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Mr. William McKelvey (Kilmarnock and Loudoun): When travelling through the country, does the right hon. Gentleman never come across people who are discontented because they are getting a 2 per cent. pay increase-- or a nil increase--while inflation is running at 2.7 per cent. and others are awarding themselves increases of 300 per cent.? Does that not cause the right hon. Gentleman any unhappiness?

Mr. MacGregor: I have always made clear my belief that salary increases of that kind, which are not directly earned through improvements in the performance of companies or productivity improvements, are unjustified and unrealistic at present and give the wrong signals. I also believe, however, that it is important for people to be able to gain the benefits of the productivity improvements that they have undertaken and that they should receive performance bonuses, provided that the performance targets are good and realistic.

That brings me to the question of VAT on fuel. I shall make just two points, as so much has already been said. First, I believe that public comment--this may be our own fault to some extent--has not made enough of one of the two elements which led to the original introduction of VAT on fuel. I refer to the environmental aspects of the proposal. [Interruption.] The hon. Member for Moray (Mrs. Ewing) laughs, but it is a hollow laugh from a member of one of the parties which argue for a carbon tax.

Mrs. Ewing rose --

Mr. MacGregor: I should like to develop my point. In all letters to my constituents and in all my remarks, I have always stressed the importance of that aspect. We have the Rio targets to meet; if we are to meet them and to secure energy conservation at the same time, all sectors of the economy--including households--must play their

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part in conserving fuel and using less of it. Given the real reduction in fuel prices since privatisation, that is at least a modest contribution to our goal.

Mrs. Ewing rose --

Mr. MacGregor: I hope that the hon. Lady will not mind if I do not give way. I am anxious not to speak for too long.

I should be happy to elaborate my point about the environment, but I have time to speak only very briefly.

My right hon. and learned Friend the Chancellor is absolutely right to warn about the consequences of the measure not going through. It would not be easy to find £1 billion plus of further expenditure saving. It would be difficult and painful in some areas and the Labour party would almost certainly oppose each and every suggestion. It would therefore have to be done with other tax measures which would involve many difficulties. Given that pensioners and other vulnerable groups are protected by the additional Government commitments and given the environmental aspects, where is the sense in that? Above all, it must not be done by adding to public sector borrowing. That could only have an upward effect on interest rates and I have found no support for that in the building industry or in small businesses or from anyone to whom I have talked.

Had there been time, I would have said more about interest rates. It is worth pointing out--it is in the Red Book--that Government gross debt interest next year will be £24.5 billion and rising. That is the consequence of high public sector borrowing and it would be added to if interest rates rose. That figure is exceeded by only four Government spending Departments. It is another reason why it is so important to bear down on inflation, interest rates and public sector borrowing.

I strongly support the Chancellor in what he said overnight and what he is doing in the Budget and I beg the minority of my hon. Friends who are still considering the matter to consider carefully the consequences that would follow their actions.

I want to raise three specific points about the future. Inevitably, I have had to be very selective. The Budget contains a number of measures to promote saving. In the past, I have played my part in the development of a number of schemes such as the business expansion scheme and schemes to encourage saving and investment. Each succeeding Chancellor wants to have a scheme that is attached to one Budget and I think that there is a danger of a proliferation of such schemes. Having watched them all during the past 15 years and analysed their effect, I doubt whether in the long run it is the best way to create a climate of encouragement for savings and investment and a savings-owning democracy.

We must look carefully at how much additionality in savings is provided by each scheme, and we must be mindful of the administrative and other costs. Therefore, one of the Budget measures about which I am a little doubtful is the proposal to continue the £9,000 investment in the tax-exempt special savings accounts. It will not add much in terms of additional saving and I doubt whether it will affect the amount of saving going into the institutions that currently have TESSAs.

There is perhaps a case for looking overall at how to encourage savings and whether the schemes are the best way of doing it, and perhaps concentrating instead on a

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low-tax regime and a change in capital gains tax to encourage longer-term saving. I have always felt that the tapering of capital gains tax, leading eventually to no tax being paid after a number of years, is the best way forward.

