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Mr. Mark Prisk (Hertford and Stortford) (Con): The hon. Gentleman is making a good point about the dangers of tinkering and meddling with the tax system, which the Chancellor is guilty of. Will he take one step further? Does he agree that tinkering and meddling not only fails to achieve end results, but distorts business behaviour, often in an unproductive way?

Dr. Cable: Yes. The hon. Gentleman is right. This morning, the Financial Times published a letter supplied by the Treasury, which makes the opposite point from the one that it was intended to make. It was published to highlight the horrors of tax avoidance and the iniquity of tax avoidance lawyers and states:

That underlines the point that, if tax policy constantly changes, business behaviour is affected in order simply to skim the tax system.

Mr. Martin O'Neill (Ochil) (Lab): The hon. Gentleman has sought to disparage the R and D tax credit and has assumed that companies that receive it would have invested anyway and remained in Britain. However, the market in a number of areas is international, both for business and for tax and rewards. A number of companies have invested considerable sums in Canada, where Liberal Governments have provided the kind of R and D tax assistance that the hon. Gentleman disparages in the United Kingdom.

Dr. Cable: I was not disparaging the R and D tax credit; I am sceptical and await the evidence, which so far suggests that the share of R and D in GDP has been completely and totally unaffected by that generous tax credit. However, we shall wait to see the outcome.

Mr. John McFall (Dumbarton) (Lab/Co-op): The Treasury Committee took evidence from AstraZeneca, Rolls-Royce and Microsoft, the representatives of which said that the R and D tax credit is one of the best initiatives.

Dr. Cable: If I were representing a company in front of the Treasury Committee, that is exactly what I would say. Why look a gift horse in the mouth? We have made the point that a good deal more clarity is needed about the benefits that derive from complex tax breaks, as opposed to a much simpler policy of moderate rates of business taxation.

My final point is rather different and relates to an issue, inequality, on which I probably share much more common ground with the Chancellor than do the Conservatives. One thing that has emerged from the statistics, which are somewhat unsatisfactory, is that, despite the Chancellor's undoubted commitment to that issue, income and wealth inequality in the UK are not very different—in some respects, they are even worse—than they were in the days of Mrs. Thatcher. There are several reasons why, some of which involve the workings of global markets, and some of which involve the workings of the tax system.

If we have a tax system in which the top 20 per cent. pay a lower percentage of their income than the bottom 20 per cent. of the population, it is clearly not working
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to alleviate the problems of inequality. A few months ago, a Labour Back Bencher tried to defend the highly regressive system of council tax. One of our criticisms of the possibly well-intentioned measures that the Chancellor has introduced on tax credits is that tax credits perversely aggravate the problem.

Ms Keeble: If the hon. Gentleman is in favour of increasing equality, why does his party oppose the new deal for lone parents, the pension credit and the child trust fund, which are three of the measures that do the most to help women and provide them with equality in modern Britain?

Dr. Cable: We have suggested that a better way in which to deal with the position of older pensioners would be to give them a decent, basic old age pension rather than a pension credit. One of the reasons for that, which we have debated extensively, is the fact that large numbers of pensioners do not claim pension credit. More seriously, those pensioners who claim face a very high marginal rate of tax—40 per cent. of them pay more than half their marginal income in tax as a result of benefit withdrawal. The system is so pernicious because it is a massive disincentive to save. It does not solve the problem of inequality.

In conclusion, the Chancellor has let it be known in the press over the past few days that he wants to present himself, his Government and his Budget with a flavour of Britishness. Economic policy will gain a patriotic element, which I appreciate because we all like to feel that we are patriotic rather than nationalistic. Under this Government, however, we have finished up with American levels of inequality, French levels of centralisation and, if the Home Secretary has his way, we will get Chinese levels of civil liberties.

Mr. Deputy Speaker (Sir Michael Lord): Before I call the next speaker, I remind the House that Mr. Speaker has placed a 15-minute limit on all speeches by Back Benchers and that it applies from now on.

1.58 pm

Mr. John McFall (Dumbarton) (Lab/Co-op): I congratulate the shadow Chancellor below the Gangway, the hon. Member for Twickenham (Dr. Cable), on a thoughtful speech. However, his political education would prosper if he read the minutes of the Treasury Committee on both the DTI—the regional development agencies say that it would be a disaster for them if it were taken away—and the R and D tax credit, which, as my hon. Friend the Member for Ochil (Mr. O'Neill) said, is essential to attract large multinational companies in an international competitive environment.

This debate is an important opportunity to assess the state of the economy and the public finances, which the Treasury Committee will do over the next few weeks when the Chancellor gives his pre-Budget report and appears before the Committee.

The Committee is interested in two areas: first, the state of the economy and the prospects for growth; and, secondly, the state of the public finances. As we mentioned in our report last year on the autumn PBR, the IMF has stated that the UK's economic performance is enviable, but there are fresh challenges in
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relation to growth. As we know, the Monetary Policy Committee has raised interest rates on a number of occasions to the record rate of 4.75 per cent. Some would say that the housing market has gone off the boil, which would have implications for the economy. The risks to the UK economy are largely international, with oil prices at $50 a barrel or so, the implications of the USA's current account deficit for the global economy and the sluggish growth in European countries.

One of the issues that the Treasury Committee will consider with the Chancellor is how to improve productivity. That has been a centrepiece of the Treasury's aspirations, and it is a challenge to all European economies. When the Chancellor comes before us on 24 February to discuss regional productivity, we will refer to developing countries, the rate of progress of China and India, and how we rise to the challenge of ensuring that regional inequalities in this country are lessened.

Anne Picking (East Lothian) (Lab): On developing countries and how we try to marry up social justice and economic stability, is my right hon. Friend aware of the early-day motion in aid of Band Aid 20, in which we support the Band Aid single? The Chancellor has allowed the VAT on that single to be donated to the charity. Woolworths is donating all its proceeds from the single to the charity, and Asda phoned me this afternoon to say that it will do likewise.

Mr. McFall: I signed that EDM, and that is very welcome news. I have an Asda store in my local community, so first thing on Saturday morning I will be in there buying a Band Aid single. I congratulate Woolworths and Asda and ask other retailers to follow their example.

There are several sobering statistics for us as regards developing countries. Within 20 years, half the world's manufacturing exports could come from those countries. Already, China is exporting more than France, Italy and the United Kingdom. Indeed, Asia is exporting as much as the European area. We can learn a lot from what is happening in those countries in terms of the need for us to develop our skills in the knowledge economy. We pride ourselves on the information technology graduates who come out of our universities, but India and China are producing 125,000 computer science graduates compared with 5,000 in the UK. The question for us is how to embrace that change and get involved in it.

Currently, only 1 per cent. of UK exports go to India and China; we need to increase that proportion. In January, the Government are promoting the year of science in China—Lord Sainsbury is going out there—and in December there is a UK financial dialogue taking place with China. I welcome those steps. However, we need progressive policies on science and skills. As a chemistry graduate, I am very sad that Essex university is closing its chemistry department—[Hon. Members: "Exeter."] I meant Exeter university. At a time when the number of science, technology and engineering university applications is falling, we need to do more to encourage those subjects.
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