House of Commons Hansard Debates for 25 Nov 1993

Mr. A. J. Beith (Berwick-upon-Tweed) : The Chancellor of the Exchequer certainly put on a good turn this afternoon. He is right to pick out the areas in which the economy is showing some long overdue signs of improvement, and to concede that the recovery is very fragile and that serious problems still need to be addressed. I shall argue later why I do not think that the Government have addressed those problems satisfactorily.

I advise the Chancellor that he should give his driver the night off and go home on the London underground--if he can get home on the London underground. He will then experience some of the problems that one of a number of public assets up and down the country are having. Those assets are in a desperate state and in urgent need of new

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investment and action. The Chancellor will know what happened a couple of days ago when the underground system was almost completely closed down.

Construction work to rebuild our public transport system is clearly required, and is one of the ways in which the Government can accelerate recovery. If the recovery is not accelerated to a higher level than the Government have forecast, we will not deal with the deficit that the Chancellor has described.

The Gracious Speech said that the Government would

"bring the Budget deficit back towards balance over the medium term."

That is a cunning rephrasing of what appeared in the Gracious Speech more than 18 months ago at the beginning of the Session that has just ended. The Gracious Speech at that time said :

"They will balance the Budget over the medium term."

Now we are only going to bring it back towards balance--and not very far towards balance, on the Government's own projections. I do not know what the Government mean by the medium term, but it is not the next three years or five years if growth is at forecast levels of about 2.75 per cent. Growth will have to be significantly above that level--and it certainly ought to be--if we are to get the deficit down.

We have not only a public sector borrowing requirement, a public sector deficit, but a trade deficit on current account. The most recent figures do not offer a clear guide to the seriousness of that problem, but everybody acknowledges that it is a serious problem. It is one that has persisted even in times of recession. There is an extraordinary tendency in Britain to buy large amounts of consumer goods from abroad, even in times of recession.

We also have the investment deficit that I referred to a moment ago--in the London underground system, in many parts of British Rail, such as the west coast main line, in housing, in schools and in hospitals. In all those areas, investment is needed.

Our public sector net worth is steadily declining--public wealth minus public sector debt--and it will be at zero by 1998 from more than 100 per cent. of GDP in the 1980s. An item appeared recently in the Lloyd's Bank review which said :

"the current mix of capital spending and borrowing implies a gradual reduction in the net worth of the public sector, i.e. a declining bequest of net public sector assets to future generations. We are consuming far more public goods than we are paying for in taxes."

I hope that the Chancellor has noted the comments of the chairman of Ford of Europe, who, in addition to giving advice about the cutting of interest rates, said that the British Government should "spend much, much more on infrastructure and its education and training Britain needs its people educated, motivated and trained to compete at world level."

Indeed it does, but we cannot get those things without paying for them.

I intervened in the speech of the hon. Member for Dunfermline, East (Mr. Brown), because I do not believe that his package of loopholes stands up to examination as a basis for paying for some of the things that he also agrees are necessary for our country.

If we look at his package in detail, we find that the £10 billion is a two-year, not a one-year, figure. As the Chancellor has pointed out, it involves trying to get a lot of corporation tax out of companies that lost significant amounts of money in the recession. At best we might get £1 billion, or a little more, out of it, but certainly not £10

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billion in one year. We will not get enough to meet the very important and urgent requirements of the publicsector.

Consideration of the Budget has been dominated by the size of the deficit. The Government helped to create that deficit and are now in danger of making it worse by a panic reaction in the Budget. There is no way that the deficit can be reduced to reasonable proportions without economic recovery ; there is no way that by trimming a bit of capital spending here and current spending there we can achieve a reduction in the deficit of £50 billion and get it right down towards balance. When we talk about getting the deficit down towards balance, we mean a deficit that can be measured in single figures, or at least not much above £10 billion.

