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11.32 am

Mr. Ross Cranston (Dudley, North): I congratulate the hon. Member for Bromsgrove (Miss Kirkbride) on her maiden speech. She spoke eloquently, and, as one of the few surviving members of her party in the west midlands, she deserves credit. I also commend my hon. Friend the Member for Exeter (Mr. Bradshaw) for a fluent speech. He fought a difficult and principled campaign, and we welcome him.

In his Budget, the Chancellor emphasised four matters--stability, more investment, more employment and social justice. I shall concentrate on social justice. It is especially appropriate to do that today, because my right hon. Friend the Secretary of State for Social Security opened the debate.

Social justice is at the heart of the Budget, and my right hon. Friend the Secretary of State spoke about the new deal for lone parents such as the job search programme,

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training and education and generous family credit help. I commend all those measures. The wider context of the measures is the welfare-to-work programme, which is central to the social justice that the Budget will deliver. It was a key feature of our manifesto commitment, as was its funding by the windfall tax.

The hon. Member for Chingford and Woodford Green (Mr. Duncan Smith) said that the Budget contained taxation surprises. The windfall tax was no surprise. The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) also spoke about that. I suggest that we accept the tax, and let the debate move on.

The welfare-to-work programme will bring the long-term unemployed back into active participation in the labour market. That will be good for them and for the economy, and will make the labour market work more efficiently. There must be concern about what is sometimes called churning--or the revolving door, as the hon. Member for Chingford and Woodford Green described it. However, there will be controls to minimise that.

As we have acknowledged, the welfare-to-work programme cannot operate in isolation, and that is why we are changing the benefits system to integrate it with the tax system. That is a top priority. Job subsidies, which have been set out by the Chancellor in the welfare-to-work strategy, have a role to play in getting the unemployed into jobs that would otherwise go to insiders.

It is standard practice to refer to tax concessions and allowances as tax expenditures. The term is intended to emphasise the similarity of tax expenditures to direct Government outlays, and to stress the need to subject both to the same treatment. I am not suggesting that tax expenditures are in any way inferior to direct outlays as a budgetary technique. The choice between the two must be made on a case-by-case basis, and will depend on factors such as transparency, equity, efficiency and the ease of administration.

The tax expenditure approach is especially valuable in several areas, particularly in social justice. I shall give the illustration of mortgage interest tax relief. The Red Book shows that tax expenditure on that relief in 1997-98 will be £2.7 billion, and will go down to £1.9 billion in 1998-99 as a result of the Chancellor's changes. Similarly, the tax relief on premiums for private medical insurance involves tax expenditure of about £110 million in 1996-97. If the relief were not abolished, the cost would rise to £120 million in 1997-98.

Putting such tax expenditure alongside comparable direct outlays brings out the social justice aspect. For example, one could compare the £2.7 billion tax expenditure on mortgage interest tax relief with the expenditures in the Department of the Environment annual report, on housing, which shows an expenditure of only £1.5 billion on direct capital support for housing. Of course, it is somewhat more than that when non-capital expenditure is taken into account. That illustration shows the importance of looking at tax expenditures to bring out the social justice aspect. It supports the Chancellor's action on mortgage interest tax relief.

The reduction of VAT on fuel is another aspect of social justice. The reduction is especially important to many of the older people in my constituency, because fuel

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poverty is a very serious social problem. On one estimate, the cost to the NHS of treating illness caused by cold and damp living conditions is £1 billion per annum.

A VAT rate of 8 per cent. on domestic fuel was highly regressive, because the average low-income household spends about 10 per cent. of its income on fuel, whereas the average household spends only 5 per cent. Low-income families often could not afford to pay to heat their homes or to have adequate hot water, cooking facilities or lighting. I therefore commend that tax reduction as another important measure in achieving social justice.

