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Column 77My right hon. and learned Friend and his team of Ministers should be selling the Budget to the country on the ground that it is reality, and it works. The reality is good news, because almost all the figures--investment, inflation, output and employment--are now pointing in the right direction. I certainly welcome the accelerated reduction in the PSBR which was announced, combined with the other side of the equation, which is the reduction in the spending total and in the planned control total. To see nearly £8 billion taken off the latter is welcome indeed. Anything less than that would have been ground for criticism; anything more would have been doubly welcome. But £8 billion was a respectable amount, and I congratulate my right hon. Friend the Chief Secretary on his negotiations to bring that about. I completely agree with my right hon. Friend the Member for Brent, North (Sir R. Boyson) who said that, none the less, Government spending as a percentage of GDP remains too high, and that it must be reduced further when prudent economic management allows.
I also regret the need to levy VAT on fuel. None of us, however orthodox our financial beliefs, would like that to happen, but it has been judged right to do it. I have a large measure of sympathy with my hon. Friend the Member for Corby (Mr. Powell), who a few moments ago gave the most cogent-- yet remarkable--short speech I have heard in the House since I was elected. I hope that my hon. Friend will join the Government in the Lobby tomorrow night, because the consequences of interrupting the planned financial schemes of my right hon. and learned Friend the Chancellor of the Exchequer could be dire. As the hon. Member for Londonderry, East (Mr. Ross) asked, are we to remove all the help that had been announced for pensioners? Is there to be a sudden and dramatic increase in interest rates as the City expresses its judgment on the loss of such a vote? I fear that we could be thrown into disarray if we do not hold the line tomorrow night.
There are two problems with which my right hon. and learned Friend the Chancellor has to grapple. The first is that an unexciting recovery is not necessarily a popular one. Anyone can inflate the economy, borrow more and manufacture a boom which, in the short term, is very popular. There is a grave danger to democracy that a worthy, decent and steady long-term economic recovery cannot get support within the democratic process, because too few people are prepared to forgo immediate consumption and admit that the Chancellor of the Exchequer is doing the right thing. Our challenge has to be to make a virtue out of the progress which has been set in train by the previous two Budgets.
The second matter with which the Government and my right hon. and learned Friend must contend is that people feel unsettled. It is not often that I agree with something that has been argued in the House by my right hon. Friend the Member for Old Bexley and Sidcup (Sir E. Heath), and I am normally tempted to interrupt him when he is on his feet. However, he pointed out the other day that an increasing number of people do feel unsettled. We are seeing the clash of two important strains of Conservative thought. There is the need to privatise and to put into private hands those commercial enterprises that have no reason to be in the public sector but, in our search for economics and market testing, we are pressing against an equal and decent belief in institutions.
Column 78We cannot subject military bands to economic analysis, as one can a commercial enterprise. Nor can we do so with the workings of certain charities, such as the Women's Royal Volunteer Service or even the royal parks. We are now beginning to ask whether everything at which we are looking is a suitable candidate for the sharp nib of an accountant's pen.
The Opposition have offered a single policy in response to this Budget, as they have to others: it is simply to accumulate grievance and play on any grievance that they can identify. I also lay at their feet the charge of designing slogans that not only play on fear but deliberately implant mistaken economic concepts in people's minds. For instance, the right hon. Member for Kingston upon Hull, East (Mr. Prescott) said on the BBC's "On the Record" that we are paying £25 billion a year to keep people unemployed. We are not. We are paying that sum because they are unemployed. Like the hon. Member for Lewisham, Deptford (Ms Ruddock), he said that he wishes to release £6 billion-worth of housing capital receipt funds, but he failed to admit that that is further borrowing. To argue that it is just a pile of money ready to be spent is deceitful.
Labour Members also argue that the real unemployment figures are higher. Will they pledge now that if they ever came to office they would immediately raise the published unemployment figure and work through their own economic policies from that figure? I doubt it. Another small matter that I want to raise is that of war widows--not service widows but widows whose husbands have been killed in active service. At present, they get an attributable pension as well as a social security pension, but as soon as they remarry, they lose both. If they could keep the attributable pension and forgo the social security pension, because at the moment they are not remarrying, the Government would save money. That matter is important to those widows, so some tired old objections in the Treasury should be shredded and this small matter looked at afresh.
I welcome the Budget and congratulate the Treasury team. In the years left before the next election, I am determined to ensure that an economy that is in the best condition since the war is not handed over to a potential Labour Government.
