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6.11 pm

Mr. John Watts (Slough) : I have a great deal of sympathy with the argument advanced by my right hon. Friend the Member for Worthing (Sir T. Higgins) and supported by the right hon. Member for Berwick-upon-Tweed (Mr. Beith) for a technical Finance Bill to separate the purely technical issues from those which have mainline economic and political importance.

I listened with interest and amusement to the right hon. Member for Berwick -upon-Tweed when he talked of hon. Members putting questions that they did not quite understand to Ministers who did not quite understand the answers that they were giving based upon slips of paper from officials advising them. I wondered whether the right hon. Gentleman had in mind an incident some years ago when my noble Friend Lord Hayhoe was a Treasury Minister and we were dealing with some extremely arcane aspects of the tax code. In the spirit of great co-operation that reigned in those days, my noble Friend said, "I must tell the Committee that I do not fully understand the answer that I am giving, but I can assure it that it is right." That was accepted.

Almost in the same category comes the passage on funding in the report of the Treasury and Civil Service Select Committee to which my right hon. Friend the Member for Worthing referred. I believe that all members of the Committee concluded that what we had agreed to there was right, but it was based more upon confidence and trust in our advisers than on any great depth of understanding.

Sir Terence Higgins : I think that my hon. Friend will agree that it would be helpful if the Financial Secretary, in replying, could say whether, on the old definition of fully funding, we are underfunding or overfunding at the moment.

Mr. Watts : It would be enlightening for all of us.

My right hon. Friend the Chief Secretary referred to the Treasury and Civil Service Select Committee's report, as did the right hon. Member for Berwick -upon-Tweed. The House will be relieved to learn that I do not intend to go through its conclusions in great detail. I hope that hon. Members find it informative and useful. It reviews monetary policy and inflation prospects and, in paragraph 17, we conclude :

"It would appear that the short term prospects for inflation are good."

The report then moves on to examine economic prospects and, in paragraph 40, we conclude that there is still a significant output gap which will ensure that the economy continues to operate at below full capacity for some years to come and therefore :

"Notwithstanding the scale of the fiscal tightening announced in the March and November Budgets, the degree of monetary easing already seen, together with a recovery in world markets, existing spare capacity estimates and an improved trade position, suggest that average annual growth of 3 per cent. over the medium term is a reasonable central projection."

Clearly there will always be doubts surrounding any forecast, but, on the balance of the evidence that we received and the judgments that we reached, that central forecast is reasonable and attainable. My right hon. Friend the Chief Secretary referred specifically to the Select Committee's conclusion in paragraph 46 of its report on fiscal policy. It is probably that part of the report that is most germane to the Finance

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Bill. Our conclusion referred back to the Select Committee's report on the March 1993 Budget in which we concluded that

"further increases in taxation or reductions in public expenditure would be required if the Government was to eliminate the structural Budget deficit."

The Select Committee then went on to say :

"We welcome the fact that the Chancellor has tightened fiscal policy further. The balance between fiscal and monetary policy has been dramatically adjusted over the past year and this is very welcome for medium term prospects for the economy. We agree with the Chancellor that if further action had not been taken to redress the fiscal position, this would have had adverse economic consequences." That was a considered view reached by the Committee, and not without or before consideration of other possible strategies. The hon. Member for Durham, North (Mr. Radice) and the right hon. Member for Berwick-upon-Tweed referred to amendments that were moved during our deliberations on the report. The one that was moved by the right hon. Member for Berwick-upon-Tweed and supported by the hon. Member for Durham, North and other Labour members of the Committee expressed concern about the size of the fiscal adjustment and the possible impact that it would have, and sought a different mix between fiscal tightening and capital expenditure. The right hon. Gentleman argued that there should perhaps have been more room for greater capital expenditure, notwithstanding the constraints, to go alongside the fiscal tightening.

That was not in the end the overall view of the Committee, but the proceedings show that the balance, at 5 : 4, was fairly close and that the Committee as a whole had some sympathy with the view that capital expenditure in this Budget had received a rather low priority than, in particular, in the autumn statement of November 1992. We recommended that a proper priority should be given to capital expenditure in future years.

