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7.16 pm
Mr. David Willetts (Havant): I begin by congratulating the hon. Members who have delivered their maiden speeches in this debate. I feel slightly guilty that I am not delivering a maiden speech myself.
We heard speeches by the hon. Members for Warwick and Leamington (Mr. Plaskitt), for South Ribble (Mr. Borrow)--whom I congratulate on delivering his speech without notes, so far as I could tell--and for Leicester, West (Ms Hewitt). We also heard from my hon. Friend the Member for Tunbridge Wells (Mr. Norman), who is particularly welcome on the Opposition Benches. From now on, we will call him "Eloquent of Tunbridge Wells". They are all very welcome to the House.
We also heard a sort of maiden speech from my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), the former Chancellor of the Exchequer. He made his maiden speech from the Back Benches, after serving for I do not know how many years on the Front Benches on both sides of the House. He made a very powerful and effective speech, in which he demolished the macro-economic judgment that supposedly lies behind the Budget. He also took apart the various arguments that we have heard at various stages from Labour Ministers in defence of the Budget.
We have been told that there was a black hole in the nation's finances. However, table 1.1, the very first table in the Red Book--as we traditionalists still call it, although new Labour has of course abolished the "red" bit--gives the lie to the story of a black hole. It reveals that--on the instructions of the Chancellor, who has provided some rather bizarre assumptions to work on--since the November 1996 Budget, the National Audit Office has changed the PSBR assumptions for the worse by £0.6 billion for 1997-98 and by £3.2 billion for 1998-99.
The line below that one, however, shows what are called forecasting changes, which are the economic changes that have occurred in the past six months under our management and since the final Budget of the previous Chancellor, my right hon. and learned Friend the Member for Rushcliffe. What do those forecasting changes show? They show an improvement in the PSBR of £3.3 billion in 1997-98 and of £6.7 billion in 1998-99. Therefore, the overall change in the public finances since the November 1996 Budget--even taking account of the assumptions under which the Government Actuary was supposed to work--has been an improvement. There is no black hole.
We were then told that the problem was that the economy was overheating. The basis for that judgment was a rather speculative interpretation of whether the economy was or
was not operating at full capacity. The Treasury has a learned little note on that, on page 54 of the Red Book. The most sensible remark appears in the second paragraph, which states:
The Chancellor told us that, because he believed the economy was overheating, he was going to take tough fiscal measures. However, as my right hon. Friend the shadow Chancellor and my right hon. and learned Friend the former Chancellor made clear, that belief in the need to use fiscal policy to tighten up on consumption in the economy was not put into practice.
If the Government were serious about trying to stop the economy overheating by tightening fiscal policy, they would have done some unpopular things to reduce people's perception of their spending power, but the Chancellor's nerve failed him. According to his analysis, the economy was overheating and we needed tough fiscal measures to deal with it, but, in practice, the only fiscal measures that he dared introduce were those which he thought would be invisible to the average consumer and the average voter. He went for pension funds and companies. His analysis was that the economy was suffering from the dangers of overheating, but he failed to deliver the measures that he claimed were necessary.
The person on whom responsibility will now fall for acting on the Chancellor's own analysis will be the Governor of the Bank of England. If interest rates rise, it will be because of the failure of this Budget to deliver the fiscal tightening that the Chancellor himself claimed was necessary.
I am reminded of the old Treasury story of the Chancellor who treated his speech writer rather badly. He was sent off to deliver a speech written for him by that writer. He went on for page after page, describing the appalling circumstances of the British economy and speaking of high inflation and a balance of payments deficit. He said that the Government had a set of policies that would enable the British economy to escape those problems. He turned over the page and found only a short note from his speech writer: "From now on, you're on your own."
The Chancellor is now in that position. From now on, he cannot blame his inheritance. If interest rates have to go up, it is because the Budget has failed to include the measures which his own analysis of the situation suggested were necessary. The Chancellor's nerve failed him. There was a failure of will and a failure of courage to follow through on what his own analysis said would be necessary.
