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Spending on health, education, training and science contributes significantly to the long-term economic performance of the economy, by improving the nation's stock of so-called human capital the health, knowledge and skills of the population as a whole. Important though it is, this contribution is very difficult to quantify. This year, however, as promised last autumn, the public sector

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accounts will identify separately the amount the Government plan to spend on physical capital projects, including improvements to the nation's infrastructure.

Overall, the new plans provide for total public sector capital spending over the next three years of around £22 billion a year. But just as that figure takes no account of the massive investment programmes of the former nationalised industries which are now thriving in the private sector, so too it ignores the very large amount of investment which is stimulated by Government policies, including investment in housing and urban regeneration. On top of this, the private finance initiative is now adding to spending in areas for which the public sector in the past has traditionally taken responsibility.

To make a success of this private finance initiative and to deliver the increase in capital spending within the public services that I want to see will require a complete change of culture within Government, together with imagination and innovation on the part of the private sector. That cannot be expected to happen overnight. Even so, the flow of private sector projects to date has still, in my view, been disappointingly small.

To speed the process up, I have already announced the establishment of a working group chaired by Sir Alastair Morton, who I am sure can be expected to work alongside me as something of a warrior in this cause. In the meantime, the Government are today giving the go ahead to three substantial new transport projects under the private finance initiative : first, the extension of the docklands light railway to Lewisham ; secondly, a new air traffic control centre for Scotland ; thirdly, the refurbishment of the west coast main line, one of our most important routes, linking some of the biggest cities in the country London, Birmingham, Manchester, Liverpool and Glasgow. The private finance initiative also offers major opportunities for improved services in the NHS. There are almost 40 NHS projects where private finance is already involved or being considered, ranging from cardiac units to hospital car parks. At Aintree in Liverpool, a scheme involving the construction of a 100-bed patient hotel, four operating theatres and other facilities is going ahead a model for other private finance projects.

In addition, my right hon. and learned Friend the Home Secretary will be taking forward proposals to finance and build six new prisons using private finance. He has already announced that he also intends to involve the private sector in the provision of secure training centres.

Finally, I have always made clear my view that roads provide a major opportunity for private finance. My right hon. Friend the Secretary of State for Transport will be informing the House shortly about the Government's plans for taking forward motorway charging in the light of responses to his Green Paper, but I can announce today that, when the technology is ready, we intend to introduce a system of electronic motorway charging in this country. This will be a massive high-technology project in its own right.

In the meantime, the Government plan to introduce new contracts under which the private sector will design, build, finance and operate roads. My right hon. Friend will hold discussions with the construction industry and others to identify the best road schemes to start with. Bringing private finance and management into the roads programme offers the prospect of substantial benefits for the construction industry, the motorist and the taxpayer alike. I am sure this will be warmly welcomed.

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Resource accounting

I have one other announcement to make to improve the way in which the taxpayer's money and public sector capital is used and accounted for.

In my opinion, Government accounting for public spending has become archaic. In my view, the time has come to move to a system of accounting which identifies more clearly the cost of resources. This will put Departments on to a similar accounting basis not only to commercial organisations but to many other parts of the public sector. I shall be publishing a paper in the first half of next year on the introduction of accruals-based resource accounting by Departments, and its implications for the way expenditure is planned and controlled, and money is sought from Parliament.


The new spending plans reflect the carefully chosen priorities of an enlightened and responsible Government. We have taken strong measures to keep public sector pay and Government administration costs under tight control. We have taken a number of crucial steps to restrain the growth in social security spending, while fully meeting our commitments to the poorest members of society.

We have increased resources to support the Government's priorities, particularly health, education and training and science. We have protected spending on law and order. We have injected new momentum into the private finance initiative. We have honoured all our manifesto commitments. Most important of all, we have managed this substantial reallocation of resources and choice of priorities without breaching the spending ceilings agreed by Cabinet last June. This significant achievement owes a great deal to the new arrangements for the public expenditure survey introduced last year by my right hon. Friend, the Member for Kingston upon Thames (Mr Lamont), but a great deal of credit is also due to my colleagues on the Cabinet known as the EDX Committee, and most particularly to my right hon. Friend the Chief Secretary to the Treasury, to whose skill and tenacity I should like to pay the warmest possible tribute.


