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6.17 pm

Mr. Oliver Letwin (West Dorset): The background to the debate can be, and has been during the debate, described in two different ways. The Government's view consists of a miraculous papier-mache mixed metaphor in which, by getting out of spending silos and conducting cross-cutting reviews to join up government, all is suddenly for the best in the best of all possible worlds and all economic cycles heretofore known to man disappear in the face of permanent prosperity, which has replaced a disastrous economic legacy.

The other picture is one that many of my hon. Friends--most recently my hon. Friend the Member for Guildford (Mr. St. Aubyn)--have painted, and I think that it approximates the truth more closely: the Government were lucky enough to inherit what has been described as a golden economic legacy but is in truth a fundamentally sound structure of an economy that has proved sounder and stronger than many of us expected. I think that my hon. Friends would agree with that. Since then, it certainly has to be admitted that there have been, in comparison with those of many previous Labour Governments, some good moves and sensible and prudent efforts. At the same time, however, worrying trends have emerged.

My hon. Friends the Members for East Worthing and Shoreham (Mr. Loughton) and for Guildford mentioned some of those trends. For example, in the balance of trade, there is a £19 billion deficit in goods, even in the first three quarters of this year, and a £10 billion deficit in goods and services in the same period. There are many other worrying trends such as asset price overheating and perhaps the beginning of serious worries about competitiveness and savings. Those are the two background pictures: one, alas, is broadly false; the other is true.

In an immensely perceptive speech, my right hon. Friend the Member for Charnwood (Mr. Dorrell)--who, alas, cannot be present now--said that what is remarkable about this debate is the ability of the House of Commons to debate tax and spending without having to debate many of the matters that had to be debated during the 1970s and 1980s, and, indeed, during much of the 1990s. It is much to the credit of the Labour party that, to all intents and purposes, it has abandoned the ludicrous naivety of socialist command economies, and has made some progress. At least we can now have a rational debate about tax and spending, and that gives us, as a democracy, much to be grateful for.

What has come out of the debate about tax and spending, against the economic background that I have sketched? First, as I think the Government in all but name admit, there has been a persistent and considerable increase in tax--an increase by stealth. My hon. Friend the Member for Bury St. Edmunds (Mr. Ruffley), who is a member of the Select Committee, told us of the 19 occasions on which he had tried to get the Chancellor of the Exchequer to admit the fact openly. I must warn my hon. Friend that, even if he makes the same point 190 or even 1,900 times, the Chancellor will never quite admit it. He cannot admit it, because the Prime Minister

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said that it would never happen, and it is well known in Labour party circles that when the Prime Minister has said that something will not happen, it cannot and must not happen. Consequently, the official Labour doctrine will be, and will go on being, that this has not happened; but, of course, no one will believe it, any more than they believe it now.

As my hon. Friend the Member for East Worthing and Shoreham made clear, we are dealing with something that defies any attempt at definitional dexterity. The fact is that, whatever definitions are used, tax has risen, and will have risen between one end of the current Parliament and the other. More important, perhaps--this may answer some of the points made by the hon. Member for Kingston and Surbiton (Mr. Davey), the Liberal Democrats' spokesman--our tax burden is not only higher than those of Ireland, Spain and Portugal, but, much more worryingly, much higher than those of the United States, Japan and Australia.

We shall have to compete increasingly with those countries given the existence of a new, open economy, in which people--human capital--will be the main commodity that we seek to attract and retain. When business is mobile, because it is knowledge based and hence people based, no one will be able to retain it in this country if they cannot provide a low-tax and low- regulation environment. If the Government do not believe that now, they will come to believe it when they discover, as all Governments do, that they have not actually abolished the economic cycle. They will come up against the problem that the fundamentals have been corroded by higher taxes, and they will find that we are not as competitive as they had hoped that we would be.

Another remarkable development is taking place. Given a vast increase in taxation--£40 million, according to the Government's arithmetic--we might have expected a huge accumulation of surplus; but, as was pointed out by my hon. Friend the Member for East Worthing and Shoreham, quite a modest amount of deficit reduction is going on. Indeed, in November--bizarrely, for reasons that I suspect puzzle the Chief Secretary as much as they puzzle me--there was a current budget deficit of about £2.9 billion.

We are talking about small differences between large numbers. They come and they go. However, the fact is that a fairly tight position is developing in comparison with what we would expect, with a huge fiscal drag and a movement towards trend rate of growth.

What is the cause of this bizarre phenomenon? Why have the Government been able--why, indeed, have they been able to demonstrate their ability so successfully--to raise taxes by stealth, without being able to repay vast amounts of national debt? Certainly, the reason is not spending on health or education. Let me put a nail in the coffin of a misleading statement that is frequently made in many places, not least--inadvertently, we hope--by some Labour Members.

We unequivocally support the increases in health and education spending. There is every reason for us to support those increases, which broadly parallel the increases that we introduced year after year. On the Chancellor's own plans, health spending will be increased

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by £9 billion a year--only £9 billion--between 1998-99 and 2001-02. That is just over, if over, the level of health inflation.

Many of the cases that my hon. Friends the Members for Guildford and for Chichester (Mr. Tyrie) and other hon. Members mentioned of structural deficiencies in delivery in the health service--the notorious waiting lists, and waiting lists for waiting lists--and of rising class sizes in many parts of education are due to the fact that the increase in spending is not that aggravated. We support the increase. It can be supported, and it could have been supported without that major tax increase. There is, therefore, quite another explanation.

Shona McIsaac: If the hon. Gentleman broadly supports the extra health spending, could he possibly explain why the shadow Chancellor described it as reckless?

Mr. Letwin: I really do not think that the hon. Lady will much advance debate by mis-attributing statements. My right hon. Friend the shadow Chancellor has clearly described the totality of spending as reckless--and, in a moment, I shall explain precisely why. I do not think that political debate should be conducted by pretending that people have said something that they have not said, as that will get no one anywhere.

My right hon. Friend the shadow Chancellor said:

"I said it last year and I say it again today. We support increases in health and education spending."--[Official Report, 9 November 1999; Vol. 337, c. 893.]

What he thought was reckless, what I think is reckless, and what I rather think that the Prime Minister must think is reckless is the vast growth in social security spending, which is where the money has gone.

This brilliant Government came to power telling us--I do not quote some minor guru, but a person called the Prime Minister--that

"By the end of a five-year term of a Labour Government: I vow that we will have reduced the proportion"--

of national income that--

"we spend on the welfare bills of social failure . . . This is my covenant with the British people. Judge me upon it. The buck stops with me."

As if that was not enough, on 7 October 1996, the Prime Minister told Newsweek:

"Our priorities should be to re-order public spending so that we're spending less on welfare and more on areas like education."

If that is the Prime Ministers' covenant, and if we are to judge him on it, he is to be judged a massive failure. Even stripping away the hype of any cumulative sums, between 1998-99 and 2001-02, there will have been an annual increase in social security spending of £15 billion, which is roughly three quarters as much as health and education spending together.

That has happened for the simple reason--which Ministers, if they are honest with themselves, perfectly well know--that the Government started with a brilliant, very sincere and profound man as Minister for Welfare Reform, and that he hopelessly failed to persuade the Chancellor of the Exchequer to let him do any of the things that he intended to do; and that the Government

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have utterly failed to attack the systemic problems in our social security budget. Ministers--and, alas, we as a country--will live to regret that.

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