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House of Lords

Friday, 23rd July 1999.

The House met at eleven of the clock: The LORD CHANCELLOR on the Woolsack.

Prayers--Read by the Lord Bishop of Hereford.

Business of the House: Debates, 27th July

Lord McIntosh of Haringey: My Lords, on behalf of my noble friend the Leader of the House, I beg to move the Motion standing in her name on the Order Paper.

Moved, That Standing Order 38 (Arrangement of the Order Paper) be dispensed with on Tuesday next to allow the Motions standing in the name of the Lord Mayhew of Twysden and the Lord Gray to be taken before the Committee stage of the Greater London Authority Bill.--(Lord McIntosh of Haringey.)

On Question, Motion agreed to.

Finance Bill

11.7 a.m.

Lord McIntosh of Haringey: My Lords, I beg to move that this Bill be now read a second time.

Traditionally in this House, the passage of the Finance Bill is an opportunity to debate not only the Budget and the Bill, but also the economy generally. I am happy to accept that challenge and I look forward to hearing from the distinguished noble Lords whose names appear on the speakers' list.

In May 1997 the Government inherited an economy in which growth was running at an unsustainable rate, the public finances were in substantial deficit, and the threat of rapidly rising inflation loomed large. On coming to power, we took tough and decisive action to get the economy back on track for sustainable growth. We were determined not to repeat the mistakes of the past.

To do this, we have given the Bank of England independence, we have cut public borrowing, and we have managed to get inflation under control. Because of our tough and decisive action, we are better placed to steer a course of stability, avoiding the boom-bust instability of the past.

Look at what we have achieved: employment is up by more than 400,000 since the election; there are now more people in work than ever before; long-term unemployment is down by more than 50 per cent and youth unemployment is down by more than 60 per cent. Inflation is under control, being at or close to its 2.5 per cent target over the past year. Interest rates peaked at half their early 1990s level and have since been reduced to their lowest level for 22 years. Mortgage rates are at their lowest for 33 years. The

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public finances have been brought under control. Borrowing has been cut by £32 billion in the Government's first two years and it is firmly on track to meet our tough fiscal rules while guaranteeing to deliver an extra £40 billion for health and education over the next three years.

The Finance Bill builds on this platform of stability to deliver higher levels of productivity in the longer term. The Government is introducing a new 10p rate of corporation tax that halves the tax rate for the smallest companies and benefits 270,000 small and growing businesses. This is on top of last year's cuts in corporate tax rates to 30 per cent for the main rate and 20 per cent for the small companies' rate from April this year. To help to bridge our investment gap, we are making first year capital allowances for small and medium enterprises available for another year. We have proposed a research and development tax credit that will further encourage small businesses to invest for the future.

The Government recognise that work is the best way out of poverty and that for far too many people financial uncertainty has acted as a real barrier to work for far too long. In our previous two Budgets, we developed new measures to help people to move from welfare to work. The Government are now delivering on their Welfare-to-Work programme. More than 280,000 people have joined the New Deal for young people and 105,000 of them have moved into jobs. More than 128,000 people are already benefiting from the New Deal for the long-term unemployed.

Now we are taking that fundamental reform a step further by ensuring that work pays. This Finance Bill, taken with the minimum wage and the working families' tax credit, aims to encourage independence by allowing working families to keep more of their income rather than paying it out in taxes. As a result of this Bill, we will have the lowest starting rate of income tax the country has seen for 35 years. The new 10p rate on the first £1,500 of income halves the tax rate for almost 2 million people. Our reforms to national insurance will lift almost 1 million people out of paying contributions at all without taking away their entitlement to contributory benefits.

This builds on the working families' tax credit, which will provide a minimum income guarantee for families with a full-time earner of £200 a week; that is, more than £10,000 a year. No such family with children will pay net income tax until its earnings exceed £12,000 a year. Finally, the national minimum wage will improve the earnings of almost 2 million people.

These reforms will make working families better off. From next April, every basic rate and top rate taxpayer will benefit from our 1p reduction in the basic rate of income tax. The average household will be £380 a year better off, and the tax burden on the average family will fall to below 20 per cent for the first time in more than 20 years.

The Bill is part of a package of measures which will give a better deal to families with children. This year has seen the largest ever increase in child benefit. Next year, it will be increased by a further 3 per cent in real terms, to be worth at least 15 per cent for the first child.

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The new children's tax credit provides most help to those who need it most when they need it most--families when they are bringing up children. It will put up to an extra £416 a year into the pay packets of families with children. That is on top of increases to the child premiums in working families' tax credit and income support. The new Sure Start maternity grant will lead to a doubling of payments to £200. By the end of this Parliament, we shall be spending £6 billion more on children than we were at the beginning. In total, 800,000 children will be taken out of poverty by the measures that we are taking.

We are also offering fairness to pensioners. The winter allowance will increase five-fold, to £100 for every pensioner household in the country. Furthermore, this April we are introducing the minimum income guarantee which, from next year, will be uprated in line with earnings. Our cuts in tax rates, taken together with the mimimum tax guarantee, will take an extra 200,000 pensioners out of income tax altogether.

The 1999 Budget contains the biggest ever package of environmental tax reforms and will make a substantial contribution to our aim of protecting the environment, now and for future generations. It includes measures to help to tackle climate change through reducing emissions of greenhouse gases; to improve local air quality; and to limit the environmental impact of land use and water pollution.

The climate change levy is an important part of the Government's strategy for tackling global climate change. It will make a significant contribution to meeting the Government's legally binding target for reducing greenhouse gas emissions set under the Kyoto protocol and our domestic goal of a 20 per cent cut in carbon dioxide emissions by 2010. We are ensuring no increase in the overall tax burden on business by recycling the revenue via an offsetting cut in employer national insurance contributions, special treatment for energy intensive industries, and direct support for energy efficiency and renewables.

The Budget also includes measures to help to tackle environmental problems associated with transport, and measures to support integrated transport. Major reform in the company car tax regime aims to benefit the environment by removing the perverse incentive to drive extra miles, and by giving drivers an incentive to choose cars that are more fuel efficient.

Vehicle excise duty was cut on 1st June for owners of vehicles with engines up to 1,100cc and, from autumn 2000, we will introduce graduated vehicle excise duty for new cars based primarily on emission rates of carbon dioxide. That is good news for drivers of smaller cars and for the environment.

The duty on road fuels has been increased by at least 6 per cent in real terms, in line with the Government's commitment. That is playing a key role in reducing carbon dioxide emissions and in meeting our legally binding Kyoto commitment.

The Budget package also includes measures to limit the impact of land use. Landfill tax has a long-term role in reducing waste going to landfill. Tax increases send

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a message to waste producers. The staged increases announced allow waste producers and local authorities to consider alternative waste disposal and minimisation methods.

The Bill also introduces seven new tax measures to encourage the take-up of works buses and provisions for bicycles for commuting and business use.

It would not be right for me to conclude this statement without saying a word about Europe. Government policy is as set out by the Chancellor in October 1997. It remains unchanged. The Government are in favour in principle of UK entry to a successful single currency if the economic benefits are clear and unambiguous. The Prime Minister restated that policy when he launched the outline national changeover plan earlier this year. He said:

    "our intention is clear. Britain should join a successful single currency, provided the economic conditions are met.

    It is conditional. It is real. Both intention and conditions are genuine".

So we need to prepare during this Parliament to have a genuine option to join early in the next Parliament, should that be in the national economic interest, and if that is what Parliament and the people decide. Through Clause 131 of the Bill we seek to ensure proper propriety for future spending on euro preparations in the revenue departments in advance of a referendum.

There are three reasons for the spend. First, computer systems in the revenue departments are among the largest in Europe. Clearly, we need to make advance preparations if the United Kingdom is to have a real option to join. If the UK were to join, revenue departments would come under pressure from UK business to allow taxes to be assessed, reported and paid in euros--as happened in the first-wave countries. By supporting a well-targeted spend now, we can save substantial sums if the UK were to join. That is no more than effective public sector planning to deliver best value for money.

If we fail to prepare, the UK will not have an option to join. It would be a nonsense for us to say at a referendum that the Government had concluded that it was in the best interests of this country, that Parliament had agreed, but that, by the way, it was not possible for us to go in because we had not made the necessary preparations. That is the justification for Clause 131 of the Bill.

This Finance Bill needs to be judged against the background of the wider changes that the Government have made since they came into office. Already, our reforms have begun to deliver a stronger economic future for the country, the right incentives for people to work and for people to invest, and a better deal for families and pensioners. There is still much to do, and we shall continue our programme of reforms through this and future Finance Bills. I commend the Bill to the House.

Moved, That the Bill be now read a second time.--(Lord McIntosh of Haringey.)

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11.18 a.m.

Lord Saatchi: My Lords, as this House can neither amend nor vary the Bill, I intend to restrict my comments to what the Bill reveals about the Government's general economic strategy.

The Bill is a metaphor for the new Labour Government--hope deferred. Many people I know felt a frisson of anticipation on 1st May 1997. They thought that perhaps the new, dynamic, young Prime Minister, full of hopes and dreams and at the height of his powers, actually could change things for the better. But now I find the same people beginning to feel a sense of disillusionment, even perhaps of sadness, at their misplaced confidence in the new Government.

It is perhaps not unfair to place the burden of blame for that sense of loss firmly on the shoulders of this Bill. Let us consider what was said about these measures at the time of the Budget Statement. The Times said on 11th March:

    "When people discover they have been deceived, they are apt to become angry".

The Evening Standard on 23rd March spoke of "its arrogance and deceit". On 24th March, the Daily Mail said that it was, "bending the truth" and was,

    "unlikely to impress voters who were persuaded to believe that New Labour was the champion of openness and honesty".

By 12th July, Labour's favourite newspaper, the Daily Mail had concluded,

    "The wheels are coming off this 25-month old Government".

"O, what a fall was there," and so soon. How did it happen? It is worth remembering exactly how much in politics follows economics. By 1997 New Labour had persuaded the British public that the economy was safe in its hands and that income tax rates would not be increased. Time and again the Labour leadership made a promise not to raise tax.

    "Our proposals do not involve raising taxes. If we have any such proposals, we will make them clear before the next election".

That was Mr Blair on a phone-in programme on 2nd August 1996. On 16th September that year, he told his audience at the Guildhall,

    "We want people to pay lower taxes".

On 21st September, Mr Blair told the Financial Times,

    "We have no plans to increase tax at all".

What could be clearer than those three statements? It was because they were so clear that many people voted Labour for the first time in 1997, as a party which they thought had learned from its past mistakes and undergone a sincere conversion.

But with this Bill the mechanism that won Labour that election began to break down. The wires were pulled out because, as I will explain, this Bill both raises taxes and--not unconnected--it further complicates the system by which taxes are calculated. That is why this Bill is a turning point for the Government.

The truth is contained in an analysis by the House of Commons Library. It shows that while it is true that there has been a £30 billion cut in taxes over the life of this Parliament, the Government have also quietly raised taxes by £75 billion. So taxes have gone up overall by

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more than £40 billion. That is £1,500 for every taxpayer in Britain. The official figures show that the burden of tax in this country will rise from 35.4 per cent to 37.6 per cent during the lifetime of this Parliament.

With this Bill the Government have taken full advantage of the present complicated tax structure. In 1997-98 the unrelieved taxable potential of this structure amounted to £434 billion, 53 per cent of GDP, but an astonishing £134 billion is given back through a complex web of allowances, exemptions, reliefs, deductions, disregards and indexations which brings the net tax take to £300 billion.