Mr. John Denham (Southampton, Itchen): In one proposal in the Budget, the Government announced a new tax on home buyers, a measure to damage the housing market, a measure to increase the number of repossessions and a huge tax penalty on those who are now vulnerable because of changes in the jobs market. That was quite an achievement for one measure, which was the decision to withdraw for a longer period of time income support for mortgage interest payments. Many principled arguments can be advanced against that change. The Government's argument for reducing that support could be applied to many other sectors of social insurance. If one must insure oneself against the possibility of losing one's job and being unable to meet interest payments, why not insure against ill health, invalidity or disability? Once that break in the social insurance system has been made, the slippery slope has begun and we shall see a gradual unravelling of the social insurance system. On those grounds alone, the move should be resisted.
Column 79I wish to concentrate on the practical consequences of the Government's proposal. Many problems can be anticipated with the withdrawal of income support for mortgage interest payments. The first and most obvious one that the House can predict with certainty is that the cost of providing the cover will rise and be higher than the cost of providing cover through the current social security system. Although I have been unable to trace it in the Official Report , I understand that Ministers have suggested that the savings from that policy will be some £200 million a year. According to recent press reports, current policies work out at £7 per £100 of mortgage repayment, which means an average cost to new home buyers of £20 to £30 a month-- £27.60 for an average £50,000 mortgage. Given that some 10 million people have mortgages, it is clear that payments of that size mean that the amount that people are paying towards insurance cover will far outweigh the sum which the Government hope to save through that mean move. Even if, as is likely, some more specialised and somewhat cheaper policies are produced, I am certain that home owners will ultimately pay far more for the provision of that insurance than they do through the tax system. Will the Financial Secretary assure us that, if the new system is ultimately more expensive to run than the existing system, it will be withdrawn immediately? It is a tax on home buyers. I understand that it is also a tax on mortgages taken out to improve people's properties. It will hit many thousands of home buyers, first-time buyers and people who want to move house.
As a Labour Member, I suppose that I should take comfort in the Government's unique ability to identify new ways of hitting their own supporters. The Government should be aware that the move will be deeply unpopular among people who have previously voted Conservative or might consider voting Conservative at the next election. A Conservative Government who are imposing a tax on buying homes and removing protection from home buyers will be deeply unpopular and I hope that that message will be put across over the coming months. It will be more expensive collectively on society to provide that cover than it is to provide it under the current system.
The second major problem is that the insurance system will not be equally available to all. That move cannot be seen in isolation from other changes which the Government have deliberately created. One such change is the creation of a labour market in which more people than ever before are in insecure employment, or forced
self-employment--people have become self-employed because no other work has been available--or are dependent on part-time work, temporary work or short -term contracts. As many people have pointed out, the cost of insuring mortgage repayment for people in part-time work, running their own business, working on their own account or on short-term temporary contracts is extremely high or is simply not available. Many people who are in insecure work will be unable to obtain that cover at a reasonable price.
Column 80According to Malcolm Tarling of the Association of British Insurers, people on fixed-term contracts and the self-employed are often refused cover. Mr. Derek Roberts, chief executive of the Yorkshire building society, said that the proposals were a disaster. He also said:
"Insurers will become more selective if everyone starts taking out insurance against unemployment and premiums are likely to go up."
I understand from a press note that General Accident has said that insurers would not be prepared to provide a come-all policy. So what is to happen to people in insecure employment, who cannot provide the income cover? They will be in a desperate position, and more people are in that position than ever before because of the policies deliberately pursued by the Government. What will be the position of those with a record of short-term employment? As each period of employment comes to an end, they will find it increasingly difficult to renew their insurance cover.
The third problem is that of regulating the market. The Secretary of State for Social Security said that he is confident that a new market will be created for those products. We have been here before. When personal pensions were encouraged, no effective regulation was in place and the net result was that millions of people were ripped off by the insurance industry. Today, the sale of those insurance products is not regulated by statute and I am confident that exactly the same thing will happen again. Large numbers of people will be sold inappropriate and ineffective policies at a high price, because I have heard nothing from the Government to show that they intend to regulate the market by statute.
The National Association of Citizens Advice Bureaux produced a report on that matter a year or so ago. The evidence in that report is indeed that the mis-selling of expensive and inappropriate policies is rife. People find that claims in the first few months are excluded. People find that, when it becomes known to an insurance company that they may be confronted with redundancy, their policies are unilaterally withdrawn and they are offered policies that are not as good.