The Chancellor's announced action on tax avoidance will be another important dimension in achieving social justice. Specifically, he announced an inquiry into the introduction of a general anti-avoidance provision. I urge him to examine such measures closely. Other countries have anti-avoidance measures in tax legislation, and they work.

The Budget's second great theme, after social justice, was long-term investment and stability. Capital investment is clearly necessary for growth. There has been under-investment in the United Kingdom for too long, and the situation is certainly not getting any better. Manufacturing is especially vital in generating employment in areas such as the one I represent. Manufacturing is vital in winning export earnings, accounting for 60 per cent. of such earnings.

I commend the Chancellor for the various measures that will have a positive effect on manufacturing, such as reducing corporation tax, temporarily allowing doubling of capital allowances for small and medium firms and permitting carrying back of trading losses. The measures will, of course, deal with only one aspect of the problem.

The problem will not be solved overnight, because, in the United Kingdom, it has many historical and cultural dimensions. In the UK, our market for corporate control fosters short-term thinking and planning, and our education system does not provide a highly skilled work force but promotes a mindset that downgrades the prestige of manufacturing compared with finance.

I commend the Government for their various announcements on education reforms, because they are a part of the jigsaw of promoting a vibrant manufacturing economy. I especially welcome the additional payments to education.

The hon. Member for Chingford and Woodford Green mentioned the abolition of tax credits for pension schemes. Our current credits system derives from our imputation system, which some people believe avoids double taxation of dividends--taxed once when in a company's hand and then a second time when shareholders receive them. However, imputation is not sacrosanct. The United States, unlike the United Kingdom, does not have an imputation system.

It is often said that double taxation is inequitable, because companies have to pay tax but partnerships do not. I do not think that that is a strong argument, because the typical form of business is the corporate form. Therefore, the introduction of the partnership comparison is a false one.

Another argument holds that double taxation of dividends discourages dividend distribution. If that were the case, imputation might well be a good thing. I suggest, however, that dividend payments are not determined solely by the tax regime.

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Untaxed pension funds have obtained a credit because of the imputation system, and the Chancellor has abolished that credit. As I said, the tax credit is not sacrosanct. As the Chancellor rightly said, many employers have been taking very generous contributions holidays and can afford to cover the gap. Regardless, pensioners on fixed salary schemes are protected, and people contributing to occupational or private pension schemes will still receive generous tax incentives to contribute. The measure, like others, must be seen in the broader context, in which many people do not have occupational or private pension schemes. My right hon. Friend the Minister for Welfare Reform is dealing with that situation.

The Budget also has some important environmental aims, which I commend. Ultimately, I hope that--as my hon. Friend the Member for Exeter said--the Government will carefully consider introducing more green taxes.

I support the Budget, because it will contribute to achieving our objectives of stability, investment and fairness for all. Those are the goals that the Chancellor set on Wednesday.

11.45 am

Mr. Nick Gibb (Bognor Regis and Littlehampton): I congratulate my hon. Friend the Member for Bromsgrove (Miss Kirkbride) on a superb maiden speech. I totally agree with her views on grammar schools, which I believe do more to broaden opportunity than any of the progressive social engineering policies that, unfortunately, are introduced too often in many of our state schools. I congratulate also the hon. Member for Exeter (Mr. Bradshaw) on his maiden speech. I am grateful that he has re-set the precedent for using notes in making maiden speeches.

I am grateful to you, Mr. Deputy Speaker, for calling me in this debate. It was during the debates on the 1974 Budget that my predecessor, Sir Michael Marshall, made his maiden speech. As I have been told on many occasions on doorsteps across Bognor Regis and Littlehampton, Michael Marshall will be a hard act to follow.

A highly conscientious and caring constituency Member of Parliament, Sir Michael was also a keen parliamentarian, eventually serving as the president of the Inter-Parliamentary Union. He was the quintessential renaissance man, having served as Industry Minister in Mrs. Thatcher's Government, when he became an energetic promoter of science and information technology, while maintaining a keen interest in the arts and in cricket. He has written a number of learned tomes on cricket, as well as books on Jack Buchanan and Stanley Holloway.

