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Mr. Dorrell : The hon. Gentleman has referred to the "essence" of the minutes. Surely the essence of the minutes of any meeting is contained in the conclusions, on which both my right hon. and learned Friend the Chancellor and the governor of the Bank of England agreed. The various minutes set out those conclusions, which represent the combined judgments of the two people involved. If the hon. Gentleman wants to arrive at the "essence" of the meeting, let him refer to the conclusions, which were agreed and acted on.
Mr. Hoon : They were acted on to the extent that there was a modest change in interest rates during the period concerned, and there is currently considerable speculation about the possibility of further changes. That precisely tracks the developments in the course of those meetings that I have tried to set out. How we interpret the minutes is a question of judgment ; I certainly do not feel that I have misled the House in any way in my representation of what took place.
The evidence that I have cited--the conclusions of the Gallup and CBI surveys and, indeed, the private view of the Chancellor of the Exchequer-- suggests that the tax rises announced in the Budget will pose significant problems for any further growth in the economy this year. They are clearly to blame for the collapse of consumer confidence, and that in turn will lead to a slowdown in the recovery. That is why I began by quoting from the Bank of England's quarterly survey, which suggested that the Government's strategy was based on an improvement in consumer confidence.
Such an improvement appeared to be under way in the earlier part of the year, and there were some statistics to support that ; now, however, those statistics seem to have disappeared, and consumer confidence--the real test of the Government's strategy--has collapsed. As the figures confirm, that is a direct consequence of the way in which the Government have raised taxes at a critical point in the health of our economy.
If I heard him correctly, the hon. Member for Hemsworth (Mr. Enright) called in aid the emperor Caligula and various popes, all of whom occupied Rome--although, I suspect, for slightly different purposes. I began to feel a little worried when he threw all the apostles at me in response to my intervention : he and I often share certain christian democrat instincts-- small "c", small "d"--about the way in which policy in the European Community should go.
Mr. Enright rose
The hon. Gentleman mentioned christian democrats. Is he prepared to say whether he supports the European People's party manifesto for the European elections, which takes a slightly different view ?
Mr. Taylor : The hon. Gentleman is never cheap, so I will not be distracted. Let me say, however, that I certainly support the European People's party, with which we are in alliance in the approaching elections- -elections that will, I hope, leave a centre-right majority in the European Parliament.
Mr. Taylor : I shall stick to the straight and narrow of the Bill. As you were not able to be present in Committee, Mr. Deputy Speaker, I shall tell you that proceedings there were as enjoyable as the past few minutes on Third Reading have been, thanks to the guillotine which enables us to have a proper debate rather than trying to take up time.
As many hon. Members have said, the Bill is a weighty document--too weighty. It has too many clauses and schedules and we should try to make it more digestible in future. However, it contains many interesting clauses, some of which were rather too interesting for the stomachs of some of my hon. Friends in Committee.
I pay tribute to my hon. Friend the Financial Secretary, who rushed us through all the lengthy procedures with great sensitivity. I am pleased that the cogent arguments put by me and by others led to changes in Committee and on Report. I think especially of the changes to capital gains tax on indexation of losses. We expressed strong opinions against the blanket removal of indexation of losses, and I am delighted that, belatedly and in the new tax year, the Government have had second thoughts on that.
There were other difficulties which I shall not mention, but I underline the insurance premium tax because on that the Government clearly listened to the industry, following a hesitant start. We had to move quickly. The industry made representations, and I declare the interest that I declared in Committee, that I advise Commercial Union but do not speak for it. The exercise of a good Committee working with a sensitive Financial Secretary who endeavours to heed outside pressures and Committee pressures has led to a better Bill. How could I possibly not draw the House's attention to schedule 12, which is all my own work, thanks to the Financial Secretary's encouragement? It includes further measures to encourage employee share ownership, for which I have campaigned for some time. I am delighted that, since the debate in Committee after which my amendments were accepted and broadly embodied in schedule 12, many people in the industry have issued press releases stating that this is a breakthrough and that they look forward to more statutory employee share ownership trusts.
