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Lord Williams of Elvel: My Lords, I am grateful to the noble Lord, in so far as I can be, for that Answer. Can he confirm that comparing like with like there will be a cut of approximately one-tenth in the defence budget? In fact, in real terms it is slightly over one-tenth. It will go down by 3 per cent. next year, 6.5 per cent. the year after, 1.5 per cent. the year after that and so forth. Is that consistent with what the Secretary of State said to the Conservative Party Conference?

Lord Henley: Yes, my Lords, it is entirely consistent. As I made clear, those were not new announcements, as

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the noble Lord seems to be implying. They result from Options for Change, the Defence Costs Study and other such reviews. The new plans show a cost programme reducing in real terms by some 11 per cent. I can assure the noble Lord that last year's press release showed a very, very similar reduction. It is, in fact, nothing new.

Lord Ewing of Kirkford: My Lords, these figures contain the belief within the Government that the tender price offered by Devonport for the refitting of Trident submarines will be met. It now seems absolutely clear that there is no stability in the docking facilities at Devonport and that substantial sums of money, running into many millions of pounds, will have to be spent to stabilise the facilities. There are also other serious defects in the facilities at Devonport. Who will have to pay these additional sums of money? Would it not make more sense, even at this date, to transfer the refitting of the Trident submarine fleet from Devonport to where it should have been in the first place, Rosyth?

Lord Henley: My Lords, the noble Lord will understand if I do not allow myself to be drawn into quite such detail on the question of Rosyth. However, I can give him an assurance that my right honourable friend will be answering a question on that subject later today.

Lord Howell: My Lords, is it not the case that, when the Secretary of State for Defence and the Prime Minister made statements to the Conservative Party Conference that there would be no further cuts in defence, they must have known that these further cuts which had not been announced were in preparation for the Budget, one month later in November? Why did that take place? Does the Minister realise that the justification for the change on page 121 of the Red Book is that it is to meet military redundancies and to enhance our front line situation, both of which any normal person would think would require an increase in defence expenditure and not a reduction?

Lord Henley: My Lords, I can assure the noble Lord in no uncertain terms that I have not been misleading the House in saying that these were not new cuts. The reductions were announced in last year's Budget. In fact the 1994 settlement is worth around £220 million more in 1995-96 and £310 million more in 1996-97 than the previous plans allowed. The cash reductions for 1995-96 and 1996-97—some £300 million and £200 million—are more than compensated for by the fall in inflation, which no doubt the noble Lord welcomes. I can assure him that when my right honourable friend the Prime Minister and my right honourable friend the Secretary of State for Defence made their remarks about the need for a further period of stability they knew that we had sufficient resources in this settlement to sustain the range of front-line capabilities described in the recent statements on the Defence Estimates.

Lord Jenkins of Putney: My Lords, is the noble Lord aware that if the Government were to give up

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Trident they could save much more money than this? There need be no personnel discussions. They could even have more military bands.

Lord Henley: My Lords, we have no intention of giving up Trident. I do not know what the views of the party opposite are but I am very interested to hear the noble Lord's views.

Lord Williams of Elvel: My Lords, does the noble Lord recall that when we debated what was known as Front Line First your Lordships were assured that the savings coming from Front Line First through more efficient administration would go towards the procurement of weapons for the front line? We were assured by no less a person than the present Leader of the House. In the light of the figures which appear to have been slipped out in an appendix to an appendix to an appendix to the Budget Statement, can the noble Lord explain why they told us that the savings from Front Line First were to be used for front-line equipment?

Lord Henley: My Lords, I am sorry but I think that this is entirely unacceptable. The noble Lord is accusing us of what amounts to dishonesty by saying that we were announcing new cuts. We were not. We were repeating the same announcements that we had made in previous years. As my noble friend the Leader of the House said on the occasion of the announcement of the Defence Costs Study—Front Line First—the new plans will mark an end in the upheaval of defence, they will preserve all the front-line capabilities necessary and they will fund necessary enhancements in the equipment programme.

Christmas Recess

Lord Strathclyde: My Lords, it may be for the convenience of the House to know that, subject to the progress of Business, it is expected that the House will adjourn for the Christmas Recess on Friday 16th December. It is expected that the House will sit at 11 a.m. on that day. It may also be for the convenience of the House to know that it is expected that the House will return on Monday 9th January.


