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6.48 pm

Mr. James Plaskitt (Warwick and Leamington): The Chancellor referred to the three main challenges that he was aiming to address in the Budget. The first was boosting enterprise, the second was securing family prosperity and the third was improving public services. The enterprise objective was rightly set first. It is, after all, the foundation for achieving progress on the others, and it is on that aspect that I shall focus my comments.

We have spent much time on the Treasury Committee and elsewhere considering the productivity challenge that the British economy faces, and my hon. Friend the

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Member for Dumbarton (Mr. McFall), who chairs the Committee, mentioned that in his contribution. There certainly is a challenge for our country in terms of the productivity gap. There is also something of a paradox because many of the things that need to be in place to secure a productive economy are already in place in the British economy. We have, for example, a high level of employment. Indeed, that has risen even further since 1997 and now stands at an historic high.

We have a relatively flexible labour market, which is another important precondition for productivity. Our economy is very successful at attracting inward investment—indeed, it is the most attractive centre for such investment in the whole of the European Union. All those important preconditions for productivity are present—they have improved further since 1997—yet there is still a productivity gap between our economy and those of our major competitors.

The important question for us to address in this Budget, as in all Budgets, is what we are going to do to help to close that productivity gap and so boost the prosperity of our economy. The first essential element to have in place is economic stability. Without that, any amount of measures targeted specifically at increasing productivity simply will not do the trick. Economic stability is crucial to business confidence, critical to secure investment and important to secure enterprise.

The fundamentals for economic stability are clearly in place. We put a key one in place when we came into office by giving the Bank of England its operational independence. That has delivered low, stable interest rates, which play a crucial role in delivering a stable economy.

Mr. John Hayes (South Holland and The Deepings): The hon. Gentleman spoke of a paradox. Does not the real paradox involve wanting to stimulate enterprise in the way that he describes—he mentioned inward investment—while at the same time wanting to interfere and to regulate? I shall give him one example, which was also mentioned by my hon. Friend the Member for Chichester (Mr. Tyrie): the ever more complex tax system. Does the hon. Gentleman believe that the tax system for small and medium-sized enterprise in this country will be simpler or more complicated as a result of this Budget?

Mr. Plaskitt: The performance of the small and medium-sized business sector speaks for itself, and answers the hon. Gentleman's question. Shortly, I shall cite some surveys that show exactly how the small and medium-sized enterprise sector is performing in our economy, compared to the economies of our main competitors. Those surveys paint a very encouraging picture of the British economy. That simply would not be so if the hon. Gentleman's accusation that the sector was overburdened with regulations were true. I will return to that point shortly.

Jim Knight: Prior to being elected, I was the manager of a small business in Wiltshire. I know that the 2,000 small businesses in my constituency will be delighted with the changes in VAT in the Budget. The flat rate for VAT for businesses whose turnover is currently less than £100,000—extending to 750,000 in April—is tremendous news for our small businesses.

Mr. Plaskitt: My hon. Friend is right. That proposal will be widely welcomed. As a point of contrast, and to

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pick up the point made by the hon. Member for South Holland and The Deepings (Mr. Hayes), we could have a debate about the scale of regulation in particular areas, but it all pales into insignificance when we recall the cost to businesses of the 15 per cent. interest rates that they had to endure when the Conservatives were in government.

Mr. Hayes: I appreciate the experience of the hon. Member for South Dorset (Jim Knight) in these matters. I was the director of what became a medium-sized business—clearly it was a more successful company than that of the hon. Gentleman—so I have some experience of these matters as well. Speaking of things paling into insignificance, the changes announced today that were positive for small and medium-sized enterprises are greatly outweighed by the increased national insurance contributions that employers in that sector will have to pay as a result of the Budget.

Mr. Plaskitt: I do not think that the hon. Gentleman is reflecting sufficiently on the reasons for the national insurance contributions being increased. Is he really saying that there is no return whatever for any business—small, medium or large—from a greatly improved national health service? There most certainly is, and it is perfectly right and proper that businesses can contribute to that just as much as individuals can.

I was in the process of listing the fundamentals that need to be in place to tackle the productivity agenda, and I mentioned monetary policy. Interestingly, there is now very little argument in the House about the positive contribution that has resulted from introducing the independence of the Bank of England, although there was at the time of its introduction. Fiscal discipline has also played a key part, and continues to do so. This has been reinforced by the measures announced by my right hon. Friend the Chancellor today. Low rates of business tax also play an important part, and a combination of all these factors has resulted in an end to the boom and bust cycle. That cycle did more harm to business stability than anything else.

