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The Prime Minister : The hon. Gentleman knows as well as any hon. Member that the great improvement in race

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relations in this country is directly related to the firm but fair immigration policies pursued by this Government. I am surprised to hear him venture down that track, in view of his record of favouring good race relations.

We promised to deliver low inflation, and we have delivered on that promise. We promised to resume economic growth, and it is now resuming. Inflation, at 1.3 per cent., is at the lowest level for 30 years. Interest rates, at 6 per cent., are the lowest in the Community. There are now too many signs of recovery for even the Opposition to ignore them. Manufacturing output has increased for months in succession and unemployment has fallen three months in a row. It is too high--I share that view--but it is moving in the right direction, and sooner than most people expected.

It is certainly sooner than the hon. Member for Dunfermline, East (Mr. Brown) expected, because, after the Budget, he said : "I make one Budget forecast--that, after the Budget, unemployment will rise this month, next month and for months afterwards".--[ Official Report, 17 March 1993 ; Vol. 221, c. 289.]

One day later, unemployment fell. The next month, it fell again, and the next month, it fell again. Another sound bite is needed, I think.

The recession has been damaging, and recovery has not come easily, but it is now under way-- [Interruption.]

Madam Speaker : Order. Hon. Members must come to order. The bawling and shouting coming from the Back Benches this afternoon is utterly disgraceful. [Interruption.] I know who the Members responsible are, and I need no one to point them out for me.

The Prime Minister : Some time ago, the right hon. and learned Member for Monklands, East admitted :

"we change our policies as we move towards a different election We'd be a very foolish Party if we went into an election in 1995-96 with exactly the same policies".

That is certainly true. But whose policies were they? They were the right hon. and learned Gentleman's. He was the undisputed author of Labour's defeat. He was the man who drew up the disastrous shadow Budget. Hon. Members may remember the hype, the fake presentation, as if it were a real Budget, and the responsible tone--the right hon. and learned Gentleman even posed for photographs outside the Treasury. Lots of passers-by do that, but they never get into the Treasury. The right hon. and learned Gentleman talks of broken promises, as does the shadow Chancellor, the hon. Member for Dunfermline, East. That is a good sound bite, but for the wrong party. The Labour party has broken every promise that it made about future policy at the election. Every one has gone to the social justice commission. The right hon. and learned Gentleman said :

"We must be prepared to examine in an open-minded way some of the fundamental features of our approach. What is the right balance between universal and selective benefits".

It was not Milton Friedman who said that, nor my right hon. Friend the Chief Secretary, nor even Lord Desai--no doubt he would have been sacked if he had said it. The right hon. and learned Member for Monklands, East himself said it. Yet time after time he accuses us of examining aspects of public expenditure that any responsible Government would need to examine.

He is the man who said that his planned increases in pensions and child benefits were essential, and that his tax

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proposals were fair, reasonable and popular. They have been so popular that he has dropped them all. So much for his promises. I would rather listen to the late Robert Maxwell on pension probity than to the right hon. and learned Gentleman.

I know that the exchange rate mechanism and economic and monetary union are matters of some importance to hon. Members on both sides of the House. Since we left the ERM, there has been substantial debate about monetary policy and the possibility of economic and monetary union. In the negotiations at Maastricht I sought and secured an opt-out on the single currency because I was sceptical of its economic impact across Europe and its artificial deadlines, and because I believed that such a decision was for the House to make. Since then, economic developments in the European Community have strengthened the reasons for caution that I set out. The European Community economies have diverged rather than converged. As we come out of recession, our main partners are heading into a recession. Some of our European partners remain keen on early monetary union, although many of their central banks are less keen. Even the keenest must now see the difficulties. The criteria for monetary union will simply not be met. When I was negotiating at Maastricht, the idea of a monetary union in 1997 looked ambitious, perhaps even a little dubious. I have to tell the House that it looks wholly unrealistic today.

