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Baroness O'Cathain: My Lords, I thank the noble Lord for giving way. I was just drawing attention to the fact that people can actually put their after-tax income into stocks and shares but, if they put it in Premium Bonds, they would still have their capital and would not be taxed on their winnings. Similarly--and it was a flip comment--I also mentioned the National Lottery. We do not tax those gains, so why tax the gains from investment in stocks and shares?
Lord Monkswell: My Lords, I maintain my astonishment that a comparison should be made between
investment and the other matters to which the noble Baroness has referred. However, perhaps investment on the Stock Exchange is a gamble.As regards the Budget Statement, we need to consider the effect of the Budget. I suggest that it has carried on the Tory philosophy of reducing the tax burden of well-off people and increasing the tax burden of poor people; or rather, it is not a question of increasing the tax burden on the latter but of reducing benefits. The net effect is the same: poor people will become poorer and well-off people will become richer. I do not think that that is a recipe for improving the state of the nation. In practice it will make things worse because one injects the wrong sort of demand into the economy. One reduces the demand for locally produced goods and services when poor people have their incomes reduced. By increasing the incomes of relatively well-off people, the chances are that one will make the balance of trade and balance of payments worse.
There is one little ray of hope within the Budget but even that contains a problem. I refer to the private finance initiative. We can see that there is something like £7·5 billion of capital expenditure forecast for the next year. That is a significant amount of money for capital investment and it will generate a significant amount of economic activity. It will bring people into work and the multiplier effect will also be apparent. However, we need to recognise that there will be increased costs as regards raising capital investment on the basis of the private finance initiative rather than on public sector borrowing. Obviously the cost of capital raised by the Government directly or by local authorities directly will be less than if private firms have to raise the capital themselves.
I hope that when the Minister replies to the debate he will be able to answer my next question. I wish to ask him about the effect of the private finance initiative on local authorities. There has been reference to the fact that capital expenditure controls on local authorities will be relaxed to enable them to engage in what might be described as local PFI. My question is: is the total for the likely capital expenditure under that particular initiative included within the £7.5 billion or is that on top of the £7.5 billion that is projected in the Budget Statement?
My final question concerns Northern Ireland. I think we all understand that the situation there is fragile in terms of the peace process. We discussed that matter a little this afternoon following the Statement. As regards the Budget, what plans do the Government have for increasing capital expenditure in Northern Ireland? What plans do they have for capital investment through the private finance initiative in Northern Ireland? I think we can all accept that capital expenditure will be beneficial in that it will provide jobs and economic activity and so reduce the stresses and social tensions that lead to the breakdown of society that we have seen particularly in Northern Ireland but also within the major conurbations of mainland Britain. I hope that the Government can answer those two small questions.
I conclude by pointing out that the creative accounting that local authorities engaged in in the early and mid-1980s, prior to their being clamped down on
by central government, provided economic activity in this country at a time when, if it had not occurred, the social consequences of the problems society was facing because of government action would have been far greater.7.15 p.m.
The Viscount of Oxfuird: My Lords, this is a timely Motion proposed by the noble Lord, Lord Desai, and we are fortunate that his, if I may say so, usual independence and skill have enabled us to take up the cudgels this evening.
It was Benjamin Disraeli who in a message to his constituents on 3rd October 1868 said:
- "There can be no economy where there is no efficiency".
Yesterday, and already to some extent in your Lordships' debate today, we have been bombarded with a variety of statistics. I must confess that, given the wealth of good news provided to us by the Treasury and others over recent weeks, I had to resist very hard the temptation of falling into the same trap or going down the same route. I find it exciting that the IMF now predicts that the United Kingdom will grow faster in 1995 and 1996 than the G7 average, just as we did in 1993 and 1994. I also find it exciting that the United Kingdom has more people in work and fewer unemployed than any other major European country.
It would not be in the spirit of your Lordships' debate this afternoon for me to fall into the same trap as European Commissioner Kinnock did this week and question the timing of EMU convergence. However, it gives me some satisfaction that the United Kingdom is one of the few countries in the European Union that meets all of the convergence criteria which would allow us to join if we wished.
In a limited time debate such as this it is possible to deal with only one or two points. Perhaps I could concentrate on that vitally important issue of exporting with which I have been concerned most of my professional life and which is one of the strongest influences on the economic state of our nation. It is indeed heartening that yesterday's Budget gave such a boost to exporters. I ask noble Lords please to forgive me, however, if I draw your Lordships' attention to one particular matter which concerns me as one who has a special interest in exporting, and not because--we must all be precise these days--I have any direct interest or involvement in the matter.
Having for many years travelled this globe marketing British engineering equipment I have some experience of the importance attached to the purchases made by our armed forces. Experience of operations worldwide has ensured that their judgment is greatly respected by those who are responsible for major military purchases overseas. I must say that our military are always prepared to back Britain and support British manufacturers when negotiating with foreign governments. I therefore find it somewhat alarming that
at present the Ministry of Defence is considering an alternative bid for the tender for Army field ambulances from the Steyr Company of Austria rather than the British-made Land-Rover which I am told fully complies with the tender specifications. What message would be sent out to the world if we bought other than the Land-Rover in such circumstances?I am given to understand that the Steyr machine is of such sophistication that the driver has to be trained specially to handle the product safely on rough terrain. What happens if he is shot? Is there a spare driver immediately available? We all drive Land-Rovers, or many of us do. I am sure that there is a lesson here, particularly for the poor injured person on the battlefield. I thank your Lordships for allowing me to make that sincerely heartfelt point.
So far as concerns the thoughts of the noble Lord, Lord Bruce, on the ratio of £100 to £160--and I believe that the noble Lord, Lord Haskel, has been responsible for some of the figures in this field--that is a fascinating ratio. If we take inward investment as £100 and outward investment as £160, the profit seems to be £60, but perhaps my maths are not quite the same as those of noble Lords opposite.
That investment overseas is very important. It does not come cheap. I have had the experience of setting up companies not only in Sweden but also in the United States. You do not get something for nothing. You cannot go and borrow from the bank in Sweden. You have to put hard-earned profits on the counter, directly into the Swedish bank to establish your capital base. That costs money. That money has to come from the UK. Therefore, that £160 is good news.
Turning from the particular to the general, it is heartening to note that UK exports are currently running at record levels and are expected to grow further, helped by growth in world trade and the UK's strong competitive position.
Indeed, the UK economy as a whole is on a path of sustained steady growth and low inflation. The economy has been growing for over three years and output is now 6 per cent.--I hope your Lordships will forgive me for using a statistic--above its previous peak.
It is just not true, as some commentators have suggested in recent weeks, that our economy is heading for recession. Of course the rate of growth had to slow from the very rapid rate seen in 1994, but all the fundamentals are still in place for healthy growth. We have an enviable combination of circumstances which has already been mentioned: low inflation, sound public finances and competitive business.
Business surveys from distinguished bodies like the CBI and the EEF point to high export orders and strong investment intentions. Yesterday's Budget will underpin consumer confidence. In short, growth in the UK economy is set to continue.