That shows that, when these matters are considered calmly and rationally, a less partisan overall view of strategy can be struck. There is no doubt in my mind that my right hon. and learned Friend the Chancellor was entirely correct in his view that borrowing could not be allowed to continue at existing levels unchecked, and that, as we enter a period when we anticipate substantial and sustained growth, that is precisely the right time to conclude that part of that growth can be taken in the medium term in higher taxes in order to reduce borrowing so as to lay the foundations for sustainable growth into the future and the aspiration of Conservative Members that that will lead to opportunities to get direct taxes lower in future.

Mr. Stern : Does my hon. Friend also agree that many of us hope to return to the heady days of the late 1980s, when the public sector borrowing requirement was eliminated and replaced by a public sector debt repayment?

Mr. Watts : I believe that my right hon. and learned Friend the Chancellor has set out a sensible and credible strategy to bring the public finances back towards balance within the foreseeable future, and that that will provide us with a real opportunity to look at options, as my right hon. Friend the Member for Shropshire, North (Mr. Biffen) argued.

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If we are in that happy position, we can make choices about whether the burden of taxation should be reduced or expenditure be allowed to increase. But while finances are not in balance and are not in vigorous health, those chances do not present themselves to my right hon. and learned Friend or any Chancellor in future years. Much has been made of the possible comparison between the burdens of taxation imposed on an average earner by Conservative and Labour Governments. In the past week or so, the most popular comparison has been between the proportion of average earnings taken in direct taxation--income tax and national insurance contributions--in 1978-79, and the proportion that is taken now.

Before making such crude comparisons, however, hon. Members should bear in mind the fact that, under the last Labour Government, the real net income of an average earner rose by only 0.6 per cent. The real net income of that same person--given that he has continued to enjoy average earnings throughout the period of Conservative government--has risen by more than 40 per cent., or £80 a week. A parliamentary answer last week reveals that today's average earner pays a slightly higher proportion of his income in direct taxes than did someone on average earnings in 1978-79. If that is true, it tells us only that, over the intervening period, although personal tax allowances have been increased by more than inflation--more than would be required by the Rooker-Wise amendment--they have not been increased as rapidly as earnings. In arguing against the consequences of the facts, the Labour party seems to be arguing against the principles of progressive taxation on which the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) waxed so eloquent.

The right hon. Gentleman pointed out that the highest marginal tax rates had been reduced under the present Government, but did not appear to take on board the stark fact--presented by my hon. Friend the Member for Esher (Mr. Taylor)--that the top 10 per cent. of income earners today contribute 45 per cent. of the total income tax take. In 1978-79, when marginal tax rates were very much higher, that same 10 per cent. contributed only 34 per cent. of the total take. Even by the right hon. Gentleman's definition, the reforms that we have made to income tax rates over the years have made the income tax system much more progressive : those with higher incomes are contributing a higher proportion of the overall revenue raised by the tax.

There are, however, other bases on which to make comparisons. Rather than comparing the proportion of average 1978-79 earnings absorbed in direct taxation with today's proportion, we should consider a different, perhaps fairer, proposition. If the last Labour Government's income tax policies had continued--if personal allowances had been increased only in line with inflation, which I understand to have been Labour's policy at that time, and if the same marginal tax rates of between 33 per cent. and 83 per cent. on earned income and 98 per cent. on savings income had continued to apply- -what would be the proportion of an average earner's income taken in tax in 1994-95?

The answer is interesting. In 1994-95, the average earner would be paying 21.9 per cent. of his income in direct tax as a result of the policies of my right hon. and learned Friend the Chancellor ; under a Labour regime, with the index that I have described, that same person would be paying 25.4 per cent.--an extra £13 a week.

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I could, of course, make assumptions about how the policy might have changed, but I think most of them would be unfair to the Labour party. I might have assumed, for example, that Labour would want expenditure to increase year on year, and might have chosen to pay for that increase by raising taxes rather than by continuing to increase borrowing. Such assumptions, however, would not have been favourable ; I am trying to be as fair to the Labour party as I possibly can.

