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Column 187rather than vice versa. Of course, there is an interplay between the two, but hon. Members would be profoundly foolish if they though that they could walk away from dealing with the prime importance of accepted and legitimate public expenditure and the undertaking of collective responsibilities that are accepted by the Conservative party and many of its opponents. One always looks for an opportunity to reduce spending, but between now and the next election the underlying thrust of expenditure, certainly in health and education, is likely to be sustained and to intensify rather than to diminish. I make that point as a check on rhetoric about what is available for tax cuts. Of course, one would like tax cuts, but my experience of them over many years is that they are tax redistributions. Revenue has increased in almost every sector except income tax, where it has been reduced. That has become the flagship of fiscal policy. I can understand the political attraction of that, but it seems to me that, when it came to the point of increasing the poll tax so that it would yield more than the local government taxes that it replaced--again, as part of the master strategy to reduce income tax--a certain amount of political misjudgment was involved ; I put it no higher than that. Such realities will control us over the next two or three years. Welfare spending is of enormous significance in our total budget. I believe that, sooner or later, changes in welfare spending will be forced on the House by the Borrie report or some other mechanism. Those changes will have to be made on the basis of the private sector being able to take over the running of a substantial part of a service which would otherwise and historically have been the responsibility of public expenditure. We have achieved that with retirement pensions and there are other sectors where it can be achieved. In my view, however, we are talking about a developing, almost Fabian-style policy, not one of substantial cuts delivered in a short time.
We should take pride in the fact that we have been successful in eliminating great sectors of expenditure on industry from the Budget. The most important part of that policy has been the privatisation of various public utilities so that their programmes are privately, and not Exchequer, financed. If expenditure on those programmes were superimposed on today's levels of public spending, that would present a formidable challenge.
I say to my hon. Friends and to my right hon. and learned Friend the Chancellor in particular that we need to be very careful to ensure that the idea of public sector involvement in industrial activity does not return via an unexpected route--Brussels. I have no hesitation in, and feel no shame about, putting the proposition that the growth in our European Union budget sits ill alongside the constraints that we try to place on our domestic economy. That creates new centres of fiscal patronage, which are then tapped, usually by local authorities, outside what ought to be the overriding determination of a national Treasury. I see that on the horizon as something that could become a factor in adding to the difficulty of ensuring prudent financial control in the years to come.
As we come to the next general election, I have no doubt that we are now moving back into a position from which a Conservative Government can move forward by encouraging a relationship between spending, revenue and borrowing that is defensible and can be properly
Column 188understood by the public. When the parties are compared, the issue will be not about the promises of the past but about the promises for the future and the extent to which the Opposition parties will try to cap spending, make other alterations or relate the consequences of their policy on the known national budget.
Above all, the comparison of the parties will revolve around the extent to which politicians preach easy options. The easiest option is economic growth. That is the option that is reminiscent of the 1960s. The election of 1964 was fought on the belief that, through the national plan and the centralised allocation of resources, we could claim a much higher performance than would otherwise be the case. The events of the 1960s showed the shortcomings of that policy.
I feel, and live with, great charity towards the Opposition, especially the shadow Treasury team. I am sad that they are still trapped in the time warp of the 1960s. The hon. Member for Dunfermline, East (Mr. Brown) is a great proponent of economic growth, saying that we would be able to do away with unemployment that is created by a Tory Government--by which he means, created by a low level of economic activity. That is reminiscent of the past. The hon. Gentleman has much charm, but being a child of flower power and the 1960s is no guarantee of effectiveness at No. 11.
Mr. Robert Sheldon (Ashton-under-Lyne) : Of course the right hon. Member for Shropshire, North (Mr. Biffen) views the 1960s differently from me. He lost an election in the 1960s and I won one. I think that that has coloured his attitude to that time.
I find it rather surprising that the Chief Secretary to the Treasury hardly mentioned the Bill, even though it is the largest Finance Bill that I have ever seen, running to two volumes. There seems to be an inverse relationship between the size of the Finance Bill and the amount of time that the Chief Secretary spends in explaining it.
The Bill includes two new taxes--on air passengers and on insurance premiums--but they did not get a mention. It is rare that a Chancellor of the Exchequer or Chief Secretary comes to the House with two new taxes but fails to mention them. When I was a Treasury Minister, I made it a principle that new taxes should be introduced at a low rate. That was a sensible policy. One ought to get the structure right and then jack it up. If a rate is low now, we must not be under the misapprehension that what we have is some minor tax about which we do not need to bother too much. In fact, it will be fertile ground for future Chancellors of the Exchequer seeking to raise money for the Treasury.