We have all been bombarded for the past 24 hours with a variety of analyses of the effect that the Budget will have on each of us. It has been a field day for the economists, who have presented us with a dazzling array of often contradictory conclusions. The reality is that yesterday's Budget was steady and prudent. It was
deliberately honed to maintain our economy in its present sound shape. It was also a fair Budget, giving a welcome boost to health, education and the police.I have been moving about the country a good deal in recent weeks, and I sense a new mood at the grass roots. As an election approaches it is clear that the average voter is beginning to take stock and compare the performance of our present Government with the promises that are being made by the Opposition. It is fascinating that if you ask somebody whether they would support an increase in government expenditure you will find that 70 per cent. will say yes and 30 per cent. will say no, but if you ask whether they would support a reduction in tax 70 per cent. will say yes and the other 30 per cent. will say no.
I believe that yesterday's Budget will help to reinforce the growing view that in the present Government we have a tried and tested team who can be trusted not to play ducks and drakes with our economy for short-term political gain.
7.24 p.m.
Lord Diamond: My Lords, having listened to every speech from this side of the House, and agreeing with them all, one is driven to the conclusion that there is very little left to say, particularly on the topic to which I wanted to devote my few remarks; namely, the need for greater investment. However, I shall do so, because I am convinced that we are not tackling the problem with sufficient vision and seriousness.
When we talk about increasing investment, we always compare investment in our economy in one year with investment in another year. That is not the appropriate comparison. The comparison should be between what we as a nation have tended to invest over the past century and what other nations have done. I agree with the noble Viscount that we should not flood the Chamber with statistics, but if there is one statistic which I implore all of us to bear in mind all the time it is that we as a nation have throughout this century eaten more of our seed corn than any comparable nation. The independent OECD figures show that today we are still at the bottom of the league in terms of the percentage of investment in relation to national income or GDP. Although, like others, I am grateful to the noble Lord, Lord Desai, for presenting us with the opportunity to discuss this matter, I am bound to repeat that we must do much more and be much more imaginative about investment.
Not only must we invest more, we must invest earlier. We must learn the arguments for contra-cyclical investment and take them on board. Not only must we invest more and earlier, we must invest more widely, not only in capital equipment but in research, development and new products. All these are essential to achieving a growth economy which will start to turn the unemployment figures into a very different state of affairs.
An example of what worries me is the way in which the media--our spokesmen--tend to welcome an increase in imports. They say that every upturn in the economy is preceded by an increase in imports, and
therefore we should welcome this as a sign that we are on the up and up. Instead, they should say "Here we go again", caught out once more with inadequate investment so that when the upturn comes domestic manufacturers cannot supply for the next 12 months so that we have to go abroad for something which is not necessarily better, but is delivered on time and available because overseas manufacturers have invested and we have not. They have the stocks and we have not. That is an example which I see time and time again of the way in which an increase in imports is often commented upon. It irritates me no end.It is certainly not an easy matter to increase the level of investment in the way I have indicated. It is all very well for the large firms, which understand the need for contra-cyclical investment. It is a different matter for the medium-sized firms, which do not. It is a very different matter for the smaller firms, which cannot. They go to their bankers and say, "I want to invest in more plant, and so on. It will not be used for the time being". The manager replies, "Are you telling me that for the time being you cannot service a loan that you are asking for? You want me to wait three or four years until you receive the income from the investment to service the loan? There's the front door, my friend". So much for the help the smaller firm receives from its average bank manager, my Lords.
We and the Government have to do much more. For the life of me I cannot see why the Government are so hesitant about increasing capital allowances. Such a proposal is a direct invitation; it would be popular; it costs nothing in the long run. Of course, there is a cash-flow problem for the Government. If you give more now and less later it affects the cash flow, but overall it would cost nothing. Certainly for the small firm which is making no profits it costs nothing to set that increase against nil profits. Certainly for the new entrant which everyone is so keen to encourage it costs nothing. I should be perfectly happy to see us going straight to a 100 per cent. write off in the first year. That would be a real encouragement to firms to develop and invest. Alas, there is nothing in the Budget which encourages that or which, through greater investment and growth, would make the impact on unemployment that I regard as our first priority. Quite the opposite, my Lords. There is a slashing of government investment under the so-called formula of PFI, and the hope that someone else will pick up the balance that is needed. It is pure hope, pure speculation, and a resignation by the Government from their responsibilities.
I wish to talk about the unemployed. What I say now may not be as accurate as my normal statements. I am told that as a result yesterday of the Chancellor's enormous efforts, and no doubt the whisky as well, he fell asleep in his chair on his return to No. 11, and had a dream. He dreamt that outside was a huge line of unemployed workers carrying banners. As he read the banners he saw, "Three Cheers for Ken"; "Well done, Ken"; "Penny off standard rate"; and "No tax on your estates up to £200,000, Well done, Ken".
He thought, "This is delightful", and invited the three leaders of the delegation to come to his room in the Treasury to thank them. He said to the first, "What was
your express view?" The man said, "I wanted to bring with me one of the group who actually paid tax and could benefit from the penny in the pound but unfortunately there was no one there. Nevertheless, Mr. Chancellor, you must realise the sincerity of my gratitude to you for what you have done". The second unemployed leader said, "I, too, want to thank you for increasing the allowance on estates. We tried very hard to find someone in the delegation who had such an estate so that he could express his gratitude more precisely, but we could not find anyone. Indeed, Mr. Chancellor, they are all bankrupt. They cannot even pay their mortgage interest, never mind benefiting by having a £200,000 estate to leave". The third man said, "Since I am here, Mr. Chancellor, perhaps I could ask you whether you had in mind anything else to help the unemployed?".The Chancellor said, "Yes, you're good fellows. Come to this window and share my magnificent view over the square and the Houses of Parliament. There you are". And that is about the sum total that this Chancellor has done for the unemployed. The unemployed family is the only family in all the standard family calculations published at this time of year which is worse off. Others are better off.
7.35 p.m.
Lord Stoddart of Swindon: My Lords, like other noble Lords, I should like to express my appreciation to my noble friend Lord Desai for introducing the debate, which has been good and well informed.
I had not intended to be provocative until I heard the noble Lord, Lord Boardman--he is in his seat but not paying attention--and was struck by his criticism of Labour Party Members, in particular the Shadow Chancellor who, he said, would say anything to gain power. I remind him that at the last election the Prime Minister promised the country that VAT would neither be increased nor extended. However, one of the first things that the Government did was to put VAT on domestic fuel. It would have been at 17.5 per cent. rather than 8 per cent. if the Opposition, joined by one or two brave Conservatives, had not prevented the Chancellor from raising it to 17.5 per cent.
I wish to talk about the Budget. It is a Budget which fails to meet the needs of Britain, in particular the need, as so many noble Lords have pointed out, for investment in productive industry. It is a Budget which has pleased few and angered many. Above all, it will not restore the feel-good factor in the British people. At the same time it has not cured the feel-bad among Tories.