The charm of such a large gross tax system from the Government's point of view is the scope it allows for hidden tax increases, which the shadow Chancellor Francis Maude famously dubbed "stealth taxes". For example, in the Treasury document on this budget, changes to income tax rates (the 10p starting rate and the new 22p band) are dealt with in two lines, whereas another 62 lines are required to describe changes to allowances, reliefs and exemptions. Oh what a tangled web!

Thus, the Chancellor of the Exchequer has been able to increase tax without ever announcing a tax increase; and given Labour the means to implement what it no doubt thought was the brilliant strategy of cutting visible taxes on voters while raising invisible taxes elsewhere.

It was precisely that practice in this Bill which led the Treasury Select Committee to ask the Government to display greater transparency in their tax policies; for more disclosure so that the Government could not hide from the political consequences of their tax actions.

Four examples from the Bill illustrate the point that the Select Committee was getting at. First, the Government abolished the married couples' allowance--an immediate tax rise of £1.6 billion next year and £2.1 billion the year after. In return, families were offered a children's tax credit. In his Budget speech the Chancellor described the measure in the following words:

    "This children's tax credit will give more--not less--help to families at the time when they need it most, when they have their children and when their children are growing up".

Yet if one strips away the rhetoric, a much more meagre truth emerges. The children's tax credit will not even begin to be paid until the last year of this Parliament, and even then it only repays £1.4 billion of the £2.1 billion tax increase from the abolition of the married couples' allowance in the first place.

Secondly, it was left to many people to find out for themselves that the loudly trumpeted 10 pence starting rate of income tax did not apply to their savings. Apart from discriminating against savers in general, this obviously removed the entire benefits of the lower starting rate from pensioners who rely on earnings from savings to supplement their pension.

Thirdly, when he introduced the 1999 Budget, the Chancellor of the Exchequer said that it offered "tax cuts for business". But while it is true that the cut in the headline corporation tax rates gives business a tax saving worth £1.9 billion up to the end of this Parliament, other corporation tax changes, including the

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new quarterly payment system, give the Government an extra £5.2 billion over the same period, a net cost to the taxpayer of £3.3 billion.

Some people think--perish the thought in your Lordships' House--that the Government were actually taking advantage of ignorance of the tax system to achieve their ends. The Director General of the CBI described:

    "the corporation tax changes which were very carefully [portrayed] as a reduction in tax rates but were actually a tax increase, exploiting the fact that the number of people in the world who understand dividend tax credits is remarkably few, which allows the Chancellor to increase taxes whilst appearing to cut them".

One final example: the climate change levy mooted in this Bill was supposed to be a revenue neutral swap between a new energy tax and a new national insurance credit. The Minister described it just now as an "offsetting cut". The Prime Minister was crystal clear on that point on 9th June last year when he said:

    "any money raised by the climate change levy is given back to industry through cuts in national insurance costs".

But the emerging reality is that the Government are only offering the national insurance credit for one year; that the biggest beneficiary of the NIC cut is the Government themselves via the public services; and that according to one estimate 12 major industries will pay £742 million more in tax and only save £64 million in national insurance contributions.

No wonder the trade and industry Select Committee concluded that this energy tax could do,

    "considerable damage to sectors of the British economy".

This Bill has woven such a tangled web that the Government have even got caught up in it themselves. As some of your Lordships may be aware, on 18th May I drew the Minister's attention to the merry-go-round between taxes and benefits, in which the Government collect £30 billion in taxes from the same people to whom they pay £30 billion in benefits. I asked him whether he thought it bizarre that the Government first tax people on low incomes, then means-test their income to satisfy themselves that they are in need; and then offer them benefits to restore their income back to where it was before they paid the tax. His answer was that it,

    "would be quite impossible to have a streamlined system which brought the two together".

But two weeks later on 27th May 1999, in a speech to the Institute of Fiscal Studies, the Chancellor described his "new mission" for the Treasury which was, lo and behold, a,

    "step by step integration of tax and in-work benefits".

I wonder whether the noble Lord will tell us whether it is he whom the Chancellor has tasked with this "mission impossible".

The Finance Bill marks the beginning of the end of this Labour Government. The reaction to the Bill is the reason Labour's core supporters preferred not to go to the polls to support the Government in either the local or the European elections. They are all good students of the Bible and they know from their Proverbs 13:12 that,

    "hope deferred maketh the heart sick".

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11.29 a.m.

Lord Burns: My Lords, last year the equivalent debate on the Finance Bill took place on the same day as my introduction to your Lordships' House. I noticed that the debate was in very general terms, and on that basis I am pleased to take part in this debate today. However, this is the first Budget for about 20 years in which I have not been heavily involved, and I am conscious of the danger of treading too hard on the toes of some of my former colleagues.

Typically, in the preparation of Budgets there are three big issues: first, the assessment of the economy; secondly, the overall budget judgment; and, thirdly, the whole question of the individual detailed tax measures. I should like to say a word about each. As to the economic background, I agree with the Minister that it has been a good year for the British economy, despite some severe disruption in the world economy. Not only did we have capital market dislocation in south-east Asia and Russia for much of the year, but Japan has continued to be in considerable trouble and has faced the unusual problem of how to create a little more inflation to get economic activity moving.

On the other hand, the United States has been going through what many regard as a miracle. We have witnessed an active debate about how much longer this can continue. Most economists believe that it cannot. Perhaps economists are not at their strongest when it comes to issues of timing, but that does not mean that reality will not eventually catch up. That in itself may well pose problems in future. We have also seen some hesitant signs of growth in Europe. Therefore, in general it has been a year of quite fragile confidence.

Looking back at some of the worries, this time last year many of us would have been quite reassured to believe that we would get through this year as successfully as we have. I agree that as far as concerns the UK everything has held together reasonably well. Output has been relatively flat for much of the year, but unemployment has come down and inflation has been close to target. We now see clear signs of a resumption of growth at a quicker pace.

I have argued previously that the Monetary Policy Committee has got off to a very good start, and some of the credit for this outcome should go to it. Inflation is close to target. I have also argued that it has been helped considerably by weak world prices and the strong exchange rate. We now see the economy running quite close to trend, and the present cycle promises to be a much more benign experience than some of its predecessors in the 1970s and 1980s. I believe that those involved in that deserve some credit.

We must also be aware that plenty of challenges remain. I have already mentioned the potential problems of the United States. There remain difficulties elsewhere in the world. When some of the effects of the strong exchange rate and weak commodity prices begin to unwind the job of controlling inflation will, I suspect, be a good deal tougher than it has been over the past year or two. On that front, so far so good.

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The Budget judgment is the second and most important part of the whole question of financial stability, and the fiscal framework has been set out in quite clear terms. The Government now have two rules to help deliver the objective of sustainable public finances, as the Minister has pointed out. Although it is a tough regime, it provides a good deal of flexibility. There is considerable dispute in the economics profession about how well based these rules are. Some ask why the Government should balance the Budget on current account; others ask why the debt ceiling should be set at 40 per cent rather than some other figures. Over the past year many have argued that if public finances had been a bit tougher it might have eased the burden on exporters by taking some of the pressure off interest rates.

Based on my experience of fiscal policy, I concluded that it was more important to do the simple things well rather than have complicated ambitions that could often go wrong. Sophisticated rules in this areas can often lead one into serious difficulty. The challenge is to do what has been announced, and to do it well. So far the Government have delivered on public finances. Some may argue that a certain amount of good luck has been involved with buoyant taxation, but one should also accept that there has been a degree of good management. The public finance figures are impressive and the projections for the future are equally welcome. We have a sound position in terms of both the current Budget and bringing down the debt ratio.

The key Budget judgment--how far the overall balance of taxes and spending should differ--was an important one. The conclusion was that there was very little scope for change. That was a conclusion with which I agree. I believe that it was right for the Budget to be much more about re-balancing existing taxes and spending rather than making any big change to the fiscal picture. But that is not the end of the story. Public finances must be kept under close scrutiny. We have been through a period when taxation has been surprisingly buoyant. There was a period in the mid-1990s when taxation was surprisingly weak. It is important not to assume that that good fortune will go on indefinitely.

Therefore, on the macro side of the Budget we are in pretty good shape. We have a clear set of principles which is being implemented. I am not as convinced when it comes to the details of tax and spending, where it is more difficult to see the principles or the coherence at work. We would all sign up to the general view that tax measures should be designed to raise revenue in a way that does least damage to the economy. We want taxes to contribute where possible to the objectives of growth and employment.

There is a natural tendency in budget-making, from which we all suffer from time to time, to believe that the way to do it is to make a list of all the matters of which we approve, such as employment, investment, small business and new technology, and decide what tax changes can be made to help them. We then make a list of those items of which we disapprove, such as alcohol, tobacco, pollution and expensive property, and think of the tax changes that can be made to make people less

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likely to indulge in those activities. What happens is that all kinds of distortions appear. One finds that similar activities end up being taxed at different rates, or that people in similar situations have to pay different amounts of tax. Sometimes rates in this country are very different from those in another and there are distortions through imports and exports; sometimes there is avoidance; and sometimes it ends up as no more than a bonus for the accountants and lawyers rather than the Exchequer. Once those distortions appear it is very natural to meet them with further distortions. One then finds that temporary tax advantages have a nasty habit of becoming permanent, and someone else has the difficult job of trying to remove them. My instinct is to avoid going too far down that route and to favour general tax-raising measures rather than too many interventions.

We all agree that the measures in the Budget to help make work pay, to improve the chances of getting more people into the labour market, to do something about poverty in families with children and to use the tax system to help protect the environment are all important. There are some useful measures. But it was with some dismay that when I looked at the opening table in the Red Book I saw 61 measures listed, 37 of which had full year effects of £100 million or less. This is not to say that size is a decisive factor in this area, but it is a continuing sign of the tendency of governments of all persuasions to pack Budget Statements with eye-catching measures which contribute to it being a memorable day. Often they are matters that we regret later.

I said at the beginning that this was the first Budget for a long time in which I had not been heavily involved. It was also the first Budget for a long time that I watched on television without knowing what was in it. The striking feature was how difficult it was to understand what was going on in the Budget simply by listening to it. It is only when one has access to the publications, in particular what used to be known as the Red Book, that one has any idea of what is happening. Often tax changes are announced in such a way that it is difficult to determine the bases against which they are measured. One sees figures rolled up into three-year totals, even though it is an annual process. Some significant measures are mentioned only in passing. Moves to change classifications are not at all clear as one listens to it.

Given the emphasis of the Government on transparency--with which I wholly agree--for an insider who has become an outsider it is a lesson to discover the extent to which it is difficult to understand the Budget. A good deal more can be gained by greater transparency in the presentation, rather than seeing it as predominantly a political event. In macro terms the position is very sound; and in micro terms there is a great deal in the Budget with which most of us agree. However, there are dangers in trying to pack too many measures into Budgets of this type. The end result is often less transparency rather than more.

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11.40 a.m.

Lord Boardman: My Lords, as the Finance Bill cannot be rejected or amended in this House, I shall confine myself to a few of the trends which arise from it. My noble friend Lord Saatchi highlighted one or two of the tangled webs woven in the Budget which, in our view, are designed to confuse the public. Be that as it may, I shall deal with only a few of the trends.

The Minister referred to the Monetary Policy Committee, as did the noble Lord, Lord Burns. Speaking in the debate last year, I was critical, but so far I have been proved wrong. The system has worked well. But I still have reservations. The same policy of dividing monetary control from fiscal and political control operates satisfactorily at present in this country. When we see what is happening in Europe, it raises doubts. There, the operations are giving rise to problems which may well increase. I hope that our system continues to work smoothly and well, as at present.