What we have been discussing repeatedly is tax rates--a very limited issue. In 1991 and 1992 the Conservative party captured the agenda. The issue at the last election should have been--indeed, the issue at any election should be--the future development of the country, a society caring for its weaker members and the prosperity of the people. At the last election the issue was no such thing. It was not even the economy, not even general taxation. It was the small difference in income tax as applied to certain people. We were talking about pence or, sometimes, a very few pounds, and 90 per cent. of people were not going to be affected very much.
Column 189What we are seeing now is the nemesis. It has come late, but it has come certain. The views of the Chancellor of the Exchequer and of the Conservative party are now being explained away because of their problems.
We ought not to be talking about expenditure against tax. That is not the only way of looking at the situation. Even less should we be concerned with tax rates against expenditure. What we ought to be talking about is revenue against expenditure. It is true, of course, that expenditure has to be covered by revenue. But revenue includes a multitude of things. It involves growth, investment and the cost of unemployment as well as tax rates. These are the matters that ought to have concerned the Chancellor in his preparation of the Budget, and ought to have concerned us all at the time of the last election and thereafter.
I hope that the Chancellor of the Exchequer is not satisfied with the increasing value of the pound against the deutschmark. He ought to be concerned not just about exporters but about the whole of manufacturing industry. I believe that he manifests some slight movement away from the hostility towards manufacturing industry that clearly existed throughout the 1980s. The right hon. and learned Gentleman seems to have a slightly more open mind, and I congratulate him on that.
Manufacturing industry must be given a chance. I can hardly ever make a speech without mentioning the 30 per cent. of middle-sized manufacturing firms that were lost to my constituency as a result of the problems that arose between 1979 and 1981. What we have lost can never be recovered, but the Chancellor could deal with some of the problems by doing more for manufacturing industry. My hon. Friend the Member for Peckham (Ms Harman), whose speech hon. Members--at least, Opposition Members--enjoyed, dealt very adequately with this matter. In the 19th century, income tax--this single aspect of the taxation system--was regarded as the great engine of revenue. Historically, however, income tax was a tax on the middle classes. It was based on taxable capacity and was raised on income after the exclusion of certain expenditures. The most important of those expenditures was the cost of maintaining a wife. Until the 1930s, women gave up their jobs when they got married. Their reliance on their husbands' support was acknowledged through the married woman's allowance. The children's tax allowance was in exactly the same category. It acknowledged that the family's expenditure had changed seriously upon marriage. The justification was that it applied to the middle classes. A working-class woman in my constituency left her child with her mother and went to the mill. In the case of the middle classes, the birth of a child resulted in a distinct drop in income as the woman ceased working.
In the case of family allowance, Beveridge excluded the first child. Why? Because the first child does not cost very much : it does not eat very much, and it does not need extra housing. But that was a middle-class concept. The working-class concept now, as it was shortly after Beveridge, is that the first child results in an enormous drop in the family's income. This is the reason for the children's tax allowance, and it is the reason for child benefit. These benefits are crucial to people whose income has undergone such change. It has always been accepted that expenditure such as that to which I have been referring is part of the cost of running a family. As people are given personal allowances, so they should receive allowances for essential expenditure. In addition to the cost of keeping a wife and a child, there is the cost of
Column 190earning a living. Here we have seen fundamental changes. Earning a living now involves costs that people did not have to meet in the past. There was a time when people in my constituency and elsewhere earned their living in the mill down the road or in the pit down the street. A man would dress up in his muffler and take a butty with him. The cost was either zero or negligible.
Things are different now. Making a living now costs a great deal of money. Many people live 20 or 30 miles from their places of work and have to meet the cost of transport. People in my constituency often travel on the motorway in order to earn their living. Many must have motor cars. Of course, sensible people try to modify their expenditure, but their costs are still very high. They can no longer turn up in a muffler and looking dirty ; they must look presentable. They may work in dirty situations, but they clean up before going home. Also, extra expenditure is involved in the provision of clothing and meals.
The tax system makes no provision for such costs. As someone who has dealt with these matters, I understand why. The Inland Revenue's fear is that if the dam were to burst, the flood could not be stopped. However, these matters can be dealt with, and this is something that we need to think about.
There is no doubt that the Exchequer could not go into too much detail in this respect, but something could be done. For the best part of 100 years we had the earned-income allowance--a concept rather different from what we know today. Anyone with unearned income has capital, providing security. It is very comforting for a person to know that there will always be income derived from that capital. Thus it was that unearned income resulted in higher tax than was paid by a person in danger of losing his job next week. This was a very reasonable arrangement.
