House of Commons Hansard Debates for 12 May 1993

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The Budget shows the real reason why the 20p band method appeals : it can bring in more revenue by sleight of hand than it costs. The cost of extending the 20p rate by £1,000 will be £710 million in 1994-95 while the revenue raised from restricting mortgage tax relief to 20p in 1994-95 will be £820 million. The revenue raised from restricting the married couple's allowance to 20p in 1994-95 will be £910 million while the revenue raised from restricting the taxation of dividends to 20p will eventually be nearly £1 billion in a full year. So the gain to the Exchequer is larger than the cost. One begins to smell a rat when one sees that happening ; one discovers that it is not a measure to help the lowest paid and it is also a revenue-raising measure.

The Chancellor, nearer the next election, will announce that he is widening the 20p band yet again. I use the word "Chancellor" in the way in which the Prime Minister now uses it, to denote whoever happens to hold that office. I say that advisedly because I have been passed a note saying that the Chancellor, speaking elsewhere, is announcing at this very moment that he does, after all, have some regrets. I have no information about which matters he regrets--we shall discover that on another occasion.

When his successor, whoever that may be, announces that he is widening the 20p band again to give millions of people a tax cut, will he point out that that 20p band has cost people money? The numbers will work out in favour of what the Chancellor claims to be his policy only if he fully replaces the 25p rate by the 20p rate. Given the PSBR forecast, there cannot be any serious possibility of that happening.

5 pm

The hon. Member for Beaconsfield (Mr. Smith) referred to the basic decision in the Budget not to increase the standard rate, but instead to use the national insurance contribution as the means of raising the equivalent of a penny, or somewhat less than a penny, on the standard rate of income tax. The hon. Gentleman justified that by reference to the national insurance fund and to the fact that the insurance fund will be in deficit if that is not done. But it will still be in deficit even if that is done. This action is not a balancing act or an actuarial balancing of a contributory national insurance fund, but the Government raising a penny on income tax without breaching the doctrinal objection to raising a penny on income tax which their election commitments represent.

As the Government have broken so many of their other election commitments in the tax area, I think that we, as Opposition parties, could now absolve them from any further commitment or responsibility at all. Nobody believes that the Government are bound by any of those promises any more, so they are entitled to start assessing what might be good for the country as opposed to which of their promises they are prepared to break and which they are not prepared to break. If the Government are to raise the equivalent of a penny on the standard rate, they should do it by the standard rate system and not by a system which fails to tax higher levels of income, fails to tax benefits and perks and fails to tax investment income. That is not a sensible route to take.

Mr. Tim Smith : Will the right hon. Gentleman confirm that it is Liberal Democrat policy to increase the standard rate of income tax?

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Mr. Beith : We are in a rather different position from that of the hon. Gentleman's party. At the general election, we told people that in some circumstances we would raise the standard rate of income tax, and we defined those circumstances. The hon. Gentleman, who said that he would never raise the standard rate, can hardly criticise me when he now represents and appears to support the actions of a Government who have done so, and who have done it through the national insurance route and have used a quite spurious argument for doing so.

Mr. Dorrell : Would the right hon. Gentleman make it clear that he is distinguishing his position from that of the Labour party by saying that he is still bound by the commitments that he gave to the electorate at the general election?

Mr. Beith : That is an odd question from a member of the Government : I cannot fathom its intricacies, particularly in reference to the Labour party. I shall seek to uphold the policies and ideas that we put forward at the election. I hope that the Conservatives, like most political parties, will have the sense to notice if they are occasionally wrong. The Chancellor has announced that he now has some regrets, but so far I see no reason to change any of the policies that we advanced at the election.

Mr. Thomas Graham (Renfrew, West and Inverclyde) : The right hon. Gentleman will remember that, just weeks before the general election, the Conservatives were accusing the Labour party of proposing a £36 billion PSBR. Yet the Conservatives are now introducing proposals similar to those advanced by the right hon. Gentleman. After one year of this Conservative Government, the country is in an economic mess. I am sure that if we had a good look at the books any one of us could do a better job than the Government are doing.