A Bill dealing with agricultural tenancy was announced in the Queen's Speech. I took through the House the last Bill dealing with that matter and I felt then that it was a fairly modest measure which would not achieve the result that we all seek of encouraging more agricultural tenancies. We now have agreement in the agricultural community for a much stronger measure, but I am concerned that it will not achieve its possibilities unless it is accompanied in due course by changes in taxation. I have in mind in particular the inheritance tax rules, which allow only 50 per cent. relief on land that the owner does not take in hand within a 12-month period, and also capital gains tax. I hope that my right hon. and hon. Friends will keep a careful watch on that and be prepared to bring the treatment of let land into line with that of occupied land for inheritance tax and allow capital gains tax roll-over relief on let land. That is the way to make sure that the new Bill will work. With regard to spending on transport and the road programme, as Secretary of State for Transport I was keen to switch as much traffic as possible from road to rail, although I was well aware of the difficulties of doing so and of the limitations of the likely ultimate effect. I believe that I did as much as anyone to promote the private finance initiative, which I strongly support. However, I am concerned at the considerable reduction in public spending on roads in the next three years. I do not believe that it will be possible to achieve a substantial switch to public transport without a cost level that we cannot contemplate. My right hon. Friend the current Secretary of State for Transport said that the

£140 million spent on the Manchester metrolink has resulted in a reduction in traffic in Manchester of around 0.3 per cent.--[ Official Report , 31 October 1994; Vol. 248, c. 1287.]

On the basis of that and other research, it appears that on those figures a transfer of just 10 per cent. of car journeys nationally from road to rail would require an investment of £140 billion. Even if that is too much, it would require a massive investment to achieve a switch to public transport which would not quickly be taken up by two, three or four years' growth on roads.

However much we want to encourage the transfer to rail and public transport, it is important to continue a substantial road programme. The design, build, finance and operate schemes will take some time to come into effect. Five or 10 years from now we would regret it if we had allowed the road programme to run down because it would result in increased congestion and frustrating delays.

Dr. Cunningham: The hon. Gentleman has returned to the subject of investment in road and rail. Far from making any improvement, the Government have cut investment for Railtrack. Not only that, they are cutting investment in such a way as to threaten jobs at ABB York carriage works and the Hunslet, Leeds-based rolling stock manufacturers. Those manufacturers are running out of

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orders and laying people off. There is no sense of improving investment in the rail network: the Government are cutting it.

Mr. MacGregor: I do not think that the Government are cutting investment in Railtrack. There is the private finance initiative on the Northern line, which will lead to considerable investment in rolling stock. The right hon. Gentleman should take account of the fact that there has been substantial investment in rolling stock in the past eight to 10 years and much of it is very modern. Much of the investment in railways is now needed in the track and infrastructure, which is where the bulk of it is going.

I do not want to elaborate on the roads programme now as there will be other opportunities to do so: I just wanted to put down a marker. Overall, my right hon. and learned Friend the Chancellor was absolutely right to take a cautious, tough and courageous line in the Budget. I totally support the strategy and I hope that all my right hon. and hon. Friends will support him on the issue of VAT on fuel. 5.57 pm

Mr. Robert Sheldon (Ashton-under-Lyne): The right hon. Member for Norfolk, South (Mr. MacGregor) and many others talked about the possible dangers if the Government were to lose the vote on VAT on fuel. The right hon. Gentleman will recall, as I do, a Labour Government who were defeated on a tax amendment involving a much larger sum than this. I hope to show the consequences of that and to explain how these matters can be dealt with.

I want to make some general points. I had hoped that, belatedly, the Government might address some of the real problems. Over the past 15 years of this Administration we have seen a terrible catalogue of errors. I shall select about four of them to show some of the ways in which they went wrong and how they might have done things better and might yet be able to make amends in some of those areas.

First, we know that the Government started off with a belief in theoretical monetarism--the intellectual nonsense that devastated my constituency and that led to the loss of one third of the companies in my region. They were the small, medium-sized and medium-tech firms that exist in every country in the world, including Germany, Japan and the United States of America. That particular dedication to a dogma caused immense damage, not only to my constituency, but to many others.

Secondly, the Government set up an uncontrollable boom--the housing and spending explosion, the consequences of which are still with us. At that time a few years ago, people felt that it made sense to sell their houses and to buy more expensive ones. Trading up was seen as an investment rather than as a consumption. With the rise in prices, people felt a spurious prosperity that encouraged further indebtedness. That was a major scandal and we are still suffering from it, with a number of people having negative equity in their homes.

