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House of Commons

Thursday 3 March 1994

The House met at half-past Two o'clock

PRAYERS

[ Madam Speaker-- -- in the Chair ]

PRIVATE BUSINESS --

Bournemouth-Swanage Motor Road and Ferry Bill

(-- By Order ) Order for Second Reading read.

Read a Second time and referred to the Examiners of Petitions for Private Bills.

Sheffield Assay Office Bill

(-- By Order ) Order for Second Reading read.

Read a Second time, and committed.

Federation of Street Traders Union (London Local Authorities Act 1990) (Amendment) Bill

(-- By Order )

University of London Bill

(-- By Order ) Orders for Second Reading Read.

To be read a Second time on Thursday 10 March.

London Docklands Development Corporation Bill

[-- Lords ] ( By Order )

Order for Second Reading read.

To be read a Second time on Monday 14 March at 7 o'clock.

British Waterways Bill

[-- Lords ]

Motion made,

That the Committee on the British Waterways Bill [ Lords ] have leave, for the purpose of its consideration of the powers sought by the British Waterways Board in the Bill, to visit and inspect sites on the Grand Union Canal, provided that no evidence shall be taken in the course of such visit and that any party who has made an appearance before the Committee be permitted to attend by his Counsel, Agent or representative.-- [ The Chairman of Ways and Means. ]

Hon. Members : Object.

Oral Answers to Questions

NATIONAL FINANCE --

Value Added Tax --

2. Mrs. Mahon : To ask the Chancellor of the Exchequer what was the cash amount paid in VAT in 1979 by a family on average earnings with two children ; and what is his latest estimate.

The Chancellor of the Exchequer (Mr. Kenneth Clarke) : A couple with two children on average earnings paid VAT of £12.95 per week in 1979- 80, expressed in


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1993-94 prices, and an estimated £19.48 per week in 1993-94. Since 1978-79, the real take-home pay of such a family has risen by £83 per week.

Mrs. Mahon : Despite that last sentence, is the Chancellor not adding to the burden of VAT by imposing taxes on car insurance, holidays, domestic fuel and many other things ? How does he expect families to meet that increased burden when the Government have created the mess that has led to that extra tax, and how can anyone ever trust the Tories on tax again ?

Mr. Clarke : The average family with one wage earner, two children and a mortgage of £33,000 is now about 30 per cent. better off than in 1990, only three years ago. That is why, although I have had to raise tax increases, people can look forward with confidence to rising living standards based on steady growth and low inflation. The tax, seen alongside spending changes that I have made, ought to produce sound public finances.

Mr. Bill Walker : Does my right hon. and learned Friend agree that we fought the 1979 election on a clear promise that we would change from direct taxes to indirect taxes ? That is exactly why the burden has been shifted and we make no apology for that because we have increased take-home pay substantially, producing disposable income which is greatly reflected in the collection of VAT.

Mr. Clarke : My hon. Friend is perfectly correct. We fought elections then and since on the basis that we thought that the burden should be shifted from direct to indirect taxation. We argued the case for incentives and their effect on the economy and it has worked. That is why the average family is now £83 a week better off in real terms than before we started on that process.

Mr. Gordon Brown : Why impose VAT on fuel when the Government should be ending the tax privileges that are central to some of the worst boardroom salary abuses in the country ? If the Chancellor really wants to act on the unacceptable face of capitalism, will he condemn Mr. John Cahill's tax-free hand-out, condemn Lord Young's £370,000 salary rise in one year and will he now fully tax executive share options ? That would raise £200 million for vital public services, or is there under this Government one tax law for the boardrooms and another for everyone else ?

Mr. Clarke : I frequently urge restraint on those who lead British industry at a time when we have to maintain our competitiveness and maintain low inflation. Individuals are cited who are wholly untypical of British management, most of whom have exercised such constraint. I do not believe in pay policies. I do not believe that Governments should direct the pay of individuals in the country and I hope that the hon. Gentleman, in the course of his revisionism, is not going back to pay policies for the Labour party.

Mr. Congdon : Does my right hon. and learned Friend agree that the welcome shift from direct to indirect taxation has significantly helped to improve our economic performance by enabling marginal tax rates to be reduced ?

Mr. Clarke : I do, and that is why, at a time of very tough public spending constraints and some increases in taxation, we have preserved our marginal rates at 25 per cent., a top rate of 40 per cent. and a lower band of 20 per cent., despite the other pressures on us. It is important that


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we do that to keep the incentives going which made the British economy perform so well in the 1980s and which will make it perform well again in the 1990s.