Mr. Beith : It is nice to have such robust help in Committee. The hon. Gentleman makes a fair point.

I wanted to argue the merits of being straight about using the standard rate rather than disguising standard rate increases through national insurance increases which do not bear fairly on people and do not raise so much revenue. The reason for that is that they do not apply to levels of income above £420 per week, they do not apply to benefits and perks, and they do not apply to investment incomes. We have proposed ways in which we could move from the present system to the wholesale amalgamation of national insurance with the income tax system. If the Government propose to add to the tax take, they should at least do so by using the standard rate income tax system. There are huge costs to the Government and even greater costs to business from our persistence in running the two systems side by side. I do not share the belief of the hon. Member for Beaconsfield that we can somehow resurrect the contributory system which, in effect, has been destroyed. There is no actuarial balance in the fund ; it is all a myth. The hon. Gentleman knows that perfectly well ; otherwise, he would tell me that there was not a £2 billion deficit in the national insurance fund and that it was all covered. He knows perfectly well that it is not covered and that the fund is not in balance.

Mr. Tim Smith : Entitlements to benefits depend on contributions. That is a good thing. Is the right hon. Gentleman saying that he would sweep all that away as well?

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Mr. Beith : The hon. Gentleman must also know that most of what is paid out in the form of benefits is not based on contribution entitlements. The contribution side now plays a small part. The hon. Gentleman should reflect sometimes on the extraordinary position in which people such as his constituents find themselves. As Members of Parliament, we have to give them a letter which explains that their failure to make two contributions in 1956, of which they were unaware at the time, has left them unable to claim a benefit now. The whole system is creaking and groaning, and it is time for it to be replaced by one which streamlines the two measures. However, that takes us wide of the clause.

I am arguing that the Government are trying to use a variety of other devices to avoid doing what they would otherwise be doing in the circumstances. They would be saying, "We got it wrong ; the economy was in far worse off a mess than we said ; the PSBR is appalling and will continue to be appalling ; we must raise more tax and we shall therefore raise the standard rate." That is what the Conservative Governments might have done in previous years, but they do not do it now because they have made a fetish of never raising the standard rate of income tax.

When we think about the allowances, we are bound to reflect on the strange perks and loopholes which still exist in the system. At the moment when the Government are exacting from people the extra costs of not indexing the allowance, Ministers appear still to enjoy the perk of having cars to drive them from their homes to their Departments. They still appear--I say "appear" because I get very evasive answers from Ministers--not to be paying tax on a benefit which is taxable for anyone in an equivalent position.

All sorts of mysterious perks and hidden benefits are still tucked away in the tax system. Such perks never work to the benefit of people at the lowest levels of income. Those people are hit by the full force of the pay- as-you-earn system, and if they are at the bottom of the scale they are hit far more forcefully than those at higher levels of income who do not have to bear the higher cost of national insurance contributions.

Mr. Milburn : The right hon. Gentleman says that he receives evasive replies from Ministers. I do not know whether he had an opportunity to read The Guardian this morning. The Financial Secretary is quoted there and I thought that his reply was far from evasive. He made it clear that, if he had to pay the full tax that was due on the perk, he would get up and walk.

Mr. Beith : Not only did I read the article, but there is a quotation from me in it, as the hon. Gentleman may recall. I do not remember those words being attributed directly to the Financial Secretary. A number of other interesting comments were attributed to other Ministers, or were said to have been made by unnamed Ministers.

In the course of the day, it has been drawn to my attention that, when the basis on which the concession appears to exist was introduced--it was part of a change made by Denis Healey when he was Chancellor which was intended to bring all journeys to work within the tax system--Ministers were told that it would not affect them and that it might be a good idea if they occasionally gave their civil servants a lift because that would help to emphasise the fact that the car was for business use and not a perk.

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Mr. Tim Smith : Did Denis Healey say that?

