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Having said that, we have no confidence whatever in the economic policy that lies behind the Bill. In the circumstances, it is high time that the Government recognised that they have run out of steam and that it is time for other people and other ideas.6.6 pm
Mr. Anthony Coombs (Wyre Forest): Before I say something about the economic background to the Finance Bill and the measures in it, I should like to comment on the interesting but slightly grudging speech of the hon. Member for Gordon (Mr. Bruce). He talked in particular about the rate of unemployment in Britain, which is 8.8 per cent. It goes without saying that every person in the House wants to do all that he or she can to effect a reduction in that rate. It is significant that the unemployment rate in Britain has been reduced by about 450,000 in the past two years. Vacancies are now at their best levels for the past four years.
As Britain exports some 30 per cent. of our manufacturing output, we do not live in isolation. We depend greatly on the worldwide trading environment. To that extent, it is worth comparing employment rates in Britain with employment rates elsewhere in the industrialised world. On those grounds, we fare rather better than the hon. Member for Gordon would have us believe. Our unemployment rate is 8.8 per cent. In Belgium, it is 14 per cent.; in France, 12.6 per cent.; in Italy, 11.9 per cent.; and even in Germany it is about the same as here, at about 8.2 per cent.
The significant point to make is that those countries that have the lowest ratio of taxation to gross domestic product--the United States with 5.4 per cent. unemployment, Japan with 2.9 per cent. unemployment and Switzerland with 4.5 per cent. unemployment--have the most significantly reduced unemployment. That shows effectively that, so long as the tax burden is lifted from industry and it operates in as deregulated an environment as is humane and sensible, industry will produce the jobs that we and all our constituents want in Britain.
The background to the Finance Bill was summed up rather accurately in the report on the Budget by the Treasury and Civil Service Select Committee, which was published a few days ago. The Committee said that the background was
"the most encouraging economic environment for some years" and that the Chancellor, who had appeared before the Committee, was justified in saying that there were enormous grounds for encouragement.
I happen to believe that our economy is right for a period of sustainable growth. We have relatively high and increasing productivity, a good export performance, low inflation, good industrial relations and the sort of supply side measures that lead to significant and sustained performance. That is borne out by business surveys. The latest west midlands business survey, for autumn 1994, said of the business climate that
"65 per cent. of firms believe business conditions in the West Midlands will improve and only 11 per cent. expect them to worsen". The Confederation of British Industry survey for the west midlands, published at the end of last year, showed that 80 per cent. of companies polled expected that their sales
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and output would increase during the next two years. About 60 per cent. expected net increases in their labour force over that period. The hon. Member for Oxford, East (Mr. Smith) described the effect of the Finance Bill on small businesses somewhat grudgingly, despite the fact that many of the measures will be of great benefit to small businesses, and I am not alone in thinking that. The hon. Member for Durham, North-West (Ms Armstrong), who is on the Opposition Front-Bench finance team, will be aware that the Durham university business school did a commentary on the 1994 Budget for small businesses, in which it said:"Small businesses will benefit more than most other sectors of the population."
Although it said that the short-term benefits might be "marginal", it thought that the longer-term benefits would be significant. The commentary ended:
"on reflection, this was a good Budget and entirely appropriate for the current economic circumstances".
It also mentioned the enterprise investment scheme and venture capital trusts and stated that the latter "can only be beneficial" for small companies. The Finance Bill and the Budget are entirely appropriate to the time and to the needs of small businesses, which produce so many jobs.
We talk a great deal about the feel-good factor. Obviously, as politicians, we want that factor to emerge because it is often reflected in the opinion polls. In one sense, however, the fact that the feel-good factor is not as evident as we would like, although the retail environment has changed recently, is evidence of the success of policies that have changed aggregate demand from consumption to exports and investment, which are significantly improving in the present environment and will lead to sustainable growth. It is no coincidence that, although consumer spending is increasing by only 2.4 per cent. per year--the Christmas figures were slightly higher--in real terms, export performance improved on last year by about 14 per cent. That improvement will underpin future sustainable growth. I am not saying that we can be complacent, for example, about the effect of a slowly improving housing market on various sectors of the economy. I come from Kidderminster, which depends on the housing market for the sale of its carpets. Although we can talk of moving resources away from the housing market by reducing tax relief on mortgages, it is crucial for consumer confidence and for the building industry, which could employ about 750,000 people with an upturn in the market, that that improvement is maintained.
