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Mr. Duncan Smith rose--

Mr. Darling: I will let the hon. Gentleman have his moment.

Mr. Duncan Smith: In line with his point about the taxation of dividends, I wonder whether the right hon Gentleman can explain what he said on 31 May 1996. He said:

"Britain lives in a global economy and the minute you even suggested taxing dividends people would go out and invest in other parts of the world."

The right hon. Gentleman has just agreed with his Chancellor that he has taxed dividends. How does he explain his volte face?

Mr. Darling: If I remember rightly, I believe that I was being asked about the taxation of investment income at a different rate. If the hon. Gentleman will allow me to see the article, I will be able to confirm that I made the remark in that context.

The argument from Conservative Members that they were simply aligning tax rates does not stand up. If all I could produce in evidence was the quotation from Mr. Norman Lamont, they might have got by, but the quotation from the Financial Secretary in the comparatively quiet waters of the Standing Committee must be borne in mind. I shall repeat it. He said:

"We needed to raise revenue in a way that did least economic damage."

He said that he was raising money from pension funds

"from a group of people with taxable capacity, but who are not taxpayers in a way that does minimum economic damage, recognising the substantial tax benefits available to pension funds as collective savings vehicles".--[Official Report, Standing Committee A, 15 June 1993; c. 377.]

It is worth bearing it in mind--although listening to the right hon. Gentleman, one would not have been aware of it--that pension funds have been paying tax since 1993. Our proposed changes will not alter the fact that pension funds will continue to be free of tax on income in the form of capital gains and ordinary shares, as well as on other sources of investment income. That has a net cost to the Exchequer, but one that we feel is justified.

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It is wrong to suggest that what we are proposing is new. In fact, the Conservative party started the process. It is equally wrong to suggest that pension funds will be left without tax advantages.

Mr. Campbell-Savours rose--

Mr. Darling: I will give way, but I want to make some progress.

Mr. Campbell-Savours: Should not my right hon. Friend circulate to all Members a copy of the 1993 quote by Mr. Lamont? Many hon. Members would like to see it, and might wish to use it extensively in their constituencies.

Mr. Darling: I am happy to make arrangements to do that, subject, as always, to the public expenditure implications. I might even pay for it myself and send it to the National Association of Pension Funds and Mrs. Robinson.

I want to explain our proposals. We believe that it is necessary to reform the system of tax credits because it contains a major distortion, under which shareholders are better off if companies pay out profits as dividends than if they retain them for reinvestment. It is right in principle to remove that distortion. The principle that underpins our changes to the corporation tax system is absolutely right. It is for the management of companies and the shareholders to make the decisions, not for the tax system to provide an inbuilt bias.

In the United States, where a similar system exists, pension funds take decisions on their economic merits. An important point to note is that they are as keen on the capital appreciation that then results as they are on dividends. Greater emphasis on capital growth is important. It will help companies and offer them high, long-term growth. It will ensure that they are not starved of capital by the tax system. Indeed, the importance of capital growth is something on which actuaries and others in this country might want to reflect further.

I was pleased to note that, after the Budget, the Daily Telegraph--which I do not think is yet converted to the cause of new Labour; it certainly was not during the election, but it may be about to turn--said in its business section:

"The quality of life in retirement . . . depends on the growth in the economy, reflected in the prices of shares where the contributor's money is invested. This is the point of the Brown Budget that the pension funds would do well to grasp."

That is absolutely right. I want to emphasise that the reason we have taken this decision is right in principle. I wait to hear whether the Conservative party would repeal it were that party ever to return to power.

The American experience is worth bearing in mind. The central thrust of the Budget is to create a climate in which the level of investment is raised. It is important to keep our eyes on that fact. Currently, the level of investment is lower than it should be at this stage of the economic cycle.

I was interested in the speech delivered by Sir David Cooksey a few days ago, when he looked at some emerging US companies in 1975 and compared their

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position then with their current position. He noted that they had expanded dramatically, which is a common feature of the American economy. He said:

"It is also notable that very few of those companies pay dividends to their shareholders who prefer to benefit from growth in capital value as the companies reinvest all of their profits in the business."

He said that that contained a lesson which we should learn.

The value of a pension depends, to a large extent, on the value of the fund available when someone retires. Someone retiring at the height of the recession would have done less well than someone retiring now because the value of the stock market has increased; indeed, it has increased quite a bit since we came to power. It is important that those who follow these proceedings bear in mind the fact that, at the end of the day, the value of a pension depends largely on the prospects for the economy.

I very much hope that when actuaries assess the results of our decisions, they will remember that capital growth is an important matter to take into account. When considering our proposals, they should remember that the well-being of the economy as a whole is the most important feature. Not only have we reduced corporation tax for large and small companies, but we have doubled capital allowances.

Our goal is a long-term one--to improve this country's investment performance. For many years, our performance has lagged behind that of our major competitors, and continues to do so despite the current recovery. That may be because, in the past, there was so much concentration on the short term. Investment for the long term and for better growth will greatly benefit companies and, therefore, pension funds, which will gain in the long term. Many of those who have commented on the impact of the corporation tax changes have ignored the long term. Indeed, that is far too common a tendency in Britain. The long term is the central point of the Government's economic strategy.