Mr. Beith : I do not know who gave the advice, but I believe that such advice was given.

The clause and the amendments relate to those at the bottom of the tax scale who get none of the little let-outs and loopholes. They bear the full brunt of tax, and in a number of respects they will be disadvantaged by the small steps towards a 20p band if those small steps are financed by tax allowances not being indexed.

The work done by the hon. Members for Preston (Mrs. Wise) and for Birmingham, Perry Barr (Mr. Rooker) in the famous amendment was an important part of tackling poverty. It was a measure to ensure that the Government did not continue without statutory or parliamentary authority to scoop tax from those least able to bear additional tax burdens. In any year in which the Government fail to abide by the Rooker-Wise principles, they deserve to be challenged and tested, because the case that they have advanced for gaining extra tax income to deal with the PSBR is not improved when elements of that tax income seem to be earned unfairly from those least able to bear it. The case is undermined by the fact that the failure to spend money on various investments has prolonged the recession and, therefore, increased the PSBR. If the Government want to come to the House and say, "Yes--we made a mess, we have a problem and we have a huge public sector borrowing requirement ; as the Red Book shows, we shall have a huge public sector borrowing requirement even if we get growth ; yes, we need to raise tax revenue to get that growth," why do they not use known, fair and trusted parts of the tax system to raise that revenue instead of raising it by the back door?

Mr. Milburn : My hon. Friend the Member for Newcastle upon Tyne, East (Mr. Brown) described the freezing of personal allowances as a sneaky measure. He is absolutely right, because the freezing of personal allowances is a tax rise in all but name. The measure will hit both ends of the income scale. It will bring more people on middle incomes into paying tax at the higher rate. It will have a serious impact on poorer families in my region--hon. Members will know that my region has the greatest concentration of low-paid people in the country. It will ensure that they pay a hefty price for the Government's economic mismanagement.

I was taken by the speech of the hon. Member for Beaconsfield (Mr. Smith), who managed to dig himself into a substantial hole by arguing that, in 1981, it was necessary to do exactly what is being done now, in the hope that it would never be done again. However, 12 years later we have more unemployed people, a bigger public sector borrowing requirement and graver economic circumstances than ever before. Who was in charge during that period? It was certainly not the Labour party. The Minister and his hon. and right hon. Friends got us into the current mess. Frankly, the poorest people in the country are now paying the price for that mess.

The measure before us today is not only a tax on the poor--it is a tax on my region in the north. Across the country, 300,000 people who do not pay tax at present will be brought into the tax net for the first time. The 4.5 million people who are low-paid and who pay tax at the 20p rate at present will also lose. They will not gain a penny from the extension of the 20p band, but will lose

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from the freezing of allowances. They will be asked to contribute to the £700 million tax bill that the freeze on allowances will cost taxpayers.

As usual, the Red Book is fairly categorical. We are talking about enormous sums of revenue that will be raised by this back-door tax rise. Inevitably, the measure will penalise those who are least able to pay. That is in keeping with the Government's record of switching the tax burden from the rich to the pthat situation.

Mr. Tim Smith : Did the hon. Gentleman not hear the figures that my hon. Friend the Financial Secretary gave to the House? Under this Government, the personal tax allowance has risen substantially in real terms, whereas it fell under a Labour Government. If the Labour party is so committed to the eradication of poverty, why did a Labour Government so furiously resist the Rooker-Wise amendment?

Mr. Milburn : If the hon. Gentleman has read this Red Book and previous ones, he will know that the tax system has changed over the past 14 years, from one in which the rich paid more tax than the poor to one in which the poor paid more tax than the rich. It is a Robin Hood in reverse-- and the figures are categorical. As the Financial Secretary knows, between 1978-79 and 1992-93, a typical family on average earnings has seen its tax burden rise from 35.2 per cent. to 36.7 per cent. of its income. Between 1979 and 1990, the poorest 20 per cent. of households saw their tax bill rise from 30.7 per cent. to 39.7 per cent. of their income, while the top 20 per cent. saw their tax take a fall from 37.3 per cent. to 33.5 per cent.