The economies of Europe are not remotely ready for one currency throughout the 12, soon to be 16, countries, and I believe that they will not be ready --if they ever will be--for many years. That is not an anti-European view ; I simply do not believe that the economic circumstances will be right, and if they are not right the damage that proceeding would cause the Community would be profound, and I should not wish to see it occur. If some of our partners decided to go ahead prematurely, that would be an economic mistake. I do not believe that we should go with them.

We have sought reform of the exchange rate mechanism. I make no secret of the fact that I prefer stable exchange rates, and so does industry. But I cannot accept that the present operation of the ERM is satisfactory. Sterling was forced out, in the circumstances described by my right hon. Friend the Member for Kingston upon Thames, but so was the lira. The franc, the peseta, the escudo, the punt and others have at different times been put under great pressure. Certainly, I could not recommend that sterling return at present. We should need greater convergence between the monetary policies appropriate for all the Community economies, and we should need to be satisfied that the system would be operated to the benefit of all its members.

In January, I made it clear that those circumstances would not apply this year. I now doubt whether they will apply for some years ahead--possibly they will not apply in this Parliament.

Sir Peter Tapsell (East Lindsey) : There will be a widespread welcome throughout the party for what my right hon. Friend has just said to the House, and there will be great support for the policies that he has enunciated throughout his speech.

The Prime Minister : I am grateful to my hon. Friend, and delighted to have a party at ease with itself.

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It is clear that the Labour party has no policies at all, and certainly no economic policies. When it had policies, they lost it the election. As the hon. Member for Brent, East (Mr. Livingstone) put it--rather cruelly, I thought--the right hon. and learned Member for Monklands, East

"bears the primary responsibility for tax and economic policies that lost Labour the election."

And now Labour has none. That is not my view alone. It is clearly shared by Mr. Edmonds of the GMB, the union that sponsors the Leader of the Opposition--or at least, it sponsored him until last Sunday. I am not sure whether things have changed since then.

Mr. Edmonds says that Labour has an identity problem and asks whether the voters

"know what Labour stands for".

He says that Labour must shake itself out of its lethargy. He asks :

"Where was the Labour movement"

during the past few months? He may well ask.

The Labour leadership cannot have been examining economic policy, because the shadow Chancellor would not recognise economic policy if it gripped him by the windpipe. The Labour leadership may have been absorbed in its falling membership, or it may have been trying to fight off the defeat of the right hon. and learned Gentleman's party reforms.

There is one area of total agreement between the right hon. and learned Gentleman and myself : he wants one man, one vote--a novel concept for Labour. He is right about that, and he has my support. Unfortunately, he does not have Mr John Edmonds' support. Mr. Edmonds wants one member, one vote, so long as he can be the member and he, and nobody else, can exercise the vote.

g as the Labour party remains subordinate to the trade unions in policy, a paid for and wholly owned subsidiary of the trade unions, Labour Members will sit on that side of the Chamber. I shall tell thright hon. and learned Member for Monklands, East why he and his party fail to convince even the leader of the union that sponsors him. It is because Labour is a party without policies and without principles that it will remain, in the short and the long term, a party without power. [Interruption.] Madam Speaker : Order. Will hon. Members leaving the Chamber please do so quickly?

[Interruption.] Order. Come along.

5.9 pm

Mr. Paddy Ashdown (Yeovil) : I believe that what we have heard and seen this afternoon is nothing less than the beginning of the end of the right hon. Gentleman's premiership. I say that not because of the lack of success of his speech--although I have to tell him that, if he had bothered to turn round he would have seen his fate indelibly written on the faces of Conservative Members. I say it not because of the effectiveness of the speech by the Leader of the Opposition, although, in its way, the right hon. and learned Gentleman's was an effective speech, typical of the speeches that he delivers--good for a knockabout but not providing too much revelation about Labour party policy.

