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Mr. Hawkins: Will my right hon. Friend confirm that, on the sensitive issue raised by my hon. Friend the Member for Morecambe and Lunesdale (Sir M. Lennox-Boyd), he and his right hon. and hon. Friends in the Treasury are prepared to consider representations by the trade body, the British Amusement Catering Trades Association, with which I am due to see my hon. Friend the Paymaster General with some of my hon. Friends next week?

Mr. Aitken: Yes. We will certainly listen carefully to representations from BACTA. I know that an appointment has already been made with my hon. Friend the Paymaster General. I thank my hon. Friend the Member for Blackpool, South (Mr. Hawkins) for his help in organising the meeting, which is of some importance. We will listen carefully to the representations made.

Mrs. Anne Campbell (Cambridge): Will the Minister give way?

Mr. Aitken: I have just said that I have taken enough interventions. I must make progress.

We recognise that revaluation for business rates can cause uncertainty by imposing sudden additional costs on businesses. So we have eased that problem in the Budget by introducing a new transitional business rate relief scheme, at a cost of £605 million in 1995-96.

On the question of helping growing small businesses to raise capital, I draw the attention of the House to clauses 64 to 67 and schedules 14 to 16 of the Bill, which launch a new venture capital trust scheme to encourage the flow of new investment into small and growing businesses.

Mrs. Campbell: Is the Minister aware that, for many people in small businesses, the main means of raising finance is the equity on their home? One of the difficulties that many businesses face at present is that the further fall in house prices in the past year has meant that more of them than ever before have negative equity. Does he have any specific proposals to deal with that?

Mr. Aitken: I was dealing with helping businesses to raise capital. I was telling the House that we were introducing a new method of raising capital for small businesses. The venture capital scheme to which I referred

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will make it unnecessary for business people in future to mortgage parts of the equity on their home, which has always been a risky thing to do unless one was very confident of the business. The venture capital trust scheme has been designed to fill the gap in the range of financing options available to growing companies. The VCTs will generate risk capital in the unquoted companies sector, while giving investors the security of a quoted pool vehicle. They are expected to lead to a substantial increase in investment. We estimate that a total of up to £2.5 billion could be raised by VCTs over the next three years. They will provide more funds where they are most needed: among dynamic, innovative and growing businesses. I now turn to the easing of burdens on small businesses and tax simplification measures. I highlight the Budget reform which raised by one third the threshold below which small employers can account for PAYE and national insurance contributions quarterly rather than monthly. That means that 60 per cent. of all employers will now be able to make their PAYE payments quarterly.

I remind the House that we have introduced other deregulatory measures to cut red tape, including increasing the VAT registration threshold, which at the new level of £46,000 is now easily the highest in the European Union.

As for simplifying the tax system, the unwelcome size and weight of the Finance Bill highlights the strange paradox that simplification can be a complicated business, at least in terms of legislation. Some 70 pages of the Bill are devoted to a major reform and simplification of the tax system. Self-assessment will be of particular help to those affected--some 4 million self-employed taxpayers and an equivalent number of business taxpayers--by the relatively complicated tax returns.

Self-assessment is desirable because it removes unnecessary duplication of work. It helps taxpayers to pay the right bills at the right time. It leaves taxpayers with fewer clerical burdens, so that they have more time and energy to devote to their primary objective of creating wealth.

Self-assessment saves public money, simplifies collection arrangements and enables the Inland Revenue to pursue dishonest taxpayers more effectively. It is true that this year's self-assessment measures will place some new burdens on employers, but those are being kept to the minimum. The overall impact of self-assessment will be significantly to reduce business compliance costs. I hope that those measures will be supported by hon. Members on both sides of the House.

I hope that the Opposition will notice that this Finance Bill, like many of its predecessors, contains more than a dozen clauses designed to plug loopholes that may offer opportunities for tax avoidance. I hope that the hon. Member for Dunfermline, East (Mr. Brown) will be pleased by that fact, because in recent months he seems to have developed almost an unhealthy obsession with tax loopholes. He squawks and sound-bites on the subject with so much moral indignation that there are times when he brings to mind Disraeli's caustic comment on Gladstone:

"I don't mind him having the ace of trumps up his sleeve but I do wish he wouldn't claim that God had put it there."