I agree with the right hon. Member for Llanelli (Mr. Davies) that the Finance Bill and the Budget were possibly predicated on too conservative-- with a small as well as a large c--a view of the natural trend of growth in the economy. Between 2 and 2.5 per cent. is too low. In the late 1980s, we produced levels of 4 per cent. and, in one year, of almost 5 per cent. Provided the Government maintain a secure grip on public expenditure and are thereby able to reduce taxation, I do not see why we should not do so again. I want the Government to reduce taxes at the lower end and to move more people out of taxation, as well as adding to the 5 million people who pay tax only at the 20 per cent. rate. That would stimulate the economy and gain a natural growth rate significantly
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higher than the rate which we are enjoying and one which would approach the growth level that we enjoyed in the late 1980s. I want to comment on three aspects of the Finance Bill-- [Interruption.]Madam Deputy Speaker (Dame Janet Fookes): Order. I am sorry to interrupt the hon. Gentleman, but a certain amount of comment and conversation seems to be coming from Opposition Members. I hope that none of the hon. Members whom I have noticed engaging in those activities is expecting to catch my eye later.
Mr. Coombs: I understand that there is a maiden speech next, Madam Deputy Speaker, and there might be a certain amount of anticipation about that.
It is nonsensical for capital gains tax to take up no less than 365 pages of taxation literature. As my hon. Friend the Member for Milton Keynes, South-West (Mr. Legg) said, at 40 per cent., it is significantly higher than the general rate of income tax and it inhibits the movement of assets. Within the capital gains tax regime, there is no differentiation between long-term and short-term gains. Significantly, I think that it was the hon. Member for Islington, South and Finsbury (Mr. Smith), speaking for the Labour party during a previous Finance Bill Committee in 1992, who proposed that the tax should be tapered for longer-term gains. The present rate is counter-productive. Studies in the United States have shown that a rate of about 15 per cent. would maximise revenue.
Although there are various ways of reducing the capital gains tax burden, as my hon. Friend the Member for Milton Keynes, South-West said, increasing exemptions without decreasing the rate is not the way to go about it. An axe has to be taken to that Gordian knot and the rate of capital gains tax should be significantly reduced. During the past few days, other hon. Members and I have been lobbied by constituents who employ a significant number of people in amusement arcades-- [Interruption.] That may be a matter of hilarity to Opposition Members, but between 90 and 120 people in my constituency rely on that business for their livelihood.
Various other forms of gambling have been protected from the effects of the national lottery. The number of jackpot machines allowed in casinos has increased and concessions have been made to bingo clubs, the pools and even to betting shops--it is proposed that the latter should be able to have cash-only win machines. Despite those concessions, the gaming machine licence duty will increase by about 19 per cent. as a result of the Finance Bill and, for the first time, an amusement machine licence duty of £250 will be imposed on video machines.
It is expected that that measure will take no less than £60 million out of the industry's profits because it cannot be offset by higher charges to consumers. Inevitably, as has been said by the leading firm of City accountants, Pannell Kerr Forster, which looked into the effect of the duty, it will lead to not only a reduction in employment and job losses of 4,600--that should be of interest to Opposition Members and everyone in the House--but a loss of £15.8 million a year in national insurance and pay-as-you-earn contributions, an increase in social security costs of £200,000 a week and, ironically, a reduction in corporation tax receipts to the Exchequer of 28 per cent., or £10 million a year, from amusement arcades and operators alone.
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I shall finish on this point-- [Hon. Members:-- "Hear, hear."] Hon. Members may be anticipating a maiden speech, but surely they are not anticipating it that much. I happen to think that the proposal to impose an amusement machine licence duty was brought about in an environment significantly changed by the advent of the national lottery. Although the Government may wish to pass enabling legislation in the Finance Bill allowing them to impose that licence duty, I urge them not to impose the duty until they have had an opportunity to consider proposals put forward by the British Amusement Catering Trades Association and the British Association of Leisure Parks, Piers and Attractions to mitigate the effects of that tax on an industry that has a significant effect on employment in my constituency.6.21 pm
Mr. Ian Pearson (Dudley, West): It is with great pleasure that I make my maiden speech to the House as the new Member for Dudley, West.
I begin by paying a generous tribute to my predecessor, the late Dr. John Blackburn. A man of great charm and courage, he radiated warmth and was popular and widely respected both within the House and throughout the constituency, where he was an energetic and effective Member of Parliament in dealing with constituents' problems. It is with a deep sense of responsibility that I succeed him in the task of representing the seat where I was born and have lived for most of my life.