We will not get anywhere near that figure by the Chancellor making the kind of public expenditure cuts that will be publicly acceptable--even within his own party, let alone in the country as a whole. If he makes significant cuts in capital expenditure, he will put more people out of work, increase the money spent on benefit and cut his tax revenues. If he cuts welfare benefits, he will reduce the spending power of the poorest. They are the people most likely to spend every penny that they get because of their desperate need to pay for the basic essentials of life.

We have to put people back to work. In order to do that, it is necessary to invest money in the renewal of the public assets which have been so badly neglected. Now is the best time to do that. We will currently get the best deal and best prices possible from the construction industry--an industry which, as the Chancellor has admitted, is still not feeling the effects of the recovery. One of the classic things that we do in this country is wait until we have boom conditions, and then say that we can now afford to improve our schools and hospitals, and to invest in the public sector. We do that when to do so is to worsen the problems of scarcity, to pile on inflation and to push up wage pressure in these crucial industries. We should do that when the industry needs the work, the country needs the assets and the prices are at their most favourable. The best time to do that is in a recession or when we are trying to get out of a recession, which is what we are currently doing.

I urge the Government not to cut capital expenditure in the Budget but to increase expenditure on the public transport system and on those parts of the road programme that are environmentally sensible. That programme could be brought forward and started now. That would help industry to get its goods to markets. It is ludicrous that, at a time when access to markets is crucial to our industries, we are so far behind in getting direct access to the channel tunnel. We should release council house receipts for house building and housing renovation. That would deal with the desperate problems of housing that the private sector is not able to meet. We should increase rather than cut the grants to housing associations that are engaged in this very important social housing.

Another way, which does not cost money--on the contrary, it brings in money --by which the Government could give a significant boost to the housing market is to learn from the mistake of the former right hon. Member for Blaby, the noble Lord Lawson. Among many other mistakes that he made at the same time, he announced a

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change in mortgage interest tax relief, which encouraged people to rush out and take on mortgages at the height of the housing market. That pushed the housing market further forward and generated some of the boom conditions that have led to the depth of the current recession.

The current circumstances, with the housing market in serious difficulty, are the right circumstances in which to announce a change in mortgage tax relief at some date in the future, which I suggest should be 1 January 1995. It would not be a change that affected existing borrowers. The sort of change that the Government propose to make will mean that from 1 April existing borrowers will pay more because their tax relief will be reduced to the 20 per cent. level. The change that we suggest would provide that new mortgages after that date would not attract tax relief, but mortgages previously taken out would ; otherwise, people would be locked into their properties. They will have to be able to carry their tax relief if they buy another house.

I do not think there is any logical defence in principle for taking money from the not very well-off taxpayers and giving it to far better-off taxpayers, who are able to use the maximum relief and have the income with which to do it.

The only defence for keeping that system is that it is difficult to get right the process of change and to ensure that people who made commitments on the basis of what they could afford when they took out a mortgage do not suffer. Such people have suffered a great deal during the period of rising interest rates.

It must be done in a way which does not create problems in the housing market. The change I suggest would actually help the housing market by stimulating it at a time when it needs to be stimulated. It is a measure which, over the longer term, would reduce deficits. It would not bring in significant revenue initially, but as the years go by it would, and to a very considerable extent.

As I said earlier, it is impossible to achieve some of what I believe is necessary without paying for it. I believe that tax increases are needed to finance extremely important measures. At the time of the general election, we said that we would be prepared to put a penny on the standard rate of income tax to fund drastic improvements in education. We stand by that commitment, and we would fulfil it if we were presenting our Budget now. We would also increase the higher rate, although we would also raise the threshold, so that those on the highest incomes made a greater contribution to the handling of society's problems.

Incidentally, that suggestion has been backed by a number of Conservative Back Benchers. They have said that, in the current circumstances, those who have benefited most--the top earners--should surely be willing, as I think many are, to contribute more to extricating the country from its present difficulties. I expected to hear that view from Labour Members as well, but I have not heard it in the debate so far ; it has been expressed mainly by Conservative Back Benchers and members of my party.