Mr. John Butcher (Coventry, South-West) : I refer the hon. Gentleman to some questions tabled by the then Labour Front-Bench spokesman, the Member for Blackburn (Mr. Straw), about the effect on the tax take of reducing the top income tax rate from 60p to 40p. What he discovered in hostile questions was that not only the cash amount from the richest section of the community increased but the proportion which the richest section of the community contributed to the total tax take increased as well. The supply side effect was real.

5.15 pm

Mr. Milburn : The hon. Gentleman must have read my speech, because I am coming precisely to the effect of the top rate tax cuts and the contrast between the 1988 giveaway Budget under Chancellor Lawson and the current Budget.

The shift in the tax burden from the rich to the poor has been achieved by deliberate Government policy instruments. For the poor, it has been achieved by shifting the burden of taxation from direct to indirect taxes.

At the same time, a growing number of people on low incomes have been drawn into paying tax through fiscal drag, as their tax-free income has shrunk in relation to average earnings. For the rich, the shift has been achieved by huge cuts in the top tax rate. I shall refer to that point in a moment.

Mr. Robert Ainsworth : We repeatedly hear the point made by the hon. Member for Coventry, South-West (Mr.

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Butcher). The issue is that, by putting the tax burden on the rich, we are getting more tax from them. Is it not the case that that is a deception, and that the real reason why we are getting extra taxation is that many more people pay it because the indexes have not been raised in line with inflation in the way that they should be? Is that not something that the Government repeatedly try to get away with?

Mr. Milburn : As always, my hon. Friend is absolutely right. It is yet another case of the Government trying to perpetrate a con on the British people. The information that I have from the Financial Secretary is clear--vast sums of money were given away in the top rate tax cuts. According to his parliamentary answers, £9.5 billion has been given away to the richest people since 1988.

Mr. Dorrell : So that we are proceeding on the basis of facts rather than assertions, I must point out that the top 5 per cent. of taxpayers in 1978-79 contributed 24 per cent. of the total yield of income tax. In 1993- 94, that same top 5 per cent. is expected to contribute 32 per cent. of the yield of income tax. That is the top 5 per cent. of income tax payers.

Mr. Milburn : The Financial Secretary obviously wants to bandy statistics--I am happy to do that. Perhaps he would like to tell us how many people are in the top 5 per cent. and what the spread is in the benefits of top rate tax cuts. According to his parliamentary answers, almost 60 per cent., or £5.5 billion, of the £9.5 billion handout and giveaway went to top rate taxpayers in one region of the country--the south-east.

It is no wonder that there was a huge fiscal stimulus to the economy in the south-east but, of course, we are now suffering the consequences of overheating, shortage of skilled labour, pressure on the green belt and a huge explosion in house prices. The brakes had to be slammed on, as they were two or three years ago, and we are now paying the price. We are shivering as a consequence of a countrywide recession, which is the result of the sort of measures that were implemented in 1988 by the Minister and his predecessors.

Mr. Jim Cunningham : My hon. Friend referred to what the top 5 per cent. paid in taxation. Does he agree that their income also rose in that period ?

Mr. Milburn : We have seen an explosion in the incomes of the very richest people. I described earlier how the top 20 per cent. have done so well, while the bottom 20 per cent. have done so poorly. There is no doubt that families on average earnings are, as a consequence of the Government's fiscal policy during the past 14 years, paying more of their income in tax than ever before. Those are the stark facts : the Financial Secretary cannot argue with them. I give one example. A top rate taxpayer in the south-east of England is on average at least £10,000 better off as a consequence of top-rate tax cuts. The south-east has not been the biggest regional gainer. The south-west takes the lead in the top-rate tax cut league. It is interesting to examine which parts of the United Kingdom do least well out of top-rate tax cuts. Not surprisingly, Northern Ireland and my region, the north, received the smallest benefits as a consequence of the cuts in top-rate income tax.