Taxation --

3. Mr. Keen : To ask the Chancellor of the Exchequer what assessment he has made of the effect of the Government's tax policies on the economic well-being of the average family on average male earnings with two children and one spouse.

12. Mrs. Roche : To ask the Chancellor of the Exchequer what assessment he has made of the effect of the Government's tax policies on the economic well-being of the average family on average male earnings with two children and one spouse.

The Financial Secretary to the Treasury (Mr. Stephen Dorrell) : The real take-home pay of a family on average earnings has risen by £83 a week, in today's values, since 1978-79.

Mr. Keen : The Financial Secretary has not answered my question. Is that because he wishes to hide the fact that the burden of taxation will have risen from 34.75 per cent. in 1979, to 38.5 per cent. next year ? If he did not intend to mislead and the policy to switch from direct to indirect taxes is genuinely thought out, why do his answers fail time and again to include the total tax burden ? Does he not think that the British public deserve straight answers ?

Mr. Dorrell : The hon. Gentleman is wrong. I gave a very direct answer to his question. He asked what assessment we had made of the effect of the Government's tax policies on the economic well-being of the average family, whose take-home pay has increased by £83 per week in today's values since 1979 as a result of the Government's economic policies.

Mrs. Roche : Will the Financial Secretary explain how it is fair to the ordinary family and the British taxpayer to increase taxes for everyone except those earning more than £64,000 a year ?

Mr. Dorrell : Once again, an Opposition spokesman is wrong. The Institute of Fiscal Studies studied the effects of the two Budgets last year and concluded from its research that they will raise extra revenue in roughly equal proportions all the way up the income scale.

Mr. Horam : Has my hon. Friend seen the estimate by the Confederation of British Industry that the shadow Chancellor's loophole- closing devices would add £3.6 billion to the tax bill for industry over two years ? Leaving aside any question of withholding tax on gas and electricity bills, has my hon. Friend estimated what effect that policy would have on prices, jobs or investment ?

Mr. Dorrell : My hon. Friend asks an important question. Labour Members parade their interest in closing tax loopholes, but the measures that they espouse under that banner would close not loopholes but businesses and would put people out of work.

Mr. Willetts : Does my hon. Friend agree that any assessment of the well-being of families has to include the effects of the fall in mortgage rates and that those reductions were possible only because of the Government's sound fiscal policies ?


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Mr. Dorrell : My hon. Friend is right. It is not a coincidence that we are enjoying the lowest interest rates for 17 years--it is a result of the Government's success at bringing down and controlling the rate of inflation and we shall continue to deliver that.

Mr. Darling : Talking about loopholes, why do the Government not close down the tax break that allows boardrooms to avoid paying tax by using offshore tax havens ? Or were the Chancellor's words on boardroom restraint just bluff as usual, with no action to follow ?

Mr. Dorrell : The Government's approach to pay and the taxation of pay is the same all the way up the income scale. We want a pay system that reflects the performance of the organisation that employs the individual. That is the policy which will continue to inform our approach to public and private sector pay.

Motor Vehicles (Security Devices) --

4. Sir Anthony Grant : To ask the Chancellor of the Exchequer if he will introduce tax incentives to encourage the installation of security devices in motor vehicles ; and if he will make a statement.

Mr. Dorrell : We have no plans to introduce such tax incentives.

Sir Anthony Grant : As car crime is the fastest rising crime of all, is it not absurd that, for tax purposes, security systems should be treated on the same basis as stereos, cassettes and suchlike frippery ? If my hon. Friend cannot change the tax system, could he perhaps try some other methods to help--for example, through insurance ?

Mr. Dorrell : If I may say so, my hon. Friend is on a better point when he suggests that the insurance industry should take account of the presence of proper security measures in cars. I understand that the industry is increasingly doing that. That is a proper incentive for people to do what is their responsibility and to ensure that their property is secure.

Mrs. Anne Campbell : Does the Financial Secretary agree that the Budget proposal that puts a value added tax on insurance will put a further burden on motorists, who are already burdened by rising crime ?

Mr. Dorrell : It is not a value added tax on insurance but an insurance premium tax which reflects the tax regimes that prevail widely elsewhere in the world. Given the Government's need to raise revenue in the Budget in November, it seems to be a very fair way of carrying out that objective.

Growth --

5. Mr. Trimble : To ask the Chancellor of the Exchequer what is the Treasury's current estimate of the rate of growth for this year and next year.

The Chief Secretary to the Treasury (Mr. Michael Portillo) : At the time of the Budget, United Kingdom gross domestic product was forecast to grow by 2.5 per cent. both in 1994 and in the year to the first half of 1995.