After the second world war, people had the benefit of knowing that their jobs would be secure for a very long time. But, parallel to that, there were high levels of inflation, and capital security was not as great as it had been. It was in those circumstances and with that justification that the Government removed the earned-income allowance. However, the time has come to restore it in some way, as capital has enormous advantages again. The security of income arising from capital is very great indeed, as is the insecurity of earning a living--quite apart from all the costs.
The restoration of the earned-income allowance in some form would also be a great advantage to the Department of Social Security as earning a living is so expensive. It costs a person so much to be in a job 30 miles away that it is better for that person to draw whatever benefits are available. This is why I suggest the provision of some allowance against working expenses.
There is no doubt that most of this country's taxes are regressive. We have flat-rate duties on petrol, tobacco, and so on. People pay the same amount of tax regardless of their earnings. There have been two main exceptions. One is value added tax, which, generally, has been neutral as a result of zero rating but has probably been slightly regressive. The other is income tax. There is no question but that was the true, great, progressive tax. One does not need to believe, as I happen to believe, in greater levels of social equality to appreciate that there are certain reasons for that tax. The people with the broadest shoulders should carry the broader burden. That was accepted not just by Labour, Conservative and Liberal Governments, but by the
Column 191people, who understood that theory. Now the Government are trying to reduce that one progressive tax--the fair tax. Their policy is a disgraceful error and it is shameful. The rate of the income tax will always be politically divisive, but the principle behind that progressive tax should not be subject to party-political argument. When it was introduced, VAT was something near to a neutral tax, but it will become a regressive one. That, too, is wrong. My hon. Friend the Member for Peckham was right to launch her attack on that tax. It is the most important aspect of the changes introduced in the Bill, and I hope that it will be reconsidered.
Under the Government, the incentive effects of reductions in the higher rate of income tax have been held sacrosanct. I happen to believe that those effects are nonsense. If one goes to extremes, I accept that such an effect might result, but within the limits of 40 per cent. or 60 per cent. rates, it is hard to tell whether there is any incentive effect.
If one offers someone an incentive to work, he will work for a year or two, but he will then get used to the incentive offered. It is hard to prove that incentive effects go on and on working. We have had a number of trial runs at producing such an effect. In 1962, the higher income tax rate was reduced precisely to bring about those incentive effects, but none were forthcoming. I remember Tony Barber telling us in 1972 about the great incentive effects that would result from his decision. Another recent Chancellor of the Exchequer, now Lord Lawson, also told us about the enormous advantages that would be gained from the incentive effects. We saw none. If there had been any, we would not be discussing the Bill.
Mr. Ian Taylor : Surely it is not so much the incentive effect but the disincentive effect and disclosure effect that are important. The right hon. Gentleman will remember that the problem in the 1970s, given the high rates of marginal tax that were paid at the top end, was that many people found attractive schemes to avoid paying any taxes. Since the tax rate has come down, people have disclosed their income and therefore the take from the top level of taxpayers has risen.
Mr. Sheldon : I do not disagree that more people will declare their income for tax purposes when the rate is lower, but I am talking about incentive effects. Academics and others argue that when people are subject to a higher level of tax, they must work harder in order to obtain the same take-home pay. There is some validity in that argument as well as in the incentive argument. The jury has never come to any conclusion. To base a political philosophy, let alone an economic one, on such an argument is of little use.
Mr. Quentin Davies (Stamford and Spalding) : I am afraid that the right hon. Gentleman's argument that marginal rates of taxation have no effect on investment, risk taking or incentives to work will carry no conviction with any hon. Member who has any experience of business or the way in which investment decisions are taken. Has he noticed that in the past 15 years 1 million more businesses have been created, a net gain above those businesses that have disappeared, than were created in 1979 or 1980 ? Does he not appreciate that tax reform is a major element of that considerable achievement?
Mr. Sheldon : I am surprised at the hon. Gentleman for falling for that one. Surely he knows that the companies that go under tend to be rather bigger than those that are created. That important factor is slid over by many people. The hon. Gentleman must know that the effects of taxation will work both ways. If one is not succesful, the tax relief on losses are equal to the profits that will be made. I have been responsible for substantial investments in my time and I do not know of anyone who was put off from making an investment because of the taxation involved. We now have low levels of taxation, but what is the level of investment today? Perhaps the hon. Gentleman will think about that. I had hoped that the Chancellor would do something about investment allowances.
The right hon. Member for Shropshire, North is right in believing that we all have an aversion to taxes, and quite right too. That is natural, basic, right and proper. At the same time as we are thinking about the problems involved in taxing people, however, we should also understand that if we want to carry the people with us, the essential thing is to decide to opt for fair taxes. My hon. Friend the Member for Peckham was right to highlight that.