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What a contrast between 1988 and the Finance Bill that we are debating today. In 1988, there was an enormous handout and a tax bonanza for the rich. As a consequence of the measures presented by the present Chancellor in his Budget this year, there will be tax increases of £6.5 billion in 1994-95 and £10.5 billion in 1995-96. The cost of imposing VAT on heating alone will mean £950 million in higher bills next year and £2.3 billion in the following years. The whole country is paying the price for the Conservatives' tax bonanza for the wealthy in 1988. What they gave away with one hand to the very rich, they are taking back with the other from pensioners, families, the low-paid and those on middle incomes. It is an odd reversal of the Robin Hood story when the poorest end up subsidising the richest in our community.

Mr. Graham : The other day I spoke to a woman in my constituency who told me that she had looked at her diary for 1979. It was faded, but she noticed that her husband was working, her two sons were working and she was going on holiday to Benidorm. Now she is not going on holiday to Benidorm, her son is not working, her other son is on low pay and her man is almost crippled with illness. In 1979, at least they were all working and they could afford to pay tax. Now 4 million people are desperate and 3 million people are unemployed. The other night we passed a measure which will mean that 9 million pensioners will have to pay through the nose to heat their homes. The Government are proud of that record. The crisis is one of their own making. My hon. Friend has elaborated on that well tonight.

Mr. Milburn : My hon. Friend is right. He graphically describes the problems that the Government have imposed on millions of people in Britain. It is not merely a question of complacency. It is a question of the Government's inability to apologise to the British people. We saw that most graphically in the private notice question just before this debate. I will not go into that, Mr. Morris, because I can see that you wish me to move on. I will take that hint seriously. So we are now all paying for that tax bonanza. By freezing personal allowances, the Government will force the tax burden of low and middle-income families through the roof. Rightly, people will feel betrayed by a party which in its general election manifesto just one year ago loudly declared :

"we are the only party that understands the need for low taxation."

The Conservatives' tax-cutting credentials have been shot through by this measure and other measures in the Finance Bill. In just one month next year --April--the British people will feel the effect of the cuts in mortgage interest relief at source and the married couple's allowance, the increase in national insurance and the introduction of the fuel tax. Ministers might not be so complacent then. Certainly the crisis of confidence which the Government face will not go away, because too many people are paying through the nose for the mistakes that have been made.

Mr. David Shaw : The Government have had a difficult Budget to prepare when we are, as we have now discovered, at the end of a recession. As we reach the end of the recession, sadly, unemployment--the lagging

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indicator--increases and the deficit continues to rise for some time after one has hit the bottom. There is no doubt that we are having to raise additional finance because we have an excessive budget deficit.

There are not many ways in which one can deal with an excessive budget deficit. Indeed, my accountancy career has taught me that there are only three : we can borrow, if someone will lend to us, but if the deficit is excessive, people do not want to lend to us ; or we can raise additional revenue ; or we can cut expenditure. It is clear that no one in the Conservative party wanted major areas of expenditure to be cut. They did not want pensioners, invalids, or those on disability benefits to suffer and they did not want cuts in health service or education expenditure. Consequently, the Government have chosen the course of raising some additional revenue and they should be applauded for taking that courageous decision.

Mr. Robert Ainsworth : If the Government decided that the right course of action was to raise revenue, why did not they seek to raise it from the very people who gained from the tax cuts that they introduced a few years ago? Why are the Government seeking revenue increases from the bottom part of the earnings structure when they gave those tax breaks to the top?

Mr. Shaw : As my hon. Friend the Financial Secretary said, the hon. Gentleman and his colleagues are living in a mythological world. In many instances, the top 5 per cent. who received the reduction in the rate of taxation have increased their earnings and the wealth that they have brought into the country. As a result, they have paid an increased proportion of the income tax bill. That is a major achievement and we must encourage that expansion.