On Third Reading of the last Finance Bill, I spoke of the need for what I described as "son of BES". The business expansion scheme, in its existing form, was being phased out ; I saw a need for replacement measures to encourage equity investment in small businesses. I welcome the package of measures contained in the Budget and the Bill, which is designed to encourage such investment--in particular, capital gains tax reinvestment relief, the enterprise investment scheme and venture capital trusts. I shall be especially happy to speak about those measures when, along with others wading through this enormous Bill, I debate them in Committee.

I also welcome the new regime to assist the unit trust industry to improve its export performance in the European Community, and to grab back some of the vast amount of business currently managed from Luxembourg. That regime was introduced following an assurance given by my hon. Friend the Financial Secretary during the passage of the last Finance Bill. Both those measures deal with interests that I have consistently espoused.

The changes contained in the Bill will play a vital role in improving our public finances, reinforcing the foundations for sustainable growth on which our ability to lower taxes again in the future--we retain that as our central objective, unlike the Opposition parties--must depend. I wholeheartedly support the Bill.

6.26 pm

Mr. Jeff Rooker (Birmingham, Perry Barr) : I support the Opposition amendment--which I distinctly heard my hon. Friend the Member for Peckham (Ms Harman) move : there can be no doubt about that. In fact, I heard much of what was said as I resumed my seat after the intervention.

The huge tax hike contained in the Bill has clearly been caused by the deficit. That is apparent both from our discussions here, and from other discussions that have taken place in recent months. It is also accepted, certainly by Opposition Members, that the prime cause of that deficit is mass unemployment.

The overall Budget package that we are debating again--I am grateful for the Chair's forbearance in that regard--may even add further to the number of unemployed people : that is the paradox inherent in it. Certainly it will not enable unemployment to fall even to what might be termed an acceptable level. Because of the Government's refusal to run our economy in a more intelligent fashion, we are storing up massive problems for future generations.

Unless we begin to accept the proposition that work is the foundation of human endeavour and well-being, and that a nation's greatest asset is the capacity and willingness of its people to work, we are in real trouble : we shall be heading towards social disintegration. However, we do not seem to be accepting that proposition at present.

We have a choice, of course. According to Professor Colin New of Cranfield university--whom I would term an engineering thinker--by the early part of the next century,

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we may either have 15 million people working 40 hours a week and 15 million on the dole, or have 30 million people working 20 hours a week. One option, says Professor New, spells social disaster ; the other spells social equity.

That is the choice that is facing this and other industrialised western nations.

Mr. Keith Mans (Wyre) : Am I right in thinking that the hon. Gentleman is advocating more part-time work--which, as far as I know, is not Labour party policy?

Mr. Rooker : I am not advocating anything of the kind, but I am saying that, unless we accept the idea that work is important to individuals-- [Interruption.] Conservative Members clearly do not accept it. If they did, we should not be creating a scrap heap of mass unemployment which means the loss of hope for millions of people.

No attempt has been made to manage the situation. If we do not manage it, we shall find that half the population is fine and in secure jobs while the other half constitutes a virtual no-hope economy. That spells social disaster. I do not like the direction in which the Government are heading ; nor do I think that the Bill is heading in the right direction.

As has been said, the Government have lost the people's trust. Trust is a key factor for political parties and political leaders. It has been a missing ingredient for a long time in this country, but it has taken the Government a long time to lose it. I am certain that they can regain the people's trust, but the problem is that it will take them as long to regain it as it took them to lose it and, in the intervening period, they will have to meet the electorate at a general election. For the first time in a decade and a half, they will meet the electorate having lost their trust and without being in a position to regain it. That will be the difference between the next election and those of 1992, 1987 and 1983.

Judging from experience, it seems that the British public do not take too kindly to being ambushed with new policy ideas--whether financial or social --during general elections. There is abundant evidence that people's minds are made up well in advance of the white heat of an election campaign. That process is now under way--people are making up their minds about what they will do when the election comes, whenever it may be. The process cannot be reversed. It is therefore crucial that those of us who oppose the Government lay the groundwork well in advance.

For a so-called mature democracy, we have incredibly immature popular mass media, so it is even more important to articulate the foundations of a different way of running the country. For the sake of our fellow citizens, there has to be a better way of running the country than that which we have seen in the past 15 years. That way has to be presented not only at the general election but in the months and years before. The Government will unashamedly steal good ideas. They will steal every good idea they come across, but this time they will do so having lost the trust of the people. That will work to the advantage of those who propagate a better way forward.

