House of Commons Hansard Debates for 28 Nov 1996 (pt 18)

Mr. Alan Howarth: Does the right hon. Gentleman regard it as a mark of prudence when the Chancellor, in his last Budget before the general election, tells the House that, in the year to come, consumer spending, which is anticipated to rise by 4.5 per cent. in the next year, will be

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the driving force of the economy, and when he adds fuel to the flames by cutting direct taxation? Is that really prudent economics?

Sir Terence Higgins: I shall deal with the whole area of policy in my main remarks.

I shall pick up on the speech made by the hon. Member for Peckham (Ms Harman). I am sad that the level of debate has been depressed to the stage where we have soundbites about 22 tax increases when the list itself is unbelievably ill-defined and does not really justify the claim at all. To lower the debate to that standard seems quite extraordinary and I would not wish to pursue that line.

I want to take up a point that the hon. Lady made about flexible retirement, because she was very careful with her words. She said, "It's all right if there is flexible retirement providing that the people who are exercising their discretion in that respect don't subsequently become a charge on the state." That passage cannot have been chucked in as a throwaway line, unless it was a straight slip of the tongue. It is worth examining exactly what that meant. I look forward to some elucidation, perhaps in the winding-up speech. The wording that she employed is interesting.

Mr. Bernard Jenkin: Is not the key point about introducing flexibility for retirement the fact that the vast majority of people are likely to take that option, and that brings forward the point at which their state retirement package becomes a liability on the state and is a significant net increase in public expenditure, which is yet another uncosted promise by the Opposition?

Sir Terence Higgins: There are a considerable number of those. I understand very well the point that my hon. Friend rightly makes.

I have, after 33 year in the House, lost count of how many Budgets we have had, but it is worth reminding people that, under Labour, we not infrequently had more than one Budget in a year. We should bear that in mind, although I am always hesitant to hark back to the previous Labour Government, because a large number of people who will vote at the next election were not born at that time.

One thing on which I do reflect, however, is the way in which taxes come and go. I am afraid that we are probably stuck with income tax, but the Government have made it clear that the sell-by date for capital gains tax and inheritance tax is rapidly approaching, and I welcome that. It is also the case that, over the years, taxes have changed. I well remember a former Chief Secretary of the Labour Government being quite clear that the selective employment tax that he had introduced would last for ever. In fact, when I was at the Treasury, we abolished both that and purchase tax. We introduced value added tax. I feel bold to say that VAT will probably continue. The Labour party's proposal for a windfall tax is certainly not something that I would ever wish to support.

I intervened in the debate yesterday and asked the shadow Chancellor whether the windfall tax would raise more or less than £2 billion. I got no answer, of course, but he went on to say, in a quite extraordinary statement:

"The windfall tax is not a tax on ordinary families."--[Official Report, 27 November 1996; Vol. 286, c. 366.]

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We need to examine carefully where the money is coming from. For a number of the privatised industries, there is a system of regulators.

Mr. Garrett: Will the right hon. Gentleman give way?

Sir Terence Higgins: No, I have given way twice already. I do not want to take up too much time.

The proposal is that Labour will tax the windfall profits--the excess profits. Either the regulators for those industries are doing their job--in which case there will be no excess profits to tax--or they are not. It seems that the Labour party's expectation is that the regulators will not be doing their jobs, and if that is so, the Labour party is positively encouraging higher prices in many of the public utilities--many of which provide services that are very important for people on low incomes--which they will then tax. The reality is that the tax will be paid by ordinary people. Ultimately, that is where the money will come from. For that reason, it is not a tax of which we should approve.

Ms Eagle: Does the right hon. Gentleman agree that United Utilities' profits, which, as announced today, are running at £845 a minute, are excessive? I can tell him that most of my constituents think that they are.

