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Lord Eatwell: My Lords, I shall be delighted to answer the noble Lord. Is it not clear that the levels of unemployment were significantly lower, inflation was lower and growth was higher from 1964 to 1970?

Lord Boardman: My Lords, I shall be happy to challenge the noble Lord on all those points. But nobody has produced a state of the economy which is stronger, better and more strike-free than it is now. The noble Lord selected one or two points on which I should love to take issue with him, but the clock does not permit me to do so.

I suggest that the Budget was built on very sound foundations. It was not, as the noble Lord, Lord Desai, hoped that it might be, built on anticipating bribes to the electorate. It was described by the Chancellor of the Exchequer as concentrating on four fields: people will keep more of what they earn and save; more will be spent on schools, national health and police; public spending will be kept under firm control; and public borrowing will be kept on the downward path. Those are the themes that he put forward. I believe that most noble Lords in this House would strongly support them. The noble Lord, Lord Desai, said that they were issues that he supported.

The tax concessions contained in the Budget were more than covered by cuts in public expenditure. Again, that is a proper aim, consistent with the themes to which I referred.

I shall not speak further about the Budget, which was all clearly set out in the Chancellor's speech and is in the Red Book. Perhaps I may say just a few words about the Red Book and the way in which the Treasury produced its Budget statistics. Within a few minutes of the Chancellor sitting down in the Chamber, the Red Book and the press briefings were available in the Printed Paper Office. They are packed with matters which were of the highest secrecy and needed the highest security. We owe a great debt to all those who were concerned in putting together the Budget documents in the Treasury and for the way in which they managed to keep security. It is not general in most

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departments of life today. However, in the Budget itself, there is much that we could debate and much to praise but I do not have the time to do so.

Perhaps I may spend a moment or two speculating on the kinds of provisions that we might have expected in a Labour Budget. Mr. Blair constantly says that his government would not be one that would tax and spend. His colleagues do not seem to be convinced; nor indeed do they intend to comply. They have made it quite clear. There was a statement a few days ago on Radio 4 by one of his colleagues, in which it was said that Gordon Brown can say anything that he likes if he thinks that it will win the election, but when Labour is in power it will be looking for other priorities apart from tax cuts. That shows how much reliance we can place upon statements which come from the other side about their proposals for a Budget.

Labour has failed to say where it stands on a whole range of key subjects: inflation, interest rates and public spending. We know that it has committed itself to a number of other matters such as the minimum wage, the Social Chapter, payroll tax and regional development agencies--a kind of glorified national enterprise board. We know where it stands on those issues. Those who took the trouble to read A New Economic Future for Britain in June of this year, no doubt read it and shuddered at it as I did. We know what Mr. Brown's windfall tax is intended to cover and the 11 different massive expenditures it is to meet. But today we have a sound developing economy; we have a sound Budget to deliver a sustained recovery and to take it forward. We are extremely fortunate.

6 p.m.

Lord Shepherd: My Lords, I suspect the noble Lord, Lord Boardman, may be guilty of some complacency in the way in which he described the present economy. And the noble Lord, Lord Clark, was beginning to enjoy himself in regard to the situation in which the Conservatives found themselves in 1979, but he forgot one factor. I refer to the grave financial situation with which we were faced on the day we took office in 1964.

In the days when I first came to this House, some 40 years ago, it was the practice that, if one spoke after 5.30, one apologised for speaking "at this late hour". I shall therefore put aside what I had intended to say and, as my Quaker friends say, I shall speak as the spirit moves me and hope to keep within my time.

I fully support what was said by my noble friend Lord Eatwell in terms of the need to recreate and rejuvenate our manufacturing base. That is essential if we are to create the prosperity which our people expect. We must do that, though in a sense it will be like climbing Mount Everest. We need a programme that is broadly acceptable and that will last at least three parliamentary terms.

There is an acceptance and belief that because we are within the European Community we can trade comfortably within the tariff borders of the Community. I suspect that in time, with the enlargement of the Community and the development of the countries within

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the Asian basin plus the United States, great pressures--political and otherwise--will be brought to bear for the reduction of the tariff borders that surround the Community. If that happens--I suspect it will happen within one generation--it will be essential for this country, if we are not able to compete within the Community, to be able to compete throughout the world, particularly within the Asian basin.

We spoke of the prosperity league. I believe we are 18th on the list. I was not impressed with most of those at the top, but was conscious of two--Hong Kong and Singapore. I visited Singapore and Hong Kong in 1946. They were basically entrepot ports. They had no industry or natural resources. Hong Kong had a population of 500,000 people. I remember water being rationed to two hours a day. Singapore had plenty of water because it had storage from Malaysia, but it had no industrial base. Today, both are major exporters. Their prosperity per head of the population is of the highest and is now above ours.