My less celestial, but similar, complaint about the hon. Member for Dunfermline, East is not that he wants to close tax loopholes but that he will keep pretending that

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he and the Labour party have a divine right to claim it as a political card of their invention. That is complete nonsense. The truth of the matter is that, in recent years, the Government have introduced more than 50 legislative measures to combat tax avoidance. This Finance Bill continues that regular process, and includes loophole- closing measures estimated to raise more than £1.5 billion in the next three years. I hope that that commitment knocks on the head the notion that the Inland Revenue or the Government are soft on unnecessary tax avoidance. We are not soft on tax avoidance, and a dozen clauses in the Bill are there to prove it.

Finally, on the two "clause fours", the Bill contains a clause 4 that deals with the denaturing of alcohol. That process has a remarkably similar bearing to what the new Islington elitists among the Opposition are up to-- denaturing the Labour party. That denaturing of the old Labour party, over clause IV, is an esoteric exercise, which seems to be generating more heat than light, and is about as relevant to Britain's modern economy as a 19th- century ecclesiastical dispute about hymns, ancient and modern.

The Islington public relations spin doctors, however, are only too delighted to use the clause IV squabble as a cynical diversionary tactic to confuse the electorate with the illusion that something important is happening within the official Opposition.

The House and the country will not judge the Opposition and the Finance Bill by whether the natural Labour party or the denatured Labour party is making the most noise--that is Tweedledum or Tweedledee territory. The battle over whose new rattle is best may well continue with a vengeance every weekend in the Dunfermline office to which I referred, where the loyal shadow Chancellor has to battle it out with the disloyal leader of the Labour Members of the European Parliament who placed that advertisement in The Guardian , but that is all "Alice in Wonderland" stuff. It is absolutely irrelevant to Britain's dynamic modern market economy.

During the course of this Finance Bill, we want to find out whether the Opposition will break their Trappist vows and evasive silences on taxation, public expenditure, borrowing and the level of the planned minimum wage. If they do not do so, they will be exposed not merely as the denatured party, but as the discredited and devalued party that does not dare to reveal its true financial and economic policies, even during the intense scrutiny of a Finance Bill debate. By contrast, our Finance Bill will put into effect the key measures in my right hon. and learned Friend's Budget. It will strengthen the excellent economic performance that we are seeing in Britain today; it will help to encourage our enterprise culture, to simplify and deregulate the tax system and to clamp down on real tax avoidance. The Bill is full of sensible and prudent measures to sustain growth in a low- inflation, high-exporting Britain, and I commend it to the House.

4.18 pm

Mr. Andrew Smith (Oxford, East): First, I join the Chief Secretary in welcoming the innovation agreed by both sides of the House, of morning sittings of the Finance Bill Standing Committee. I assure him that that means that the Bill will have more scrutiny by the Opposition,

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not less. I shall not join him, however, in devoting my speech to matters other than the Finance Bill. It spoke volumes for what the Government have put in the Finance Bill that the Chief Secretary spoke for 20 full minutes before referring to the Bill. Even then, the remainder of what he said was spattered with the sparsest references to it. He spoke for eight minutes on the Bill and 24 or 25 minutes on other matters.

The Bill contains 348 pages, but does nothing to address the country's needs. It is as disappointing, damaging and divisive as the Budgets from which it results. Throughout its proceedings, the Opposition will contrast our approach of fairness and opportunity with the Government's addiction to privilege, vested interests and unfair taxation. The Bill is also rather a shambles, containing neither proposals to rescind the increase in VAT on fuel, nor measures to implement the mini-Budget of 8 December. We know that the Government will bring those forward by way of amendments later, but what a way to carry on--major Budget changes spatchcocked into the Bill at the last minute, when the public, interested parties and hon. Members will have less than adequate time to consider them and no opportunity to amend them in Committee.