Dudley, West is situated on the western fringe of the west midlands. It contains a number of small towns and villages, including Sedgley, an old market town that was once part of the Norman barony of Dudley; Kingswinford where I grew up, which dates back to the Domesday book; and Wallheath and Wordsley. They all border on the green belt and rural fringe of south Staffordshire.
The seat has changed radically over the 20 years since a Labour Member of Parliament was last returned to the constituency. Its population has grown enormously, with new housing developments, particularly in Amblecote and Gornal. Now, three quarters of those who live in the constituency own their own homes. Industrially, too, the seat has changed dramatically. The past 20 years have seen the closure of the steel industry and allied trades in Brierley Hill, Brockmoor and Pensnett. Recently, we have seen the growth of Merry Hill, a major retail and leisure complex. It is one of the biggest shopping centres in western Europe, with more than 2.5 miles of marbled malls attracting 23.5 million visitors a year. That prime retail site is more profitable than Oxford street. The area still produces the finest cut- glass crystal in the world and has some of the best pubs and beers to be found anywhere. My constituency has a strong and proud manufacturing tradition, with more than 2,500 small businesses, many of which are in specialist engineering and serve the motor industry.
The people of Dudley, West are practical, hard-working, open and honest. They keep their promises and expect others to keep theirs. On 15 December they spoke for the nation. In massive numbers, they voted against a Government who they believe have lied to them and betrayed them and are completely out of touch, and for a Labour party which they know is more in tune with their needs and aspirations and is developing a growing bond of trust and confidence with the British people.
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My principal reason for speaking, however, is not to report the strength of feeling in Dudley, West about VAT on fuel, broken promises and the growing appeal of new Labour--the poll result amply demonstrates that. It is that my background is in business finance and economic development. Until I joined the House, I was closely involved in helping small and medium-sized businesses to grow, and in helping local and regional economic developments to increase jobs, improve skills and raise prosperity.A burning issue in Dudley, West is the devastating impact of Merry Hill's success on town and village centres within my constituency and the neighbouring constituencies represented by my right hon. Friend the Member for Dudley, East (Dr. Gilbert) and the hon. Member for Halesowen and Stourbridge (Mr. Hawksley). The seriousness of the problem is widely recognised and has produced a major change in ministerial guidance on out- of-town retail development. Nothing has been done, however, to alleviate the problems. Merry Hill's success owes as much to tax incentives for the site's development as to anything else, although I freely acknowledge the vision and entrepreneurial endeavour of the private developers who got the project off the ground. I want the affected centres in Dudley borough to be given special status in an amendment to a clause in the Finance Bill so that they can benefit from a package of tax reliefs and allowances similar to those on offer to Merry Hill when the site was developed. That would be natural justice.
More broadly, there is significant scope for a more imaginative use of tax breaks in funding economic and infrastructure development. Tax breaks should be designed to attract institutional funding support and provide support for public-private partnership development through the issue of regeneration and renaissance bonds. The Budget has missed an opportunity to develop that possibility and the private finance initiative is singularly lacking in that respect. As a champion of small and medium-sized businesses, I welcome the purpose behind the establishment of venture capital trusts. My experience in the venture capital industry leads me to suspect that the Government's figures on the amount of funds that will be generated from it are highly ambitious, to say the least. I share the concerns and scepticism of my hon. Friend the Member for Oxford, East (Mr. Smith) that the scheme may degenerate into a tax avoidance mechanism for the very rich and produce no real benefit for businesses. That must not be allowed to happen. Neither VCTs nor business angels schemes--I presume that they are given greater support--will solve the problem of the equity gap that still exists. Nor is there an effective support programme for the vast majority of small and medium-sized businesses that do not want to go down the equity route but want to develop, grow and thrive.
The Government have a major role to play in assisting companies to upgrade the sources of their competitive advantage. That is not to deny the role of the market, but our country should provide at least the same level of support for our businesses as that offered by other regional and national Governments.
In the west midlands, our future prosperity is linked to the fortunes of the motor industry. We compete head to head with Baden-Wu rttemberg in Germany and
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Emilia-Romagna in Italy. We have had significant successes, but the simple fact is that the support available in other regions of Europe for businesses is far ahead of what we can offer in the west midlands. We can, and must, do better to provide such support if we are to compete successfully in future European and world markets. Providing tax relief to defray research and development costs of small companies is one mechanism of merit that should be discussed further in the House, but much more is needed.For a long time, I have been impressed by the way in which the German Government have supported growing businesses through the Kreditanstalt fu r Wiederaufbau. There is a strong case for establishing and supporting regionally based business development banks and institutions in our country which could offer patient, long-term loan finance to companies. That matter should be considered in the Committee considering the Bill.