I now turn to my proposals for taxation. My task is simple. I need to raise revenue, but to do so in a way which does least damage to the economy.


At a time when taxes are having to go up, it is particularly important to collect all the tax which is properly due. So let me begin with my proposals to counter tax avoidance.

Suggesting that Budgets should close tax loopholes is stating the obvious. Every Budget over the last 14 years, and indeed every Budget that I have listened to before that, has closed some tax loopholes. It is not a big new idea. The tax avoidance industry is always ingenious, but it is one industry which this Government has certainly never helped. [Interruption.] The right hon. and learned Member for Monklands, East (Mr Smith) would not know what a loophole was if he were looking one in the face.

My Budget today contains a particularly good crop of new proposals to combat tax avoidance, starting with an end to the ploy which is apparently growing under which

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salaries are paid in gold bars, coffee beans, cowrie shells, or other exotic payments in kind, simply to avoid national insurance contributions and delay paying tax.

I also intend to counter the abuse of the tax relief for profit-related pay ; tackle the avoidance of stamp duty on property transactions ; halt the use of shell companies to avoid payment of tax ; and end the use of indexation to create or increase capital gains tax losses. These measures will yield about £2 billion in the next three years. Claims that more might be found in this way are, I regret to say, much exaggerated.


Next, I propose to broaden the tax base. I have never disguised my personal view that the coverage of value added tax in this country is too narrow. Under the EC's sixth VAT directive, there are serious limits on the Government's ability to extend it to things which are exempt, but we do have the freedom to introduce separate taxes, and that is what other European countries do. I propose to follow their example in two particular areas, which I believe are well suited to this country.

Air passenger duty

First, air travel is under-taxed compared to other sectors of the economy. It benefits not only from a zero rate of VAT ; in addition, the fuel used in international air travel, and nearly all domestic flights, is entirely free of tax. A number of countries have already addressed this anomaly.

I propose to levy a small duty on all air passengers from United Kingdom airports. This will be set at £5 for departures to anywhere in the United Kingdom and the European Union ; and £10 for departures to other destinations. The new duty will come into force next October, and will raise some £330 million in a full year. There will be exemptions for transfer passengers and small planes. This means, for example, that most flights between the Scottish islands will not bear tax.

Insurance premium tax

Second, we have always tended to tax financial services in this country much more lightly than other sectors, including manufacturing. In this Budget, I have decided to tackle one sector of this industry which is exempt from VAT. Virtually every other member state charges an ad valorem tax on insurance premiums. I propose now to do the same.

The rate will be only 3 per cent., among the lowest in Europe, and the tax will apply to most general insurance of risks located in the United Kingdom. It will come into force next October, and will raise over £750 million in a full year.

To avoid driving business offshore, I propose to exempt the reinsurance of risk, and the insurance of most ships, aircraft and international transit goods. To avoid taxing exports, I propose to exempt export credit ; and to avoid taxing savings, I shall exempt long-term insurance such as life assurance, including assurance for endowment mortgages.

For the typical family with motor, home contents and building insurance, this tax will cost about 35p a week.


I shall return later in my statement to the existing indirect taxes, and particularly to VAT, but before I do, let me set out my proposals for direct taxation.

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First, I propose to freeze again the personal allowance for income tax, the threshold for higher rate tax and the income limit for the age-related allowances. I do not propose to change the inheritance tax threshold or the exempt amount for capital gains tax ; or the lower, basic or higher rates of income tax. The 20p lower band will be extended by a further £500 next year as planned, to £3,000. I intend to raise one allowance which has been frozen for the last four years the blind person's allowance. This will rise next April from £1,080 to £1,200.

These proposals will yield £560 million in 1994-95, relative to an indexed base, rising to £745 million in 1995-96.

Married couple's allowance

Now that husbands and wives are taxed independently one of the best taxation reforms in recent years the married couple's allowance is a bit of an anomaly. As announced in March, from next April it will be limited to 20 per cent. Given the need to raise extra revenue, I propose to reduce the rate of relief further, to 15 per cent from April 1995. This will yield £830 million in 1995-96, rising to over £1 billion in a full year.