The most important feature of the Budget, and by far the biggest tax increases, are the measures involving the taxation of dividends. I should declare an interest as an economic adviser to Kleinwort Benson, as there is obviously a learned economic debate going on in the City about the implications of these measures.
The analysis on which the Chancellor bases his measures is one with which we are familiar. It is to be found in the writings of the likes of Will Hutton and
others. The argument is simple: one of the things that is wrong with this vulgar Anglo-American capitalism which they dislike so much is that too much money is distributed in dividends to shareholders and not enough is retained in the way that it is in the virtuous continental economies that they admire so much. However, that analysis is flawed.
It is not the case that money distributed in dividends is spent on candy floss and conspicuous consumption. Much of the money distributed in dividends goes to pension funds, and is then available for them to invest in projects and companies which they believe have the best prospects. There is no reason why the companies that generate the best cash flow and retain most of their earnings should have the best new investment projects. The role of the capital market is precisely to take the revenues from companies that are thriving and to allocate them to the capital projects which are going to provide the best return.
It is not unlike the dilemma with which the Labour Government have already had to start to wrestle--what to do with the regime for local authority capital receipts. It has dawned on the Government that the local authorities that have the greatest capital receipts may not be those to which the Government wish to give the biggest new spending and borrowing powers. That is why there is a rather ingenious scheme in the Budget whereby the extra £900 million of capital spending by local authorities is not the £900 million belonging to the authorities which happen to be sitting on the greatest capital receipts.
By analogy, exactly the same argument applies in the capital markets--there is no reason why the companies sitting on the greatest retained earnings should be the companies with the most attractive investment prospects. That is the classic argument for capital markets to allocate investment funds, and it works in this country.
That is why entrepreneurs who want to invest in biotechnology or set up a new business and get investment venture capital come to the markets of London and New York. They do not go to the continent, because there, the only way to get more money to invest is to be big already. That is why the continent's economies are slowing down and why the British economy is in its sixth year of growing more rapidly than that of France or Germany. Therefore, the economic analysis on which the Chancellor's measures rest is false. It cuts across his declared intention of doing something to stimulate investment.
The Chancellor also claims that his proposals will yield an enormous amount of tax revenues. The figures are very dramatic, and much bigger than those for the windfall tax. In the next three years, he wants the abolition of tax credits for pension funds to yield well over £10,000 million. That means that the fiscal tightening of which he is boasting depends crucially on this one incredibly complicated and yet ill-thought-out measure.
If this measure does not deliver what the Chancellor claims for it, and if people in the City work out ways to get around this enormous tax hit that he is trying to impose on them, all the calculations in his Red Book will go up in smoke. He will have nothing else to turn to.
The evidence is that the Chancellor may well find that the ingenuity of the City is such that he fails to raise the revenues he promises. The incentives for people to work
out ways to distribute funds from companies to pension funds and avoid the heavy hit that he is trying to impose are enormous.
We know what pensions funds will do: they will now invest in foreign equities to get past the tax penalty that the Chancellor is imposing on domestic investment. He also knows that, because of the abolition of the foreign income dividend scheme, many international companies with streams of income from abroad, which will now be highly taxed, will instead look for other ways to pass on those dividends to their investors.
There will, of course, be a significant shift abroad by international companies with headquarters or large-scale operations in London to avoid the effect of the tax. It is at that point that Labour Members, who were yesterday cheering so loudly about an indefensible and incomprehensible measure, will begin to realise what it means for the real economy. When BP, Shell or ICI announce that they are shifting a significant part of their activities abroad to avoid the tax penalties, Labour Members will understand what it means.
There are also economic implications for the public sector. I would be interested to hear from Treasury Ministers what calculations the Government Actuary has given of the impact of the proposals on, for example, public sector pension schemes. The Secretary of State for Education and Employment assured me when I intervened on him that there was not a problem with the pension funds of university teachers. I was grateful for that assurance, and I hope that it is correct, but we know that there are no surpluses in the funded local authority pension schemes.
