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Column 608the economy was blighted by the disease of inflation and that inflation then ceased to be a competitive handicap on the British economy.
The Finance Bill is, as always, far too long. A number of right hon. and hon. Members and others outside have commented that if parliamentary draftsmen cannot produce a more lucid and succinct Bill, we ought at least to market-test, to see whether outside firms of lawyers could not do a better job. Those comments have clearly not been taken to heart, but one hopes, as with many drips of water on a stone, that one will eventually have some impact. I hope that I will be forgiven if I continue to make that point.
Mr. Matthew Carrington (Fulham): Does my hon. Friend agree that the complexity of the tax system--and consequently of the Finance Bill--makes an increasingly strong case for an annual taxes management Bill in addition to the Finance Bill? A taxes management Bill would be considered by a Committee that could take expert outside evidence and examine tax proposals in considerable detail, separately from the political matters incorporated in the Finance Bill.
Mr. Davies: I much appreciate my hon. Friend's expertise and I have the greatest regard for it. He makes a good point extremely well, but I hesitate because the effect of two Standing Committees considering the Bill would be that the technical Committee would tend to be marginalised and would not make quite the impact on opinion or on the formation of tax law that is desirable. The distinction between the Bill's technical and political aspects is not always as clear as some people think. What are sometimes seen as technical issues are invariably couched in incomprehensible verbiage, as in recent Finance Bills, but they nevertheless can have considerable economic impact on businesses, consumers, savers and investors. The general and political impact might be missed if so-called technical matters were brushed into a separate Committee.
I see great merit in my hon. Friend's proposal that the Committee considering the Finance Bill should take evidence from outsiders before detailed debate. That principle should generally be adopted, as I have said in other contexts. Before any major Bill is taken through the House, a Special Standing Committee should take evidence. The constitutional and procedural procedure that would enable it to do so already exists but, regrettably, little advantage is taken of it. Our procedures and scrutiny would be more effective and better legislation would go on the statute book and would not need to be revised so often if we took advantage of it.
It would be churlish and ungrateful not to acknowledge three technical aspects--to reflect my hon. Friend's intervention--of great importance, where changes for which I have been pressing for some time have been incorporated in the Bill. I refer first to changes to schedule A. I am grateful that the Government propose that the profits of companies involved in real estate should be taxed according to the same criteria used for other forms of business. A case could never be made in equity or in economic theory why that should not be so. I am sorry that the Government have not gone to the logical extent of extending that principle to companies.
I am equally grateful for the proposed changes in roll-over relief but--and I will make this point in Committee if I have the chance to do so--there is no
Column 609reason for not taking matters to their logical conclusion, which would save 30 or 40 pages of appendices. It could simply be stated that roll-over relief applies whether the funds are rolled over into incorporated businesses, assets or shares in businesses run by individuals trading as a principal.
Finally, in respect of personal equity plans, in the past I have pressed for new clauses or amendments to Finance Bills to achieve a reduction in the distorting effects of tax breaks available for retail savings, by wrapping them all up in one vehicle. I would like bank deposits, which now enjoy tax-exempt special savings account facilities, and all forms of financial instrument, including equities, convertibles and bonds, to be available through the same vehicle and on the same terms.
The Bill makes a major step forward with the proposal that bonds can be included in a PEP, for which I am grateful, but I am sorry that the Government have not gone the whole hog and allowed individuals to manage their own PEPs--to set aside a portion of their portfolios and to manage them themselves. The present PEP tax breaks do little, especially for savers on small incomes. They pay tax at the marginal 25 per cent. rate and have no reason to benefit from capital gains tax concessions that PEPs offer because they do not normally enjoy capital gains of more than £5,000 a year. Such people generally find that the tax benefits of a PEP do no more than compensate for the management fees that they have to pay to intermediaries for enjoying such tax breaks.
I should have thought that the introduction of personal assessment would be a good opportunity to go a little further and allow people to manage their own ring-fenced savings and to put into them such maximum amounts as the Government may consider that they can afford in any one year. Any breaks for such savings contribute to the favourable shift in the burden of taxation from more damaging direct taxes to indirect taxes, which has been one of the many encouraging features of Conservative fiscal policy over the past 15 years. 5.9 pm
Mr. Denzil Davies (Llanelli): My hon. Friend the Member for Oxford, East (Mr. Smith) chose to quote an apt and fairly obvious text in his speech--the words of the Maples memorandum. The former Financial Secretary said:
"the reality is now that the rich are getting richer on the backs of the rest, who are getting poorer."
Even the old Labour party could not have put it better than that. Certainly, this Bill does not improve matters. It probably makes matters worse. I shall try to give one reason why the rich have been getting richer on the backs of everybody else. It is partly because for the first time, certainly since the 1920s and 1930s, financial policy has economic and industrial policy in its stranglehold. The bankers and the central bankers now rule to a greater extent than at any previous time, certainly since 1945 and before.
