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Mr. Dorrell : I am sure that the hon. Gentleman would not want to mislead the House, still less the voters. Is it not true that the Institute for Fiscal Studies has looked at the Government's plans and concluded that there is a structural deficit, and has looked at the plans published by the Conservative Front Bench and said that the arithmetic adds up?

Dr. Cable: It has said that the arithmetic adds up in a purely mechanical sense. Perhaps it should be more widely known that the IFS has said that it has no competence to judge the credibility of the cuts that were proposed by the James report, and it specifically disclaimed any competence in evaluating those proposals. Yet the whole Conservative taxation and spending programme hinges on that. It has not been independently evaluated. Certainly when the Liberal Democrats have considered it on a purely technical level, probably at least £8 billion-worth of those cuts make no sense whatever.

Mr. Dorrell: It is obviously true that any Government who implemented changes in the spending plans would have to accept responsibility for those changes, but the hon. Gentleman was suggesting that a Conservative Government based on those plans would have to increase rates of taxation, which is simply not correct.

Dr. Cable: I did not use the phrase "rates of taxation". What I said was that taxation in aggregate, the amount raised in taxation, the share of taxation in the national economy, would rise under the Conservatives' proposals. If they were honest and open about that and acknowledged that there would be a rising burden of taxation under their proposals, under Labour's proposals and ours, at least we would start with a
 
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sensible common base for debate. Equally, we will all have to accept, on each of our three sets of proposals, that there will have to be a high degree of fiscal discipline in respect of public spending. That is the common basis on which this debate should proceed.

I am happy to support the Bill and I wish the Chief Secretary well in his next job. He will be greatly missed in the House.

2.17 pm

Mr. Stephen Dorrell (Charnwood) (Con): I begin by declaring an interest as a director and shareholder of a manufacturing business. Like many others, I would like to echo the closing remarks of the hon. Member for Twickenham (Dr. Cable) in wishing the Chief Secretary success in his new career. We will follow his developing life with interest and we shall miss his bonhomie.

We are discussing a reasonably heavily truncated finance Bill today in the circumstances of the run-up to a general election, but as my hon. Friend the Member for Tatton (Mr. Osborne) reminded us, the degree of change that has been introduced by the Government in the originally published Bill is nowhere near the degree of change that was agreed to in the run-up to the 1992 election. I remember some of that because I became Financial Secretary immediately after the 1992 election and had to pick up a substantial amount of legislation that had been drafted ahead of the election and dropped in the finance Bill in the run-up to the 1992 general election. I congratulate my hon. Friend on securing the Government's agreement to drop some of the most complex aspects of the original legislation, but my hon. Friend the Member for Sevenoaks (Mr. Fallon) was correct to remind the House of the difference between the Finance (No. 2) Bill that we are discussing now and the Finance Bill that was put through ahead of the 1992 general election. It is regrettable, although I am sure that my hon. Friend the Member for Tatton secured the best deal possible, that the Government were not willing to delay the legislation that is included in the Bill in order to ensure that it was subject to proper parliamentary scrutiny after the general election.

The real issue with this Finance Bill is not the measures in it, but those that are not in it, but would be necessary if the Government's plans were in truth to add up. I am interested not in what is in the Finance (No.2) Bill that we are discussing today, but in what would be in the Finance (No.3) Bill that a re-elected Labour Government would have to introduce.

All our constituents know, and every Member of this House knows, that we have been here before. In 2001, ahead of that year's general election, we and our constituents were told by the Prime Minister and the Chancellor that there would be no need for tax increases if a Labour Government were re-elected. At the first occasion after that election the Chancellor came to this place and proposed in the 2002 Budget an £8 billion tax increase—an increase in the national insurance contributions paid by both employers and employees. The argument advanced at the time was that all of that was necessary because the money was all going into national health service expenditure. That always was a dishonest argument—it was just as dishonest today, when the Prime Minister used it at the Dispatch Box during Prime Minister's questions, as it was on the day it was first used in the 2002 Budget.
 
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We all know that the total tax yield that comes out of the tax system goes into the Consolidated Fund and that it is then for the Government to decide priorities on the use of that money. All the Chancellor was seeking to do by labelling that £8 billion tax increase in 2002 as money for the NHS was to sweeten the pill of the extra burden that the Labour Government were imposing on voters.

Mr. Prisk : I am hesitant to interrupt my right hon. Friend's excellent flow, but I want to remind him of what happened after the 1997 election. We were not advised that our pensions were going to be raided, but a £5 billion annual raid was executed then. Does he agree that there is a record of not one election, but two, in which this Government have taxed without warning?

Mr. Dorrell: My hon. Friend is entirely right; there was an unheralded tax increase after the 1997 election and another after the 2001 election. Of course, we all now know the effect that was achieved, and I want to focus on the tax increase following the 2001 election, because the Institute for Fiscal Studies published last week an analysis of the effect of that increase on disposable incomes.

It is helpful to us in the run-up to this general election for voters to be reminded of the effect of the tax increase that the Government introduced immediately after the previous general election in order to make the books balance in the early years of this Parliament. Last week, the Institute for Fiscal Studies published a report on the movement of disposable incomes during recent years. It reported that, for the first time since the early 1990s, real disposable incomes fell in 2003–04 compared with 2002–03. Why did they fall? They fell because of the £8 billion tax increase that the Chancellor introduced after the previous general election, having promised beforehand that an increase would not be necessary.

It is not just a matter of the total taxation that the Government have imposed, which has had the effect of cutting real disposable incomes in the last year for which figures are available, which is 2003–04. It is also important to examine the distributional effect of the tax policies that have been pursued by this Government, not just in this Parliament, but throughout the period since 1997, as my hon. Friend the Member for Hertford and Stortford (Mr. Prisk) rightly says.

The Chancellor is very fond of saying that he has not increased rates of income tax. That is a dishonest argument for two reasons. First, it draws a polite veil over the fact that he has increased the rates of national insurance contributions. Most of our constituents and, I suspect, most of us, do not notice the difference in our pay packets between increases in income tax and increases in national insurance contributions. The truth is that marginal tax rates have increased, as one sees if one considers tax and national insurance together. Beyond that, the combined effect of freezing both the personal allowance in 2002 and the higher rate bands, in addition to rising income levels, is that 7.5 million income tax payers are paying at a higher rate than they would have done if the whole system had been fully indexed to earnings in 1997.

So when the Chancellor of the Exchequer talks about tax rates not having gone up, he is wrong on two counts: first, national insurance contributions; and secondly,
 
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the unplanned and unfair effect of holding down the allowances and bands in the tax system and not indexing them to earnings. We should do well to remember and to remind our voters of this statistic: the Labour Government since 1997 has meant that 7.5 million—very nearly one third—of all income tax payers are paying at a higher marginal rate than they would have done if the system had been fully indexed to earnings since 1997.

The Institute for Fiscal Studies and an analysis of the tax record of this Government in office have demonstrated that the effect of a Labour Government is to raise the tax burden on income tax payers. The IFS is relevant to this debate not just because of its analysis of the effect of a Labour Government on the tax burden in the past, but because, as we have already mentioned in this debate, it is offering a warning of what a re-elected Labour Government would mean again.

I said in an intervention on the hon. Member for Twickenham that the IFS had examined the Government's published plans and those of my right hon. and hon. Friends on the Conservative Front Bench, and concluded that the Government's plans include what in the jargon is called a structural deficit—that is to say, a black hole or a need to raise taxes in the next Parliament in exactly the same way as they were raised in this Parliament because the Government have not been able to control the growth of Government expenditure.

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