These are distinctive measures and should be taken in the overall context of the Budget judgment which started in November. My principal point is that I am perfectly content that the fiscal judgment in November was right. I do not resile from praising my right hon. and learned Friend the Chancellor for his Budget judgment, which stands up very well. I am not at all put off by the remarks of the hon. Member for Ashfield (Mr. Hoon), who attempted to find devilment in the minutes of the meetings between the Chancellor and the Governor of the Bank of England. As my hon. Friend the Member for Havant (Mr. Willetts) said, as soon as there is open government people try to abuse it.
As I said in an intervention, November's Budget judgment and the judgment in March last year by the former Chancellor have both made sure that we anticipated problems that would otherwise have emerged. If we had not increased taxation in 1993, we would now be talking about what taxes would need to be raised this year, and that
Column 966would have been a burden still to be faced. However, by failing to tackle the PSBR, we would have ensured that interest rates would have remained higher than they are. That issue is important when dealing with the market, and it could have had a much more negative effect on consumer confidence than the hon. Member for Ashfield alluded to.
Mr. Betts : As a result of that reasoning, would not the hon. Gentleman agree that, if the Government had been bold and honest enough to increase taxes in 1992 rather than in 1993, the whole process would have begun much earlier ? I remind him that at that time the Government forecast was for a £30 billion PSBR deficit.
Mr. Taylor : The hon. Gentleman may recall that, in the Buget debate in 1992, I advocated tax increases but through a broadening of the tax base. The 1992 Budget judgment was made on the basis of what we then knew was reasonable. Any Government have to try to adjust to the circumstances of the time. A responsible Government faced with a PSBR deficit forecast of £50 billion have a number of options. In reply to my intervention, the hon. Member for Peckham (Ms Harman) refused to make any judgment about how she would have tackled the problem.
When faced with a PSBR deficit of £50 billion, one can either increase taxation, reduce expenditure or borrow more, or have a combination of all three. One has to make a judgment and then stand by it. I have said that in November the Chancellor got the judgment right. All the indicators show that the rise in private consumption that has been going on for the past three years is continuing and will continue in 1994.
The slight difference, if there was any, between the Governor of the Bank of England and the Chancellor of the Exchequer was whether there were still inflationary pressures in the economy and not the extent to which taxation might damage consumption. There is inevitably some damage to consumption when new taxes, are introduced. The Labour party has always been much more enthusiastic about introducing new taxes, and it should know about the damage to consumer confidence better than we do.
In the light of the continuation of consumption, one must judge at what point inflationary pressures could grow and at what point there would be a too-rapid take up of capacity leading to a possible increase in the trade deficit. Such judgments call for important calculations, and fiscal policy is a way of restraining or at least controlling growth in consumption. Monetary policy--that is to say, interest rates--is another of the calculations.
The judgment is about right, and I would have been greatly concerned if I had seen a much faster reduction in interest rates, bearing in mind that they have come down from 15 to 5.25 per cent. There is now tolerance, given the wider economic situation, for a further small cut in interest rates with the agreement of the Bank of England and the Chancellor. A large cut, which is sometimes advocated by Opposition Members, would be a dangerous injection of monetary laxity and could then lead to interest rates rising much more rapidly than we would wish. Stability is all.
One of the problems in the British economy has always been the volatility caused by over-reactive politicians. Volatility, and not just the level of inflation, has been our biggest bedevilment, so that investors require a higher yield to protect their investments against the prospect of volatile inflation. Short-term interest rates have fallen and
Column 967long-term rates fell at the time of the Budget precisely because it was plain from the figures in the Red Book that borrowing was being tackled. Long-term yields fell and the yield curve was shallower. More recently there have been one or two nervous phases about the long-term yields. That supports my contention that we can never ignore the prospect of inflation returning. We can never be complacent about inflation : it is a constant battle. Opposition Members should bear in mind that taxation rises this year, the restraint on expenditure and the reduction in the PSBR formed the basis for sustained economic growth with low inflation. That is what Britain has wanted for many years but could not achieve.