The Government's third serious error involved bringing about the second major recession of our time, when industry suffered once again. It led to us leaving the exchange rate mechanism on Black Wednesday. We seem to forget that that probably cost this country about £5 billion--an immense amount of money that was in foreign

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exchange, which we could have used in many other ways. Those events led to the industrial recovery, of a sort, that has arisen since. The fourth indictment has been the waste of North sea oil, which hon. Members know about. Who is there in the House who believes that that accretion of sudden wealth has been handled for the good of our country? No one believes it. It was a disgraceful episode. We could have used that great resource to modernise our industry, to prepare us for the difficult times ahead, to revive our cities and to invest in infrastructure. Instead, we squandered it.

We are coming out of recession.

Mr. John Evans: My right hon. Friend has mentioned four points in relation to waste in the 15 years of Tory Government. Will he mention the fifth one: the £14 billion wasted on the poll tax?

Mr. Sheldon: No one can doubt that. The matter involves not only waste of money, although that is extremely serious. Local government finance has been ruined. Today, local government is different from what it was 15 years ago. It has never had sufficient finance to deal with the problems that it has faced, but it was able to contain the problems. The large proportion of money that it needs from central Government has distorted local government decisions. It cannot decide to spend money in a certain way because it costs so much more than it used to in the reduction of Government grants.

We are coming out of recession, but we still have a balance of payments deficit and a public sector deficit. At any rate, a chance exists to make some amends. The Government's main task is to create investment in both industry and people. I am delighted that my hon. Friend the Member for Dunfermline, East (Mr. Brown) has put that at the forefront of the Labour party's aims--it should be there and he is right to do that.

There is a difference in the time scale involving investment in training and the time scale involving investment in plant and machinery. Investment in plant and machinery can often get a return in months. In education and training, investment success needs a number of years. There was one exception to that. The wartime training scheme created engineers for the war effort who produced large numbers of trainees ready for the factories. The difference between then and now is that jobs existed that could immediately be filled. The Government could, therefore, undertake training but they need to find ways of making use of it. The lesson from that is that training is best undertaken when demand is higher than it is now. Further investment in training and education is essential, but the results will be long term.

To achieve necessary investment in industry, incentives must be given. As I say again and again, a 25 per cent. investment incentive is not an incentive at all. It is a disincentive because so many items of plant and machinery are not worth 75 per cent. of their value at the end of the first year and they are not worth the amount by which they are allowed to depreciate over succeeding years. Already, the Chancellor of the Exchequer and the Governor of the Bank of England are telling us of their worries about an overheating economy. It is clear that severe capacity constraints exist due to the failure to invest.

The Chancellor of the Exchequer told us that investment incentives will "distort investment decisions." Of course they will. That is what they are all about. Such

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incentives are needed when investment is inadequate. The Chancellor distorted tax allowances to provide up to £290 million for venture capital trusts. He distorted them to produce a development that is far less important than investment. Venture capital trusts will receive £290 million, but the amount of incentive for plant and machinery will not change. Far more important than those trusts is the need to encourage investment in manufacturing industry. Investment in manufacturing industry will not produce all that many jobs. Efficiency will translate into higher production rather than much higher employment. The whole purpose of investment in manufacturing industry is to provide wealth. That is what we need from industry. It allows us to export more and to reduce imports. That wealth is required and it will translate into higher expenditure and more jobs in other parts of the economy.

Another reason exists for the low level of investment: the way our corporation tax system works. The maintenance of dividends in bad times as well as good is a peculiarity and it makes it difficult to invest. The Secretary of State for National Heritage began an examination of short- termism and dividend excesses. It is wrong that outside influences, or whatever influences there were, have cut short that necessary examination. We are entitled to know the circumstances and the reasons behind the cancellation of that valuable initiative. Retentions of profits are the most frequent and most reliable source of finance for investment. Of course, the use of outside capital is sensible, but, for many firms, the cost is high and uncertain. As well as that, a difficulty exists in convincing lenders where their technical understanding is fairly low. There are limitations, therefore, in going to the market for money. Those limitations do not apply if one is able to reinvest from one's own resources. After all, most investment comes from that source. Capital allowances should have been changed to allow for that.