I have been able to touch on only one or two issues relating to small businesses that are the lifeblood of Dudley, West's economy, just as they are vital to the future of Britain as an industrial and trading nation. I believe that it is not the purpose of a maiden speech to go into significant detail, but I would welcome an opportunity to expand on those issues and themes in more detail at a later date.
I know that it is customary for a maiden speech to be heard in silence. I have been warned, however, that I cannot expect similar treatment ever again. I thank hon. Members for their courtesy this evening.
6.31 pm
Mr. John Townend (Bridlington): It is always a great pleasure and a privilege to follow a maiden speaker. I congratulate the hon. Member for Dudley, West (Mr. Pearson) on his excellent maiden speech. I am sure that we will hear a lot more from him in future years. The hon. Gentleman has clearly had a significant effect on the Opposition Benches, because as one who has attended practically every debate on a Finance Bill in the past 15 years, I can tell him that at 6.31 pm there would normally be just five Opposition Members present. [Interruption.] I have to admit that, normally, there would not be all that many of my hon. Friends on the Conservative Benches, either. [Interruption.]
Madam Deputy Speaker: Order. Will those who are going out of the Chamber go quietly? Those who remain should also be quiet.
Mr. Townend: My right hon and hon. Friends and I are very grateful to the hon. Member for Dudley, West for his kind remarks about his predecessor, Dr. John Blackburn. He was extremely popular on both sides of the House. Even though he was older than me, he would often address me as father or uncle.
I believe that Madam Speaker must have done a lot of research when she put my name following that of our new colleague, the hon. Member for Dudley, West, on the list of speakers, because we have an awful lot in common. He has already told the House that he represents a seat in the area in which he was brought up and that he is a local Member of Parliament. I, too, represent an area of east Yorkshire in which I have lived all my life. There are not too many other hon. Members who can claim to be true
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local Members of Parliament. It is a great advantage to represent the area in which one has lived all one's life, as the hon. Gentleman will discover over the years.The hon. Member for Dudley, West also spoke about his interest in public houses and beers, and the House is well aware of my long-standing interest in the alcohol industry. I am sure that the hon. Member for Gordon (Mr. Bruce) would join me in welcoming the hon. Gentleman to the lobby which is trying to persuade the Government to give the brewing industry a level playing field in Europe.
In common with the hon. Member for Dudley, West, my occupation was in business finance. I started off as a chartered accountant and you said that one of your main interests--
Madam Deputy Speaker: Order. Not the Deputy Speaker, but the hon. Member for Dudley, West (Mr. Pearson).
Mr. Townend: The hon. Member for Dudley, West said that his main interest was small businesses and he raised some relevant provisions in the Finance Bill which concern such businesses. I am also involved in small businesses.
The hon. Gentleman has had a famous victory and we should not take that away from him. He follows a long line of hon. Members who also enjoyed famous by-election victories but who were not with us for too long. When we regain that seat, however, I hope that, in due course, the hon. Member will find a real safe Labour seat. I wish him well in his parliamentary career. I am sure that he has a valuable contribution to make. His experience in the business world in particular will be extremely valuable to his party, which is not well endowed with people experienced in business and, in particular, small businesses.
I had the privilege to be called to speak during the debate on the Budget, when I spoke at some length about the excellent performance of our economy in the past year and the Government's enormous successes. They have been mentioned in some detail by my hon. Friend the Member for Milton Keynes, South-West (Mr. Legg). With inflation at a low level, unemployment falling month by month, a recovery that has surprised everyone by being export led, the balance of payments deficit falling month by month, the Budget deficit falling faster than expected and investment and productivity rates rising, the performance of the British economy in the past year has been the best that I can remember. On the economic front, the Achilles' heel of the Government is spending and taxation--my right hon. and hon. Friends will not be surprised to hear that.
The size of the Finance Bill--it comprises 348 pages and contains 144 clauses and 29 schedules--suggests that my dear friends and colleagues at the Treasury have not yet got a grip on the Inland Revenue. We are supposed to be the party of deregulation; as such, there is absolutely no need to have a massive Finance Bill year after year, Bills that make our tax legislation more and more complicated. Whenever the Government come up with a good idea to encourage investment or to encourage business, the Revenue is so obsessed with tax avoidance that it hedges the idea around with so many qualifications, which run into hundreds of clauses and subsections, that no one can understand it. The purpose of a good proposition is, if not lost altogether, certainly weakened.