I also believe that we are still experiencing the baleful effects of the disastrous experiment with the exchange rate mechanism. The economy is still depressed. Fear and insecurity still abound. This Budget, which should be about reviving confidence, will simply leave things as they were on Monday, before the Budget. Perhaps they will be even worse, because expectations were raised which have now been dashed.
The Chancellor's and the Government's concentration on low inflation and getting the PSBR down is causing great difficulty. He is trying to get it down; indeed, he is forecasting the public sector borrowing requirement down to zero or below by 1999--in time, I fear, for
this country to be frogmarched into a single European currency with all the harm that that will do to our economy and to the unemployed.I want now to turn to one specific item in the Budget: the reduction of 27p. in the tax on spirits and the real reduction in all other alcoholic drinks except strong cider through the failure to increase the duty in line with inflation. Of course, a great cheer goes up for reducing tax on alcoholic liquor, but count me out of the cheering. Alcohol is a most potent drug and is the cause of enormous misery and indeed slaughter as well as ill health and sickness. One in five road traffic deaths and injuries is alcohol related. That means that two people a day are killed on the roads and every day thousands are injured due to drink driving. Millions of days are lost at work through alcohol consumption and accidents at work are often alcohol related. Vandalism, brawling, knifings and murders are often related to over-consumption of alcohol. It is also the cause of a huge proportion of wife and child battering.
Yet despite all that, which the Government know well because they have to pay for the social consequences, the Chancellor has seen fit to make the consumption of alcohol cheaper, thereby ensuring that consumption will go up. With it there will be an increase in the social evils relating to alcohol. It is morally corrupt and disgraceful that the message in this Budget has been sent out by the Government that alcohol is harmless. "Drink up and be merry", the Government say, "even if your merriment injures or kills others or results in child and wife battering". It is a great pity that it is I and not a Bishop who has to preach this evening the evils of the demon drink, but someone has to do it because it was a wrong decision. Perhaps the decision was related to the fact that the Tories have very few MPs in Scotland and many of those they have are in areas which distil whisky.
Let me turn to taxation. I agree with the Leader of the Labour Party and the Shadow Chancellor that we should aim for fair taxation. I believe that that also means reasonable, not excessive, taxation, but it should be a system where those on high and very high earnings should be expected to pay rather more than they do at present. I am not one of those who are enamoured of the slogan, "Let people keep all the money they can in their pockets and spend it as they wish". That usually means less taxation for those on very high earnings or incomes and much higher expenditure for those on low incomes. It is the latter who lose out.
The Shadow Chancellor has been criticised and even mocked for suggesting a 10 per cent. bottom rate of income tax to assist the low paid and to ease the transition from benefit to employment. In my view, that is an altogether laudable aim which should be supported and encouraged. Unfortunately, the Shadow Chancellor did not go far enough in his proposals for fair direct taxation. More needs to be done than simply proposing a new rate of 10 per cent. We need that, certainly, but it is quite absurd that people earning just over £30,000 per annum find that their tax rate at the margin jumps from 25 per cent., or 24 per cent. now, to 40 per cent. That is a huge jump and thus they pay the same rate as
people earning 10 or 100 times as much. As well as a lower bottom rate of tax, we need a higher top rate with a gentler progression to each band.A top tax rate of 50 per cent. or even 55 per cent. would hardly be confiscatory, if applied to high earners. Indeed, in my own view, many of those high earners would welcome a direct tax system which was seen to be fairer than the present one. They could enjoy a warm glow of satisfaction, knowing that they were making a fair contribution towards the services that we all enjoy in this country. If the number of tax bands were increased in line with a lower bottom and higher top rate, it would then be possible to arrange movement from one tax band to another in gentler steps, thus easing the transition.
No doubt I shall be told that what I have suggested would cause administrative difficulties and would not be tax efficient. However, I believe that for the longer term those ideas should be considered.
I should have liked to talk about the family, but unfortunately my time is up, so I shall complete my speech. As I said at the beginning, the Budget failed to meet the needs of Britain. The only really good thing about it is that it has probably hammered the last nail in the coffin of this awful Government.
7.45 p.m.
Lord Astor of Hever: My Lords, despite what we have heard from the other side tonight, I am convinced that the Budget will help move the United Kingdom towards our goal of being the enterprise centre of Europe. The business climate could hardly be more favourable. The recovery is well established, the economy continues to strengthen, profitability remains high and companies are in a healthy financial position. We have low interest rates and low taxes. On this point, I was interested to read a recent survey by Tribune, in which two-thirds of the Labour MPs polled said that they wanted a new higher top rate of tax. Indeed, the last speaker would agree with that. Clearly, Labour still want to penalise success and pursue the politics of envy.
Obviously, Labour does not understand business. It wants to spend on increased capital allowances when investment is already growing. It wants to introduce the social chapter and a minimum wage which would cost jobs and hold business back. Just when our companies need lower costs and lighter regulation, Labour would burden them with extra red tape.
One of the industries that has really benefited from the business climate under this Government is the motor industry, which has literally been reborn. Ninety-nine per cent. of our motor industry is owned by foreigners. A noble Lord--not on this side of the House--remarked to me at lunch last week that this fact made him feel ashamed. Interestingly, later that day I saw him drive off in a French-built car. However, it is not a matter for shame; it is a matter for celebration and is a really substantial success story for this Government. Foreign ownership is a colossal advantage, since it has brought to Britain the world's best practices in car production and greatly improved export prospects.
Exports could account for a million cars a year by the end of the century. As production levels in British car factories rise--and both Honda and Toyota are planning significantly to increase their capacity by the end of the decade--a circle of prosperity comes into effect, both among the manufacturers themselves and in the component industry supplying them. It becomes more sensible to make all the major parts over here.
The component industry, including thousands of smaller British-owned companies, is reaping the rewards, having sharpened itself up to meet the more demanding specifications of the car makers. This in turn means that British firms are now better placed to sell abroad, although they will have to maintain their position of world-class competitiveness.
A perfect illustration of that turnaround was the announcement by Lucas Industries that they are to supply £1 billion-worth of electronic fuel injection systems for diesel engines to Volkswagen, a contract which in previous times could only have gone to the German supplier Bosch. Mercedes has invited several British companies to tender as suppliers for the first time.
The opt-out from Maastricht's social chapter is also helping the revival. Social costs here are much lower than on the Continent. A low-cost economy, union co-operation and sterling competitiveness mean few countries present so benign an economic environment for making cars. As a result, more than £1 billion of investment has been promised this year, with much more to come.
Ford is investing heavily, with plans for new Jaguar production in Coventry and engine programmes in Dagenham and Bridgend. Vauxhall has upgraded Luton with dramatic effect and Rover is still investing heavily in Birmingham to cope with booming Land Rover sales, which I hope will include field ambulances for the Ministry of Defence. Within the next six months, Ford and Vauxhall will be considering where to build the replacements for the Escort and the Astra, two of the most important models in Europe, raising hopes of further investment in Britain. There should be no contest.