There is a certain irony in saying that the failure to obtain £1.5 billion from VAT on heating will mean that the Budget will be "holed below the waterline." The Government predict that, if the amendment is carried, there will be dire consequences. That is nonsense; it is all rubbish. The Government scorned fine tuning, but this is fine tuning to the amount of 0.5 per cent., or even less, of Government spending. Why should the Budget judgment of the Chancellor of the Exchequer be sacrosanct? Iain Macleod used to scorn that view. The Chancellor of the Exchequer of the day used to say, "This is my Budget judgment and this is all set." Iain Macleod would say "nonsense" to that, and he was right.

I had the advantage of taking part in the consideration of many Finance Bills with Iain Macleod. It was a great privilege to sign, with, I think, only one other hon. Member now present, a plate that commemorated Iain Macleod on his life's work. The right hon. Member for Horsham (Sir P. Hordern) was the other signee. It was a privilege to have been recognised in that way. Iain Macleod scorned that fine tuning and he was right to do so.

The interesting thing is that the Red Book states that, in the past 10 years, the average error in spending has been £10.5 billion. We are talking about £1 billion now. Who do the Government think they are? They have such

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certainty about the future when the average error in the past 10 years--not the error for just one year--has been so great.

I, like the right hon. Members for Norfolk, South and for Worthing (Sir T. Higgins), remember when the Rooker-Wise amendment to index personal allowances was moved. It was supported by Nigel Lawson and cost about £1 billion in 1977. At the time, the Chancellor claimed--as all Chancellors claim--that the Budget judgment cannot be altered because it hangs together so well; it is so perfectly constructed that to take away one brick would mean the collapse of the whole thing. That, of course, is rubbish.

In 1977, the £1 billion was readily absorbed within the margins of error, but it is now claimed that the amendment would introduce such a fundamental change that everything would collapse if it were accepted. The present margins of error have become much greater and the cost is lower.

Chancellors of the Exchequer have a touch of the confidence trickster about them--they do not inform their Cabinet colleagues about the Budget until it is too late for them to do anything about it. The secrecy surrounding the Budget was because certain information could be used to enable those in the know to make large fortunes, but much of that has gone. The abolition of purchase tax and the introduction of value added tax mean that advance notice must be given and, in any event, the Chancellor himself leaks so many details that much secrecy is no longer possible.

The Budget is about raising money in taxation; it is not about the course of the economy but about how much the Chancellor can give away in income tax reductions the following year. However, I am not sure that it will have the same effect in 1996 as it did in the past because VAT is becoming ever more unpopular, and for very good reason.

VAT is a regressive tax which hits the worst off hardest. It used to be only a slightly regressive tax. Indeed, when the right hon. Member for Worthing introduced it, it was claimed that it was broadly neutral. I always believed that it was slightly regressive but recent changes have altered that, none more so than the latest.

Today, income tax is our only progressive tax. It is a major tragedy that we have lost what was once common ground between our parties. We believed in the need for "progressivity" in the tax system. We may have argued about the scale of progressivity--we wanted more progressivity than the Conservatives--but progressivity itself was taken to be a good thing. Now, however, we no longer have that general accord, which is a great pity because it was an advantage when dealing with such matters.

Conservatives Members should not be fooled into believing in the sacred nature of Budget totals. They should not deny themselves the opportunity to go through the sensible Lobby this evening. The Treasury can easily rewrite the figures, just as the Chancellor can easily rewrite his speeches following a wet night in Dudley. It is the House that must decide supply, now every bit as much as it has in the past.

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6.12 pm

Sir Terence Higgins (Worthing): It is always a great pleasure to follow the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) as I have done so many times. I wish immediately to take up his point about this evening's Division although I shall deal with it in more detail later. We are not considering whether the Budget is sacrosanct or the sum of money involved--although even these days £1.5 billion can scarcely be regarded as peanuts--but whether the Government can get their business through. I must point out to the right hon. Gentleman that we do not know what the effect on markets would be tomorrow morning if the Opposition amendment were carried. I shall concentrate on three main points: value added tax on fuel; what I regard as the myth of the unified Budget; and the question of a single currency and whether we should have a referendum on it. All three points in different ways form part of what one might call the "Lamont legacy". I shall comment on each in turn, but I have a further issue to raise.