Mortgage interest relief

I propose to take a similar approach to mortgage interest relief. As the House is aware, the rate of mortgage interest relief will fall from 25 to 20 per cent. in April. From April 1995, I propose to reduce it further, to 15 per cent., raising an additional £970 million in 1995-96. For those with mortgages of £30,000 or more, this will cost around £10 a month. That is a tiny fraction of the benefit borrowers are still receiving from the very substantial reduction in mortgage rates in the last three years.

The limit on loans qualifying for mortgage interest relief will remain at £30,000.


The tax increases that I have announced will enable me to give some modest help to businesses.

Corporation tax

There will be no change to the main rate of corporation tax, which remains the lowest in the European Union, or to the small companies' rate, but I propose to raise the profits limit for smaller companies by 20 per cent. This will reduce corporation tax bills for 30,000 companies.

Foreign income dividend scheme

To help reinforce Britain's place as Europe's most attractive location for international business, I shall implement proposals to make surplus advance corporation tax repayable on dividends paid out of profits earned abroad by companies based in the United Kingdom.

Export credit

For exporters, I propose to make an extra £200 million of export credit cover available in 1996-97, and to cut export credit premiums for certain important developing markets, including India, Mexico and Turkey. British exporters of capital goods have been very successful in winning orders over the last year, particularly outside Europe. My right hon. Friend the President of the Board of Trade and I want to see that continue.

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Uniform business rates

The business rates poundage increase next year, based on the 1.8 per cent. September retail prices index, will be the lowest since introduction of the uniform business rate. For properties in England and Wales still protected by transitional relief, I propose to cut the maximum real increase in rate bills next year by a half, to 10 per cent. for larger properties and 7 per cent. for smaller properties. Small properties that are used for both domestic and business purposes the shop where the owner lives at the back will face no real increase at all. Separate arrangements will be made in Scotland and Northern Ireland.

This will bring significant relief next year to over 600,000 business properties throughout the United Kingdom. It will cost a little over £100 million next year.


My particular priority this year has been to help small businesses. In my opinion, the biggest contribution any Chancellor can make to reducing unemployment over the medium term is to ensure that the conditions are in place for new businesses to become established and for small businesses to grow. As a country, we generate plenty of budding entrepreneurs and any number of good inventions and ideas ; yet all too often, those ideas stay on the drawing board as money is channelled instead into the safer larger companies.

My proposals seek to address three separate problems facing small businesses today : the burden of regulation ; the shortage of external finance ; and cash flow.


I can announce today four contributions to my right hon. Friend the Prime Minister's campaign to turn the tide of excessive regulation, which threatens to engulf our smaller firms.

Simplified assessing

First, the Finance Bill will include the initial tranche of legislation to implement the plans announced in March to reform the current regime for assessing personal tax. The new system will be simpler and more efficient. The changes will be of particular benefit to the self-employed.

Income tax and national insurance contributions

Secondly, my right hon. Friend the Secretary of State for Social Security published last month the report of the working group set up to consider the options for aligning income tax and national insurance contributions. My right hon. Friend and I agree with the group's conclusion that there are significant savings to be had from using the same definitions, same paperwork and same audits for income tax and national insurance. We are now looking at the group's main recommendations, and will be bringing forward proposals early next year.

VAT threshold

Thirdly, on the administration of VAT, firms are currently required to register for VAT when their turnover reaches £37,600 a year. I intend to raise this to £45,000 with effect from tomorrow. This will allow up to 75,000 more traders to opt out of VAT altogether.

Statutory audit

Finally, the statutory audit. The Companies Act requires all companies to have their accounts audited, but for the

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smallest companies the expense can be out of all proportion to the benefit. When I was at the Department of Trade and Industry, I continually pressed for a change to that. My predecessor announced consultation in the March Budget. I can now announce the conclusions.

My right hon. Friend the President of the Board of Trade and I have decided that most companies with a turnover between £90,000 and £350, 000 a year in future need only get an independent accountant's report on whether the company's accounts correctly reflect its books. For the 40 per cent. of companies with turnover of less than £90,000, we propose to take the deregulation a step further. For those small companies, the audit requirement will be abolished altogether.