We believe that everyone who pays taxes should contribute to our education commitments through the penny on income tax, but that only those earning over £27,200 a year should finance other changes through the increase in the higher rate. We think that such measures are necessary--and they can be backed by measures to tackle waste, of which there is plenty. The separate administration of income tax and national insurance is extremely wasteful,

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particularly for Government but also for business. The two systems could be brought together : although complicated further measures would be needed, the end result would be a much more economical arrangement.

As the National Audit Office has demonstrated, there is a tremendous amount of waste in the social security system. People are overpaid, and very large sums are involved. There are enormously wasteful Government-funded advertising campaigns. Huge departmental entertainment expenditures have come to light in recent months. Then there are policy reversals such as the poll tax mess, as well as unclaimed support from European funds for measures that we could be introducing in this country and many other examples of waste. I do not think, however, that measures to deal with waste would solve all the problems. We must tell people honestly that some things need to be done, and that they must be paid for.

I believe that we must give at least some interim help to pensioners, who have fared very badly in the past few years. We would cost into our programme an immediate £2 increase over and above the price-related increase, and entirely separate from compensation for the imposition of VAT on fuel. In fact, we would not proceed with that ; we consider it a particularly harsh measure, which, moreover, is not tailored to bring about changes in the amount of fuel that is used. It is not backed by measures to enable people to insulate their homes, which would have offset the cost of the tax.

The Chancellor should not forget charities or the overseas aid budget, which is now under pressure as a result of the desperate situation in sub- Saharan Africa. It would be possible to provide at least a small measure of help, even within the current constraints. I told the Chancellor in an earlier intervention that I thought the time had come to lock in the monetary discipline against which any expansionary measures such as these need to be set. He may wish to claim some credit for having managed monetary policy cautiously over a relatively short period, but I do not share his confidence in all the members of his own party--let alone members of the official Opposition--in regard to the way in which other Chancellors might conduct monetary policy. I certainly do not believe that the market is entirely free of the belief that even he might, in some circumstances, press for or pursue an interest-rate decision whose timing was related to powerful political pressures, rather than to the longer-term objective of price stability.

Mr. Jacques Arnold : The right hon. Gentleman said that he did not believe that the imposition of VAT on energy had had the impact that it should have had. The Liberal Democrats' document "Costing the Earth" states clearly :

"The impact on consumers of energy taxes must also be recognised." In its 1992 election manifesto, the party said equally clearly that it would

"support a Community-wide energy tax on all energy sources." Why is that?

Mr. Beith : That was and is our policy. The hon. Gentleman must have missed several earlier debates in which his hon. Friends have read exactly the same passage to me, and have secured exactly the same answer.

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What is so crazy is the imposition of VAT, which does not cover the whole area of energy at the generation end, but applies directly to consumers, on such a scale and with so little regard for their circumstances that there is no reasonable way in which they can adjust to it. Indeed, some of the biggest adjustments that could be made to reduce energy emissions would be made not in the domestic sector, but in the transport sector. Those least able to adjust are pensioners confronted with a rate of first 8 per cent. and then 17.5 per cent., who do not even own their houses and have not the means to insulate those houses effectively.

An energy tax should not be a revenue-raising measure, as the Government's VAT is ; it should be a behaviour-changing measure, preceded by provisions enabling people to insulate their houses, thus reducing rather than increasing their net gas and electricity bills. [Interruption.] The hon. Member for Gravesham (Mr. Arnold) has heard that argument several times before. If he cannot understand it now, I think that he is being a little slow.

The Government must also consider smaller business. It is clear that the business expansion scheme, and the various other measures that have been tried, have not yet solved the problem of conveying venture capital effectively to small firms. Even the capital allowances that came to an end a month ago had a disappointing effect on investment. The Government should not give up the search for measures to help match venture capital, on sensible terms, with the businesses that can make use of it.