Lord Strathclyde: At a convenient moment after 3.30 p.m., my noble friend Lord Henley will, with the leave of the House, repeat a Financial Statement that is to be made in another place.

Financial Statement

3.36 p.m.

Lord Henley: My Lords, with the leave of the House, I shall now repeat a Statement being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

"With permission, Madam Speaker, I should like to make a Statement. Following the vote on Tuesday night, I told the House that the Government remained committed to taking all the necessary measures to put

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the public finances on a sound footing. The reductions in the public sector borrowing requirement I announced in my Budget were welcomed at the time by the business community, by the financial markets and by this House. During the course of the Budget debate few right honourable and honourable Members questioned that judgment. To keep these borrowing plans intact, I said I would be bringing forward measures to make good the gap in the public finances from holding the rate of VAT on domestic fuel and power at 8 per cent.

"I can now tell the House what those measures will be. A press note filling out the details of my proposals will be available from the Vote Office as soon as I have sat down.

"Holding the rate of VAT at 8 per cent. will reduce revenue by about £1 billion in 1995-96 and, reflecting the quarterly profile of payments, £1.5 billion in subsequent years. These are the amounts that I have sought to recover.

"Since VAT on fuel will remain at 8 per cent., it would be quite wrong to increase social security expenditure by providing the full compensation package previously announced to help people with VAT at 17.5 per cent. We will adjust the amount that would have been paid if VAT on fuel had been increased, saving around £200 million in 1995-96 and subsequent years. We will of course keep in place the help already given for 8 per cent. VAT on domestic fuel and power. We will increase benefits fully in line with the relevant cost-of-living index, including the component reflecting the impact of last year's VAT increase.

"After these adjustments pensioner couples will receive help of at least £1.05 a week from next April. This will be more than the average weekly cost to pensioners of paying 8 per cent. VAT on fuel. I am also keeping unchanged the increases in cold weather payments and spending on the Home Energy Efficiency Scheme which I announced in the Budget and in last Tuesday's debate.

"This small change in the previously announced pension rates has a knock-on effect to the national insurance system, since the lower earnings limit is automatically linked to the single pension. National insurance contributions will therefore start at £58 rather than £59 a week from April 1995. The upper earnings limit will be unchanged. This will have the effect of raising receipts from national insurance contributions by some £50 million next year.

"The remaining gap for 1995-96 amounts to some £800 million. My first step was to look at public spending. In my last two Budgets I have been able to find savings of £43 billion in public spending over the four survey years. This is much larger than the increases in taxation that we have found it necessary to make to restore healthy public finances after the recession.

"We have managed to find these savings while increasing spending in real terms on key public services such as the National Health Service and the police. My objective remains to reduce government

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spending to below 40 per cent. of total national output. Both of my Budgets have made that objective much more achievable.

"The details of this year's extremely tight public spending settlement have already been announced by the relevant Secretaries of State. I do not consider it practicable or sensible to reopen those settlements today. At the time of my Budget, I struck a balance between spending and revenue designed to ensure that the economy remains on track for steady and sustainable growth. Nothing that has happened since then has led me to change that judgment for this year's settlement.

"The next area I considered to recover the shortfall in revenue was direct taxation. Since 1979, this Government have reduced the basic rate of taxation from 33 pence in the pound to 25 pence. and we also introduced the new lower rate of 20 pence. One-fifth of all taxpayers now pay tax only at this lower rate.

"When seeking to raise revenue in the 1993 Budgets my right honourable friend and I considered it necessary to freeze personal allowances and to reduce the married couple's allowance and the mortgage income relief allowance. I considered then that these increases in direct taxation were a sufficient and reasonable contribution to our revenue needs. That remains my view today. I do not intend to reverse my decisions to index the personal allowances and to over-index above inflation the elderly person's allowance and the 20 pence band.

"I also considered raising additional revenue from business taxation. In my Budget I provided as much help as I could for the business community. The reason was simple. Strong and thriving businesses are essential for a strong and thriving economy.

"I also listened during last week's debate to the Labour Party's proposals for closing loopholes and introducing a windfall tax on utilities and I have done some work on studying them. They are not serious options for revenue raising. This Government have never been a friend to the tax avoidance industry and Conservative Chancellors have changed loopholes year after year. The last two Budgets speak for themselves. I raised nearly £3.5 billion between 1994-95 and 1997-98 by closing loopholes. The honourable gentleman's proposals on loopholes are undesirable changes in taxation on legitimate business.