I say it because of the speech by the right hon. Member for Kingston upon Thames (Mr. Lamont). I believe that

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the two speeches that we have just heard, and all the other speeches in the debate, will be forgotten when the right hon. Gentleman's words will be remembered and will reverberate down through the months and years that remain of the Government. I do not know when the Prime Minister will go. It may take weeks or it may take months. But when he does go, this afternoon will be the occasion that people will point to as the start of that process. As the House will have recognised, the right hon. Member for Kingston upon Thames delivered a speech of considerable dignity. He was clear about his own view of his role in what has happened over the time that he has held high office. However, the speech was devastating in its criticism of the Government and devastating, too, in its criticism of the right hon. Gentleman's friend, the Prime Minister. The right hon. Gentleman lifted the lid--particularly in the last three or four minutes of his speech--on a Government who lack clear leadership and are blown hither and thither by opinion polls, a Government prepared to fiddle with interest rates for political purposes and infected by short-termism-- those are not my words, but those of the right hon. Gentleman--and a Government who lack direction.

The right hon. Member for Kingston upon Thames has shown--more clearly than the words of any Opposition Member could have done--what lies at the heart of the Government of this country. The Conservative party is riven by a virulent civil war, and is without a leader who can mark any kind of course forward for the nation. [Interruption.] I invite Conservative Members to read tomorrow, not my speech nor that of the Leader of the Opposition, but that of the former Chancellor, who was a part of the Government and who has taken the lid off it in such a devastating way. I say again that his is the speech that will be remembered.

We now know that the Government cannot bring themselves to face the immensity of the problems that they have created. They cannot recognise the reality of the misery that they have inflicted on ordinary people's lives. They do not understand the concept of fairness, do not care about betrayal and cannot grasp the opportunities that now lie ahead for our country.

The Prime Minister clearly thought that sacking his Chancellor would provide a way out of his problems. But the reverse has proved to be the case, as he was clearly exposed in the words of the former Chancellor today. The Government's crisis, as he expressed it, is not a crisis of men, but also a crisis of measures. It is no good the Prime Minister just changing the people : he must change the policies of the Government as well. That change was called for by the clarion voice heard at Newbury and in the county council elections. The Prime Minister has given his answer this afternoon. He has changed the Chancellor who he said did nothing wrong but intends to stick to the policies that have done this country so much damage. The departure of the Chancellor did not resolve the Government's divisions--it highlighted them. There are now two Conservative Governments- -the Government of the new Chancellor of the Exchequer and the Government of the new Home Secretary. And stuck in the middle of this increasingly bad -tempered contest is the Prime Minister, relegated to the job more of referee than of leader.

The Chancellor's departure did not clarify the Government's economic policies, either--it muddied the

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waters still further. We are yet to have a clear statement from the new Chancellor of the Exchequer. Such reticence is uncharacteristic of the right hon. and learned Gentleman. When he was Home Secretary, he was never off our television screens, where he expounded the details of the Government's economic strategy. Presumably, it will now be the new Home Secretary who, having secured for himself in his deal with the Prime Minister a position on the Cabinet's economic committees, will now speak for the Government on such matters as the exchange rate mechanism. What has been sauce for the pro-European goose will now be sauce for the Euro-sceptic gander.

Above all, the Chancellor's departure did not add to the Prime Minister's authority over his party or over his Government. As we saw this afternoon, it diminished his standing and undermined his authority, which I believe will never be recoverable. Only the present Prime Minister could achieve this singular double--to make people support Arthur Scargill and to make people feel sorry for the right hon. Member for Kingston upon Thames.

The right hon. Member for Kingston upon Thames is entitled to feel aggrieved. He is entitled to ask what it was that he did wrong. Will the Prime Minister tell him which of his policies he found unacceptable? No ; he made it clear that he will not. Nor will he tell him in which areas he was incompetent at his job. This morning we heard from the new Chancellor of Exchequer on the radio that his predecessor was simply hounded out of office by the press. Is it, then, the measure of our Prime Minister, that, in the very week in which he told the Financial Times that he would not be bullied into a reshuffle, he was? Let me quote the Prime Minister's own words :

"Neither now, nor at any stage in the future, are my reshuffles going to be preceded by assassinations of my colleagues." Despite that, that is exactly what the right hon. Gentleman allowed to happen.