By "sensible terms", I mean a greater dependence on long-term interest rates, rather than the short-term rates that have bedevilled small businesses and driven so many of them to the wall during the recession. At present many exist on overdrafts and other forms of finance that are peculiarly vulnerable to interest-rate changes. Nevertheless, I hope that a longer-term policy of consistently lower rates will be possible.

I am arguing for a Budget for recovery. I do not believe that the Gracious Speech gives us any hope that the recovery will be the basis of the Chancellor's Budget ; I fear that the Government will be panicked by the size of the deficit into introducing measures that will not help to lower that deficit, and may even make it worse. I want expansion that we know can feed back in tax paid by people who are back in work, benefits that those people no longer require and assets that will equip industry to compete more successfully in the future. I ask the Government to engage in longer- term investment in education, which I believe is essential.

The Budget will be viewed against the background of a Gracious Speech that is in large part devoted to undoing the Government's past mistakes in regard to the economy and law and order. I am told that they have introduced more than 60 pieces of law-and-order legislation, but they have found it necessary to devote a quarter or a third of the legislative programme to law and order because they have got so much wrong in the past.

This is a speech presented by a Government dedicated to the centralisation of power, desperate to centralise control of the police and magistrates courts ; a Government who have opened up a whole system of appointed bodies --quangos to whom they appoint their friends to control more and more of people's everyday life ; a Government hopelessly divided on the fundamental question of Britain's future in Europe.

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Earlier, the Chancellor rightly remarked on the diffrence between the flavour of what the right hon. and learned Member for Monklands, East (Mr. Smith) said to the TUC conference and what he told the CBI. There was an equally marked difference between the tone of Ministers' speeches to the Conservative party conference and their speeches to the CBI conference. One would hardly think that they came from the same Government--in some instances, indeed, the same Ministers were involved. The tone was entirely different, because the Government are deeply divided on an issue that is fundamental to our future. We certainly do not wish to give our support to such a Gracious Speech. We invite the House to support our amendment, by which means we seek to express our belief that the country could be run very much better.

5.49 pm

Mr. Edward Leigh (Gainsborough and Horncastle) : Today's debate gives us a rare opportunity to take a broad view and to give our own views of which direction the Government should take. I hope, therefore, that the House will forgive me if I do not confine myself to speaking solely about economic matters.

The Queen's Speech is addressed to Parliament assembled of the United Kingdom and ends with the words :

"I pray that the blessing of Almighty God may rest upon your counsels."

That neatly encapsulates in a few words what a Conservative Government are elected to defend--the traditions of monarchy, the supremacy of Parliament, the unity of the realm, including Northern Ireland, and the moral authority of the churches. All four are under threat as never before, despite, or perhaps because of, unprecedented prosperity and materialism. However, all four need to be defended by Tories, even, sometimes, from themselves.

It is up to us to defend the monarchy as a sacerdotal symbol of national unity and shared history and tradition. It is up to us to ensure that the supremacy of Parliament, so hard won by the Bill of Rights and civil war, cannot be the plaything of diplomacy or party management ; it is probably our greatest gift to world civilisation. It is the nearest thing to an absolute in politics.

We must retain a Union based on consent. Two truths are self-evident in the argument on the Union. Only the people of Northern Ireland can decide, and only they should be allowed to run their own affairs. That logic can produce only one result--a free Parliament or assembly for Northern Ireland. A deal cannot be brokered in Dublin or London--only in Derry and Belfast. Self-government will bring responsibility ; with responsibility will come compromise ; with compromise will come settlement.

We must maintain the moral authority of the Christian churches not by preaching ethics as politicians--that is for the Churches--but by creating a social environment where Christian concepts of care for others by ourselves and our families, not by others and certainly not by the state, are the norm and where the material gains of capitalism are always balanced by the spiritual rewards of service. Capitalism is not enough. Left to itself, it can degenerate into destructive materialism.