We should take all that into account in regard to what can be and will be achieved in the Asian basin, which we may have to confront, if we are not already confronting it. I sincerely believe that we must rejuvenate and expand our economic and manufacturing base. The noble Lord, Lord Boardman, said that we are doing well. But that depends from where one starts. We must recover what was once the manufacturing and economic base of this country. We are a long way from it today. I hope that the knowledge in regard to the potential competition that this country and other European countries may face is borne in mind.

In regard to the Budget, my understanding is that its object was limited. It was to make the economy more manageable and give it greater flexibility; it was to provide incentives for those who work in industry and trade; and it was to create new opportunities and protection for those who are retired or who have savings. That concept of the objects of the Budget is its basic weakness and sooner or later we shall need to find a new formula which gives us a longer term plan--I hesitate to use the term "national plan"--which will command the acceptance of all political parties.

I must say to my noble friends that I found yesterday's Budget extremely clever. It gave a little here and a little there. In terms of inheritance tax the move to £200,000 was about right. Why should the ordinary man be taxed twice? First, he is taxed on his earnings and, secondly, he is taxed on his savings. The reduction of the tax on savings is to be welcomed. Also, I support the concept that the workforce should be encouraged to buy shares within their companies, provided adequate safeguards exist.

I support all those elements of the Budget. But I turn to the 1 per cent. I do not support plebiscites, but if we had a plebiscite and put to the ordinary people of this country, "Will you accept a reduction of 1p in the pound on your tax or would you like that sum to be hypothecated, in addition to what is already paid by the state, to hospitals and schools?" most of us would be surprised at the response. I believe the ordinary man

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would say that he attaches supreme importance to the quality of our medical service and schooling and that he may well forego what is, after all, a minute saving.

My anxiety concerns the forecasts. My noble friend Lord Diamond sits behind me. But I believe forecasts to be extremely dubious. They may be based on specific facts, but they are highly vulnerable, particularly at this moment in time. For instance, if the PSBR is to be reduced, it will require a major change. The Government know from their recent experience that what is forecast for the PSBR now is much higher than what was forecast 12 months ago. I understand that forecasts have to be made, but the danger lies in getting them wrong, particularly when one bears in mind the risks to ourselves and our currency and one takes into account the speed at which currencies fluctuate and the fact that that fluctuation is difficult to stop once it starts.

The Chancellor is to be congratulated on producing a prudent Budget and--I say this to the noble Lord, Lord Boardman--for his courage in withstanding the enormous pressures placed upon him for solely political reasons.

6.10 p.m.

Lord Skidelsky: My Lords, I very much regret that a prior engagement will stop me from being present for the whole of the debate. I am very sorry about that. I was delighted to hear the speech of the noble Lord, Lord Desai, and I congratulate him on his success in securing us the occasion to discuss the Budget Statement. The speeches so far fully justify that innovation and I hope that it will become permanent.

One of the noble Lord's most endearing qualities is his intellectual honesty, which I know has been a source of some embarrassment to his Front Bench in the past. He was honest enough to say this afternoon that he favours a high tax economy. How he squares that with his penetrating analysis of the dynamics of the global economy I am not quite sure, but at least he favours a high tax economy. I hope that I am honest enough to say that I favour a low tax economy. That is the nub of the difference between us, and I venture to suggest that it is the nub of the difference between the Opposition side of the House and our side of the House.

I wish I could persuade the noble Lord, Lord Bruce of Donington, that in taking up that position I am not betraying John Maynard Keynes. I believe that the only way you can get the Government's budget to work in favour of stabilisation is on the basis of sound public finances and the only way to make them sound is by cutting public spending; otherwise you face a continuing borrowing problem which turns the markets against you and prevents governments from doing even the necessary things that governments should do. But that is another debate for another occasion.

I welcome this week's Budget as, above all, a responsible Budget. The Chancellor has resisted the temptation to go electioneering. Modest tax cuts are balanced by modest spending cuts. That is the only strategy consistent with getting our interest rates down, which is the only basis of the boost to the economy which the noble Lord, Lord Desai, and all of us want.

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The noble Lord, Lord Eatwell, said that the Budget has done nothing for investment. But if it is a Budget that enables interest rates to come down, then it will have done an enormous amount for investment. It is a very old-fashioned view that the only way you can get more investment is by increasing government spending on capital projects; the way you get more investment is by running your public finances in a way that enables you to have low interest rates. If you have low interest rates, you get durable recovery and an upsurge in growth.

I welcome this Budget as a further confirmation that we have renounced the bad old days of stop-go, the days when government deliberately created political business cycles in order to get re-elected--all go before the election, all stop after the election. We have turned that corner and I do not think that any Chancellor will do that in the future. I am glad that the Chancellor has rejected the advice of some Tory pessimists to leave the public finances in a mess for an incoming Labour Government. I read that proposition in a couple of articles by Conservative journalists. The Chancellor has rejected it.