Actuaries, who often value shares largely on the basis of prospective income and take relatively little account of market values, should begin to think long and hard about what they have been doing. They have tended to inflate the effect of the loss of tax credits. Over the past few weeks, there has been much comment in the press about that. Actuaries should change their approach. In the United States, actuaries pay much more regard to market values. That is beginning to happen with some funds in this country, but it is necessary for both pension schemes and actuaries to sit down and take a long, hard look at the real effect of the loss of tax credits and to understand the Government's strategy in the long term.

Sir Nicholas Lyell rose--

Mr. Darling: I will not give way, because I have been speaking for too long already. We have had four days' debate on the Budget. We are now having an Opposition day, which is substantially on the Budget. Tomorrow, there will be Second Reading of the Finance Bill, and

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there are further days of debate in the House next week. No one could say that we are curtailing debate on these matters.

Mr. Lilley: This is an Opposition day.

Mr. Darling: It is an Opposition day, and I am replying to the right hon. Gentleman's points.

The steps that the Government are taking will stand this country and its economy in good stead in the years to come. For the first time in many years, Britain has a Government who are looking to the long term and who will create an environment in which there is growth and investment. That will be good not only for companies and pension funds but for all the people of this country.

5.47 pm

Mr. Archy Kirkwood (Roxburgh and Berwickshire): I am pleased that we are having this debate today. The Chief Secretary was right to say that a great deal of time has been made available, but the issues are extremely important. When I spoke in Friday's debate I expressed my support for the Government's overall strategy, particularly the welfare-to-work proposals. In a continuation of that spirit, I readily acknowledge that the Government are showing proper levels of ambition and determination in the fight against poverty.

I share the view that improving access to employment is the only way to beat dependency and hardship. I repeat my offer of support for the Government's efforts to help the left-out millions get back into the mainstream of society. Anyone who argues against the objectives of the welfare-to-work programme is politically blind, deaf and dumb to the circumstances in this country.

Having said that, there are grounds for strong opposition to the way the Government intend to finance their plans. I am pleased that the Opposition tabled this motion today because it is right to focus on that. How the Government spend the money is one matter but, as this important debate shows, how they intend to raise it is another. I want to concentrate on the latter.

There are, of course, two sources of finance in the Government's programme, and we Liberal Democrats find them both difficult to stomach, primarily because of the heavy penalty that we believe they will impose, both now and in the future, on Britain's pensioners. The first tax is the windfall tax. I share the Chief Secretary's surprise that, both in today's debate and in the debates on the Budget, the official Opposition did not concentrate more on that. The second tax will be raised through abolition of the dividend tax credits reclaimed by pension funds.

Although both sources of funds are distinct taxes, they have been introduced for the same reason and share a common provenance: the Government's almost obsessional timidity over taxation and the revenue raising conundrum that such timidity has inevitably caused. If one cannot use the fairest, most transparent and most progressive tax--which is income tax--one simply must look elsewhere. Unfortunately for British savers and pensioners, the Chancellor has turned his gaze on them.

It is difficult to overstate the importance of the taxation straitjacket that the Government are in. As I said in last Friday's debate, the United Kingdom is faced with a

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situation in which the Government have become a prisoner of their own pre-election rhetoric. They cling to the vote-winning line: "We can have gain without pain; we can raise billions of pounds without anyone having to pay; and we can magically solve the problems of chronic underinvestment in education and institutionalised unemployment with a few tax increases that are so opaque and complicated that they seem to be entirely cost free."

Such a proposition is nonsense, and the Budget exposes it as such. There is simply no such thing as a tax for which no one must pay--a fact that encompasses both the windfall tax and the withdrawal of dividend tax credits. Together, those taxes constitute nothing less than a smash-and-grab raid on British pensions.

It is now reasonably well documented that the windfall tax is hitting not only the so-called fat cats--I understand Ministers' emotional reaction to their having secured unconscionable and unjustifiable increases in emoluments--in the privatised utilities, but employees or customers or future investment in those industries. In some industries, all three--employees, customers and future investment--are affected.

An equally valid argument is that it is simply not possible to take £5 billion out of the corporate sector without hurting the millions of people whose savings and future incomes are tied up in those utilities. The Government have adopted an unconscionable position on the matter. The tax will have an impact on the millions of individuals who own shares--many of whom arrived on the scene a considerable time after the windfall was gained. It may also impact on institutional investors, such as pension funds, which hold in their hands the future incomes of 19 million people with occupational or personal pensions. In years to come, those people will pay the indirect and hidden, but very considerable, costs of the windfall tax.

The Chief Secretary tried to argue that the windfall tax poses no problems because the welfare-to-work programme will work--hopefully, it will--and enable those entering employment to make proper provision for their pensions. If the tax's objective was to raise money to start such a beneficial cycle, however, why do not Ministers openly raise the money by increasing income tax? If the tax will start such a beneficial cycle from which everyone will gain, why do not Ministers go to the electorate and say, "The most honest way to raise the money to start such a cycle is through income tax?"

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