I want the top rate of tax to come down lower. It is sad that we wish to cut only the basic rate from 25 to 20 per cent. We should consider how to reduce the top rate from 40 per cent. We are now competing in the world to bring the wealth creators to Britain. If we could encourage more of them to come here, more revenue would be raised from income tax at lower rates. That is the great achievement of the Government.

I return to my key point. We must either raise revenue or cut expenditure. The Opposition argue that we might be in a different world if they were in office. They say that the deficit would be considerably less. They are trying to con the electorate into believing that if they were in office, we would be in a make-believe world. That is the only world that would be different. One cannot say that if Labour was in office there would be no German recession, no French recession and no American recession. We live in this world. We do not live in the make-believe world that the Labour party would like to exist if it was in office.

So revenue had to be raised in the Budget. Clause 52, with which the amendment deals, is the right clause and the right measure to raise additional revenue.

Public finances have to be prudently managed. Reference has been made to the Labour manifesto's proposals which we costed at some £37 billion. I commend the hon. Member for Renfrew, West and Inverclyde (Mr. Graham) for remembering that figure. That £37 billion was not what the deficit might have been ; it was additional to any deficit that we now have. If Labour had been in office and the recession had continued--I am talking about the recession in America, Germany and France, which are

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key export markets--we would be looking at a deficit not of £50 billion but of £50 billion plus £37 billion ; a deficit of at least £87 billion, approaching £100 billion.

Mr. Jim Cunningham : Will the hon. Gentleman give way?

Mr. Shaw : I shall give way to the hon. Gentleman, who no doubt wants to explain how a Labour Government would have financed such a deficit.

5.30 pm

Mr. Cunningham : I shall not explain that aspect. I should have liked the hon. Gentleman to have gone on to say that the difference between the Labour party and the Government at the time of the general election was that Labour borrowing would have been used for investment, whereas the money that you have borrowed is to pay your debts. That is the fundamental difference between you and us.

The Second Deputy Chairman of Ways and Means (Dame Janet Fookes) : Order. I remind the hon. Gentleman that he is addressing me when he says "you", and I am not responsible.

Mr. Cunningham : I apologise, Dame Janet.

Mr. Shaw : I disagree with the hon. Gentleman because I, like many people, studied the Labour party manifesto carefully. More significantly, I made a number of interventions in the speeches of Labour Front-Bench spokesmen in the year or two before the general election asking if the commitments that they were annoucing at the Dispatch Box were firm commitments. I started to add them up on the back of an envelope and on my calculator. They were not capital commitments to invest in Britain's future. Many of them were revenue commitments to invest in more pay, more salaries and more bureaucracy. They were the sort of commitments that would have to be funded with increased borrowing. As an accountant, I know that to fund wages and salaries with borrowing is the worst sort of deficit financing.

Mr. Graham : I take the point that the hon. Gentleman did his sums on the back on an envelope. I am pretty sure that everyone in the Committee and in the country will agree that the Government, too, have done their sums on the back on an envelope. The hon. Gentleman has a fond interest in Scottish affairs. In Strathclyde we have lost more than 50 per cent. of our manufacturing jobs since 1979--166,000 jobs. The Labour party planned an investment and training programme. That was what part of the sum was intended for. That was welcomed by the people of Scotland and, I am sure, by the people of Britain who wanted Scotland once again to be the engine of recovery. The £36 billion of public sector borrowing would clearly have been welcomed. It would have provided a basis from which to build on in the future and we might not have had this recession, which has clearly been created by the Government.

The Second Deputy Chairman : Order. The hon. Gentleman's intervention is becoming a speech.

Mr. Shaw : I recognise the hon. Gentleman's contribution. As he rightly says, I have a great interest in Scotland and some Scottish affairs. I am sure that he will recall that under Labour, between 1974 and 1979, not just

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in Scotland but in the country as a whole, manufacturing output fell and we had a record number of industrial disputes and a major problem in getting enough investment in British manufacturing. Yesterday, the Select Committee on Social Security heard from managers of the British Coal pension fund about its problems. It was notable that the deficits from the fund's investments occurred under a Labour Government who made generous contributions to compensate. The surpluses that have improved pensioners' benefits have come since the Conservative Government have been in office. Those surpluses have been earned from the success of British business and British industry, so there has been a major transformation.

