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increase was at the Governor's request. So there may have been a slight difference in perception of exactly who was making the decision.

The right hon. Member for Shropshire, North made an interesting point about taxation and the distribution and balance of taxation, which had not been made before in the debate. The Government and the Conservative party ought to address it. When Conservative Members set out a policy of cutting income tax in 1979, many naive souls thought that they meant just that; nothing else. Some people thought that if they voted Conservative, they would pay less income tax. Hooray! Hallelujah! Reassuring speeches continued throughout the past 15 years saying that that would be achieved without any cuts in education or health. The Conservatives said that there would be painful spending cuts in general, but when it came to the specifics, Ministers were always ready at the Dispatch Box to say that social security spending was being protected, health spending was being protected and education spending was being protected.

That was, of course, a fantasy world. The standard rate of income tax was reduced, but that reduction was more than compensated for in other taxes elsewhere, which fell more unevenly and more unfairly. The intervention of the hon. Member for Motherwell, North (Dr. Reid) was more about the burden that has fallen on the average family when it calculates its total tax payment than about the deductions at source on its income.

Mr. Nigel Evans: Is the hon. Gentleman trying to say that the Government tried to deceive the electorate by saying that income tax would come down, but that any shortfall would not have to be made up from expenditure taxes? That is not true. The hon. Gentleman must remember that we fought those general elections in that period on a manifesto which said that we would switch taxes away from income tax to expenditure taxes. That is exactly what we have done.

Mr. Bruce: I seem to recall that Lord Howe, as he now is, said that he had no intention, when challenged, of doubling the rate of VAT. Of course, he was right, since it has risen from 8 per cent. to 17.5 per cent. That statement was specific. Indeed, when pressed at the last election, the Prime Minister said, in a formula that we all now recognise, that the Conservatives had no plans to increase taxes. That phrase means, of course, that they will do whatever they please as and when the time arises. However, the public have learn to understand that formula.

When the Chancellor made his second Budget speech, I made the point that he seemed absolutely determined to ensure that he got the revenue for which he settled from the most painful and irritating taxes on consumers, which they would really feel. I described that as "the politics of pique". I believe that it is just that. I find it extraordinary that the Chancellor could have found the money in other ways, causing less irritation and, indeed, less inflationary pressure, to which I shall return, yet chose not to. In fact, in his Budget, he gave away just over £1 billion in tax reductions, which he clearly decided were more urgent and more important than responding to the public demand not to extend VAT on fuel.

Certainly, quite a number of those tax changes were not urgent, or required or necessary to any strategy, public or private, which had been declared or communicated to the electorate. If the Chancellor had been in touch at all with

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public opinion, he would have recognised that he had room to manoeuvre, and could have made a virtue of not going ahead with the second tranche and saved the Government from the embarrassment of being defeated in the House.

I agree that the Government's defeat in the House of Commons has had a beneficial effect on the public's belief that the House, perhaps, for a change, has some real control over the Executive. However, the Chancellor has done nothing to improve the credibility of the Government, of which he is a member. Indeed, he could have retrieved a little of that credibility if he had been only a little more sensitive and a little more in touch.

The pique has gone into taxes on drink and petrol. The Chancellor tried to say that it was all the Opposition's fault. From the Liberal Democrats' point of view, all I can say is that we clearly identified alternatives which would have provided the money that he now says is necessary and which would not have caused the irritation and inflationary pressure.

When I questioned the Chancellor in his opening speech on that inflationary pressure, he said--perhaps it was an understandable answer--that the new tax changes were slightly less inflationary than the extension of VAT on fuel. My understanding is that VAT on fuel would have put 0.4 per cent. on the retail prices index, and the subsequent changes announced will put 0.3 per cent. on the RPI. However, when we are working with inflation levels of 2 per cent. or thereabouts, those increases have significant impact, which one would have thought that the Chancellor would wish to take on board. Of course, 0.1 per cent. on the retail prices index, as, indeed, the Chief Secretary to the Treasury was telling the Treasury and Civil Service Select Committee yesterday, has an immediate effect on the uprating of social security benefits. From reading the Chancellor's statement, I understand that social security charges rise by £160 million for every 0.1 per cent. on the retail prices index. In those circumstances, I put it to the Chancellor that, if he had not sought to get that money from putting up taxes at all, he would saved himself more than £600 million in social security uprating requirements. It seems strange that he did not take that opportunity.