The Bill will compound the Government's record of broken promises and incompetence. It will do no good to the vast majority of people and nothing to improve the position described by the vice-chairman of the Conservative party--no less--when he said in the Maples report: "the rich are getting richer on the backs of the rest, who are getting poorer."

That is the reality that people are experiencing, and it will get worse as living standards fall under the impact of the further tax increases that will hit people this April and of the rise in housing costs, which the Bill would make worse, and as people are hit by the consequences of centrally imposed cuts in local council services.

Mr. Giles Brandreth (City of Chester): The hon. Gentleman has touched on tax increases. As it would be fruitless to ask him what tax increases he has in mind, will he concentrate his mind on public sector borrowing? Does he endorse the Government's aim of reducing the public sector borrowing requirement to £5 billion by 1997-98? What does he judge is the correct level of public borrowing in the term covered by the Bill?

Mr. Smith: We shall take no lectures from a party that not only broke all its election promises on tax, but built up record levels of public borrowing, for which the country will pay dear over the next few years.

Instead of dealing with people's worries and doing something about them, Conservative Members just claim that everything the Government do makes things better. They pump out propaganda that shows the same scrupulous regard for the truth as the promises that they made to cut taxes at the previous general election. We have the 100 facts from the chairman of the Conservative party, which I presume the Chief Secretary must have checked as they contain such wonders of wishful thinking as fact 27:

"The PSBR is forecast to fall from £21.5 million in 1995/96"-- chance would be a fine thing--and the claim in fact 96 that spending on the Welsh language is "now over £7.5 billion." That will come as news to my hon. Friends in Wales.

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Doubtless in the same spirit, the chairman said in his news release:

"for Britain, good news is all about us, if only we care to look."

Once he has finished explaining that to his vice-chairman, Mr. Maples, who thinks that people are getting poorer, the right hon. Member for Richmond and Barnes (Mr. Hanley) may find time to explain to the country the fact that living standards are falling by 4 per cent. this year; this year, direct taxes on a typical family will go up by £6.44 a week; indirect taxes will go up by £2.72 a week; and interest on the national debt will be a staggering £36 billion more in the next five years compared with the past five years. With killer facts such as that, the Conservative party chairman has nothing to boast about. He should be apologising to people for broken promises and for how badly the Government have let Britain down.

Ministers should apologise today for bringing forward a Bill that does nothing for investment, jobs and fairness. In their news release on the publication of the Bill, the Government heralded venture capital trusts as

" a major theme of the Finance Bill".

They said that they would provide

"vital extra funds for investment."

The Chief Secretary said in his speech that that would ensure that funds went where they were most needed. There is, however, no evidence to suggest that the proposal will create any new money for investment--there is every expectation that it will divert savings from other quarters.

It is revealing that the financial and investment press has focused rather more on the tax avoidance opportunities and rather less, indeed hardly at all, on new funds for investment. The magazine, Small Company Investor , for example, reports:

"Our bet is that there will be an avalanche of lower-risk property-backed schemes taking money away from entrepreneurial small companies. Think again Chancellor."

I fear that that message will fall on stony ground and will be unseen by the Chancellor and his colleagues, because reading that magazine and criticisms of the Government's proposals in other publications prompted me to ask to which investment publications the Treasury subscribes. I received an interesting list, which included something called "Baking Technology", which I presume is used for cooking the books.

Given how often the Government make extravagant claims about the help that they have given to small businesses and bearing in mind the fact that more than 750,000 of them have gone bust in the past five years, one might have thought that the Government would subscribe to Small Company Investor . Between now and the Committee proceedings, the Government should make a wise investment in a subscription for that magazine and obtain some back copies of it. They would then discover that it contains headlines such as:

"Life is just a bowl of tax cherries. Will you need to pay capital gains tax again? Maybe not."

There is no doubt that venture capital trusts are a massive tax break. They provide tax breaks when the money goes in through relief from income and capital gains tax; tax breaks when the money is in trusts when

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dividend and capital gains are not taxed and tax relief when the money comes out with relief on the capital gains.