I have heard Tory Members on television and on the wireless--or the radio, as it is more popularly called--calling for their supporters to stand firm "at this trying time". In the Chamber, the Prime Minister and the Chancellor can look behind them and see that they have a majority in the House. No one denies that that is the case,

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in the Division tonight or in those that will come in the summer. Being able to see their support is their parliamentary comfort factor.

However, when they go outside to face the people, things are rather different. When they leave here and look behind for their supporters "at this trying time", they will realise that they received only 42 per cent. of the votes in the ballot box and the support of only 33 per cent. of the British electorate in 1992. They do not have a legitimate majority in Parliament to drive through their policies. They received the support of only one third of the total electorate at the previous general election. That is a fact that cannot be denied.

Mr. Forman : Will the hon. Gentleman give way?

Mr. Rooker : I do not want to be diverted, but that point needs to be stressed constantly.

Mr. Forman : On an historical point, surely the hon. Gentleman realises that, if one applies that test to our system of government, one has to go back to 1935 to find a Government who received the votes of more than 50 per cent. of the qualified electorate. Surely he is using an outdated argument.

Mr. Rooker : I am in favour not only of a modern economy but of a more modern electoral system. I believe that people's views should be represented here according to the votes cast. The Tory party is over- represented in terms of votes in the ballot box, which is why it is in trouble now and why it is wholly bewildered by the fact that the country is up in arms not in support of its policies but against them. The Tories did not have a majority to start with, but I do not want to get diverted. [Laughter.] I should be happy to debate the issue at length, but you would rule me out of order if I were to do so, Madam Deputy Speaker.

I and some of my colleagues from Birmingham were not present for the presentation of the Budget in November and December. We were otherwise occupied at a three-day inquiry into parliamentary boundaries in Birmingham. I therefore paid more attention than usual to the press reports, some of which I re-read this morning. I picked up one newspaper dated 1 December and read four headlines : "Hidden tax will bite in spring" ; "Double whammy of Lamont and Clarke costs family £430" ; "Recovery for the Tories and for the country"--that was the headline of the leader column--and "Clarke masters the art of invisible taxation". They are rather different from the headlines this morning and those of the past few days. We no longer read about the "master of invisible taxation", because the Tories have been rumbled--the public have rumbled what has happened, not only in this Budget but for the past decade and a half. Now that their taxation policies have been rumbled, panic has set in, and the simplistic reaction of many Conservatives is to call for more cuts in services.

Their dilemma is that the public are already receiving fewer services for more taxes. The Government cannot justify the extra taxes, because they have not promised corresponding extra services. That is their dilemma, not ours, and we shall seek to exploit it and ram it home at every opportunity.

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Not all the challenges to our services will be financial but I shall dwell on the financial aspect for the moment. There will be an attack on the benefits system. I wish to make it clear that I am in favour of maintaining universal benefits for the elderly and for the youngest in order to ensure maximum take-up by those who are dependent on them, but I also favour clawing back payments from those who clearly do not depend on them. That must be a fairer way in which to proceed. We must ensure universal take-up by the oldest and the youngest, because we know that enormous numbers of people do not collect their non- universal benefits.

I do not mean, however, that we should pay benefits willy-nilly and irrespective of resources to the richest in the land. I cite one example. I see no justification for the fact that a low-paid worker earning £60 or £65 a week--too little to pay income tax--should have to pay more than £5 a month in national insurance to help to pay for the current state retirement pension of someone who is receiving a substantial private pension, when the recipient has not paid for the state pension but has paid for the private pension. The pay-as-you-go system for the state pension is nonsense if we are calling on the very lowest paid to fund the state pension for people with substantial private pensions. There ought to be a clawback mechanism for that, to bring in some equity and fairness. The same ought to operate, on the grounds of equity, for the youngest.

I want universal child benefit. I would like it to be properly indexed and fully funded to meet the costs of bringing up children, bearing in mind what my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) said earlier about the reason why we abolished the income tax allowances related to the children in the family and merged them with family allowance all those years ago. Families have been ripped off terribly in recent years, because the benefit has not been properly indexed and was never set at a level sufficient to meet the costs of bringing up children.