Finance for industry

However, I do not just want to lighten the burden of regulation. I believe that positive steps are required to increase the flow of risk capital into small businesses.

Capital gains tax

For managers and employees to leave steady jobs and take a chance by going into business on their own, the risk must be worth while. At 40 per cent, our top rate of income tax is the lowest in the European Union, and I intend to keep it that way, but our capital gains tax regime still bears disproportionately on the successful entrepreneur.

In 1991, we increased the capital gains tax relief for business people who sell up on retirement, by providing a complete exemption from capital gains tax on the first £150,000 of capital gains and a half exemption on the next £450,000. I now propose to increase those limits to £250,000 and £750,000 respectively. By rewarding those who have been successful in the past, thatdividual facing a capital gains charge should be able to defer the tax indefinitely by reinvesting those gains in an unquoted trading company.

Venture capital trust

I also intend to create a new type of investment, a venture capital trust, which will channel savings specifically into unquoted trading companies. Investors will receive dividends and capital gains entirely free of tax. By investing through a trust, they will also be able to spread their risk across a number of different companies. My hon. Friend the Financial Secretary will shortly be issuing a consultation paper fleshing out the details.

Enterprise investment scheme

In my view, there remains, too, a strong case for encouraging equity investment in unquoted trading companies.

I propose to introduce a new scheme, the enterprise investment scheme, to do just that. The enterprise investment scheme will differ from the old business expansion scheme in several important respects. To target the money where we want it to go, property-related investments will be excluded. Up-front tax relief will be limited to 20 per cent., but any losses on investments will qualify for income tax and capital gains tax relief ; and all capital gains within the scheme will be entirely free of capital gains tax. The limit for investors will be £100,000 a year.

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Most important of all, to help those who are looking to invest their expertise as well as their money, people previously unconnected with the companies they invest in will be able to take up paid directorships. The cost of the new scheme could eventually rise to some £50 million a year. Taken together with my proposals on capital gains tax and the new venture capital trust, I believe that it could generate substantial new investment in the unquoted company sector.

Late payment

Finally, on the small business sector, I turn to the problem of small companies' cash flow. There is one issue which year after year tops the list of Budget representations made to all of us by the small business community the problem of late payment. There can be nothing more frustrating than delivering a quality product on time at a competitive price and then finding that one does not get paid for months. Late payments wreak havoc with cash flow, and for many small firms they can make the difference between survival and failure. The habit of late payment is corroding our business culture. I am quite sure that it needs to be dealt with.

There are many options for tackling that problem, and my right hon. Friend the President of the Board of Trade and I will be looking at two in particular : first, a new British standard for payment performance ; and, secondly more significantly legislation to provide for interest on late payments. Late payment was a serious problem for small businesses throughout the last recession. I believe that the time has now come to take that issue head on.


The Government's clear policy has always been to shift the burden of taxation, over time, from income to spending. This reflects the Government's underlying political philosophy that people should be allowed to keep as much of their own money as possible. Provided the less well-off are helped, it is fairer and less damaging to the economy to tax people on how much they spend and consume than on the work they do.

In line with this policy, even in a very difficult year, I have been able to avoid any increase in income tax rates. But to do this I have had to raise further revenue from indirect taxation. Let me start with the excise duties.

Road fuel duty and vehicle excise duty

First, I propose a modest increase in the vehicle excise duty on cars the tax disc of £5 a year. The duty on lorries will be unaffected.

Secondly, on road fuel duties, with effect from 6 pm tonight, I propose to raise all the road fuel duties by 3p a litre. Even so, petrol will still cost less in the United Kingdom than in most countries in the European Union, and it will be cheaper than it was in real terms in the early 1980s. It is not good policy in these environmentally conscious days to keep road fuel costs so much cheaper than they used to be. Taken together, these increases will raise around £ billion next year. Bus fuel duty rebate will be held at pre-Budget levels.

In March, my predecessor announced that fuel duties would increase on average by at least 3 per cent. in real terms in future Budgets in order to restrain carbon dioxide emissions. My right hon. Friend the Secretary of State for

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the Environment subsequently announced in July that the Government would be looking at further measures in this area to help to meet our Rio commitment.