7.50 p.m.
Lord Murray of Epping Forest: My Lords, one of the strong and welcome themes running through tonight's debate is the need to modernise British industry and to that end improve investment, both in physical assets and in training.
I agree very much with the noble Lord, Lord Desai, to whom we are all indebted for the debate tonight, that, while the economy above all needs a boost in capital spending, cuts in income tax have no great observable incentive effect in that direction. I agree, too, with the noble Lord, Lord Diamond, that, as history shows, most people are likely to spend their tax cuts on consumer goods, probably imported. There is certainly no assurance that the money will be invested in British industry.
The Government rightly encourage and indeed help particular industries to invest. To that end they offer financial inducements--dare I use the word "subsidies"?--to Japanese, German and Korean companies to set up shop here, if necessary outbidding other governments. I strongly agree with my noble friend Lord Merlyn-Rees and the noble Lord, Lord Astor, as to the great advantage that such inward investment has brought to this country.
But, if it is right to encourage inward investment in this way, surely it is equally right to encourage domestic companies which are important to our future to remain here and survive. I want to descend from the macro-economic peaks that have characterised the debate to the level of examining particular industry. I want to argue that it is right to encourage shipping companies not to continue flagging out abroad, with the consequent loss of trade and earnings for Britain, to say nothing of the implications for defence. The Budget Statement signally fails to do that. However, I want to argue that it is not too late and that this matter should be looked at again.
I declare an interest as a trustee of the National Union of Marine, Aviation and Shipping Transport Officers. But my greater interest is in halting and reversing the decline of what has been, could be and ought to be a major national asset.
Shipping is not a sunset industry. Britain depends on shipping for the carriage of 95 per cent. of the exports and imports referred to so often this evening. But four-fifths of those imports and exports are now carried in foreign ships, as the noble Lord, Lord Mackay, will remember from a previous incarnation, when he graced the office of Minister for shipping. Last year, world seaborne trade hit a record total of 4½ billion tonnes. By the end of the decade it will be seven billion tonnes. World shipping earnings are £100 billion a year, of which Britain now receives only 4 per cent.
Even with reduced crewing on modern ships, the demand for seafarers is growing. There is expected to be a world-wide shortage of 350,000 officers by the end of the decade. British seamen are the best there is, but they are a threatened species. In 1980, 63,000 officers and ratings were employed on ships with the UK Chamber of Shipping. Today, there are less than 20,000. As we heard this afternoon, in 1980 nearly 1,300 cadets were in training; today there are less than 400.
The results are plain. They are characteristic of so much that has happened to this country over the past generation--not merely under this present Government but under previous governments as well. British shipping has traditionally been one of the biggest earners of invisibles. Now the balance has gone into the red. Less obviously, the fleet's decline is being felt in a wide range of related industries and services--shipbuilding, shipbrokering, marine insurance and so on. British owners can no longer afford to replace their ships with modern ones, so our ships are now on average 16 years old--twice as old as they were 15 years ago. That brings into focus and illustrates a point made by so many speakers in the debate, not only on this side of the Chamber but on the other Benches as well. It is a
challenge to us. If we could capture just one per cent. more of the world market, it would be worth £1 billion to us in terms of gross invisible earnings. But--and here's the rub--given the extent of support that foreign governments provide for their merchant fleets, the UK shipping industry cannot do it alone.Japan is planning to extend its already big aid programme with a £300 million support package, including tax exemptions for seafarers, tax breaks for shipping companies, loans of up to £240 million for new ships. The Dutch Government introduced a shipbuilding scheme worth more than £20 million and this year is adding new special tax arrangements. Malaysia has established a £215 million fund for investment in shipping. France recently brought in new measures to encourage fleet modernisation, with a £55 million fund for shipowners and investment aids worth a further £17 million a year. I could go on.
When the Government are told what is happening and warned of the consequences, Ministers repeatedly take the line that they must work for the abolition of all aid packages. But the packages are increasing, not diminishing.
To be fair, the Government have offered a little assistance in recent years. There was the Government Assistance for Training Scheme for cadets and the Development of Certificated Seafarers' Scheme, giving grants to employers. But as we heard earlier today, the GAFT grants are not proving big enough to encourage employers to take on cadets. The Government also partially restored, in 1994, in the form of roll-over relief, part of the tax incentives withdrawn in 1984. And since 1991, deepsea seafarers have had the 183-day rule income tax concessions.
I welcome those concessions. However, the point is that, in introducing them, the Government have clearly acknowledged the need for support but they have set them at a minimal level which does not enable the British fleet to compete effectively. In other words, we are getting the worst of both worlds.
It is still not too late for the Government to have second thoughts--or for the Opposition in another place to put down amendments to achieve our national objectives. At the very least, if the Government are serious in their intention to persuade other governments to drop their subsidies, they should go in to the negotiating table armed with some bargaining counters in order to negotiate away the schemes if that is the long-term effect.
The industry does not ask for massive support. The support proposed would cost some £40 million. Less than half of 1 per cent. of the £6 billion transport budget is spent on ships and ports. The cost of doubling that to a modest 1 per cent would be minimal. The market is there and the opportunity is there, but the market is rigged against Britain. It is time we took some action to redress the balance. The Budget provides that opportunity still.
7.59 p.m.
Baroness Rawlings: My Lords, as neither an economist nor a businesswoman, I rise to speak in this debate with great reservation in a House not only filled
with so many Budget experts, such as the noble Lord, Lord Desai, but also containing no less than six ex-Chancellors of the Exchequer.The practice of the House as I understand it is not to have on Wednesday a Motion that is in any way controversial; but I gather from what we have heard today that that does not mean that we do not have a controversial debate.
This Budget has been hailed for weeks, nay months, by most commentators as more of a political budget than an economic one. The Party opposite had already made its comments and given its briefing criticisms on the Budget last week, long before the Chancellor had even delivered his Speech. It is difficult to believe that it already had all the details last week. Were they perhaps leaked? I think not.
There has been strong criticism from the Benches opposite but I am loath just to negate all those criticisms by reeling off a mass of statistics which go on for hours, like the old Soviets used to do. Most of your Lordships know them all already. Probably that would not only send your Lordships to sleep but myself as well. But why, whenever noble Lords on the Benches opposite discuss the economy, do they knock it? They cannot admit that Britain, far from being left behind in the world economy, is doing very well. Like the old Soviets, they prefer to look at statistics instead of realising that the Government have been prospering in the real world.
It is a tough old world out there. Our competitors in Europe and the rest of the world constantly monitor the position in Britain. They know that our key industries are more competitive than ever before. They know that investment in our economy has grown faster than in any other major European country and six times faster than under the last Labour Government. Labour closes its eyes to that and only wants to run Britain down.