I strongly believe that, if it is achieved, at the next general election we shall receive great credit for having taken the measures now, and the hon. Member for Peckham will have to start to change her tune. Almost her entire speech this afternoon fought the most recent general election again. It was not about what we should do now, about what will happen in the future. It was about this or that Minister or this or that Back Bencher saying in their election address in 1992 that the Conservative party believed in low taxation.
We do believe in low taxation, but that does not mean that at any given moment we reduce taxation if it is not prudent so to do. We face up honestly to the electorate if we have to make a different Budget judgment. That is precisely what we have done. We do not expect to be popular for it, but it must be confronted.
As the hon. Member for Dagenham (Mr. Gould), who will soon no longer be with us, clearly stated, for any given moment Labour will have a higher taxing policy than that of the Conservatives simply because the Labour party will always spend more money. There is no way of getting round that. The debate at the most recent general election centred on that. It was not about whether we said that taxation would increase. Labour would have increased taxation to accommodate the greater expenditure it proposed at that time. For any given greater level of Labour expenditure, Labour's taxation will be greater than that which we would have applied, because we would not spend that extra money. The Labour party must face the electorate with the consequences of its decision, and we must face the electorate with the consequences of ours.
Mrs. Anne Campbell : Does the hon. Gentleman accept that the debate has moved on ? It is not about higher taxes but about unfair taxes. Does he agree that in the past 14 years there has been a redistribution using the taxation system, so that those people who are on lower incomes are far more heavily taxed now than they were in 1979 under a Labour Government ?
Mr. Taylor : Because average incomes have increased, it is true that it takes a lower multiple of average earnings to reach the top level of taxation than it did under the last Labour Government. I realise that. However, top rate taxpayers now contribute a greater percentage of total taxation than they did under the most recent Labour Government. Yet our top tax rate of 40 per cent. compares with 98 per cent under the last Labour Government--and unearned income tax at 15 per cent. and their top rate of tax
Column 968of 83 per cent. Now, in spite of the fact that we have reduced the top rate of tax, more tax is contributed by the top rate taxpayers. One has to take human reality into account. If one socks people with a 98 per cent. marginal rate of tax, they will not declare their income for taxation purposes. The biggest growth industry under the last Labour Government was accountancy--so reviled this afternoon by one or two Labour Members. The accountancy profession had its boom period because evasion as well as avoidance was a necessity for people who were otherwise being taxed at marginal rates of 98 per cent. The public still remember that ; the hon. Member for Cambridge (Mrs. Campbell) should be very careful when she speaks about top rate taxpayers.
Some interesting figures were quoted in one of the weekend newspapers. If someone on average earnings had a £50,000 variable rate mortgage that was taken out in 1988, that person's post-tax, post-mortgage income would have fallen by 27 per cent. in real terms by mid-1990. However, from mid- 1990 to the end of last year, the post-tax, post-mortgage income of that same person, with that same mortgage, would have increased by 78 per cent. That is a startling change, and indicates the gearing effect on the economy, and consequently on consumption, of interest rate movements.
It is bad news for obvious reasons, but, once again, proves my point, in terms of the extent of volatility since 1988. It would have been better to have a much more gradual transition, but it cannot be denied that, since mid-1990, a person with such a mortgage has done extremely well, far outweighing the impact of the tax changes that were made in the last Budget. That has an important effect on consumer confidence, and it is important to take that into account when one considers total consumption and the effect on the economy. The other side of the fiscal balance to taxation is public expenditure. The Government were very courageous in the settlement that was reached for a new control total, and I suspect that they will have to continue to be careful to stay in the Red Book guidance on new control totals in the next few years. There is always pressure to spend more, and I know that the EDX Committee--the Cabinet Committee on public expenditure--has already started to consider the control total, and the way in which it is reached, for the next Budget.
There will always be a tendency for Government Departments to want to spend more. The reason for that is that any Minister worth his or her salt always thinks in terms of inputs. Sadly, the debate has not changed sufficiently to outputs so that the quality of the services provided by Government, which should be the better criterion, is not often used. It usually comes down to the fact that we have spent more money and therefore the service must be better. The language of how one qualifies or quantifies the quality of the service provided by Government must change.