Universality is the key to ensuring that we do not miss out the vulnerable, but that does not mean that we do not have a mechanism for clawing it back from the wealthiest in the country, who obviously do not need it in terms of dependency.

Sir Terence Higgins : Is the hon. Gentleman saying that the national insurance pension should be means-tested?

Mr. Rooker : No. The right hon. Gentleman has been here much longer than I have, and has also been a Treasury Minister. The national insurance pension is getting smaller as a proportion of pensioners' incomes, and it will continue to get smaller proportionately. One of the reasons is that the Government are committed to freezing it in real terms. Because it increases only in line with prices and not with earnings, the pension is frozen in real terms, and has been frozen in real terms for more than a decade. It has cost a married couple of pensioners more than £20 a week, because it has been frozen in real terms. There is no extra benefit for those pensioners. The pension ought not to be frozen in real terms for the generality of the population. It is based on pay-as-you-go. It is not a funded system. I cannot see the benefit, however, in ensuring that the pay- as-you go system operates for the millionaires and the wealthiest people in the country, who

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could give up what is a pittance to them, which they do not need and--what is more--they have not paid for because by then they are not paying national insurance contributions. One can therefore bring in a clawback mechanism on the wealthiest people in the country. I see nothing in social justice against that. However, the national insurance pension has to be a universal benefit, available to every citizen in the land. Otherwise, acceptable changes, based on equity, would not be passed by the House.

I shall suggest three and a half new taxes before I conclude. It behoves the Opposition to do a little bit of free thinking, because we do not like the unfairness of the taxation system and the way in which it has been rigged against the poorest in the country during the past few years, as I will show using the Government's figures. There are many taxes in the Bill. I lost count whether there were 12 at this stage or 20 if one counts the two Finance Bills put together. Some we oppose ; others we support. I have not heard anyone speak--I do not expect that anyone will--against the extra increase in tobacco duty in excess of the rate of inflation.

I cannot believe that any sensible Member of the House would not vote for that tax. Every all-party Committee, from the Public Accounts Committee to the Health Select Committee, has called for increases in tobacco duty on the grounds of improving the health of the nation, which has a by-product in reducing the financial burden on the national health service. In my view, probably 3 per cent. is not enough. I declare myself a non-smoker, but that is not the point.

Smoking is the cause of the biggest killer in this country--coronary heart disease, which kills 300,000 people a year. It is a tragic loss of life, and it is heavily based on the people's propensity to smoke. Although I would not wish to ban smoking--that would be crazy--we may be able to use the price mechanism to price people into good health. There is nothing wrong with that. It is a tax increase that we can support. [Hon. Members :-- "Hear, hear."]

I do not want to go into the highways and byways of the insurance surcharge. I understand that it is a new tax. My right hon. Friend the Member for Ashton-under-Lyne is right to say that it is outrageous that the Chief Secretary came to the House to promote a Finance Bill with new taxes, a Bill which is large by any standards--I do not complain about that, as I shall not be serving on the Committee--and did not refer to those taxes. I should have thought that one would be proud that one was bringing forward new taxes to broaden the tax base. People have tried to broaden the tax base for a long time, although it can be done in unacceptable ways--VAT on fuel was an example.

The insurance surcharge does not relate to crime, although I think that it is a crime prevention measure. It is, in effect, a surcharge on motor vehicle insurance, which is one of the biggest causes of crime in the country as a result of the irresponsible ownership of motor vehicles that are left empty and not parked properly, wasting much police time. However, the imposition of a surcharge, effectively, on motor insurance will lead to people cutting corners by cutting the cover they pay for.

The insurance surcharge will not assist pollution. It will not reduce overcrowding on the roads. It would have been much more effective to make the provision of free parking

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by employers a taxable benefit in urban areas, including this place. I am happy to suggest that and get it in the neck, if necessary.