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The Opposition talk about tax avoidance and how they would increase the tax yield, but how they can criticise the Government, when, year after year, they produce a Finance Bill of this size, I do not know. In the debate on the Budget I spoke at some length on the economy in general and tonight I would like to deal with one or two of the Bill's provisions that affect my constituency. My hon. Friend the Member for Wyre Forest (Mr. Coombs) has already raised one of them--tax on amusement arcade machines. As right hon. and hon. Friends will know, I represent three tourist and holiday towns--Bridlington, Hornsea and Withernsea--in which there are a considerable number of amusement arcades and operators. I have to say again that I think that those proposals have come from the Inland Revenue, and have not been especially well thought out.I am especially interested in the comment of the Paymaster General, in a letter which he wrote to me, that
"Government policy, as stated by the Chancellor, is to widen the tax base where sensible rather than increase the rate of individual taxes, or raise the rate of income tax."
I do not object to that in principle, but that is not the only choice. There is another, and that is not to widen the tax base, not to increase taxes at all, but to control and reduce public spending. I ask my right hon. and hon. Friends to consider that matter again. Even if they insist on obtaining that yield, it can be done more cost-effectively.
I have had a long telephone conversation with, and a letter from, a distraught constituent who is a small business man. He tells me that, if the proposals are passed unamended, he will be out of business. He takes only about £8,000 a year out of his small, one-man business. He operates single-site machines, which he lets, and he shares the stakes with the site owner. The new tax will cost him £8,000 a year. The tax on a two-operator machine will cost £500 a year, or £10 a week, while that on a one-operator machine will cost £250 a year. If the measure is passed unamended, many of those machines will be withdrawn, so the Government will receive no income. As my hon. Friend the Member for Wyre Forest said, the resulting loss in corporation tax, the increase in the costs of unemployment pay and social security to the people who lose their jobs and the loss in national health insurance contributions and pay-as-you -earn taxation makes one seriously wonder whether it is worth the candle. The British Amusement Catering Trades Association has made some interesting proposals which would ensure that most of the yield that it is hoped the changes will produce will be achieved by another means. It proposes to decrease the rate on those machines to £100 and to introduce a new band of tax on the all-cash pay-out machines. I strongly urge my right hon. and hon. Friends to consider those proposals carefully.
I also urge my right hon. and hon. Friends, when they are preparing next year's Budget, to tell Customs and Excise and the Inland Revenue that there will be no further new taxes.
Another matter, which affects my rural constituency, is the proposal to end the present concession, which has been in force for many years, that vehicle excise duties should be exempted for owners of vehicles that are used for short journeys of up to six miles a week on public highways between different parts of land that those same people occupy. Many agricultural holdings have parcels
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of land that are geographically close to one another but not integrated within a ring fence, and many more have contiguous parcels of land that are bisected by public roads. People need to cross the road simply to move a tractor from one side to the other. Under paragraph 2(h) of schedule 4 to the Bill, that exemption will be abolished. I do not know how much money will be gained as a result, but it seems to me that it is not a very sensible proposition, because such a road will be used only for very small distances, for convenience. That places another burden on agriculture. The measure will be especially burdensome to small farmers--and the Conservative party is the party that believes in and supports small businesses. I think that someone in the Department must have been trawling around, asking, "Where can we find an extra burden to put on various people?"I trust that the present Finance Bill will be the last one in the present Parliament under which the overall burden of taxation will increase. From now on, taxation must be reduced, but that must be coupled with fiscal rectitude. The Government must adhere to the programme, which they have set out clearly in the Red Book, to reduce the public sector deficit. There must be no weakening on that. I have stood in the Chamber year after year and said the same thing, and I say it now to my right hon. and hon. Friends: public spending at 42 per cent. of gross domestic product is far too much, and we should be ashamed of that level. However, the deficit may be reducing more quickly because revenues are increasing faster than forecast in the Red Book. If we succeed in reducing taxes--I think that we shall--we shall not put the future of the economy at risk if we reduce spending by an equivalent amount; there will be no effect on the fiscal stance.
If my right hon. and hon. Friends go out into the country to listen to what people are saying, they will discover that the great dissatisfaction with the Conservative party at the moment, as expressed in the by-election that brought the hon. Member for Dudley, West to the House, has nothing to do with disputes about Europe; the dissatisfaction is about crime, law and order and the way that people feel about the money in their pockets. Therefore, we should take no notice of the hon. Member for Gordon, who said that, at the next Budget, the Government should be very careful about cutting taxation. Of course he would say that, because he wants the Government to lose the next election.