Last night I read through the Budget speech. I was impressed by what I thought was a great achievement: to produce a speech which appeared to show that the Budget carried out all the wishes the Prime Minister had expressed about reducing taxation, and never to increase tax during the Labour administration. There were some 20 references to cuts in taxation but not a single reference, in the whole of the Budget speech, to any increase. I felt that the spin doctors must have been delighted with how consistently that policy was presented. It was only when one analysed what had followed from that presentation that one realised the massive amount of stealth taxes which have been imposed. In his opening speech, my noble friend said that over £7 billion would result from the Labour Budget this year.

One of the methods used in the Budget was to put forward a number of taxes which will not take effect until April of next year. That has the advantage that this year the taxpayer does not have to pay any of those taxes; and next year the proposal will not appear in the Budget because it is in this year's Budget. It is a way of causing a certain amount of confusion. It is not unique, but it is done to extreme in this case. Those tax increases which were to take effect straight away have proved to be somewhat painful. Off the cuff I cite the increase in diesel tax and vehicle excise duty, from the imposition of which lorry drivers in this country are suffering severely.

My noble friend referred to the figure produced by the Library of the House of Commons of £7.1 billion extra tax due this year as a result of the Labour Budget. I find this use of "billions" in taxation somewhat confusion and misleading. To the average member of the public, a billion is rather more than a million, but not a thousand times more. I prefer to talk about £7,100 million of extra taxation. Then one realises that is quite a large figure. One knows that it is rather more than a million, even if one does not realise that it is a thousand times more.

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My noble friend referred to the married couple's tax allowance. Although we mind the tax implications of the change, the recognition of marriage as no longer of any significance was unfortunate. The abolition of the 20p rate was completely overlooked in order to play up the 10p rate. As the Minister will know, many suffer from that change.

In turning to the business world, I declare an interest. I was at one time president of the Association of British Chambers of Commerce. It is said that the cost of this year's Budget to business over the next three years is £3,200 million (£3.2 billion). As a one time Chief Secretary to the Treasury, I know that one has to look not only at how the money is raised, but at how it is spent. Reductions in class sizes have been stressed as one advantage flowing from the Budget. As we know from debates in another place, it does not seem to be an entirely unanimous view that class sizes have benefited in that way: the reverse would seem to be the case. As regards health, there is reference to waiting lists although it is clear that waiting lists have been altered so that the figures presented and the true figures somewhat differ.

Transport is said to be one of the main areas to benefit from the raising of all this additional taxation. I do not know whether one goes by what is said by the Prime Minister or the Deputy Prime Minister in judging how well it has done, but it does not seem to be effective.

Earlier this week, one issue--it is relatively small in Budget terms--struck me forcefully. A Parliamentary Question was raised from the other side of the Chamber about ex gratia payments to former British prisoners of war of the Japanese. It was said that Canada was making ex gratia payments to Canadians who had suffered the terrible fate of being prisoners of war of the Japanese. In reply, the noble Lord, Lord Gilbert, estimated that it would cost this country between £100 million and £150 million to adopt the Canadian scale of compensation to prisoners of war of the Japanese. He continued:

    "Unfortunately that is not the policy of this Government, nor of any previous government".--[Official Report, 20/7/99; col. 808.]

I do not seek to defend previous governments, although there was somewhat different pressure on them often to get the Japanese to pay more themselves. This proposal is for the British Government to make compensation. Many of those poor prisoners of the Japanese have died. Many are suffering desperately and are ill. Having raised these vast sums in additional taxation, for the Government then to say that it is not their policy to pay £100 million or £150 million in compensation indicates that our priorities for expending these vast sums are unfortunate.

11.48 a.m.

Lord Desai: My Lords, some years ago I was lucky enough to introduce a debate on the Budget Statement in your Lordships' House on the day after the Budget had been read in another place. I believe that we should revive that practice so that your Lordships' House has an opportunity to debate the generalities of the Budget rather than the details of taxation. We should restore the practice of having a general debate on the day after the

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Budget. If we have that debate several months later, one has to try to remember the various hoo-ha that was caused on the day. It is astonishing that people make such a fuss about the Budget every year and then forget about it two or three days later.

We have had a good debate so far. I welcome the noble Lord, Lord Saatchi, to his Front Bench role. He made a valiant attempt to stir up trouble--or perhaps apathy--trying to make it look as though there were problems. His speech reminded me of the famous Saatchi poster featuring actors pretending to be the unemployed, which was very successful. However, the economy is doing so well that it is not news. That is the great achievement of my right honourable friend the Chancellor.

Two-and-a-half years into a Labour Government we normally expect the economy to be in dire trouble, with sterling under attack and the Chancellor rushing here, there and everywhere clutching his head and trying to introduce extra Budgets. Yet here we are in mid-term and there is not a problem with the economy. The economy is a very dull thing--it does not even make headlines in the Financial Times.

I am the first to admit that more or less since our exit from the exchange rate mechanism the economy has been going well. Having made a fantastic mess, the previous government partly cured a lot of it. The noble Lord, Lord Lamont, had to introduce severe increases in taxation. I praise him for that, because high taxation was necessary at the time to cure the debt to GDP ratio, which was going out of control. Sometimes one has to have taxation. One cannot have something for nothing.

When we came to power the economy was in a sense doing dangerously too well. Two years on the economy is in good shape. We did not have the recession that everybody predicted or the great Budget deficit disaster that the shadow Chancellor was going on about last September. Although some people complain about a £7 billion tax increase, we have to remember that this is a £900 billion economy. A £7 billion tax increase is less than 1 per cent of that--not something that a proper businessman would get out of bed for.

The reason that the economy is doing well is that rules were set down and followed on the proper conduct of fiscal and monetary policy. I am tempted to say that discretion is better than rules, but only if I am the Chancellor, not if anybody else is. Rules are very good for all other Chancellors. We have created a successful economy by abiding by the rules.

The prognosis for the next two or three years is good. I can see no reason why the economy should not do extremely well. We shall emerge with the debt to GDP ratio under control and unemployment not very high. The noble Lord, Lord Saatchi, will no doubt go on complaining about the tax burden, but if a government want to spend 40 per cent of GDP on public expenditure, sooner or later taxation has to be somewhere near that level or the country will be ruined.

Taxation is not a great burden. It is a way of redistributing the burden of meeting expenditure. That is why aggregates are always wrong. It is no good complaining that the tax burden has gone up from X per cent to X plus 2 per cent. We have to look at where the

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burden falls. That is where the analysis of the married couple's allowance is at fault. My right honourable friend the Chancellor is distributing money from all married couples--some of whom may be childless or whose children may have grown up--to couples who are married with small children. He is redistributing the money within the class of married couples. That is desirable distribution. One should not throw money away irresponsibly. The Government are rightly directing their attention to the need for children to be properly provided for. Not all the money goes back, because not all married couples have children. It is right to direct money towards couples with children and away from those who do not have children. I have no problem with that.

I have two or three very important considerations. I must disagree with the noble Lord, Lord Burns, about the prospect of inflation. I am much more worried about deflation and having to deal with prices falling all the time. Over the past 50 years economists have forgotten how to manage a deflationary economy. We have lived so long with inflation that it has coloured all our thinking about indexing and real interest rates. It will be difficult to construct policies to deal with deflation. For example, we shall not be able to carry on with a target of 2.5 per cent inflation, which looked rather tough when the Chancellor set it. We shall have to start worrying about how the Bank of England and the Monetary Policy Committee will deal with a world in which inflation is practically zero, if not negative. That will give cash a different importance from the situation in an inflationary economy.

The noble Lord, Lord Burns, is an interesting case of not quite a gamekeeper turned poacher, but a man who used to weave the tangled web or the spider who has become a fly. He is now caught in a web that other people weave and he cannot find his way around it. I welcome him to the club of the ignorant, to which I have belonged for a long time. I agree with his remarks about the robustness of the US economy. I hope that the correction in the US economy comes sooner rather than later, because if it comes during election time, the protectionist pressures in the US are likely to be inflamed. There is a genuine danger of the United States receding from its commitment to free trade and the World Trade Organisation and indulging in all sorts of silly games about trade and protectionism.

Lastly, I should mention the euro, because no doubt the subject will crop up frequently. After thinking about the issue for a long time I have come to the conclusion that there is no strong argument on either side. It is not a matter of life and death; it is a currency. As long as it keeps inflation low and ensures good purchasing power within its area and the market treats it as reasonably stable against other currencies it will be all right. Currencies are very useful, but they are instrumental and not of great importance. The Government are right to see how the euro does and decide whether the British economy will gain from joining it and if so at what time. The current timetable is perfectly all right. I welcome the one dollar euro. With a one dollar euro and the

23 Jul 1999 : Column 1217

pound remaining stable against the dollar, we may yet get a world of stable exchange rates. That would be of immense benefit to future Chancellors.

11.59 a.m.

Lord Lucas: My Lords, I shall leave discussion of the economy and the Budget to the great guns of the Front Benches, and to the occasional smart bomb from above. I wish to concentrate on one aspect of taxation; namely, how it can be used to encourage finance for new ventures and young companies.

A great deal of finance is provided by institutions. Over the past few years we have seen how those institutions have become steadily more risk averse, due largely to the legislation and regulation that we have imposed on them, but also to concentration and competition within the industry which have made it expensive for institutions to deviate from one another in performance terms.

I have been hankering for the opportunity to tackle this through the taxation system. For example, it is clear that concentrating the tax reliefs that the institutions receive on behalf of the rest of us on investments which have been held for, say, more than 10 years would produce extremely desirable results in terms of how institutions manage their investments, their attitude to corporate governance and the quality of people and expertise they employ. However, I have not been able even to get close to a practical way of imposing that kind of taxation system. Until someone else better and brighter than I produces a scheme, I shall leave it be.

I shall concentrate instead on the personal aspect; that is, the contribution that personal investment makes to financing young companies with venture capital. That is especially important in the early stages. Personal investment offers elements that institutional investors cannot. Often such investments are made by people who themselves have expertise in the area, and who may well have the time to help the young companies. Generally they are people who are making decisions for their own assets, which means that they can be quick and decisive, based on their personal judgment of the people involved, rather than needing to go through long and expensive committee processes. Therefore it is a relatively cheap process for the investor. Furthermore, they are interested in much smaller levels of investment than is the average institution.

However, for the purposes of this debate, personal investors are remarkably tax sensitive. A lot of people can be guided into making the kind of investment that the Government consider desirable by using the tax system. There is a long history of governments trying to use the tax system in this way. I recall being involved in the early stages of the business expansion scheme, under which I ran a fund. There have been many variations since then, and many are currently in use. However, they have all suffered from two major disadvantages: they are founded on essentially legislative and rule-based systems.

People are remarkably adept at finding ways of cheating. From the earliest days, schemes have been produced which fit within the rules but do nothing to

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advance the future of the economy. Such schemes operate by taking 60 per cent now and turning it into 100 per cent in five years' time, using purely tax relief and generating no actual money in the mean time. That is a pretty good rate of return. All risk is removed from the process and it becomes a wonderful investment. Many schemes have been put together successfully and have achieved tax relief on that basis.