I nevertheless believe that, if we can stay within the control totals, that will be a better balance for public expenditure as a proportion of gross domestic product than there has been for some time, safeguarding the key expenditures, not only social services, but health and education. I believe that that will be recognised by the electorate by the time of the next general election. However, there is no easy way out.
Column 969Opposition Members should be careful, because the normal tendency of the Labour party close to an election is to start making promises about the ways in which life will be better under Labour because they will spend a few extra billion pounds. At the moment, the right hon. and learned Member for Monklands, East (Mr. Smith) is telling everyone to keep quiet, but at some point there will be no way of avoiding that problem.
I am not sure what the Labour party has to offer its supporters other than more expenditure and more money spent on the producers of public services. We shall watch with great interest what promises are made and the way in which they vary from the Red Book, because I emphasise that if one gets a variance from the Red Book one must say whether one will pay for it in more borrowing, which means ultimately higher interest rates, or more taxation, which would undermine Labour's entire attack on us.
I have to say to the Labour party that one of the reasons why I am happiest about what the Chancellor did in November was that debt servicing was almost the fastest growing area of public expenditure. Debt servicing accounts for about 7 per cent. of gross Government expenditure. It had to be brought under control, and one understands why the Chancellor took those measures.
Others want to speak and I will finish with a point about employment. One of our difficulties in this country, in spite of the welcome figures today, is that there will not be real employment growth--in other words, a reduction in unemployment--until the economy expands at a rate faster than about 2 per cent. If my judgment is right that the fiscal balance now will not cause too great a cut in consumer expenditure--it will simply ensure that it grows at a more stable level--we must find other ways to reinforce economic growth such as on the capital account for infrastructure projects, involving private finance initiatives on which the Treasury is extremely keen. To get the economic growth going, we need to consider supply side measures, skill training and so on. It takes time, but it is essential. All those things are necessary to get our economy growing on a stable, non- inflationary basis at a level that will have a significant effect on job creation and employment. Taking the community as a whole, there are many wasted resources through unemployment.
The target for the Government, having got the Budget judgment right last November, is to ensure that they create the type of low-inflation, high- growth economy that will enable us, at the next general election, to face the electorate with a very good prospectus, which I have no doubt they will warmly endorse.
Mr. Macdonald : It is easy to understand why the hon. Member for Esher (Mr. Taylor) complained about our dwelling on the last election. Despite the fact that it was their fourth election victory in a row, Conservative Members are so embarrassed and ashamed that they blatantly lied to the electorate at that election that, rather than glorying in the result, they object whenever we bring up the memory. Despite their desire to wipe the slate clean and make people forget the promises that they made to the electorate at the last election, the public will not forget.
Column 970They will register their verdict in the forthcoming local and European elections and their final verdict at the next general election.
My hon. Friend the Member for Hemsworth (Mr. Enright) pointed out how poorly the British economy had done during the 1980s compared with the Italian economy on a range of indicators. One that struck me was the fact that the growth of the Italian economy outstripped that of the British economy. The Italian economy is now larger than the British economy for the first time in 200 or 300 years. That was just one of the dismal milestones which the Government passed during the 1980s.
One of the most dismal milestones of all was the fact that, for the first time since the Elizabethan era, the United Kingdom had a manufacturing trade deficit. That milestone was passed in 1983 and, every year since, our manufacturing position has grown steadily worse.
The hon. Member for Esher touched on the importance of trade and trying to get the balance of payments correct in the future. The balance of payments has not been dealt with in this debate, but was a spectre in previous Finance Bill debates. Three or four years ago, people were predicting a balance of payments deficit approaching the scale of the current public sector borrowing deficit. The recession averted that, but as the economy will inevitably begin to pick up in the next two or three years, I fear that the balance of payments spectre will come back to haunt us, blowing off course all the fine predictions made in the Red Book and by the Chief Secretary at the beginning of Third Reading.
Only one aspect of the Chief Secretary's speech was admirable--its fluency and the skill with which he used language to disguise the seriousness of the economic disasters that have befallen us during the 1980s and into the 1990s. Whenever an event forces a change of policy on the Government, the consequences suddenly become the noblest of virtues. Disasters become triumphs and setbacks become great leaps forward.