Such institutions are not swept aside in a moment. They are worn away by neglect. Can we, therefore, promise the House and our electorate that we shall never sleep on our watch?

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The debate is an opportunity to reflect on the guiding lights for Conservatives that shine through the defence of the institutions I have mentioned. They are, first, the maintenance of national sovereignty that flows directly from the defence of the historical privileges of Parliament ; secondly, the defence of the nation or its interests from external aggression and the preservation at home of freedom, under the law, from lawlessness ; and, thirdly, the maintenance of sound finances--a balanced budget without increases in direct taxation.

Any Conservative Government or legislative programme of a Conservative Government is judged by those three yardsticks. The first reminds us that power does not derive from some supranational institution, treaty or solemn constitution, but from the consent of the people at general and local elections. Thus, the essential building block is the local community and not the European Community.

This year, we need to use the opportunity of the Boundaries Commission to break down the structures of government, remove distant layers in health care and local government and create unitary authorities based on whatever town, suburb, area or even large village that people relate to ; we need enabling and not providing bodies, efficiently contracting out work on competitive tenders. As far as possible, they should be given such powers as they can finance from their own resources.

We need to reinvigorate the Government as a vehicle for furthering consumer and local choice at the expense of impersonal bureaucracies or even ideologies. For instance, it is fashionable to argue that the march towards a liberal market world trading system is unstoppable and that, inevitably, more and more power will be diverted from local communities and national Parliaments into the boardrooms of multinational companies and the councils of international trade negotiators. I disagree.

The people themselves will rise up against politicians who distance themselves from their needs. A parish council in Lincolnshire trying to achieve more control of its planning from a distant, bureaucratic council ; a Nottingham miner operating a so-called uneconomic pit : further afield, a Neapolitan voter sickened by Mafia or city boss corruption ; a farmer in the Auvergne trying to preserve his rural culture and employment ; a steel worker in Pittsburgh threatened by cheap Mexican imports ; or a fisherman in British Columbia rebelling against giving into to the distant Quebecois- -they are all small and unfashionable people who are derided by the great and the cynical in their political and industrial elites, but their power is enormous. It is being heard with increasing force. It is a distant rumble, but it moves ever closer.

Before then, the grandiloquent posturings of world-weary statesmen in their council chambers will be seen as the mutterings of emperors without clothes. A new force is arising in Europe and the world. It is spurred by mass unemployment and it is protectionist and nationalistic.

Our duty is to acknowledge that force and to harness it into positive and creative channels--into a patriotism that is not fearful to fight for national self-interest, yet promotes free trade where it is fair, which is proud but does not dominate ; that provides essential public services, but ensures that they are efficiently privately and competitively delivered to meet the needs of consumers and not the desires of producers.

If we become so concerned with cutting sophisticated deals in the conference chamber of NATO, the UN, the EC or GATT that we lose touch with our electorate, their pride

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and their prejudices, we will be swept away like the Canadian Conservatives or the French socialists. We have to remember and acknowledge that warning.

Nowhere is the gap between the leaders and the led diverging so widely as in the development of European co-operation. We must gain support by saying that the drive towards European unity of purpose is essentially a process of equal peoples, from time to time co-operating on certain issues, but always preserving the power to act unilaterally and to take back control over a certain issue. Power and authority must flow up, not down. The essence of nationhood and Parliament is that, in theory, it is supreme under God. That is its magic and its imperative.

We can and must gain support by saying that the drive towards greater free trade which is sensible cannot be seen as an end in itself or an inflexible ideology, but as a sensible device by sovereign nations reducing for a time barriers to the creation of wealth where essential self-interest and strategic industries are not threatened.

It is absurd for us to argue that the small, traditional Japanese rice farmer should be destroyed by cheap American rice imports from California so that Detroit car workers are put out of work by imported Japanese cars. We can take the drive towards world free trade to ridiculous lengths.