Policies are often invalidated by people taking short-term employment. What will happen to people who have a period of unemployment and claim on their policy, who go on to the jobseeker's allowance and are told to go back and take whatever temporary job is available? They will find that their insurance policy is invalidated, and obtaining a new one will be impossible or extremely expensive. Policies have also been invalidated by minor, unrelated and unreported sickness.
Unless those policies are regulated, the Government will invite that problem to continue and to worsen. I believe that the National Association of Citizens Advice Bureaux is right to say that, in any case and even without the change, that market needs proper regulation. That has not been offered.
The change will lead to an increase in the number of repossessions. We should be aware that, according to the latest announcement, not only people who take out new mortgages but other people should be insured, because the period when all mortgage holders' interest payments are not paid will be extended. The Government seem to assume that mortgage lenders will simply continue to carry the costs of a long and growing period of arrears from mortgage borrowers. I do not believe that that is the case. I believe that the Government, by the change, threaten the whole of the deal that was allegedly done
Column 81with mortgage lenders a year or so ago, and far more people will have their homes taken away when they get into arrears.
Finally, the change will have a serious economic impact. People will no longer be able to move from one part of the country to another if they have had a period of unemployment, because they will not be able to obtain insurance protection. The labour market will become clogged up. Of course, as we have seen--
Mr. David Sumberg (Bury, South): I warmly welcome three specific measures in the Budget. The first is the decision by my right hon. and learned Friend the Chancellor to remove the disincentive to move from the benefit system to employment. My constituents in the north-west of England, who have suffered from unemployment for many decades, will value and appreciate that.
The second measure in the Budget that will have widespread support is that on the revaluation of business premises. Had the Chancellor done nothing, that would have had serious consequences for many small businesses in the north-west of England.
Thirdly, I warmly welcome my right hon. and learned Friend's decision to reduce the amount of money available for the road programme. I hope that that will mean the end of the disastrous M62 relief road, which has caused such hardship and difficulty for many of my constituents.
However, one part of the Budget will not be so popular or acceptable to my constituents, many of whom have loyally supported me in three general elections. That part is the increase in VAT on domestic fuel from 8 to 17.5 per cent.
When VAT was first introduced on that service about two years ago, I voted for it with the greatest possible reluctance. It seemed to me that, for an indirect tax, it suffered from two fatal flaws. The first was that it contained no real element of choice. One can choose whether to buy a motor car; one can choose whether to have a meal in a restaurant; one can choose whether to go on a holiday. One cannot choose whether to keep warm in winter--and VAT follows the choice that one makes.
The second fatal flaw, unique in an indirect tax, is that in order to make it politically acceptable--I do not think that we ever have--we have to throw so much money at it that we then reduce dramatically the amount of revenue that it produces. We went through all of that with the poll tax.
Two years ago, the nation's finances were precarious. We were deep in recession, public borrowing and public spending were escalating out of control and any Government who failed to take measures to correct the situation would have been regarded, rightly, as profligate and irresponsible. I concluded that the Government had no choice but to take the tough remedial action that they did, and I supported the imposition of VAT in the Lobby.
However, two years after that first decision to introduce VAT on domestic fuel, a new and different scene has emerged. The Government's measures are working. Inflation is at its lowest for nearly 25 years. The economy
Column 82is reviving. Unemployment is falling, day by day, month by month. Exports are increasing and investment is growing. The prospects for the British economy are better than they have been for years. They have changed dramatically in two years, and the Government deserve a great deal of the credit for that.
It is true that we cannot afford to relax, but I believe that we can afford to review our earlier measures. Indeed, my right hon. and learned Friend the Chancellor seems to take that view himself. In this Budget, in contrast to previous Budgets, he has fully indexed the personal tax allowances because, as he rightly put it in his Budget statement:
"we can at last begin to benefit from our steady return to healthy public finances."--[ Official Report , 29 November 1994; Vol. 250, c. 1102.]
Therefore, in my opinion, a political choice can be made. There is scope-- limited scope, I accept, but scope nevertheless--to revisit the VAT on fuel issue and, I believe, to limit it to 8 per cent. We could forgo some of the tax reductions, or forgo in part some future income tax cut. We could introduce new tax measures, which are there if we want to seize them, or perhaps have a slightly less ambitious target for reducing public borrowing, for the Chancellor's targets were far better than any of the experts expected them to be, or we could combine all or some of those measures.