I know that it is difficult to accept that your opponents are successful and on the right track, but we can only look at the hard facts. Britain is the main country in Europe for overseas investment from the United States, Japan and Korea. That means thousands of jobs. We have the necessary stability for outside investment. That is vital for our economy. I am afraid that the only thing that Labour--even new Labour--with its rush to sign up to the social chapter, will attract to Britain is more European regulations. Now even the other European countries have admitted that the social chapter does not work. Europe is following Britain's lead today while Labour is following Europe's leaders of yesterday. I remember losing vote after vote in the European Parliament for five solid years in this area because we were in opposition. But, luckily, when the real decisions were taken in the Council, we had a sensible Minister, a Conservative Minister, who was not prepared to sell our industries down the river through even more of those damaging regulations.
Britain needs strong world-class companies to compete in global markets. It needs companies such as British Telecom, which is a privatisation success story with more than £25 billion invested in Britain. That is an investment which the Treasury could never have
afforded to give and makes BT one of the most advanced networks in the world. It considers Europe as its natural extended home market, which is critical to its globalisation plans. It is a British company operating in more than 40 countries around the world. It cannot operate successfully if it is hampered by petty rules, regulations and regulators. Its guidelines should be the competition policy set out by the GATT and the World Trade Organisation, not the constricting ropes of the social chapter. All companies, whatever their size, need a stable and sound economic environment in which to operate, where people feel secure. That is exactly what the Chancellor, in full command, has produced with this Budget.Finally, I should like to touch on just two points in the Budget. First, there is the cut in income tax: basic rate has been cut by 1p to 24p; that is a tax cut--the kindest cut of all; the 20p band has been widened by £700; there is the new 20 per cent tax rate on savings income. It means that 26 million taxpayers will be better off. Now, one in four taxpayers will pay tax at only the 20p rate. Secondly, at the same time, this Budget keeps public spending at 40 per cent. below GDP. That is essential for a lasting recovery. We all know that a lasting recovery will bring higher living standards and more jobs. Surely this is a responsible, sensible budget that will be proved a success not only now but, more importantly, in years to come. It is not a "quick fix" but a Budget for the long-term good of the British economy.
But the Labour Party calls this Budget "yet another failure". If it is a failure, then, remembering the great French composer Bizet, who died aged 37 broken-hearted over the supposed failure of his opera Carmen, so be it.
8.5 p.m.
Lord Rea: My Lords, most noble Lords so far have spoken about the health of the British economic situation and many have proffered remedies. I shall reverse those words and talk about the economics of the British health situation; by that I mean the health of the British people--the nation--rather than the National Health Service.
When the National Health Service was founded 47 years ago, it was expected, together with the other provisions of the so-called welfare state, based on the principles set out by Lord Beveridge, that it would level up and make equal the health status of "all sorts and conditions of men"--and by men I also mean women, even if the Book of Common Prayer from which the words are taken, along with Thomas Jefferson, did not do so, as Madam Speaker pointed out earlier today. It would do that by eliminating the five giants: want, idleness, ignorance, disease and squalor.
It is true that the expectation of life has risen. Many infections are no longer a major threat and infant and maternal mortality rates have fallen to a level which was undreamt of 47 years ago. Some of that is due to the ingenious discoveries of science as applied to medicine; but most of the improvement is due to the better nutritional and environmental conditions which have been experienced by the population, thanks to the
improvement in the social and economic situation of the majority of the British working class during almost 40 years of nearly full employment from 1940 to the late 1970s. However, even in the days of the government of the noble Lord, Lord Callaghan, uncomfortable evidence was appearing that some sections of the population were slipping behind. That led to my late and much missed friend Lord Ennals setting up the working party on Inequalities in Health chaired by Sir Douglas Black. His report, the Black Report, was published, rather reluctantly in small numbers, in a cyclostyled version by the then right honourable Patrick Jenkin, Minister for Health, who took no action on its recommendations; and nor did the Chancellor.The report revealed that there was an increasing discrepancy between the best off, whose health status was racing ahead, and the worst off, who had higher sickness and mortality rates over almost the whole range of diseases. Since that report, much admired as it was for its academic thoroughness, a steady mass of evidence has accumulated to show that since 1979 the gap in health has been widening. For the first time, last year a report was published in the British Medical Journal showing that mortality rates among deprived population groups in the north of England were in fact increasing. Up to then, although the health gap was widening, even the least well off were showing some improvement.
In Britain it is not merely the health of the poorest 10 per cent or 20 per cent. that should give us concern but also that of the largest group in the population: the skilled working class, classified by the Registrar General as social class 3, non-manual and manual--the office workers, computer operators, fitters and electricians. Though their health is better than that of the unskilled, they suffer more illness and earlier deaths than those in professional and managerial work, who are setting the trend in high health status, even when lifestyles deleterious to health (smoking, physical inactivity and so forth) are allowed for. In fact, Professor Michael Marmot's study of the whole range of Whitehall civil servants, from cleaners to senior mandarins, showed that, starting from the top, there was a steady deterioration in levels of health and increasing incidence of illness as one came down the scale.
Incomes in the Civil Service range from £120,000 at the top to £6,000 at the bottom, a 20-fold discrepancy. There is little difficulty in understanding why those at the bottom are less happy and die younger than those at the top. But there is a linear relationship between health status and job status throughout the range.
Dr. Richard Wilkinson of Sussex University (a proper doctor with a PhD) showed a relationship between an improving life expectancy and the proportion of a country's GDP going to the least well off--70 per cent. of the population--when comparing countries which have a GDP of over 5,000 dollars per head of population. In other words, countries with the most egalitarian wealth distribution have in recent years shown the biggest gains in health.
During the past 16 years, while the distribution of wealth in the UK has become more and more unequal, Britain has fallen a long way down the international
league table of health statistics--that is, life expectancy and infant mortality rate--starting at No. 8 and now just passing No. 20. We have been passed by countries such as Eire and Spain and left standing by Hong Kong, Singapore and Japan, which is now the top of the league.The Budget did nothing even to start to reverse that trend; indeed, it may even make it worse. One of the first tasks of a new Labour Government--or perhaps a government of new Labour, as the noble Baroness pointed out--must be and will be to start the process of redistributing income more fairly. A minimum wage is a start. Fairer progressive taxation is another. But, above all, by borrowing initially if necessary, we must have measures to help the unemployed back to work.
Nearly 90 years ago George Bernard Shaw wrote in Major Barbara that poverty is,
- "The greatest of evils and the worst of crimes".
8.14 p.m.
Viscount Chandos: My Lords, if there were not already sufficient reasons for feeling a degree of nervousness in speaking for the first time from this Bench, on top of that I am faced with trying to wind up, on behalf of these Benches, a vigorous and stimulating debate with contributions from many of your Lordships' distinguished economists and economic specialists. As the proposer of today's debate, my noble friend Lord Desai and my noble friend Lord Eatwell, who opened, are, without doubt and without partisanship, among the most erudite economists of all. I feel as though I have been asked to sing "Nessun Dorma" equipped only with a packet of throat pastilles, in concert with two of the "Three Tenors".