That was most noticeable in what the Chief Secretary said about taxation. Previously, the Conservatives were the party of low taxation. Now, it is a virtue that they are increasing taxation and the Chief Secretary takes pride in the fact that the Budget will increase taxes by their greatest level in peacetime history. In the midst of all those changes of course and twists and turns, it is important to maintain a perspective and not allow the public to forget what has happened in the past four or five years. I wish to do that on just two of the issues raised in the debate so far : public spending and taxation. Public spending featured heavily in the Chief Secretary's speech. Instead of the traditional goal of low taxes, his aim in the next three or four years is to rein back public spending and keep the lid on the spending binge on which the Tories embarked a year or two before the last election.
It is important to put the current spending position into a historical perspective. In the late 19th century, public spending as a proportion of GNP was a little less than 10 per cent. Most of that public spending was incurred as a result of the empire paying off debts from previous empirical wars--the Boer and the Crimea--so it was current expenditure rather than investment in capital projects for the future. With the coming into power of the radical Liberal Governments of the early 20th century, particularly with Lloyd George's people's Budget, there was a marked increase in Government spending, which rose to about 5 per cent. of national wealth.
Column 971After the first world war, with the further establishment of basic programmes of social protection and the strains imposed on them by the recession of the 1920s followed by the great depression, public spending as a share of national wealth rose to some 25 per cent. It was maintained at that level because of wartime spending until the election of a Labour Government in 1945.
The Labour Government of 1945 embarked on a major programme of public expenditure, particularly on the welfare state and national health service, which increased the Government's share of national wealth by some 10 percentage points and brought it up to 35 per cent. The Conservative Governments of the 1950s inherited that level of public expenditure and never rolled it back.
Throughout the 1950s and early 1960s, spending stayed at a more or less steady plateau of about 35 per cent. of GNP. With the elections of the Labour Governments of the late 1960s and the mid to late 1970s, public expenditure increased further again, by about 5 per cent. on each occasion.
Mr. Geoffrey Clifton-Brown (Cirencester and Tewkesbury) : While the hon. Gentleman has been making his long historical analysis of GDP as a percentage of our total wealth, I have looked up the figure in the Red Book. Will the hon. Gentleman explain to the House why public expenditure as a proportion of total GDP reached the staggering figure of 49.25 per cent. in 1975 ?
Mr. Macdonald : If the hon. Gentleman looks at the Red Book at page 23--I think that is the page to which he referred--he will find that the statistics that I am giving are absolutely right. Between 1974 and 1979, public spending as a proportion of GNP averaged about 45 per cent.--at its highest it was 49 per cent. In the early 1980s--at its highest under Lady Thatcher--it was 47.5 per cent. The difference is not that great, which is the point that I am endeavouring to make.
When the hon. Gentleman intervened, I had not reached the mid to late 1970s. I was about to say that, from the plateau of 35 per cent. in the 1950s, under the first Wilson Government in the late 1960s, public spending increased by about 5 percentage points to a new plateau of about 40 per cent. The later Labour Government increased it to a subsequent platform of about 45 per cent.--sometimes higher, sometimes lower. It sometimes went up to as high as 49 per cent. and was sometimes as low as 44 per cent., as when the last Labour Government left office.
Mr. Dorrell : The hon. Gentleman keeps referring to a figure of about 45 per cent. I shall help him to be a bit more accurate. The average for the five years of the last Labour Government was 46.5 per cent. of national income. The peak in this cycle is shown in the same table as 45 per cent. of national income. That is the difference between the parties.
Mr. Macdonald : I am glad that the Financial Secretary has put that on record. That was exactly the point that I was endeavouring to make. We have had 15 years of radical Conservative government and the Financial Secretary tells me that the difference in the figures is about 1.5 per cent.
Mr. Dorrell : I was comparing the average over the cycle of the last Labour Government--46.5 per cent.--and the peak in this cycle, under this Government, of 45 per cent. The plans in the Red Book show how we intend that figure to fall to 41 per cent.--roughly the same as the 40 per cent. figure of the late 1980s.