Bognor Regis, like its former Member of Parliament, is no stranger to the arts and literature. William Blake was a long-term resident of Felpham, a village on the town's outskirts. The green and pleasant land that he evoked is abundantly evident on the West Sussex coast, although one searches in vain for dark satanic mills.

The resorts of Littlehampton and Bognor Regis combine all the unspoilt charm of Victorian seaside towns with the beautiful countryside of the nearby south downs. On average, Bognor Regis has the most sunshine hours in Britain, and its beach is one of only 22 with the coveted blue flag.

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Littlehampton, too, is famous for its beaches. Sea bathing began in Littlehampton as early as the 1750s, and it has had a harbour since mediaeval times. Today, Littlehampton--where the River Arun finishes its journey--is home to marinas and to boat builders, including Osborne's, which builds lifeboats for the Royal National Lifeboat Institution.

My constituency has long been a magnet for holidaymakers. G. K. Chesterton praised the strength of Bognor's deckchairs. Sir Robert Peel rested there after the stresses of the repeal of the corn laws. The Leader of the Opposition, now Prime Minister, took time off from the stresses of leading the Labour party and brought his family to that famous Bognor landmark, Butlin's, in 1995.

It would be remiss of me, as the first Member of Parliament for Bognor Regis and Littlehampton, not to draw attention to the visit to Bognor in 1929 by someone even more august and eminent than the Prime Minister. For between February and May of that year the town was honoured by the presence of King George V, who came to convalesce in the fresh, sea air. Whatever the King may or may not have said about the town on his death bed in 1936--the subject of intense academic debate, to which I have no intention of adding--it is thanks to that visit that, from 1929 onwards, the town became known as Bognor Regis, the King's Bognor.

The climate that led King George V's doctors to recommend his going to Bognor has attracted many generations of people to retire to the constituency. Indeed, 36 per cent. of its population today are retired.

The previous Government stood up for the interests of pensioners. That is why the average pensioner today is 60 per cent. better off in real terms than in 1979, not just because the Conservative Government managed to maintain the real value of the basic state pension but because they took steps to assist and encourage the build-up of private pension assets, which now amount to a staggering £650 billion--more than the pension funds of all the European Union countries put together.

The pensioners of Bognor Regis and Littlehampton will find it hard to understand why, rather than taking steps to increase the value of pension fund assets, this Budget will reduce their value. It is not a minor reduction. The Red Book makes it absolutely clear that £4 billion will be raised next year and £5.4 billion the year after from the abolition of the tax credit on dividends. That is the equivalent of confiscating from pension funds and other tax-free funds more than the windfall tax each and every year.

That loss will have to be made up by higher contributions from individuals and companies. Only half of the company pension schemes represented by the National Association of Pension Funds, whose members represent 70 per cent. of all employees in this country, are in surplus. The other half will have to extract higher pension contributions from their employees or from shareholder funds. That will mean that companies will have less money for investment. Many of the funds that are in surplus have been paying discretionary increases in pensions to poorer pensioners. These may well have to stop. Some 5 million people with personal pensions will have to pay higher pension contributions immediately or face a reduced pension.

The change to the dividend tax credits is income tax dressed up as a tax on companies. It is equal to a 2p rise in the rate of income tax. I looked to see what the title

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was of the Inland Revenue press release that introduced that investment-destroying tax change: it is "Tax Changes to Promote Investment by Companies".

A number of foreign companies have invested in Bognor Regis and Littlehampton. That investment has created jobs much more effectively than the Government's welfare-to-work scheme ever can, and it has brought wealth to the constituency. One hardly noticed aspect of the Budget will make such investment less likely in future.