Deep in those words is a message for the whole Government. The Prime Minister agreed with his Chancellor's policies because they were the Prime Minister's policies, set down by No. 10. The Prime Minister never questioned his Chancellor's competence ; they acted together. The Prime Minister and his Chancellor were a team. They stood shoulder to shoulder. The Prime Minister saw no need for the Chancellor to depart after black Wednesday. Why? Because, as the ex-Chancellor himself revealed so clearly, although it was damaging for the country to have a Chancellor who had lost credibility, it was convenient for the Prime Minister to have a Chancellor who protected him. That is the reason why the right hon. Gentleman did not resign. This afternoon we must do more than debate the Government's appalling record of mismanagement in the past : we must put forward the right policies for the future. As the new Chancellor said, he inherits an enormous hole--the black hole of the Budget deficit. Substantial public borrowing will often be necessary. But we do not believe that we can wish away a Budget deficit of this magnitude, which bears down on the whole nation and on our chances of recovery. We are dealing with the consequences of years of economic mismanagement under the Conservatives. We are now a nation living in debt--this year, 8 per cent. of our national income. The very Government who have told us that they are responsible with public money are now borrowing £1 billion a week. That is £50 every week for

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every household throughout the land. The interest cost alone of the extra debt which the Government have generated is about £4 billion each year. That alone is the equivalent of 2.5p on income tax just to pay the interest on the Tory debt. Those are the results of deep structural problems in the British economy, but they have been exacerbated by the inept economic policies of the Government.

Mr. Patrick Nicholls (Teignbridge) : The right hon. Gentleman speaks as though the recession is an entirely United Kingdom fact and has nothing to do with Europe. Surely the right hon. Gentleman, a passionate advocate of a united states of Europe, realises that the recession has applied throughout the Economic Community. If the right hon. Gentleman is really saying that the recession is entirely home-grown, he is revealing himself to be even more economically illiterate than I would have given him credit for. Is he admitting that or not?

Mr. Ashdown : Of course I concede--I have always conceded it--that there is a worldwide recession in place, but the hon. Member for Teignbridge (Mr. Nicholls) has to address the question that was so clearly put by his colleague the ex-Chancellor. He made it quite clear that the depths of our recession, particularly in 1987, 1988 and 1989ut the blame for the special position of our country and its deep recession and the damage that has been done on his Government's own policies. I invite the hon. Member for Teignbridge to read that speech.

The country expects--the country demands--that all parties should concentrate now on putting together the policies to start to put Britain on the right road. We know who is to blame for the mess, and the country knows who is to blame for the mess. What people want to know is how we are going to get out of it and who is to get us out of it. The Government have tried one way of tackling the deficit ; they have put up taxes. The Government say that they were forced to do that. If that were so, it might be understandable. I do not believe that it is always wrong for a Government to change their mind. If the country is being driven on to the rocks by Government policies, a change of course is needed. Frankly, I would much rather have a Government who changed their mind to be right once in a while than a Government who never changed their minds and were always wrong. But the Government's explanations for those events will not wash. They say--we heard it clearly in the Prime Minister's speech--that they were somehow taken by surprise by the figures that they inherited after the election, but who did they inherit them from? Themselves. Who had better access to those figures than they? They say that they did not know what was coming, but the projections for the future of the public sector borrowing requirement were widely canvassed by The Guardian and other newspapers well before the election date. The opposition parties--ourselves and Labour--at least sought to address that position. By contrast, the Government sought to hide it from the nation in order to get themselves elected. We tried to tell the country the truth. The Government deliberately told the people a lie. What is more, they knew that it was a lie. They could not have known otherwise. The Leader of the Opposition says

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that it was a betrayal. Perhaps it was, but it was worse than a betrayal ; it was a deliberate act of deceit upon the people of this country.

