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6.4 pm

Mr. Malcolm Bruce (Gordon): The right hon. Member for Worthing (Sir T. Higgins) is right to warn about the dangers of basing spending proposals on future growth, but I hope that he would acknowledge that the same must apply to the Conservative Government, and that the Chancellor should not be talking--he is not yet talking-- about tax cuts until he has achieved his objectives on the finances. I shall return to that subject later.

The right hon. Member for Chesterfield (Mr. Benn) also took us to an argument. Of course there is an argument about what overall taxation should be, but there is a legitimate and proper argument, within that framework, about the priorities that divide the parties. It is very unfortunate that sometimes our debates do not allow that argument to take place, and that only the absolutes, in terms of financial framework, are discussed.

The present debate may be regarded in future as historic. We are reaching the end of a Government who are further behind in the opinion polls than any Government have ever been and secured re-election. We might be holding the last debate on a Tory Queen's Speech, and in that context it might be the last chance to determine the extent to which the Government have performed on economic policy on their own terms.

It may be worth reminding the House that, since the Conservatives came to power in 1979, boasts have been made throughout successive Parliaments, by successive Ministers, that we are in a new era for Britain--that an economic miracle has been wrought, with higher growth

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and lower taxes. In fact, 16 years on, in most material ways, nothing has fundamentally changed and the Government have failed to deliver on all those promises.

It is not that nothing has changed. I am happy to acknowledge that, within the balance sheet, some good things have happened. The reform of the trade unions is especially important, may be long lasting and was actively supported by Liberal Democrats and our predecessors.

The recognition, which was not heard in the speech of the right hon. Member for Chesterfield, that one does not get something for nothing and one must operate in a disciplined budget framework and take account of market forces, is correct. The Government have acknowledged that one must have a policy about balancing the budget in the medium term, although it is interesting to note that the Chancellor has changed his language on that. His object used to be to balance the budget in the medium term. Now it is to get the budget towards balance in the medium term--a more relaxed attitude at this stage of the Parliament.

Having acknowledged that there are some achievements, it is worth recording the scale of the failure. Taxes under the present Government are greater than they were under Denis Healey, for all the talk about tax cuts. Growth has been, on average, about 2 per cent.--currently 1.6 per cent.--manufacturing output continues to be less than it was in 1979, and investment as a percentage of gross domestic product is the lowest on record. Unemployment is more than double what it was when the Conservatives came to power and has remained at that level. It is generally recognised that our education system and training standards are poorer than those of most of our competitors.

There is therefore no economic miracle, and it is interesting that Ministers no longer speak about it in the way that they did even a few months ago.

Manufacturing production growth is Zero per cent. and unemployment is 2.2 million and static. A very critical fact is that the public sector borrowing requirement is heading for a 50 per cent. overshoot on the current year.

Liberal Democrats have targets on those issues and publish them, unlike the Labour party, so we feel that we may with some legitimacy make a constructive critique of the Government's performance.

Retail price inflation is 2.9 per cent. It is greater than the 2.5 per cent. target that the Government set themselves for the present Parliament, and the Bank of England is sure that there is little or no chance of the Government achieving their forecast. Investment is low.

I had a meeting last week with the German chamber of trade in London. Its representatives said that the extraordinary thing about investment in the British economy was that it was appreciated by foreigners--the Government were constantly boasting about levels of inward investment--but they did not understand why there was such low investment by British-based investors. I ventured to say that perhaps British investors knew the British Government better than foreign ones and had less confidence in their ability to deliver policy in the long term.

There has been a devaluation under this Government, but its benefits are clearly waning, as this week's balance of payments figures demonstrated--they were the worst

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ever. Ministers had boasted abroad about a strong recovery--an economic miracle--but it is fading, weak and fragile and needs to be handled with considerable care if it is not to be derailed. That is why the debate about the drive to reduce taxes which has seized the Conservative party is worrying. The economy is now performing substantially less well than it was a year ago and borrowing has not been brought under control. It is therefore extraordinary that, having been told last year that the position was so bad that there had to be a 3 per cent. increase in taxes, we can now apparently, against an even worse background, discuss tax reductions. That policy does not add up.

The Government, who have claimed that they have an unyielding war on inflation--to reduce it and keep it permanently low--are clearly using much more relaxed language when they refer to inflation. The Chancellor of the Exchequer says that the target is 2.5 per cent., but if inflation turns out to be something above 4 per cent. we will be relaxed about it. That does not show the same degree of determination as when he first set the target.

The need to reduce interest rates is more important to virtually everyone involved in the British economy than immediate short-term and unsustainable tax cuts. A 1 per cent. reduction in interest rates would save the Government £2.5 billion a year in interest payments. [Interruption.] Hon. Members are making remarks from a sedentary intervention so perhaps I should quote the Chief Secretary to the Treasury when he was speaking about last year's Budget. He said:

We seem to be hearing a different story. If £21.5 billion did not justify tax cuts when they were forecast and we are now talking about £30 billion as the outturn, it is difficult to see how the Government can justify the debate that they have allowed to take off among their Back Benchers. The Chancellor is being pushed to bribe the electors with their own borrowed money. He is borrowing at the rate of £1,000 per second. Some £160 billion of debt has been added to the national debt over the past five years--in addition to the equivalent of 8p extra on the basic rate of tax. Earlier, I intervened on the Chancellor to quote from his summer economic statement, in which he said:

That is a good summary and should be noted. It will be noted after the election if taxes are cut before the economic circumstances exist to justify and sustain them.