We might well ask why some areas of Scotland, for which the hon. Gentleman and I share an interest and concern, have not benefited. I am concerned, even as the Member of Parliament for Dover, that some of the benefits in our economy are not filtering through into the Scottish economy. The only possible explanation is that too much of the Scottish economy is managed by Labour-controlled local authorities.

If we could shift the resource base from the Labour-controlled local authorities in Scotland into the private sector, my constituents in Dover would benefit from a better managed economy. The Government might not even have had to introduce clause 52. Public finances overall would be better managed because we would be spending less money in the public sector and getting more profitable investment and more profitable resource development in the private sector.

Mr. Graham : The hon. Gentleman mentioned Scotland, but he must realise that the Scottish public have rejected the Government for decades. I wish that the Scottish people could have a wee turn at giving the Prime Minister a bloody nose like the English and Welsh voters. I am sure that they would give him a real belt in the belly if they had the chance of a referendum.

Mr. Shaw : I do not want to stray too far from the subject, but the hon. Gentleman must accept that the problems that are developing in Monklands, East and a number of other key Labour areas show that a unique opportunity is developing for the Conservative party in the 1990s in Scotland. There is no question but that, when the people of Scotland see how much employment in the public sector is taking job opportunities from the private sector in Scotland, there will be a transformation in the Government's political fortunes in Scotland. That is already occurring, as can be seen from the improved results in Scotland at the general election.

But to return to my main point, if Labour had been in office we would not be sitting here today talking about whether we can afford to index personal allowances or other allowances. We would be talking about how to deal with a major deficit of enormous

proportions--potentially £100 billion.

Dr. Roger Berry (Kingswood) : Does the hon. Gentleman recognise that the rate of growth under this Government has been the worst of any post-war British Government and far worse than that of the previous Labour Government, that as a result unemployment is far higher and that that is the major reason for the high level of public sector borrowing?

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Mr. Shaw : I just happen to have a graph here which I have produced on my computer. However, graphs cannot be recorded in Hansard, so I shall have to talk about it. I assure the hon. Gentleman that the real prosperity clearly existed in the 1980s. The only significant cuts in public expenditure where the line on the graph falls below zero took place under a Labour Government in 1975, 1976 and 1977. Since then, public expenditure and the nation's prosperity have continued to improve. Therefore, I cannot accept what the hon. Gentleman says.

The Second Deputy Chairman : Order. Before the hon. Gentleman continues, I should point out that he is going wide of the amendment. I have given one or two warnings already and if the hon. Gentleman or any other hon. Member persists, they will have to resume their seat.

Mr. Shaw : Thank you, Dame Janet. I desperately wanted to get back to the main point, but I was diverted into Scotland and some of the wider issues of the economy. I appreciate that you are being your usual firm self, but I realise, as I am sure do many, that a better balance in many areas of the economy, of which Scotland is one, between the public and private sectors, would mean that the private sector would create more jobs and there would be less deficit and consequently less need to restrain the increase in personal allowances in the way in which the clause does. That is the key point. The real issue raised by the Opposition in this debate is whether we should curtail allowances or raise the rates of income tax. The Opposition have not lost their old clothes. They have dusted them down again, having found them in the closet. They want to raise the rates of income tax. I cannot support that view.

Mr. Nicholas Brown : That is not so.

Mr. Shaw : The hon. Gentleman says that that is not so. If he does not want to increase revenue by raising the rates of income tax, either he must want to cut expenditure or he must want to borrow more. If not, I do not see how he will be able to meet the deficit which, as I said earlier, occurs not just in the United Kingdom but worldwide.