The Government put themselves forward on a false prospectus for the nation that would have done honour to a Maxwell pension fund prospectus. If the Government had been a company, they would be up before the courts for fraud. They knew it to be a fraudulent prospectus for the nation.

Mr. Nicholls : Will the right hon. Gentleman give way?

Mr. Ashdown : No, I will not give way. I have given way to the hon. Gentleman once. I have not the slightest intention of doing so again.

Who will ever be able to believe a Conservative promise again? Now, of course, it is the nation that must pay for that deceit. The Government have decided that not the whole nation will pay for that deceit--of course not. It will be the poor and the most vulnerable who must pay for the Government's deception and for their mistakes. That was the real stinging injustice in this year's Budget--not just the imposition of VAT on domestic fuel without adequate compensation, but the fact that in the Budget overall the poorest tenth of our nation are proportionately asked to pay twice as much as the richest tenth. That is the depth of the injustice of this Government and of their economic policy.

If there is a price to be paid to dig the country out of the hole that was created by Ministers, it should be fairly shared among the whole nation. We believe that there is a sense of fairness in the British people. It is a sense which has been continuously ignored by the Conservative party and by the Government, a sense which has been discouraged by their measures, and a sense which is not allowed to express itself through positive policies set out by the Government. But that instinct of fairness is still strong in our nation. It is the instinct that will undo the Government's second strategy, the second act of betrayal.

Having found out that even putting up taxes has not done the trick, such is the scale of the economic mess that we are in, the Government are now telling us that they will resort to draconian public cuts--cuts again in our welfare state, our benefits system, which yet again hit the weakest, hit the poorest and hit the most vulnerable. So how should we tackle the deficit? Of course there should be savings in public expenditure where they are possible. An efficient tax and benefits system would save millions of pounds. If we had a competent or even reforming Government, savings would be found and could be made. The Government are bloated on bureaucracy. They make expensive mistakes such as the poll tax. They spend a fortune closing down coal mines. They waste money on flawed education tests. They use taxpayers' money to sweeten the implementation of grant-maintained schools. They deliberately boosted public spending before the election, knowing full well that they were not prepared to pay for that spending after the election. But, if savings can be made, they will be made on the margins. Savings alone will not cover the massive Conservative deficit.

Of course we should be closing tax loopholes too, as the Labour party proposes, but that will have an affect only on the margins of the massive Conservative deficit. Of course we should be stimulating employment. Of course it is true

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that the Government have failed to provide policies for that. However, even if we accept the Government's own forecasts of economic growth in this decade, we are still left with the projected deficit of £30 billion in 1997-98. That is the measure of the economic disaster that has been brought about over the past 14 years. I say to the Labour party that there is now no realistic growth forecast which by itself brings the public sector deficit down to manageable levels over an acceptable period. Frankly, Labour is deceiving itself and the public if it pretends otherwise. We will probably have to come to the crunch to answer the question that Labour seems so reluctant to answer. If the choice for paying for the Government's mistakes is between cutting into the body and the bone of our welfare state in a way that penalises the most vulnerable and spreading the burden fairly through taxation, there can be only one answer. Paying the price for the Government's mistakes is a burden that must be shared justly by us all, not paid for by the poor, the elderly and the vulnerable.

Mr. Dennis Skinner (Bolsover) : I do not know what the right hon. Gentleman's plan is to try to secure a victory in the Christchurch by- election, but he talks about fairly sharing the burden. He is talking in the context of raising taxes. Let me explain to him that in the first 10 years of the Tory Government the richest 1 per cent. in Britain had £26.2 billion in tax cuts. Instead of calling upon working-class people in Christchurch or anywhere else, the right hon. Gentleman should be supporting the idea of clawing back that £26.2 billion from the richest 1 per cent. They have had the money, and they must foot the bill.