Property-backed companies, which are trading for tax purposes, fall within the Bill's provisions, which means that the Bill risks replicating the worst features of the business expansion scheme. There would be nothing to stop a venture capital trust being designed round the opportunities for a millionaire's tax shelters, such as that marketed by Johnson Fry Holdings, which offers the opportunity to shelter capital gains of up to £100,000 a year, with the indefinite benefit of the interest gained on the tax liability thereby deferred.

The Opposition do not believe that the stated purpose behind the investment schemes is all bad; we want to see investment encouraged. We have argued for particular encouragement for investment in research and development. Our concern, however, is that the schemes presented in the Bill offer legion opportunities for abuse. The Government will claim that they have created provisions to reduce those opportunities, but they have succeeded rather more in creating legislative complexity than they have in inhibiting avoidance. It would be a triumph of hope over experience to expect that things will not be worse than even I have described once the full ingenuity of the tax avoidance industry gets to work.

The same goes for the provisions to extend the enterprise investment scheme and roll-over relief. The memorable words of the December 1994 issue of "BESt Investment Tax Shelter Service"--another publication that I would commend to Ministers--were:

"Another detail change (for which we had been lobbying) sees the much disliked `property test' abolished for EIS and Re-investment Relief companies. This will have the effect of . . . reducing the costs of creating artificial structures to get around the old provisions."

There could be no clearer confirmation that the Government are opening up further opportunities for abuse of low-risk

property-backed schemes, which even they had to recognise and reverse following their abuse in the business expansion scheme.

What is more, the tax avoidance culture for super-rich and very well- advised people makes a sickening contrast with the increases in tax bills-- £800 extra a year--for a typical family, compared with 1992, when the Prime Minister promised tax cuts year on year. It is obvious, yet again, that, with the Government, there is one rule for the few and another rule for the many; one rule for a person with £100,000 of capital gains a year to shelter, and another for the waged or salaried employee, struggling to pay a mortgage and fearful of unemployment.

Mr. Tim Smith (Beaconsfield): The hon. Gentleman is missing one rather important point--that a lot of people who make equity investments lose a lot of money. The record showed that many people went into the BES for tax reasons and lost a great deal of money. As a considerable risk is involved, surely it is right that the Treasury should offer some tax incentives for people to take a risk. That is the important point, is it not?

Mr. Smith: It is a long time since I heard anything as extraordinary as the idea that the mass of ordinary taxpayers should subsidise wealthy people to put their money into schemes that are often safe, one-way bets without risk.

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The Bill also threatens investment by its proposals on deep discount and qualifying index securities. Although we understand that the Government are thereby trying to prevent loans being structured with the sole intention of deferring or avoiding tax, we are worried about the serious, possibly unanticipated, effects that that would have, especially on non-profit-making organisations such as housing associations and universities.

Those organisations have found those instruments for borrowing especially advantageous because they have been available to them on more favourable terms. It would cause special difficulties for them if the goalposts were to be moved part of the way through the game, so that those organisations were now confronted by greater borrowing costs on existing loans. That could mean larger rents for housing association tenants and budget difficulties for universities--perhaps even for health trusts, if they also have used those instruments. The Finance Bill changes would be especially onerous on institutions that had already incurred, before 29 November, considerable fees in preparing a qualifying index security for issue but had not yet issued the debt. The university of Portsmouth has been cited to me as an example, and I am sure that we shall need to discuss many others in the detailed proceedings on the Bill. Options should be explored to avoid those difficulties. First, the taxation of existing arrangements on the same basis as was expected when the transaction was initially executed- -which natural justice and fairness would dictate--has much to commend it. Secondly, tax benefits on future arrangements could be restricted to approved borrowers, such as the non-profit-making organisations, including housing associations and universities, to which I referred. Such options could deal with the potential injustice caused by the increased cost that many borrowers will bear because the Conservative Government propose to remove--in effect, retrospectively--tax incentives that the Conservatives themselves created in 1984 and 1989.