Mr. Trimble : That is an extremely low rate of growth. To cope with the Government's problems with public expenditure in the medium term, they will have to take


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measures to increase the rate of growth. Can the Minister give an assurance that the Government will consider taking such measures and not allow themselves to be influenced by spurious foreign exchange considerations or panicked by the current problems in the bond market ?

Mr. Portillo : The principles underlying the Government's monetary policy have been set out time and again and are extremely clear. People believe that that monetary policy enjoys great transparency. The hon. Gentleman is wrong to say that our rate of growth is very low. After all, the United Kingdom will have the fastest rate of growth of any major European Community country in both 1994 and 1995. The rate of growth that we want to see is one that is sustainable.

Mr. Heald : Does my right hon. Friend agree that flexible labour markets and improved competitiveness in Britain have made ours the fastest- growing economy in Europe and that what we need is more Conservative policies and more deregulation so that Britain can continue that programme ?

Mr. Portillo : My hon. Friend is right. Obviously, we have reaped the benefits of the reforms that we undertook in the 1980s. The reforms through trade unions and the scrapping of the wages councils have led to a downturn in unemployment in the United Kingdom much sooner in the recovery cycle than we expected, and sooner than has been experienced in other countries. That is a tribute to the policies that we have followed over the past decade.

Mr. Radice : What is the Chief Secretary's estimate of the current output gap ?

Mr. Portillo : Our view at the moment is that there are no inflationary pressures that would justify any movement. There is an output gap at present, but I do not wish to quantify it. There is spare capacity in the United Kingdom, which is one of the reasons for thinking that the inflationary pressures are moderate.

Mr. Forman : Is not the important thing about output for economic growth in this country that it is likely to be sustainable, non- inflationary and at a level that we can carry through over the years ? In that context, is it not important that there are signs that industrial stock building is taking place again and that that is likely to lead to a further growth in investment, which puts the recovery on a very sound basis ?

Mr. Portillo : My hon. Friend makes an important point. His first underlying point is vital. What we need to see in the United Kingdom is growth from year to year. We wish to see growth at a sustainable level ; we do not wish to see inflationary pressures building again. We can be well satisfied with the present conditions. The Government make the inflationary and monetary prospects extremely clear month by month.

Redistribution of Wealth --

6. Mr. Gareth Wardell : To ask the Chancellor of the Exchequer if he will make it his policy to redistribute wealth within the United Kingdom.


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The Economic Secretary to the Treasury (Mr. Anthony Nelson) : The Government's policy is to promote the creation of wealth so that all members of society may be better off.

Mr. Wardell : Does the Minister accept the figures in the Inland Revenue statistics for 1993 which show that 10 per cent. of the population own half the marketable wealth in this country ? If so, why have the Government targeted the poorest members of our society to be the scapegoats for the Government's economic mistakes over the past decade ?

Mr. Nelson : The hon. Gentleman, like the Labour party generally, has always been obsessed with relativities rather than realities. Most people are more concerned about their real wealth and earnings than about relativities, and both of those have gone up under the Government. In particular, the wealth of the bottom 75 per cent.--that is most people in this country--has grown by 70 per cent. in real terms since the Government came to office.

Mr. Nicholls : Will my hon. Friend congratulate the hon. Member for Gower (Mr. Wardell) on his engaging honesty in bringing to the Floor of the House once more the language of the redistribution of wealth, bearing in mind that that comes from a party which had tax rates of 98 per cent? Does that not show that all the snappy haircuts and good suits on the Labour Benches cannot conceal ancient prejudices ?

Mr. Nelson : My hon. Friend is absolutely right. The Labour party will always put the redistribution of wealth before the generation of wealth.

Mr. Beith : Instead of merely complaining about boardroom salaries, why does the Chancellor not make a contribution to solving the problem by making the tax system more progressive ? Will he confirm that from 1 April, people earning £7,000 a year will face a marginal tax and national insurance rate of 35 per cent. while those earning £500,000 or £1 million a year will pay just 40 per cent. in tax ?

Mr. Nelson : It is important that the tax regime should provide incentive as well as revenue. The richest 10 per cent. paid some 35 per cent. of income tax when the Government first took office ; they now pay 45 per cent.

Mr. Lidington : Will my hon. Friend stick to economic policies that encourage not the redistribution of wealth, but its creation, because without wealth creation we shall have neither the high personal living standards nor the good public services that we all want ?

Mr. Nelson : Yes, Madam Speaker.

