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1.1 pm
Mr. Geraint Davies (Croydon, Central): I apologise for missing the introductory speech of my right hon. Friend the Secretary of State for Social Security and Minister for Women. I was speaking to a business audience in my constituency explaining the merits of the Budget. I should say that my comments were very well received by a large business audience in Croydon, which is the hub of business activity in the south-east. I thank the hon. Member for Buckingham (Mr. Bercow) for his brief remarks, which were very interesting and entertaining to hear.
I should like to respond to what I can describe only as the ragbag of rubbish from the Leader of the Opposition and shadow Ministers in their reply to a bold and creative Budget. We should state clearly the framework and strategy behind the Budget, which is to achieve the long-term future success of UK plc in the global economy. We want to establish the capital investment, infrastructure and skill base that will enable us to compete, so that we can create the prosperity that will be necessary to change Britain for the better.
We have inherited a portfolio of endemic problems which must be grasped with vigour and immediacy. Those problems include a history of under-investment inphysical capital compared with our competitors. Of the 15 European Union countries, Britain is in the humiliating position of having lower earnings per head than every country except Greece, Spain and Portugal. Ireland passed us in the league just before the general election. Our position is an appalling disgrace, and it is a legacy from the Conservative Government.
We are spending £25 billion of public money annually to repay debt. That is more than we spend on schools. We should be investing in schools for the future productivity of our economy. Moreover, an extra £30 billion will enter the economy because of building society flotations, posing a danger of overheating the economy. Skills shortages and bottlenecks could result from the situation that we have inherited, which is a complete mess.
The Labour party was elected with a mandate which has no historical precedent, to implement change on the back of our clear manifesto pledges. Our manifesto pledges included introducing a windfall tax as the pump-priming means of getting people back to work. Therefore, people who criticise the windfall tax are criticising the will of the British people. Nevertheless, the precedent for a windfall tax was set by the Conservatives. Our obligation to the electorate is to build economic strength so that we can deliver the health, education and other benefits that have been so neglected. The solution to that is long-term investment in physical and human capital in the British economy, combined with stability, which enables foreign as well as domestic capital to be invested in jobs.
Almost immediately on taking office, the Chancellor delegated to the Bank of England the operational responsibility for setting interest rates. Some Opposition Members criticised that, but in fact the cost to British industry of borrowing went down overnight and the value of shares went up. Incidentally, the value of pension funds also went up, so when we hear all the Opposition rubbish about pension funds, let us not forget that.
In the Budget, corporation tax has been reduced to the lowest level in British economic history--indeed, the lowest level in Europe. It is all very well for Opposition Members to say, "Hear, hear, we all support that," but we want to know why they did not reduce corporation tax to support British industry, British jobs and British prosperity for the new millennium. They did not.
Moreover, we have reduced tax on small and medium-sized businesses, which will be the engines of future prosperity for Britain. If every small business took on one extra worker, there would be zero unemployment. The Labour Government will support the entrepreneurial culture of small business--I have been a small business person myself--which will be a new engine for growth in the future.
We have tackled long-term youth unemployment by giving incentives to employers to bring on board people who are in danger of being dislocated in society and outside the job market. I gave a speech earlier today to a business audience who were very receptive to the opportunities that they have been given to lower the marginal costs for taking on new workers, to increase productivity and thus to expand their businesses. The accusation that this will have a short-term, substitutional effect is clearly not the case.
What is more, we are investing in education and in a university for industry, so we are investing in human capital as well as physical capital. I put it to the House that the package of measures will not only secure greater domestic investment but attract what is inherently mobile international capital into the British economy to make us even stronger. That will be the secret of success.
One does not have to listen to me to know that that is true. One simply has to read the financial press to know that immediately after the Budget the stock market jumped 80 points. What did that do to the value of pensions? They all went up. We hear all this stuff about how the Budget is a tax on pensions and that it will all be awful, but the financial markets have delivered. First the Bank of England change sent the stock market up. Then the stock market went up following the Budget. Everyone's pensions are secure because the financial markets respect what the Chancellor has done as being in the long-term interest of the British economy.
All this stuff that we hear, such as "Your pension is ruined," and so on, is quite wrong. The reality is that the value of people's pensions is determined to a certain extent by what they put in now. But their contributions are put into shares, into companies, and the profitability and growth of those companies in the future will determine what the pensioners of tomorrow--who are the workers of today--can take out. We are creating the conditions in which those companies can succeed, and in turn those pensioners will be secure. If we did not do that, they would not be secure.
We heard that the Budget was anti-home-ownership. The Conservative Government reduced mortgage interest relief at source in the past, and the housing market is now beginning to go out of control. If MIRAS had not been reduced and used to fund the huge deficits that we inherited, or used for meaningful expenditure, the Governor of the Bank of England would have raised interest rates anyway. It is obviously better for MIRAS to be cut because the customer--the person with the mortgage--will pay the extra price in any case. I very much welcome that.
Historically, investment in British industry has been distorted by the enormous subsidy that is put into mortgages, which has made people in Britain invest in houses instead of in industry. That is one of the weaknesses that we would face if we had greater European monetary union. We are creating better conditions for industrial investment while holding down consumer demand.