The British economy has now had nearly 10 years without a single quarter showing negative growth. We need to go an awfully long way back into history to find circumstances such as these. The Chancellor's forecasts announced today suggest at least another four years of these economic conditions. This is a platform of stability that British business has not enjoyed for a generation.

Mr. Redwood rose

Mr. Tyrie rose

Mr. Plaskitt: The right hon. Member for Wokingham (Mr. Redwood) stood first, so I shall give way to him.

Mr. Redwood: Does the hon. Gentleman see the irony of Labour Members urging the private sector to greater productivity when it is their Government's policy to ensure that there is a massive decline in the political classes by saying that MPs cannot do the job and that we need all sorts of other elected people all round the country to do part of the job for us? Does he also see that lower productivity—or lower output per person—is sometimes desirable, because it is the Government's policy to have

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much shorter working hours for doctors, which will naturally lead to much lower productivity in the health service, rather than producing better working conditions?

Mr. Plaskitt: I would willingly take any point that the right hon. Gentleman made on productivity if his party had had a record, when in office, of being able to turn the magic key on productivity. In all of its 18 years, however, it did not. The right hon. Gentleman should have a little more patience with our measures, and show more understanding of what is resulting from our efforts, given that lamentable record.

Mr. Tyrie rose

Mr. Plaskitt: Because the hon. Gentleman serves on the Treasury Committee, I will give way to him, then I want to make some headway.

Mr. Tyrie: I am grateful to the hon. Gentleman. He said that we had now had 10 years of steady upswing. Does he not therefore concede that the foundations for what he has described as the end of the boom and bust cycle must have been laid some time during the early 1990s or earlier?

Mr. Plaskitt: No, that does not follow. Many of the other factors that were present at the end of the first four or five years of growth, in 1997 when his Government left office, were threatening the continuation of that growth. Rising inflation and the very high level of debt alone suggested that that growth might well have come to an end unless important measures were implemented, such as those that we introduced when we came into office. There is therefore an error in the hon. Gentleman's logic.

The conditions that I have outlined were necessary to secure an increase in productivity, but they were not in themselves sufficient. It is therefore right that we should do more to promote enterprise, to improve the skill base of the economy and to promote investment and innovation. I was pleased to hear that my right hon. Friend had something to say about all those important areas in his statement. The Budget needs to be judged in part—probably in substantial part—on the basis of the contribution that it makes to those objectives.

I understand, because of the obvious concentration on it, that most of the debate about the Budget may well revolve around the national health service. That is entirely understandable. In acknowledging that, I would like to point out that we should not overlook the question of productivity in relation to the NHS. Productivity is just as important there as it is in other parts of the economy. I would encourage Members to read the section of the Wanless report that debates the issue of productivity in the national health service—it is paragraph 5.31, if Members want to have a look at it. It shows the impact of achieving our health service objectives in terms of getting the productivity question right.

Wanless has as his central case a projection that health spending will rise to 11.1 per cent. of gross domestic product by 2022. He points out, however, that if health service productivity is 1 per cent. per annum worse than his forecast, spending would have to rise to 13.1 per cent. of GDP in 2022 to achieve the same health service output.

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Conversely, if productivity in the health service is 1 per cent. per annum better than his central case, the same health service output will be achieved with spending having to rise only to 9.4 per cent. of GDP. In other words, over a 20-year period a 1 per cent. fluctuation up or down in productivity inside that important public service amounts to a 3.7 per cent. of GDP differential—at today's prices, £35 billion, all resting on getting the productivity equation right inside the NHS. If that is true of the NHS, one can imagine how true it is of the whole economy, including the private sector. Small alterations and improvements in productivity performance can have a huge impact on the economy's overall performance. It is therefore right to make enterprise the first priority and to do what we can to promote it.

Small companies are very important in this context. There are about 5,000 in my constituency alone, and nationally they contribute about 45 per cent. of total output. The number of small businesses has grown every year over the past five years, and there are now 40,000 more than in 1997. The Government have already taken several measures to help small businesses, including the reductions in small business corporation tax introduced in recent years, the shortening of the capital gains tax asset taper and the introduction of the Small Business Service.