There was a time when Ministers took pride in the fact that they were sound financial managers of the economy, but they no longer listen to their own advice. The general election is pressing down hard on them and good economic management is less important than kidding the voters that the Government can deliver a miracle and hoping that the electors will not take account of the failure of the Government's forecasts.

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In the same debate on the economic forecast, the right hon. Member for Fareham (Sir P. Lloyd) said:

the electorate--

    "would note that the election was getting closer, and they would ask whether it would not have been easier all round not to have hiked up taxes last year just to lower them this year . . . Higher interest rates would not be good for investment, and the historically low rate of investment is probably our most persistent economic problem and the greatest threat to economic growth in the longer term."-- [Official Report, 12 July 1995; Vol. 263, c. 992.]
That was a Government supporter speaking in the House. Yet such is the political imperative that all that sound advice and sensible analysis is now being forgotten.

Conservative Members, perhaps understandably, criticised the shadow Chancellor's speech because it did not give an alternative policy, but he has tabled an amendment which we can support because it identifies many of the things that are wrong. I agree with some of the Conservative criticisms that Labour's position lacks clarity on a policy about which electors are increasingly anxious to hear. The Labour party does not have a clear economic policy or tax policy to convince anyone. It may have a useful electoral strategy, but not an economic policy.

The deputy leader of the Labour party has said on numerous occasions that cuts in the standard rate of tax could not be justified at present and should not be supported, but there has been no sign of what the Labour party will do. It seems that it will criticise policies, but allow cuts to be imposed even when they are irresponsible and will ultimately have to be reversed because they have been introduced at the wrong time against the wrong economic background.

It is hardly surprising that the late John Smith's economic adviser, John Wells, left the Labour party in disgust last week. He said that Labour's policy was "simply dishonest". He said:

Labour is apparently committed to a 10p tax--the right hon. Member for Worthing (Sir T. Higgins) was right to say that the level of tax is not known--5 per cent. VAT on fuel, higher benefits and higher spending. I wonder whether the shadow Chancellor is taking tax advice from Sting's accountant. The shadow Chancellor has been able to make his figures add up, but nobody outside the House can square them. It has been estimated that the minimum cost of a 10p tax rate would be £6 billion and we are entitled to know how that would be funded. It is not the most efficient way to deal with poverty anyway.

As the Chancellor of the Exchequer acknowledged in his speech, we set out our alternative strategy in the Liberal Democrat's alternative Budget that we published yesterday, from which I shall pick out four points. Our Budget comes in advance of the Budget and the Chancellor is still in purdah so he might benefit from advice. We believe that reducing interest rates would be the biggest single contribution to assisting the economy. Interest rates in the UK are higher than those of our main competitors; they are higher than those of America,

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Germany and Japan. The Chancellor must not put at risk any opportunity to reduce them and he certainly must not place them in danger of being pushed up.

That is one reason why we have consistently argued for an operationally independent central bank. It is important to include and understand the adjective "operational". The policy parameters for the independent bank should be set by Government, but their day-to-day administration should be a matter of economic judgment, not political judgment. If we operated on those terms, we would achieve lower inflation and permanently lower interest rates. Our inflation target is in the range of 0 to 3 per cent. because we believe that the 1 to 2.5 per cent. range is proving unrealistically narrow.

I wonder whether there should be some review of the operation of the inflation report. The discussions that I have had with the Bank of England suggest that trying to second-guess what will happen in two years is a very tricky business that is open to different interpretations. We must reach some agreement on how the report can operate more effectively and how we can take into account the balance of arguments. We must not have a futile argument about who is right, but must make a realistic assessment of the best estimate.

We have proposed several tax reforms in our alternative budget. As a Member of Parliament representing a Scottish constituency and one who is interested in Britain's trade, I am glad to announce that we have specific proposals about the spirits tax. It seems that the pique displayed by the Chancellor last year following his defeat over value added tax and his decision to introduce extra taxation of 26p per bottle on spirits has backfired. The Treasury received less revenue from the sale of spirits this year than in the previous year. I hope that the Chancellor will learn from that experience and will take account of the Treasury Select Committee's report on the matter. He must recognise that the time is right to reverse that decision, if not go further and cut spirits duty by 56p per bottle. Spirits are our single biggest export earner and it is astonishing that we should treat them so badly in our home market.

We have also introduced a progressive proposal to reform taxation which independent experts acknowledge is extremely efficient at delivering a transfer of funds from the better off to the poor and helping people to climb out of the poverty trap. We would impose a 50 per cent. tax on earnings over £100,000 per year and we would then use the resulting tax yield to remove 750,000 people from the tax bracket altogether by raising the threshold and harmonising the starting level for tax and national insurance. That would be a useful tidying-up exercise and I believe that the Chancellor should take our advice. Our proposal is progressive, fair, easily costed and self-financing.

The most important commitment in our alternative budget is our pledge to allocate £2.5 billion over and above the sum allocated by the Government to education and training. Unless we raise the standards of education in nursery schools, secondary schools, universities and training colleges, we will not lay the foundations for the sustained economic performance that will deliver the economic strength to finance future programmes.

In conclusion, the Government can no longer claim to have presided over an economic miracle. The economy is faltering, the Government have failed to meet their own

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targets and we desperately need money for education and training in order to secure our future. We must invest now if we are to deliver success in the future.

In that context, I shall make two points. First, if the Chancellor introduces irresponsible tax cuts in next week's Budget, we shall vote against them on the grounds that the money should be spent on education and on bringing borrowing under control. Secondly, if the Government do not switch from short-termism to a long-term vision for the future, they must recognise that they have been in power for too long and they should make way for those with fresh ideas and a fresh approach who may deliver what the Government have failed to achieve in the past 16 years.

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