The first guiding light is that nations should seek not to dominate but to co-operate, not to pool sovereign power and thereby surrender it, but temporarily to accommodate themselves to others.

It is permissible for Great Britain, as it has done for 400 years, to involve itself in continental politics and to preserve the balance of continental power--whether threatened by Philip II, Louis XIV or the Commission--and to promote trade. It is not permissible for one generation of parliamentarians to bind their successors or irrevocably reduce the sovereign power of a successor Parliament. Against the institutional bedrocks of Conservatism, the monarchy, Parliament and the Church, the guiding light of the defence of the nation is complementary ; is, indeed, essential.

The second guiding light is the defence of the citizen from external aggression and internal lawlessness. Yet in pursuit of cost cutting in the first, or liberal nostrums in the second, it is easy to lose sight of this essential light on the horizon to aim for. The Queen's Speech recognises that, and that is to the good, but the public will view with well-founded cynicism anything that smacks of gimmickry in any Queen's Speech. That should remind us that consistency and action--even, sadly and inevitably, sometimes the wrong consistency and the wrong action--are better than inconsistency and inaction.

The jury is out on whether prison reforms or destroys, although it certainly deters and removes from society. It may be that the only sort of action that would really impress the public on law and order would be automatic custodial sentences for theft from private dwelling houses and violence against the individual.

Equally, we should not be defensive about law and order. Perhaps we should have more of a can-do attitude in

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crime prevention, whether by installing deadlocks or tracking devices in cars or greater security in the home. Such measures could make a dramatic difference.

Once we are sure of our institutional support and the guiding lights are clear, we should ask ourselves why we want to be in office and what we want to achieve. Physical works are invariably a greater monument than a wealth of legislation. That is a lesson that we should have learnt during the past 15 years.

One example is transport. We should be completing now, not in the next century, a new international railway station, preferably in east London, connected on a fast line to Dover. What a pity that we are consigning hundreds of thousands of people to dispiriting unemployment, dependent on benefits. Should we not be giving them proper training and community work in return for those benefits? People do not expect simply speeches, treaties or slogans from their Government. Oppositions must content themselves with that. People want action, and Governments who fail to provide it invariably become Oppositions. Action this day should not mean action until some Back Bencher threatens to vote against it. It is better to fail honourably in the Division Lobby than to languish as a weathercock of newspaper editorials.

That sort of tough action applies to balancing the budget over the lifetime of this Parliament. We must do it and it must be done through cutting non- wealth-creating public spending. A Government who balance their budget exude confidence, responsibility and ability. But that cannot be done by raising direct taxation. Quite apart from its effects on consumer confidence, it knocks away the very bridge that connects us straight to the hearts of our supporters which, sadly, in this real world, a bad world perhaps, follow closely on from their wallets. From now until eternity every Tory Chancellor should read George Bush's lips and remember.

That leaves the Chancellor between a rock and a hard place, and cutting public demand not directly linked to wealth creation is a hard place indeed, as my hon. Friend the Economic Secretary knows all too well. The only real opportunity lies in social security. That brings us up against our Christian conscience. Should the underprivileged, the weak, the poor, the disabled, the unemployed suffer because we have allowed expenditure to outstrip earnings? Of course they should not.

But our aim in this Government, this year, in this Queen's Speech, in this House, must be to convince people that we are not just looking for cuts, because that will not get anywhere with the general public ; we must convince them that we have a philosophy, a positive and creative one, to help people to help themselves.

As Conservatives, we need the courage to argue our case for self-reliance and for family support. It is no kindness to substitute impersonal state support for our own personal responsibility. The very generosity of the state gradually erodes the traditional role of the extended family in providing for its most needy members. Where the state can intervene is to set people on the road to self-reliance, not trap them in terrible dependency which leads them to a state of despair.