In 2000, when the Economist Intelligence Unit surveyed the 60 largest economies in the world to assess how good they were as a place to do business, the United Kingdom economy came second. Another survey by the Fraser Institute ranks the UK second overall in terms of business freedoms. I urge Conservative Members, who are fond of raising concerns about so-called over-regulation, to ponder the conclusions of those surveys. The Fraser Institute puts the UK economy third out of the world's 22 largest in terms of its use of markets and first in terms of property rights. All those factors are vital in delivering improved productivity. Such findings belie the charges that are made with monotonous regularity about an over-regulated business sector.

Given that those are important targets to aim for, my right hon. Friend's Budget contains some very welcome measures, including the extension of the research and development tax credit, further exemptions on capital gains tax, intellectual property recognition, further reductions in corporation tax, especially targeted at the small business sector—the basic rate goes down from 20 per cent. to 19 per cent. and the starting rate goes down all the way to zero—the simplification of VAT and help with payroll. All those measures will be warmly welcomed by small businesses in my constituency and throughout the country.

To make further progress on productivity, it is vital to do something about the skill base in the economy. It is a knowledge-driven economy; increasingly, the ability of people in work to perform effectively is the determinant in improving productivity.

I welcome the further announcements on education investment, which is a capital investment in tomorrow's economy. We have made good progress in primary and secondary schools on literacy, numeracy and increased standards, but a big challenge remains as regards the existing work force. The report by the Organisation for Economic Co-operation and Development reminds us that the UK has a higher proportion of low-skilled workers

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than any of our major competitors. Reskilling those currently in work plays an important part in developing the skill base that we should not overlook. I therefore welcome the measures to increase the scope for learning provision for employees by giving financial support to employers who release members of staff to take up training opportunities. It will be interesting to see the outcome of the employer training pilots in different parts of the country. They could make a significant contribution to increasing the skill base in the economy.

The whole question of investment is crucially linked to meeting the productivity challenge. The UK has a history of under-investment, although that is improving. In 1997, investment as a share of gross domestic product was 17.2 per cent. It is now about 19 per cent., so it is moving in the right direction, but it must go further if we are to meet the productivity challenge. Much has already been done to help to stimulate investment, including the research and development credits for small business—now extended—the planning reforms, which were particularly welcome in areas in need of regeneration, the stamp duty exemptions and the single pot funding for the regional development agencies that was introduced earlier this month.

It is important to deal with the innovation gap. A paper by the Institute for Fiscal Studies largely attributes the UK's productivity gap to the greater levels of innovation secured by our competitors. Promoting research and innovation is vital to meeting the productivity challenge. I was pleased to hear my right hon. Friend announce additional investment in universities and colleges, because they are often crucial centres for securing innovation, which flows out into industry and is taken up and turned into investment, in turn boosting productivity. It is therefore vital for the Government to invest in the research base in our universities.

I sound a note of warning to the Treasury about that, and I shall listen with care when the detailed announcement is made. How evenly spread will the additional money be? There has been a tendency to concentrate additional investment for university research on the top 20 or so universities, which, although they are the top universities for academic attainment, are not always the most appropriately placed geographically for spinning off innovation into industry. I enter a plea for colleges and universities in the west midlands, many of which—including Coventry university and, in my constituency, Warwickshire college—have developed strong links with the automotive industry. They have a considerable record on innovation that has been picked up by that industry and used to help it to promote its products and win markets, to the benefit of the whole economy. Nevertheless, they, and others like them, find that their research funding is declining. I hope that that process can be reversed. Will the Minister take that on board and talk to his colleagues about how the welcome increase in overall funding for innovation will be spread around? We will get a better return on it if it is directed towards educational centres that have already established proven, close links with manufacturing industry in particular.

Of course, higher taxes were announced in today's Budget—higher levels of national insurance to fund the national health service—but set against that is the contribution made by the sound fundamentals of the economy, which play a much more significant part than the increase in one tax. Total spending on the NHS, which

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is currently £65 billion a year, is scheduled to rise to £105 billion by 2007. A rise of that scale would be nowhere near possible if we had not put in place the sound fundamentals of the economy. Most of that additional investment is delivered by the strong performance of the economy, not by the one particular tax increase that was announced today. It is only possible and can only continue if we go on putting the enterprise objective first.

The Budget does that. It helps us to meet the productivity challenge and thereby to deliver greater fairness. Enterprise and fairness have gone hand in hand under previous Labour Budgets since 1997. Together they have taken a further step forwards today, and that should be broadly welcomed.

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