This Chancellor and all of us on these Benches want and expect the Government to win the next election and inherit a strong fiscal position as a basis for their further reforms. You could say that the Chancellor has learnt from the whole experience of the post-war period that short-term highs are not worth the long-term lows and anyway no longer fool the public. Modesty is forced on governments nowadays as it is very hard for them to make people pay more taxes than they actually want to pay. That is the practical problem with the vision of the noble Lord, Lord Desai, of a high tax economy.

People have shown that they do not want a high tax economy and they do not vote for parties which promise to put up taxes. It is increasingly easy for people to arrange their affairs so that they avoid paying tax, whatever they may say in the plebiscite suggested by the noble Lord, Lord Shepherd. For example, it is estimated that the Government lost £100 million in alcohol duty revenue last year from people buying their drink abroad. These schemes are becoming increasingly possible. This lack of revenue buoyancy, incidentally, is reflected in the interesting resort to pre-modern methods of taxation like the national lottery. Nor can governments borrow any longer to their heart's desire from savers who have been fleeced too often in the past.

I especially welcome the Chancellor's help for long-term care and his tax encouragement for savings and employee share ownership. I am very pleased--here I must declare an interest as chairman of the Hands Off Reading campaign--that the Chancellor has maintained zero rating of VAT on the printed word. We now look to the Government to maintain that position in Brussels against the continual pressure to harmonise VAT rates across the Community.

All that seems to me admirable. My doubts about the Budget chiefly relate to its spending side. Some of the spending cuts look a little cosmetic to me. This year £500 million has come off the contingency fund. The noble Lord, Lord Desai, has implied that the tax cuts are

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being paid for by a run-down in the reserves. I do not read the figures that way because according to page 131 of the Red Book falls in the reserves will be balanced by expected receipts. I do not know what the answer to that is. Perhaps my noble friend the Minister will elucidate this technical conundrum when he winds up.

There are also cuts of £1.5 billion in capital spending programmes. Those are supposed to be made up by the private sector through the private finance initiative. I tend to agree that these are likely to be spending cuts postponed rather than cut. It is difficult for hospital trusts to borrow on the strength of assets for which they are not allowed to charge and on the collateral of one year's guaranteed income alone. I wonder how successful the private finance initiative will actually be in raising capital investment.

My real question, and the one on which I want to end, is whether there is any real strategy underlying the Chancellor's prudent housekeeping. What is the Government's medium-term fiscal aim? Is it to balance the budget over the cycle? Is it to balance the budget by 1998? Is it to bring the PSBR into balance? Those are all phrases which have been on ministerial lips in recent weeks. I am none the wiser. All I know is that the PSBR is obstinately stuck at about £30 billion. That is too high and the date for its reduction seems to be put back year after year and, even now, depends on rather optimistic sets of judgments and assumptions both on the revenue side and on the side of economic growth. I am not quite clear what the medium-term strategy is.

Let us be clear. We on this side want to reduce taxes. Everyone is committed to that. But I do not see a clear strategy yet for reducing the burden of taxation. In fact, I see from the Red Book that government receipts are expected to be higher as a proportion of national income in the year 2000 than they are at the moment and that the tax burden is expected to be 4 or 5 per cent. higher than it was in 1990. It is true that by then spending is expected to be below 40 per cent. It may be, on good assumptions, that we shall get a rough balance between taxes and spending at about 40 per cent. of GDP by the end of the century. That is better than nothing, but it is hardly dramatic. Both William Waldegrave and Chris Patten have recently called for a public spending share well below 40 per cent. I missed that commitment in the Budget strategy. As yet there is no real commitment, yet I believe that that is the only plausible basis for long-term Conservative economic policy.

The trouble is that we shall not get those cuts unless we reduce the agenda of the state. A debate on a Budget is neither the time nor the place to start that deep discussion, but I have no doubt that we shall have to have it, and we have to win it. What is the welfare role of government in a privately wealthy economy? What goods should the state provide and what goods should the private sector provide? We have to start that debate from first principles. I hope that a coherent vision of where we want to get to and how we intend to get there will inform the Budget strategy of the next phase of Conservative Government. After all, we have seven years in which to work it out.

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6.21 p.m.

Lord Merlyn-Rees: My Lords, the noble Lord, Lord Skidelsky, is always thought-provoking even though in his last words he was romancing. He referred to the fact that some Conservative journalists said that it would be a good idea to leave a mess for a Labour Government to clear up. The noble Lord should look at 1964 because it has happened before. As regards his view on the link between interest rates and investment, when I was a boy in the 1930s interest rates were at rock bottom, but there was no investment. The link between the two is not as easy as classical economists think.

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