The Government have made two major economic blunders. The first was to enter a regional, fixed-exchange system--the exchange rate mechanism--when there was very little exchange control left in the world and we had a global economy. Then, of course, when that became a disaster, the Government made another major error--partly, no doubt, in panic--and I am sure that the Treasury has regretted it ever since. In effect, as the hon. Member
Column 610for Stamford and Spalding (Mr. Davies) said, the Government handed over control of monetary policy to the Governor of the Bank of England.
Again for the first time since the war, we have a division of control: the Government control fiscal policy, at least in theory, while the Governor of the Bank of England controls monetary policy. The wretched meetings that take place every month--the Eddie and Kenny show--do not come up to Pete and Dud or Smith and Jones. Every month the two portly gentlemen sit there, take each other's temperature and no doubt also stuff a thermometer into the mouth of the British economy and perhaps other parts of its anatomy as well. After every month's meeting, the teenage scribblers in the City are in a state of neurosis trying to discover what has gone on.
I have been in the House long enough to remember fine tuning. Were I not addressing such an august gathering, I would say, "Hands up who remembers fine tuning." You probably remember fine tuning, Mr. Deputy Speaker, but I do not know whether anyone else does. Fine tuning was condemned throughout the 1970s in trenchant speeches by Baroness Thatcher and various other financial experts then on the Opposition Benches. Fine tuning was condemned as a terrible thing: how could industrialists plan for the future or for investment with all that Government interference in the marketplace?
The present monthly meetings really amount to fine tuning. Every month those involved sit down and look at the economy; then interest rates go up or down by a quarter or half a per cent. point, or by half a per cent. I feel sorry for any industrialist or business man who has to plan and invest and try to create growth in his or her business faced with the nonsense of those meetings every month. I intended to direct a comment to the Chief Secretary, had he still been present, but I will address my remarks to the Financial Secretary. I hope that they will try to persuade the Chancellor of the Exchequer to give it a rest for a month. Why not make it every two months to let things settle down? It is ridiculous to have such an absurd division and method of conducting matters.
Once upon a time--more people may remember this than fine tuning, and we heard about it from the hon. Member for Stamford and Spalding--there was the fashionable doctrine of monetarism: the teaching and lectures of Professor Friedman, if I may use that shorthand form. It certainly existed in the 1970s and 1980s, until Lord Lawson decided that he either did not understand monetary policy or that he was tired of it and so a different monetary policy was introduced. Lord Lawson's monetary policy was to shadow the deutschmark. Apparently nobody told the then Prime Minister, but Lord Lawson went on shadowing the deutschmark, into the exchange rate mechanism we went and the rest, as they say in Hollywood, is history.
What is happening at the moment and the way in which monetary policy is being controlled is not monetarism. I have some respect for intelligent monetarism, but the present policy is not even monetarism. M3 has practically gone out of the window. M4 has gone, MO has gone and also M1. I even remember domestic credit expansion--hands up who remembers that--and I remember sterling M3 as well. Clearly, few Conservative Members know very much about such things, so perhaps one should delve back in time a little, although I accept entirely that we should not become trapped in history.
Column 611Today's policies are not monetarism because monetarism had a certain rationality, although it did not work very well. Perhaps that is why Lord Lawson gave it up and why none of the central banks of the world, although they may pay lip service to it, pays much attention to M3 and M4. The Bundesbank still pretends, but it misses its targets most of the time and when it misses its targets it does not adjust its guidelines or ranges.
Now we have something quite different, although I am not really sure what it is. I suppose if one hands over the control of money to the high priests of the mysteries, one ends up with some kind of mystical monetary policy. I can describe it only as a kind of monetary policy based on the jus naturale or natural law--a kind of medieval policy. Apparently, the Governor of the Bank of England knows the natural growth rate of the British economy. I do not know what it is, and I do not suppose that the Governor knows either although he pretends that he does. It is a little like the old courts of equity, which used to say that justice varied according to the length of the Chancellor's foot. Perhaps the natural growth rate of the British economy varies in a similar way.
Apparently there is a natural growth rate and woe betide us if it increases by a little above that natural growth rate: if that happens, up go interest rates, the Governor gets into a terrible state and the Chancellor has to do as he is told. Again, I feel sorry for the industrialist who has increased productivity, whose growth is greater than the natural growth rate and who is trying to create jobs and investment. Along comes Eddie from the bank and tells him that he cannot do that, up go the interest rates and the industrialist has to pay more for his money.