What I have just said about deep discount securities emphasises the importance of what I said earlier about venture capital trusts. The Government always appear to be taken by surprise when, having created a tax break, they subsequently find people taking advantage of it. Rather than launching different schemes to capture a few headlines each year only to be confronted with the need to unscramble the mess later, it would be much better to take a considered, long-term and properly consultative approach to encouraging investment and saving. We need properly thought out action, not gimmicks.

Just as the Bill is wholly inadequate on investment, it abjectly fails to tackle unemployment. The increases in beer and spirit duty that the Government propose to introduce under the mini-Budget resolutions will cost jobs. We share the concern expressed by the Treasury and Civil Service Select Committee, which said in its Budget report published yesterday:

"We recommended in our Report on cross-border shopping that the Chancellor should take full account of the potential disadvantages of any widening in the level of duties between the UK and the rest of the European Union, and the encouragement this might give to increased cross-border purchases. We are concerned that this recommendation may not have been heeded and that UK industry could be damaged as a result."

Our fear and that of many in the brewing, pub, retailing and distribution industries is that those excise duty increases, further widening the cross- channel differential,

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will prove a jobs killer. What is more, the unemployed will look in vain for any measures in the Bill that will effectively generate jobs. We shall argue for a proper rebate for employers recruiting the long-term unemployed. We shall put the case for phased release of local authority capital receipts, for a small business expansion scheme, for measures to increase the availability of affordable child care and for job-generating energy efficiency schemes.

We shall take every opportunity to oppose the vindictive proposal to withdraw mortgage help for the unemployed. The unemployed need jobs and training; they need help to get them back to work, not punishment that threatens to turf them out on the streets. We argue for fairness where the Government are entrenching a Britain of double standards and deepening inequality. We want action on boardroom excesses, on profiteering by the privatised utilities and on excessive bank charges.

Mr. Sykes: I am grateful to the hon. Gentleman for giving way. When he talks about chucking people out on to the streets and turfing them out of jobs, does not he realise that the Labour party's adherence to the social chapter will do exactly that? I speak not just as a Member of Parliament, but as an employer.

Mr. Smith: The social chapter--long overdue for application in this country--would extend to British employees rights that are increasingly taken for granted across the rest of the European Union. Why should people in this country suffer due to the obsessions of some Conservative Members, not all of them--I recall the speech that the hon. Member for Stratford-on- Avon (Mr. Howarth) made last week when he said that the minimum wage should apply as a matter of justice and that we should sign the social chapter. We are talking about basic rights and protecting people. The Government want to remove even the basic protection that remains after their wanton vandalism of our welfare state over the past 15 years.

Mr. Sykes: I am grateful to the hon. Gentleman for indulging me yet again. If what he says is true, what does he have to say to the people in Scarborough with jobs at a large company in my constituency, which has just doubled its production line in Scarborough rather than build a factory in France because of the social chapter there? Jobs come here because of our lack of a social chapter and because it costs so much to employ people on the continent. That is the reason why we are the centre for Japanese and American investment--not the hon. Gentleman's policies.

Mr. Smith: We welcome inward investment, including that mentioned by the hon. Gentleman. In many such cases, the executives running those companies have stated on the record that they would be happy to comply with the provisions of the social chapter. What worries inward investors is not that we may be applying social protection in the United Kingdom in common with our European partners, but that Conservative Members' antics involve divorcing Britain from the European Union, thereby cutting us off from the business opportunities that the single market presents.

Mr. Anthony Coombs (Wyre Forest): The hon. Gentleman says that he is interested in inward investment. We receive much inward investment because we have

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among the lowest rates of corporate tax in Europe. What would the hon. Gentleman say, therefore, to someone such as Howard Davies, the director general of the Confederation of British Industry, who analysed the Labour party's plans to close so-called "loopholes" in corporate tax only a year ago and found that they would increase the rate of corporate tax by no less than 25 per cent. or £3.6 billion every year? How does the hon. Gentleman expect people to invest in this country when faced with that scenario?

Mr. Smith: Howard Davies subsequently accepted that that was not the case, and I have not heard him comment about our proposals in the way that the hon. Gentleman implies.