The Treasury's not unreasonable response has been to try to draw the rules ever tighter and make them ever more complicated, to the point where those rules impinge on the management of a company, which should be the eventual beneficiary of the tax relief. Eventually, one cannot make perfectly reasonable and sensible business decisions under those schemes without risking the tax relief. One has to go through long, uncertain and incredibly detailed processes even to get the tax relief in the first place. The procedure is especially difficult for a young technology company which may be seeking markets throughout the world. For instance, it may need to license products to get into the American market quickly enough, or it may wish to set up a joint venture in the Far East to secure its position quickly in the world market. Such activity is likely to lead to the loss of tax relief under present schemes, and that is because those schemes need to be designed to stop people cheating.

I have been greatly inspired by the Government's private-public partnership schemes. They have made great advances in the ways in which the Government can work together with private institutions in areas originally thought of as purely governmental activities. I believe that that can combine with the long-running success of the City code on takeovers and mergers, which is not rule-based but is rather a principle-based system. It may be worth testing ways to learn how tax relief might be apportioned to companies looking to grow.

I ask noble Lords to imagine the following test. A decent firm of accountants is given an allocation of £20 million of tax relief by the Treasury; that is, when the accountants present a company to the Revenue saying that the company comes under the allocation, the Revenue will offer tax relief to the investors in that company. However, the accountants will be honour-bound to follow certain principles when choosing which companies to bring forward. The companies will have to be those whose investors are facing a much greater risk than from stock market investment. It has to be a real business, and it has to be new money rather than funds being recirculated to proprietors and others. It has to be something which is clearly of benefit to this country, to UK plc.

A list of real principles could be drawn up. Those principles would not be absolute, but they would need to be followed largely in the round. For example, a company may have been brought to its current development at enormous cost to the proprietor who has overgeared himself and made his own life impossible. A small return of capital would be a sensible way of allowing that proprietor to sleep easy and function better.

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When the firm of accountants had run through its £20 million allocation, it would go back to the Revenue, which would judge what it had done against the criteria set down. If the firm of accountants had not done well, it would not get any more tax allocation and the privilege of unquestioned access to tax relief would be granted to another firm. Those who failed the test would have their access to tax relief restricted or confined to the current rather tedious system. Such a test would not in any way be likely to disadvantage the Inland Revenue. No sensible firm of accountants working in the limelight, on its best behaviour and trying to do something better than is being done at present, would be likely to produce anything worse than we have now. Plenty of cheating is going on, even under the current rules.

There may be scope to try out several different schemes at once, without becoming too exotic. If this kind of scheme worked, it would have enormous benefits. The system would work very simply as regards the Treasury. A better quality of investment would be made. Companies which have the capacity to grow fast and to grow internationally would be much better served by this kind of system. Any company receiving tax relief in this way would naturally have a proper firm of accountants behind it, and in many cases it would be a great benefit. The accountants themselves would be extremely reluctant to abuse the system because none of the major firms could afford to be without access to it.

I give, as an example, the good behaviour of investment banks in the City. Investment banks are naturally badly behaved and are always looking for ways to get round the system. But by and large they behave under the code because they know that on those occasions when the code has been broken, they have been severely punished, and they risk losing their access to the London market. It almost always works and it is a good example of how a principle-based system can work. For businesses, such a scheme would provide simplicity of use, ease of access and, above all, systems that could be adapted to their individual business planning needs without having to jump through hoops designed purely to deal with people who want to cheat.

I hope that the Treasury will accept testing, which has been so well pioneered by, for example, its colleagues in social security. This aspect of the tax system has resisted the attempts of many governments and officials to produce a rule-based system that works. The test might fail, but inevitably such a test could be no worse than the current system.

12.10 p.m.

Lord Simon of Glaisdale: My Lords, my intervention in this debate demands a preface of apology, because it is 40 years since I was concerned with public finance. There are one or two specific matters I should like to raise in the expectation that the Minister will clear my confusion. I have given him notice of what I intend to raise, but that was probably unnecessary because he seemed to have the whole scope of Treasury concerns at the end of his tongue.

The first issue is the public debt--borrowing. Your Lordships will remember that in Disraeli's great critique of Whig government he specified Venetian oligarchy

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and Dutch finance. The Dutch finance may be the raising of a large public debt in order to finance current expenditure.

I raise the question because it was not quite clear how the previous government regarded the public debt. It was said that there was a very large borrowing requirement, as a previous speaker said. That borrowing requirement was very large and was growing, but it was said that it would be brought into balance in the medium term. It was not clear whether that meant that in the medium term--whatever that was--there would be no net borrowing, or whether the retrenchment of debt would balance the borrowing that had occurred during the cycle. What it should mean, in my respectful submission--I hope that the Minister will confirm the point--is that over the trade cycle such borrowing as may be called for when the cycle was in its trough would be repaid when the cycle was at its height, as it is at the moment. Over the whole cycle, therefore, borrowing would not increase.

Over and above that, one must, in my respectful submission, consider what the borrowing is for. A bridge over the Humber was fortuitously and belatedly proposed to coincide happily with a by-election in Hull. Nevertheless, it is something that can be used by subsequent generations. It seems to me that that is something for which borrowing is permissible, because it is subsequent generations who must pay the interest, and indeed repay the capital, on what is borrowed. On the other hand, matters such as health and legal aid are different. Mostly, those two items do not justify putting a burden on subsequent generations. Merely because we are in danger of becoming a nation of litigious hypochondriacs does not justify borrowing. Borrowing may be permissible for education, because that benefits subsequent generations, but it is largely inadmissible for health and legal aid in litigation.

The second matter on which I hope that the Minister may be able to clear my mind is the hypothecation of revenue. As your Lordships know, before the Consolidated Fund was established, any proposal for public expenditure had attached to it an appropriate levy by way of taxation to finance it. The greatest reform in our history of public finance was the establishment of the Consolidated Fund. Every source of income, even capital, coming into the Exchequer would be paid into the Consolidated Fund and paid out according to priorities established by government. That has been accepted now for 200 years, but there are signs that it is being questioned.

I venture to ask the Minister, in so far as hypothecation has been accepted, whether, how far, and on what principles that is justified. I shall give two recent examples. The windfall tax was hypothecated to pay for the return to work. Even more questionably, the recent transport White Paper, A New Deal for Transport, stated:

    "We will therefore introduce legislation to allow local authorities to charge road users so as to reduce congestion".

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Even more questionable was the glee with which that announcement was received by the spin doctors, especially those working for the transport department. It was claimed as a great departmental victory over the Treasury and I fear that that is just what it was.

I ask the Minister how far such hypothecation of revenue will be carried and how can that can be justified. In some circumstances, hypothecation is acceptable. We have all been content with the way national insurance operates. National insurance contributions are hypothecated to pay for benefits. Certain non-taxation income, such as fines, is hypothecated without being taken in to the Consolidated Fund. The question has been asked: on what principle will there be an exception allowing hypothecation of revenue? The Chief Secretary to the Treasury stated that each case will be decided on its merits. That means that each case will be determined by its political advantage. But we can rely on the noble Lord to do rather better than that and to provide us with an explanation.

The penultimate matter I want to raise is the general anti-avoidance rule. The noble Lord, Lord Saatchi, justly mentioned the extreme complication of our fiscal code. That is most noticeable in anti-avoidance provisions. What happens is that some extremely clever accountant works out an extremely recondite way of getting around a tax charge. It must be very complicated. When the Revenue has belatedly caught up with it, it becomes even more complicated because the Revenue has to chase through the extremely complicated evasion and provide a counter measure.

I had had several experiences where the result was incomprehensible and that is not justifiable. After all, in a democratic society legislation is the framing of rules by the citizens which will bind them. If the rules are incomprehensible, the legislative process has failed lamentably.

A general anti-evasion rule was proposed, and an investigation was set up to consider it. In reply to the question on the consultation paper, I suggested the following formula: any transaction, the predominant purpose of which, as a whole or of any step of which, is the avoidance of tax, shall be void for that purpose although otherwise valid. That is by no means original because both America and Australia have general anti-avoidance rules.

A unit was set up in the Inland Revenue to consider that, but in a recent Budget the Chancellor of the Exchequer gave notice that it would be wound up, as it has been, and it is said that he went boldly and gleefully into a great number of specific anti-avoidance measures which are no clearer than were their predecessors. Therefore, I ask the noble Lord why that unit has been wound up. The letter to me stated that for the time being the Inland Revenue would not be proceeding any further with the development of a GAAR or with the consultative process. Why not?

The final issue I want to raise relates to the arts. One of the greatest contributions to general civilisation has been the English country house and its estate. Anyone who a few years ago attended the exhibition at the

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Victoria & Albert Museum of the destruction of the country house--I know that the noble Lord, Lord Strabolgi, did--will realise how much we have been damaged by the introduction of death duties in the 1890s by Harcourt who said, perhaps truly in that respect, "We are all socialists now". We now have inheritance tax. It could be greatly modified to be less damaging to our cultural heritage and I ask the noble Lord, although I did not give him notice, whether he could deal with that point.

I turn lastly to the fiscal treatment of works of art. The Americans benefit greatly from their system. If, when someone buys a Van Gogh picture, he undertakes to donate it to the public on his death, that, say, £5 million could be set against his taxable income. Not only that, but as works of art become more expensive, the annual increment can also be set against the taxable income. But it does not even end there, because the Van Gogh on the wall increases in value according to inflation and that, too, is allowed against taxable income.

When I was concerned with this, I thought that was a fiscal racket. I still think it is a fiscal racket, but I think it is a fiscal racket we ought now to be prepared to face. We need not go so far as the Americans with their annual increment, but there is much to be said for a capital element. With that, I leave the problems to the noble Lord.

12.27 p.m.

Viscount Trenchard: My Lords, I am grateful to the noble Lord, Lord McIntosh, for introducing the debate today and for giving the House the opportunity to discuss the Finance Bill which implements the Government's third Budget. It is a great honour to follow the noble and learned Lord, Lord Simon of Glaisdale; I find myself in full agreement with what he said. He asked several pertinent questions and I am sure that noble Lords on all sides of the House will be looking forward to the Minister's replies.

I should declare my interest as a director of Robert Fleming International. As your Lordships are well aware, the City's prosperity depends on the continued application of sound and stable monetary and fiscal policies. I enjoyed the interesting speech of the noble Lord, Lord Burns, whose enlightened leadership of the Treasury over many years has done so much to ensure this continued financial stability.

As always, it was interesting to hear the speech of the noble Lord, Lord Desai. I regret that I could not find myself in full agreement with the whole of his speech, but I wholeheartedly endorse his suggestion that your Lordships should be permitted to debate a Budget speech immediately after the Budget has taken place rather than several months later.

On the face of it, this year's Budget seemed fairly benign. The Government even attempted to portray it as a tax-cutting Budget by the use of headline-grabbing gimmicks, such as the introduction of a 10p in the pound starting rate for income tax, which sounds wonderful until one reads on and discovers that this rate applies only across a £1,500 band. That is worth around a mere

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£1 a week to the relatively small number of people whose earnings are between £5,000 and £6,000 a year or so.

Of course, as your Lordships are well aware, all governments naturally try to present their Budgets in the most favourable light possible, but this Government take the prize for their ability to disguise the effect of their actions. The Chancellor's three Budgets have so far increased the tax burden by £40.7 billion over the course of this Parliament; and yet the Prime Minister claimed in another place on 10th March, in respect of the current financial year,

    "a net tax cut of £4.5 billion".--[Official Report, Commons, 10/3/99; col. 358.]

It beggars belief that he can say that when the Government's own Budget Statement shows clearly that taxes have risen in the last two years and continue to rise by a further £7.1 billion in the current year.