Mr. Macdonald : The Financial Secretary cannot rely on plans ; he must rely on the record. The record shows that the peak under the last Labour Government was 49.25 per cent., and the peak under this Government has been 47.5 per cent. The Labour Government exited with a figure of 44 per cent. Under this Government--committed to 15 years of radical cost- cutting under Lady Thatcher and the current Chief Secretary--the figure is 45 per cent., which is 1 per cent. higher than when the Labour Government left office.
The point that I was trying to make--I think that the Financial Secretary has helped to make it--was that of the simple and obvious failure of all Conservative Governments to roll back the share of state spending as a proportion of national wealth to any serious degree. I know that the Red Book speculates on rolling the figure back to 41 per cent., but the Conservatives have had 15 years of attempts to roll back the share of state spending, which is now higher than when the last Labour Government left office.
When one compares the impact of successive Conservative Governments with the impact of Labour Governments, one sees that in the late 1960s there was an increase of about 5 percentage points and in the late 1970s there was an increase of about 5 percentage points. In 1945 there was an increase of about 10 percentage points. Compared with those considerable impacts on the share of public spending in national wealth, 15 years of Conservative Government have had a negligible impact, as page 23 of the Red Book clearly shows. I make this journey into the past to try to put into perspective what I regard as empty rhetoric--the high-taxation, high-spending claims of opposing parties. The reality is that Britain, in line with most western European Governments, is probably stuck with a share of public spending as a proportion of national wealth of around 45 per cent. in the medium to long term. Nothing that the Conservative Governments of the past 15 years have done has altered that by any appreciable margin and it is hard to credit that anything they do in future will have any impact.
Mr. Dorrell : The hon. Gentleman is advancing an interesting argument. I certainly do not accept his proposition that under the present Government public expenditure will remain at 45 per cent. of national income, but if that is his assertion and view of what would happen under a Labour Government, perhaps he will tell us how a Labour Government would finance the extra 4 per cent. of national income that he wants to see accounted for by public expenditure. He would not want it to be borrowed indefinitely, so he owes the House an explanation of how the revenue gap of 4 per cent. of national income that he has opened up would be filled.
Mr. Macdonald : I simply pointed out that the highest figure under the last Labour Government was 49 per cent. and that the highest figure under the Conservative Government is 47.5 per cent.--the difference is very marginal and cannot really sustain the rhetoric that we have heard. I have not said at any time that I wished to see public expenditure increased to 49 per cent.
Column 973I was arguing in favour of fixing global levels of public expenditure and that trying to measure the success or failure of a Government by whether they increase or reduce the figure by 3 or 4 per cent. is fatuous and beside the point. That is not what we should be looking at when considering public spending.
Unfortunately, that is the obsession of the Chief Secretary. The whole test of whether his strategy will succeed over the next four or five years is apparently whether it will roll back the share of public expenditure in national wealth.
At the start of the Finance Bill, the Chief Secretary referred to the United States, where the ratio is around 35 per cent.--the Chief Secretary used the figure of 38 per cent. That is certainly significantly lower than the European average and lower than it is in Britain. He implied that that was his long-term target.
Of course, the right hon. Gentleman neglected to point out that the key difference between the United States and the countries of western Europe is that health care in the countries of western Europe is largely socialised. That accounts for much of the difference between the United States and Europe. He will also be aware that the current United States Administration has presented a fairly comprehensive package of health care reforms to Congress and the congressional budget office has judged that the impact of that package would be to increase federal expenditure in the United States by some six or seven points.
Therefore, the Chief Secretary's case that the United States is somehow a model that we should be emulating and that we should be slashing our expenditure back to American levels fails to take into account what is happening now in the United States, and the difference in health care treatment.
Mr. Willetts : May I commiserate with hon. Member and assure him we were looking forward to hearing his remarks and drawing on his experience in the Finance Bill Committee, but these lengthy historical, statistical digressions on public expenditure ratios seem to be detaining him and the House.
Mr. Macdonald : The hon. Gentleman seems to object to the point I am making because he does not like to admit that 15 years of Conservative Governments, by their own objectives and aspirations of cutting spending and taxation as a proportion of national income, have been a complete and utter failure. That is what both tables on page 23 of the Red Book clearly show and that is what Conservative Members are trying to get away from.