It is not usual to examine the nitty-gritty of the Budget resolutions but I seek clarification on one. I must declare an interest in that I am the chairman of a company pension fund. Although I do not quite follow the argument, there seems to be a discrepancy between the resolutions-- especially No. 35--and what appears on the Order Paper today. Is it merely a misprint? I should appreciate some clarification.

The Financial Secretary to the Treasury (Sir George Young): I commend my right hon. Friend on his observation. He is right to point out that since the resolution was published last week the text has been amended so that it more closely reflects the text of the clause to which it relates. In a nutshell, it will ensure that tax relief for pension contributions is correctly applied.

Sir Terence Higgins: I am grateful to my right hon. Friend. We shall no doubt try to work out later what that means and whether it is a good or bad thing. At any rate, it certainly seemed odd that the two texts did not tie up.

The Opposition's amendment to the resolution to amend the law relates to a procedure that I introduced 20 years ago and which has stood the test of time. I am, therefore, not keen for the Opposition to muck around with it. The right hon. Member for Ashton-under-Lyne will remember that one year we debated whether every possible item--from sanitary towels to antiques-- should be zero-rated or exempt. Amendment after amendment was debated but, clearly, we could not continue in that way every year, so I devised the current form of words.

The Opposition, for the first time in 20 years, are seeking to amend that form of words in one specific case, namely VAT on fuel, so that it can be debated. I resent my form of words being mucked around and I shall certainly support the Government this evening. In one sense, I have perhaps more reason to object to VAT on fuel than anyone else because, as the right hon. Member for Ashton-under-Lyne said, I and the late Iain Macleod had the task of devising VAT in Opposition and I steered it through the nitty- gritty of the Finance Bill.

We believed that two main factors should form the basis of VAT in this country, which would make it fairer than anything in Europe. First, we took the view that the most essential items of consumer expenditure of

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importance to those on low incomes should be zero-rated and, secondly, that there should be only a single positive rate of tax. By way of mitigation, I should point out that we abolished at the same time the selective employment tax, which was incredibly unpopular, and purchase tax. The disadvantage of the purchase tax was that there were huge gradations between what were luxury items, semi-luxury items and those which were not quite so luxurious. We decided to scrub that system and introduced zero-rating for the largest items of consumer expenditure of importance to low-income families. Other than that, it was left up to people to decide on what they spent their money. The single rate of tax was 10 per cent., which is lower than it is now.

If the Opposition were to succeed this evening, and if it were subsequently decided to leave the rate of VAT on fuel where it is, we would effectively have a multiple-rate system and I do not doubt that before long many more multiple rates would be introduced. That would be a retrograde step and, for that reason, I am not inclined to support the Opposition.

Let us consider the effect of VAT on fuel on pensioners and those on low incomes. We are in an extraordinary position. If we go ahead and raise VAT on fuel to 17.5 per cent. and continue with the compensation arrangements, the gross yield from the tax--something like £2.9 billion--will give a net yield of only £1.6 billion while the relief will amount to £1.3 billion. To put it in simpler terms, more than 44 per cent. of the yield of this tax, which is imposed on the country as a whole, will be used to offer relief to pensioners, the disabled and those on income support. One might reasonably claim that that, as it has now been developed, is rather a socialist measure, and I am puzzled as to why the Opposition are not supporting it.

However, what I said when the idea was first mooted two years ago is still true: if we were to compensate people 10 times over they still would not believe us. That is the political reality. But the economic reality is that compensation is now very great.

The right hon. Member for Copeland (Dr. Cunningham), who spoke for the Opposition, suggested alternative forms of tax that he would impose, but he made no attempt whatever to quantify them in relation to the revenue that would be lost if VAT on fuel were not increased to 17.5 per cent.