Anyone who has served in the Treasury will know that hypothecation is an unmentioned word. The Treasury does not like hypothecation because, once it gets the money in, it cannot spend it as it would wish. We all know the lesson of the road fund licence. It was supposed to be spent on building roads, but when the then Chancellor of the Exchequer finally got hold of it he said, "Look here, this is nonsense. Roads are only one item that we need to spend on." I agreed with that argument then and I agree with it now.
There is one difference today, however, because the financing of the national health service will inevitably continue to rise. That expenditure will increase in the next century and, who knows, beyond that. We will spend more and more of our resources on it. On that basis, there is a case for arguing that if one makes an exception for a service as important as the NHS, perhaps hypothecation would be the best way to finance it. That argument should be considered. Although I was strongly against hypothecation, in the current circumstances and for as far as one can see, it must be looked at afresh. I look forward to that being done.
My hon. Friend the Member for Peckham was right to draw attention to the important issues. I hope that we will be treated to a better consideration of the details than has been offered hitherto. The Chief Secretary spoke about the way in which the Finance Bill would proceed, and I hope that he will not proceed with it in the manner that he adopted in his speech. He should deal with the details in the manner to which we have been accustomed over the years.
Sir Terence Higgins (Worthing) : Given that the Opposition failed to table an amendment on VAT on fuel in the earlier Budget debates, it is extraordinary that the hon. Member for Peckham (Ms Harman) resolutely refused to move the Opposition amendment on VAT today. Despite being prompted by you, Mr. Deputy Speaker, several times, she failed--
The fact is that the hon. Lady could not bring herself to utter the words, "I beg to move the amendment in the name of my right hon. and learned Friend" and so on. There is a good reason why she might not wish to move that amendment, because linked to VAT on fuel are the compensatory arrangements that my right hon. and learned Friend the Chancellor has made. The reality is that the tax will fall across the population, but nearly half of the revenue will be redistributed to just 15 million people. It is, to a great extent, what one might fairly describe as a socialist measure.
If the Opposition amendment was carried this evening, many of my constituents, particularly pensioners, would find that they suffered considerably, because those compensatory payments would be lost. That is an interesting point.
In one sense, the Bill can be described literally as a monster. We have never had a two-volume Finance Bill. It is twice the size of the average Finance Bill and, in terms of the number of pages, three times the size of many previous ones. That gives considerable cause for concern. Whatever the Opposition's attitude, it will be difficult for the Bill's many clauses to be properly considered in Committee. A Procedure Committee that I chaired about 12 years ago made a recommendation that has been repeated by successive Procedure Committees--that there is an overwhelming case for isolating the main political measures in the Budget, and then presenting a separate taxes management Bill.
When the Procedure Committee suggested that to the Leader of the House, he had three objections. First, he said that it was not a simple matter to separate the technical details from substantive tax changes. But it would not be difficult to remove from this massive document a large percentage of purely technical items that could reasonably be included in a separate Bill that would not be subject to timetable restraints.
Secondly, the Leader of the House said that two Bills would need extra time for Second Reading and consideration. But that is not a great time constraint. Thirdly, he said that a taxes management Bill might not be given sufficient priority. If sufficient priority could not be given to it, there is a good case for not having it anyway. The Leader's three objections were not valid, and there is a strong case for splitting future Finance Bills. There might even be a case for dividing the present Bill, even at this late stage. I shall say more about procedure later.
It is clear that the recovery is under way. I congratulate the all-party Select Committee on the Treasury and Civil Service, which analysed the Budget in considerable detail. I have great doubts about the timing of the Budget measures. The recovery is at an early stage, and we cannot yet say that demand should be reined back by tax increases.
There are two worrying matters. First, the previous Chancellor and the present one have developed a tendency to announce tax changes in advance, anticipating tax increases at some time in the future. We all know perfectly well that forecasting in the Treasury and elsewhere is so bad that no one can tell what the situation will be at the point in the future for which we are now seeking to legislate tax changes.
Column 194While the changes may be good in themselves, the timing is certainly doubtful. It is also true that the Chancellor would have been much better placed next spring to judge the situation and decide what needed to be done than he was at the time of the unified Budget at the end of last year.
The tax increases will inevitably put some brake on the recovery, although they may not stop it. Perhaps it will accelerate again, but it is difficult to see the case for a recovery, slow-down, recovery scenario. The problems arising from that should be considered. However, some factors will be stimulating the recovery as the tax increases are being introduced. The fact that the Government are not fully funding the borrowing requirement should stimulate the recovery, although the passage in paragraph 10 in the report from the Select Committee on the Treasury and Civil Service on the issue of funding is obscure.
Perhaps the Financial Secretary will tell us whether, on the true definition of funding--that is to say, the deficit that is being financed from the non-bank public--the Government are proposing to overfund or underfund, because that is not at all clear. I hope that at this stage we are somewhat underfunding, and producing an additional stimulus.