How on earth are we expected to have investment-led growth in the British economy if the Governor of the Bank of England is for ever knocking any such growth on the head whenever he feels that the natural rate has been exceeded? Moreover, it is depressing that the natural rate seems to be based on extrapolation from the past. Sadly, governors of central banks, like generals, tend always to be fighting the last war, which can have very damaging consequences for an economy.
There has been no real attempt to consider the changes that have taken place in the British economy over the past 10 years: the changes in the labour market, the massive global changes that are taking place in the economies of many countries in the world, the fact that tariffs are coming down and will rapidly disappear with GATT, and all the pressures on costs-- those matters are apparently not taken into account. Instead, we are told that the high priests--the bankers--know what the natural growth rate is.
Unemployment, too, is a favourite target for central bankers. Again, apparently, there is a natural level of unemployment. What a cheek they have. According to the Governor, in a lecture a week or so ago, there is something called structural unemployment. I do not know what that is, but clearly the Governor does. If, at one of those monthly meetings, it appears that one extra poor individual has found a job, taking the number of unemployed below the natural level, up go interest rates to hit him on the head and ensure that no one else gets work.
Column 612One may tease and satirise, but it is a brutal, cynical and cruel policy because it targets the unemployed on the basis of very little rational analysis of what is happening. Moreover, not only is that the Government's policy operated through the Governor of the Bank of England; I am sorry to say that my right hon. and hon. Friends on the Opposition Front Bench also seem to support the handing over of monetary policy to a central bank. That happened in the 1930s when both main political parties paid obeisance to Montague Norman and it is happening again. All the fashionable opinion in this House and all parties apparently dare not question the nonsense currently known as monetary policy.
If I were unemployed, I would ask, "Who needs a Bank of England?" I spent four years as a Treasury Minister, with responsibility not for the Bank of England--thank goodness--but for matters covered by the Bank, and I often asked myself that question.
In those days, the Bank of England did certain things. It had to control the movement of capital and there was exchange control. That involved 400 people pushing pieces of paper around. I was responsible for banking legislation and, perhaps foolishly, I decided that the Bank of England should be the institution to deal with banking regulation. That responsibility could have gone elsewhere or to another institution.
After 1979 and the changes in the 1980s, the Bank of England still regulates the banks, but exchange control has gone. With floating exchange rates, who needs central bankers? Apparently, the Bank of England sold Government stock. I do not know whether the Bank is responsible for that. When I was in the City a very long time ago, there was a splendid man with a high hat and pin-stripe trousers employed by a firm called Mullens and Co. which had been selling Government stock for about 200 years. Apparently that company knew all about selling Government stock and did it very well. I am not sure whether the sale of such stock is still contracted out. If it is not, there should be market testing for the Bank of England. What does the Bank do? I have been told that central bankers provide marvellous lunches. Apart from that, and clobbering the unemployed, what does Eddie do for his money? In all fairness, someone must ask on behalf of the unemployed, "Who needs Eddie George? Who needs the Bank of England?" My view may be old fashioned, but I believe that it is wrong for Governments to hand over control of important matters relating to the economy and of monetary policy when those matters affect the livelihoods--and sometimes the lives--of people. It is wrong for Governments to hand over control to undemocratic and unelected institutions, but that is what has happened and it is no business of an Opposition to support a Government who do that.
One of these days there will be a catalyst. One of these days the fashion will change again. Until it changes, I do not see much investment-led growth coming to the British economy or much reduction in unemployment. The rich will get richer, the rest will get poorer, and the poor and the poorer will have no hope because democracy will not provide them with any hope.
Column 613entertaining, witty and erudite. I cannot agree with much of his speech, but I am glad that he took the opportunity to remind the House of his time as a Treasury Minister during those halcyon days of Lord Healey.
When Lord Healey presided over the economy, interest rate stability was the order of the day. British industry, and those who tried to run British industry, had the certainty of stable interest rates under Lord Healey's guidance. They had low inflation and an economy which usually had to face at least two or three Budgets a year.
I agree with the right hon. Member for Llanelli that our affairs are still overshadowed by the figure of Lord Lawson. The shadow of Lord Lawson is still cast on the making of our economic policy. Lord Lawson will certainly rank as one of the more interesting Chancellors of modern times. He was certainly a great reforming Chancellor with regard to taxation. However, his reputation was badly tarnished by the financial mismanagement of monetary policy in the late 1980s, to which the right hon. Member for Llanelli referred, when we followed a policy of shadowing the deutschmark. Hon. Members will also recall that he advocated our membership of the exchange rate mechanism. Lord Lawson's mistakes in monetary policy still affect our economic policy making today. However, we can understand why the Government have paid so much attention to trying to get monetary policy right and to providing monetary stability.