There is a role for the state in providing training and community work for people who cannot find it under their own resources. We do not need to attack any class or people, whether it is one-parent families or anyone else. We must nurture and not destroy the human spirit.

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Government must be seen not as a struggle for daily survival but as a crusade for regeneration. If we remain true to the guiding lights of national sovereignty that I have mentioned, of freedom under the law and self-responsibility, we may suffer some short- term unpopularity, particularly if we seek to balance the budget, but in the long term we shall not founder ; we shall prosper, and ultimately we shall win through.

6.4 pm

Mr. Robert Sheldon (Ashton-under-Lyne) : The astonishing thing about the Chancellor of the Exchequer's speech was that it did not deal with the central economic issue facing us today, and that is the balance of payments. The balance of payments deficit is £17.5 billion and it was not referred to once. I find that astonishing. We have a depression unequalled in our history. We cannot export enough and we continue to import. That is a fundamental change from previous depressions and crises in our history, not just after the second world war but before that.

The automatic way to restore the balance of payments was to depress the economy. That was harsh medicine, sometimes wrongly attributed, sometimes wrongly phased, but it was medicine that everyone knew. That is the medicine that has been followed, but this time it has not resulted in any success.

What has happened is that 14 years ago we had a reduction in capacity in our industry and that has not been put right. I can hardly ever contribute to an economic debate without mentioning that in my constituency we lost 30 per cent. of our manufacturing industry between 1979 and 1981--good firms, firms that every country has, medium-tech firms, one or two hi-tech firms, firms that had everything to gain, but they could not exist with a 17 per cent. bank rate, the highest rate ever, and a pound worth $2.40. They lost out. Now we have another recession. I notice that the Chancellor believes that it started to end 18 months ago. He had better get round the country pretty fast if he thinks that the recession started to end 18 months ago. Some would say that it has not ended yet. There are some signs of that, but to say that it ended 18 months ago is something of which the Chancellor would have a great deal of difficulty convincing anyone.

For one calculation I can join my constituency with the area next to it-- Tameside and Stockport. I join them together because a branch of the Amalgamated Engineering Union used to be based on Ashton-under-Lyne, but we have lost the Tameside branch and it is now joined with Stockport.

The Amalgamated Engineering Union used to have just over 20,000 members, highly skilled, the sort of people for whom the country is crying out. In the same area today, there were 5,000 when I investigated the matter a few months ago and I suspect that there are now fewer than 5,000. That reflects the level of skill that has been lost. We must remember that they were trained, highly skilled people, happy to give their work and achieve the kind of rewards that skilled people have traditionally always had.

Manufacturing industry is important. I was pleased that, in some of the questioning that is even now being put, the Chancellor has accepted that. Manufacturing industry sells things. By all means, let us sell other things. Let us sell services and insurance abroad. I am all in favour of that,

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but the economies that are succeeding at the moment are those that continue to sell the products of manufacturing industry.

Therefore, we need investment. It will not bring quick returns, but we need investment in our manufacturing industry. I hope that the Chancellor will say something about investment incentives. They are crucial. I would go beyond 40, to 60 or 70 per cent. What is important is the use of new machinery and equipment that can make goods and produce skills. New machinery gives rise to the skills that are commensurate with it. Of course, I also want a competitive pound which would help us to sell abroad and to stop imports.

Production is required, not just because jobs are produced--that aspect can be overstated--but because goods are produced, and that affects our balance of payments. That is enormously important. More jobs will be produced over a period, but I accept that the number of jobs in manufacturing industry will decline as the industry becomes more efficient. People design machines so that fewer people are employed but the wealth which those people create will spread to other areas of the economy. However, goods must be produced. The failure to deal with the balance of payments deficit will occupy the Chancellor's mind and he will not be able to leave it alone when he comes to the Budget.