I want to address the particular point of the extra duty on drink. A serious industrial issue arises, which the Chancellor has acknowledged and accepted. Indeed, I welcomed his response to the hon. Member for Moray (Mrs. Ewing), which implied that he was prepared to look at the issue again to see whether there could be an adjustment in the distribution of drink taxes that would be beneficial to the whisky industry and, incidentally, I suppose, to gin makers as well. The Chancellor said on 29 November that his reason for not putting duty on drink was that he recognised the industrial issue and the concerns over smuggling. He said:

"No Chancellor can remain unmoved in the face of this".--[ Official Report , 29 November 1994; Vol. 250, c. 1096.]

Having been moved then, a week later he had moved right back again. He has put pressure on the industry in ways that most of us who have a direct interest in the health of the Scotch whisky industry cannot understand. We have distilleries in our constituencies and therefore a real understanding of the industry's difficulty in the face of tax changes, which has been acknowledged in the past two Budgets.

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Wine is relatively less taxed than whisky. With the greatest respect to a few vineyards in the south of England, wine is not one of the United Kingdom's great beverages that we produce in substantial quantities and not one of our great industries. On the other hand, Scotch whisky has a global market in which we are pre-eminent. It is clearly acknowledged by the industry that its health in the home market is a major determinant of its continuing ability to sustain a healthy export market. If the Chancellor were determined to take his money from alcohol, he should have gone for the wine market rather than for the whisky industry.

I find it puzzling that the Chancellor seems to be more concerned about the sensitivities of the wine and champagne industries, which are not British-- we do not make those products in significant quantities--and rather less concerned about a major home-grown industry. I hope that he will address that concern in a radical fashion, which will give the industry some confidence and optimism in its future regime.

I am not alone in that view. The Institute for Fiscal Studies, referring to that point, stated:

"If the relevant measure of `sin' is the alcoholic content of the drink, then there may be an argument for narrowing the `tax per litre of alcohol' gap between spirits, and wines and beers. This would have the added benefit of lessening the current discrimination against a largely domestically produced good."

I hope that the Chancellor will consider that recommendation seriously, because it would be extremely welcome. I take his response to the hon. Member for Moray as a sign that he might be prepared to do that.

The increase in tobacco duty seems to be widely recognised as an area in respect of which there is a clear and unarguable health problem and where tax is a reasonable way of dealing with that problem. However, in the Liberal Democrat alternative Budget, we would have used the money specifically for the national health service.

We are particularly cross about the petrol tax. The Government do not seem to have a strategy for transport. The lead story in The Guardian today refers to the completely shambolic state of railway privatisation and the lack of a transport strategy. People in rural areas know that we do not have the potential for significant public transport development. As a consequence, the Government have simply increased the cost of using a car, particularly in rural areas, without a corresponding reduction elsewhere.

The Liberal Democrats believe that the Government should have cut vehicle excise duty, at least on small fuel-efficient cars. That would have reduced the tax on car ownership. As a result of that, one could have justified increasing tax on petrol so that that was a tax on use rather than on ownership. Increasing petrol tax while increasing vehicle excise duty imposes a burden with no compensation for people living in rural areas.

The Chancellor could have found the money in other ways. Indeed, I sent him a letter in which I enclosed my suggestions for raising that money. At least £600 million worth of tax cuts in the Chancellor's original Budget were unnecessary. The savings in respect of social security uprating by not including it in taxes would have been about £600 million. There were other areas where waste

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could have been eliminated in Departments, and that would have provided more revenue than the Chancellor has raised.

Perhaps the Chief Secretary to the Treasury would care to answer a question to which I have not received a satisfactory answer. He suggested to me yesterday that there was no way of cutting public expenditure in the current year once the Budget is set. I do not accept that it is not possible on procurement strategies, about which the Chief Secretary knows something, to say that, as the inflation outturn is better than expected, one is looking for additional savings to come back. I do not believe that that could not or should not happen.