Mrs. Clwyd : What would the Minister say to the people in my constituency who do not have the opportunity to create wealth, and where 61 per cent. of households have incomes of £4,000 a year or less ? Is that not real poverty in Britain today ?

Mr. Nelson : Over the period since the Government came to power, there has been a general increase in the earnings at all points on the distribution scale. A married couple with two children on average earnings are now some 40 per cent.--£83 per week--better off than in 1979. That is a considerable achievement. What matters to most people is their take- home pay and their earnings.


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Mr. Ottaway : Does my hon. Friend agree that this question demonstrates that the Labour party is interested only in penalising anyone who is prepared to stick their neck out and do something useful for the British economy ?

Mr. Nelson : My hon. Friend is absolutely right. The Labour party has made no positive contributions towards wealth creation in this country ; it is simply the politics of envy that we hear time and again.

Macro-economic Policy --

7. Mr. Hain : To ask the Chancellor of the Exchequer if he will now revise his macro-economic policy targets set in the 1993 Budget.

Mr. Kenneth Clarke : Sustainable economic growth, low inflation and sound public finances remain the key macro-economic policy objectives of this Government.

Mr. Hain : Has the Chancellor of the Exchequer altered his macro- economic policy targets on pay ? Contrary to what he told Today this morning, the right hon. and learned Gentleman has the power to intervene on fat cat freebies and to close loopholes in relation to executive share option schemes. He has the power--or, at the least, the Government do--to instruct the regulators of the privatised utilities to stop abuses by executives such as £700,000 in tax-free giveaways for water chiefs. Why does the Chancellor only have a pay policy for the low paid and not for the privileged elite who are getting money as though there were no tomorrow ?

Mr. Clarke : Every Conservative Chancellor closes tax loopholes and there was a good crop in the November Budget. My hon. Friend the Economic Secretary said that one should look at where we get income tax and national insurance contributions nowadays. The top 10 per cent. contribute 45 per cent. of the total, whereas they contributed only 35 per cent. 10 years ago. We spread the tax burden fairly, and we do not ever want to go back to the punitive tax rates that so destroyed the economy in the 1970s under Labour.

Mr. Budgen : Will my right hon. and learned Friend offer further explanation of his apparent linking between the level of executive pay and inflation ? Does he agree that if any private company pays too much to any of its employees, that will result in its products being priced out of the market, and that that is a matter for the market, not for preaching politicians ?

Mr. Clarke : As I am sure my hon. Friend will agree, at present we have our best record on inflation for 25 years. Manufacturing productivity is at an all-time high. It is extremely important that we keep our competitiveness. Therefore, I am extremely glad to see that the level of pay settlements remains at such an historically low level. With respect to my hon. Friend, I have to say that the climate of opinion has contributed to all those good targets and one or two leading individuals could contribute to the favourable climate of opinion that we have created.

Mr. Andrew Smith : On the macro-economic damage inflicted by the huge sweeteners that the Government are giving for rail privatisation, wil the Chancellor admit that the Government instructed British Rail to change its accounts to turn a £968 million capital allowance tax


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liability into a £683 million tax credit to be passed to privatised companies ? Will he now act to stop that monstrous fraud on the taxpayer ?

Mr. Clarke : I hope that the hon. Gentleman's indignation will be satisfied when he tables a question for written answer by my right hon. Friend the Secretary of State for Transport on that important matter.

Mr. Smith : I have done so.

Mr. Clarke : I am delighted to hear it. The fact is that privatisation has transformed the performance of most of our public utilities and companies. It has turned British Airways, British Telecom and British Steel into hugely successful international companies. Sad to say, we have been left behind a little on the privatisation of railways : the Japanese, French and others have moved ahead of us. I am sure that privatisation will produce the same transformation in the performance of British Rail as it has in so many others of our previously nationalised industries.

Mr. Jenkin : Does my right hon. and learned Friend take heart from the fact that a substantial depreciation in the rate of sterling in the past 18 months has not thrown economic policy off track ? Will he take comfort from the fact that Professor Tim Congdon, who was pessimistic while we were in the exchange rate mechanism, is now optimistic about future growth of our economy ?

Mr. Clarke : One of the remarkable achievements of the past 18 months has been that, following a marked devaluation of the currency, we have kept inflation down. It has not led to any adverse consequences for our competitiveness in any other way. We now have a reasonably stable exchange rate at the new valuation. That is one of the favourable factors that are helping to produce the prospects for good, steady, sustainable growth in Britain.

Taxation --

8. Ms Eagle : To ask the Chancellor of the Exchequer what assessment he has made of the impact of the Government's tax policies on the economic well-being of the poorest 10 per cent. of wage earners.