Mr. Legg: Opposition Members, and particularly the hon. Member for Durham, North (Mr. Radice), will recall that, when Lord Lawson appeared before the Treasury and Civil Service Select Committee, he was asked to comment on the making of monetary policy. He said that interest rates went up when he said so. That was how monetary policy was run under the stewardship of Lord Lawson.
My colleagues on the Treasury Bench can be rightly proud of the fact that the making of monetary policy is now more open and more balanced. I support the current openness, and I believe that the publication of the minutes of the meetings between the Chancellor and the Governor of the Bank of England improves the economic debate in this country. They show the people who are running businesses and investing in this country how monetary policy is being made. I do not agree with some hon. Members and commentators who believe that the Governor and the Bank of England have been given de facto independence. When the Governor gave evidence to the Treasury and Civil Service Select Committee, he took pride in the fact that he took the initiative in respect of the last interest rate increase. When the Chancellor gave evidence, he admitted that some power has passed from the Treasury to the
Column 614Bank. He believed that that was good for the markets and that they now had more confidence in the making of monetary policy. I do not believe that there is de facto independence. I believe that we have arrived at a halfway house. The way in which that halfway house operates must be considered further. My hon. Friend the Member for Stamford and Spalding (Mr. Davies) referred to the open market committee of the Federal Reserve bank in the United States, which also produces minutes. However, if we consider central bank operations in the United States and in Germany, it is clear that there is a more collegiate approach to monetary policy.
One of our present problems is that, from the minutes of the monthly meetings between the Chancellor and the Governor, it is clear that a whole range of indicators have been brought into play. Decision making on interest rate policy seems to be all too anecdotal.
Again, in the rhetoric of the Chancellor and the Governor we find much about stopping the boom-and-bust cycle. That is an echo of the late 1980s and of the problems that we experienced under Lord Lawson. But if we look at the figures in Red Book and at what is happening in the real economy, we can see very little chance of boom and bust in the current monetary environment.
The monetary environment in the United Kingdom, like that in most G7 countries, is very subdued. Domestic demand in the United Kingdom is running at about 2.5 per cent., and overall growth is running at 4 per cent., but the major contributor to that overall growth level is a greatly improving exports position. About 1.5 per cent. of the total increase in GDP is due to excellent export performance. Domestic demand is probably growing at only about trend level--2.5 per cent., perhaps less--because part of that growth in domestic demand is due to current stock-building.
I see no justification for trying to put up interest rates on the basis of trying to discourage domestic consumption or, as we have heard in the past, to restrain house prices, for instance. House prices and asset prices are very subdued. Domestic consumption is also subdued.
I have some words of caution for the Chancellor in his meetings with the Governor. In the Red Book, we find that interest rate policy and monetary policy are supposed to be set according to expectations of inflation levels in two years. At the previous meeting of the Governor and the Chancellor, when the Governor requested an increase in interest rates, his forecast for inflation in two years--the forecast of the Bank of England--showed a falling expectation for inflation. In his discussions, the Chancellor certainly needs to be sceptical of further requests from the Governor for interest rate increases.
The other aspect of the Lawson years was very effective taxation reform. Lord Lawson had a successful formula for taxation reform, and that was to establish lower rates and broaden the base. The Finance Bill has several tax reform measures, but I draw hon. Members' attention to changes in relation to capital gains tax in particular. On capital gains tax, we seem to be moving in the opposite direction from the Lawson principle of lowering rates and broadening the base. Capital gains tax remains high--40 per cent. Few of our competitor countries have fixed capital gains tax at 40 per cent. Treasury Ministers
Column 615also recognise that that is too high a level of taxation, because their strategy, rather than to lower the rate or fundamentally to reform capital gains, is to increase exemptions, backed up by tough anti-avoidance provisions.
We see in the Finance Bill several measures to extend exemptions. There are now incentives for investing in quoted companies through personal equity plans. There are now incentives for investing in unquoted companies through venture capital trusts and through enterprise investment schemes. There are now arrangements whereby people can roll over capital gains between trading assets and also roll over capital gains into shares. We have a range of exemptions to the capital gains tax legislation.
Hon. Members can justify all those changes and all those exemptions as having very worthy objectives, such as the objective of further investment, about which we have heard from my right hon. Friend the Chief Secretary this afternoon, but however worthy those objectives might be, certain fundamentals do not change.
Risk does not change. At the moment, many people do not invest in venture capital because they assess it to be a high-risk sector of the market. Changing the tax regime will not alter the basic risks involved. Also, the more financial vehicles that one sets up to try to find exemptions and ways around the very high levels of capital gains tax in the United Kingdom, the more financial intermediaries are involved. Financial intermediaries want remuneration for their involvement. We need to see root-and-branch reform of capital gains tax.