When a friend heard that I was faced with this formidable task he said that he presumed, in the finest traditions of the Foreign Office, that I would speak on endogenous growth theory while my noble friends would speak on the subjects investment bankers are expert in--whatever they may be. In the result, my noble friends have shown not just their academic expertise, but also their mastery at analysing the real world in terms vividly and, sadly, painfully understandable to the layman. We should therefore be particularly grateful to my noble friend Lord Desai for introducing today's debate and enabling your Lordships' House to address the economic "State of the Nation" in the immediate aftermath of the Budget Statement.
In the limited time available I cannot respond to every noble Lord who has spoken today, let alone raise every aspect of our current economic situation or the Budget Statement's inadequate recognition of the economic mountain we have to climb. But, before I concentrate on my particular theme, I cannot help but join my noble friend Lord Eatwell in expressing my dismay at the mean-spirited foundation of the Government's Budget.
Despite evidence to the contrary, it cannot be only noble Lords on this side of the House who feel a repugnance towards measures which, however ostensibly prudent in macroeconomic terms--my noble friend Lord Desai exposed the questionable nature of that prudence--are in some cases viciously unfair in the way the burden of taxation is maintained or even increased on those with the lowest income, while the first steps of reversing the huge tax rises of recent years are so clearly for the benefit of the better off.
I should like to concentrate my remarks on the Government's objective of achieving sustainable non-inflationary growth--something to which every noble Lord aspires and which is, of course, the only way we can in the longer term achieve the resources and the opportunity to provide a significant improvement in the standard of living for those who have been so poorly treated by this Government, as well as continued steady progress for those more fortunate.
The noble Lord, Lord Astor of Hever, echoed the phrase of the Chancellor of the Exchequer in his Budget Statement,
- "Britain is the enterprise centre of Europe".
My noble friends and our colleagues in another place have made it perfectly clear that we are centrally and fundamentally committed to an enterprise economy at the very heart of a market-based system. Professor Patrick Minford, who seems to think that his position as one of the three remaining so-called "wise men" advising the Treasury, is an appropriate platform for facile political invective, is quoted today as saying that our party's intentions towards a low tax, free-market economy are at best doubtful, at worst damagingly hostile. That is absolutely untrue, as Professor Minford will in due course find out, though I cannot hazard whether my right honourable friend Gordon Brown will have the benefit of Professor Minford's advice at that time. The noble Baroness, Lady O'Cathain, and the noble Lord, Lord Skidelsky, who should know from our
shared creation of the Social Market Foundation of my personal commitment to a market economy, can, I believe, likewise be reassured.What we on these Benches are committed to is an enterprise economy in which the opportunity for enterprise and the benefits from enterprise are open to everyone, not just those whom the Government will now permit to avoid inheritance tax above the hugely increased threshold by acquiring shares on the Stock Exchange's alternative investment market, the latest in a long line of the Government's ill-advised and economically distorting tax shelters for the wealthy. I might add at this point that, whether or not there is a case for differentiating between the capital gains tax rate on short and long-term gains, it is both wrong and unrealistic to contemplate what the noble Baroness, Lady O'Cathain, and indeed the Prime Minister suggest--the outright abolition of capital gains tax.
We are committed to an enterprise economy in which, as my noble friend Lord Eatwell has argued, careful measures to stimulate productive capital investment by both the public and the private sector creates an atmosphere of confidence for industry and consumers alike--which in turn creates the sustainable, non-inflationary growth which this country needs and is entitled to. In the absence of the noble Lord, Lord Skidelsky, I will risk suggesting that, if low interest rates alone were sufficient to stimulate adequate levels of investment, the historically low interest rates of the past three years should not have allowed the serious shortfall in investment which is now apparent.
We are committed to a low-tax market economy, where the low taxes apply to those on low incomes and not just to those on high incomes. Last week, regrets were expressed in your Lordships' debate on the gracious Speech that the Labour Party had advocated a lower tax band, of 10 or 15p in the pound, thereby, in the eyes of some of your Lordships, creating a competitive bidding process for lower taxes. How odd. I thought competition was now accepted on all sides of the House to be good. And we were not competing to cut the taxes for those already well paid, well off and fully employed. We want, as my noble friend Lord Eatwell spelt out so clearly, to lower taxes and eliminate distortions in the benefits system and to remove the disincentives for those out of work or on welfare to take up employment and join the enterprise economy themselves. Sixteen years after this Government reduced the top rate of income tax to 60p in the pound, they have still left unchanged effective marginal tax rates for those out of work or on low earnings of 90p or more in the pound. Sixteen years, my Lords, the time from birth to school leaving age, and noble Lords opposite and their colleagues in government have learnt nothing, forgotten nothing.
Investment, as so many noble Lords on this side of the House have argued--none better than my noble and valued friend Lord Diamond--is the key to a more prosperous future than our Tory past; investment in education, investment in training, investment in technology, machinery and equipment. That is why, in the face of the relentless squeeze on productive public
sector investment over the past 16 years, my right honourable friend Mr. Prescott proposed the principles of private finance for the public sector and why we therefore support, as preferable to the alternative, the PFI. I should declare an interest at this stage, that a company of which I am a director has a subsidiary which acts as consultants to NHS trusts in seeking private sector finance. But, for the same reasons as those advanced by my noble friend Lord Eatwell, I have serious concerns that PFI is not the best long-term way of addressing the issue. How much better would it be to tackle the underlying inconsistencies in the country's public accounts and restore, as the noble Lord, Lord Clark of Kempston, proposed from the Benches opposite, a proper, updated distinction between capital and current expenditure, so that the appropriate financing of productive investment can then be gauged and implemented.I cannot end without taking one further example of the Government's cock-eyed priorities, so requiring me to declare another interest, as a director of English National Opera, which, as a supplement to its buoyant box office revenue, depends on Arts Council grants. At the same time as proposing a cut of more than £60 million in the funding available to the Department of National Heritage, and hence a 3 per cent. cut to the Arts Council, this Government propose to exempt classic cars from road fund tax at a cost, estimated today by experts in this field, of at least £25 million per annum, without even allowing for the costs of ensuring by other means adequate standards of safety. I would not want to impose any financial hardship on the noble Lord, Lord Monson, and, with a lifelong interest in cars, bear no ill will towards other classic car owners. But can it really be right, in considering the quality of life for those in a position to enjoy life, that we should threaten our national heritage and culture in order to exempt cars of more than 25 years of age from tax--let alone freeze the lone parent's allowance, at a saving of only half what is handed to classic car owners?
My Lords, this is not a Budget whose immediate reception should give the Government much encouragement:
- "Budget blues put £ near record low",
Nor do I believe that this Budget will be better regarded in six months' time, as some of the Government supporters try to find comfort in thinking. It is mean-minded and inadequate now, and it will be mean-minded and inadequate then, when the long-term problems in our economy will be ever more cruelly exposed.
The noble Baroness, Lady Rawlings, has cast her right honourable friend the Chancellor as a latter-day Bizet, the composer of one and a half successful operas. I look forward to the many future Budgets of the Verdi of prospective Chancellors, my right honourable friend
Gordon Brown, and the prospects then, despite the run-down and underinvested economy he will inherit from this Government, of sustainable, non-inflationary growth and progress towards full employment once more.8.28 p.m.