That would cut overcrowding on the roads. That would cut pollution. That would be a worthwhile new tax to consider. It would have the benefit of raising money, and it would assist public transport and have the other spin -off effects that I have mentioned. That would be a much more effective way of bringing in a new tax. It is not intended to bash the motorist. I simply take it as an extension. When people challenged me, as a Member of Parliament, about all the perks we have, the only two perks that I have ever been able to mention since I have been a Member of the House are permanent 24-hour, 365-day parking free of charge in the centre of Birmingham and in the centre of London.

We have the peculiar arrangement that people have to pay to park cars. The parking of cars uses up space. That in itself is a cost, and in some ways it can be met. Some people know what the costs are, whether it is commercial parking or not. It would have been more effective, in terms of pollution and overcrowding on the roads, to make the provision of such parking a taxable benefit than to bring in a surcharge on motor vehicle insurance.

The Finance Bill could also have been a vehicle--that was not an intended pun--for securing proper funding of the national health service. That is why I was delighted with the speech of my right hon. Friend the Member for Ashton-under-Lyne. We could have used the Finance Bill to introduce a special tax for the health service, made up of an income and expenditure element.

I see no problem about setting aside, and I have called it a set-aside tax. If we can have set-aside for land, I am sure that we can have a set-aside of part of income tax or a set-aside of one of the expenditure taxes, to be hypothecated, to use the technical term, as a way of funding the national health service. It is the single area, at national level, where a specific task to run a service would be acceptable. I think that it would even be popular.

I also think that we should fund part of our compulsory education service-- I emphasise, the compulsory years--from local education bonds. We ought to consider that seriously. I know that my local authority in Birmingham is making inquiries and considering the issue. It would require changes in the law. Local people need to know that there is some transparency in the provision of their services and the way in which they pay for them.

Hypothecation for health at a local level and for the compulsory part of education would be useful because it would be transparent. It would ensure that the services were provided. People would see what they were getting for the cash. It would enable the services to be ring-fenced. There would be a defence from the constant simplistic calls of people who demand cuts. The cuts always fall on the wrong elements of our social wage. I also think that the transparency of that type of tax would enhance value for money. The only downside is less Treasury control and I for one can live with that.

I shall not recite the figures on the tax burden increases, which were so well illustrated earlier by the excellent speech of my hon. Friend the Member for Peckham.

I have to confess that I had a moment of inner pleasure on Sunday as I heard my noble Friend Lord Healey taking apart Lord Parkinson on the non- indexation of personal allowances. The freezing of personal allowances will create, from April, 600 or more new low-paid taxpayers in

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every constituency in the country. I hope that hon. Members are proud of that. If anyone thinks that 600 is not very many, 24 Conservative Members have majorities of fewer than 1,200 and 13 have majorities of fewer than 600.

We are at the margin, it is true, but the Budget is creating almost half a million new low-paid taxpayers. It is a thundering disgrace that the lowest -paid people in the country should be asked to put their shoulders to the wheel in that fashion to pay for the Government's economic mess.

The most telling point that I have come across in recent months shows that the Conservative party has not simply happened to come up with this year's Budget, or last year's Budget. My example proves that increasing taxes on the low-paid and on average earners is not a mistake, or a one-off incident that the Government can put away in aberration or get out of in the next couple of years, before the general election. The tax increases in this Budget and in the spring 1993 Budget are part and parcel of a long-run process of shifting wealth, income and the tax burden in this country.

My example comes from the Government's own publication, the 1993 edition of "Social Trends". Table 518 shows that, between 1979 and 1989, real net incomes for the poorest fifth of the population, after housing costs had been taken into account, remained exactly constant, whereas for the middle fifth they increased by 23 per cent., and for the wealthiest part of the population, the top fifth, they increased by no less than 40 per cent. There is the contrast.

That did not happen because of one incident in one Finance Bill ; it has been part of a long-run process ever since 1979, when the Conservatives came into office. In Budget after Budget, we can detect the shift. All in all, it is making our society more unequal and more polarised than ever. The Bill will only make matters worse. 6.51 pm

Mr. Matthew Carrington (Fulham) : I do not propose to follow up the intriguing suggestions of the hon. Member for Birmingham, Perry Barr (Mr. Rooker) about free parking in Birmingham, not to mention the means-testing of universal benefits. However, I agree with him that the Finance Act is not popular legislation. Nobody likes paying increased taxes or welcomes the need for the state to take more money out of the economy, but there are times when that is necessary, and I strongly believe that this is one of them. The measures in the Bill are entirely justified.