I am acutely conscious that if my right hon. and learned Friend has been a little harsh on income tax payers in this year's or previous years' Budgets, he can come back next year and the year after to correct that injustice in future Budgets. That is not, in practical terms, the case with VAT on fuel for domestic heating. Once that additional rate is imposed, there really is no going back--no going back for the Government and, by the Opposition's silence, no going back for any future Labour Government.
The burdens of correcting the nation's finances in the past two years have been properly and rightly shared between indirect and direct taxpayers. The benefits of those measures in future Budgets will accrue only to direct taxpayers, and that, in my view, is not right. Many, many loyal Conservatives throughout the country are not direct taxpayers or, if they are, pay very little direct tax. I think that they deserve to be heard. It is undoubtedly their last chance. The Opposition amendment is purely technical. Of itself, it does not alter the Budget or the tax rates one iota. It does not allow the Opposition to reopen every aspect of previous taxation and fiscal policy. It simply permits a rethink, a reconsideration, a review, of whether we proceed with that additional amount of VAT on domestic fuel. That is all it allows--nothing more, nothing less.
After a great deal of thought--for I have supported the Government through thick and thin almost since the day that I came into the House--I do not believe that we can allow that final opportunity to pass us by. We owe it to our constituents, to our party, to our friends outside, and most of all to ourselves, to give everyone the chance to consider whether we are doing the right thing. I shall vote tomorrow so as to give the country, the House and, most important, the Government the chance to think again.
Column 83Sumberg) on demonstrating some political bottle. He has told us that he is prepared to vote to enable the House to rethink the terrible imposition of value added tax on fuel, which will bear most heavily on the poorest and most disadvantaged in our society. I give the hon. Gentleman full marks for that. At the same time, I wonder whether his stance has anything to do with the fact that Conservative Members who represent marginal seats will have difficulty obtaining mortgage insurance protection over the next few months, bearing in mind the fact that many of them will be facing redundancy. It will be difficult for people such as the hon. Member for Bury, South to arrange for mortgage insurance protection. He is vulnerable, and no doubt insurers are aware of that.
Many things have been said about the Budget, and perhaps the least important comment is that it is dull. The Tory press used that description, and perhaps its coded message is that the Government are leaderless, lack direction and do not know how to regenerate the economy and to get people back to work in real jobs that provide stimulation and the opportunity for them to develop their skills. The Tory press is aware of the cynicism that lies behind the Budget. It is designed to buy time so as to maximise the diminishing chances of the Conservative party being returned to office after the next general election. That is not in the interests of the economy and the nation. Provision has been made for cynical tax bribes before the next election, but that will not fool anybody this time round. There is the old maxim that it is possible to fool some of the people some of the time. The other side of the coin is that it is not possible to fool all the people all the time. That stage has been reached and the Tory party has been rumbled. The people will not buy again the Tory tax bribes that have been offered in previous general elections.
An interesting comment--it was lost in the acres of newsprint about the Budget--was made by Nick Goulding, who is at the sharp end when it comes to policy. He was speaking on behalf of the Forum of Private Business. He is not someone who would automatically support and sustain the Labour party. He referred to the Budget as
"jam tomorrow when what we needed was jam today."
I understand that. The Government claim to be the pal of small business, but they have let down the small business sector. Small businesses need demand in the economy. They need people to be in work so that they have incomes to enable them to purchase products and services from the small business sector. Unfortunately, small businesses have had a harrowing time over the past few years. The Government's economic policy has deprived them of customers. It is tragic that so many small businesses have gone to the wall. I put out my hand to those people of courage who have tried to run and sustain small private businesses. In some instances they have been family businesses, which were built up over many years. The individual families were proud of those businesses, which were the result of sacrifices and long hours of work. In many instances the businesses have been lost because of the Government's callousness, not because of fecklessness or their owners' inadequate business skills.
Column 84The Government demonstrate their callousness by their determination to impose further taxation on ordinary families, especially working-class people. Some of the poorest in our society will be worse off, some by more than £300 a year, because of the tax measures that are set out in the Budget. The Government's last-minute attempts to minimise the cruel effects of imposing value added tax on heating bills will not be sufficient to ensure that the elderly and the poorest families are able to keep warm during this and subsequent winters. It seems that the Government do not recognise that for a single pensioner to keep his or her home warm, the cost is the same as has to be met by two people. That fact has not been recognised in the Government's palliatives.
The Budget was presented against a backdrop of growing greed and division in our society. The hon. Member for Bury, South produced a litany of "full marks" for the Government. Needless to say, I did not agree with it. What he did not say was that during the Thatcher years and those of the current Prime Minister the divisions between the haves and have nots have become much wider. Selfishness and greed have flourished.