I also want to know why the Government have done nothing about the more than £500 million that they are spending on consultants when the civil service analysis suggests that they have produced only £10 million of material benefit. That is clearly an area in respect of which there is identifiable waste inside and outside the Government. For the benefit of the House and the Chancellor, I say that Liberal Democrats accept the need for a disciplined approach to budgeting. The Chancellor wanted to know what level of borrowing is acceptable and whether it was too high or too low. We have been working on the convergence criteria as a reasonable base to work towards. Three per cent. of gross domestic product is about £22 billion.

When we approached our budgetary exercise this year, we were quite clear that as the public sector borrowing requirement was well above that level, we could not justify an increase in borrowing and our Budget was calculated within that framework. I hope that the Government will acknowledge that we have accepted that discipline and that we have included it in our calculations. As the finances improve, we shall be able to select different priorities and people will be able to debate the choices. However, in the present climate, the Government have left us with very little room for manoeuvre, although I believe that we have found some quite creative ways of manoeuvring.

In his response to me the other day, the Chancellor said that our suggestion for taxing benefits in kind that are paid to employers on employers' national insurance charges was administratively impossible. I have checked that and, frankly, the Chancellor was talking absolute nonsense. That is a perfectly routine matter. The Chancellor knows perfectly well that, as the threshold has never been increased in living memory above £8,500 a year, and as form P11D is required for everyone who earns more than £8,500 a year, it is simply a matter of ensuring that benefits in kind are declared and that the tax is calculated. It is nonsense to suggest that that cannot be done.

The Government have rushed into a situation where they simply did not need to create such pain. They have caused the maximum amount of pain for the minimum amount of gain. That is a rather churlish exercise, which I believe was motivated by pique. It ignores many of the arguments that the Government had previously put forward.

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That point has been noted outside this place. Roger Bootle of the Hong Kong and Shanghai Banking Corporation-- which includes the Midland bank--has written:

"The Chancellor seems to have missed a trick. He surely could have raised the necessary money without increasing excise duties at all . . . thereby saving a full 0.4 per cent. on the RPI. This would have helped the battle against inflation directly and would have minimised the danger of an increase in wage inflation. In addition, it would have helped to reduce public expenditure, not least on benefits which are tied to the RPI. It seems particularly odd to target alcoholic drinks which the Chancellor ostentatiously left alone in his Budget"--

except for the cut in champagne. The City, like me, believes that the Chancellor has created irritation for no purpose.

Many of us are left with the belief that the Government have acted deliberately to try to get the message across to people that they had to increase taxes and that the Opposition forced them to raise those unpopular taxes. The truth is that the Government imposed those taxes on themselves. They have created the situation for themselves. They had enough disciplined means operating within their own constraints for raising such taxes. The Government are trying to get their hands on revenue so that they can give it back to people later and hope that they will be persuaded that that is great generosity resulting from the success of a Conservative Government.

Given that the Chief Secretary has already made it clear that the tax increases of the past two years were necessary and justified because of the potential borrowing requirement of £50 billion, will he tell us what level borrowing would have to be reduced to, to justify tax cuts, or at least will he tell us what the criteria would be to determine whether tax cuts were justified?

The House and the country are entitled to expect that the Government's argument that required tax increases should be the same argument that justifies tax cuts. If the Government have not been able to create the economic performance to justify that, they should not introduce cuts imprudently for purely political reasons when the economy cannot stand such cuts. If the Government are prepared to lecture Opposition parties about discipline, I hope that they will accept the constraints that their own discipline imposes on them. 6.18 pm

Mr. Roger Sims (Chislehurst): I preface my remarks by declaring an interest as parliamentary adviser to the Scotch Whisky Association. I shall elaborate on some of the points made by the hon. Member for Gordon (Mr. Bruce) in connection with the industry.