As the Prime Minister said the other day, since the tax was first mooted electricity and gas prices have fallen, so even allowing for VAT as it is now to be imposed, gas and electricity prices have still declined. Again, that effect is very different from that presented--even, alas, by some of my hon. Friends who have not studied the matter as closely as they might have done. I hope that the Government will succeed in rejecting the Opposition amendment, and anyone who has really studied the subject will hope so, too. My next point is about another part of the Lamont legacy--the so-called unified Budget. From the Committees that examined the idea before it was announced, it was clear that we should not adopt it without carefully examining the procedural implications. That warning should have been heeded. I have spelt out both in an article in The Times and last week in The House Magazine the fact that instead of having three annual opportunities for debate--we have always debated both

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sides of the equation, expenditure and taxation--the whole thing is concertinaed into the period between the State Opening and the Christmas recess.

Of course, there will be a Finance Bill later, which will have a Second Reading, but that is about it. Last year, for more than seven months the Chancellor of the Exchequer did not make a speech in the House. That represents a serious deterioration in parliamentary accountability. Moreover, it means that there is a very short period within which representations may be made to the Chancellor about what he has announced in the Budget. The fact that the Christmas recess intervenes tightens the timetable considerably. We must reconsider the whole business from a procedural point of view, and I am glad that, as I understand it, the present Chairman of the Treasury Select Committee proposes to do so.

One possible way of solving the problem might be to leave the unified Budget in its present form but to move it to the spring. That would require a fairly radical change in the Treasury's internal proceedings, but it would avoid the difficult concertinaed programme that we now have. The difficulty has been exacerbated by the Opposition, who insist on an economic debate on the Queen's Speech a week before the Budget, when the latest forecasts are available and the Chancellor could not say anything substantive.

Mr. Andrew F. Bennett (Denton and Reddish): Would it not be better to reform the parliamentary year completely, and get away from the nonsensical arrangements whereby we are away for such a long period from July until the end of October?

Sir Terence Higgins: Perhaps, but that would raise different issues, rather than how the various items of Government business should be spread throughout the year. Presumably there will eventually be some reaction to the report of the Jopling Committee, and I believe that there is a strong case for having, in addition to the estimates days, which fulfil a useful function, a certain number of specific days devoted to public expenditure.

The House has never really had serious debates on public expenditure, because the estimates were totally incomprehensible to almost everyone, and bore no relation to the real subject of the debate. That is not now the case. As a result of the work of the Treasury Select Committee and of the Treasury under my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont), people can now tell what the estimates are all about, and we could have an intelligent debate on the basis of the departmental reports. The Select Committees can now examine those and the Departments can scrutinise expenditure. Perhaps on some sort of biannual cycle--with four days, or eight half days, of debate--we could then discuss particular Departments' expenditure plans. The Select Committees have the responsibility of scrutinising policy, expenditure and administration, but, for reasons that I have explained, they have not done a very good job on expenditure. Now there is an opportunity for them to put that right.

If that happens at least we shall have gained something from the change to a unified Budget--although in my view the whole idea is a myth. The reality is that because of our Standing Orders we can only reduce expenditure and taxation; we cannot increase either. So there is no question of the House saying, "We shall have a unified

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Budget, and trade off higher spending on the health service for an increase in income tax." In that sense, there can be no real unified Budget.

As I have said elsewhere, that applies even to the Government. The Secretary of State for Health does not go to the Chancellor and say, "I want more for the health service, so you must put up income tax." She has to haggle with the Chancellor about how much will be spent on the health service, then he separately decides what should happen to taxation. So there is no genuine unified Budget either in the House or within the Government. None the less, in deference to the idea, accountability in the House has been seriously eroded.

The Opposition have failed in their task by not bringing that fact out, especially when the confusion arose last year involving the withdrawal of pairing and the general breakdown in communications. The Opposition should then have negotiated better arrangements for financial matters.

Finally, I shall say a word or two about the single currency--and here I pay tribute to my right hon. Friend the Member for Kingston upon Thames who was much involved in negotiating the opt-out clause, and so on. The single currency is a difficult issue, but I am deeply concerned about the proposals now being made by some of my right hon. and hon. Friends and others who want a referendum on it. It is a paradox that Members on both sides of the House who argue that the sovereignty of the House is being eroded by Brussels and by the European Union should seek to offset that process by resorting to the technique of referendums, which are alien to our system of representative democracy.

On that subject we always risk the accusation of being elitist, but it is not likely that one could get a sensible response from a referendum on a single currency. If one asked people outside what the difference was between a single currency and a common currency--it is a fundamental difference--I doubt whether one in 10, or even one in 50, would give you an intelligent answer.