Perhaps the most harmful and underhand move the Government have made since they came to power was their unexpected decision, on which they did not consult, to abolish advance corporation tax credits in the hands of pension funds and charities. Millions of those who supported the Government at the last general election are now suffering a diminution of income as a result of the imposition of the tax on pension funds which costs them £5 billion a year. This amount does not include the loss of income to charities, which starts to take effect this year and will be progressively introduced over the next four years. What is still not widely understood is that the effect of this change is that tax-exempt institutions are now paying tax on the income they earn from their investments in UK equities.

I must declare another interest, as a trustee of the Royal Air Force Benevolent Fund. We estimate that at current dividend levels the measure will diminish our income by some £600,000 a year by 2004, when it becomes fully effective. The Government have missed an opportunity to ameliorate the effects of this unwarranted burden, which impairs our ability to help those in need who did so much to secure our freedom.

My noble friend Lord Saatchi has already identified many of the areas where this long and unnecessarily complicated Finance Bill fails to achieve its declared purpose or increases the tax burden by stealth. I will not delay your Lordships by addressing all the same points, but I would like briefly to address just a few areas affected by the Bill.

The motorist is bearing a disproportionately large part of the tax burden. Around £8.50 of every £10 spent on petrol is now tax. Excise duty on petrol has risen by 12p a litre since the Government took office and is now higher than in any other EU country. It is one-third higher than the level applied in Germany. It is nearly eight times the level applied in the United States.

The situation is even worse in the case of the road haulage industry. Diesel duty has been increased by 12 per cent, and at the same time some lorries have incurred a virtual doubling of road tax. Our road haulage industry is the most heavily taxed in Europe, and unless

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the Government provide some relief there is a growing risk that it will move to Holland or some other continental country.

As for the Government's proposal to levy a lower rate of vehicle excise duty on cars whose engine capacity does not exceed 1,100cc, the CBI and others have expressed doubts about its effectiveness as a measure to reduce the environmental costs of motoring, and I have to say that I am not convinced either. Vehicle excise duty is a small proportion of overall motoring costs, and engine size is in any case not necessarily related to the level of carbon dioxide emission. I acknowledge that the Minister has said that the Government intend to introduce measures specifically related to carbon dioxide emission levels; in which case, why have they not introduced them now?

The reduced rate of vehicle excise duty falls into the same category of gimmick as the 10 per cent income tax band. I do not know how many of your Lordships were able to avail yourselves of that offer of a sweetener by the Chancellor before taking the bitter pill that was the increased petrol duty, because the DVLC made the sweetener rather difficult to enjoy. Registered owners of cars with an engine capacity less than 1,100cc received complicated, indeed, almost incomprehensible, forms inviting them to apply for a refund in respect of the unexpired portion of their tax disc purchased at the previous higher rate. The form could be used only during the month of June and had to be submitted together with an additional separate form applying for a new tax disc to run from 1st June for six or 12 months.

The effect from the Government's point of view was therefore to increase their tax take, because in the short term the vehicle owner took out a new licence earlier than the expiry date of the old licence, and in the majority of cases the refund will have been less than the amount paid for the new licence. Since the DVLC knew who owned cars with an engine capacity less than 1,100cc and the date of expiry of their tax discs anyway, I do not understand why it did not send every such car owner a cash refund voucher which could be used either as a credit against the vehicle owner's next licence or encashed against production of the registration certificate to prove ownership.

Can the Minister tell the House in respect of what proportion of cars with small engines the complicated procedures necessary to obtain a refund were completed? To announce to the world that one is giving small car owners a benefit and then make it so difficult and complicated for them to obtain the benefit is rather like asking all one's friends to a party so late that the likelihood is that only a small number will accept but the others will all feel grateful and will regret only that they could not come.

I do not think it is good manners to say, "I told you so". However, I cannot help but remember what several noble Lords and I said in the debate on the Finance Bill on 31st July 1997. It was already clear then that the Government's first Budget would encourage consumers to spend rather than save for their retirement. Unfortunately, events have proved that to be the case even more so than I feared at the time.

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Even before the effects of this year's Budget are taken into account, the latest figures show that the savings rate as a proportion of household income has fallen by 30 per cent, from 10.5 per cent to 7.4 per cent, since the second quarter of 1997. I expect that this year's anti-savings Budget will make matters worse. Why did not the Chancellor apply his new 10 per cent income tax band to savings as well as earned income? Retired people living on their pensions supplemented by income from their savings thus face a double whammy, given the raid on their pension funds.

Why on earth did the Chancellor do away with the very successful TESSA and PEP saving schemes with which savers had become familiar and comfortable? I fear the Government's motives were partly a dislike of the savings culture and partly to bring about change for the sake of change. The Government's new savings schemes, called ISAs, are unnecessarily complicated in structure, and the amount that can be invested tax-free in equities or cash-related investments each year has been reduced by around a half.

According to a report in today's edition of The Times, Mr David Prosser, chief executive of Legal & General, has claimed that the complexity of ISAs is discouraging investment. He has apparently called for the Government to scrap the distinction between "mini" and "maxi" ISAs and abolish the separate investment limits for cash, stocks and shares. In the three months since the introduction of ISAs Legal & General's sales of investments have fallen from £324 million in the second quarter of 1998 to £195 million in the corresponding period this year.

In order to restore confidence in the savings market and encourage people to save more, the Government should acknowledge the failure of ISAs and resurrect the highly popular PEP and TESSA schemes. Will the Minister encourage his right honourable friend to do just that? If his right honourable friend did, I believe the Government's decision would be warmly welcomed both by the City and by savers, large and small alike.

What the Government do and what they say are vastly different things. The Chancellor talked a great deal about reforming and cutting national insurance contributions. However, people on middle incomes and the self-employed will actually pay far more. As your Lordships are well aware, changes to national insurance are implemented not through the Finance Bill before us but through secondary legislation and regulation.

I do not wish to give the impression that everything in the Finance Bill is bad. The provisions of Clause 44 repealing the income tax charge on mobile telephones and those of Clause 45 providing limited exemption for computer equipment are to be welcomed. I ask the Minister to confirm that season ticket loans to employees will continue to be exempt and will not be aggregated with house purchase loans.

While the intention of the provisions with regard to bus services is to be welcomed, like so much else in the Bill they are unfortunately far too complicated and subject to too many conditions. For example, why is relief confined to buses with more than 17 seats?

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The reduction in the basic rate of income tax to 22 per cent from next year is to be welcomed. But what the Government give with one hand they take away with the other. The abolition of the 20 per cent tax band means that this year taxpayers will start to pay tax at 23 per cent when their earnings reach £5,835, whereas last year they could earn almost £3,000 more than that before hitting the threshold.

The Minister referred to Clause 131, which entitles the Government to incur expenditure in advance of a decision being taken by the people in a referendum as to whether we should participate in European monetary union and adopt the euro as our currency. He said that people would find it odd if they were to vote in favour of joining, only to be told that we could not because we had not made preparations. I believe that the Minister's attempt to put forward such an illogical explanation would surprise the House. The reverse is the case: people would rightly be angry if, in advance of a decision not to join, substantial expenditure had been wasted on unnecessary preparations.

Of course we must always keep our options open, as indeed must businesses, large and small. But I assure the Minister that in my limited experience, no successful business wastes money on pursuing courses that have not been adopted as its firm's strategy. I fear that in his opening speech the Minister portrayed the benefits introduced by the Budget in rather too glowing terms. I hope that he will give the House an assurance that unless ISA subscriptions increase substantially in the near future, he will at least consider reintroducing TESSAs and PEPs.

I am grateful for having had the opportunity to participate in the debate and look forward to hearing the contributions of other noble Lords and the Minister's reply.

12.42 p.m.

Lord Shore of Stepney : My Lords, I shall concentrate on one particular matter in the Finance Bill. In introducing the Second Reading debate, my noble friend mentioned tax allowances and small businesses.

I shall not deal with the generality of tax allowances and small businesses, but one aspect of profound importance which, in terms of constitutional significance, goes way beyond the content of the clause itself. To help noble Lords to concentrate their thoughts, I am discussing Clause 78. In its present form, Clause 78 was amended on 5th July in a late Committee stage in the other place. In its present form, it amends the Capital Allowances Act 1990 and reduces certain capital allowances--that is, 100 per cent allowances--in favour of small and medium firms in Northern Ireland.

That measure of particular benefit to Northern Ireland was introduced in 1998 as part of the effort to assist that hard-pressed Province, its employment situation and other problems. It was an extremely welcome measure. We now find that the scope of that clause in the Finance Act 1998, and as re-enacted in the first draft of the Finance Bill 1999, has been struck down. It has been amended, not by the other place, but by the European Commission. If anyone here does not recognise the

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profound importance of that fact, frankly, he has not seriously been following politics and our affairs in recent years.

Why do I believe it so tremendously important to get that matter right? First, since the commencement of the German presidency at the beginning of the year we have faced a new drive towards tax harmonisation in Europe. We know all about that. We know also that a worrying and uncertain code of conduct study is taking place in which over 100 items relating to taxation are being considered under the chairmanship of the present Paymaster General in the other place, with European participants.

That study is looking for unfair tax provisions. Of course, we were told that we had nothing to worry about. But I must make the point crystal clear. I remind the House that we debated tax harmonisation on 28th January. I was worried about the word "harmful", as distinct from "non-harmful". My noble friend Lord McIntosh assured me then that:

    "It can be well explained and properly discussed, and if we do not like the results of the discussions we shall not allow them to go ahead".

He went on to say most unambiguously:

    "The Government can deliver those promises. Questions of tax require unanimous agreement, so there is no question of tax changes that we do not support being imposed upon us by Brussels".

It is quite clear about what we were talking. In the following column, my noble friend listed the number and identity of the particular British tax allowances which were being considered by the code of conduct committee. Among them was 100 per cent first-year capital allowances for small and medium enterprises in Northern Ireland. My noble friend concluded that part of his speech by saying:

    "The view of the UK is that none of these measures"

which obviously includes the Northern Ireland tax allowance,

    "is harmful within the meaning of the code and the UK will submit a robust defence of the measures".--[Official Report, 28/1/99; cols. 1207-1208.]

There is no doubt at all about my noble friend's commitment. Indeed, as recently as 22nd June, when the Paymaster General gave evidence to the Select Committee, she said that there were eight UK measures in the long list of tax measures being examined for being "potentially harmful". She went on to say that the Government were confident that those items were not harmful and that they would be successful in that argument. There is no doubt at all about what we are discussing; nor about the pledges and promises which we were given.

I turn to the extraordinary state of affairs which was then revealed by the debate in the other place which took place on 5th July at the late Committee stage of the Finance Bill. When the press release of the Northern Ireland tax allowance was first promulgated, there was a minor statement at the back to the effect that it had to be cleared with the Brussels Commission. To be fair, I believe that the Ministers assumed that that was merely a formality; otherwise they could not possibly have

23 Jul 1999 : Column 1228

given those guarantees about the integrity of our tax system in the robust and unequivocal terms which I quoted.

We now find the unhappy Financial Secretary, Barbara Roche, having to introduce this amendment. She made a marvellous statement:

    "I want to make it clear to all right hon. and hon. Members who have spoken that, although the Northern Ireland measures were notified to the code of conduct group that is chaired by my hon. Friend the Paymaster General, we do not believe that they represent harmful tax competition".

Mrs Roche is quite clear about that. She is equally clear that we cannot have it imposed upon us as we have been assured and guaranteed. She went on to say something truly astounding to me:

    "We are considering not that group"--

tax code of conduct measures--

    "but state aids. I point out to the right hon. Member ... The state aid rules were in place when we joined the EU. Any aid, including fiscal aid, can be found to be a state aid".--[Official Report, Commons, 5/7/99; col. 696.]