I have never been a great enthusiast for VAT on fuel, but given the need for additional revenue I understand why my right hon. Friend the Member for Kingston upon Thames (Mr. Lamont) felt justified in introducing it. There is a perfectly valid argument to be made for it, not least that VAT on fuel applies in most European Union countries. Of course, in the case of most goods and services which attract VAT, the consumer can choose whether to purchase them. Fuel is a necessity.

That is not an argument against imposing VAT on fuel, but it is self- evident that it would be necessary to protect from its impact those on low incomes, particularly pensioners and others on social security benefits. I was one of several hon. Members who voiced concern on that

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score when the VAT proposals were announced in April 1993. I am bound to say that I was astonished that the need for a package of compensation was not recognised by Ministers and announced at the time of the April 1993 Budget, or at least soon after it. Instead, it was not until November last year that detailed proposals were announced. It was not surprising, therefore, that during those six or seven months a campaign against the tax built up a substantial head of steam. The campaign was never effectively countered, with the outcome that we saw a week ago--a case, I fear, of a defendable policy poorly presented.

Despite the fact that the first stage of VAT and the first stage of the compensation package were already operative, the House decided last week not to implement the second stage. That seemed to be an illogical, if not perverse, decision. However, the decision was clear, and my right hon. and learned Friend the Chancellor was right to accept it--indeed, he could not do otherwise. He was then forced to find alternative sources of revenue, and he spelled out the various possibilities that were open to him last Thursday and, to some extent, again today, and gave us his decisions.

The increase in respect of petrol is clearly unwelcome, but it is a well established source of revenue and should procure what the Chancellor wants. The House will not be surprised to know that I welcome the increase in tobacco duty. It is also a well established source of revenue and again should produce what my right hon. and learned Friend wants. I hope, too, that it will play a part in persuading smokers to reduce their consumption and in dissuading those who might be tempted to take up the habit from doing so. I am particularly concerned about the incidence of smoking among young girls.

If people choose to smoke, they should be free to do so, provided that they do not cause offence to others. However, given what we know of the effects of smoking, it is surely the duty of Her Majesty's Government to take every possible step to discourage the habit. It is clearly established that price is a factor, especially among the young.

Mr. Ottaway: My hon. Friend says that smoking should not be encouraged and refers to its detrimental effect. He says that the Government should intervene where relevant. I hope that my hon. Friend will not go as far as consultants at the Mayday university hospital in Croydon, who refuse to treat patients who habitually smoke. After all, they are civil servants whose duty is to serve the community and not to dictate the terms on which they are prepared to do so.

Mr. Sims: My hon. Friend the Member for Croydon, South (Mr. Ottaway) tempts me on that issue, not least because the Health Select Committee, of which I am a member, is currently considering priority setting and where funds should be most appropriately used. Much as I would like to launch into a dissertation on that interesting matter, you would rightly rule me out of order, Madam Deputy Speaker, but I certainly would not endorse the action that my hon. Friend has described.

Mrs. Lait: As my hon. Friend knows, I share many of his views about a policy of high taxation acting as an effective deterrent against smoking. Will my hon. Friend share his thoughts on the availability of cheap cigarettes,

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particularly to the young market, through illegal importation? Does my hon. Friend agree that that undermines our policy of high taxation?

Mr. Sims: Naturally I do, and I am very concerned about that matter. It must be tackled. We cannot let it continue. There are various other ways in which Government policy could reduce the incidence of smoking. For instance, I would like a more robust approach to tobacco advertising. Again, however, if I launched into that subject, I might try your patience, Madam Deputy Speaker. The increased duty on alcohol is far from welcome in any quarter. Indeed, the reasons for that were spelt out by my right hon. and learned Friend himself in his original Budget statement. There is no doubt that the increase will exacerbate the problem of cross-channel traffic in alcohol, especially beer, and it will have an adverse effect on brewers and on off-licences. For the reasons that I have given, I am especially concerned at the effect of the increase on the fragile home market for whisky. That was recognised by the Chancellor in the past, by freezing the duty at existing levels in the previous two Budgets, but his present proposal to increase the cash differential between spirits on the one hand and beers and wines on the other can only harm the whisky industry.