How are local authority employers to top up the pension schemes they operate in order to meet the liabilities they already have to their employees? Where will they find the money? It will come from the sums that they are supposed to spend on schools and school buildings. As was established under questioning by my hon. Friend the Member for Maidenhead (Mrs. May), those resources cannot be ring-fenced, and they will be used to meet the extra pension liabilities that the Chancellor has just imposed.
We were promised a full explanation from the Secretary of State of what the Government's welfare-to-work measures will do, but no such explanation was forthcoming. We heard the sketchiest of accounts, with no serious analysis of the British labour market or of the employment circumstances of 18 to 24-year-olds. There was nothing to enable people to assess the measures seriously.
I offer the House some evidence about the labour market for 18 to 24-year-olds. A written answer the other week said that, in 1996, 1,209,000 people aged 18 to 24 went off benefit. Of those, 637,000 definitely went into work, and another 359,000 failed to attend the benefits office for reasons that we do not know. Those people are also expected to have found work, adding up to almost 1 million 18 to 24-year-olds moving off benefit and into work last year.
That puts Labour's 250,000 into perspective, and raises an important practical problem. How will they design their measures in such a way that they do not help the 1 million young people every year who would be going
off benefit and into work anyway? How will they avoid what, in the language of the policy analysts, is called the dead weight cost?
The dead weight cost problem affects all welfare-to-work policies, and is particularly acute for 18 to 24-year-olds, because there is a lot of mobility in that age group, with many people going off benefit and into work and others, sadly, going out of work and on to benefit. It is a turbulent part of the labour market. That is why it is difficult to design measures to help those stuck on benefit without wasting a lot of money helping those who would have got off benefit and in to work regardless.
In 1996, 18 per cent. of benefit claimants aged under 25 left the count each month, as against 13 per cent. of claimants aged over 25. Even among 18 to 24-year-olds who had been unemployed for more than six months--about whom the Government claim to be particularly concerned, although there are way below 250,000 such people left--12 per cent. left the count each month, as against 8.5 per cent. of those aged over 25 who had been unemployed for that period. There is already a lot of mobility among those young people. That is why dead weight is such a problem. We have heard no explanation of how the Secretary of State will address that.
There are other problems. What about the displacement effect? Why should any employer now employ a 16 or 17-year-old? Can Labour Members, who claim to be so concerned, explain what prospects there are for a 16 or 17-year-old who wants to get a job--as I understand it, this is still a free country, and that is a legitimate option for 16and 17-year-olds--when employers will get a subsidy if they take someone who is 18 to 24?
What about the perverse incentives? What if an employer wants to take on an 18 to 24-year-old who has been unemployed for three months? There will be no special subsidy there. The employer will say, "Why don't you come back in 12 weeks? I like the look of you and I want to take you on. Come back in 12 weeks and I'll make it worth your while." There will be an increase in the number of people unemployed for six months so that the employer and employee can divide between them the special tax subsidy that the Government are offering.
The measure is so ill thought out that I doubt the Labour party's genuine conviction and belief about taking action on welfare to work for 18 to 24-year-olds. If they cared about the problem, they would not just say so: they would have thought about it. If they had done, they would surely be able to tell us how they will deal with the dead weight costs, how they will avoid the problems of displacement and how they will confront the perverse incentives. We have heard nothing about that from the Chancellor or from the Secretary of State for Education and Employment. That is why we are beginning to doubt how serious they are about it.
My right hon. Friend the shadow Chancellor eloquently pointed out that we had been told that the measures would save money that could be released for education. As my right hon. Friend established when he researched the subject as Secretary of State for Social Security--findings that have been backed up by independent organisations--in no country are such schemes self-financing. There is no scope from saving on unemployment in that age group to release funds for education.
"It is impossible to measure the output gap with any degree of certainty."
The output gap is no basis on which to conduct macro-economic policy, because measuring the output gap is virtually impossible. One cannot manage an economy by speculating on the size of any output gap.
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