The Budget's central proposition is one of investment for the long term and the creation of stability for the future. It is designed to put the people of Britain back to work. It is clear that the Budget is good for jobs, good for consumers, good for pensioners and good for Britain.
1.9 pm
Mr. Robert Syms (Poole):
It is a great pleasure for me to contribute to today's debate because so many hon. Members and so many of my personal friends have made great maiden speeches. I particularly congratulate my hon. Friend the Member for Buckingham (Mr. Bercow) on his impressive debut in the Chamber. A few years ago he was in competition with me for the constituency of Bristol, South. This is the first time that I have heard him speak and I now know why he beat me. I congratulate him on his remarkably good contribution.
The story of the British economy over the past three, four and five years has been one of great success. We have been growing rapidly--certainly, more rapidly than most of our continental competitors--with low inflation and falling unemployment and without the usual balance of payments crises or problems of overheating. Much of the credit for that success should go to the previous Government and to the policies of my right hon. Friend the Member for Huntingdon (Mr. Major) and my right hon. and learned Friend the Member for Rushcliffe(Mr. Clarke), who took some tough and sensible decisions to set the economy in that direction.
The present Government inherited an extremely favourable economic position. Indeed, if the previous Government had been a little less concerned about putting the national interest ahead of party interest there might be more of us on the Conservative Benches. The tough decisions that were taken were doubtless good for the nation, but some of them may not have been so good for the Conservative party.
Existing problems stem from a successful economy, not a failing economy. Fast growth inevitably leads to some pressures in the system, but overall the Government have inherited a good economy. I am not sure that there was any need for a Budget at this time. I can understand that after 18 years in opposition a party wants to come in and set out its policies, but there was no economic case for a Budget--certainly not a Budget with 17 tax rises. It is a major tax-and-spend Budget.
The Chancellor spoke in his preamble of his concerns about overheating in the domestic sector, particularly in terms of consumer spending, house prices and broad money. Yet his tax rises hit primarily the corporate sector, not the domestic sector. Therefore, by his own standards, he must have hit the wrong target.
The Government's overall approach has been wrong. This country's future must lie in a low-tax, flexible and growing economy, perhaps less regulated than its continental competitors. The Government's major impositions on the corporate sector have set back the prospects for the economy. The comments in papers such as the Financial Times certainly suggest that the measures will lead to higher interest rates and--something that we already have--a higher exchange rate. The overall combination of higher taxes on corporate business and higher interest and exchange rates will not be good for the British economy or for jobs over the next few years.
In particular, the Chancellor took the wrong approach with his tax on pensions and the abolition of the dividend tax credit. Ultimately, the price will be paid by pensioners because the pensions are provided for them. There are more than 12 million people with corporate pensions and 7 million with personal pensions. The tax will affect them all. It is estimated that it could cost £195 per year per
pensioner, leaving multi-million pound gaps in the funds. The Pensions Act 1995 contains provisions to maintain minimum pension fund requirements, so there is no doubt that pension funds will have to act to make up the gap.
Estimates of what the tax will raise increase from £2.3 billion in the current year to £4 billion next year and £5.4 billion the following year. Peter Murray, chairman of the National Association of Pension Funds, estimates that the measure will take more than £50 billion of extra pension contributions from the public and private sector over the next 10 years. That is a substantial change in the taxation of what has been a successful industry for this nation, and it is sad that the measure has to be implemented.
Not only that, but there may well be a double hit. Many actuaries value pension funds on the income stream from dividends, which means that when they come to value the shares--irrespective of what happens to share values on a day-to-day basis--they may well reduce the value of the pension funds. That double hit will mean that still more money will have to be raised from pensioners and those contributing to pension funds.
Local authorities will also be hard hit. Many local authorities, including that in Poole, are capped. When they have to find the extra hundreds of thousands of pounds that are necessary, services will suffer. Many local authorities will therefore be in great difficulties.
I especially oppose the windfall tax. I know that it was well trailed in the Labour party manifesto, but I am personally against retrospective taxation. The tax will raise £5.2 billion and is bound to have an effect on investment, jobs and ultimately the prices faced by the customer. When I served on the water consultative committee in the early 1980s, the real problem facing the industry then was the pollution legislation of 1980, which required major investment. Such investment is still needed, but the industries hardest hit by the tax will be the water and electricity industries.
I am also greatly concerned about the scrapping of tax relief for private medical insurance for the over-60s. More than 600,000 currently benefit from medical insurance and the scrapping of the relief could mean that more than 200,000 will join national health service waiting lists when they suffer health problems. The cost of the scheme is only £140 million--a relatively small amount in Budget terms. The typical cost of private health insurance for a pensioner aged 60 to 64 is currently £50 per month. It is likely that that will rise to £65 per month as a result of the change. There is certainly great concern among my constituents, many of whom have written to me on this aspect.
Overall, the Government have failed the test. The best thing would have been to allow the economy to grow and create jobs, but they have intervened, brought in 17 tax increases and raised more than £6 billion in the current year--mainly from the corporate sector. That burden, plus the additional costs of the minimum wage and the social chapter, could well spell disaster for businesses in this country. We shall have higher interest rates and we already have what appears to be an uncompetitive exchange rate; the effect will be to slow down the British economy.
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