The Conservative claim that it is the party of low taxation is disproved by the figures on page 23 of the Red Book, and a number of my hon. Friends have illustrated that fact during their speeches this evening. I made the point by way of intervention that, although the Chief Secretary is increasing taxes across a range of areas, it is not as though there are no tax cuts on offer this year.
The Local Government etc. (Scotland) Bill introduces the abolition of sporting rates. The measure will cost the Exchequer some £2 million and the benefits of that tax cut, in a year when everyone else faces increased taxes, will go exclusively to the proprietors of large estates north of the
Column 974border. People such as the Duke of Buccleuch, the Countess of Sutherland and the Earl of Thurso will share the £2 million between them.
That hypocrisy illustrates that the real argument between the two sides of the Chamber is not about global increases in the total amount of taxation or total expenditure ; rather, it about striking a balance within taxation and expenditure. It is a question of how taxes are raised--whether they are raised fairly from the people who are most capable of bearing the burden of taxation. It is a question of whether money is spent on items which produce growth in the economy in the long term, such as housing and public infrastructure, or whether it is spent on items such as employment benefits which pay for people to be idle.
That is the real difference between the two sides of the House. It is not a question of global totals ; it is a question of fair taxation and sensible spending. That is the message that we will be taking to the upcoming European elections and to the next general election.
Mr. Willetts : We are now coming to the conclusion of many months of deliberation on the Finance Bill, in which we have heard two types of contributions from the Labour Benches. First, we heard nit-picking comment on the detail of particular clauses. In one memorable sitting, a member of the Labour Front-Bench team managed to spot several printing errors in the Bill--that led the Financial Secretary to congratulate him on his skill in proofreading. When Labour Members were not proofreading, they engaged in wide-ranging ritual denunciations of any and all tax increases, but we sadly missed anything in between. There was no meaty and substantial engagement on the real questions of tax policy. We were not offered any enlightenment as to what a Labour Government's approach to taxation would be.
Mr. Nicholas Brown : The hon. Gentleman raises an interesting topic. We get opportunities to discuss the Labour party's approach to taxation, but not while we are scrutinising the Finance Bill in Committee.
Mr. Willetts : The scrutiny of the Bill in Committee was either pernickety or ritual denunciations, but we did not have the substantial debate on some of the major aspects of tax policy for which the clauses provided ample opportunity.
Despite the Labour party's failure to set out its views on tax policy during the many hours spent in Committee, the broad outlines of the difference between the two parties is clear if one reflects on the way in which a party in government responds to the inevitable effects of a recession on the public finances. The real test of a Government's ability to steer the economy comes not when we are enjoying the benefits of the good times, when the economy is recovering and when one is in the benign phase of an economic cycle but when we are in the difficult times and recession drives public finances into deficit.
There is a clear contrast between the approach taken by the Labour Governments in 1974, 1975 and 1976 and that taken by the Conservative Governments in 1980 and 1981. Everything that we have heard in the debate on the response to this recession and its impact on public finances shows that the difference in the response to the two previous recessions still obtains.
Column 975In 1974 and 1975, the then Labour Government tried to borrow their way out of the recession and out of the enormous deficit that occurred as a result of a fall in tax revenues and large increases in public expenditure. Their attempt to avoid the difficult decision to increase taxes to bring down the public sector borrowing requirement led, of course, to the notorious intervention by the International Monetary Fund when the City and the international financial markets ran out of tolerance for the Labour party, and a high level of borrowing was required. We ended up with cuts in public expenditure programmes--6 per cent. real reductions in one year--and those cuts were more draconian than any that we had experienced in the post-war period.
The alternative, which was the approach taken by the Conservative Government in 1980-81, was to do the painful but necessary thing and raise taxes to reduce the PSBR so that we did not run out of road and were not still trying to borrow when we had lost the patience of the markets. That was the right decision to take in the recession of 1980-81, and the sustained economic recovery of the 1980s proved just how right it had been- -we had the longest peacetime economic recovery that we have ever enjoyed.