We now have the platform and, if the Government do what they should do in the next year--if they do what their supporters want them to do--they will squeeze public spending sufficiently to give themselves ample resources to reduce taxes. That must be our first priority. If anyone believes what the public opinion polls are trying to say--that the majority of people now believe that a Labour Government would deliver lower taxes than a Conservative Government--he or she is in cloud cuckoo land. Does anyone seriously believe that Labour Members, if they were ever to sit on the Government Benches, would make proposals to reduce spending? Does anyone believe that they would make proposals to reduce taxation? Every Labour Government have taxed more at the end of the Parliament than they did at the beginning.
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It is the Conservatives' failure to live up to our reputation as the party of low taxation--our failure, as far as publicity goes--that has allowed people to start to believe that, in the words of my hon. Friend the Member for Welwyn Hatfield (Mr. Evans), "that lot over there" would spend less and tax less. They are in cloud cuckoo land. I also wish to comment on the Opposition Members who continually claim that so much money can be saved for the Exchequer by closing loopholes. They do not mean closing loopholes; they mean closing concessions, so let everyone beware. [Interruption.] Yes; they mean closing concessions, such as the concession on inheritance tax that the Government introduced which allows family farms to go from father to son, and the concession that the Government introduced which allows family businesses to be carried on to the next generation, provided members of the next generation carry on the business and work in it.Let the public beware: when the Opposition speak about ending concessions, they will hit the farmers--the small farmers, the family farmers. Let the farmers' sons know that the family farm might not go to them if the Labour party comes to power. Labour will hit the small businesses that the hon. Member for Dudley, West said that he had come to the House to represent. Those are the concessions that the Opposition want to do away with. We curtail avoidance methods every year when we bring forward the great bible- -the Finance Bill. If Opposition Members can give good examples of tax avoidance that should be stopped, I am sure that my right hon. and hon. Friends will be only too pleased to know about them.
Mr. Brian Sedgemore (Hackney, South and Shoreditch): Now try to be coherent.
Madam Deputy Speaker: Order. I do not think that the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) was in his place when I made some observations about sedentary interruptions, so I shall repeat my comment: I deplore them.
Mr. Townend: I am sure that the hon. Gentleman, whom I have always considered to be a friend, would like to withdraw his remark, Madam Deputy Speaker. I served for many years on the Treasury and Civil Service Select Committee and I always found the hon. Gentleman to be reasonable--the adjective which he used could be used of him, particularly when he was questioning a former Chancellor of the Exchequer.
I support one of my hon. Friends who said that next year, when we consider how to disburse the great treasure that we have saved by cutting public expenditure and give people back their money, we should look carefully at capital gains tax. With a minimum of expenditure we could simplify what has become a not very productive and complicated tax. It is so complicated and yields so little that I respectfully suggest that it might be a good idea to think of abolishing a tax every Budget, as we used to do some years ago. As I said when we debated the Budget, I support the broad thrust of this year's Budget and the Finance Bill. I have every confidence that, as the year continues, the faces of the Opposition will become bleaker and bleaker as the recovery continues, the population feels better and better, unemployment continues to decrease, the budget deficit continues to fall and the balance of payments
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moves into surplus. We shall deal with our Achilles' heel and at the next Budget we shall start a continuous programme of reducing taxation.6.51 pm
Mr. Giles Radice (Durham, North): First, I pay tribute to my hon. Friend the Member for Dudley, West (Mr. Pearson), who made an extremely confident and fluent maiden speech. I congratulate him on paying such a warm tribute to his predecessor and on his knowledge of his constituency, particularly the pubs and beer. It is clear that he will bring expertise to our debates. His speech showed a great knowledge of small businesses and what can be done to help them. I look forward to hearing what he has to say in future debates. I have no doubt that he would be an extremely good candidate for the Finance Bill Committee--a fate worse than death which perhaps I should not wish on him.
I shall devote most of my remarks to the Select Committee report on the Budget, which it is customary for us to consider on Second Reading of the Finance Bill. However, I shall first comment on the remarks of the Chancellor who, in a typically low key and modest way, said:
"I come before a Select Committee which will find it extremely difficult to ask any kind of critical questions on the
macro-economy."
We also had some remarks in that vein from the hon. Members for Bridlington (Mr. Townend) and for Stamford and Spalding (Mr. Davies). It is true that there are some good signs about the economy. There is an economic recovery after the longest recession since the war. Inflation is still low and the balance of payments is improving, especially on exports. There are, however, a number of qualifications to be made.
