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Mr. Rhodri Morgan: Is the hon. Gentleman saying that he disagrees with the readjustment upwards of the expected rate of inflation, or GDP deflator, from 2 to 2.75 per cent.? Or does he accept it as an accurate reflection of what has happened to pressures in the economy, which have pushed inflation up through the demutualisation disaster and the boom in financial services within the M25 area?
Mr. Bruce: Whether I accept it is beside the point: it is what the Chancellor has determined is at the heart of his Budget. The former Treasury Select Committee, of which I was a member, expressed some scepticism about the previous Government's forecasts, but the commentators said that a judgment could be made. The current Chancellor has made a revised judgment and has determined that inflationary pressures are greater, but he has not made any compensating provision to help the public services and the spending Departments to cover that. We are entitled to an explanation, especially as the Government are pursuing progress on the Finance Bill with indecent haste.
The extra moneys announced in the Budget for the NHS and education, about which the Secretary of State for Health boasted, are largely fictional as they merely offset the effects of higher inflation.
Mr. Darling:
Does the hon. Gentleman accept that the health budget will increase in real terms by 2.24 per cent. next year and the schools budget will increase by 2.7 per cent? That is after applying the GDP deflator.
Mr. Bruce:
I accept that there is a real increase, but it is nothing like what the Government have claimed. The Chief Secretary's point ignores the fact that no compensating increase has been given this year, which means that the Departments will have to absorb that deflator in full. If the two are added together, we are talking about a standstill Budget and no significant investment in either Department. The Government have not addressed that factor.
When the Secretary of State for Health was trying to dismiss my intervention earlier, he missed the point that the Liberal Democrat manifesto commitment and our alternative Budget would provide substantial extra investment in health and education in the current financial year. We explained how that would be delivered, but the Government have failed to provide a single penny of that. The situation will deteriorate even before we reach next year.
The Chancellor has also reduced the level of the contingency reserve to only £2.8 billion for next year. Given the inherited contingency reserve, he will have less
ability to accommodate the Budget pressures. In the Goldman Sachs Budget review of 2 July, David Walton, a colleague of Gavyn Davies who edits the review, noted:
For the following year, the extra £1.2 billion is substantially wiped out by the higher inflation. The Library has said that
A further concern must be that £200 million of the extra health money has to go through the Scottish Office, the Welsh Office and the Northern Ireland Office. Those Departments will be able to pass the money on only if they can squeeze other areas to cover for the loss through inflation. That is the same problem that local authorities will have with the education vote.
The Chancellor boasted in the Budget of £1 billion extra in 1998-99 for education and extra money for capital spending in schools--£83 million in 1997-98 and £250 million in 1998-99. After inflation, that amounts to a cut of £200 million in real education spending for 1997-98. In 1998-99, there will be no more money for further and higher education. After inflation, the extra £1¼ billion will be worth around £600 million in real terms. That is a real increase, but it is much less than the Government have claimed.
If local authorities are in difficulties, they will be unable to pass all the money to education. They will lose £1.2 billion from their real spending plans because the higher inflation will affect local authorities just as much as it will affect Government Departments. Local authorities will also have to pay more to top up their pension funds following the Government's change to the taxation of dividends. It is estimated that the change could cost local authorities up to £300 million per year. The Chancellor was not convincing when he tried to dismiss that criticism as a Conservative plot simply because the local authority being interviewed at the time was Conservative controlled. Every local authority in the country--under Labour, Liberal Democrat, Conservative, Scottish National party or no overall control--will have to find the extra money. That is the reality.
Local authorities will receive around £1.2 billion extra for education next year and simultaneously lose exactly that amount in higher inflation. If they want to deliver
more money for education, they will have to cut other budgets. That is against the background of an already planned 1 per cent. real cut in local authority funding next year, which the Government do not intend to change, and of additional pressures in areas such as school rolls and social services. That is the dilemma that all the public services will face.
The Chancellor claimed in his Budget speech:
Mr. Radice:
Is the hon. Gentleman suggesting that there should have been a £6 billion tax increase directly on the consumer?
Mr. Bruce:
If the Chancellor was arguing that the taxation increase in the Budget was justified as a means of putting a squeeze on consumer spending, that is where he should have put the taxes. He tried to justify the increase as a tax on the corporate sector, which is inconsistent. My point is that he did not convince the markets, which is why interest rates are likely to rise this week.
Mr. Swinney:
Has the hon. Gentleman read the comments of the chief economist of the Royal Bank of Scotland, which suggest that if monetary policy was directed towards Scottish requirements, interest rates would not be increasing as they are likely to do in the next few weeks?
Mr. Bruce:
That is a matter of opinion. The Liberal Democrat proposals for the reform of the Bank of England--so that it becomes a United Kingdom reserve bank--include the proposal that it should have a policy body that is geographically representative of the entire United Kingdom and is not determined by factors centred on the south of England factors. That would at least ensure that the broad economy was taken into account.
In other areas where the Chancellor made claims, too, his Budget does not deliver. For instance, it will not provide the environmental improvements boasted of by the Government. It will make no contribution towards reducing carbon dioxide emissions by 20 per cent. Indeed, it is likely to lead to an increase in emissions as a result of the cut in fuel prices. Despite the rhetoric, the Budget sends the wrong signals by reducing the price of using energy instead of reducing the price of saving energy.