We shall oppose two miserable and mean-minded measures in the Finance Bill. There can be no justification for the Government freezing the modest blind person's allowance for the third time in four years, especially when so many blind people have to get by on such low incomes. We also challenge the unfairness of the Bill not extending to those holding pensions in occupational schemes and retirement annuity contracts the flexibility on purchasing annuities that the Bill introduces for personal pensions. There is no good reason to discriminate against a million pensioners in that way. As well as the Bill's unfairness, we shall also expose its absurdities and the damage that will result from the imposition of the new vehicle excise duties and registration regime. It will impose administrative burdens on emergency services and load new charges on essential service vehicles such as snow ploughs, gritters, and street-cleaning and street-lighting lorries. The new charges will affect tractors and even mowing machines. Cars on display in second-hand car dealerships will be taxed--I am sure that Conservative Members will have something to say about that.

I look forward to hearing Ministers explain how that is all part of their deregulation initiative to lift the burdens of red tape from business. I also look forward to their explaining the operation of the Bill's provisions for self-assessment in taxation. I wish that I shared the Chief Secretary's optimism that they will simplify matters. I note that he conceded that the Bill's provisions will impose additional burdens on employers. The proposal, which has a certain amount to commend it in theory, is threatened by the incomprehensibility of its implementation. After all, self-assessment is being introduced into a tax system that the Government have made increasingly complex in recent years. A crude measure of that is the number of pages of legislation on income tax, corporation tax and capital gains tax, which has more than doubled since 1982. There is no dodging the fact that self-assessment involves a big transfer of responsibility for compliance from the Inland Revenue to the taxpayer. Judging from the Bill's complexity, many taxpayers who at present are able to manage their tax affairs without professional advice will need to employ such advice as a result of the operation of the Bill, and that advice does not come cheaply. Whereas people previously had to state just their income and capital gains, they will now have to have sufficient knowledge of the tax rules to calculate their

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own liability. That will prove very worrying for many people--especially elderly taxpayers--given their legal obligation to get their calculations right.

We shall pursue how the provisions can be made to work in a fair and straightforward fashion and what help and advice will be available to taxpayers. The Government should think very seriously about the proposal because taxpayers face a double burden--insult on top of injury. Not only will they be charged more tax--in breach of the Conservatives' election promises--but they will face more worry in calculating their liability.

There is a lot wrong with the Finance Bill. Like the Budgets that it implements, it is a wasted opportunity. In place of an incompetent Government's inadequate Bill, Labour and the country want to see action for jobs, action for investment, and partnership--the only route to success for a modern economy. Where there is unfairness, division and disillusion, Britain needs investment, training, jobs, partnership and fairness: real hope for the future.

In voting against the Bill tonight and in the policies and action for which we are campaigning up and down the country, we shall demonstrate how Labour speaks for Britain and brings closer the renewal of government, which Britain needs so desperately. 4.45 pm

Mr. Quentin Davies (Stamford and Spalding): The hon. Member for Oxford, East (Mr. Smith) made a characteristically vigorous speech, but, perhaps understandably, he declined to mention the most startling fact about the British economy--the unprecedentedly favourable conjuncture of economic circumstances.

Last year, growth was slightly more than 4 per cent., inflation was 2 per cent. and unemployment declined by 500,000, compared with the trough of the recession two years ago. Productivity and investment were extremely buoyant and the increase in exports generated much of last year's growth. As a result, at a time when our economy is growing much faster than those of most of our trading partners, our balance of payments has improved substantially--in fact, we now have a balance of payments equilibrium.

That combination of factors is quite unprecedented in the lifetime of Members of this Parliament. It raises two obvious questions: first, what caused that benign combination and what was the role of Government policy in it and, secondly, how can it be sustained? Inflation has been a disease of the British economy for the past 30 years. I think that there is general agreement, nationally and internationally, that we could not have succeeded in mastering inflation in the time scale and to the extent to which that has been achieved if we had not been in the exchange rate mechanism. The Prime Minister took the extremely brave decision to join when he was Chancellor in the autumn of 1990. It was a deliberate Government decision that has certainly brought its rewards. Of course, as often happens when one has to cure a serious disease, the medicine is not always very palatable, but it was a necessary decision and it has proved extremely effective.