I am irritated when Conservative Members try to distance themselves--they do so for local consumption in their
constituencies--from some of the worst effects of the Government's policies. There was an example of that on the evening of 1 December. I was in the Chamber during an Adjournment debate--one of my many sins is that I never go home. Present in the Chamber were the hon. Members for Surrey, East (Mr. Ainsworth) and for Croydon, South (Mr. Ottaway). The dentist Minister--the Parliamentary Under-Secretary of State for the Environment-- was at the Dispatch Box. I rumbled them. The hon. Member for Croydon, South was bleating about the excessive profits of the East Surrey water company. He talked also about excessive dividends. His comments were obviously for consumption in his constituency.
At the same time the hon. Member for Croydon, South is supporting and sustaining a situation in which considerable profits are allowed to be amassed by a few directors when his constituents are paying more and more for a basic need--water. The hon. Gentleman reported "a profit increase last year of more than 45 per cent.--some £8.2 million on a turnover of only £25.5 million--and as such should be prepared to submit to competition."
He added that
"in 1991, two directors, who held almost half the shares, were paid a dividend of £1.17 million at a time when consumers faced an increase of 24 per cent."
I am recounting what the hon. Member for Croydon, South was saying in the Chamber late at night last week. Only three Members, apart from Mr. Deputy Speaker, were in the Chamber. It is hypocritical of hon. Members to express such views when they are not prepared to support the measures that are suggested by my right hon. and hon. Friends, including the taxation of windfall profits of privatised companies. It is outrageous.
The hon. Member for Croydon, South said that Ofwat, that toothless consumer protection body,
"in a letter dated 12 July 1991",
"about the levels of prices, profits and dividends. Regrettably, it took no further action."--[ Official Report , 1 December 1994; Vol. 250, c. 1433.]
Column 85That is what is happening. It is time that the truth was told. Conservative Members are supporting and sustaining a Government whose policies are designed to make the rich richer and to depress the living standards and quality of life of the poor.
The Budget has been introduced for a year when we can mark the 50th anniversary of the victory over fascism as well as the 50th anniversary of the election of the post-war Labour Government. I hope that we shall celebrate the fact that that Government introduced the national health service, which was much valued and appreciated by ordinary working people. We now see the NHS under constant attack by the Government, and especially in the Budget.
The financial allocation for the coming year marks a reduction for NHS provision. The Minister shakes his head, but he knows that the additional moneys that will be made available will be wiped out by inflation. There is an increasing demand for services because as a consequence of the policies pursued by the Labour Government from 1945 to 1950 people are living longer. As a result, there is now a greater burden on the national health service--an increased demand. I am proud of that increased demand, but the Government are failing to shift enough national resources to provide for the service that is needed.
I could go on much longer about the anniversary of the Labour Government, because it is particularly pertinent, but we shall have other opportunities to mention it this coming year. The fact is that the Budget will cut many services that were introduced in 1945 by our fathers and grandfathers--and, of course, our grandmothers--who were proud of having instituted a welfare state of which the country should also be proud, and which my party is proud to defend and protect. We shall do so this year, campaigning on the Floor of the House, and when we take office in two years' time.
Mr. John Marshall (Hendon, South): It is always a pleasure to follow the hon. Member for Thurrock (Mr. Mackinlay), but I considered his remarks about my hon. Friend the Member for Bury, South (Mr. Sumberg) particularly snide. As the hon. Gentleman should know, my hon. Friend is a solicitor, and I cannot believe that any solicitor would make less money than a Member of Parliament; I should have thought that any insurance company would regard my hon. Friend as a very good risk.
The hon. Gentleman displayed considerable ignorance of the water industry. It is absurd for him to regard Ofwat as a toothless body, given that Ofwat has reviewed the K factor and told the privatised companies that the rate of price increase will have to decline substantially--and that, in some cases, prices must be reduced. It is scarcely a toothless body; it is a very effective body.
The hon. Member for Thurrock does not understand that one reason for the necessity to privatise the water industry was the fact that, so long as it remained in the public sector, investment in sewerage and new water facilities had to compete with investment in schools, hospitals, housing, railways and roads, and always came off very badly. The hon. Gentleman knows, and the House knows, that there has been a dramatic increase in investment in the water industry since its privatisation. It
Column 86is surely the height of hypocrisy to call for more investment in water and then to complain about the consequences.