Because the commission found that benefit to Northern Ireland to be a state aid, a coach and horses is extraordinarily driven through our national defences. We were struck down and the Bill had to be amended accordingly.

I do not think I have ever come across such an outrageous matter. The House and the country have been deceived. I am not accusing my noble friend of deception. I am sure he has not deceived us. He is an honourable man and he would not dream of doing so. However, these two matters cannot be squared: the guarantee of the integrity of our tax systems falling within national competence and, at the end of the day, when challenged saying slyly that it comes under the category of state aids.

If that is so, how much of our indirect tax system is not to be considered as state aid and an unfair advantage? We are seriously at risk. We do not need clarification; we need action. To add to the incredible polygraphy of the situation, I looked at the state aid provisions in the treaty. In general terms, they say very worrying things. Paragraph 87 of the Consolidated European Communities Treaty states:

    "Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the common market".

My goodness, that is a paragraph. It also sensibly states:

    "The following shall be compatible with the common market",

and it mentions regional aids which are approved. Under paragraph 2(b) it states:

    "aid to make good the damage caused by natural disasters or exceptional occurrences".

I should have thought that the case of Northern Ireland, even excepting this clause, could have been argued strongly to be that. Paragraph 3(a) states an exception:

    "aid to promote the economic development of areas where the standard of living is abnormally low or where there is serious underemployment".

23 Jul 1999 : Column 1229

I should have thought that that would have fitted Northern Ireland like a glove. But what do the Government do? They do not challenge it and take it, if need be, to the European Court. They tamely submit and smuggle it through at a late stage in the proceedings of the Finance Bill. I think that is shameful and it must be stopped, halted, exposed and reversed. I hope that I can receive strong assurances from my noble friend, not least because the whole of our indirect tax system is now at risk.

12.54 p.m.

Lord Northbrook: My Lords, before coming to power the Labour Party sought to portray itself as a low tax, business-friendly party. It knew that that was an important way in which to convince the electorate that it was safe to vote Labour. One of the pledges made by the Prime Minister before he was elected was not to increase tax rates above what they were when the Conservatives were in power. While on the one hand the Chancellor has kept those rates unchanged, and in some cases cut them, which we on these Benches welcome, on the other hand he has raised taxes overall by attacking pension fund tax credits, increasing national insurance contributions, raising indirect taxes and cutting back tax allowances.

In Labour's first Budget, as my noble friend Lord Trenchard stated, pension funds were deprived of their advance corporation tax credits, a move that few of the public understood. I shall repeat the figure that that produces an extra £5 billion of revenue for the Government. In the longer term, it will also force companies to put extra money into their pension schemes.

With regard to national insurance, while rates have been reduced for the lowest paid, any employee who earns more than £27,000 a year will be worse off due to the raising of the upper earnings limit. Other indirect taxes have been raised consistently. Petrol tax is now the highest in the EU, as has been stated. Diesel duty hikes have caused severe difficulty and protest from the haulage industry, as has the increased vehicle excise duty. Insurance premium tax has been increased in this Budget alone by a quarter. Tobacco duty is up again, although the Government's figures show that overall revenue from that tax is falling due to smuggling. Company car tax is also up.

Turning to tax allowances, the married couples' allowance has been abolished, which is a strange move for a government who profess to support the family. They have abolished the MIRAS tax relief which has hit home-buyers. The change to the allowances for couples with children--the new children's tax credit--which is tapered away for higher rate taxpayers, will affect hardworking families on middle incomes.

Even on the direct tax side, the Budget is not quite as good as it appears. First, the new 10p rate of income tax does not apply to savers' income. Secondly, because the 10p starting rate of tax is being funded by the abolition of the 20p rate, many people who were facing a marginal rate of tax of 20 per cent will now pay

23 Jul 1999 : Column 1230

23 per cent. Overall, as has already been stated, people earning between £5,835 and £8,635 will pay a higher marginal rate of income tax as a result of these measures. According to the House of Commons Library, that will affect over 4 million people.

Long-term savers also face higher taxes under this Government. The abolition of the advance corporation tax credits means that, for instance, a pensioner who receives £3,000 a year from a state pension and has £10,000 in income from shares will be penalised in the 1999-2000 tax year, as opposed to the previous year, to the extent of nearly £600 because he is unable to reclaim any tax credit on his dividends. That is in spite of the lower 10 per cent tax band on the first £1,500 of taxable income. Why should that type of saver be especially penalised as against someone who holds government stock or has building society or bank deposits?

Even for companies, the headline news, which looked so good when first announced, looks rather less impressive when examined in detail. I welcome the new 10 per cent corporation tax rate for smaller companies. However, when one looks at the measure in detail, one sees that the full 10 per cent relief applies in full only to companies with profits below £10,000 and is worth a maximum of £1,000. However, companies are better served than sole traders, for whom the combined Class II and Class IV changes increase national insurance contributions by £500 or so a year.

Companies as a whole face a much stiffer tax collection regime by now having to pay corporation tax on a quarterly basis. It is to be noted that the quarterly payment regime was introduced in a document which referred to a "modern" system of corporation tax, not a simpler one.

I welcome the Government's moves to simplify the capital gains tax rates for individuals although, as I said last year, the continued mixture of the indexation and tapering regime is most unwelcome. I point out the anomaly that lower and basic rate taxpayers who invest in life company products will be at a disadvantage as life company share gains are still charged at 23 per cent. With regard to companies' capital gains tax, I welcome the decision to continue with the indexation system.

The Government have been skilful at raising extra tax revenue by non-headline measures. We on these Benches believe in fewer taxes and an honest, open and transparent taxation system--in general the opposite to what the Government have been doing over the past two years.

1 p.m.

Lord Brightman: My Lords, perhaps I may take up a moment of your Lordships' time to draw attention to a point which I first raised three years ago in a debate initiated by the noble and learned Lord, Lord Howe of Aberavon. The noble and learned Lord called attention to the case for simpler and more user-friendly tax legislation (Hansard, 27th March 1996). I intervened in that debate to address one point only; namely, the pressing need to simplify the structure of the capital gains tax legislation. I do not find myself in complete agreement with the view that that legislation has been

23 Jul 1999 : Column 1231

simplified to any great extent. I hope that in addressing this issue I am not breaching the traditions of this House in debating Finance Bills to which the noble Lord, Lord McIntosh of Haringey, referred when he opened this debate.

I have nothing against a tax on capital gains. In essence, the tax is simple. If the sale price of, for example, a stock exchange investment exceeds the purchase price, we deduct one from the other and that is the taxable gain. It is, however, recognised that it would be unfair to tax a gain which is attributable only to inflation and not to any real increase in the value of the investment. There is, therefore, built into the legislation what is called an "indexation allowance", which reduces the amount of the taxable gain according to the rise in the retail prices index over the period of ownership falling between March 1982 and March 1998.

A new tapering relief is to take the place of the indexation allowance, but most unfortunately the old system still applies to the period between March 1982 and 1998. The tax works in this way. The taxpayer obtains from the Revenue a table of monthly indexation factors, as they are called, from March 1982 to March 1998. That is no problem. His first task is to establish the net gain. He does this by deducting the value of the investment on 31st March 1982, if then held, or the purchase price if acquired at a later date, from the sale price. He must then ascertain the so-called "indexation factor", which he does by consulting the table of monthly indexation factors, running his finger vertically down the left hand column to pick out the year of acquisition and the horizontal column to pick out the month. Having established the indexation factor to three places of decimals, he must then establish the indexation allowance. He does this by multiplying the March 1982 value, or the subsequent purchase price, by the indexation factor--again going to three decimal places. Finally, he deducts the indexation allowance from the net gain in order to establish the taxable gain.

That exercise is not at all difficult for those of us with a mathematical turn of mind and a pocket calculator. But think of the problem if, over perhaps 16 years, there have been rights issues that have been taken up. A new calculation has to be made in respect of every rights issue because the date of acquisition, and therefore the indexation factor, and therefore the indexation allowance, will have changed in respect of the new acquisition. Think further of the magnitude of the problem if the investment consists of accumulation units of a unit trust. Unless there is a special Revenue concession of which I am unaware, an additional calculation would have to be made for every distribution which has been accumulated. If the unit trust in question makes half-yearly distributions and the investment has been held since March 1982, no fewer than 32 separate calculations would have been made. The mind boggles.

The noble Lord, Lord Butterworth, in a debate on the Finance Bill in 1997, described the system as,

    "a Byzantine procedure which is clearly too complex for most who assess themselves and attempt to complete their tax return without professional advice".--[Official Report, 31/7/97; col. 359.]

23 Jul 1999 : Column 1232

In 1996, I ventured to describe the present system as producing,

    "a very great deal of wholly unproductive work for tax experts which adds nothing whatever to the prosperity of this country".--[Official Report, 27/3/96; col. 1725.]

Or, to use the words of the noble Lord, Lord Lucas, which does nothing for the future of the economy.

The remedy is simple. Bring forward the base date of 31st March 1982 to something more realistic; thus, for example, exempting an investment which has been held for, say, five years. That would largely solve the problem. I do not know whether there is any country in the world which taxes a capital gains made on an investment held, as of now, for 17 years, soon to be 18 years.

1.7 p.m.

Lord Mackintosh of Halifax: My Lords, I am by profession a chartered accountant and when I am not sitting in your Lordships' House I spend my time advising my clients on matters of taxation in my position as a tax partner of Price Waterhouse Coopers. On the basis of that experience I am addressing my comments to whether the Bill is good for business.

As far as I can ascertain from comments made by members of the Government, the Finance Bill has three main aims: to promote fairness, to put forward measures to promote employment and encourage entrepreneurs, and to promote savings. All those aims are laudable and I am certainly in agreement with them. If this Bill succeeded in achieving those aims it would indeed be a good Bill for business. A number of measures in the Finance Bill achieve those aims and we on these Benches would wish to support them. But unfortunately the Bill does not achieve those objectives in all areas.

There is little doubt that, if asked what he or she would like from a tax system, one of the first things a business man would say would be a low tax burden and a constant tax environment. I question therefore whether producing a Finance Bill like this each year is the right way to approach reform of the tax system. This Bill has 140 clauses plus 20 schedules and runs to 193 pages. It cannot be good for business to continue to generate changes in tax legislation of this magnitude on an annual basis. What we need is a clear, consistent approach to tax legislation. I believe that this can be achieved only if the Government implement a complete review of our current tax legislation. The tax rewriting project is a step in the right direction, but all this is doing is rewriting existing legislation and putting it into English without changing the law. It will do nothing to achieve what is really needed, which is a complete overhaul of the system. It is rather like painting a railway bridge after abolishing the railways. It will look nice and does not do anybody any harm but has no practical benefit.

What business wants is a low and consistent tax burden so that it can plan and invest with certainty. The Government have reduced the headline rate of corporation tax, which must be applauded, but as they know full well, the headline rate is not everything. One needs to look underneath to see what the burden of tax on business really is. Although the headline rate of

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corporation tax in the UK is just about the lowest in Europe, 4 per cent of UK GDP is collected in corporate tax, whereas in France and Germany, where the headline rate of corporation tax is much higher, only 1.8 per cent of GDP is collected by corporate tax. The Government have gone some way towards helping business by reducing the headline rate, but it is important that they look further at the significant corporate tax burden which is left.