Mr. Brown : I made this point to the hon. Member for Beaconsfield (Mr. Smith), but perhaps the hon. Gentleman was not paying his usual attention. In 1988, the Labour party voted against the Government's top rate tax cuts. That is still our position. We should not have a deficit if the top rate of tax had not been cut, for it amounts to a substantial sum of money. [Interruption.] The Financial Secretary laughs, but cumulatively that extra sum of money would have been available to the Government since 1988. The purpose of our amendment is not to increase income tax. Its purpose is to restore the allowances that the Financial Secretary and the Chancellor of the Exchequer are trying to freeze.

Mr. Shaw : I know that the hon. Gentleman uses a wide base when he studies these issues. He has heard of the Laffer curve. If the rate of taxation is too high, the amount of revenue raised goes down. The Financial Secretary has produced the figures and has shown that, by reducing the top rate of income tax, we have increased the revenue take from the top earners. That, surely, is the key point.

Mr. Brown : But the hon. Gentleman must acknowledge that now there are 1 million more of them.

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Mr. Shaw : The point that I acknowledge is that the top 5 per cent. are paying more as a proportion of the total income tax take. Mr. Dorrell rose --

Mr. Shaw : Does my hon. Friend wish to confirm that point?

Mr. Dorrell : Yes. The hon. Member for Newcastle upon Tyne, East (Mr. Brown) is completely wrong. The group of people about whom I was talking numbered 1.3 million in 1978-79. In 1993-94, it numbers 1.2 million, so, for what it is worth, there has been a fractional reduction, not a big increase in the number of individuals concerned. What has increased is the share of the income tax burden that those 1.3 million or 1.2 million people contribute. That share has increased sharply, from 24 per cent. to 32 per cent. of the total yield of income tax.

Mr. Shaw : What my hon. Friend has said shows that it is a truism that, if we reduce the rate of income tax, we increase revenue. That must be a very important lesson. I know that the hon. Member for Newcastle upon Tyne, East wants to rise and confirm that those who sit on the Opposition Front Bench have now learnt that lesson.

Mr. Brown : We are talking, I think, about different groups of people. If I heard him aright, the Financial Secretary is talking about the top 5 per cent. of high earners, to whom he referred earlier, whereas I am referring to all those who pay tax at the top rate. The hon. Gentleman's argument is absurd. If one received more revenue by reducing the tax rate, the logical assumption is that even more revenue would accrue to the Government if one reduced the tax rate yet further, but that obviously is not the case.

Mr. Shaw : The hon. Gentleman knows how the graph works. He also knows how the calculation works : that at a tax rate of 100 per cent. there is zero revenue, because there is no point in going out to work. The hon. Gentleman must also know that if one reduces tax rates to too low a level, the Government will not raise the maximum amount of revenue. The key point of the Laffer curve as it is computed is that the optimum tax rate is of the order of 15, 20 or 25 per cent., depending upon which country one is in and depending also upon the financial base that one uses. It is clear that, even at 40 per cent. tax rates, there may be the opportunity to lower still further the top tax rate and increase revenue. [Interruption.] The hon. Member for Newcastle upon Tyne, East told me off for not paying attention, so he should not converse with the hon. Member for Birmingham, Perry Barr (Mr. Rooker), but perhaps he suffers from my weakness from time to time.

The key point is that the Government have made the decision not to change allowances, thereby increasing revenue, instead of attempting to raise additional revenue by increasing the rate of income tax. That would have been a disincentive. It would not have been the right thing to do as we come out of the recession. It would have put on the motor car's brakes ; it would have stopped the engine ; it would have taken away the fuel that can help us to get out of the recession. The Government have done the right thing and it was a sensible decision to make.

Mr. Tim Smith : Is not it clear from these exchanges that the Opposition have learnt nothing from the experience of

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the past 14 years? Some people may think it incredible that my hon. Friend should suggest a tax rate of 100 per cent., but there was a tax rate of 98 per cent. in 1979. That was the rate that we inherited.

5.45 pm

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