It is perfectly clear that, faced with the consequences for public finances of the recent recession which proved to be longer and deeper than forecast, the Government are repeating the step that it was necessary to take in 1981 --they are raising taxes. Just as then, despite all the catcalls and jeering at the time, that step laid the basis for a sustained strong economic recovery. We can be confident that getting the public finances in order now will similarly lay the basis for an economic recovery in the 1990s.
The trouble is that the Labour party has made no serious attempt to engage in any debate about those issues. Perhaps I can inform my hon. Friends who are here but who were not members of the Committee that Labour Members instead regularly read to us extracts from the manifestos on which Conservative members of the Committee had fought the election.
There were times during the longueurs of the Committee when I found my mind wandering to the poor Labour researcher who had possibly been tempted into working for a member of the Labour Front-Bench team by the prospect of being able to think about economic or tax policies but who was instead lumbered with the task of reading Conservative Members' election manifestos. Perhaps through you, Mr. Deputy Speaker, and Hansard I might speak to this unknown researcher and commiserate with him or her for the appalling level of job satisfaction offered by Labour Front Benchers. I hope that, next time, he or she will be allowed to research some of the meaty questions relating to tax policy that did not detain those on Labour's Front Bench this time.
Mr. Ian Taylor : I must correct the impression given by my hon. Friend. Any offer to work for the Labour party can be enhanced only by including in it the opportunity to read Tory election manifestos rather than being forced to read Labour party documents.
Mr. Willetts : That is a very good point. One is led to wonder whether the job of dealing with such dangerous, subversive literature had to be divided among several Labour researchers in case prolonged exposure to it led to
Column 976defections to the Conservative party. Who knows what special measures had to be taken to handle that dangerous propaganda ? In the remaining minutes of my speech I shall reflect a little more on the sort of economic recovery to which we can look forward because of the tax measures in the Bill and in the previous Budget in 1993. I am unashamedly optimistic about the prospects both for inflation and for real economic growth. All the evidence suggests that the Government are enjoying considerable success in holding inflation down not just within the 1 to 4 per cent. target range, but down towards the lower end of that range.
The figure for the growth in M4, for example, which is in the middle of its target range, suggests that some of the anxieties which have been apparent in the City over the past few weeks about the future course of inflation do not appear to be well founded. In fact, the problem appears to be that there are still macho managers in British industry who want to plan very high rates of return on their investments because they are making pessimistic assumptions about the future course of inflation, which seem unlikely to be borne out by events.
When firms and senior managers proudly say, "We are looking for a rate of return of 17.5 per cent. on our investment," when the British economy can look forward in the medium term to an inflation rate in the 1 to 4 per cent. range, that is no longer a sensible way of running a business. It shows that the opposite of money illusion--inflation anxiety--is still persistent although, given the Government's monetary and fiscal stance, it is not justified. The crucial indicator that ties together prospects for inflation and for the real economy is, of course, spare capacity. The hot topic nowadays is : what is the spare capacity of the British economy ? If we can get a feel for the spare capacity that is still stretching out before us, we shall be able to get a feel for how rapidly we can expect the British economy to grow without suffering the old problems of high inflation.
All the evidence suggests that we have substantial spare capacity. That is not a matter of taking a snapshot picture and measuring the size of under- used plant and industrial capacity at a particular moment. It is a matter of looking at indicators such as skilled labour. One of the most impressive pieces of evidence is that throughout the recession employers kept investing in training their employees, and now that recovery is under way, there has been no significant increase in the number of firms reporting difficulties in finding skilled labour.
The old problem of skilled labour shortages emerging in the early stage of an economic recovery appears less serious this time than in the past, which lays to rest some of the scares put about by the Opposition about training and the quality of the British work force.
Mr. Alan Duncan (Rutland and Melton) : While my hon. Friend is talking about spare capacity, does he accept that one of the major triumphs of economic management over the past two years, which the Budget specifically addresses, has been the rise in fixed-term lending over five, 10, 15 and even 20 years ? Does my hon. Friend accept that that significant change in lending arrangements will allow businesses and individuals to plan for the long term without being subject to the strange amplitude of interest rate costs ?