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Mr. Tam Dalyell (Linlithgow): Will the right hon. and learned Gentleman satisfy our curiosity? Were our suspicions in opposition wrong that, as Chancellor of the Exchequer, he would have dearly liked to give independence to the Bank of England, but was forbidden to do so by the Prime Minister and others?
Mr. Clarke: I have always said that the views of Chancellors on the independence of the Bank of England are usually given after they have left office. Perhaps at some stage I will give a full exposition of my views on the independence of the Bank of England.
My view on monetary policy is that it should be based, above all, on controlling inflation. Interest rates have to be high enough to hit an inflation target, but also kept as low as possible to provide room for growth. If the arrangements are to be changed, the Chancellor should make far better provision than he has to ensure a balanced approach. I am not the only person who thinks that giving the Bank of England complete independence with the sole purpose of hitting the inflation target will mean over-insurance. It certainly does not need to be combined with the fiscal tightening that has been introduced in the Budget.
I am sure that the hon. Member for Linlithgow (Mr. Dalyell) does not disagree with my comments about the strength of sterling. I thought that he was going to congratulate me on my record of keeping down the duty on whisky. That always got praise from Scottish Labour Members, but was suddenly forgotten by the Chancellor in the Budget. He put up the tax on whisky, because he obviously prefers water.
I shall deal briefly with the measures chosen in the Budget, because I have already dealt with the strategy. I am now speaking from the Back Benches, so my contribution should be shorter than a Budget speech. The windfall tax is a deeply regrettable tax and I hope that we never see its like again. The tax has no economic justification. It is a political tax, devised at a time when it was needed by the Labour party to appeal to the popular prejudice against fat cats--those individuals who seem to have done too well, although they will not pay the tax--and to old Labour's prejudice against privatisation. The tax combines those two prejudices, but has no logic behind it.
The choice of companies is arbitrary, as is the definition of excess profits and the choice of the tax base. As it happens, the Government have chosen the best tax base, because the regional electricity and water companies have performed better than British Gas and British Telecom.
However, the windfall tax has fatal flaws. It is arbitrary to look with hindsight at a purchase and say that it was a bargain, so it will now be taxed. The Government have no answer to the argument that today's shareholders are not, in many cases, the people who had the windfall. The tax will hit people, and pension funds, who happen to have investments in the relevant companies. It is a political gimmick, and people will forgive the Government only if they never do it again.
My fear is that, now that the Government have found that they can raise £5 billion to spend on their programmes, they will be tempted to do something very similar next time they get into financial trouble. The Government have shown that they have a populist approach to tax raising, not an approach based on economic policy. They look for a tax that makes a good speech on the right platform, and that is the sole origin of the windfall tax.
The tax change that the Government did not announce beforehand is even worse. I happen to know that they were secretly working on it in opposition. The Chancellor has the nerve to describe the changes he has made to advance corporation tax as part of his Budget for investment.
A few years ago, my right hon. Friend the Member for Charnwood (Mr. Dorrell) and I considered whether the tax credit encouraged the distribution of profits instead of their retention. We considered the argument that companies would invest more if they retained more, but we rejected it, mainly because we were worried about the impact on pension funds. We were worried about its effects on pension funds, especially after the new capital adequacy requirements, and we left it alone. We certainly never contemplated abolishing the tax credit completely.
The changes have not been done for any economic reason. The Chancellor announced changes to dividend tax credit because he knew that 999 out of 1,000 people would not understand a word he was talking about. He did not do so because he wanted to explain to the public that it would give a tremendous boost to investment. It was a convenient tax that people would not understand and that is why Labour Members cheered it. The Government are now attacking the BBC for reporting the true consequences of the policy on the radio this morning. Norman Lamont had a similar problem when he reduced the tax credit, and that is why I did not follow his example.
The policy will have an extremely damaging effect on pension funds. We are told that the pension funds are in surplus, but that is absurd, because they are not all in surplus. Some are, but many are not. Many people with personal pensions will not be told that their funds are in surplus, and their expectations will be upset. People who are about to retire have rung me to say that they are in funds that are not well funded. They tell me that they have legitimate, but not guaranteed, expectations of lump sum payments, and they know that the trustees of their funds will have to consider the effects of the change.
It is no good saying that the change will have no effect, because it will take 20 per cent. out of the value of the income from the equity investments of pension funds. It is absurd to say that £5 billion can be taken out of the funds every year without any effect. The change is not good for investment, because it will raise the cost of capital. It has cut the capital value of major companies. It is a political decision and, like the windfall tax, it makes no economic sense. It played well in presentation to say that it would raise £5 billion, because people do not understand it.
Mr. Chris Pond (Gravesham):
The right hon. and learned Gentleman cannot see the faces of his Front-Bench colleagues, but many of us suspect from their glum expressions that we are hearing the prepared speech
The right hon. and learned Gentleman has told us of his concern about the big hit on the pension funds. Was he not concerned about the big hit on the pensioners that the previous Government made when they raised VAT on fuel? That was a much more important big hit and, therefore, his comments are somewhat hypocritical.
Mr. Clarke:
When we raised VAT on fuel, we raised the pension and benefit levels to compensate. I shall not go through the arguments again, because the Labour party has now done what it wanted to do. However, it has always been true that retirement pensioners were the one section of the population not affected by our change. They were the only ones who were compensated for it.
The increase in VAT on domestic fuel was an environmental measure. I found it amusing yesterday to listen to the Chancellor go on about environmental measures and then a little later reduce the tax on domestic fuel that the Conservative Government had introduced. When I was defeated on the second instalment of the imposition of VAT on domestic fuel, I said that everyone in the House of Commons would benefit from the defeat except pensioners, because we cancelled the increase in pensions to offset the change. The bigger people's houses, the more they will benefit from the reduction on VAT in domestic fuel, but the windfall tax and its effect on the utilities will more than wipe out any benefit.
The Government have increased tax on petrol. The housing market has been tackled, not, rather surprisingly, by getting rid of MIRAS but by cutting it back a little. The increase in stamp duty on bigger houses falls between two stools. It is not enough to affect the housing market. I do not believe that the housing market is overheating seriously outside the south-east of England. The increase in house prices is extremely patchy. The Government must be cautious in hitting the housing market when it is recovering from such a dead condition that it could still come back to normality.
The Government's measure is a small way of raising revenue at the expense of those buying a house or moving house. I do not remember the Labour party mentioning it at the general election. If the Chancellor had told owner-occupiers that he was contemplating increasing stamp duty, more of them might not have voted for his party.
Reference has been made to spending. I welcome that, because it is a complete change from what the Prime Minister and the Chancellor have said until now. The Liberals got in first. They were right to say that it was an idiotic commitment by the Government to say that they would stick to departmental spending totals for the first two years. No Government in history have done that. We have had a public spending round every year. All sensible Governments readjust their priorities. I am flattered by the extent to which the Chancellor still sticks to my spending totals for last year. Local authorities will have to stay with what they have got, except on education. The police service will stay with what it has got; so will the Prison Service.
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