Some of the recovery does not have much to do with the Government. There was a devaluation, which is not often mentioned. As a supporter of the exchange rate mechanism, I have to acknowledge that. Fortunately, I have a good alibi as it was I who coined the phrase that we entered the exchange rate mechanism
"at the wrong time, for the wrong reasons, at the wrong rate."--[ Official Report , 15 October 1990; Vol. 177, c. 937.]
I said that on the day that it was announced to the House of Commons that we had entered the ERM. Fortunately, my remarks were reported in the House, so I have an alibi. Some Conservative Members do not. We owe much of our success in exports to the fact that we devalued. As the report shows, that has been the main motor of our recovery, but it is not often mentioned by Ministers and certainly not by the Chancellor of the Exchequer.
We do not often hear about the fact that, as a consequence of the two recessions, we still have a small manufacturing base and do not have enough capacity in the economy. The nature of the recovery means that there is not a feel-good factor. There have been cuts in living standards and many people, particularly in the south, are suffering from negative equity as a consequence of the crash in the housing market.
Having been in the House for some time and having heard successive Chancellors make grand statements about the economy, I warn that the use of hyperbole on the British economy has an extremely bad track record. We all remember the economic miracles associated with the 1980s--the boasts of Mrs. Thatcher, Lord Lawson and even the present Prime Minister. I remember the Prime
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Minister's speech just before we entered the longest recession since the war. A certain amount of humility from Ministers on the subject of the British economy would be in order. We all know that improving the British economy is a long, hard road and there are no short cuts. My hon. Friends are right to say that long-term investment in education and training and in research and development is important, but it takes time and there are no easy answers. I wish to concentrate the rest of my speech on the subject of tax cuts. It is clear from the speeches of the hon. Members for Bridlington and for Milton Keynes, South-West (Mr. Legg) that Conservative Back Benchers and those who voted for the Conservative party at the last election very much want to hear about tax cuts. In our report, we warned the Chancellor about the dangers of making tax cuts. Everyone in the House understands the attraction of cutting taxes. Even at the best of times our constituents are not wildly enthusiastic about paying taxes.It is part of Conservative mythology that the 1992 election was won on the promise to cut taxes. Following the tax-increasing Budgets of 1993, the Opposition are entirely justified in throwing that promise back in the Conservatives' faces. The Dudley, West by-election was basically won on the back of those broken promises and the fact that the Conservative party promised to reduce taxes and then did not do so. Instead, the Government increased taxes by the largest amount in one single year--as everyone now knows.
We have just heard from the hon. Member for Bridlington that the Chancellor is under great pressure from many of his supporters to cut taxes as soon as possible, preferably in the 1995 Budget. It is clear why they want him to do that: they hope that it will restore their political fortunes. The question that my Labour colleagues and I put to witnesses at the Select Committee hearings--to the Government's economic adviser, the Governor of the Bank of England and the Chancellor--was if and when it would be economically and not just politically justified to cut taxes. Their answers are of some interest to the House.
The Government's economic adviser, Mr. Alan Budd, saw two reasons why it might be unwise to cut taxes: if such action threatened sound public finances--to be fair, the hon. Member for Bridlington also mentioned that point--and if the economy was at or above its full capacity. When asked the same question, the Governor of the Bank of England agreed that tax cuts could be inflationary if the economy was overheated or was growing above capacity. In answer to the question from my hon. Friend the Member for Warwickshire, North (Mr. O'Brien), he also said that if tax cuts were made at a time when the economy was overheating he would have to consider his advice to the Chancellor on the subject of increasing interest rates.
Not surprisingly, the Chancellor was less forthcoming in answer to our questions about tax cuts. He agreed--as he had to, because his economic adviser had just said it--that as well as the state of public finances he would have to consider the overall state of the economy before cutting taxes. He assured the Committee and the general public that he would not take risks with inflation, but he said little more; he has certainly not discouraged his
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supporters, such as the chairman of the Conservative Back-Bench committee, from assuring Conservatives that, come the next Budget, the Government will cut taxes.Mr. John Townend: I am obliged to the hon. Gentleman for giving way. While cutting taxes in isolation could be dangerous for the economy, will the hon. Gentleman accept that if the tax cuts were balanced by spending cuts--if it were fiscally neutral--there would not be the same danger?
Mr. Radice: It would depend on the economic situation at the time. One would also have to consider the underlying economic situation, as Alan Budd told the Committee.