Mr. Kenneth Clarke : The real income of a family with two children at the lowest decile of male earnings has risen by almost 24 per cent. since 1978-79.

Ms Eagle : Will the Chancellor confirm that after his massive tax hikes of the next two years, the bottom 10 per cent. of people will pay 25 per cent. of their gross income in taxation ? After the tax cuts of the 1980s, one third of which went to the top 1 per cent. of super-rich, with the bottom 10 per cent. receiving little or nothing, how can the Chancellor justify making the poorer taxpayers carry the can for his Government's economic failures ?

Mr. Clarke : Of course, most of the bottom 10 per cent. in terms of income do not pay income tax at all. Their incomes are largely affected by changes in benefits, in which the Government have been extremely generous in recent years. For example, we have given more than £1 billion of extra help since 1988 for poorer families with children. For that reason, figures comparing the actual


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overall effect on lower deciles of the population are misleading if they leave out the substantial increases in benefit that the Government continue to provide.

Mr. David Shaw : Will my right hon. and learned Friend confirm that the best way of helping people on low wages to get real wage improvements in future years is by Britain having a successful economy in which high added value is what we seek for our industries and our service sector ?

Mr. Clarke : I agree entirely. That is why, during the 1980s, the living standards of low wage earners went up by a quarter after we came to power. During the period when Labour had been in power, real income for the same group of people had risen by only 4 per cent.

Mr. Nicholas Brown : The Chancellor is effectively confirming to the House that the Conservative party is the party not of low taxation but of regressive taxation. Returning to the original question, which my hon. Friend the Member for Wallasey (Ms Eagle) asked, what is the moral justification for taxing citizens of ordinary means, particularly those with family obligations, rather than clawing money back from the beneficiaries of the 1988 top rate tax reductions ?

Mr. Clarke : The justification is that it increases the revenue received and retains the skills of those people in this country. By giving people the necessary incentives, we get the economic performance that we got in the 1980s compared with the economic performance that we got in the 1970s when the Labour party had put the top rate up to 83 per cent.

Mr. Quentin Davies : Is it not the case that the average direct tax burden in this country during the 1970s Labour Government was higher on the scale than at the highest point of the direct tax burden during the whole of this Government up until now, and prospectively under the new tax arrangements ?

Mr. Clarke : It is also the case that the percentage of total gross domestic product taken by income tax and national insurance has dropped from 18.5 to 16.5 per cent. under the Conservative Government. We are a party of low taxation and, most spectacularly, we have reduced the marginal rates of taxation to 40 per cent. at the top and to 25 per cent. for the standard rate and introduced a new lower band of 20 per cent. for the very lowest wage earners. We have no intention of giving way to pressure from the Opposition to put those rates up again.

Personal Tax Allowances --

9. Mr. Janner : To ask the Chancellor of the Exchequer how many representations he has received concerning his plans to freeze personal income tax allowances.

Mr. Dorrell : Treasury Ministers have received a number of representations.

Mr. Janner : Does the Minister accept that freezing personal income tax would place a heavy burden on people who are on the borderlines of poverty ? Does he know, as a Leicestershire Member, that the average women's wage in the city of Leicester is the lowest in the country and that among the people who will be hit most by the proposals are those who can put up with them least ?


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Mr. Dorrell : We shall not accept lectures from the Opposition on the importance of indexing personal allowances. Between 1974 and 1979, the Labour Government cut the value of the single personal allowance by about a quarter. We have seen it increase by roughly an equivalent amount since then. The hon. and learned Gentleman should regard this measure in the context of all the other measures in last year's Budget. As I said in answer to an earlier question, those measures raise extra revenue in roughly equal proportions across the income scale.

Mrs. Angela Knight : Will my hon. Friend tell the House how many fewer people are paying income tax now than would have been paying it, had the 1978-79 regime continued ? Of those who pay income tax, how many pay it only at the 20 per cent. rate which we introduced ?

Mr. Dorrell : My hon. Friend is on to an important point. More than 1 million people who would have paid income tax had we simply indexed the allowances that we inherited from the Labour party are not paying income tax this year or next because we have over-indexed the allowances since 1979.

Ms Harman : Will the Minister confirm that, from this April, 400, 000 people on low incomes who do not currently pay income tax will start to pay it for the first time ? Is it not a scandal that, of those people, 160,000 are pensioners who will start to pay income tax on their low occupational pensions ? Does that not show that the 1993 Budget not only broke election promises but hit hardest at those who could least afford it ?


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