Mr. Duncan Smith: Or people on either side of the House.

Sir Terence Higgins: That may be true. Indeed--and I am sorry to say this in his absence--the shadow Chancellor, the hon. Member for Dunfermline, East (Mr. Brown), mixes up not only a single currency and a common currency, but exempt and zero-rated VAT status. But that is by the way.

My main argument is that all appeals for a referendum on a single currency are really appeals on the broader European issue. The idea that a referendum should be held at all is wrong, and the idea that we should have one on a single currency--unless we added a few supplementary questions, such as what do people think about the convergence issue and what size deficit they favour--is bizarre. It is also fundamentally incompatible with our system of representative parliamentary democracy.

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I make one exception on referendums, and that relates to Northern Ireland. When it is a question of which country people are to belong to--

Mrs. Ewing: Why not the Scots?

Sir Terence Higgins: I would describe what might happen there more in terms of a border plebiscite. I believe that that is distinguishable from what might reasonably be called a referendum. I very much hope that we shall not go down that road.

Despite what was said by the right hon. Member for Copeland, I believe that my right hon. and learned Friend the Chancellor's Budget judgment generally is about right. Inflation is at a remarkably low level and unemployment is coming down month by month. The rate of economic growth may be a little too fast at this stage, but until we get closer to the capacity ceiling, that growth must be to everyone's benefit. The balance of payments is remarkably resilient, investment is going up and consumer expenditure is not likely to get out of control.

The only real problem is the size of the deficit. I am a little wary of those who say that we shall have tax increases now, but that we shall have tax reductions later. Such reductions seem likely to be envisaged at a stage in the economic cycle when they will be least appropriate. The deficit being forecast two or three years out is still too high. That being so, not to go along with this Chancellor's and the previous Chancellor's proposals on VAT on fuel at this stage would be the height of folly. On that basis, I shall support the Government this evening. I congratulate my right hon. and learned Friend the Chancellor on what is, in all the circumstances, an entirely satisfactory Budget.

6.30 pm

Mr. Matthew Taylor (Truro): Budget debates are sometimes rather something and nothing affairs. They are something in that they address one of the most important issues in the running of the state--the building of a strong and fair economy, and the balancing of state and personal finances to achieve that end. They are nothing in that the inbuilt majority of the party of government normally guarantees that, despite all the debate, the essentials of the Chancellor's programme, right or wrong, are seen through. The Opposition may oppose, but they cannot dispose.

I hope that tonight, things may prove rather different. Tonight, there appears to be the real prospect that the Chancellor will not have it all his own way. Tonight, if all those who know in their hearts that the proposed further increase in VAT on fuel is not only a broken tax promise, but wrong-headed and unjust vote with their consciences and their constituents, the Chancellor will be defeated. Such a defeat would undoubtedly be welcomed by the country. There is overwhelming opposition among all our constituents to this tax. The Government should already have started to listen to what the people are saying. If it takes some Conservative Back Benchers of courage and integrity to make the Government listen by joining the Opposition in voting against VAT tonight, in the long run, those Conservative Members will do the country and their party a service.

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Why is the tax so unpopular? First, it is unpopular because the British people, rightly, feel that they have been deceived by the Government. As we heard earlier, Conservative Ministers and the Prime Minister himself made the specific pledge at the general election that

"we have no need and no plans to extend the scope of VAT." Rightly, people cannot believe that those who were running the economy before and during the election were so ignorant of the true state of public finances that the need for big tax rises was not revealed to them until shortly after the election. Those tax rises were forced through in the March 1993 Budget.

Secondly, the tax is unpopular because it falls so harshly on the old and the cold. The tax asks those who struggle to afford to keep warm in winter, rather than those who can afford it and who have been the major beneficiaries of previous tax cuts, to bail out the Government financially to allow tax cuts next year. The Chancellor argued last week that adequate compensation measures would be introduced to help alleviate the burden on the elderly. This week, a report by Age Concern shows that the compensation is simply not enough. Many single pensioners will expect to receive an extra 50p a week to help offset VAT on fuel. In fact, they will get only an extra 30p, the other 20p being incorporated in the annual uprating. On average, single pensioners and pensioner couples who are mainly dependent on state pensions will be 56p a week worse off after the VAT increase.