Mr. Ashdown : I hope that Labour Front-Bench Members heard the statement by the hon. Member for Bolsover (Mr. Skinner). They are the ones he needs to persuade. They are the ones who will not say the kind of things that he has said. The hon. Gentleman has asked me what our strategy is for the Christchurch by-election. It is quite simple. It is to have the strategy that we had in Newbury--to tell the blunt truth to the people of this country. They want to hear and are prepared to hear about the seriousness of the economic position and about what must be done to solve it.

They do not want betrayals, such as the Government's betrayal of the nation through their deceit at the general election. They do not want to hear either, as the voters of Newbury so clearly showed, a party such as the Labour party which is prepared to say what must be done, but not how it is to be paid for. That is how we won Newbury and, if we win Christchurch, that is how we shall win it.

Mr. Nigel Forman (Carshalton and Wallington) : The right hon. Gentleman talks about the blunt truth. He said earlier that any public expenditure savings could be only marginal. Will he now tell the House the blunt truth? By how much would his party wish to increase the standard rate of income tax to close the deficit?

Mr. Ashdown : The hon. Gentleman's own Chancellor could not at this stage give him figures about the public sector borrowing requirement and could not tell him what he will do in the autumn of this year. The hon. Gentleman makes a brave try, but I shall not answer his ludicrous question.

Sir Peter Hordern (Horsham) : Why not?

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Mr. Ashdown : The hon. Member for Carshalton and Wallington (Mr. Forman) asked a question that his own Chancellor would not answer. I have made it clear--I have said something that the Labour party will not say-- that rather than cutting into the bone and the body of the welfare state, if we have to balance our public sector borrowing sensibly and responsibly by finding tax, we shall take that view.

Mr. Stanley Orme (Salford, East) : How much?

Mr. Ashdown : The right hon. Member for Salford, East (Mr. Orme) asks, "How much?" He knows perfectly well that the figures are not yet available to anyone--not even the Government. The right hon. Gentleman should realise that I have laid down some clear principles about how we should deal with the PSBR. His party will not do that. The people of Britain have worked long and hard to build a decent system of welfare provision. Governments have not paid for it ; it has been the people and the taxpayers who have paid for it. It would now be an act of malice and vandalism for the Government to destroy that achievement. If the Government wish to add that to their other betrayals they will never be forgiven.

I shall tell the Government what I believe the British people now want from them today. They want a Government who will be honest with them and Opposition parties that will face up to the truth. They want a Government who show that they believe in fairness and who do not penalise the poorest and the most vulnerable for their own mistakes. They want a Government who will set a clear strategy and who will stick to it. They want a strategy that will encourage small businesses, stimulate enterprise, initiate a powerful programme to get the long-term unemployed back to work, give a clear lead so that Britain can make the best out of its future in Europe, prudently invest in the future, especially in skills and in a modern infrastructure, and give independence to the Bank of England to act as a bulwark against inflation.

Was it not amazing that we heard for the second time in the resignation speech by the right hon. Member for Kingston upon Thames that he wished Britain to have an independent central bank? Is it not extraordinary that the two previous Chancellors have taken that view, but that they have been prepared to say so only after they have resigned? I have described what the nation wants from the Government but, unhappily, we have a Government who will provide none of those things. Frankly, the sooner they leave us, the better.

5.34 pm

Mr. John Biffen (Shropshire, North) : The motion makes no reference to the size of the deficit. However, the right hon. Member for Yeovil (Mr. Ashdown) quite properly identified the deficit as the subject that will give rise to growing political debate and differentiation between our approaches to economic problems over the remainder of this Parliament. As he has discovered, it is a topic on which one enters with some trepidation, as there is a natural desire for quantification which may take the general principles rather further than political prudence suggests. However, unless we are prepared to do that, this will be a missed opportunity.