We are overtaxing capital gains, only to relieve certain favoured activities. That fundamental approach of overtaxing an activity as a whole but picking favoured activities that one wants to relieve from tax is very interventionist. It is an approach that Opposition Members often advocate. It does not fit altogether easily with a Government who are committed to the free market.
I have a word of caution also on loopholes. We have heard much from the Opposition about loopholes and the enormous amount of tax they might raise. Conservative Members have certainly highlighted the fact that the Opposition are really talking not about loopholes but about extra taxes. My right hon. and learned Friend the Chancellor, in his 1993 Budget, to some extent sought to steal the Opposition's thunder by bringing in provisions-- anti-avoidance legislation--which he claimed would increase the taxation take by about £2 billion. He thought that £2 billion extra over three years could be gained by bringing in legislation which, to some extent, blocked loopholes.
My right hon. and learned Friend considered many of those loopholes to apply to capital gains tax. It is interesting to look at this year's Red Book and the figures that the Inland Revenue has provided for its estimate of the take from capital gains tax in the current year. We find that it has revised the estimated revenue down from last year's figure of £1.3 billion to £0.8 billion. For the subsequent year--1995-96--the figure is only £800 million. I suspect that the Inland Revenue's claims for substantial increases in revenue from blocking loopholes and putting in place significant anti-avoidance measures are not borne out in practice.
Column 616I urge Treasury Ministers to keep an audit of those projections for extra revenue from anti-avoidance provisions, because I do not think that they achieve the figures that were originally set out. I am sure that Ministers widely accept that, in today's global economy, people and capital are very mobile. If we seek to inhibit the way in which people undertake transactions in their attempt to obtain a little extra revenue, they often take advantage of mobility, do their transactions differently, or are less active in their investment procedures.
Overall, a full reform of capital gains tax, based on a tapering system whereby those who invest in capital for the long term in this country are properly rewarded by having a reasonable overall level of taxation levelled on their gains, is the correct route to take. My right hon. Friend the Chief Secretary highlighted some of the fine aspects of the legislation. Some of the reforms that he particularly highlighted are those in respect of self-assessment, which he believed would help the British economy. From a cursory look at the Finance Bill, I endorse many of the comments of my hon. Friend the Member for Stamford and Spalding and his concern about the standard of draftsmanship in the legislation and about the obscurity of some of the legislation. In looking at the Finance Bill, we must bear in mind the fact that the Government's policy is to deregulate. One must be very careful, when putting another 350 pages of taxation legislation on the statute book, that one is standing true to the overall principle of deregulation. Many of the provisions will have to be interpreted by Inland Revenue staff throughout the country, and there is no guarantee that they will be able easily to understand the detail and interpret those provisions properly. The process of trying to understand them will be a burden on British industry and business.
The right hon. Member for Llanelli told us a great deal about economic history in the UK. Those of us who have been in the House for a comparatively short time were grateful for his tour de force. He took us back over at least 20 years. I remember a speech by Sir Keith Joseph in 1979--the Stockton lecture, entitled "Monetarism is not enough".
The centrepiece of the Red Book and the Government's financial strategy has some worthy elements--for example, low inflation, exchange rate stability, low national debt and, right at the heart, a declining public sector borrowing requirement. Those elements are at the core of the Government's strategy. The right hon. Member for Llanelli and other hon. Members on both sides of the House will recognise them as the convergence criteria set out in the Maastricht treaty.
We cannot have a successful economy simply by looking at convergence criteria. They are not particular economic virtues in themselves; their whole purpose is to produce a certain level of fiscal stability, so that central bankers running a European central bank can set an interest rate policy across Europe in the knowledge of that stability in debt levels and fiscal policy. Basically, it is for their convenience that convergence criteria have been put at the forefront of economic policy both in the United Kingdom and in many of our EU partner countries. However, convergence criteria are not enough to ensure a healthy economy.
Column 617My right hon. and learned Friend the Chancellor has introduced many supply side measures that will help the economy, but we must be very conscious of the overall level of public spending. I remind hon. Members of a statement by Lord Lawson in 1977:
"The real evil of excessive Government spending, and the excessive taxation that must necessarily accompany it, lies . . . in the certainty of misallocation of resources, economic and social debilitation, excessive state power, and--very far from least--the erosion of personal freedom."
Conservative Members are very concerned to guard against excessive state spending, which has often been made tolerable for many people in the productive economy by high levels of inflation. Governments have spent heavily on behalf of the state, but usually it has been at the same time running very large Government borrowing requirements, which have been financed by inflation. Those who bought Government debt in those circumstances have never received the returns that were originally implied.
The world financial and economic environment today is different. Inflation is very subdued, with especially low levels in the United Kingdom. Running large budget deficits under those conditions is not sensible economics. In the United Kingdom and in many other countries people are having to pay much higher levels of taxation to finance high levels of public spending. There are limits to how much people are prepared to pay.