A card that came in my postbag today raises a further point and sums up the horror that elderly people feel at the prospect of a 9.5 per cent. hike in VAT on domestic fuel. The writer said:

"I do not have a full stamp record so do not receive a full pension. Last year I only got a percentage of the fuel increase. Is the same to be done to the new £52 a year? SHAME."

Meanwhile, according to the social policy research unit at York university, lone parents with young children receive only 25 per cent. compensation and low-paid families who have children, but who are not on benefit, will get no extra help at all.

Furthermore, the compensation takes no account of regional variations in heating costs. In my area of the south-west, people pay some of the highest fuel bills in the country, largely because of the introduction under privatisation--about which the President of the Board of Trade boasted so much--of extra distribution costs for those living in remote areas far from generators. That comes on top of the highest water bills in the country and rising unemployment in an area where the benefits of such recovery as there is are not showing through to the businesses to which I talk. Indeed, unemployment has gone up at a time when it is falling elsewhere. As there are especially large numbers of elderly people living in the south-west, I am amazed that, as yet, no south-west Conservative Members have said that they will have the courage and decency to back their constituents on the issue. It is high time that Conservative Members in the south-west voted for their constituents rather than for the maintenance of their Government.

Thirdly, the tax is unpopular because everyone knows that it is being hiked up now so that the Chancellor can introduce tax cuts later. Taking money out of people's pockets to give some of it back to them as election bribes and raising VAT now to cut income tax next year is a pretty cheap trick by the Government, but a rather

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expensive trick for those on the receiving end. It is especially unfair to those on low incomes, some of whom may not benefit at all from direct tax cuts.

What are the Government's excuses for the tax? First, they say that the finance is necessary. Given that the Chancellor talks of tax cuts as early as next year, it is hard to be entirely convinced by that argument. Even if we accept the Chancellor's judgment that he needs the finances now, there is no need for this especially unfair tax. The Chancellor believes that the money is vital to the nation's economy, but there are various other ways in which the money could have been raised.

In the Budget, the Chancellor introduced new tax cuts totalling £1 billion, exactly the amount needed to hold VAT on fuel at 8 per cent., allowing for the compensation measures. The Government could have avoided the rise because they had the money, but they chose not to. I shall give a few other examples of ways in which the Chancellor could have met his target. He could have introduced the tax reforms outlined in the Liberal Democrats' alternative Budget, including extending employers' national insurance contributions to benefits in kind, and reforming inheritance tax and performance-related pay. That would raise £1 billion.

Sir Terence Higgins: The hon. Gentleman is saying that instead of raising VAT, the Chancellor should have abandoned the other tax changes he made. Those changes include, of course, hiking the threshold for tax on pensioners. Is the hon. Gentleman saying that he is not in favour of that?

Mr. Taylor: I am outlining a series of different ways in which the Chancellor could have met his target. One would have been to abandon the tax cuts made which happen to exactly equal the cost of abandoning VAT on fuel. Another way is the series of tax reforms that I have just mentioned and I shall outline some others. We outlined what we would do in our alternative Budget, which included rather more substantive changes to employers' national insurance contributions.

I am addressing the Chancellor's claim that he had no alternative. That simply is not true. Indeed, it is pretty obviously not true because we all know that the Chancellor is choosing between a large range of alternatives and using his judgment about which is best. He cannot claim anything other than that it is his judgment. Although he says otherwise, he would not privately argue that very strongly. The Chancellor could have reduced the 1995-96 contingency reserve by £1 billion, leaving a substantial £2 billion which would have risen to £5 billion by 1996-97 on his figures.

Secondly, the Government seek to justify the tax by arguing that it is green; a tax to save the planet. Never was there such a wolf in such inadequate sheep's clothing. In fact, the tax falls on all energy use equally, polluting or not. It is a tax on electricity from clean wind power as well as from polluting coal, on electricity from clean hydro-electric as well as from polluting gas. The whole point about shifting tax from the "polluter pays" principle is to target the polluter not the good guy. This tax notably fails to do so.

Mrs. Ewing: Does the hon. Gentleman therefore regard it as a double insult that, in many areas of Scotland, where the bulk of our power is produced by hydro-electric

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