Before the Budget, an overseas investor, say, from the United States, investing in the UK through a wholly owned subsidiary could claim half the tax credit less a withholding of 5 per cent. on dividends paid to the US, which meant that the effective corporation tax rate in the UK for such a corporate investor was only 28 per cent. The Government have now reduced the refund to almost nothing. Even with the reduction in the rate of corporation tax that was announced in the Budget, it is still less advantageous to invest in the UK than it was before the Budget. And the title of the press release is: "Tax Changes to Promote Investment by Companies". Never has an Inland Revenue press release been more inappropriately titled.

The same press release also announced the end of the foreign income dividend scheme. That was introduced by my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) to assist UK companies with overseas holdings which had developed a surplus of advance corporation tax that they were unable to offset against their mainstream corporation tax liabilities because the overseas dividends had already been taxed abroad. There is no logic in abolishing that relief. It has no connection with the abolition of the dividend tax credit; it is simply a way of raising further revenue for the Government, and it recreates the problem that the Conservative Government had so imaginatively sought to solve.

The Budget shows that the Labour party's much-vaunted use of focus groups has not taught it to understand or adopt the instincts of the British people, but merely to find the language with which to cover up a tax-raising Budget and a smash and grab raid on the nation's pension funds.

Rather than listening to the instincts of the quiet majority, Labour Members have built up an enemies list: fat cats, pension funds, private health insurance--things that they think that the public dislike. While pretending to tackle the people's priorities, they are attacking the people, particularly pensioners. They are attacking the 62 per cent. of pensioners whose occupational pensions will be devalued by the tax credit reforms. They are attacking the 600,000 pensioners who have taken out private health insurance, at least one third of whom, independent estimates suggest, will terminate their policies and rely instead on the national health service, presenting the state with additional costs far exceeding the £115 million raised by abolishing the relief. They are attacking pensioners who pay electricity and gas bills, whose bills will rise or fall less steeply as a result of the windfall tax; attacking non-tax-paying pensioners who have a few shares and will no longer be able to claim back the tax credit on those dividends. All of that is taxation on the sly. While

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declaring war on a list of enemies, the Labour Government are in fact picking the pockets of us all, and of pensioners in particular.

The Government have introduced a complex welfare-to-work programme, but every major economic decision that has been taken by the Government in their eight weeks in office will destroy jobs: the minimum wage, the social chapter, higher than necessary interest rates as a result of abrogating to the Bank of England the Chancellor's responsibility for setting rates, abolishing the dividend tax credit and, of course, the windfall tax. The Chancellor's revised assumptions, set out in the National Audit Office report published on 19 June, constitute a confession that under his stewardship the economy will have lower growth, higher unemployment and higher interest rates.

I was disappointed not to hear anything in the Budget statement about the tax simplification project begun by my right hon. and learned Friend the Member for Rushcliffe. All that the new Chancellor has managed to do is to create further complexity in the tax system. If someone saves in a personal equity plan, he receives a tax credit; if he saves in a pension, he does not. If he holds shares directly and is a taxpayer, he receives a tax credit; if he holds shares directly but is not a taxpayer, he does not receive a tax credit.

The Chancellor eventually intends to introduce another rate of income tax. He has announced his intention to reform capital gains tax. Worst of all, he has announced that he might introduce a general anti-avoidance provision, which would give rise to huge uncertainty in the tax law. It would require pre-transaction rulings, it would give too much power to the Inland Revenue, it would hamper corporate activity and it would cause a surge in litigation as taxpayers sought to have the law clarified by the courts.

The Budget is a disappointment. The Chancellor inherited an economy which is the envy of the world and which the British people trusted him to manage. With this unnecessary Budget--which seeks to increase investment, but will reduce it, and which seeks to increase the number of jobs, but will cost jobs--he has failed to live up to the high hopes of so many millions of people who voted Labour, many for the first time, on 1 May. It is a bad Budget, it is not the Budget for which the British people voted and it is one that Labour Members will come to regret.


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