The Red Book shows that the level of taxation is now moving up to 40 per cent. of gross domestic product. Clearly, there is resistance to further increases and to the tax base being spread even more widely. Western European countries have often taken that into account by switching their tax-raising powers from direct to indirect taxation, but even with indirect taxation, there are limits on how far a Government can go.
If Governments increase indirect taxation excessively, people may stop buying goods or they may resort to the black economy. If taxation weighs especially heavily on the poor, or if it is perceived to do so, the Chancellor--as we have seen in recent weeks--may fail to get support from Parliament. Therefore, the overall levels of taxation caused by excessive Government spending need to be kept under review.
Currently, middle England is suffering from an excessive level of taxation. The tax burden on many people has risen over the past few years, and there will be further rises in the next 12 months. To make that tolerable, the Government's commitment to containing public expenditure and driving down excessive levels must be renewed and strengthened. That priority must be at the centre of our economic policies, because it is a necessary ingredient to reinvigorate the confidence and enterprise of the British people.
That is a clear divide between Conservative Members and Labour Members. The whole philosophy, strategy and policies of Labour Members, whether or not they wish to declare them, are driven towards ever higher levels of public spending. With that, and with low inflation, it is inevitable that the Labour party stands, and always will stand, for high levels of personal taxation. That is the charge which it must answer in this House and which, in due course, it will have to answer at the hustings.
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Mr. Malcolm Bruce (Gordon): The hon. Member for Milton Keynes, South -West (Mr. Legg) basically said that the Government need an economic policy that will work. He has told us what is wrong with their policy 15 years after it started. Those of us who have been in the House a few years have been on that roller-coaster a few times. The hon. Member for Stamford and Spalding (Mr. Davies), in his characteristically euphoric way, selected the good news. There is some good news and those of us with a genuine interest in the British economy welcome that. However, the hon. Gentleman showed a confidence that history suggests should be tempered with caution. In particular, he implied that inflation was now conquered. There is no question but that inflation is low and is staying at a low level, and that is welcome. However, when we talk, as most of us do, to business people, we do not find an underlying feeling that it will necessarily stay low or, indeed, that interest rates will stay low. In fact, real interest rates are high and rising, which possibly explains why Britain's investment climate is not good. It is certainly nothing like as good as the Government forecast. I am sure that the hon. Member for Stamford and Spalding will acknowledge that those of us who serve on the Select Committee were sceptical about that forecast.
Mr. Quentin Davies: There is no difference between me and the hon. Gentleman. We both agree that it is important that inflation is kept down. We both agree that inflation has been brought down to encouraging levels. We both agree that we must not be complacent about that.
It is precisely because we must not be complacent that I commended the Government on taking several courageous steps. I specifically mentioned three--the decision to increase interest rates much earlier in the cycle than has previously been the case; the decision to increase taxation and reduce the fiscal deficit; and the decision to underwrite the soundness of monetary policy by publishing the minutes of meetings between my right hon. and learned Friend the Chancellor and the Governor of the Bank of England. The hon. Gentleman cannot have listened to the points that I made.
Mr. Bruce: I shall not make the mistake of giving way again to a repeat of the speech that I heard the first time. The hon. Gentleman will hear my argument develop, and perhaps he will get my point. We constantly hear Ministers and Conservative Members say that the Government's objective is to lower taxes and public expenditure. The reality is that, after 15 years, they have succeeded on neither count. They have not reduced public expenditure as a proportion of gross domestic product. Nor have they reduced the tax take--in fact, they have increased it. From 1974 to 1979, the period of the previous Labour Government, when Denis Healey was Chancellor of the Exchequer, total taxes as a percentage of GDP amounted to 35.75 per cent. The Government predict that, by the end of this Parliament, the tax take will be 37.75 per cent. of the total. That is the prediction of a Government who not only say that they are committed to tax cuts, but pretend that they have delivered them. Not only have they not done so; they have presided over the biggest single increase in taxes in one year under any Government of any persuasion.
I hope that the Government's record and their credibility are wearing impossibly thin. They will find it extremely difficult to persuade the British people that,
Column 619even if they have the genuine desire to deliver, they have the slightest idea of how to do so. They must be judged on delivery and not on their ambitions, which they have not fulfilled.
Most people will remember that a major feature of the previous general election was the claim that people would face an enormous tax bombshell if there was a change in government. As a result of the previous three Budgets, the average family will pay more than £1,000 a year more in tax than they did before the previous general election. That resulted from electing a Government who specifically warned the public against the dangers of electing anyone else, saying that they should fear tax rises.