At some £50 billion, the budget deficit is unsustainable and it had to be tackled, for good reasons. If the deficit continued at £50 billion, an increase in interest rates would inevitably and rapidly follow, and soon after that, curiously enough, there would be a short-term increase in the exchange rate. As the deficit continued, that would end and the exchange rate would collapse, which would lead to further interest rate rises. Almost inevitably, lenders would then refuse to provide more money for the Government to finance their deficit.

We have been there before. That is precisely what happened in the mid- 1970s, and it led to what happened to the Labour Government--the coming of the International Monetary Fund and the forcing of savage cuts in the budget

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of this country. So the problem had to be tackled. There was no question but that the deficit was unfundable in the long term. In tackling the deficit we have two choices, and I am glad to say that the Government have taken them both. The first is cutting Government expenditure, and I believe that that has been done as far as is possible at this stage. In yesterday's debate we heard how difficult it is to limit the growth in Government expenditure, let alone to cut it. My right hon. Friend the Chief Secretary to the Treasury told the House earlier that we shall cut about £8 billion from expenditure over the next few years. That is welcome, but it is by no means enough to bring our finances back into balance. That inevitably means that, even with all the reductions in public spending, we still need tax increases.

The increases have to be large. We cannot limit them to a level that we hope will be sufficient, but that may prove insufficient. One of the principal reasons for increasing taxes at this stage, and showing that we are doing something about our budget deficit, is not only to ensure a rapid reduction in the deficit but to make certain that the financial markets have considerable confidence in the Government's determination to reduce it. That confidence will allow lenders to continue to provide the Government with the money needed to carry them over a period during which the borrowing requirement is bound to remain high, and, unfortunately, may even increase, as it tends to in a period of recovery from recession. We must boost the confidence of the markets that the Government propose to tackle our fundamental problems.

Of course, the tax increases proposed in the Bill, which I believe are right, may turn out to be too high and, in a shorter time than some people suppose, we may find that the Government have raised too much tax. Then we shall be faced with the happy prospect of having to decide where to cut taxes. That time will come rather sooner than some pessimists think. It will come ; the signs of the recovery of our economy are strong. We have heard that estimates of economic growth have increased from 2.5 per cent. at the time of the Budget to almost 3 per cent., and even that may underestimate how rapidly the economy is growing.

That rapidity of economic growth may mean that the tax paid to the Exchequer increases more rapidly than we projected ; in fact, it is certain to do so. We may find that the Budget deficit is brought down more rapidly than we expect. That will not happen this year, but the signs may start to appear next year. Certainly, in three years' time we shall start to see significant effects of a sustained economic growth at those levels of recovery. So I hope that we shall soon see more pleasant Finance Bills.

The speed of recovery itself can cause problems, especially if it gets out of control, so one of the benefits of the tax increases will be their effect in slowing down the historic tendency of our economy to overheat. Taxes may provide the necessary damper. If our economy grows too fat, we risk returning to our historic problem of the conflict between interest rates and foreign exchange rates. As our economy recovers, the pound tends to increase rapidly in value. Historically, that problem has been tackled by reducing domestic interest rates, which continues the overheating of the economy, and foreign exchange rates increase even further. We then end up in a boom-bust cycle, as we did most notably in 1988. That in itself is undesirable, and the problem needs to be tackled. I hope

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that the Treasury is watching carefully the strength of our economic recovery, and will ensure that it does not get out of control.

Mr. Salmond : Given the current state of our balance of payments, is the hon. Gentleman not concerned about the possibility that we may currently be in a bust-bust cycle?

Mr. Carrington : The hon. Gentleman must not be watching the economic indicators or keeping in touch with the many constituencies in which business and economic activity is growing visibly and fast, and where activity is showing encouraging signs of sustainable and rapid recovery.