Sir Terence Higgins: I did not express any view on that. I said that one of two things will happen: either the regulators--I shall come to another point about competition--will keep profits down, or the profits will be excessive, and at the end of the day it is the consumer who will pay. Instead of discouraging that, the hon. Lady wants to tax, to take away excess profits and give them to the Treasury, when in fact they are being paid ultimately by consumers.

It is clear that some privatised industries do not have regulators, but they are competing elsewhere in the economy. It is not at all clear in those circumstances, because we are simply not told how wide the scope of the windfall tax will be, whether the tax will extend to the competitors of the former privatised industries as well as the former privatised industries themselves. The fact is that either the tax has not been thought through, which may well be the case, or the Labour party is simply not prepared to spell out what it really involves. That is much more likely to be the case.

I make a final comment--this is perhaps the last occasion on which I shall have the chance to do so--about local authority taxation, which has been fairly disastrous over the years. We had the rates system, which caused endless problems, the poll tax, which perhaps was not a wild success, and we now have the council tax. My own feeling is that there is a strong argument for transferring the cost of local services entirely to the Exchequer. The argument, "He who pays the piper calls the tune," has long since been invalid, because a high proportion of local government expenditure is financed from the central Exchequer anyway, and we had only to hear the statement from the Secretary of State for the Environment yesterday to realise that. I hope that, in the next Conservative Government, the costs of local government will be transferred to the central Exchequer and that there will be a block grant, leaving local councillors with an important role to play in allocation of resources.

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The economy is reaching a critical stage, because whenever one is recovering from a recession, the crucial point arises as to the stage at which the Chancellor should appropriately damp down the level of increase in aggregate demand. The answer that I gave to the hon. Member for Stratford-on-Avon (Mr. Howarth), who intervened earlier, was that, given the stage that we are at in the recovery, the balance that the Chancellor has struck is entirely appropriate and prudent. It is a difficult decision, however, as we have found in the past. It was certainly difficult at the time of what has become known as the Barber boom: it was hard to judge when to slow down the growth in aggregate demand--although I feel bound to point out that the background was one of horrendous increases in world commodity prices and entirely different industrial relations. There were similar problems in 1990. It is important for the Chancellor to get it right this time.

Table 3.10 of the Red Book, on page 54, gives figures of 2.5, 2.5, 3.5 and 3 per cent. for growth in GDP in 1995, 1996, 1997 and 1998 respectively. That must be related to what is happening to the productive potential of the economy. In an interesting passage, the Red Book comments:

"While productive capacity probably grows fairly steadily, actual output growth varies more."

That is certainly the case. The passage continues:

"Output fell well below its trend level in the early 1990s recession. Growth was probably significantly faster than trend during 1993 and 1994, and the output gap therefore began to narrow. However, growth was slower in 1995 and the first half of 1996, and the output gap is unlikely to have narrowed much further over this period."

The Red Book concludes:

"there is still a negative output gap of between 0 and 3 per cent. of GDP."

In those circumstances, I think it entirely appropriate that the Chancellor should plan the increase to which I have referred over the next three years; but I also think it important for him to make it clear that the rate of growth that he forecasts will not continue indefinitely. As we approach the productive potential ceiling, aggregate demand should go up only at the same rate as that productive potential. I very much hope that the Chancellor will bear that in mind.

On page 88 of the Red Book, a table shows the percentage of GDP taken in total taxes and national insurance contributions. All the other forecasts cover a relatively short period up to the first half of 1998, but, to my surprise, this table goes as far as 2001-02. Perhaps, when she replies to the debate, my hon. Friend the Economic Secretary to the Treasury will explain why we have projected the figures so far ahead. My strong feeling is that the assumptions on which that forecast must be based, with regard to economic growth, unemployment and taxation, must be very uncertain, and I am doubtful about the virtues of extending economic forecasts as far ahead as 2001-02. I am also not at all clear about the extent to which the forecast makes allowance for the Government's spend-and-save programme, which is obviously very important. I hope that that can be clarified, but, as I have said, I consider the present overall position extremely satisfactory.