Mr. John Townend (Bridlington) rose --
The other problem that the Government ignore is the massive and apparently unshiftable increase in unemployment. Again, I am not speaking as an apologist for the Labour Government. In a sense, I am independent of their record, but the facts speak for themselves. Many of us remember the poster that read, "Labour isn't working". I seem to remember that unemployment at the time was 1 million. It is now running down from 3 million to 2.5 million. The right hon. Member for Llanelli (Mr. Davies) referred to the concern of the Governor of the Bank of England about structural unemployment. He says that he does not think that it can go much below 2.5 million. Other commentators say that that may be right, but perhaps it can go no lower than 2 million.
The cost of unemployment is, fundamentally, making it impossible for the Government to get out of their economic bind. It is worth summarising that the total cost of unemployment is £25 billion. The difference between the net extra cost of unemployment when the Government came into office and the cost now is £15 billion a year. The benefits of receipts of £118 billion from North sea oil and £77 billion from the privatisation windfall have been wiped out by the cost of unemployment. It is not good enough for Ministers to say that they do not believe that there is an unemployment strategy. Alternatively, they believe that simply to lower inflation, to cut public expenditure and to cut taxes will solve the unemployment problem. Evidence suggests that the contrary is the case. The country is now entitled to say that, after 15 years of failed economic policies, however honestly pursued, the party in government has had 15 years too much credit. It really is time to start looking at alternative ways of prioritising our economic objectives and delivering them. Clearly, we must do something to achieve that. On the specifics of the Chancellor of the Exchequer's Budget strategy, it was ironic that the hon. Member for Milton Keynes, South-West lectured previous Governments for having sometimes three Budgets in a year when the Government have just produced two Budgets in a week. That suggests that some people are standing in a pit and do not realise which way the mud is flying.
A particular concern has been highlighted. The hon. Member for Oxford, East (Mr. Smith), who opened the debate for the Opposition, drew specific attention to a paragraph in a Treasury and Civil Service Select
Column 620Committee report. I asked the Committee to include it and it agreed to do so. It is specifically relevant to the issue of duty on alcohol.
I urge the Government to get to grips with the matter. The Chancellor made it clear in Budget No. 1 that he recognised that no justification existed for increasing the duty on alcohol. Ironically, he decided to cut the duty on sparkling wine. He acknowledged that an increase in duty would have two problems. First, it would aggravate the problem of cross-border shopping because of the differentials. Secondly, it would hit hard a major domestic industry, especially the spirits trade, but also the brewing industry. A week later, what did he do? He imposed taxes that widened the differential and that hit that important industry.
I shall declare a clear constituency interest. I represent whisky distilleries. Boundary proposals affecting my constituency, assuming I am successful in winning under the new boundary arrangements, will mean that I quadruple the number of distilleries that I represent. It is an important Scottish industry and an extremely important British industry. It is ironic that no one ever speaks about this, but the gin industry is not unimportant either. We produce those two important export products. Those industries employ a great many people and earn a great deal of foreign exchange. We should treat them with sensitivity. They all require a strong and healthy home market to be successful in the export market.
I urge the Chancellor of the Exchequer--perhaps the Financial Secretary could respond to this--to say what he will do about that, or that he will do something about it before the next Budget, because the industry cannot be left in such uncertainty. I have spoken to a number of people in the industry and visited one or two of the distilleries in my constituency. There is real anxiety that they will lose out and a feeling that their competitors in other countries receive a somewhat more sympathetic hearing from their Governments, who understand the importance of the matter. I urge the Government to respond to that.
Mr. John Townend: It is not just about having sympathy for those industries. If we are in the European Community, it is only right and proper that our industries should be able to compete on a level playing field. Does the hon. Gentleman agree that one of the real dangers is not just the personal buying, but the smuggling that is going on at an increasing rate, and in which criminal elements are starting to appear? We all know what happened in America during prohibition. Does he agree that a danger exists?
Mr. Bruce: I do and I have acknowledged that, although I am still puzzled by the Government's cut in Customs and Excise staff. It is essential that we attack and intercept smuggling, but the hon. Gentleman will acknowledge that part of the incentive for the smuggling is the wide differential in prices. That is not an argument for eliminating that. We should try to persuade our European partners to recognise the public policy benefit of not having alcohol duties that are too low. They should be encouraged to increase them a bit. We cannot, however, worsen the position by widening the differential. I agree with the hon. Gentleman, but we must approach the matter at both ends--at the market as well as at the crime and smuggling ends. The Government picked a strange time to impose that saving.