In a previous incarnation, I used to have to write an annual article about the Budget for Scottish chartered accountants. I frequently began my article with this quotation:
"To tax and to please no more than to love and be wise is not given to man."
Those words have come back to haunt many of us over the past few months as we have listened to what our constituents have said about the proposal to increase the rate of value added tax on electricity and gas.
I do not wish to oppose that increase tomorrow. I challenge my hon. Friends who propose to do so by abstaining, or by voting with the Opposition, to answer two questions. First, how would they replace the revenue that they will vote to go without? Secondly, if they cannot tell us which tax they wish to increase, they should at least tell the House which form of public expenditure they would reduce. Would they favour less spending on the health service, less spending on schools or less spending on housing? It is for them to tell the House what they would cut, or which tax they would increase; to do neither would be an act of irresponsible populism. Anyone who votes with the Opposition tomorrow must recognise that his or her action will lead to a degree of uncertainty in the gilt-edged market on Wednesday, to weaker sterling and, perhaps, to higher interest rates. That is the price that some people are willing to pay tomorrow. The decision taken by some of my hon. Friends, however, pales into insignificance when compared to the irresponsibility of the Opposition. The Labour party is never knowingly underbid when it comes to public expenditure. It wants to spend more on the health service and overseas aid; we are told that it wants to invest more in the infrastructure. It wants to spend more on schools, and--since last week--it even wants to spend more on grant- maintained schools. But Labour never tells us how it will pay for that increased spending. Tomorrow it will vote for a tax reduction: it is trying to fool the British public into believing that it is possible to vote for a tax reduction and increased public expenditure at the same time. Labour Members are the first people to try to follow Ronald Reagan into supply- side economics, which caused remarkable problems in the United States; it seems that they seek similar problems in the United Kingdom.
I welcome the Budget's proposals on housing benefit. Some 12 months ago, a constituent of mine moved from the London borough of Hackney to the London borough of Barnet. The constituent wrote to me saying that Barnet was a nicer place in which to live, but did not say that Barnet's Member of Parliament was any better! The constituent then complained that Barnet would provide only £250 a week in housing benefit, which would not meet the full cost of the rent: the full cost of the rent had been met in Hackney.
That sum of £250 a week, however, amounted to no less than £13,000 a year. I do not think that people should expect to receive such sums from the taxpayer week in, week out: once they start receiving £13, 000 a year in housing benefit, there will be precious little incentive for them to get out of the housing benefit trap. We have certainly found that there is no incentive for people to haggle about rent levels. If people know that their rent will be underwritten by the local authority and
Column 87the taxpayer, why bother arguing with the landlord? The landlord knows that the level of rent that the local authority will agree is reasonable, so he charges up to that level. The tenant knows that he will get it all back, so there is no incentive for any discussion to take place. As a result, the other body--the body of taxpayers who are paying something towards other people's housing benefit-- must also pay the consequence of housing benefit, in the shape of higher rents. I am sorry that the Budget did nothing about capital gains tax. This country has the highest CGT rate in western Europe, and I believe that the 40 per cent. tax on long-term gains is too high. I understand why Lord Lawson decided to harmonise capital gains tax and income tax rates in 1988, so that there would be no fiscal incentive to take income as capital rather than as income; I also understand why the artificial barrier between short- term and long-term gains was abolished. There was a nonsense which said that a stock held for 364 days represented a short-term gain, while one held for 367 days was a long-term gain and attracted a significantly lower tax rate: that was a distortion of the operation of the market. I see some merit in saying that people who held shares for five, six, seven, eight or 10 years should pay a lower rate of CGT than the current 40 per cent. I must be true to the principle that I enunciated earlier this evening, when I criticised those who wanted to leave VAT on fuel at 8 per cent. and asked how they would pay for it. I must say how I would pay for a reduction in the long-term rate of capital gains tax. I would do that by re-examining the two tax advantages associated with personal equity plans and tax-exempt special savings accounts--PEPs and TESSAs. I believe that those accounts have affected the pattern of savings, rather than the total level. They have constituted a significant cost to the Revenue.
PEPs are of no value to the standard-rate taxpayer, because the money paid to the fund manager is broadly equal to the income tax savings that he generates. We see the financially sophisticated taking advantage of such benefits. They have not increased the level of savings; they have merely altered the way in which people save. I welcome the Budget's increased emphasis on the private finance initiative. The Chancellor announced that we were close to signing £5 billion worth of contracts. I was particularly interested in his statement that there would soon be another statement about the Northern line--he used the words "very soon"--which was a remarkably positive thing for a Treasury Minister ever to say about any future contract.