The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish): My Lords, I welcome the noble Viscount, Lord Chandos, to the Front Bench. I hope he survives longer on the Front Bench than his noble friend Lord Desai, who thought a few unthinkable thoughts and found himself back on the Back-Benches. The debate has gone on perhaps a little later than many of your Lordships thought. I therefore appreciate that some noble Lords have had to go because they had planned their day on the basis that our debate would last for four and a half hours and would be over by 7.30 p.m. Therefore, I fully understand that some noble Lords have had to leave.
It has been a very interesting debate. I am always grateful when the noble Lord, Lord Desai, speaks. The noble Lord and I joined your Lordships' House at the same time and for many months we both found ourselves very much at the bottom of the batting order, usually fairly adjacent to each other in any debate in which we were involved. But I notice today that the noble Lord has managed to get himself at the top and myself at the bottom, so some progress has been made. I say also to the noble Lord, Lord Desai, that I always enjoy his speeches. He is an economics professor under whom I might have enjoyed being a student--not that I was ever a student of economics and, as some may say, that will be apparent shortly. Like most of the rest of the world, I did not study economics. However, I believe that I might have enjoyed studying under the noble Lord, Lord Desai. I am not sure whether I would have enjoyed studying under his noble friend Lord Eatwell. I might have found it a little uncomfortable. Nonetheless, I am sure that it would have been as equally interesting.
The overriding aim of this Budget is to maintain a healthy and sustainable rate of economic growth because without growth, there can be no prospect of improved public services, more jobs and higher living standards. The British economy is growing steadily. The recovery is now in its fourth year. Growth has been well balanced and output is at record levels. Exports have been strong; business investment has started to pick up and consumer expenditure has been on a steady upward trend. Unemployment has fallen by over 700,000. Businesses have created half a million new jobs and inflation remains low. It is no wonder that the OECD said that our performance last year was "impressive". It praised the pace-setting reforms that the Government have implemented since 1979, which have immeasurably improved our competitiveness.
Although growth has indeed slowed in recent months, as some noble Lords have pointed out, it has not stopped in its tracks, as perhaps some have tried to suggest, but far from it. All the indications are that growth will continue at a healthy rate into next year and the year after. The fundamental ingredients are all there; namely,
low inflation, sound public finances and competitive businesses. Seldom can a Chancellor have delivered a Budget against such an encouraging background as my right honourable friend did yesterday.It is not just the Government that expect the British economy to continue growing at a healthy rate, as my noble friend Lord Oxfuird said; it is also the view of independent forecasters. He drew our attention to the IMF and no less a body actually expects Britain to join Germany at the very top of the G7 growth league next year. Exports have very much led the recent phase of the recovery and they are at record levels. They are competitive, highly profitable and they are benefiting from expanding world markets.
I listened, as I always do, with great interest to the noble Lord, Lord Bruce of Donington, who talked about the mass destruction of manufacturing capacity. The noble Lord lives in an unreal world. I might agree with him if he had said that there have been massive changes in the nature of our manufacturing capacity, but to talk about "massive destruction" shows that the noble Lord, like many others, tends to think about manufacturing industry as the traditional manufacturing industries we had many years ago and not the new manufacturing industries. Exports of goods are up by 6.5 per cent. in volume terms over the past year. Export growth last year was the fastest for 20 years. United Kingdom exports in volume terms are indeed at record levels. We are now Europe's largest exporter of items such as computers and colour televisions. I suspect that one of the problems we have in this debate is that some noble Lords do not recognise these items as manufactured products. They are the modern manufactured products.
We must not forget the export of services and our investment income, the so-called invisible receipts, largely coming from work in the City of London. Taken together, these account for around one-half of all our overseas earnings. We are the only major country with substantial invisible surpluses. The success of our exporters has helped us to achieve current account surpluses with the rest of the G7 countries and with the four Asian tigers. The noble Lord, Lord Shepherd, rightly pointed out something that we always have to remember--that is to say, we have not only to compete in Europe, which is a very important market, but also around the world because we are a major trading nation. We depend not only on the European Union for our markets but also on the rest of the world. We have a current account surplus with these Asian tigers; namely, Hong Kong, South Korea, Singapore and Taiwan. Overall, our current account deficit remains very modest in relation to our GDP.
Investment is picking up where firms need to expand capacity and adapt and adopt new technology. The climate for investment is excellent. The recovery is well established and profitability is high. I say to the noble Lord, Lord Diamond, to whom I always listen with great interest, that it is much more important than giving investment allowances to ensure that companies have good, high profitability on which they can base sensible long-term investments. These company finances are strong. Company tax and
interest rates are low. Business surveys show strong investment intentions. Indeed, investment in the manufacturing sector is already 12 per cent. up over the past year to its highest level for four years.I understand noble Lords who say that in the great tables of things the situation does not look as obvious as I am trying to make it. We are accused as a country, and more than just as a Government--the noble Lord, Lord Diamond, again spoke about over 50 years--of not investing enough. An interesting thing is that the noble Lord, Lord Desai, who introduced this debate, wrote in a recent article in the New Statesman:
- "The United Kingdom notoriously invests a lower proportion of its GDP than, say, Japan or Germany, but the rate of growth of the UK economy is not that much lower. The British get bigger bangs for the bucks from investment than the rest. It is not fashionable to say this, but after all, it is outputs that matter and not inputs".
The story of investment is good. Total investment has grown faster since 1979 than in France, Germany and Italy and about six times faster than it did under the last Labour Government. The manufacturing productivity gap between us and our main Continental competitors has been narrowed substantially from between 30 per cent. and 50 per cent. in 1979 to just 10 per cent. now. The gap actually widened under the last Labour Government.
My noble friend Lord Boardman rightly pointed to inward investment, as a number of other noble Lords have done. That is very important. I say to the noble Lord, Lord Merlyn-Rees, that that inward investment has helped very many parts of the country which have had serious unemployment problems. He discussed Wales; I could discuss Scotland.
Without going on too long, perhaps I may list one or two of the most recent stories of inward investment in this country. Chunghwa Picture Tubes Ltd. from Taiwan has just announced a £260 million investment in Mossend in Lanarkshire, creating 3,300 jobs in manufacturing, which will go a long way to replace the unfortunate closure of the steelworks there. Lexmark International of the United States is going to Rosyth, Fife, to create 500 new jobs. To show that I am not looking just at Scotland, Fujitsu from Japan announced an £800 million expansion at its County Durham site, creating 500 new jobs. Nissan has a £250 million investment in the north-east. Siemens from Germany announced its decision in August to build a new £1.1 billion semi-conductor plant in North Tyneside, creating 1,800 new jobs. The whole House knows that I could go on with a number of other examples in recent times and, indeed, other examples where the factories are now up and running.