All forecasters, Government or otherwise, tend to underestimate turning points in the economy--whether it is going up or down. At every successive cycle, the error has been greater. Therefore, as we have now passed a turning point, there is every reason to suppose that the recovery will be stronger than expectations. That has happened even since the Budget. There is now a general feeling that the recovery is faster than it was then. In view of those two factors, I am hopeful that the recovery will accelerate.
As the recovery proceeds, pay restraint will come to the fore. It was in the headlines this morning and on the 1 o'clock news. In "The World at One", Mr. James Naughtie came up with the old question, "Why aren't Members of Parliament setting an example?" The press grossly misrepresented what happened after the debate on Members' pay a short time ago. Over the period 1992-95, our pay has not gone up faster than inflation, although the press have represented the increase at about three times the rate of inflation.
It is said that we should set an example, but an interesting statistic arises from the long-term view. I have been in the House for a long time, for about 30 years, and throughout that time, in real terms, Members' pay has been below what it was when I first came here. It is now approaching that level, following the recent decision of the House.
In real terms, we are now in almost exactly the position that we were in 30 years ago. Meanwhile, average earnings for the population as a whole have gone up 19 times in cash terms and 90 per cent. in real terms. That gives some idea of the extent to which Members of Parliament have set an example. I hope that, when Mr. Naughtie and others in the media deal with this matter, they will remember that, although I do not expect the example that we have set to be followed.
Column 195be for more than 55 of the 651 hon. Members to join the charity payroll giving scheme that is operated by the Fees Office.
Sir Terence Higgins : Hon. Members may join that scheme, but the hon. Gentleman's intervention does not in any way undermine my main point about the relative rates of pay of the population as a whole and of hon. Members. Increasingly, that issue will become relevant as the recovery proceeds, despite the considerable changes in the structure of the economy over the past 12 years.
As the recovery proceeds, British industry should have a fair deal in relation to its competitors. I am increasingly worried by our tendency to set an example with EC directives. We are proud of the fact that Britain is the first country to implement this or that directive, hoping that everybody else will immediately follow, but we know that that does not happen and that there is often such time lags. There is a strong case for a mechanism by which directives are implemented simultaneously. British industry is often placed at a disadvantage by that time lag.
Last year, we debated at length, on two specific amendments, the British shipping industry. One amendment was about 100 per cent. capital allowances, and the other was about roll-over relief. Most hon. Members recognise that this is a difficult and special issue that could be ring- fenced. I hope that the Government will pay more attention to that in Committee and on Report.
It was said last year that, if we took action, we would not be setting an example to the other European countries, and that we must try to get them to get rid of their subsidies. In the meantime, those countries have either greatly extended their subsidies or introduced new ones. The competitive position of British industry must be taken into account in international negotiations. Let us have a level playing field. I have no doubt that, if we had a level playing field, the British shipping industry would be competitive. We must take a broader view of such issues.
Finally, I want to say a few more words about procedure. Before the last election, it was clear from a number of Committee reports that there should be great consultation before moving to a unified Budget. We then had the election and everyone forgot about it. The next thing we knew was that my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont), the former Chancellor, announced, with no consultation whatsoever, that we were to have a unified Budget. It is important that both sides of the House should clearly agree what the financial programme of the House should be in future. We used to have financial debates on three occasions during the year : the autumn statement, the public expenditure White Paper and the Budget. We are now down to just the Budget and a Second Reading debate on taxation issues.
We are told that there may be a two-day debate on public expenditure in the summer, but we still have no discussion on public expenditure as part of the unified Budget. In many respects, it would be better to have a debate on specific public expenditure items in addition to the usual estimates days, which fulfil a useful function in the parliamentary process.
Column 196A unified Budget should cover public expenditure as well as tax. Such debates on the Floor of the House might be more helpful than further debates on taxation, which gets extensive scrutiny. I hope that, despite the present breakdown in communications, the Opposition will realise that this is not simply an opportunity for sorting out our financial programme during the year ; it is the responsibility of both sides of the House. We do not want the extent of parliamentary debate on such matters to be restricted as a result of moving to a unified Budget. It is an important matter for the House, and we need to sort out the procedures.
Having said that, the Bill is extremely complex. We have not yet had a chance to go into detail, and when we do, we shall find a number of aspects which need careful consideration or
reconsideration. The Bill contains a series of proposals which need to be put into proper context, and the present procedures for analysing, discussing and amending them cannot be regarded as satisfactory.