The energy efficiency measures in the Budget are weak and vague. The Budget states:
The increase in road fuel duty--a revenue-raising measure--is disguised as an environmental tax, but it does not involve a tax switch from good to bad. The golden rule of the Liberal Democrats in this matter is that any increase in revenue from environmental taxes should be given back in tax cuts elsewhere to show that it is a tax-switching measure and not just another wheeze for taking more money out of the consumer's pocket.
We needed a commitment to long-term environmental improvements, but the Budget moves in the opposite direction. It is not the response to the challenge of global warming for which we might have hoped. I hope that the Government will think again about this. They have a full Parliament in which to address the issue and they will certainly get a constructive contribution from the Liberal Democrats.
I say this with regret, but the Budget betrays the spirit, if not the letter, of Labour's promises on taxation. One year after Norman Lamont's tax-raising Budget of March 1993--a year after the general election, not a mere six weeks--the present Chancellor said:
The Budget is not "fair". The Institute of Fiscal Studies acknowledged that Labour has often criticised the Tories for the unfairness of the impact of their Budgets. But, the IFS stated:
The Chancellor tried to argue that he was encouraging investment and that the windfall tax was designed to squeeze the fat cats. He knows perfectly well that the fat cats have gone, and they have taken the money with them. The tax is arbitrary, retrospective and unfair. It will hit not the fat cats, but the 19 million people with money in pension funds, who will lose around £80 each as a result. Those who did not take the money and run but retained their shares will also suffer to some extent.
Changes in dividend and profit taxation will increase the taxation on business income by £3 billion per year. The IFS has said that the precise effects of this package
are uncertain. The Chancellor tried to boast that he knows exactly what it will achieve, but the academics are uncertain. The IFS states that the package is
"The Budget plans imply a sharp fall in the real level of public spending . . . this is considerably tougher than Ken Clarke intended . . . The Chancellor did not mention what services he intended to cut in the fanatical pursuit of these spending totals. The chances of achieving these plans are close to zero."
On Budget day, the Chancellor boasted:
"I have decided to allocate . . . to the NHS for 1998-99 a sum of £1.2 billion. This does more than meet our commitment to the people of this country".--[Official Report, 2 July 1997; Vol. 297, c. 315.]
However, as I have already said, no additional funding has been provided for the current year, despite an existing £350 million NHS deficit. If that is taken into account, the higher inflation this year will cut real spending in the NHS by between £300 million and £350 million. Labour Members who cheered the Budget a week ago will not cheer when they see the consequences for their local health authorities this winter.
"taking into account the extra £1.2 billion and higher inflation, the net increase is some £0.41 billion"--
at current prices. I accept that that is extra money, but it is about a third of what the Chancellor claimed and it will follow a cut this year. That will mean a serious, continuing squeeze on the health service and represents no bonanza.
"My goal . . . is to ease inflationary pressures without damage to industrial and exporting prospects . . . In this way we can moderate the upward pressure on interest rates and on the exchange rate as well as further our objective of sustainable public finances."--[Official Report, 2 July 1997; Vol. 297, c. 305.]
But the Budget failed in its primary task of rebalancing the economy away from excess consumer demand to prevent higher interest rates and a higher pound. Of the £6 billion of new taxes, only £1 billion to £1.5 billion fell on the consumer, which will have only a marginal impact on consumer spending in a year in which consumers will receive £37 billion in windfalls of various sorts.
"Options for helping people on low incomes to insulate their homes and save energy are to be examined."
I am to meet a representative of the National Energy Efficiency Authority tomorrow and I hope to be able to tell him that he will get more money.
"If he cannot point out the section of the election manifesto which warned of increased tax rises for the ordinary voter . . . he should be ashamed of himself."--[Official Report, 17 March, 1993; Vol. 221, c. 291.]
Labour's 1997 manifesto merely says:
"New Labour is not about high taxes on ordinary families."
At the time of the previous Budget, in November, the present Chancellor said:
"That is the Tories as they are all the time. Before the election, they raise expectations. After the election, they raise taxes."--[Official Report, 27 November 1996; Vol. 286, c. 370.]
I have to say that I do not see the difference.
"As a proportion of their income it is the poor who have fared worst--they have lost around 1 per cent. of their disposable incomes"
and added that in cash terms
"the very poorest group loses somewhat more than the next couple of deciles."
I hope that the Government will address those matters over time, but they have not done so in this Budget.
"likely to squeeze company cash flows. Very optimistic assumptions are required to believe this will increase business investment . . . Despite the rhetoric, changes are unlikely to benefit business investment."
For all the reasons I have set out, we shall vote against the Budget, and we shall continue to demand a statement to the House on the public spending cuts. We do not accept that the House can be treated in this way. To be asked to vote on the Budget on a Monday and then to vote on the Second Reading of a Finance Bill--which has not yet been published--on Thursday of the same week is moving ahead with indecent haste. Contrary to what the Leader of the House said on Thursday, this is not just a Budget to implement the Government's manifesto pledges: it contains major taxation changes which were not in the manifesto, and these must be considered properly.
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