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4.58 pm
Mr. David Heathcoat-Amory (Wells): Contrary to the rosy picture presented by the Chief Secretary, the country is beginning to pay the bill for a Labour Government. The rhetoric of the Budget has given way to the reality of an unnecessary and tax-raising Finance Bill. The Government have been in office only 10 weeks, but the cracks are already appearing.
The first thing the Chancellor did--almost on the first day he took office--was to hand decisions about interest rates over to the Bank of England. He cannot hand over responsibility for monetary policy, but decisions are now to be taken by others. A little later, he relaxed the inflation target. We met our inflation target of 2.5 per cent. or less by the election. That was the achievement of my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke), who never relaxed his determination to get inflation down permanently and to meet our inflation target by the date of the general election. He did it.
The new Chancellor loosened the inflation target to an aim of 2.5 per cent. a month with a 1 per cent. tolerance either side of that target before various letters and explanations are to be demanded from the Bank of England. That sent a clear message to the markets, to economic participants and to the world at large that Labour Governments are soft on inflation. They always have been in the past and this one is no different. That was confirmed in the Budget arithmetic published last week as part of the financial statement. The higher prediction for inflation is built into the plans, so the Chancellor expects to break his own inflation target. I do not know whether that should be the subject of a letter he writes to the Bank of England or whether the Bank of England should write to the Chancellor, but it is clear that inflation is set to rise this year and next and it is written into the Red Book.
Mr. Darling:
Can the right hon. Gentleman tell us whether the Opposition believe that the Bank was wrong to raise interest rates today?
Mr. Heathcoat-Amory:
We would not have relaxed the inflation target or given away decision making about monetary policy to the Bank of England. We would not have introduced a Budget that will increase inflation. If the Government will address all those issues, we will tell them what we might have done in the hypothetical situation about which the right hon. Gentleman asks.
The Chancellor could have done something about inflation in the Budget. I do not know whether there are some neo-Keynesians in neo-Labour, but there are those
who believe that tax increases should be used to regulate the economy. I am not sure that I am one of them, but there is a view that excessive consumer expenditure can be damped down in a Budget. The Chancellor could have done that, but, instead, he chose to hit not consumers primarily, but savers, pension funds and utility companies. To that extent, it was a missed opportunity.
The Chancellor increased some taxes on consumers directly and, to that extent, contributed directly to inflation. He increased indirect taxes on tobacco and fuel. He put up the duties on petrol, diesel and heating fuel immediately, bringing forward those increases by five months. That netted him an extra £750 million in the current year, but it goes straight on to the retail prices index.
It should not go unremarked that the tax increases--17 in all, including the indirect tax increases--make it a regressive Budget. The Institute for Fiscal Studies has calculated that the poorest 10 per cent. will be hit hardest by the tax changes that have been announced, so before Labour Members become all sanctimonious about how only they look after the poor and the disadvantaged, they should reflect on the fact that they are being invited to approve a regressive Budget.
Faced with the fact that the Budget and the Finance Bill have relaxed the inflation target, that the Red Book predicts that the Chancellor will miss his own inflation target and that the Budget has not only failed to deal with inflation but has added to it, the Bank of England has now raised interest rates again--the third increase since the election.
The verdict of the Monetary Policy Committee was that 6.5 per cent. was adequate a few weeks ago. Having studied the Budget and the Bill, it now evidently concludes that an extra 0.25 per cent. is needed. That is the result of the first 10 whirlwind weeks of the new Government.
Mr. Darling:
I am sure that the right hon. Gentleman did not mean to mislead the House on that point. The Bank of England's report today notes the fiscal tightening in the Budget last week and further notes that the problems have arisen over a long period. Will he accept that the former Chancellor was advised on many occasions, specifically in February, that if he did not take action to increase interest rates he would not hit the target in the long term?
Mr. Heathcoat-Amory:
Of course the Chancellor attempted a fiscal tightening in the Budget, but I have explained that the targets he hit on the revenue side of his Budget were not directly consumers, but pension funds, savers and businesses and that the extent to which he did put up taxes has had an inflationary effect. The Bank of England must have taken all that into account before deciding on a third increase in interest rates since the election.