By keeping inflation low we have managed to keep interest rates low. I believe that that is very important from the point of view of investment and jobs. I thought that my noble friend Lord Birdwood was being unnecessarily pessimistic in the view that somehow or other improved technology and efficiency would inevitably lead to fewer jobs. I do not believe that that is necessarily true. Perhaps I may commend at least part of a speech by the noble Lord, Lord Peston, in the debate on the Address last Thursday, I believe, where,
from the point of view of an economist, the noble Lord addressed that problem. I shall perhaps address it in a more simple way and point out that countries like Japan and the United States, which are arguably the most technologically advanced societies, have kept unemployment low and they are still at the cutting edge of those changes. So I really do not think that we need to be pessimistic about it. However, we have to make sure that we are in a position to seize any opportunities for such new investment. Dare I say that as a cultural change we need to accept that those new products are manufactured products every bit as much as the ships or railway engines which the industrial areas of Tyneside and Clydeside once produced?We should not be too pessimistic about employment. We should remember that we have more of our people in work than is the case in other European countries. I gave the figures the other day. Sixty-eight per cent. of our population of working age are in employment. The figure for Germany is 66 per cent., in Italy it is 51 per cent., in France 60 per cent. and in Spain 45 per cent. We should remember that that is the other side of the unemployment figures. I now live in Glasgow and although I did not represent that area when I was in the other place, I know about the pockets of serious unemployment. I do not minimise the difficulties for the people who live there. However, there is no point in trying to paint a picture of Britain as somewhere where there are only unemployed people. We should not paint a pessimistic picture of Britain, especially if we want to encourage people to buy from us or to come here and invest.
While I am giving comparative figures, perhaps I may look at this from the viewpoint of unemployment. On the ILO base--I am trying to be as reasonable as possible to noble Lords opposite--unemployment in the UK is 8·2 per cent. In Germany it is 8·4 per cent., in Italy 11·3 per cent., in France 11·4 per cent. and in Spain 22·2 per cent. All of your Lordships are rightly worried about the youth unemployment rate. In the UK it is 13·6 per cent. I think that we can all agree that that is far too high and, indeed, Germany is doing much better with only 8·3 per cent. However, the youth unemployment rate in Italy is 31·8 per cent., in France it is 27 per cent. and in Spain it is 40 per cent.
I am not too surprised that noble Lords opposite did not talk much about the social chapter and the minimum wage because one of the interesting things about the figures that I have just given is that the countries in almost the worst position among the major players in the European Union are France and Spain which have the lethal combination of the minimum wage and the social chapter. Those are the countries with horrendously high rates of youth unemployment, with general unemployment and with a much lower percentage of their population in work. So I do not think that we should paint too gloomy a picture of the position in this country when one looks at how our near neighbours are getting on in terms of their employment and unemployment figures.
Not many noble Lords mentioned inflation, although my noble friend Lord Boardman is an exception. I am not surprised by that because we are now enjoying the
best inflation performance for almost half a century. The underlying rate has been at or below 4 per cent. for 38 consecutive months. We have achieved that by setting an explicit inflation target and by putting in place some of the most open and transparent arrangements for monetary policy in the world. Thanks to the brave decision that was taken last year by my right honourable friend the Chancellor to increase interest rates when the economy was coming under pressure, we believe that inflation is now close to its peak. The cost pressures from higher commodity prices and the depreciation of sterling are now easing. Cost pressures in the labour market are also noticeably subdued. We expect underlying inflation to fall steadily.I believe that with continued care we have broken through the psychological barrier that we have had in this country for far too long of accepting inflation as something with which we have to live. One of the great strengths of the German economy is that neither the politicians nor the people there have accepted that philosophy. I do not want to go too far in this aside, but I also think that living with high levels of inflation has meant that when we do come to a prolonged period of low inflation people do not feel as well off as they thought they used to feel because they thought that getting more money in their pockets, for their houses or in any other way was an indication of increasing wealth when, against a background of rising inflation, it certainly was not.
I turn now to government borrowing. Sound public finances are vitally important. The less the Government borrow, the easier it is to keep down interest rates. The noble Lord, Lord Desai, argued that point in his article of a fortnight ago and again in his speech today. That is good news for business, good news for investment, good news for home owners and good news for jobs. Sound public finances are essential to sustain economic growth. No country can expect to run a large budget deficit for long without getting into trouble. Under the last Labour Government, the PSBR reached nearly 10 per cent. of national income--and we all remember what happened. Inflation and interest rates soared. The economy collapsed, and eventually we had to call in the IMF. In doing so, we encountered the only time in the post-war period of the UK economy when real spending has been cut. It was cut by 7 per cent. and, in the words of the noble Lord, Lord Desai, it was a "traumatic experience" and it is an experience to which this Government have no intention of ever subjecting this country again.
We have to take tough decisions. Governments often have to do that. We often have to risk short-term unpopularity in order to get our public finances back on a sound footing. Borrowing always increases in a recession, but once the recession is over, as is ours, the Government need to make sure that borrowing comes down again. This Budget keeps government borrowing on a clear downward path by keeping tight control of public spending. The PSBR, which stood at £45 billion two years ago, will be reduced to £29 billion this year and will continue to fall in the years to come. Indeed, with government borrowing here falling faster than that of any other major European country, we are on track to achieve
a balanced budget by the end of the decade. We have managed to do it before and I am sure that we shall do it again.The key to lower government borrowing has been tight control over public spending. In his three Budgets my right honourable friend the Chancellor of the Exchequer has succeeded in slashing £53 billion off previous expenditure plans. The new plans allow for real growth in public spending of just one-quarter of 1 per cent. per year. By 1997-98 we will have met our target of getting public spending below 40 per cent. of national income.
We have re-examined and refocused our spending priorities and there is more money for some of the key public sectors about which people care such as schools, hospitals and the police. I believe that people are offered a fundamentally flawed choice when it is suggested that we can either reduce taxation or spend more on health and education. I believe that with a healthy economy one can successfully do both.
We intend to spend more on education and to build on the considerable improvements that we have seen in the past 16 years in education and in the outputs of education. Today about one in three youngsters goes on to higher education; 16 years ago that figure was one in eight. The number of youngsters staying on at school today after the leaving age of 16 is markedly larger than 16 years ago. I am certain that we all applaud those improvements. Of course, we want to do better and, with the extra spending, I am sure that we shall do better.
The noble Lord, Lord Rea, rightly pointed to the importance of the health service. We have put more money into the health service in every year of our term of office and will do so again this year. Perhaps unfortunately for governments, the cleverness of doctors and the advances in medical technology create their own pressures for higher spending. Today many operations, procedures and medicines are available which were not available 16 years ago but--dare I say this wearing my Treasury hat--they all seem to cost a great deal more money. That is something that we must face up to. As I have said, we have put a lot more money into the health service and many new hospitals have been built and are now open throughout the country. One or two of them even bear my name on either the foundation stone or plaque.
We have put more money into those two important areas of government spending. We have done so to help young people in school and to help people when they require the National Health Service--
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