At this stage of a Parliament, the existence of a borrowing requirement of such magnitude is bound to cause a reconsideration of what has been traditional in

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time-honoured policies. The Leader of the Opposition--I regret that he has departed, but he will miss little--said that we needed a wholly new start in economic policies.

I see that my hon. Friend the Member for Billericay (Mrs. Gorman) is present. I say to her and to others in the distinguished company in which we move, to our mutual satisfaction, that that view could be called "fresh start". That of course is exactly what impinges on our national political debate.

We have had a fresh start in the area of Community affairs, and we are obliged to have a fresh start as the House attends to the very difficult problems of how one closes that £50 billion gap. The Government have sought to give us a gentle introduction to the task by publishing their own forecast on how the borrowing requirement may be reduced. I realise that it does not carry the significance of a committed plan, but it is a working guideline published in the 1992 "Financial Statement and Budget Report".

It shows the current deficit of £50 billion dropping by £6 billion in the first year, and by £5 billion and £4 billion in the two years thereafter. I do not believe that that fall is anything like fast enough. I do not think that it is satisfactory, given that we are seeking a balanced and healthy management of our domestic economy. I hesitate to offer my alternative model, but I hope that, by the end of 1996, that figure will have dropped from £50 billion to about £15 billion to £20 billion. That is a formidable undertaking. Mr. Nicholas Brown (Newcastle upon Tyne, East) indicated assent.

Mr. Biffen : I see that I have the nodding acquiesence of the hon. Member for Newcastle upon Tyne, East (Mr. Brown). I think that he would agree that it is none the less a realistic target if the political will is there.

It is important to understand how the deficit arose, and to do so calmly. The early parts of these debates are great spectator events, but now it is a rather tedious show. However, there was very little contribution in the early exchanges to the debate about the real nature of our problems. Of course the recession has been a major factor in the deficit. Nobody can say with much precision the extent to which it has been a factor, but I accept that it could be well over 50 per cent.

However, there is an underlying thrust in public spending in respect of welfare. It is really a demographic consideration. The population at work are a declining percentage, and the population who are on benefits are a growing percentage. That carries the most profound implications for public spending and for the extent to which current public expenditure will crowd out capital public spending, which is the first charge on our economy.

Let us think about the exchanges between those on the Government and Opposition Front Benches earlier this afternoon. In the current circumstances, it is almost impossible to have a constructive and intelligent debate about how we shall try to fashion our future welfare commitment.

I have some mild hope that, when Gordon Borrie produces a report, sooner or later politicians can sit round and consider the funding and commitments in respect of publicly financed welfare, as was the case in the 1950s and onwards, when there was consensus between those on the

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two Front Benches and between the major elements of the two significant parties about the financing and objectives of defence policies.

In terms of public spending, until we can agree to some parameters for welfare spending, that vital sector will remain undetermined and, to some extent, always subject to those who will play a short-term card in the hope of gaining a modest advantage in bidding for the vote of welfare recipients.

I do not have much optimism about the outcome of the current considerations of welfare expenditure and the massive review that is being conducted by my right hon. Friend the Chief Secretary to the Treasury. I was impressed by the orchestration of the great campaign. I have read all the heartache stories in the newspapers--but the policies were all put to me when I was Chief Secretary and the process was conducted in a miserable, subterranean fashion. I was not seeking to become a high profile politician.

The conclusion that I have drawn is that, whatever economies are secured by the Government--I wish my right hon. Friends in the Treasury every success- -they will be modest in the context of the magnitude of the present borrowing requirement.

Therefore, I inevitably turn to a consideration of the revenue. My right hon. Friend the previous Chancellor showed great fortitude in seeking a substantial increase in revenue through the extension of value added tax. Ultimately, there is no way that my right hon. and hon. Friends or, indeed, Opposition Members, can avert their eyes from the challenge of what to do about income tax.