"I have looked many times at his proposal on executive share options. The policy behind tax relief for executive share options is geared to encouraging companies to motivate key employees and benefit all shareholders. Executives are liable to capital gains tax once they sell their shares. The right honourable gentleman exaggerates the cost of the scheme. He has claimed that I could raise £200 million by 'reforming' it. The actual total cost of this relief is estimated at around £50 million.

"The suggestion of a windfall tax is, by definition, a one-off tax. It could not replace permanent annual loss of a flow of revenue. In any event, it appears to be based on the suggestion of taxing profits on gains

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which, as the right honourable gentleman appears to have discovered in this morning's press, are already liable to taxation. A windfall tax would simply be another tax on a particular sector of industry. Like other taxes on business, it would inevitably have adverse effects on that business sector's investments and prices.

"My third and remaining option for 1995-96, therefore, has been to look at indirect taxation. As the House has rejected an increase in indirect taxation to which it had previously agreed, it is wholly consistent with my Budget strategy and it preserves the shape of the Budget to fill the hole with increases in indirect taxation. I have decided to bring forward certain increases in taxation in addition to those announced in my Budget to take effect from midnight, 31st December 1994.

"I propose that the duty on tobacco products, with the exception of hand-rolling tobacco, will increase by just under 4 per cent., equivalent to 6 pence on a packet of 20 cigarettes. This further increase in tobacco duty is consistent with our policy of increasing prices to discourage smoking.

"I also propose that the duties on road fuels will rise by a further 1 penny per litre. I have kept these increases to the minimum to limit the burden on business users and the rural motorist. Even after the increases, petrol will still be cheaper in real terms than a decade ago and cheaper than for our main European competitors. The increase will also play a part in our strategy for curbing the emission of CO 2 . We remain fully committed to the target of reducing CO 2 emissions to 1990 levels by the year 2000.

"Finally, I propose that duties on alcohol will rise by around 4 per cent. This is equivalent to 1 penny on a pint of beer, 5 pence on a bottle of wine and 26 pence on a bottle of whisky. For the reasons set out in my Budget Statement, I had hoped to spare these industries any increase in duty this year. But in the present circumstances and as a result of my need to raise revenue from sources other than VAT on fuel, I have reluctantly judged it necessary to raise some additional revenue from them.

"Taken together, these increases will raise £180 million in the current year and nearly £800 million in 1995-96. In total this is sufficient to meet the shortfall next year. I expect the public sector borrowing requirement next year to be the same as I announced in my Budget Statement.

"Let me turn now to the following year, 1996-97. For that year I need to raise £1.5 billion. The tax measures that I have announced today will raise an additional £850 million.

"The impact of the higher duties that I have announced today on the RPI will not be as great as the impact would have been from the second stage of VAT on fuel. Inflation will therefore be very slightly lower than expected leading to further public spending savings on benefits of around £160 million in 1996-97 and later years. And there will be savings of around £200 million from the withdrawal of help to compensate for the second stage of VAT.

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"There will, however, remain a further gap of around £300 million to be filled in 1996-97. I propose to finance this gap by reducing the public expenditure control totals for those years. For the time being I will score that reduction through a reduction in the provision that I have made for the reserve. The eventual consequence for departmental programmes will be addressed in next year's spending round. I expect the public sector borrowing requirement to be as I announced in my Budget Statement in 1996-97 and in subsequent years.

"Resolutions under the Provisional Collection of Taxes Act to hold VAT on fuel at 8 per cent. with effect from 1st January 1995 will be tabled very shortly. My right honourable friend the Leader of the House will then be arranging a debate before the House rises for the Christmas Recess.

"I said in my Budget speech that the British economy was currently facing the most favourable set of economic circumstances it has seen for many years. Trade figures published only this morning show that exports are up 14 per cent. in the past year and once again at record levels. The trade deficit is the lowest it has been for almost 10 years. The outlook for jobs and future prosperity for men and women in this country is improving day by day.

"This House has an obligation to keep this healthy recovery on track. We have an obligation to act responsibly and not be tempted by short-term populist measures which would undermine confidence in the Government's commitment to sound public finances. The measures I have announced today ensure that that commitment is fulfilled."

My Lords, that concludes the Statement.

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