Those of us who live in north London must put up with trains that are 35 years old. They are well past their sell-by date and we look forward to having new trains.
Mr. Marshall: I do not think that anyone will buy them, but we need new trains. I was chairman of the all-party friends of the Northern line group which pressurised Ministers earlier this year. I am glad to say that because of that pressure there is the probability of an announcement before the Christmas recess. That will be warmly welcomed by the people of north London who
Column 88would look on it as their best Christmas present for a long time. Of course, the private finance initiative will do much more than improve the quality of the Northern line. It will improve the quality of the health service, public transport in general and, of course, education.
The different philosophies of Conservative and Labour were demonstrated over the weekend. In The Mail on Sunday the hon. Member for Cunninghame, North (Mr. Wilson) said that the Labour party would impose restrictions on British Telecom dividends. He gave the impression that that was fine because it would affect only a few millionaire toffs, perhaps from Mayfair. He did not realise that such a restriction would affect all the recipients of occupational pensions because there cannot be an occupational pension fund company that has not invested in BT. Even the managers of the Maxwell pension fund would have invested in BT.
Such a restriction would also affect the holders of with-profits and life insurance policies because every insurance company has invested in BT. The proposal affects not just a few millionaires but millions of common people. The hon. Member for Cunninghame, North underlined the economic illiteracy that often afflicts Labour party spokesmen. They call for windfall taxes on public utilities and forget that such taxes will affect investment by those utilities. They propose dividend controls without realising that they would hit many millions of people. They fail to recognise the major changes that have occurred since privatisation of our major industries and ignore the fact that privatisation has led to a huge increase in investment and a massive improvement in the quality of service. At one time industries such as British Telecom, British Airways and British Steel cost the taxpayer a great deal of money, but they now contribute massive amounts in corporation tax and give a much better service to the customer. Those are the accolades for the policy that the Conservative Government have pursued for a long time. The Budget is one of the most fortunate that has ever been bestowed on the country. Britain now has the most soundly based economic growth since the war and for the first time economic growth is export led. The Chancellor was able to forecast a £6 billion improvement in the balance of trade this year. Historically, Britain has had periods of expansion that were fuelled by consumer demand, but this time the expansion is fuelled by increased exports by our great midlands industries. The prosperity of the midlands will percolate down to the south-east and be drawn up to Scotland. It provides the greatest opportunity that Britain has had since the war.
The one move that would defeat the prospect of sustained economic recovery would be the election of a Labour Government committed to a massive increase in expenditure and no increase in taxation to compensate for it. That would lead to higher interest rates and higher inflation and would destroy many hundreds of thousands of jobs.
Mr. Matthew Carrington (Fulham): I welcome the Budget not so much because of what it does, although what it does is good in terms of helping the long-term unemployed to get back to work and assisting small businesses, but because it is modest. It does not do much, and that is entirely right. More significant is what it does
Column 89not do, and those omissions were dictated by previous Budgets because most of the corrections that were needed to improve the budget deficit had already been made.
The problem is that the economy is coming out of recession and growing fast. The growth rate is over 4 per cent. and the last thing that the economy needs is further stimulus. A Budget that did not reverse the earlier tax increases and did not decrease taxes is precisely what the economy needs. The Red Book predicts that economic growth will slow next year, largely because of changes in North sea oil production but also because tax increases are slowing the economy. On the whole that is welcome, because a growth rate of about 4 per cent. is unsustainable and would eventually lead to bottlenecks in the economy. That would give rise to inflation and the problems that have occurred too often in the past.
If the economy does not slow down in the way that has been suggested, other measures will need to be taken. The Treasury's record on forecasting economic growth has not been good. Over the past two years, the projections were for a much slower growth rate than has occurred. It is entirely possible that over the next few years growth may still be far higher than the Government predict in the Red Book. There must be flexibility in the response to economic recovery and in the various mechanisms that are used to slow it down.
No one likes tax rises or VAT on fuel, although in this case tax rises are perhaps more acceptable than the alternative, which would be a rise in interest rates. We need to take some of the excess growth out of the economy, and that must be done either by tax rises or by interest rate rises. VAT on fuel is a peculiar tax in that although it will raise about £3 billion, about half that amount will be given back in various benefits. Consequently, it is a rather inefficient tax and if it were not for the broader picture of the use of VAT, many people would find it even more objectionable than most tax rises. However, as the VAT base needs to be broadened and as fuel is one of the most obvious areas in which to raise tax--
Mr. Mackinlay: Truly, I am at a loss. As if it is an authoritative statement, the hon. Gentleman says that the VAT base has to be broadened. Who says? That is clearly divisive. Where did the hon. Gentleman get that great wisdom?