That recovery raises the question of whether interest rates need to be cut to enable the stimulation of the economy, as is often suggested. Interest rates should not be cut. There would be little benefit from doing so. Interest rates are at an historically low level and cutting them will not encourage investment. Investment decisions are less dominated by interest rate levels and much more dominated by the ability to sell the goods and services. What drives the recovery of the economy is investment decisions, not the cost of the money necessary to provide that investment. Little would be gained from cutting interest rates and if the Government did that, they would run the risk of over-heating the economy.

Foreign exchange strength, especially against the deutschmark as we have seen in recent weeks, is not something to worry about. Such strength is unfortunate for exporting industries, especially those exporting in Europe, and will undoubtedly dampen our export-led recovery, but it will also right itself, because recovery in the German economy has begun. As soon as that recovery in the German economy has gone beyond a certain stage and there is great confidence in it, the rate of the deutschmark will rise again and sterling will depreciate against the deutschmark.

I welcome the Finance Bill. It is unpleasant medicine, but I believe that it is the right medicine at the right time. The measures in the Bill provide the possibility of sustained, non-inflationary growth in our economy, a possibility that we have not seen for many years and one that we should go for with full confidence.

7.1 pm

Mr. Barry Jones (Alyn and Deeside) : I support the Opposition amendment, which I, too, clearly heard my hon. Friend the Member for Peckham (Ms Harman) move. I interpreted the prospect of a tax overshoot, instanced by the hon. Member for Fulham (Mr. Carrington), as a general criticism of the proposed high taxes. If it was not that, it was indeed a sophisticated speech.

The Chief Secretary's speech was brief--much briefer than his usual speeches--brash and aggressive and it seemed to be a diversion, a ruse--

Mr. Salmond : It was brazen.

Mr. Jones : The hon. Gentleman says that the speech was brazen and I also attach that epithet to the Chief Secretary's singular performance. I heard the right hon. Gentleman ask plaintively where all the Welsh honesty had gone. I resisted the temptation to intervene but, in his absence, I say that he has one honourable Welsh Member in me, one who is honest and makes an honest observation of the Bill. The people of Wales will totally reject what he

Column 214

has proposed. I can honestly say to the House that, in Wales, the proposal for value added tax on domestic fuel is greatly, bitterly and angrily rejected. There is no case for it to persuade the people of Wales.

The Chief Secretary made his speech flanked by what I thought were anxious- looking Ministers. Later, I noticed that the Chancellor left the Front Bench and took up a position on the Back Benches beside the hon. Member for Slough (Mr. Watts). What the subject of their collusion was, I do not know. In Wales, we describe the Chancellor as "Ken the tax" and that is an honest report from Wales.

I have a letter from the regional electricity board, which was addressed to me as a resident of north Wales and is headed "Introduction Of VAT On Domestic Fuel". It said to me, as a householder :

"As you may be aware from recent press coverage, supplies of domestic fuel may continue to be zero rated where an advance payment has been credited to your electricity account by 31-3-94." I found that surprising, but when I held my surgery days later in the town of Buckley, one of my constituents, Mr. Tasker, came to me with a similar letter and told me of his anger and disgust at the letter because, he said, the proposition was unfair. He did not have spare money to make a payment in advance. He saw the letter as an invitation to those who were well off to take advantage and he instanced the predicament of his fellow constituents who found it hard to make ends meet over this financial year and could find no money to put aside for the year after that.

There is an injustice at the heart of the Bill. Imposing VAT on domestic fuel is an unjust measure that brings forth a doubtful proposition. The indignation and anger of my constituent was real and I put it to the House, and specifically to Government Front Benchers, that they should concede the case that is made in our amendment. It is helpful to hon. Members to be accessible to their constituents and to live among them. I hold nearly 50 surgeries a year and on Friday in Buckley some 54 people consulted me. It took me more than three and a half hours to interview them. Throughout the consultation, their anxiety about not being able to make ends meet was repeatedly raised. The Bill will make the predicament of my constituents worse.

A residents association in my constituency was determined to consult me about the residents' problems in meeting fuel bills.

Mr. Jim Cunningham (Coventry, South-East) : Does my hon. Friend agree that not only the imposition of VAT but the proposals for cuts in benefit in general terms suggest that the Government are making people who are caught in the poverty trap and who are already some of the poorest members of society pay for the mismanagement of the economy, specifically through the measures that they have introduced over the past 14 years?

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