Relaxation of monetary policy and the reduction of interest rates made possible by our membership of the ERM--indeed, it began at the moment when we joined the ERM and continued from autumn 1990 until the early

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part of last year--have resulted in the revival in economic growth. Some economists believe that, as a general rule, there is a gap of 18 to 24 months between changes in monetary policy and those changes impacting on output. Remarkably, that rule seems to have applied perfectly in this instance: output began to revive and we came out of recession in spring 1992.

Considerable fiscal expansion ran parallel with that relaxation of monetary policy and reduction in interest rates, which contributed to re- establishing the growth of the British economy. Both policies were clearly deliberate, conscious Government actions, and they have produced results.

It is wrong, however, to look at the growth or success of any economy purely from the demand side. We all know--as we have learnt in Britain through painful experience and as the entire world has learnt in many different contexts--that it is no use increasing demand through monetary or fiscal measures if the supply side cannot respond and produce the new products, which are called for as fashions and the patterns of demand change, effectively and at a competitive cost. If the supply side cannot respond to an increase in demand, that increase in demand will simply create inflation or a massive increase in imports as the rest of world meets it, resulting in rapid deterioration in the balance of payments.

We have experienced exactly the opposite: a substantial increase in demand with falling inflation and a steadily improving balance of payments. That demonstrates that there has been a fundamental change in the British economy, which is a result of the supply side reforms that the Government have undertaken since the beginning of the 1980s, embracing the improvement in the labour market, the reduction of trade union monopolies and the diminution in the obstacles to productivity growth that beset British industry for so long, increasing flexibility, mobility of capital and labour and increased dynamism and professionalism in management.

Mr. Barry Legg (Milton Keynes, South-West): My hon. Friend mentioned our exports performance and the tremendous improvements in the current account. How much of that would he attribute to the more competitive level of sterling following our departure from the exchange rate mechanism?

Mr. Davies: It is quite clear that devaluation has improved our competitiveness, but much more striking--as I am sure my hon. Friend is aware--is the fact that our turnaround in output and emergence from the recession predated the end of sterling's membership of the ERM and black Wednesday by some six months. The devaluation was clearly not the basis of the revival in output.

One can say, however--and perhaps my hon. Friend was thinking of this--that the devaluation posed considerable dangers. At a time of rising demand, falling interest rates and rising Government expenditure, to add on to that already expansive formula a considerable devaluation of about 15 per cent. against the weighted average of currencies with which we deal could have taken the economy over the edge into inflation.

My hon. Friend brings me to my second point--where we stand on inflation. The Government sensibly and wisely responded to the devaluation with a considerable

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change in fiscal policy by reducing public expenditure, or at least the growth of public expenditure, and by raising new tax revenues and reducing Government borrowing.

My hon. Friend the Member for Milton Keynes, South-West (Mr. Legg) and I supported the Government in that fiscal retrenchment and in the difficult and painful decisions that have had to be taken on taxation, as we all know so well. We defended the Government because we knew that those measures were necessary and that, if they had not been taken, there would have been a danger of increased inflation, particularly because of the devaluation to which my hon. Friend rightly refers.

The second great question I want to raise is the one that most concerns our constituents: whether such a splendid state of affairs and encouraging series of developments can be sustained. One might look again at two aspects: demand and growth on one side and inflation on the other, and we know how interdependent they are. If we run into inflation, we shall find ourselves back in the stop-go cycle that has beset us so disastrously in the past.

People are not primarily concerned with growth at present. The economy has been extremely buoyant, but it cannot continue to grow at a rate of 4 per cent. per annum, as it has in the past 12 months. In the Red Book, the Government predict that from 1996-97 onwards the rate of growth will be 2.75 per cent. If the Government consider that 2.75 per cent. is the sustainable non-inflationary growth rate of the British economy, that represents a considerable increase in the secular sustainable growth rate of the British economy in the past. It is an encouraging picture and it reflects the supply-side reforms to which I have referred, the buoyancy of investment and the even greater buoyancy of business investment predicted for next year.