I have now decided to strengthen the March commitment by increasing road fuel duties on average by at least 5 per cent. in real terms in future Budgets. This will complete Britain's strategy for meeting our Rio commitment. We are the first country in Europe to do this ; and we have done so in a way that minimises the additional costs to industry.

Others in this country some others in this House and in Europe continue to canvas unrealistic blueprints for a new European Union-wide carbon tax, which would impose massive new burdens on British industry. Any critic of the Government's tax plans who claims also to support the international agreement to curb carbon dioxide emissions will be sailing dangerously near to hypocrisy.


Next, I come to tobacco. With effect from 6 pm tonight, the total tax on a packet of 20 cigarettes will go up by 11p a duty increase of 7.3 per cent. The duties on other tobacco products will rise by the same proportion.

In addition, I have decided to strengthen the commitment on tobacco duties that the Government have given in the past. I intend to increase tobacco duties on average by at least 3 per cent a year in real terms in future Budgets.

I believe that the approach we are adopting in Britain is the most effective way to reduce smoking. It is clearly nonsense for some European countries to ban advertising to protect state-owned tobacco industries, but then impose markedly lower levels of tax.

Wine, beer and spirits

Turning next to the duties on alcohol, let me start with beer. I have listened carefully to the arguments put by the industry about the declining consumption of beer in this country, the effect of the change to end- product duty and the growth of cross-Channel imports of beer. Taking all these factors into account, I have decided that, for the first time in five Budgets, there will be no increase this year in the duty on beer.

Mr. David Blunkett (Sheffield, Brightside) : That is what comes of having a beer-swilling Chancellor.

Mr. Clarke : Let me assure the House that this decision has nothing whatever to do with the drinking habits of the Chancellor of the Exchequer, and to prove it, I am also proposing to freeze the duty on spirits for a further year.

The spirits industry, which is a major United Kingdom export business, is facing problems similar to the brewers'. I know that my proposals will be warmly welcomed by the House, and will give right hon. and hon. Members from Scotland something to celebrate on St Andrew's day.

For wine, sparkling wine and cider, I propose to raise the duty in line with inflation. This will add 2p to a bottle of wine. But it will not take effect until after Christmas. [ Laughter .] For those hon. Members who are still here, the overall effect of all the tax measures I have announced will be to raise revenue next year by a little under £1 billion. By 1995-96, that will rise to about £5 billion, and to £6 billion by 1996-97, about per cent. of GDP.

These sums fall a long way short of the reduction in the borrowing requirement I judge necessary. As I announced

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earlier, I intend with my Budget to reduce the public sector borrowing requirement next year, not by £1 billion, but by £5 billion, with a reduction by 1996-97 of £10 billion.

The central challenge I have faced in finalising this Budget is how this gap could be bridged. Every commentator realised that one of my options must be to extend the VAT base. The main candidates are food, children's clothes, transport, sewerage and newspapers. A powerful case for each of them can be made, and no amount of lobbying need put us off, but before looking at that, I have always made clear that my first responsibility as Chancellor is to get public expenditure under the firmest possible control.

I have already announced that the Government's new spending plans fully meet the remit agreed by Cabinet in June, but when the House comes to study the Red Book it will see that the figures for the new control total in each of the next three years are markedly lower than those set out in the March Budget and the cash ceilings agreed by the Cabinet in June.

The explanation for this difference is simple. The Cabinet has decided to establish new spending plans which are not just consistent with the ceilings that we set for ourselves in June, tough though they were. We have decided to set plans which in each of the next three years are lower than the June ceilings.

Our spending plans for the coming year have been reduced by more than £3 billion. The new control total for next year will be £3 billion below the level we set last year, and £8 billion below the plans for that year that we first set two years ago.

That is not all. In 1995-96, we have reduced the new control total by £1 billion and in 1996-97 by nearly £3 billion. Taking into account lower debt interest payments resulting from lower borrowing, I expect that, as a direct result of the Budget, total public spending over the next three years will be around £10 billion less than we assumed at the time of the March Budget.

