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Lord Eatwell: My Lords, if the noble Lord will forgive my intervention, perhaps I may ask a question on that. But, first, I thank the noble Lord for his kind words at the beginning of the speech.

I wonder whether the noble Lord has slightly misread his brief on the £850 million increase. It is due to an increase in profits taxation, not to a projected increase in profits. It is entirely due to the fact that profits will now be taxed on a current year basis instead of a past year. That raises profits taxation. It is not a projected increase in profits.

Lord Mackay of Ardbrecknish: My Lords, I believe that I said "mainly". I was about to say that profits from the self-employed are to be taxed, as I would expect the

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noble Lord to say, quite correctly, on a current year basis, just as employees are now, rather than on a previous year basis. Therefore tax has to be paid sooner. Since profits are assumed to be rising, there will be a cash flow yield to the Exchequer. I believe that we are nearly agreed on that.

The noble Lord, Lord Eatwell, the noble Lord, Lord Ezra, and the noble Lord, Lord Desai, raised the point about the PSBR and the recent reports suggesting that the income from taxes is rather under the projections and therefore that the PSBR may be larger than projected. I wish to make a number of points. First, the PSBR is still on a downward trend. We see in the various figures that the Government's spending--it is an important aspect of the calculation which ends one up at the PSBR--is very close to budget forecast. We believe that continuing tight controls of that spending will ensure that the PSBR continues to come down.

As I think your Lordships know, we are considering why that undershoot has occurred. We shall consider with interest the conclusions of the group which is doing this work for us. My right honourable friends in the Treasury will then have to decide whether they need to take any steps to deal with any points that arise from the investigation into the reasons for the shortfall.

I have mentioned this point to the House on a previous occasion. On that occasion I was helped by the noble Lord, Lord Peston, who gave me a clear and elegant economic description of what I was fumblingly trying to explain in more mathematical terms, and that is that the PSBR is the difference between two large figures, so, inevitably, the error in the PSBR is quite a large error every year, and has always been so for every government. Noble Lords should bear that in mind before they start to think that the end of the world has come as regards the PSBR.

Because it is the difference between two large figures, and one of those is Government expenditure--I listened, as I always do, to the noble Lord, Lord Desai, when he discussed this--if one wants the PSBR to be zero in a short period of time, and to balance budget, one has to do one of two things. Either one must increase taxes or one must cut expenditure drastically. Over the past three years we have attempted, and succeeded, in cutting government expenditure by a total of £53 billion.

From time to time in your Lordships' House I make suggestions for savings in the large Department of Social Security budget, and my noble friends make suggestions for savings in their budgets. I notice that we are not often met with support from the party opposite, but I do not complain about that, except to say that, unlike the noble Lord, Lord Desai, the party opposite does not seem to be prepared to accept that if we go down its road of not containing public expenditure, we would have to go down the noble Lord's road of increasing taxation. Indeed, three or four years ago when we were faced with a difficult situation we had to increase taxation, which is against our natural feelings. However, we felt we had to do that in the interests of the economy. I have no doubt that the noble Lord, Lord Desai, approved of that. He might seek to give his Front Bench--both here and in the other place--a

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lecture about the merits of that government policy because they do not seem totally to subscribe to it as they spend much of their time attacking us for having taken the difficult step of increasing taxation rather than see the PSBR expand further.

The noble Lord, Lord Eatwell, asked me about the national debt. I suppose we move onto that subject quite naturally from PSBR. The net public sector debt rose to around 44 per cent. of GDP in 1994-95 from 27 per cent. in 1991-92. Of course there was a stage when we managed to repay part of that money in the late 1980s. However, it remains well below the level of 49 per cent. that we inherited in 1979. It is expected to fall back again in the years ahead, as the noble Lord, Lord Eatwell, will see if he looks at page 70 of the Red Book.

The noble Lord, Lord Ezra, was concerned about rapid monetary growth although he was advised by the noble Lord, Lord Desai, that he should not worry too much about that. I think that the noble Lord, Lord Desai, has a point there. I would say to the noble Lord, Lord Ezra, that I agree that M0 and M4 are growing somewhat above their medium-term monitoring ranges, but there are other indicators that point to a much more subdued inflationary position. The Chancellor and the Governor take into account all the evidence before they decide the level of interest rates. I hope to return to the matter of inflation later. We expect it to remain low. We are enjoying the lowest run of inflation for almost 50 years. If the noble Lord, Lord Ezra, is being advised by the noble Lord, Lord Desai, and myself not to worry too much about M0 and M4, perhaps that comforts him for the weekend at least.

The noble Lord, Lord Ezra, mentioned the private finance initiative and the Government's own public sector capital spending. The PFI is not a device to reduce public investment; it is about harnessing private sector skills and making the Government the purchaser rather than the provider of public services. We believe that it will lead to better value for money. But, of course, by going down the PFI route one is also making substantial future commitments to buy services from the private sector. One has to take that into account when looking at the Red Book line on the public sector public expenditure position. We believe that the PFI is important, but I do not wish to delay your Lordships by giving many examples of PFI and how it is succeeding. For example, as regards my department, we hope shortly to announce a programme of co-operation between the Benefits Agency and Post Office Counters Limited to shift from the rather antiquated method of paying benefits by books and giro cheques to one using plastic cards which we believe will be much better for all concerned. That is but one example of the benefits of the measure.