The proposal will also affect European markets at a time when minimum rates in the Union are being discussed. We want to persuade our European partners to reduce discrimination against spirits. As the hon. Member for Gordon said, Britain is a large producer of spirits, whereas our European partners are wine producers. Increasing rates on spirits must surely weaken our Government's negotiating position.

Similarly, in overseas markets the Scotch whisky industry is constantly trying to overcome the high barriers of domestic duties which are erected against imported spirits and urging that they be reduced. How much more difficult its case will be made when our own Government increase the domestic level of duty on spirits. Will the measure produce the increased revenue for which my right hon. and learned Friend the Chancellor is looking? The reason for freezing the level a couple of years ago was that the duty had reached the point of diminishing returns. After the 1992 uprating, the total Treasury take on whisky declined by £80 million. Last year, the duty remained unaltered, and that produced an extra £45 million, although it is still below the 1991 level.

The Treasury must be aware that whisky is a particularly price-sensitive product. Will the increase in duty produce any revenue gain at all? Certainly, I doubt whether it will do so to the extent that my right hon. and learned Friend hopes. Perhaps in winding up the debate my right hon. Friend the Chief Secretary will tell us what the Treasury forecasts as its yield from the increased duty on whisky and whether those expectations are well founded. The last time the duty went up, receipts went down. Why should that not happen again?

At 10 o'clock tonight I shall support my right hon. and learned Friend in the Lobby by voting to increase the tax on petrol and tobacco for the reasons that I have given. However, I fear that he is wrong about alcohol. First, his

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proposals will damage the whisky industry; secondly, they will weaken our negotiating stance in Europe; thirdly, they are unlikely to produce the revenue that he requires.

I have been critical of several of my hon. Friends who were sent to Parliament--as I was--to support our party, our Prime Minister and our Government and who chose to withhold their support for one or two specific matters despite being well aware of the possible consequences of their actions, on which I need not elaborate. I have no intention of being so self-indulgent: I refuse to put my Government at risk simply because I have doubts about a specific issue.

I shall follow my right hon. and learned Friend into the Lobby when we come to vote on the increase in tax on alcohol, but I shall do so with a heavy heart as I believe that it is a step which will prove to be ill considered both in principle and in practice.

6.31 pm

Mr. D. N. Campbell-Savours (Workington): My remarks will be brief. I hoped to intervene during the Chancellor's speech, but he would not give way.

I think that Ministers of the Crown are completely out of touch in their handling of the increase in tax on tobacco and I think that they have made a major error of judgment. The right hon. Member for Thanet, South (Mr. Aitken) has some experience in his constituency of the matters to which I shall refer.

It is assumed that the increase in tobacco tax will reduce consumption. However, I argue that it will increase, for the reason given by the hon. Member for Hastings and Rye (Mrs. Lait). She is absolutely correct about what is happening in the marketplace. The reality is that one can buy black market cigarettes in any town in the United Kingdom. A huge secondary market has developed in cigarettes costing between £1.50 and £1.80 per packet or £15 per carton.

In Workington one can buy as many black market cigarettes as one wants. They are freely available, and the situation is the same all over the country because of the current tax regime. I do not smoke, so I shall not purchase black market cigarettes; indeed, even if I did smoke, I would not purchase them because I would be cheating the Revenue. Nevertheless, black market cigarettes are available anywhere in the United Kingdom because of the difference between the retail price of cigarettes and the price charged by black marketeers who sell them at substantially reduced prices.

It is wrong to assume that all cigarettes sold on the black market are imported cigarettes. Most of the cigarettes that are sold on the black market in the United Kingdom are made in Britain. All the major brands are available. One can purchase black market cigarettes from pubs, shops and social clubs in all parts of the country. As a consequence of that thriving black market, the price of cigarettes will fall. The people who want to smoke--including young people--will purchase black market cigarettes. The Budget will not raise revenue in the way that the hon. Member for Chislehurst (Mr. Sims) imagines; it will reduce it. More cigarettes will be made available to young people at a lower price. Clearly, the Government have not taken that consequence into account.