After that 10-week period, we are left with higher inflation and more to come, higher interest rates and higher taxes. Of course, we had a stock market rally, but before the Government take too much comfort in that they should see what it consisted of. Retailer and bank shares were up, but the shares in manufacturing and engineering companies and exporters were down. Is that what the Chancellor meant by rebalancing the economy?
This was not a Budget for investment. Yes, corporation tax came down a little for businesses that are incorporated, but we know that most small businesses are not incorporated. There were some short-term increases in capital allowances, but nothing for the long term. The point is that all that was overwhelmed by the sum that the Chancellor is taking out of the corporate sector. One cannot take out a net £3 billion from British companies and expect them to increase their investment plans. That is what the Budget did and now the interest rate increases make the message even clearer. It will be more expensive to invest and the strength of the pound means that exporters will find things even worse. The message is clear--Labour is bad for business.
The central claim of the Budget is that it is for the long term. That was supposed to be the Budget's hallmark. The first item in the Finance Bill is the windfall tax. I do not know whether that is supposed to be long term or whether there are to be other windfall taxes. If participants in the private finance initiative do too well out of a deal, I wonder whether there will be a windfall tax on them. If the Government try to privatise London Underground or air traffic control services, I wonder whether there will be a windfall tax if the shareholders do too well. Perhaps that is what the Government mean by making the windfall tax long term. The only sense in which the tax covers a long period of time is that it is retrospective to the extent of 13 years to find the profits that the Government want to tax. They want to spend the money not in the years stretching ahead, but in short-term employment subsidy schemes.
Already the tax is in a muddle. We were told by the Paymaster General on Friday that he had made some mistakes about how the tax was to be calculated and that he would bring forward an amendment. He told hon. Members that they should not worry as it was only a small matter. Well, it is not a small matter when the Government use the coercive powers of taxation against a group of British companies that they have singled out for allegedly making excess profits and then fail to table the correct way of doing it and expect us all to work it out from some elliptical remarks by the Paymaster General on a Friday morning.
It is disgraceful that the Government are rushing through a Bill that they prepared in only a few weeks without any regard for the principles of openness or consultation and without the publication of draft clauses--about which they made so much in opposition. Then, they talked about the importance of improving legislation by consulting those affected and by publishing draft clauses and so on--but all that has been forgotten. They published some sort of a draft Bill over a weekend and they think that it is a substitute for all the things that they urged on us when they were in opposition.
The proposed timetable is a disgrace. This is a colossal tax-raising Budget which includes 17 tax rises and a huge, new, complicated tax. The schedules that deal with the windfall tax alone run to 15 pages. Pages more deal with anti-avoidance legislation. All that is to be forced through in short order. There is to be a guillotine even before the Committee stage has started. That has not been provoked by any filibustering; there has been no attempt to disrupt the Bill. It is simply that the Government want to push it through and get away for their summer holidays.
Realistically, there is no opportunity for outside bodies, tax institutes, professional bodies and those affected by the Bill to contribute to the Committee stage. I understand that the Committee is to sit on successive days, whereas usually Finance Bill Committees sit two days a week. That should worry Labour Members because they were sent here to scrutinise the Executive. They are supposed to look carefully at the legislation on which they will be voting. They have a duty to ensure that the legitimate points made by outside interests are considered.
We have already heard from the Paymaster General that there is something wrong with the clauses dealing with foreign income dividends. During questions earlier, the Chief Secretary said that it had all been made clear last Friday. I looked up exactly what the Paymaster General said about foreign income dividends:
We have heard that the Treasury has received telephone calls from British companies with large amounts of foreign earnings. They say that if the Government persist with the clause as drafted they will simply relocate to other countries. That would blow a hole in the Government's claim of making Britain the number one magnet for foreign investment--as, in fact, it was under the Conservative Government.
"We are also looking sympathetically at the position of UK-based groups with a substantial amount of foreign income."--[Official Report, 4 July 1997; Vol. 297, c. 586.]
He said nothing else--there was no clue as to whether he intends to withdraw the clause or change it.
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