Like the noble Lord, Lord Ezra, and my noble friend Lord Boyd-Carpenter I wish to discuss the landfill tax. Green taxes--as the noble Lord, Lord Desai, pointed out when he said that he approved of them--are discussed in this country. We are aware of the need to look after our environment. That is particularly relevant in a small country such as ours. We are surrounded by fish, as the noble Lord, Lord Bruce of Donington, reminded us.

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We are a small country with a large population. In the main we are a densely populated country. It is important therefore that we look after our environment. As I said in my introduction, the landfill tax has been widely welcomed. It seeks to help us conserve our environment.

The noble Lord, Lord Ezra, was worried about local authorities. They will benefit from the reductions in national insurance contributions. However, one cannot simply exclude local authorities from the tax because they use landfill sites a lot. They are principal waste tippers thanks to all of us and our consumption and our desire to have our dustbins emptied weekly. Therefore I do not think one can exclude local authorities from the landfill tax as that would send the wrong signal. But local authorities, like business--even those which use landfill sites heavily and dispose of much waste--must be sent a message that they must consider whether landfill is the best way to deal with their waste, or whether they can do more recycling and consider other ways (especially with regard to business) to reduce waste in the productive methods they use. This is a sensible tax and I hope it is one which will cause local authorities and business to sit back and think about the amount of waste they are disposing, how they can reduce it and whether they can recycle it.

The noble Lord, Lord Desai, asked me about the family and income tax. That reminded me of the debate which my noble fried Lord Skidelsky introduced a few weeks ago. The figures all concern averages, but the most common type of family with children and two earners, one full-time and one part-time, with joint earnings of around £25,000 a year, will be £280 a year better off as a result of the tax proposals in the Budget, whereas taxpayers as a whole will, on average, be £190 a year better off. Looked at from that point of view, the results of the Budget would appear to be skewed in what I think the noble Lord would consider to be the right direction in favour of families.

The noble Lord also asked me about converting income tax into an expenditure tax. I understand that this is a favourite of some economists and theorists but these proposals begin to stumble on various practicalities, for example as regards what one does with savings and investment. Does one make those tax deductible? There are also questions as regards the tax rate one would have to charge. I believe I was reprimanded by the noble Lord, Lord Eatwell, for being a VAT junkie. I suspect that if one were to shift to expenditure taxes, my dependence on VAT would increase considerably. These matters have to be balanced. There is a good argument for taxes on spending and that is why we in this country have gone over to VAT. However, as I said, the matters ought to be balanced.

I turn to one or two smaller, but still important issues raised by the noble Lords, Lord Ezra, Lord Bruce and Lord Eatwell. They raised the matter of the court case reported today under the headline: "Vat man faces multi-billion pay-back". In the judgment handed down on 25th April the Appeal Court reversed, by a majority, earlier decisions by both the VAT tribunal and by the High Court. In this particular case the Appeal Court

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concluded that VAT had been incorrectly charged on interest-free credit provided by finance houses. Customs are appealing the decision to the House of Lords.

The amount of money at stake, as stated in the press reports, has been widely exaggerated, and was not provided by Customs and Excise. Businesses whose circumstances are the same as those of the appellant, Primback, in this particular case may wish to make claims for tax overpaid. Such claims, however, will have to be supported by appropriate evidence. Customs will provide guidance on that in due course.

My noble friend Lord Boyd-Carpenter asked about recent reports about school fees plans. The decision on this particular matter is one entirely for the Charity Commission Board under Section 3 of the Charities Act 1993. That Act gives a right of appeal against the commission's decision to the High Court. I understand that an appeal is likely in the case of at least one of the five institutions concerned. In the circumstances I am sure the House will understand that I am not able to discuss the merits of the commission's decision.

I will pass on the remarks of my noble friend Lord Harrowby to my right honourable friends in the Treasury.

Perhaps I may address two final points. The first relates to unemployment, and was raised by the noble Lord, Lord Bruce of Donington. I remind him that he, and we, ought to examine the international comparisons, as well as the position in our own country. The Government are very concerned about unemployment. We are very pleased, and I sometimes wish that Opposition spokesmen would sound as pleased, at the monthly decline in unemployment figures. They are now down by over three-quarters of a million from their high point in the recession that has now passed.

We are still not satisfied. Youth unemployment in particular is bad; although the noble Lord, Lord Bruce, did not mention that. I shall not use the figures that are used internally in the United Kingdom; namely, the claimant count; I shall use the international comparison figures, published by Eurostat. The last figures I have that provide those comparisons put the United Kingdom at 8.6 per cent. as regards unemployment. For Spain, the comparison is 22.6 per cent.; Italy 12.4 per cent.; France 11.6 per cent.; and Germany 9 per cent. In other words, the other big players are not doing nearly as well as we are.

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