The revenue required to meet such a deficit means that we cannot conceivably exclude the role of income tax in closing the gap. That is true not merely in the practical terms of the money needed but, more importantly, because I do not believe that we can exclude income tax in terms of the perceived equity. We cannot go to the public of this country with a policy of increasing taxation in order to undertake the essential task of reducing the borrowing requirement and say that we have excluded income tax.

Over the past decade or so, we have paid some penalties in concentrating our fiscal policy so overwhelmingly on reducing income tax. We have done so to the detriment of the other factors in the totality of taxation. We must clarify the concept--we shall require an increase in the standard rate and in the top rate of taxation. I understand why the right hon. Member for Yeovil (Mr. Ashdown) became coy about book-keeping. I have the same innate diffidence--I do not know how I have survived so far and not become a Liberal. I simply do not believe that the sums needed can be achieved in the lifetime of this Parliament without thinking in terms of at least an extra 2p on the standard and top rate of income tax.

Mr. Tim Smith : I am sure that my right hon. Friend is aware that the figures in the Red Book for 1995-96 show that, of the tax increases proposed of £10.6 billion, about £8 billion will be increases in income tax. That is a substantial increase, and to increase the standard rate by 2p in the pound would produce only another £4 billion. Therefore, I think that the Government have the balance about right.

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Mr. Biffen : I am sure that my right hon. and learned Friend the Chancellor will be pleased to have the assistance of my hon. Friend the Member for Beaconsfield (Mr. Smith), which makes my right hon. and learned Friend appear as a moderate against my own left-wing extremism.

Mr. David Nicholson (Taunton) : My right hon. Friend has made a statement which has important implications, not merely for the conduct of our economic affairs, but for the debate between the so-called left and the so-called right inside the Conservative party. My conversations in recent weeks with Conservatives in my constituency, which my right hon. Friend knows well, have revealed that Conservatives--both retired and employed-- would give the measure considerable support.

Mr. Biffen : The prospect of my becoming a folk hero among Tory activists is not a career move that I sought in the autumn of my days.

I have tried in general terms to sketch what I believe our policy objectives should be when dealing with the budget deficit. There is also the question of how to present those policies. My right hon. Friend the Member for Kingston upon Thames (Mr. Lamont) made a memorable resignation speech, which identified the difficulties that arise when there is no close and intimate understanding between Chancellor and Prime Minister--as Baroness Thatcher found with both Lord Howe and Lord Lawson.

I regret that my right hon. Friend is no longer able to serve the Administration, and hope that he will have the same experience as Selwyn Lloyd and return to high office at a future date.

My right hon. and learned Friend the new Chancellor clearly holds great fascination for the media. The number of times that I have been asked to comment on his hush puppies and other aspects of his sartorial and theological commitment are beyond belief--he is a cottage industry. However, that will pass, and my right hon. and learned Friend will be left with the problem of how to conduct a policy which I have elaborated and which I believe will be profoundly unpopular.

Even after allowing for the impact of economic revival, my right hon. and learned Friend has been given the task of introducing a substantial increase in taxation and trimming public expenditure that will affect expectations. One of the most challenging tasks for a Chancellor in today's circumstances is to adjust expectations. We are distant from the politics of growth and easy redistribution. The more demanding challenge, which we now face, is to have to learn, in national accounting terms, to live within our means. That task now faces the Administration and the Chancellor.

My right hon. and learned Friend the Chancellor has a good-natured approach to politics--he is of the Ronnie Scott tendency. It is a delicate point to put to him, but I am not sure whether his approach is quite right in the present circumstances. My views are drawn straight from the pantheon of Euro-scepticism--that will not cause my right hon. and learned Friend any difficulty, as he has shown great elasticity over European issues.

In the late 1950s, when, De Gaulle came to office and had Antoine Pinay as his finance minister, he was in a similar position to that of my right hon. and learned Friend. National finances were out of kilter, and many established practices had to be challenged. The policy

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