Mr. Carrington: The hon. Gentleman should look at statements by his party on the need to increase VAT to meet European objectives. VAT is one of the major revenue raisers upon which the tax system relies. If the VAT base was too narrow and it was levied on too few goods, it would have to be levied at too high a rate to be effective.
Widening the VAT base is right; the difficulty comes when it is levied on people who cannot afford it. That is precisely where the help for old-age pensioners comes in and makes VAT on fuel a more acceptable tax. The rebates are at about the right level to ensure that those who end up paying VAT on fuel will, for the most part, afford it, whether or not they want to afford it. The tax needs to bed down and in the end it will be accepted.
There is one other way of bringing Government revenues into balance, which is to cut public spending. I would strongly support any such measures and I am glad that the Budget outlined some moves in that direction. However, as has been said in our Budget debates on other
Column 90days, the reality of the cuts being made is to do more with inflation, a reduction in unemployment and the growth of the economy than with Government spending. That was probably inevitable because any easy cuts in Government spending have already been made. Any cuts in current Government spending would be difficult to make without causing serious hardship and lasting damage.
The changes that have occurred have been in long-term Government spending-- for example, to the rising trend in social security payments and pension entitlements. They have been necessary to bring the long-term structure into balance. They are to be welcomed, but they do not really affect what is happening currently in the economy. The Budget's overall picture of the economy is strong. It appears that within two years it will return to fairly robust health; certainly by the turn of the century it will be very strong indeed. That will provide the opportunity for jam tomorrow, which many of us would welcome. However, it raises problems because as the economy grows stronger, the amount of savings will begin to decline. That has already happened. The savings ratio--an imprecise measure, but the best that we have--has declined from 12.25 per cent. to 10 per cent. this year and is likely to continue to decline, possibly to as low as 8 per cent., in subsequent years. Therefore, I was pleased with the provisions in the Budget to liberalise the PEPs and TESSA regimes in order to encourage savings.
More will need to be done as the opportunity presents itself. In particular, we must encourage people to make their own investments. One of the principal obstacles to investment is capital gains tax. I strongly urge that the whole structure of capital gains tax be reconsidered. To have it set at a figure of 40 per cent. is punitive in the long term, even if it is justified in the short term. As I understand it, the reason for setting capital gains tax at the same level as the top rate of income tax is purely to stop anti-avoidance--people converting income streams into capital gains tax opportunities. I can understand that and it may be a good reason for having a short-term rate of capital gains tax at a fairly high level; perhaps not as high as 40 per cent.--there are transaction costs in making such a conversion--but at a realistic level that still deters anti- avoidance.
Having long-term capital gains tax means that people do not retain investment for a lengthy period and therefore do not make the necessary long-term planning decisions to invest in the economy. We should consider incentives to encourage investment, of which the major one has to be the restructuring of the capital gains tax system.
I would like a cut in direct taxes when the right circumstances prevail. Far too many people are paying income tax. One of the facts that will emerge with the self-assessment system is that far too many people are required to submit income tax returns. There should be reform of the system to take more people out of paying income tax. We should also think again about the present income threshold of £8,500, above which everyone has to submit a return. That figure was initially set at a level that reflected the income of directors and higher-paid employees, but now it is about half the average wage. It is a ludicrous threshold and in effect is just a job creation programme for Inland Revenue officers.
Column 91We should consider carefully whether the tax benefit from large numbers of people on low incomes submitting returns is offset by giving the Revenue the means to catch people on low incomes who might otherwise avoid tax. That measure should be re-examined.
Taken overall, the Budget is extremely good. It will lead to stability, which is vital as Britain comes out of recession. It will enable industry to plan, people to save and a climate of certainty to prevail, which in turn will enable our economy to gather a strength that it has not had since the second world war. We will not be able wholly to eliminate the busts and booms in our economic cycle. It is too much to assume that we can get away from peaks and troughs because no Government have that sort of power. However, stability in fiscal matters will smooth the peaks and the troughs and enable the economy to continue to grow steadily over the years to come. For that reason I welcome the Budget and I hope that it successfully overcomes its hurdles tomorrow night.