Mr. A. J. Beith (Berwick-upon-Tweed) : We have heard two interesting speeches from the Government Back Benches. I agree with the wise words of the right hon. Member for Worthing (Sir T. Higgins) on matters of procedure, on the British shipping industry and on the uncertainties of the projections from either side of the House about the speed of recovery and the difficulty of making judgments on the effect of tax measures so far ahead.
The right hon. Member for Shropshire, North (Mr. Biffen) brought to the debate his usual candour to such an extent that I began to realise why he had not been used more prominently in the election campaign in which the tax promises figured. I am sure that he would have wanted to qualify them as appropriately as he qualfied much of what he said today.
For the most part, it is hon. Members who have served on Finance Bill Committees who have commented on the enormous size of the Finance Bill. It is a two-volume edition or serial publication. When the Chief Secretary referred to the need to give it orderly consideration, he failed to recognise that the Bill is scarcely capable of orderly consideration by the normal procedures of the House. That is why its division into a taxes management Bill and a Bill dealing with more controversial items would have been appropriate. I have often felt that some aspects of Select Committee procedure, as used in Special Standing Committees, would be appropriate to some of the detail of a taxes management Bill. I have often watched or participated in exchanges where neither the Minister nor the hon. Member knew what they were talking about and each had to be refreshed by notes from elsewhere before replying to questions. That is such a frequent occurrence with the more technical parts of Bills in Standing Committee that I would wish to see it replaced by technical questions being answered by someone who actually knew the answers. That is a procedural development which would be widely welcomed.
In the current climate, the Chief Secretary has made it clear that he proposes to guillotine the Finance Bill. We need to see that guillotine. Now, partly as a result of the current climate, we are getting "Jopling minus"--the proposals of the right hon. Member for Westmorland and
Column 197Lonsdale (Mr. Jopling) without some of the safeguards and qualifications which the right hon. Gentleman and other members of the Committee on which I served considered to be necessary and appropriate. It is time that we had the whole package instead of automatic timetabling. We should consider any proposals from the Chief Secretary against that background.
Mr. Stern : As a member of the Jopling Committee, may I say that my understanding is that we are not getting the Jopling proposals, which I still support, because the two or three Front Benches have been totally unable to agree on their implementation.
Mr. Beith : The hon. Gentleman is partly correct. There are objections from two Front Benches but certainly not from three. We were, and are, in favour of the Jopling proposals. I understand that Labour Front -Bench Members have become more critical than they were initially. Whether that is in any way related to perceptions that they will be in opposition for longer and that government is not beckoning is not for me to say. The atmosphere appears to have changed from initial welcome to increasing hostility.
As a result of how the Labour party legitimately chooses to exercise its tactics in the House, we may end up with one side of the Jopling proposals without their important safeguards. There is no reason why that should be so ; if the Government wish to proceed they should proceed with the safeguards. We shall test that when we see the Chief Secretary's proposals. That is the procedural and political background to the Bill.
The economic background is the deficit of which the Prime Minister did not seem fully aware when he said how readily he could achieve tax cuts when the Conservatives won the election. That was the phraseology he was using.
The deficit was created by the Government because of the boom-bust sequence which produced the length and depth of the recession. That is the background to the measure. What has made the recession so damaging to public finances and made the gap between what the Government spend and what they raise so large? It is of course the scale of unemployment, the number of people who are receiving benefits instead of paying tax and the lower levels of tax paid by people and companies because of the effects of the recession. Throughout the recession we have argued that it would have been appropriate to engage in greater public capital spending to get more people back to work and thereby contribute to hastening recovery. It would give us assets that we will need in future if our industry is to be more competitive, such as better public transport and education.
Although at some future time public finances may be in a relatively healthy state, it might then be inappropriate to engage in large-scale public capital expenditure for fear of creating the very overheating of the economy which has occurred previously under Governments of both parties.
I also believe that the Chancellor has overdone the scale of the tax increases and that his judgment about what the tax increases are likely to do to demand in the economy is not correct. There was obviously a hint of that fear in the speech of the right hon. Member for Worthing.
The country has been through a severe recession. People who have money are frightened that they will soon not have much of it and feel that they should not risk spending
Column 198it. Many more people borrowed and are now in great difficulties. Negative equity and disaster in the housing market are leading people to be very cautious.
I recall when the effect of a previous Chancellor warning of and indeed recommending future tax cuts was to encourage people to spend. If people see large tax cuts coming, they are likely to be more cautious about spending, particularly against the background of their experience of the recession and that of their friends and relatives. I am not one who actually seeks a consumer-led recovery ; I would much rather see an investment-led recovery, hence the policy proposals that I described a moment ago. I do not think that we will get a consumer-led recovery against the background of fear about the effect of these tax cuts. What I say about capital expenditure is borne out in what the Treasury and Civil Service Committee said. I am not praying the Committee as a body in aid of the whole of what I argued a moment ago. Indeed, there were differences of view in the Committee on the Budget judgment, which are expressed in the various amendments that were moved.