Including also the reduction in cyclical spending as the economy recovers, and other changes, the total reduction in public spending over the next three years compared to the March Budget projections will be no less than £15 billion.

Those public expenditure savings dramatically reduced my need to raise taxes to get the borrowing requirement down. As a result of that achievement and only because of that I can now confirm that I have no need this year to propose any changes to the VAT base. Throughout the public spending round, all my Cabinet colleagues understood that the essential job in this Budget was to move back towards a balanced budget ; and we all understood the clear preference on this side of the House for this to be done, so far as possible, by firm control of public spending. That is what we said we would deliver, and that is what we have delivered, because that is what is required to keep the recovery going.


My Budget today puts Britain firmly on course for a sustained period of rising prosperity and falling unemployment, based on low inflation and healthy public finances.

This is a no-nonsense Budget which deals directly and firmly with the main challenges facing the country today. Above all, it is the Budget of a responsible Government which is determined to bring lasting recovery to Britain.

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I commend it to the House.

Provisional Collection of Taxes

Motion made, and Question,

That, pursuant to section 5 of the Provisional Collection of Taxes Act 1968, provisional statutory effect shall be given to the following motions :

(a) Tobacco products (rates) (motion No. 4) ;

(b) Hydrocarbon oil (rates) (motion No. 5) ;

(c) Vehicles excise duty (rates) (motion No. 8). [ Mr. Kenneth Clarke. ]

put forthwith, pursuant to Standing Order No. 50 (Ways and Means Motions), and agreed to.

Mr. Deputy Speaker : I now call on the Chancellor of the Exchequer to move the motion entitled "Amendment of the law". It is on that motion that the Budget debate will take place today and on succeeding days. The remaining motions will not be put until the end of the Budget debate next week, and then they will be decided without debate.

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Budget Resolutions and Economic Situation


Motion made, and Question proposed,

That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance ; but this Resolution does not extend to the making of any amendment with respect to value added tax so as to provide

(a) for zero-rating or exempting any supply, acquisition or importation ;

(b) for refunding any amount of tax ;

(c) for varying the rate of that tax otherwise than in relation to all supplies, acquisitions and importations ; or

(d) for relief other than relief applying to goods of whatever description or services of whatever description. [Mr. Kenneth Clarke.]

4.51 pm

Mr. John Smith (Monklands, East) : I congratulate the Chancellor on being the first holder of his office to introduce a unified Budget combining the traditional Budget and the public expenditure programme in one. In terms of the material to be covered, it was clearly a greater challenge than that posed to any of his predecessors, and he delivered it with his customary style. He may live to regret saying that he had public borrowing once and for all under control. After all, one of his predecessors as Chancellor, the Prime Minister, told us that there would be tax cuts year on year and that there would be no increases in VAT either upwards or in scope.

In another respect the Chancellor's Budget is unusual because many of the tax decisions that will hit people next April were taken in his predecessor's Budget last March. In 1993 there are two Budgets. As we heard again today, those Budgets are bad news for the taxpayer, they betray Conservative tax and spending pledges, and they are designed to make the British people pay the price of Conservative economic mismanagement.

I remind the House and the country that in March the former Chancellor primed a ticking tax time bomb which will explode in April. VAT on domestic fuel of 8 per cent. rising to 17.5 per cent., a hike in national insurance contributions, a cut in mortgage tax relief, and a real cut in personal tax allowances represent an additional £8.50 per week for a typical family from April. What did we get today ? We got more betrayals of Conservative election promises. I calculate that there are at least three new taxes on income because to freeze personal allowances, not for just one year but for two years in succession, is a devious way of increasing income tax. I calculate that that is another £1 a week extra tax for the basic rate taxpayer. The Government may not change the formal rate, but they wriggle in all sorts of ways to try to increase the income tax bill without the public detecting that they are putting it up.

I warn the Government that when people examine their pay slips in April next year and in the April after that they will see the true tax cost of the Conservatives. Similarly, cutting the married couple's allowance is another way of increasing income tax ; and a third way, of course, is by a substantial cut in mortgage tax relief. Those are three ways in which income tax has been increased. If that was not enough on the suffering people, there is to be a tax on holidays. I notice that it will not apply to

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