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Mr. Bercow : Given that the Chancellor strongly advocated entry to the exchange rate mechanism—which was unsuccessful but reversible—and given that he now favours, in principle, entry to the European central currency and the running of our monetary policy by people whom we do not elect and cannot remove, does he now recall the wisdom of Kipling, who wrote:

"The burnt Fool's bandaged finger goes wabbling back to the Fire"?

Mr. Howard: My hon. Friend makes his point with characteristic eloquence, and I entirely agree with him. Perhaps, however, he makes the mistake of assuming that the Chancellor's approach to this matter is rational. As we know, his approach to the whole question is determined simply on the basis of the faction fighting in the Cabinet.

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The Chancellor is also consulting on a new fiscal policy in the event of our joining the euro. He is not content with merely abandoning his monetary policy; he must abandon his fiscal policy as well. Since becoming Chancellor, the right hon. Gentleman has gone to great lengths to boast about his fiscal policy framework and his supposedly cast-iron fiscal rules. If we join the euro, however, that framework is set to change. The Chancellor will have to introduce a third rule allowing him to do what Governments stopped doing 30 years ago, and try to fine-tune the economy with tax changes. Governments gave that up 30 years ago because it did not work, but the Chancellor has to try to do it again, because he will have given away the ability to set interest rates. He is giving away the nutcracker, so out comes the sledgehammer to crack the nut instead. That is why his own evidence says that

"fiscal policy may need to be more activist"

if Britain joins the single currency.

Mr. John Wilkinson (Ruislip-Northwood): My right hon. and learned Friend has identified an important point. The problem experienced by Finance Minister Eichel in the Federal Republic of Germany, to which he alluded earlier, is precisely the one that he describes. Forcing through a reform package of taxation against the predispositions of the Social Democratic party has proved to be exceedingly difficult, and in the meantime German unemployment remains inexorably high.

Mr. Howard: That is true, but the change that the Chancellor is embracing needs a little more analysis. We must consider what it will mean in the real world. According to John Butler of HSBC,

"very important and frequent swings in tax rates"

will be required. The Chancellor's documents list the taxes that he has in mind: VAT, excise duties and taxes on housing. "Investment in housing", his documents complain,

"is relatively lightly taxed compared to other investments".

The Chancellor has spent six years "converging" Britain with European levels of business tax and European levels of red tape. Now it is the turn of homeowners.

"Tax instruments affecting the housing market have some immediate appeal",

his documents say, and stamp duty is singled out. What level of tax rises has he in mind?

Mr. Nigel Beard (Bexleyheath and Crayford): Will the right hon. and learned Gentleman give way?

Mr. Howard: I am afraid that the hon. Gentleman will have to listen to this for a little longer.

Replicating the average level of stamp duty in France, Germany, Italy and Spain would involve a fivefold increase in the tax paid by people buying properties valued at between £60,000 and £250,000. That would increase the amount of stamp duty paid on a £100,000 house by £4,000.

I now give way to the hon. Gentleman. I look forward to hearing him explain how he will justify that sort of increase to his constituents.

Mr. Beard: Can the right hon. and learned Gentleman explain why the United States, with a common interest

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policy, does not experience the vast swings of tax policy that he describes, yet is perfectly well managed economically?

Mr. Howard: The United States is one country. It has much higher labour mobility. Its people speak one language. It has a system of substantial fiscal transfers between one state and another. The only reason for entering the euro is to build a country called Europe. Those who want to build a country called Europe are absolutely right to be in favour of joining the euro, but if there is no wish to build a country called Europe there is no justification for joining.

The increases in stamp duty are not the only tax increases identified in the Chancellor's own documents. Everything that I am saying is based on those documents. They say that existing powers to raise taxes such as VAT may not be enough, and that the limits may have to be widened if we join the euro. The fact that the existing powers allow the Chancellor to increase VAT to nearly 22 per cent. gives some indication of the sort of tax rises that he has in mind.

None of it would work anyway. The Treasury's own evidence lists all the reasons why discretionary fiscal policy has failed in the past. I think I just heard the Chancellor ask, from a sedentary position, "Who wrote this?" The answer is the economists in the Treasury. It all comes from the 18 volumes of supporting documents that the Chancellor produced on 9 June.

