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Mr. Brown: I have just found the answer to my sleepless nights. Just as I will not take advice from a shadow Chancellor who supported a Government during the last world downturn who ran 15 per cent. interest rates, 10 per cent. inflation, lost 2 million manufacturing jobs, and had 1.5 million people in negative equity, neither will I take advice from the shadow Chancellor and his party on levels of borrowing. For 16 of the 18 years of Conservative Government, they were in deficit; for 11 of those 18 years, the deficit was above 3 per cent; in the Conservative years under the Major Government, the deficit was 6 per cent.; and it rose to 8 per cent.—the equivalent of £80 billion at today's prices—for two years in 1992 and 1993. Yet the shadow Chancellor has the audacity to try to lecture Labour Members about borrowing.

When borrowing is actually lower than it is in Germany, in France, in Japan and in America, why is the right hon. Gentleman so obsessed about the borrowing figures? There is one reason and one reason only: it is because, as he said in The Daily Telegraph yesterday, his aim is to cut spending. He is on record—he will not be allowed to forget this, because this is something that is at the centre of the pre-Budget report—as calling for a cut in public spending to 35 per cent. of national income, which is an £80 billion cut. The leader of the Conservative party is on record as saying that he wants to cut public spending to 35 per cent. of GDP. Perhaps an even more significant figure—the chairman of the Conservative party, Lord Saatchi—is on record as wanting to go back to the 1950s and to cut public spending to 30 per cent. I have to ask the Conservatives how many hospitals and schools and how many nurses and teachers will be lost.

The shadow Chancellor is wrong on savings. The savings ratio was lower under the Conservative Government in the 1980s. He is wrong on central administration. The costs of central administration were 4.9 per cent. of national income when we came to power; they are now 4.3 per cent. and they are falling to 4.1 per cent. We will take no lectures about the cost of bureaucracy from the party that gave us the poll tax, BSE and many other bureaucratic nightmares that we had to deal with when we came into government.

When the records are looked at, it will be found that the shadow Chancellor and his party have been wrong on every issue of economic policy. Let us remember that they opposed Bank of England independence, they opposed the minimum wage, they opposed the new deal, they opposed our symmetrical inflation target and they opposed our fiscal rules. Today, they are opposing an economic policy that has given us the best growth for the past three years of all the G7 countries and a level of public investment in services that has been surpassed by no one in the last 50 years. At the same time, we are dealing with the problems of investment and reform, and he seems to have forgotten the announcements that I made about reforms in the spending review coming up. The Conservative party was 18 years in government; it is going to be 18 years in opposition.

Dr. Vincent Cable (Twickenham) (LD): I am happy to start by acknowledging that, in some key respects, the Chancellor has a very good story to tell. We have low inflation and low unemployment and we have had steady growth and a respectable level of public debt.

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I am afraid, however, that in other respects the statement showed the Chancellor at his worst. He trailed a long stream of complex new tax gimmicks, adding to an already over-complicated tax system. I notice that he spoke even more rapidly than usual when he got to the very dodgy numbers on the Budget. The fact is that there are a lot of red faces in the Treasury about the red ink on the Budget. The number that he has come up with today—a £37 billion deficit for the current financial year—is £10 billion more than he expected a year ago.

How does the Chancellor reconcile his optimism on the golden rule with the assessment of the independent and highly respected national institute that estimated a few days ago that there is a 50:50 probability that he is going to break the golden rule over the cycle, to which he attached so much importance? Can he confirm the story in today's edition of The Times that he has already written a letter to the European Commission explaining that he will have to break the Maastricht rule for the current financial year?

Is not the problem that, whereas the Government have established—they should be given credit for this—a secure and stable framework for monetary policy, that credibility does not exist in fiscal policy? The reason for that is that the Chancellor decides what assumptions he wants the auditors, the National Audit Office, to investigate. Why will he not throw the Government books open to a completely independent outside assessment?

It is clear from what the Chancellor said that the main reason for the widening deficit is a shortfall in taxation. He made no attempt to explain that. Will he try to explain why the shortfall is so large?