The question is how to come down gradually and gently into a sustainable rate of growth. The Government have been extremely sensible and prudent in their fiscal and monetary policy. We have had not only the fiscal retrenchment, to which I referred and which is extremely welcome, but a change in monetary policy since last autumn, when interest rates began to rise again. My right hon. and learned Friend the Chancellor has had to take difficult decisions. There is always pressure from politicians, from the media, from constituents, from industry and from borrowers, who say interest rates should be lower. We hear that unfailingly from Opposition Members, particularly from the hon. Member for Dunfermline, East (Mr. Brown) who, ever since I have been in the House, has never said anything about monetary policy except that interest rates should be lower, whatever the concatenation of circumstances and whatever the results of that policy might have been.

We know that it would have been disastrous to have said simply that interest rates should always be low. My right hon. and learned Friend the Chancellor has sensibly decided that the time has come, when the economy is buoyant and without waiting for inflation to manifest itself, to take some early measures to trim demand to a sound and sustainable level. It is striking that he has intervened to increase interest rates at an earlier stage in the cycle than ever before, and I commend him for that.

My right hon. and learned Friend has done something else, the significance of which has not been appreciated as much as it should have been. He has taken an extremely brave measure in deciding that the minutes of his monthly meetings with the Governor of the Bank of England

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should be published six weeks later. There is a precedent for that in the open market committee of the Federal Reserve bank in the United States, but that is a committee of an independent central bank.

It is quite unprecedented for politicians voluntarily to decide to put such constraints on their monetary policy as will inevitably follow from publishing those minutes. No Government could easily sustain their position when those minutes were published six weeks later and it was revealed that the Governor had said that the Government's inflationary targets could not be met unless interest rates were put up and the Chancellor had replied, "No, I shall not put them up; I cannot take your advice." Complete chaos and collapse would follow in all the financial markets--in the sterling foreign exchange market, in the money markets and in the gilt market--and that would prove very expensive.

The Chancellor has placed a discipline on himself quite voluntarily. He has decided to forgo--and those of us who have sufficient confidence in him and in the Government know that they would not have wanted to use it in practice--even the theoretical possibility for the Government to manipulate monetary policy for electoral or political purposes.

That is an extremely important self-denying ordinance. The hon. Member for Edinburgh, Central (Mr. Darling) mutters into his beard--well might he do so. He is probably saying what a confounded thing that is. If, by any dreadful mishap, Labour is returned to power, it would immediately want to go for broke, cut interest rates and spend money like it was going out of fashion, but a possible constraint, on even a future Labour Government, has now been built into the system.

It is unprecedented for a Government to impose such a self-denying ordinance on themselves, but it is good monetary policy since it increases its credibility. It makes it clear to the financial markets, borrowers, savers and investors in the economy that British monetary policy will not be manipulated for short-term political purposes. That will create greater confidence in the economy and will positively affect the cost of capital, investment intentions, willingness to buy gilts and--other things being equal--the yield on gilts and the cost of funding the national debt, which we all know is too high and is a matter of concern.

That self-denying ordinance should also reduce the British economy's volatility. If monetary policy is more credible and then is altered in one direction or another, everybody will believe that the new policy will be stuck to and will not be pushed off course by political pressure. That can only be good, because adjustments of a lesser amplitude will then be needed to effect a given change in expectations and behaviour. We will achieve at least some of the benefits that countries with independent central banks have enjoyed as a consequence of the greater credibility with which they conduct and pursue sustained and consistent monetary policy.

I give particular credit to my right hon. and learned Friend the Chancellor for that. It gives us great confidence that our achievement of bringing down inflation is not a one-off and temporary but can be sustained. Of course this Parliament has experienced difficulties, but when future generations look back on it they may say that one of its great achievements was to bring to an end an era in which

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