In paragraph 90, the Committee collectively and without dissent said :
"We believe that the reduction in the level of capital expenditure announced in the November 1993 Budget reflects the relative ease with which such cuts can be made. We recommend that a proper priority should be given to capital expenditure in future spending rounds." In the preceding paragraph we cast doubt on the Government's optimism about their private sector initiatives--not hostility, but doubt about how the Government can rely on major private sector contributions to public works projects after all the experience of the Jubilee line and crossrail, and the difficulty of assembling that mix without the public sector taking on the risks that turn it into public borrowing.
That weakness in capital expenditure will lead to shortages of capacity and weaken our competitive capacity for the future. That applies not only to the physical investment in, for example, the transport system, but to our investment in education.
Mr. Ian Taylor : In searching for clarity in what the right hon. Gentleman is saying, may I say that it appears that he does not want the tax increases to come in, because he is worried about the recovery, and that he does not want to cut public expenditure. The consequence of that must have been the increase in borrowing, which could well have caused other problems for the economy. Where is he prepared to make the changes?
Mr. Beith : I did not say that there should never be any cuts in public expenditure. If the hon. Gentleman looks at the Treasury and Civil Service Committee report and the amendment in it that I moved, he will see that it is clear that I wanted a different mix of fiscal tightening and public capital expenditure. That recognises that one would not be able to project from that the achievement of as great a reduction in the borrowing requirement through tax increases, but one could hope to secure reductions in the borrowing requirement through the taxes paid by the people who would then be in work as a result of the public investment, and the reductions in the benefits that would need to be paid out to those people.
That is a judgment that the Chancellor has made. I disagreed with his judgment about the scale of the tax
Column 199increases and its effect on recovery and about how reasonable it would be to allow in the borrowing for some more capital expenditure. The Committee pointed out that all this talk about ending the public finance problem "once and for all"--the words that the Chancellor used--betrays an assumption of reliability and certainty in the whole process, which is foreign to anybody and everybody's experience of those matters. We are all talking about judgments. I am arguing for a different judgment.
Mr. Forman : In his argument about getting more people back into work and so increasing revenue, does the right hon. Gentleman not recognise that there is bound to be a first year public expenditure cost in doing that, and therefore that the deficit will worsen before it improves? If he is intending to take the strain on borrowing, he must realise that there are implications for monetary policy in allowing full reign to the use of capital receipts by local authorities, which is, I believe, part of his party's policy.
Mr. Beith : The answer to both questions is yes. That is why I argued that it would have been better if we had done that earlier. The effects would then have come through now. There is, of course, a monetary policy implication in what we are all talking about today. If the Government's measures have too severe an effect on demand and growth, the pressure will be on the Chancellor to relax monetary policy to offset the effects of his fiscal policy. Let us be in no doubt that that is what lies at the back of this. It puts pressure on the Chancellor and on monetary policy, which might be inappropriate given all the other things that he must take into account, as long as it is he and not the central bank who determines that policy. The range and scale of the tax increases are considerable. There is the VAT increase on domestic fuel--not just 8 per cent. this year, but 17.5 per cent. next year. That does not address the question of where many of the problems about global warming and carbon dioxide emissions lie. It does nothing about transport and the huge contribution that private transport makes to that. Nor does it address the issues of energy savings, about which I shall seek to direct the House when I introduce a Bill a week on Friday. I hope for much Government support for it, particularly as they are putting up people's fuel bills on such a considerable scale.
There is also the matter of 1p on national insurance contributions. It is not mentioned in the Bill. It is the equivalent of a penny on income tax for all but the higher levels of income. That is what is so unfair about it. It is done for straightforward tax and fiscal reasons, yet the Government stick it on national insurance so that they can go on saying that they have not put up the basic rate of tax--not that anybody is impressed by the story that the Government have not put up the basic rate when they have managed to put up income tax by every other possible means.
The failure to index personal allowances and the defiance of the Rooker- Wise amendment--I can say this in the presence of the hon. Member for Birmingham, Perry Barr (Mr. Rooker) who moved that amendment--brings 400,000 more people into tax. I cannot count the occasions when I have heard Ministers rejoice in the number of people whom they have taken out of tax by indexing the
Column 200personal tax allowance, year after year. This year I have not heard any of them mention that they are taking 400,000 more people into tax as a result of this.