Some good ideas are being talked about--taxation of research and development where there is consideration of moving to a tax credit system, which would be of enormous help to those businesses starting up. They could then receive a tax refund for expenditure incurred, rather than simply having a loss which they can carry forward against profits in future years. There is also review of the taxation of intellectual property and, in particular, looking at whether when going into the 21st century the system of withholding taxes is really appropriate. In a modern society we need to make it easier for business to trade and not burden it with 19th century ideas like withholding tax. There is also talk of revamping the capital allowances system. All of these are good ideas but, as yet, those ideas are not reflected in this Finance Bill. I hope that the Government will take those ideas forward and, in doing so, make sure that they listen to what business really wants.

One of the main areas where the tax burden on business has significantly increased in recent years--and this Finance Bill continues the trend in contributing to this increase--is payroll. This includes the introduction of a new travel and subsistence regime, of the minimum wage legislation, of a new construction industry scheme, of a working families' tax credit tax regime and of student loan repayments. In addition, there has been the introduction of the quarterly payment system for corporation tax, where companies paying the full rate of tax have to estimate their current year's profits in order to make their interim payments.

It seems to me that these changes are being made, some of which make much sense and I fully support, without much thinking behind the additional burden on business. The introduction of self-assessment for individuals and self-assessment for companies is moving the burden of administering the tax system from the Government to the taxpayers. Maybe this is right and it would be better to have an Inland Revenue service which just sets the policy and polices the tax system rather than administering it. But if we are moving this way, the Government have a duty to ensure that the tax system is as simple as possible. There is a huge burden on the payroll departments of business and one has to ask whether this is consistent with the desired objective of increasing employment.

It would be helpful if the Government were to indicate that they recognise the extra burden that they are placing on business and could be seen to be doing what they can to simplify it. If legislative changes are made, the announcement could be accompanied by a compliance cost assessment which quantifies the

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additional burden imposed by the changes. The additional burdens placed on business should be in proportion to the benefit of such changes.

In this Finance Bill there are a number of good measures in relation to employee benefits, but the way in which they are implemented by this Bill does not help business as much as it could. Let us take, for example, the mobile phone, to which my noble friend Lord Trenchard referred. Removing the benefit in kind from the use of a mobile phone for private purposes was widely welcomed because of the burden of accounting for this benefit. However, rather than completely removing the benefit from a mobile phone, what we have left is a situation where, if mobile phones are provided to employees with a pre-paid ticket, which is frequently the case, this ticket is regarded as a voucher and thus there is still a benefit in kind. There is also still a benefit in kind if you provide an employee with a land line and a few private calls are made. Thus there is still an administrative burden on business to sort out benefits with regard to telephones.

A similar problem applies to computer equipment at home. Again, removing the benefit from the home use of computer equipment was widely welcomed, but as the limit has been set at such a low level--£2,500--and many laptop computers, which are generally the computer equipment used at home, cost more than this, the Bill still leaves in to charge a significant amount of computer equipment.

A green issue to allow employers to provide a bus service for employees without there being a benefit in kind was again met with approval. But initially the Bill defined a bus as being a vehicle with 17 or more seats, which meant that most minibuses used by employers would not qualify as a bus and, therefore, the benefit in kind would remain. Fortunately, in this case the Government have listened to business and the definition was changed by way of an amendment in the other place. The definition of a bus is now down to 12 or more people, which is helpful.

One cannot look at this Bill without commenting on the income tax position. Far from simplifying the tax system, this Bill continues the trend that was started by the last Finance Act of increasing the number of income tax rates. Income tax is now charged at a plethora of different rates for 1999-2000, depending on the nature of income. Non-savings income is taxed at 10 per cent, 23 per cent and 40 per cent. Non-dividend savings income is taxed at 20 per cent and 40 per cent, dividend income is taxed at 10 per cent and 32.5 per cent, and trust income is taxed at 34 per cent. Is it really sensible to have a tax system with so many different rates on differing forms of income?

The introduction of the 10 per cent rate of income tax in this Bill was heralded by the Government as a great breakthrough. I am very pleased with the introduction of a 10 per cent rate of income tax, but this is another example of where the idea is good but the underlying execution is not. Who really benefits from the 10 per cent rate? If you are a pensioner on a state pension with a bit of savings income, then the personal allowance will cover the pension but the same savings

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income will still be taxed at 20 per cent. Surely if anybody should benefit from the introduction of a 10 per cent rate of tax it should be somebody like a pensioner with a small amount of investment income.

To illustrate the complexity of the new system we could look at what this Bill does for cases of three single pensioners under the age of 75 with the state pension of, say, £4,000. Let us suppose that they all have additional gross taxable income of £2,000, that pensioner A's additional income is dividend income, pensioner B's is bank interest and pensioner C's is retirement annuity income. Although they all have the same gross taxable income, they will all have different net disposable income after tax. Pensioner A will have £5,800, pensioner B will have £5,940 and pensioner C will have £5,972.

The tax system for such taxpayers needs to be easily understood, as they are unlikely to be able to afford professional help in preparing their tax returns. The introduction of a new tax band fails completely with respect to the simplification of the tax system and does not target many of those who ought to benefit from the introduction of a tax band of 10 per cent.

The complexity of the income tax system will have its effect on business. The self-employed business man will have to work out the different rates applicable to himself but, for employees, it will again be the payroll department which has to spend time sorting out what should or should not be applied.

There is much in this Bill about stamp duty. For many years stamp duty has not received much attention and was perhaps seen as a levy that was going to wither away. However, by increasing the rates in this Bill, the Government have signalled that they regard stamp duty as a serious levy. The Bill also contains much anti-avoidance legislation to tighten up on the enforcement. If stamp duty is to remain a serious levy, is it not time to rewrite and consolidate the stamp duty legislation, rather than tinker with it as the Government do in this Bill?

The 1891 Stamp Act is still one of the principal pieces of legislation in this area. As we enter the 21st century, it cannot be right still to be relying on this legislation. Surely a complete rewrite and consolidation are required. However, before doing so I think that the Government should decide whether stamp duty is the right form of levy for a modern economy. Stamp duty was started in the 17th century Netherlands where a competition was set up to see who could come up with the best idea for a new tax. Stamp duty won. Stamp duty is effectively a dead weight on business dealings as it applies to shares, property and other formal agreements, and I think that there should be due consideration as to whether stamp duty is the right tax for the 21st century.

This Bill does not do a great deal to encourage savings. From looking at the contents of the Bill I am not sure whether the Government are intending to promote savings. We have the new ISA, and whether this will succeed in promoting savings is too early to tell. However, the biggest area in which the Government would want people to save is pensions. The message has certainly not been helpful here. As my noble friend has

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already said, blocking pension funds from reclaiming the ACT credit has effectively increased the tax burden on savings for pensions by £4 billion to £5 billion a year. In order to encourage people to save more for their pensions it would be helpful to have assertions from the Government that they will not increase the tax further on pension funds and that they will not reduce the tax relief available on payments into a pension fund.

The Government seem to acknowledge the link between giving a tax break to individuals and the encouragement for them to take a risk in investing in a business venture. This clearly works and there is significant investment in new business that would not be made if tax incentives were not available. The Bill seeks to close some of the perceived loopholes created by these breaks. As my noble friend Lord Lucas has said, if the Government try to eliminate all the potential loopholes, the reliefs become so complex that they discourage the investment they are trying to promote in the first place. My noble friend Lord Lucas made some interesting points in this area. I hope that the Government will look further at some of the points made by my noble friend in the form of tax reliefs for investment planning.

In conclusion, this Bill contains some good ideas, but not all of them have been put into practice as effectively as they might have been. Headline reductions in tax have been more than offset by the stealth tax underneath. It is a Bill which could have been of much more help to business and still be consistent with the Government's aim of fairness, encouraging employment and enterprise and encouraging savings. It was a missed opportunity and could have been so much better if the Government had really listened to what business had wanted.

1.22 p.m.

Lord Newby: My Lords, in the equivalent debate on the Finance Bill last year I identified two substantial macro-economic risks, as I saw them. The first was an inflationary risk. In June last year inflation stood at 3.7 per cent, having just come down from 4.2 per cent. At that point it was by no means clear which way inflation was going to move. Inflation now, on the headline RPI level, stands at 1.3 per cent and at 2.2 per cent on the RPIX figure, which is possibly more reliable. Inflation has fallen on the harmonised index of consumer prices, which is used across the EU, to 1.4 per cent compared with a Euroland average of 0.9 per cent.

Therefore my fears in terms of inflation were completely and utterly misplaced. Another area where I expressed some considerable scepticism about the Government's predictions related to growth. It seemed to me then that for the Chancellor to be making relatively bullish noises about growth at a time when all the evidence indicated that we were entering a downturn, was unrealistically optimistic. Again, I have been proved wrong. However, I think that it is worth looking, as we look to the future, to see what has happened within the economy in terms of growth.

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Some parts even of manufacturing industry have done extremely well over the past couple of years. For example, engineering output has risen consistently by 3 per cent over the past few years. I suspect that that is one of those little known facts which is concealed by the more general complaints of the manufacturing sector about the pressures under which it has been operating. The two sectors within manufacturing which have suffered consistently have been textiles, which face long-term decline, and the metal and metal processing industry--this has been hit particularly severely over the past year--particularly the steel industry which has been hit hard by the high pound.

Further, I believe that there are signs of a pretty unequal geographic spread of growth with considerable tightness in the labour markets in the South East, East Anglia and the M4 corridor, and much weaker markets further north. Looking further ahead, I have a suspicion that the traditional methods of attracting investment to the regions with lower levels of economic activity will be less successful in future because increasingly investment and growth take place around software, however measured, rather than hardware which is more susceptible to high levels of intervention and grant levels from government.

Having failed spectacularly last year to predict what was going to happen, what are the "Newby predictions" for this year? As regards inflation, I disagree, I think, with the noble Lord, Lord Desai, that we are entering a period where we shall face, as it were, a deflationary risk. I think that to the extent that there are signs of future inflation, they are upward rather than downward. I refer to pressure on service sector wages, rising house prices, rising commodity prices and probably a falling pound against at least one of our two major trading partners. The risks in terms of inflation are upwards rather than downwards. However, I suspect that, as happened last year when inflation was rising relatively quickly, the MPC will act strongly to "cap off" any signs of increasing inflation. Therefore although there is, as I say, something of an inflationary risk, I suspect that we shall not see a significant increase in inflation over the year ahead.

The other area where one can be almost certain that there is uncertainty is the exchange rate. Here I again disagree with the noble Lord, Lord Desai, as regards his golden scenario of stable exchange rates. I suspect that will not happen. The "Newby tip" on this is that the pound is likely to rise against the dollar. I believe that at some point the American boom will stutter to an end. I suspect also that it will fall against the euro because I suspect that the euro will rise. If one looks at the way the euro has been commented upon, one can see the difficulties of the prediction game. Only last week most leading commentators were saying that it was only a matter of days or a matter of timing before the euro reached parity with the dollar. As soon as the euro started to rise this week the same people predicted that it would only be a matter of time before the euro is at 1.10 dollars.

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That demonstrates the fickleness of the commentators but also the fickleness of currencies. It also demonstrates the fancy footwork that will be needed by the Eurosceptics to explain why the rate of exchange with the euro is bad for the pound. Up to now we have been told that a weak euro was bad because that made it more difficult to sell our goods to Europe. I suspect that it is only a matter of time before we are told that a strong euro is bad for industry within the eurozone. I confidently predict that we shall shortly hear those arguments.