My hon. Friend the Member for Dunfermline, East (Mr. Brown) rightly mentioned the £50 billion budget deficit. The Government talk of dealing with that deficit by cuts in the welfare state. The deficit is not due to the welfare state. Why are the Government talking now about cuts?

I refer to pensioners. People of pensionable age were born in the 1920s and 1930s, and there was no baby boom at that time to bring about large numbers of pensioners. There has been an increase in life expectancy, but that is not remarkable, and there has not been a sudden surge in the number of pensioners during the past two or three years.

The Government are doing quite well out of pensioners because they have not increased pensions in line with earnings, but instead have increased them in line with prices. As the economy grows, pensions will form a relatively smaller part of the cost of running Government. That is an enormous advantage for the Government. Although people will live longer, the benefit that the Government will get from linking the pension to prices is more than will be obtained from the greater expectancy of life.

Where did the £50 billion deficit come from, and where is it going? As my hon. Friend the Member for Dunfermline, East rightly mentioned, the deficit comes from unemployment. My hon. Friend made a good speech, but I am afraid that the Chancellor's answer was a bit of knockabout stuff. I cannot blame the Chancellor, as it must be rather difficult for him with the Budget five days away. Nevertheless, the serious points raised by my hon. Friend will remain serious next week, whereas the knockabout stuff will be forgotten long before then. The deficit comes from unemployment, added to which we have council tax subsidies, a recession and incompetence. Those are the elements of the horrifying budget deficit. However, we must not be mesmerised by that figure, because we can still borrow for investment. We can do so even with the £50 billion deficit, but the

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investment must be genuine. Anyone can go to his bank manager with cash flow problems as long as he has a good case to argue. There are some good investment opportunities available which will produce genuine returns. One example is repairs of council houses which are rotting away. The Government could borrow against those houses, and would save money in the end. Those houses cannot be demolished and they have long years of life ahead of them. The Public Accounts Committee has produced report after report showing how disgraceful the country's roads are. The Government's failure to keep the roads in good repair has led to roads having to be reconstructed at enormous cost. The worst thing is that they do not know which roads have to be reconstructed. Such work on roads is a sensible investment which can produce a return in a few years ; the railway system is a similar example. Training people is a good investment, while education is a longer-term investment for which a good case can be made. Even with the £50 billion deficit, certain forms of expenditure can be undertaken which can produce returns. I will talk now about VAT, and the ending of the zero rating. It fell to me to take the chair during consideration of the sixth directive in May 1977 during this country's presidency of Europe. The directive went well, and a deal was done with the Dutch Finance Minister, as a result of which we kept virtually everything that we had. Few people realised that anything had changed in this country regarding VAT, although things had changed in other countries. I made the point strongly at that time--I have believed it ever since--that VAT is an important tax because it is broadly neutral. It is not a progressive tax-- it never was--but it is not regressive either. The danger now is that by abolishing the zero rating, the Government are turning a broadly neutral tax into a regressive tax, which means that those with the least pay will suffer the most. If the Government start to move in that direction, they could make virtually all taxes regressive, such as taxes on petrol, tobacco, and alcohol, and vehicle excise duty. There are taxes the same for everybody, whatever their income may be. The poor will be taxed at the same level as the rich.

All this country's taxes will be regressive, except one--income tax. That will remain as the only progressive tax, and it is the one tax which the Government are determined to reduce. Everybody knows that income tax is fair, although the rate can be changed. It can be argued that the rate is too high at some stages, and too low at others, but it is the one progressive tax.

I will now say something about the proper conduct of public business, a matter which has been causing both me and the Public Accounts Committee concern. Today we have seen the Committee's report on the West Midlands regional health authority. It is right that concern should be expressed in the House about the serious shortcomings in that case.

One official in the authority who was new to the NHS made a bonfire of all kinds of controls, while the chairman and the board seriously neglected public accountability. A total of £2.5 million was spent on consultants without the authority being notified, despite there being rules that any

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