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Mr. Beard: Why?

Mr. Davey: The proposal is unlikely to achieve its aim because there are dead-weight costs, and because one cannot be sure that what is given tax relief is what we want to give tax relief to. For example, a pharmaceutical company with a whole range of drugs that it cannot sell in western markets could dump them on developing countries. Giving tax relief in those circumstances would be totally contrary to the Government's intentions.

Five clauses and one schedule are devoted to the aggregates tax, although we were told in the debate on last year's Finance Bill that the Government had sorted all that out, that there were no problems and that they could go ahead with the measure. The Liberal Democrats—and, to be fair, the Conservatives—said that the aggregates levy should not go ahead at that time because the problems had not been sorted out. The fact that the Government have presented the House with five

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clauses and a schedule on the matter tonight shows that we were right and they were wrong. They should delay the implementation of that tax until they have sorted it out properly.

All this complexity is the reason for the Liberal Democrats launching their campaign for simpler tax. Details of it can be found at and I recommend it to hon. Members. We shall consult over a period of time with business, tax professionals and all other interested parties on a whole range of proposals for simplifying the tax system. We want to engage constructively with business and the tax professionals—the experts—to ensure that when we are in government and come before the House with tax proposals, they will be proposals to reform the tax system, to reduce the compliance costs for business and to introduce major micro-economic reforms to help UK plc.

Rob Marris: Will the hon. Gentleman give way?

Mr. Davey: No, I want to make some progress.

I commend to the House one particular proposal on simpler tax in our first e-newsletter on the website, because it relates to the Finance Bill. We believe that film tax relief should be abolished. It is clear from the Bill that the Government realise that this little tax relief, which they put in place a few years ago, has become a complete rip-off. A whole series of companies are now exploiting it in a way that goes totally against the Government's original intention. Soap operas—the Coronation Streets and Emmerdales of this world—now claim that every episode is a film in its own right, to get the tax relief. How is that stimulating entrepreneurialism and innovation? Those reliefs only serve to create extra tax complexity.

Mr. Beard: Will the hon. Gentleman give way?

Mr. Davey: No, I will not give way.

We are now having to debate many pages in the Bill relating to anti-avoidance mechanisms for a relief that we should abolish. We should be taking those pages off the statute book.

To be fair to the Government, there are a number of measures in the Bill that we welcome. The fact that the bribes that companies used to give to win business overseas are no longer to be tax deductible is welcome; that is something that we have campaigned for. The extra support for amateur sports clubs is also welcome, as is the fact that some of the measures in the Bill have been widely consulted on. The increase in the inheritance tax rate band is welcome, as are certain other modest measures.

When we add up all those welcome measures, however, and stand back and ask, "Does this Bill improve the British tax system?", I am afraid that the answer is no. If it did not underlie a Budget strategy that we genuinely support, including investment in the health service, we would not feel able to vote for its Second Reading.

On Second Reading, it is customary to discuss the Treasury Select Committee report and the macro- economic policy that lie behind the Budget. I shall do so briefly. The Chancellor and, indeed, the Chief Secretary to the Treasury had, and have, a relatively good story to tell about the economy. Employment is high and

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unemployment is low, interest rates—both long-term and short-term—are low, and inflation is low. All that is welcome news, and represents a genuine achievement on the part of the Labour Government. The Budget, however, fails to address many failings. First and, in many ways, most significant is the fact that the British economy is incredibly unbalanced.

For some six or seven years, the growth of the economy has been fuelled by the consumer sector alone. It has not been fuelled by investment in business or in manufacturing. Labour Members know that, and they should worry about the fact that the Budget makes the situation worse by piling taxes on to the corporate sector and not restraining the consumption of the household sector through a balanced tax policy. The Government are leaving the job of dealing with consumer demand to the Monetary Policy Committee, which in due course will mean higher interest rates that will stifle investment. By failing to achieve a balanced tax policy—a policy that would help to balance the macro-economy—the Government are storing up serious problems.

Dr. Palmer: Will the hon. Gentleman give way?

Mr. Davey: I will give way once more.

Dr. Palmer: I thank the hon. Gentleman. Is he saying that not only would he have preferred an income tax increase to a national insurance increase, but he would have preferred a larger increase?

Mr. Davey: We have spelled out our proposals. We would have liked quite a large increase for those earning more than £100,000 a year and a modest increase for the remaining sector, which would have hit those who will not be clobbered by the national insurance contributions. We accept that that would have had a much bigger effect on private sector consumption, but it would have produced a much more balanced economic policy.

Concerns have been expressed about the Government's short-term growth forecasts. Just the other day we learned that in the first quarter of the year the economy has grown by only 0.1 per cent. If the Chancellor is to meet the growth targets that he announced a few days ago, that figure will have to be revised, or the economy will have to grow very fast during the remaining three quarters of the year. The Item Club, to whose pronouncements we should pay particular attention because it uses the Treasury's own forecasting model, has said independently that it does not believe the growth forecast will be met.

My main worry about the forecast, however, relates to the longer term. Both in 1999 and now in 2002, the Chancellor has increased his forecasts of the economy's underlying growth potential: the forecast in the Budget is 2.75 per cent. per annum. I do not quibble over whether that figure is achievable. It may well be achievable: indeed, owing to the excessive caution exercised by the Treasury up to now, it probably is, especially as public spending forecasts are currently based on a 2.5 per cent. forecast. What concerns me is the argument that the Government have produced to back up the change. If we really want to hold the Government to account, we must understand the thinking behind their policies, and analyse those policies rigorously to establish whether they meet the tests of arguments.

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How do the Government say they can now revise upwards the underlying rate of growth? They have used a new report from the Government Actuary's department relating to an increase in the size of the labour force, and in particular the prediction that net migration will be slightly higher over the next few years. That may strike Members as very reasonable, but when we look at the detail and, specifically, at the Budget publication "Trend Growth: Recent Developments and Prospects", we find that the Government have not used the Actuary's principal forecast. They have gone away from the principal projection by the Government Actuary. They say that it is excessively cautious and believe that it should be higher. In using a new report to justify uplifting the growth forecast, the Government have gone against the forecast of the Government Actuary. It takes some explaining.

Mr. Beard: The hon. Gentleman is laying all the emphasis on the increase in the size of the working population. Reports also show that, year on year, there has been growth in productivity. That alone justifies the change in the trend rate that the Government propose.

Mr. Davey: I am sorry but the hon. Gentleman clearly has not read the Government's own report. The Government assume in their forecast of underlying growth that productivity will stay the same. He cannot argue that underlying growth has increased due to productivity; his own Ministers are not arguing that. It is largely down to the change in net migration.

Mr. Beard: Will the hon. Gentleman give way?

Mr. Davey: I hope that the hon. Gentleman will show that he has read the report.

Mr. Beard: Given that the hon. Gentleman is apparently reading from a paper, he might read it accurately. The Government are not projecting any increase in future growth; they are not saying that they have not allowed for growth over the past five years. They have made a cautious prediction, taking today's productivity growth and not allowing it to increase according to the measures introduced in the Budget. That is what the Budget is saying.

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