Column 621I have another concern. I had an exchange with the Chief Secretary to the Treasury when he was giving evidence to the Select Committee, and he did not satisfy me that the Government are as rigorous as they make out in keeping public expenditure under control. In particular, the Liberal Democrats have identified a number of areas of Government extravagance and waste that should be dealt with. Government spending on advertisements and entertaining has increased by several times the rate of inflation, with no evidence as to how that could be justified. Massive amounts of money are spent on consultants. I am not against consultants in principle, but the Government's own evidence suggests that the net financial benefit is very small. That seems to be a clear waste of money.
I found it interesting that the Chief Secretary to the Treasury took the view that it was unreasonable when the economic outturn was rather better than forecast for Government Departments to be expected to trim their budgets during the year. He said that it would create far too many management problems. Yet it is exactly what is imposed on local authorities and other agencies all the time.
The Department of Transport has told the railway operating companies--I know about ScotRail in particular--that they must find savings in the current financial year of between 5 and 10 per cent. That, of course, is to pave the way for privatisation. Incidentally, the consequences of that for Scotland are extremely severe. There is only one profitable rail service in Scotland. As the management in Scotland has said, there is only one possible way for a company that only operates trains--it no longer owns the track--to achieve cuts. It is to stop running loss-making trains. As every service in Scotland is a loss maker bar one, the consequences for the Scottish transport system are potentially devastating. It is not good enough for the Minister to say that the Government cannot do it to their own Departments, but they are prepared to do it to outside bodies. The Government suggested this year that they had achieved enormous savings, but those savings were achieved simply by errors in forecasting and because the economic outturn was better than anticipated. That is fine, but it is not a real saving in terms of rigorous attack on waste. In that sense, the Government have not been as credible as they would like us to think.
Therefore, it is extremely important that the Government do not make the same mistake that was made during the Lawson years of talking about economic miracles and the fundamental transformation of the British economy. There is no evidence that we have achieved a position in which the British economy is capable of earning the increased amount that it needs to ensure that we can sustain our public spending programme and maintain our competitiveness. There are signs that the foundations are being laid. I hope that they are, but one would have to talk in terms of two, three, four or five years and the accumulated benefits of those five years before one could say that we had achieved a fundamental shift.
It is a big mistake to latch on to the good figures when we are coming out of the recession and to claim something much more far-reaching that is not justified. The warning in that is that politically motivated tax cuts in advance of an election, which are not justified by the economic performance, will have a severe negative effect
Column 622subsequently. The Government should understand that the public will not be taken in twice. The public know what happened last time. The tax cuts were clawed back with interest and an awful lot of pain. Interest rates had to go up and we were knocked into a deeper recession than otherwise would have been necessary.
The Government have to recognise that if they want to talk about responsible and sound public finances, they have to do so at election time as well and not only in the immediate post-election period when it is much easier to make bold decisions and stand by them in the hope that they will get away with it in the long run. That has been alluded to even by Conservative Members. I seem to recall that the right hon. Member for Shropshire, North (Mr. Biffen), in his own dry way, once or twice has pointed out to Ministers that this time they might not find it so easy to fool people because the people were not likely to be taken in so readily twice.
As the Bill moves into Committee, we believe that the Government have either missed or failed to recognise opportunities on certain issues. As Liberal Democrats, we believe that certain reforms or changes in tax structure should be considered. I have already mentioned the duty on spirits. We shall certainly resist the Government's increases in duty on spirits in particular.
We believe that our proposal for reforming vehicle excise duty would be environmentally beneficial and would be welcomed. We intend to promote that. Our proposal is essentially to tax people on the use of their cars rather than on the ownership. We would switch the burden away from vehicle excise duty and put it on to petrol duty. Our calculations suggest that the overwhelming majority of motorists, even in rural areas, would be better off and the environment would also be better off. The Government could readily adopt such a proposal.
Several parts of the Government's new proposals for enterprise promotion and so on have already been mentioned. It is interesting that every time the Government introduce a new tax break, they by definition introduce potential new tax loopholes. The Government should at least respond constructively to any suggestions that potential abuses could be avoided before they have developed. We intend to make such suggestions.
It has been suggested that another way to promote energy efficiency may be to alter the VAT structure for energy-efficient building materials. That could usefully be debated. One of the ironies of the new 8 per cent. VAT rate on fuel is that it could be used for other items. Energy-efficient materials are one such item that is well worth considering.
We feel that several other proposals can and should be considered. Some of them have already been suggested from the Labour Front Bench and some have not. The Finance Bill is an enormously long Bill, with remarkably little in it. I echo the view previously expressed. Why do we have to say so little at such enormous length and tire ourselves out for so many hours in the process? I hope that we shall have some sharp and genuine debates on some real issues of tax policy, in which the Government might be constructive in recognising that there are some genuine ideas that come from outside their circle. If those ideas are not ready now, they will certainly be ready to be properly assessed and considered in Committee. We look forward to playing a constructive role in that process.