In considering the economic wisdom of tax cuts, the key issue is the extent of spare capacity in the economy--an issue on which we did not receive any clear answers. Last year the economy grew well above the so-called trend growth rate. Economic growth was 4 per cent., but the Treasury estimates the trend growth rate in the economy at between 2 and 2.5 per cent., which is about the growth rate that the economy has achieved in the past 10, 15 or 20 years. How long the economy will continue to grow above trend without overheating depends on how much spare capacity exists and whether there have been the supply side improvements about which Ministers and Government Members always boast but of which there is little hard evidence. The jury is still out on that question.
With regard to capacity, the chief economic adviser told us that the output gap is anything between 1 per cent. and 4 per cent.--in other words, he does not really know. However, most advisers were sceptical about the size of the output gap despite the long recession. For example, Mr. Gavyn Davies told us that he is now seeing a sharp tightening in the labour market. Mr. Christopher Johnson talked about the risk of inflationary pressures, while Mr. Andrew Brittan, who has a Keynesian reputation, said that much of the capacity which one might imagine would be present in the economy was lost during the recession. Therefore, he said, the economy could grow above trend for only a couple more years at the most.
The Select Committee concluded in its report that in view of the dangers of overheating, and given that we did not know how much spare capacity was left in the economy, it was correct to be cautious about the amount of spare capacity remaining and about the circumstances in which tax cuts would be justified economically. In his written evidence to the Committee, Christopher Johnson pointed out that the idea that taxes are being increased in this fiscal year only to be lowered in the following year
"seems like a pointless `Duke of York' exercise, marching the troops up the hill only to march them down again".
One does not have to look at the crystal ball when one can read the book. There is a recent example of a Tory Chancellor cutting taxes when the economy was overheating and I am sure that the hon. Member for Bridlington remembers it very well. In March 1988 Nigel Lawson gave away £6 billion in a full year when inflationary pressures were already very strong. Partly as a consequence of that Budget, the economy went out of balance, interest rates had to be raised to record levels in order to balance it again, and the country suffered a prolonged recession from which we are only now recovering.
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In his Budget speech, the present Chancellor told the House: "Those who bask in their short-term popularity and neglect the need for sound economic measures will live to rue the day hereafter."-- [ Official Report , 29 November 1994; Vol. 250, c. 1080.]He should heed his own advice with respect to tax cuts.
7.5 pm
Mrs. Jacqui Lait (Hastings and Rye): I am grateful to be able to take part in the debate as I have been privileged to speak in the two previous debates on the Budget, when I concentrated on an issue which is of particular interest to my constituency--the illegal importation of tobacco and alcohol products.
The House will be pleased to hear that I do not intend to spend too much time repeating those arguments today, although my commitment to solving the problem by approximating--I use the word "approximating" and not "harmonising"--duties throughout the European Union remains as strong as ever. I will continue to encourage Treasury Ministers and others to make sure that Ministers in other countries are aware of the health implications of the illegal importation of cheap tobacco and alcohol, its effect on the rule of law and on Government revenues, and the costs of trying to prevent the smuggling of those products. Apart from that constituency point, I wish to address some broader issues, many of which have been mentioned already. I do not wish to repeat what has been said already, but I should like to pick up some of the points made by the hon. Member for Durham, North (Mr. Radice). I am always fascinated by the debate on spare capacity as I am never sure exactly what "spare capacity" means, although one has an instant vision of empty and rusting factories and of many people in long-term unemployment.
I believe that the fundamental problem of spare capacity is access to capital. If the pound is strong--as it is now--if there is a great deal of inward investment in the economy and, because of the expertise of the City and its international role, there is access to international capital at very competitive interest rates, it seems to me that capacity is limited only by our access to capital and our ability and desire to borrow it.
We can always build factories. Modern technological developments mean that factories are no longer the huge, acre-gobbling monsters that they once were. We can compare today's factories with the original Longbridge site, the memorable Rootes in Linwood and the old ICI at Teesside. Today smaller, much more efficient plants produce many more goods. We have to erase old- fashioned attitudes about production and manufacturing.
We must ensure, as the Government have, that we are able to access capital at a price that we can afford to pay. The key to achieving that aim is keeping down the inflation rate. One of the benefits of controlling inflation is the elimination of the short-termism that has plagued our country for the past 40 to 50 years, when investors could not rely on the fact that the pound would be worth exactly the same amount in two years' time as it was on the day they made their investment. If people cannot believe that their investments will retain their worth, they want high returns as compensation for that risk. If the pound is steady, our investments will become much more
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