994-95. It is only next year that we are talking about, less than a year away. Mr. Godley is forecasting £60 billion, whereas Mr. Congdon is forecasting £38 billion, a difference of £22 billion in the forecast of the PSBR for next year. That illustrates the difficulty in forecasting the PSBR.

Mr. Robert Ainsworth (Coventry, North-East) : Would the hon. Gentleman care to make a few comments on the forecast immediately before the last election of tax decreases year on year, made by the Chancellor-- and the Prime Minister, I think ?

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Ms Harriet Harman (Peckham) : That was not a forecast ; it was a promise.

Mr. Smith : Unfortunately, I do not have last year's Red Book with me, so I cannot say what tax decreases were forecast. But, of course, the main tax decrease that was proposed in last year's Budget was the introduction of the innovative 20p tax band to which I have already referred, which was opposed by Opposition Members but was widely supported by the electorate only a month later in a general election.

Mr. Jim Cunningham (Coventry, South-East) : I accept what the hon. Gentleman said about the 20p or 20 per cent. tax band, but does he not agree that that was offset last year and this year--last year by the increases in VAT and this year by the proposed increases in VAT?

Mr. Smith : I have already said that increases in taxes are unpopular, but Governments have to make unpopular decisions sometimes, in the national interest. That was an unpopular decision that will form the basis for sound economic recovery.

Mr. David Shaw : My hon. Friend is talking to an amendment on revenue raising and the issue whether we should be raising additional revenue. He drew attention to the fact that the Opposition spokesman, the hon. Member for Peckham (Ms Harman), refused to detail how alternatively she would raise additional revenue. Does he conclude that, if she proposes to keep the PSBR the same, she now really wants to reduce public expenditure? Is that not a major change for the hon. Lady and the Labour party? Does the Labour party now want to cut public expenditure significantly, if it will not raise additional revenue?

Mr. Smith : I am very sorry to disillusion my hon. Friend, but I recall that, in her speech on Monday, the hon. Lady's solution to the PSBR was to cut taxes and increase spending. She said "Let's have more spending on education and training, and let's have more investment allowances for companies." That means lower business taxes and higher public spending. I am only a simple accountant, but if one cuts taxes and increases spending, I think I am right in saying that one adds to the PSBR. So I do not think that the hon. Lady's solution is the right one.

My hon. Friend the Member for Dover (Mr. Shaw) is entirely right. There are only two possibilities : one has either to increase taxes or to cut public spending. Those are both difficult and unpopular decisions that Governments have to take.

The second yardstick by which this matter should be considered is the decision in the Budget to devote what help was available to business ensuring that the tax cuts that could be made went to business. That was the right balance, I think, at the present point in the economic cycle.

As my hon. Friend the Member for Dover said, as a result of that, this Budget was widely welcomed by business. If we look at the table on page 6 of the Red Book, we can see why. The decision not to increase business rates by more than indexation will cost the Exchequer £370 million this year, but that decision has been widely welcomed by business, as has the decision debated last night to improve VAT relief on bad debts. That will cost £150 million in the current year, but it will bring immediate relief to many companies that have cash flow difficulties.

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There is an important balance here between business taxes and personal taxes. I believe that the Government have that balance right, too, so it was right in the Budget to make some increases in personal taxation, and that is why I support the clause.

Mr. A. J. Beith (Berwick-upon-Tweed) : The trouble with the small, but important, steps towards the 20p band to which the hon. Member for Beaconsfield (Mr. Smith) referred is that individually they often have the effect of not helping the poorest and lowest earners. That is a point to which I shall return in a moment. To be in favour of a general objective is not necessarily the same as supporting proceeding to it by steps which do not in themselves help the people it is supposed to help.

We have on the Order Paper two amendments with the same objective as the amendments that the Labour party has put forward today. They would stop the Government from failing to increase the personal tax allowance, but continue the freezing of the married couple's allowance. By a neat bit of gazumping, the Labour party in the course of the past three days put down more amendments, thus widening involvement in this debate.

The freezing of the personal income tax allowance brings more people into tax. I remember speech after speech by Chancellor after Chancellor and Financial Secretary after Financial Secretary saying how many people the Government were taking out of tax. If one freezes personal income tax allowances, one brings more people into tax, and they are by definition people at the lowest levels of income. The married couple's allowance is not in the same category. Some people regard it as an anomaly because it is not related to whether there are children in the family. Freezing it seems to have become quite a common practice and to enjoy reasonably widespread support, but we would support that only so long as child benefit continues to be uprated annually, at least by the rate of inflation.

The Government are selling their 20p tax rate as if it is helping those on low incomes and is in some way a better measure than indexing the tax allowance. That is patent nonsense. The small steps taken towards the 20p tax rate, such as the one taken in this Budget, are not a significant way of helping those on the lowest incomes. It is, indeed, a kind of deception of the British people.

If steps to the 20p rate are paid for by not indexing the basic rate, one hurts the people the policy is supposed to assist. Every person with income above £3,445 will lose £18 a year, because the personal allowance should have been uprated by 2.6 per cent.--using the December 1992 RPI--to £3,535, which is £90 higher, and since they would have paid tax at 20p on that £90, the loss is £18.

Instead of uprating the allowance, the Chancellor has widened the 20p band, but this applies only to people with incomes above £5,445, so the income tax deduction from the new wider 20p band begins to offset the tax increase from not indexing only for people who have annual incomes above £5,445. It is only at incomes above £5,805 that the income tax cut from the wider band offsets the increase from not indexing the allowance, so from the point of view of those on the lowest incomes it is a poor bargain ; they would have been much better off if the tax allowance had been indexed. The Chancellor continues to boast that the extension of the 20p rate is assisting the poorest in society, but in fact it does not have that effect.

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