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Mr. Letwin: The right hon. Gentleman is presenting an interesting argument. To the extent that falling prices are generated by competition and technology rather than excessive monetary restraint, why does he believe that that is bad?
Mr. Davies: It is not bad up to a point, Lord Copper. However, it is bad when inflation reaches zero and general prices start falling. I believe that capitalism needs some inflation. A deflationary position, whereby general prices fall, creates enormous problems for businesses and manufacturing industry, especially in Britain.
Mr. Edward Davey: If growth in the real economy is strong and unemployment is down, does it matter if monetary variables are falling?
Mr. Davies: It matters if prices fall. A good example is the steel industry. The problems in the steel industry in south Wales are created by the falling international price of cold-rolled coil. It has fallen to a point where it is not possible for the British steel industry to make a profit in many areas of Britain. Somebody else may make a profit somewhere else in the world, but not the British economy. Japan has a different sort of economy, but it showed the dangers of general price deflation.
We are therefore back to good old fiscal policy.
Mr. Davies: I can understand why the hon. Gentleman shakes his head because he is a creature of the 1980s fashion that fiscal policy is bad and monetary policy is good. He now nods, but in economics, fashion changes, and it is beginning to change now. Fiscal policy is again beginning to become more important than monetary policy.
I welcome the Bill for two reasons: the merits of the different tax changes, and because some money, including public expenditure money, will be put back into the economy. Four years ago, we handed over monetary policy to the Bank of England, but perhaps fiscal policy will come into its own again. Monetary policy will not solve the real problems in the world economy: falling prices, with which the Federal Reserve, the European central bank and the Bank of England cannot deal.
I am glad that the Chancellor introduced the Bill, that he has not put all his trust in central bankers and that perhaps fiscal policy will again become fashionable.
6.19 pm
Mr. Edward Davey (Kingston and Surbiton): It is a privilege to follow the right hon. Member for Llanelli (Mr. Davies), but I must take issue with some of the economic points that he made. The previous group of academics to claim that monetary policy was ineffective were extreme right-wing economists who believed in the
hypothesis of rational expectations and that macro- economic policy had little effect on the actions of private agents in the economy. It is unusual to hear someone from a different wing of the political spectrum presenting the same argument. Although I agreed with the right hon. Gentleman that, in certain circumstances, fiscal policy can be effective, nowadays monetary policy undoubtedly has by far the greater impact, particularly in the short and medium terms, on the economy--it has the greatest impact on aggregate demand in the economy.The right hon. Gentleman gave an interesting historical analysis of economic trends, but I refer him to periods in the early 20th century and in the 19th century, in this country and other advanced industrialised economies, when prices fell during strong economic activity. The idea, therefore, that one cannot have both deflation and strong economic growth does not hold up to historical analysis. It is to be welcomed when prices fall. My constituents certainly like to see prices go down when they go into shops to buy the services and goods that they need.
The Finance Bill is unusual compared with other Finance Bills, for three reasons. First--it is quite a serious reason--there is no report from the Select Committee on the Treasury to accompany the Second Reading debate. In the past--I checked the record--the Select Committee has published a report, which helped proceedings in the debate. The reason we do not have a report is, I believe, that there is some disunity among members of the Select Committee, which I regret. We felt that the report would probably not be unanimous. There was no report last year; that has been repeated this year. However, we have the benefit of the evidence--to which I shall return, because there are some interesting nuggets there for colleagues to consider.
Secondly, the Finance Bill is relatively short compared with previous ones, at least in the recent past. This time last year, we were dealing with a Finance Bill with 558 pages which ended up having 597 pages. However, this Bill is still far too long. It is 292 pages long--much longer than most Finance Bills, even in the 1980s. That worries me. If the Government are trying to sweep up before a general election and not put a heavy Finance Bill before the House, and they still come up with a Bill of 292 pages, I am extremely worried for the future. It should have been a very short Bill.
Either Ministers are intent on continuing to hound business and the private sector with too much tax legislation, or they are not in charge of their civil servants, who are putting forward far too many schemes, which Ministers are not throwing out. Nevertheless, the Finance Bill is unusually short compared with recent attempts.
Thirdly, as the hon. Member for West Dorset (Mr. Letwin) said, the Bill is relatively uncontentious. Most of its contents, with the exception of the aggregates levy, are relatively uncontentious, but we will judge the Bill not just by its contents, but by how it deals with the wider issues that are affecting this country--the big picture issues.
Before I come to those, I want to relate a serious matter to the House. I hope that Treasury Ministers will go away, check the record and have an answer ready for the winding-up speeches. I believe that the Chancellor of the Exchequer misled the Select Committee on the Treasury when he gave evidence on 20 March. He was being
questioned by the hon. Member for Bury St. Edmunds (Mr. Ruffley) about the tax burden; it is something to which he returns assiduously. In reply, the Chancellor said:
- "The facts in the Red Book are accurate; but I am pointing out to you that, as far as the inherited situation was concerned, the tax burden was due to rise to 38 per cent."