Listing the reasons for the failure of discretionary fiscal policy, the Treasury says that there are "complexities" and "practical difficulties". It cites studies showing that the policy was a destabilising influence. The Chancellor's permanent secretary and his chief economic adviser have written a book about what a mess it all was, and how wonderful it is that we have left all that behind. But now, as the Institute for Fiscal Studies puts it, it is "back to the future". It says:

"The idea that tax rates should be used actively to manage the amount of spending power in the economy has been out of fashion for three decades, but Mr. Brown is willing to turn the clock back".

That is not all. This is the Chancellor whose allies told The Independent in February:

"If the tests have not been met, we should rule it out for the Parliament. You can't keep looking at it every six months or a year until you get the right result. People would see that as a political fix rather than a decision taken on economic grounds".

But a political fix is exactly what the Chancellor announced.

The Chancellor once used to say that to join the euro successfully,

"we must demonstrate a settled period of convergence."

And to "demonstrate sustainable convergence", he said,

"will take a period of years".—[Official Report, 27 October 1997; Vol. 299, c. 584–85.]

After all, if our economy looks similar to the eurozone economy, how do we know that so-called convergence is real, and that it is not a case of ships simply passing in the night? But on 9 June all that changed, when the Chancellor told the House that far from judging sustainable and durable convergence over a period of years, he will give it until next March, when he may look at the tests again. So we have no convergence to speak of now, but the Chancellor is asking us to believe that we

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might have "sustainable and durable" convergence in eight months' time. Four in five tests have been failed, but the Chancellor is asking us to believe that all five might be passed "clearly and unambiguously" in eight months' time.

What of all the reforms that the Chancellor says are required to bring that about, such as changes to housing finance, labour market flexibility, regional and local pay structures, new inflation targets, reform of the stability and growth pact, and reform of the European Central Bank and of the economies of the eurozone? All of that is to be completed well before next March, to provide time for the result to be assessed afterwards. But in fact, this week the Prime Minister gave the game away when he suggested that the referendum could take place before the reforms are fully implemented.

So there we have it: the issue is not completing the reforms and assessing the results. So much for assessing sustainable and durable convergence over a period of years! Now, convergence is to be judged on the basis that these reforms just might, eventually, get under way. So not only will we not know whether the ships are just passing in the night; the ships will not actually be anywhere near each other. They will just be on the way, and hopefully they may meet, this year, next year, sometime—or never. What an absurd basis on which to make irrevocable changes to the economic future of our country.

As Steven Andrew of the asset management company ISIS said:

"It borders on the incredible to suggest a significantly different conclusion can be sensibly reached within such a brief time frame".

Even the Institute for Public Policy Research, the Government's favourite think-tank, says that it is "implausible" that progress will have been made by next year on the

"long-term barriers to euro entry"

that the Chancellor identified. So why is the Chancellor continuing the uncertainty in this way?

It is clear that the policy that the Chancellor has now adopted on the euro was based not on logic, and certainly not on the national economic interest, but on the narrow, partisan interest of a faction-ridden Cabinet, and on the narrow, partisan interest of a Chancellor looking to keep in with both sides. None of this would matter quite so much if he did not mean it and he was just taking his colleagues for a ride, but his policies will affect people before a single vote is cast in a referendum. It is the country that is being taken for a ride. Business will now pay the price of the Chancellor's rolling assessments and rolling uncertainty. Households will now pay the price of his attempts to force our economy to "converge". And the whole nation will now pay the price of the Cabinet's faction-fighting—a nation that says that its priorities are hospitals, schools, crime and tax, but which sees the Government continuing to waste time on the euro.

To curry favour with those factions, the self-styled "iron Chancellor" has announced that he was prepared to ditch everything that he claimed he stood for: his monetary policy, his fiscal framework and his so-called prudence. Some of it will go now, irrespective of whether we join, and he has no qualms about abandoning the rest if we go in. The Chancellor's approach is now clear

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for the whole nation to see. After all the fine talk of the last six years, when it came to the crunch, this Chancellor has chosen to sacrifice his credibility for partisan reasons; and now that it has gone, he will find that it has gone for good.

The Chancellor may have thought that the compromise that he agreed on 9 June was worth it for a quiet life. He may have thought that the price of the policies that he has now adopted would be paid by others than himself. He may even like to pretend that it was really nothing to do with him, but ultimately the content of that statement was his responsibility, and in lost credibility and respect he may find that he has paid the biggest price of all.

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