On the spending side, the Chancellor is quite right that the main problem is the Iraq war. On the figures that he gave today, which I understood to be a revised figure of £3.8 billion, is it not the case that the money will run out next September if the cost continues at the current rate of £200 million a month? Is not the brutal truth about this war that the activity that the Government embarked upon with the full support of the Conservative party has resulted in a situation in which British taxpayers will continue to have to pay large sums? Is there not truth in the adage that there is no such thing as a free war?

I have accepted, and I do accept, that there are positive elements in Government economic policy, but will the Chancellor be equally candid in accepting some of the failings? One of the failings is a serious imbalance in the British economy. Why, for example, did the right hon. Gentleman not say a single word about the trade deficit and the balance of payments? Would he not acknowledge that there is potentially a serious problem as a result of spiralling consumer debt and the possibility that that may result in a sharp downturn in spending? Does he not accept the Bank of England's analysis that the housing market is over-valued and could well deflate? Has the Treasury done any serious risk analysis of what could happen if such scenarios evolve? Will he publish it if it has?

In conclusion, may I ask another question? The Chancellor has built a reputation not just for competent economic management but for a genuine concern for

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social justice—probably rather more so than his next-door neighbour. However, can he explain why he now presides over a tax system in which the poorest 20 per cent. of the population pay 42 per cent. of their income in tax but the richest 20 per cent. pay only 44 per cent. of their income in tax? That is why the Liberal Democrats are making proposals not to raise tax, but to create a fairer tax system by lifting the burden of tax, particularly council tax on pensioners, and by asking the best-off people in society to pay a little more.

Before the Chancellor recites the lists from the Prime Minister about Liberal Democrat spending commitments, which the Prime Minister seems to have raided from conference resolutions going back to the days of Campbell-Bannerman, may I ask the Chancellor to face a straightforward question? Why is it unfair and damaging to the economy to have a 50 per cent. tax rate on earnings of more than £100,000—on the earnings of the likes of Lord Sainsbury, Steve Norris and even the Prime Minister—when it is perfectly reasonable, according to the Government, to have a 50 per cent. marginal tax rate on a graduate teacher who, under the Government's proposals, would pay the top rate of tax and another 10 per cent. in top-up fees. It is precisely the Government's lack of sensitivity to injustices and unfairnesses of that kind that is leading to so many of their supporters deserting them.

Mr. Brown: I have great respect for the new shadow Chancellor representing the Liberal party, and especially for the policies on social justice and the other items that he took with him when he moved from the Labour party to the Liberal party and in which he still believes.

Let me deal with the hon. Gentleman's individual points. As I said in my statement, we have submitted our report to the Commission today with a letter to the commissioner saying that, in our view, we meet a prudent interpretation of the stability and growth pact. We believe that a prudent interpretation is one that takes into account a cyclical adjustment of the borrowing.

On Iraq, we have set aside £2.5 billion this year and that is a very considerable amount of public spending to make possible the action that is taken at both a humanitarian and military level in Iraq.

On balance of payments, the hon. Gentleman should look at the figures that were published this morning that show a position that is better than people had expected. We do not have the balance of payments deficit that the Conservatives had in the 1980s.

As far as debt is concerned, I have had this debate with the hon. Gentleman across the Floor of the House. Although it is true that house price debt is at a high level, mortgage interest payments as a share of income are at a far lower level than in the early 1990s. In fact, they are half what they were in the early 1990s

As far as poverty is concerned—I think that our parties share a common approach on social justice and we want to ensure that more children are taken out of poverty—the hon. Gentleman must examine the tax system that we have developed. Although the top rate is 40 per cent., the bottom rate is minus 200 per cent. because the system is based on tax and benefit integration. That is exactly the sort of tax credit system

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that the Conservative party used to support and it is not too dissimilar from the earned income tax credit system in the United States of America. It allows us to pay people money from the Inland Revenue, especially for children, if their incomes are very low. I put it to the hon. Gentleman that the number of families with marginal deductions above 70 per cent. has been reduced under this Government and, indeed, we ended the situation in which people had marginal deduction rates of more than 100 per cent., which applied when we came to power.

The problem that the Liberals have when advocating their tax policies is that whatever they do with their 50 per cent. rate, they would find a spending gap of about £10 billion to £14 billion. That is why the former Liberal Democrat shadow Chancellor, who was replaced only a few months ago—he was probably replaced for saying this—said that

The Liberals then announced another 40 spending commitments and sacked their shadow Chancellor.

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