I was interested in that, so I asked the Chancellor to confirm that the 38 per cent. figure was
- "calculated on the same basis as the figures in the Red Book".
- "On exactly the same basis?"
In November 1996, when the Conservative Government said that the tax burden was due to rise to 38 per cent.--I think that it was 37.9 per cent. to be precise; perhaps it was 38 per cent. in the following year--the European system of accounts 1995 was not operating. The ESA 1995 was introduced in 1998 by the Office for National Statistics. If we recalculate the figures in the November 1996 Red Book and adjust the tax burden figures, we get a very different tax burden--it is considerably lower. The reason why it is lower is that, under the ESA 1995, money GDP was raised by around 2 per cent; so the figure that the Chancellor quoted to the Select Committee was not calculated on exactly the same basis as the figures that appear in the current Red Book. I hope that Ministers will check that and apologise to the House if I am right.
Mr. Deputy Speaker (Mr. Michael Lord): Order. I appreciate that these are complicated matters and that they are, to some extent, matters for debate, but I think I heard the hon. Gentleman say that the Chancellor had misled the House or the Committee. He should not use those words.
Mr. Davey: Of course I withdraw those words if they were incorrectly used, but I understood that there was, shall we say, a discontinuity between the words in the record and the analysis that I was offering the House. I hope that Ministers can try to correct it.
I go on to the big picture and how we should judge the Bill. The Liberal Democrats believe that the Bill fails to provide the extra resources needed for our schools, hospitals, police and pensioners. My hon. Friend the Member for Truro and St. Austell (Mr. Taylor) set out those needs on 13 March in the House. I shall not repeat everything that he said, but he made some pertinent remarks, particularly about schools, hospitals and pensioners, why they need extra resources and why the Budget and the Bill fail to provide those extra resources.
In my constituency, class sizes in secondary schools have gone up to record levels--levels not seen since 1973. Despite some increase in capital spending, for which I give the Government credit, there is still a huge backlog of repairs. I give one small example to Ministers. In St. Mary's primary school, Chessington, three outside
classrooms are still extremely cold in winter and far too hot in summer, and they still do not have lavatories. They are not yet included in any refurbishment plan, for replacement by permanent modern buildings. There is therefore still a backlog of repairs.There is a huge teacher shortage in my constituency, too. Whether we talk to a primary or a secondary head teacher, the message is still the same. They are having real problems recruiting staff. That means that there are sometimes no teachers in front of classes.
In my constituency, there is a huge problem with hospital bed shortages. In recent months, there has been a large increase in admissions to the accident and emergency unit. The hospital authorities have tried their best. They have put beds in seminar rooms and closed the day surgery in order to use the beds for overflow from A and E, but there has still been a huge increase in the number of overnight stays. They have gone to a hospital nearby, Tolworth hospital, and, following some suggestions from me and others, managed to open a ward temporarily. They did that because they needed intermediate care beds. In my constituency, nursing homes have closed and the number of care beds has reduced significantly. That has caused a huge problem for the hospitals. We need to tackle those bed shortages. Recently--I think last week--the British Medical Association produced a survey to that effect.
There are huge shortages of general practitioners and a lack of medical students applying to train in consultancy and general practice. Those are the problems. It is interesting to note that one of the key problems generally in the public sector is a shortage of staff. Whether it is in the health service, schools, police or other public services, there is a significant shortage. The Budget contains some measures to deal with those problems, but it does not go far enough, particularly in relation to London and the south-east, where the problems are particularly acute.
As my hon. Friend the Member for Truro and St. Austell said, in this Parliament, private sector wages have increased by an average 15 per cent. whereas public sector wages have increased by only 10 per cent. Therein lies a huge problem. Until we tackle it and make it clear that we value our public sector workers and provide them not only with financial rewards but with status, those shortages will continue to undermine attempts to modernise our public services.
The Bill also does not provide the resources necessary to ensure fairness to pensioners. Although there have been increases in the minimum income guarantee, as we know, many people do not claim the guarantee. The latest figures show that more than half a million pensioners who are entitled to the minimum income guarantee do not claim it. That fact demonstrates the problem with the Government's overall strategy for tackling pensioner poverty. If Ministers continue solely down the route of means testing and do not increase the basic state pension, pensioners will continue falling through the holes in the safety net and not receive the money that they desperately need.
Hon. Members talk about prices decreasing, but many pensioners face increasing bills. Their council tax bills, for example, are certainly not being reduced. In just three years--since 1998, when they started running Kingston
council in my constituency--the Conservatives have pushed up the average yearly council tax bill from £700 to £950. Pensioners in my constituency have to pay those tax increases on low increases in the basic state pension.
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