Smokers--the people we are trying to target for health reasons--recognising that they will have to pay more for cigarettes each week, have a reason for finding and

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purchasing black market cigarettes. If the measure is carried, the Government can do nothing to prevent that development, except intervene in the area of smuggling. People are entitled to bring large numbers of cigarettes into the country, but many re-sell them within the United Kingdom.

The Government should start by looking at any United Kingdom port--such as Edinburgh, Newcastle and Hull--which trades with European ports. They are all routes by which large numbers of cigarettes are imported into the United Kingdom. People travel to Europe, fill their vans with cigarettes and return to the United Kingdom to sell them on the black market. Only last week in Wales some people were prosecuted for importing large numbers of cigarettes on a very organised basis--they were clearly running a business.

Many shopkeepers in the United Kingdom sell cigarettes, tax paid in full, across the counter. They, too, will suffer because their revenue will fall as a result of the Government's measure. We do not require extra technology to deal with the problem. The Government are mad if they are prepared to reduce the number of customs officers when hundreds of thousands of people are coming through British customs carrying cigarettes far in excess of their own requirements. In effect, the Government are inviting black marketeers to enter the market.

We should consider what has happened in other countries where high prices have created product shortages. In the Scandinavian countries, high prices for spirits led to the development of a black market in home-produced "hooch". In the end, those countries were required to liberalise the market and reduce duties and internal taxation so that the legitimate internal market in spirits and beer could take off. The Government's Budget measure will have unintended consequences, and that is very wrong.

The answer is harmonisation, but, due to the principle of subsidiarity, there are varying views as to whether it can be applied in these conditions. There has to be harmonisation of the tax regime for cigarettes throughout the European Community. That will mean a substantial increase in the rates of taxation in other European countries, but Ministers have a duty to press for that.

In the meantime, the Government must act to protect local retailers, who will lose business. They must also act to protect young people, who may be drawn into smoking as a result of the reduction in cigarette prices that I believe will occur throughout the United Kingdom.

6.39 pm

Mr. Richard Ottaway (Croydon, South): I agree with much of what the hon. Member for Workington (Mr. Campbell-Savours) said about health, although not with his political arguments. I share his concerns about the dangers of young people being lured into smoking. That is a non-political view that hon. Members on both sides of the House share.

The pre-Budget submission that the Confederation of British Industry made to the Government was entitled, "Recovery in progress: do not disturb." That headline was appropriate before the Budget, was reflected by it and is still a good summary of the current state of affairs, despite the political upheavals of the past few weeks. With unemployment of 11 per cent. in the south-east compared with 9 per cent. in the Rhondda valley--I thought that it would be a long time before a Conservative

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Member of Parliament for the south-east would be saying something like that, but there it is--in constituencies such as mine we are only too keenly aware of the need for a sustained recovery, which will lead to a rise in living standards.

While we want to encourage that sustained recovery and ensure that it is maintained, it is essential that we do not allow it to turn into a boom that is followed, as night follows day, by a bust. There is a danger of that happening.

The economy is showing the most superb set of performance figures. Underlying inflation is 2 per cent., which is its lowest level for a generation, especially over a sustained period. We all know that inflation is the enemy of investors--both commercial investors and the elderly person with savings trying to live off fixed interest. Inflation is the danger to them all. It is a credit to the Government that they have managed to get inflation down to their target. They set a range of between 1 and 4 per cent. and expressed a preference for getting it in the lower half of that bracket. The figure is wobbling on the edge of the bracket, but let us hope that the Government can keep it on target.

The OECD confirmed the second good set of performance figures--this year, the United Kingdom economy is predicted to be the fastest-growing major economy in the European Union. That should come as no surprise when one studies our export performance. One of the most exciting aspects of this recovery is that it is export-led. How many times have we had booms when all the surplus money generated simply went in house price increases and was wasted unproductively? This time, exports are leading the way and house prices are fundamentally stable. Our exports to the European Union are up 17 per cent. on a year ago, while the economies of the other member countries grew by only 5 per cent. It comes as no surprise, therefore, when commentators say that we are closing the trade gap. It is also fair to say that inward investment is transforming our industrial practices, as ideas and concepts are imported from overseas to make ours a more efficient and productive economy. Perhaps privatisation is a controversial subject, but it has been a fundamental success and is very much a part of our economic revival. As the Opposition are constantly saying, "That's not true," we must consider how we achieved it. Throughout the 1980s, productivity grew faster here than in any other European Union country. Since 1979, investment in plant and machinery has risen by 54 per cent. and business investment by 35 per cent.--

Dr. Reid: Growth was slower.