Then there is the interesting case of mortgage interest tax relief. In the election campaign the Liberal Democrats were lambasted constantly by the Government on this issue. We argued that it was not a good idea and that we should look for ways of phasing it out because it involved a considerable subsidy from people who were not well off to people who were a great deal better off. On countless occasions, I have seen leaflets and have been at meetings where Conservatives challenged the incorrectness of such a course and used it as a means of attacking us. They are actually doing it by steady stages and will eventually complete the process if they are in power long enough. Let us have no more of their criticisms of us. Conservatives were saying the same thing about petrol tax. They attacked us on the petrol tax increases that we proposed, which are smaller than the increases that they have introduced. The Government will pay a penalty for trying to hide their tax intentions and, having done that, to hide the scale of the tax increases. Most of what has been discussed in the press and on television in the past few days about their scale has been known since the Budget, and a large part of it since the preceding Budget. The Government will have to change their rhetoric and their way of describing things if they are ever to convince people that tax increases on this scale can be justified.
The Government are introducing two new taxes. What about all those Budgets in which another tax was abolished? Some of them were taxes of which we had never heard. But now the Government have managed to introduce two taxes that we have heard of. One, an insurance tax, is not a good idea, especially in the light of the experience of the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), who correctly pointed out the Treasury approach--"Bring it in low and you can always increase it later." The insurance tax may look low at the moment, but it can be steadily increased. It will not appeal to those whose insurance premiums are right at the margin of their spending, particularly pensioners in areas where there is a lot of crime, or fear of it, many of whom do not insure, or surrender insurance polices as premiums increase. It is not a good idea, particularly in relation to the revenue that it raises.
I do not have the same fundamental criticism of the airport tax, but I am worried about the impact that it will have on remote communities who are dependent on air communication. They have little alternative and will not be effectively safeguarded by the Government's attempts to make an exception that relates to the size and number of seats on the aircraft. That will not help many of the island communities in Scotland who will be affected by the tax, and also the remote communities on the mainland of Scotland who are dependent on air travel for any form of rapid communication across the country.
Mr. Salmond : The right hon. Gentleman listened, as I did, to the speech on Budget day--on St. Andrew's day--and heard the Chancellor give what apparently was a clear commitment that those people would be protected. But in the detail of the measure, as the right hon. Gentleman well knows, the vast bulk of island travellers will have to pay the airport tax. Is not it a matter of honour as well as a matter of finance that the Chancellor now changes his mind?
Mr. Beith : Indeed. I am giving the Chancellor the credit of assuming that he wants to exempt remote communities. That is why he talked about limitation on the number of seats on the aircraft, providing a tax exemption. If that is his intention, he will have to do much better to achieve the object. I am therefore tabling amendments designed to do that. I hope that Ministers will either come up with their own or be sympathetic to what we propose, if that is the Government's intention. It will hit people who have to travel frequently by air services and who are dependent on those services, rather in the way that Ministers get in cars to make journeys, or others of us get on trains or buses for regular and frequent journeys.
I was interested to hear the right hon. Member for
Ashton-under-Lyne talking about hypothecation and his experience of the arguments about it in the Treasury. We have argued the hypothecation case in proposing at the previous election that a specific additional 1p of income tax should be used for added educational expenditure. The issue of hypothecation is worth examining. The Liberal Democrats are examining it as a party. We have reached the point--if we have not already we shall certainly have done so after these increases--where the general public ask what all this is for. When they are confronted with massive tax increases designed to bail out previous economic failures, they are bound to say that they pay taxes in order to obtain certain benefits. If that is so, it is reasonable for the public to demand that we should look at ways of tying the tax more clearly to the benefit that they seek. That gives the Government less flexibility, but it might put more power in the hands of the people.
My general conclusion is that the Chancellor has put on too much by way of tax increases ; that by their nature, in many cases those tax increases are unfair, for example, the national insurance contribution ; they are not spent on or dedicated to the things that are most needed in the way of investment, and they represent a broken promise.
Ministers talk as if they are obliged to impose painful taxation measures to clear up the mess left by an irresponsible Government with whom they have no connection whatever. They seek to give us the impression that they are left with a painful task that they carry out rather as the headmaster used to carry out corporal punishment on the basis that "This hurts me more than it hurts you", as a direct result of taking over the reins of Government from a lot of incompetent scoundrels who must have been holding them for the previous 14 years. Yet they are part and parcel of that Government. They have held office in it at every conceivable level. That excuse simply will not wash.
The new Government line is that it is all right to introduce huge tax increases as long as they are to bail out their own crass incompetence and not to pay for better schools, better public transport or better benefits for disabled people. That will not wash either. The Government say, "Never mind our policies. Never mind our record. Our instincts are all right. Our instinct is to cut taxes." Well, the Government's economic instincts were wrong because they gave us the boom and then the bust, and their political instinct was not to tell the voters what they intended to do about it.