Mr. Ottaway: If the hon. Gentleman is patient, I will get to that issue in a moment.

Against that background, one is tempted to argue, "If it ain't broke, don't fix it." The Budget largely did that and it reflected the views of the CBI, with one notable exception. The measures contained in last year's Budget show signs of fulfilment. The aim this year--rightly--is to continue the reductions in public expenditure that have partially been achieved by the tight control of inflation, while ensuring that public expenditure continues to decrease as a percentage of gross domestic product. This afternoon, the Chancellor put that succinctly when he talked of "filling the gap."

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The net effect is a welcome and continuing decline in the public sector borrowing requirement, which is projected to go into surplus by the end of the decade. Given the way in which forecasts have constantly been beaten, and the growth in the economy, I predict that in his November 1996 Budget the Chancellor will be able to forecast a nil PSBR for 1997-98. Then, the challenge will be to start to reduce the national debt.

After all, the relatively small size of that debt has given us a competitive advantage over our rival economies, both in Europe and the world. As we have to pay a relatively small amount of interest each year, we have been placed in an enviable position when compared with other economies. That, coupled with the strong emphasis on private pensions that was brought about by the reforms of the past decade, means that we will be paying out much less in pensions to an aging population than other countries. Those two factors give us a highly competitive edge and bode well for the future.

I do not need to remind the House why we are here. Obviously, most people would demur when asked whether they supported the introduction of new taxes. If we carried out a survey on whether to introduce income tax, I am sure that the country would be emphatically against it. No one likes new taxes, but, as Oscar Wilde reminded us, the only two things in life that are certain are death and taxes.

We debated value added tax on fuel in two Budgets and on other occasions. My only concern was whether the people least able to pay would be unable to do so. Once the package of compensation for the unemployed, the old and those on low incomes was established, however, I had no personal quarrel with the increase. As the people with the largest houses would be the hardest hit, the proposal struck me as one that might have come from the Labour, rather than the Conservative, party.

What puzzled me about last Tuesday was the fact that the introduction of the second tranche was ultimately brought down by Members who voted for it on other occasions and I regret the fact that those Conservative Members involved seem to have an alternative agenda that has little to do with protecting the elderly and more to do with disrupting the Government. As the Conservative party braces itself for what I suspect will be a massive by-election defeat in Dudley, I hope that those Members will realise what they are doing to one of the oldest political parties in the world.

Mr. Campbell-Savours: Why does not the hon. Gentleman look at his hon. Friend the Member for Northampton, North (Mr. Marlow)?

Madam Deputy Speaker (Dame Janet Fookes): Order. I remind hon. Members that the hon. Member for Croydon, South (Mr. Ottaway) was correctly looking at me, the person to whom he was addressing his remarks.

Mr. Ottaway: I am aware of the presence of other hon. Members in the Chamber, Madam Deputy Speaker.

I have no quarrel with the Chancellor's decision to make up the shortfall in funding by introducing excise duties, on which we will vote tonight. We have a growing problem with cross-border smuggling and I welcome his anti- smuggling proposals. He was right not to increase the duty on wines and spirits in his original

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Budget. His forced decision to raise that duty will do little to help the drinks trade, especially in the south-east of England. During his short statement last week, my right hon. and learned Friend the Chancellor said that the introduction of excise duty on smokers would be a healthy deterrent. In my intervention on my hon. Friend the Member for Chislehurst (Mr. Sims), I asked whether it was appropriate for the medical profession to decide whom to treat. A serious problem at the Mayday university hospital in Croydon is a matter of some concern to me. If the duty is to be a deterrent, what do we say to drug addicts or alcoholics? We must remind ourselves that those who refuse to treat people who habitually smoke are there to serve the community, and not to dictate the terms on which they do it. I shall return to the motion before the House.

The decision of the Chancellor of the Exchequer to raise interest rates by 0.5 per cent. was particularly interesting. He was quite right to do so to maintain confidence in the global markets. Statements from the Chancellor and the Bank of England suggested that the rise was likely to happen anyway. It did, however, have a noticeable steadying effect on the markets, which have remained particularly stable in the aftermath of the decision of the House on Tuesday.

I found the Opposition's statement that the increase in interest rates was a major blow to the economy most concerning. One can only assume that if they had been in a similar position, they would not have introduced that interest rate increase. How they can reach that conclusion is beyond me.

Mr. Campbell-Savours: We would not have been in that position.

Mr. Ottaway: Is the hon. Gentleman saying that he would not have introduced an interest rate increase?

Madam Deputy Speaker: Order. There is a good reason why I deplore seated interventions.

Mr. Ottaway: I am happy to give way to the hon. Gentleman if he wants to say what he would have done. As I thought, he has nothing to say.

It is perfectly obvious to a moderately well-informed observer such as myself that inflation pressures are stoking themselves up in the economy. With output growing by 5.9 per cent., the dangers of those pressures reappearing are always close to the surface. It is possible that the Labour party believes that inflation is licked and that it does not have to bother about it. That would be to defy history where, in any economic cycle, inflation will rise and fall.

Confidence is growing, but employers are also complaining about skill shortages. The warning signs are clear for all to see. In my constituency, I recently received a report that the price of paper had risen by more than20 per cent. in the past four months, and there was strong evidence that paper suppliers were acting in unison to force up the price.

Mr. Andrew Smith (Oxford, East) indicated assent .

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Mr. Ottaway: The Opposition spokesman, who frequently speaks a lot of sense, nods in agreement. Why, therefore, did he say that the interest rate rise was a danger to the economy?

The Governor, who has by far the best access to data in the economy, firmly believes that there are inflationary pressures. Under the circumstances, it would be plain folly not to raise interest rates as a warning shot to the economy.

The most depressing thing has been the lack of concise proposals from the Opposition. The Chancellor asked the hon. Member for Dunfermline, East (Mr. Brown) a simple question this afternoon--did the hon. Gentleman think that the Chancellor's expenditure and taxation plans were too high or too low? My right hon. and learned Friend got no reply.

The President of the Board of Trade put a similar question to his opposite number, the right hon. Member for Copeland (Dr. Cunningham), during the Budget debate last week. The reply was that the right hon. Gentleman could not say what the position would be in three years' time, so how could he say what the Opposition's economic proposals were? That was a perfectly reasonable position to take. However, the question my right hon. and learned Friend asked this afternoon was whether the hon. Member for Dunfermline, East thought the Government's figures were too high or too low. It is a sign of the paucity of arguments from the Opposition that the hon. Gentleman was unable to respond to that question.

The nearest we have seen to sound policy from the Labour party has been the Commission on Social Justice, which was set up by the late John Smith as a blueprint for a new economic strategy, no doubt designed to entice the middle-class voters the Labour party needs to win an election. It is a curious document, strong on rhetoric and weak on remedies. Not unsurprisingly, it attacks the Government's policies of cost-cutting, deregulation and privatisation, although I fail to see how that squares with the party's intention to scrap clause 4. The Labour party will have to try harder to convince my constituents when they argue that the reforms of the 1980s have made the economy less efficient.

The document makes the plea--often repeated by the hon. Member for Dunfermline, East--that our alleged economic failure has been due to a lack of investment. The flaw in that argument is that investment has not been particularly weak. From 1960 to 1990, investment in machinery and equipment as a percentage of GDP was well ahead of that of America and Canada, and only marginally behind that of Germany and France. Britain's investment shortfall is due mainly to exceptionally low levels of housebuilding. It is the quality, and not just the quantity of investment that matters. One need only look at the rusty investments of the steel industry in the 1970s to have that point underlined.

Finally, there is the question of what the Opposition would do to stimulate investment if they were in power. There are several ways in which they could do this. I can

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