I turn to the Bill and the Budget. I agree with two general points made by the noble Lord, Lord Burns, and the noble Viscount, Lord Mackintosh of Halifax. The first relates to transparency. In the far-off days when I was responsible for all of about five paragraphs of the drafting of the Budget speech and for all of about three tables in the Red Book, the Budget speech and the Red Book were extremely boring, but at least they were relatively straightforward. One knew from both what was going on. We now have an extremely interesting series of publications and a much more flamboyant style of speech, but it is much harder to know what is happening. Often days, weeks and months pass before the impact of the Budget becomes clear. Therefore I strongly support the demands for greater transparency and also the demands to reduce the temptation to tinker. As noble Lords have pointed out, Finance Bills are lengthy year after year. Therefore it is difficult for anyone other than a tax lawyer to understand the tax system. As the noble Lord, Lord Burns, said, half of these minor tinkering measures have not had the effect they are supposed to. A number of them have created yet more anomalies, which will require long and detailed further legislation to remedy.

I turn now to the measures themselves. We welcome the Government's priority for reducing the tax burden on those with lower incomes. However, we are not convinced that the 10p rate is the best way of doing so; we would prefer to raise the personal allowance. We have put forward suggestions which would, given the combination of our proposal to raise the personal allowance to £5,600 and our proposal for a 50p maximum tax rate on incomes over £100,000 a year, take 2.5 million people out of tax altogether. We think that is the best way to deal with taxation at the bottom end.

As to the cut in income tax, this seems to us to be one of the worst examples of a macho posturing on taxation. What is the justification for a further 1p cut in income tax other than for the Chancellor to be able to say that, just like the Tories, he knows how to cut income tax? It seems to have no economic justification whatever, particularly when one considers the strains imposed by current expenditure levels on health and education services. This seems to us to be a mistake.

Perhaps I may take up a point made by the noble Lord, Lord Saatchi. I do not believe it is the failure of the Budget or the Finance Bill as a whole which is causing disillusionment with the Government but a failure to deliver in the key areas of the welfare state where most people who voted Labour expected progress.

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Whilst I am critical of the Government in this area, for the noble Lord, Lord Saatchi, to say that it is the beginning of the end of the Government--that the wheels have fallen off--is slightly extravagant in the light of yesterday's by-election result. I was sorry that when he was making that point about the Government he did not have a similar extravagant description of what is happening to his own party's standing in the polls.

Let me return briefly to financial matters. There is one issue upon which I would like to test the Government-- it was raised at some length by the noble Viscount, Lord Trenchard--namely, the failure of ISAs to achieve the purposes for which they were introduced. I do not agree with the noble Viscount that they were a malign way of attacking savers; I believe that ISAs were introduced with the best intentions. However, the truth is that they have not achieved their goals. Cash ISAs are selling relatively well but sales of equity ISAs are extremely low, much lower than the Government expected. The reasons are fairly clear. The rules are so complicated that both individual savers and financial advisers are saying to people, "Get a cash ISA-- that is straightforward--and you can look at a share ISA later on". The truth is, of course, once one has got a cash ISA one cannot get a share ISA later on.

There is now a suggestion in the industry that there may have been some mis-selling arising from the inflexibility within the rules. It would be sensible and highly desirable if the Government were to look at the questions of both take-up and potential mis-selling. They should clarify and simplify the options available under the ISA umbrella and ensure that there is clarity in terms of the regulatory framework.

The Government are fortunate in having a robust economy, which should continue to do well in the year ahead. In our view, their key challenge is how to use the benefits of this economic strength to improve public services and to reduce the debilitating and destructive social divisions which were the legacy of the previous administration. I am confident about the future of the economy, but I am less confident about the Government's ability and determination to achieve these wider social objectives.

1.34 p.m.

Lord Kingsland: My Lords, having heard a debate of extremely high quality, I rise to wind up on behalf of the Opposition with a due sense of humility. The fact that I am a mere lawyer exacerbates that sentiment. The quality of the debate has been uniform throughout the House.

The noble Lord, Lord Desai, if I may say so, delivered a speech of characteristic perspicacity and charm. I take issue with him on one point only: his remark about the speech made--I thought most brilliantly--by my noble friend Lord Saatchi.

The noble Lord, Lord Desai, drew our attention, amusingly, to one of my noble friend's most successful advertisements. However, if I may most humbly suggest to the noble Lord, in doing so he missed the point that my noble friend sought to make about Government policy: that Ministers are saying one thing about

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taxation and doing another. That is hypocrisy and is not acceptable in a democratic system. Moreover, if the real burden of taxation is increasing and not diminishing--as I think my noble friend so admirably proved--that in the long run will be bad for both employment and for saving in the economy.

We heard also a most interesting and forceful speech from the noble Lord, Lord Burns. I sense that, in delivering it, he was caught somewhere between the desire to be loyal to his former colleagues in the Treasury, on the one hand and, on the other, his desire to exhibit to your Lordships' House an appropriate degree of independence. I was particularly struck by his tentative approval of the need for greater transparency. I hope that when the noble Lord delivers his speech next year, he will evangelise transparency.

I think the House will agree that we heard a quite outstanding speech from the noble Lord, Lord Shore--a real barnstormer. A little later I hope to make one or two observations about the most important points he raised.

As usual, the contributions of the two very distinguished former Law Lords--the noble and learned Lords, Lord Brightman and Lord Simon of Glaisdale--were of the highest quality. They brought out points about the Bill that I for one--and perhaps, dare I say it, your Lordships also--would not have spotted but for their acute observations.

Among my colleagues on this side of the House, I was particularly struck that four of my noble friends--Lord Northbrook, Lord Mackintosh, Lord Lucas and Lord Trenchard--all of whom have great experience of financial matters in the City, drew to the Government's attention important matters about the legislation which should be addressed.

Such has been the standard of debate that it is a great shame--as the noble Lord, Lord Desai, and my noble friend Lord Trenchard have said--that it did not take place several months ago. I do not think that another place is so sure of its ground in economic matters that it can afford not to have the benefit of what your Lordships have said. The quality of the debate on the Finance Bill in another place would have been much better had it had the advantage of hearing this debate in March or April rather than now.

A point made by the noble Lord, Lord Burns, in the course of his remarks, leads me to one of the two main things that I want to say on behalf of the Opposition. It relates to the noble Lord's reference to the way in which tax policy is established. He said that, normally, one sets levels of taxation and decides on types of taxes which meet the revenue raising requirements of the Government which do the minimum necessary amount of damage to the economy.

So my question is: are the Government confident that they have correctly applied that formula to taxes on commercial road vehicles? That is an absolutely central issue for our economy. Yet, if your Lordships glance at what is in the Budget about increases in diesel taxes this year, as was brought out well by my noble friend Lord Trenchard, and if your Lordships look at the level of vehicle taxes that have to be paid on commercial

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vehicles in relation to levels paid by our main continental competitors, I suggest that your Lordships are bound to come to the conclusion that these taxes are seriously inhibiting our competitive position. And it is a critical area for the economy.

Indeed, it seems to me that such a policy is counter-productive. If our competitiveness is adversely affected, our wealth creation in those adversely affected areas will diminish; accordingly, the income generated by them will diminish and, therefore, the tax yield will diminish. So in the end, the interests of the Treasury and those of competitive industry march hand in hand. So why is it that the Government are so out of kilter with the levels of those taxes in the countries of our main competitors?

The other matter that I wish to address is that so ably dealt with by the noble Lord, Lord Shore. I refer to the issue of tax harmonisation. I am sure that the noble Lord, Lord McIntosh of Haringey, will look to the stars as I mention this topic. I recall that on at least two occasions this year he has had to address it from the Government Front Bench. We owe a great debt to the noble Lord, Lord Shore, for bringing the issue out in this debate.

The noble Lord concentrated on the 100 per cent SME allowance in Northern Ireland, but there were other measures, as he suggested--special measures for the film industry; certain aspects concerning the enterprise zones; and matters concerning the sale of certain categories of ships. The noble Lord is right: all those matters were drawn to the attention of the Code of Conduct Committee by other member states early in the year. I know that the noble Lord, Lord McIntosh, addressed those issues in a debate in your Lordships' House in January.

What used to be--I suspect that they have now changed as a result of the Treaty of Amsterdam--Articles 92 to 94 of the old Treaty of Rome dealt with state aids. At the beginning, the European Court of Justice defined them rather narrowly. But over the past 20 years its jurisprudence has developed in such a way that the definition has become so wide that it can encompass certain forms of taxes as well as subsidies. That is a fact with which we shall have to live as long as we remain members of the European Community.

The noble Lord, Lord Shore, is right to say that if the Government really wished to stand up for their initial position on the matters I have mentioned, they could have dared either one or other of the other member states or the European Commission to take the United Kingdom to the European Court. The noble Lord legitimately asks: why did the Government not do that? He asks it the more so when we know that the Government have complete protection in the Council of Ministers. As the noble Lord, Lord McIntosh of Haringey, said in the debate in January and in a later debate in June, all decisions on tax policy in the European Community are still taken by unanimity. So the Government, from what seemed to be, if not an impregnable, at least an entrenched, position, somehow, between the beginning and the middle of the year, gave way on this issue. Why did they do it?

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The constitutional position that we face in the United Kingdom with respect to parliamentary control over this class of EU activity is such that we do not know. All the negotiations that took place in the committee of civil servants in Brussels that considered this matter were in secret. Not only did they take place behind closed doors; we do not know what the agendas of the meetings contained; we have never seen the minutes; and we do not know what the individual submissions of the members states which criticised us were. That is secret government--which is wholly unacceptable in an absolutely critical area of economic activity.

Perhaps I may put it this way. There can be legitimate differences about the extent to which a central bank ought to be subject to political control. During the period of the Gold Standard, very little control was exercised, either by another place or your Lordships' House, over the economic policy of the Bank of England. At the beginning of the Government's term in office, in 1997, they decided to delegate much decision-making power over monetary policy to the Bank of England. Even in my own party there are legitimate differences of opinion about the extent to which that was wise.

But there has never been any doubt that the only place to determine tax policy has been in Parliament. The reality of the matter is that, because all these tax measures are being discussed in secret, Parliament has lost control, and the Government have been able to take a decision that is detrimental to the United Kingdom's interests without any public debate on the matter at all.

Many of your Lordships, in criticising the institutions of the European Community, have offered intergovernmentalism as an alternative way of controlling European Community affairs. Your Lordships have done so because you believe that, where intergovernmental arrangements were made between civil servants, there would always be the opportunity of the national Parliament to maintain control of its own civil servants. But intergovernmentalism in the Community will never work unless national control by Parliament of government Ministers and civil servants operating in committees in Brussels is made a reality. That is the central challenge that the Government must face on this issue.

There is one other, more general issue on tax harmonisation to which I wish to draw your Lordships' attention, and it is this. The Minister made the House aware of the arrangements that are being made, in preparatory mode, for the run-up to the referendum on the single currency, whenever it comes. But the Minister was strangely silent on how he sees the relationship between the single currency and tax harmonisation. It is said by many commentators that any country that has a single currency must, ineluctably, engage in a process of tax harmonisation thereafter.

I should like to ask the noble Lord, Lord McIntosh, whether he believes that. It has always seemed to me that, if a country--and of course 11 countries in the Community are now members of the single currency--is a member of a single currency, a fortiori, the last thing it wants to do is harmonise taxes. Once you have

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joined a single currency, you remove your independence of manoeuvre over one of the two crucial economic instruments in the economy; namely, monetary policy. If you also give up your control of fiscal policy, you essentially give away all your economic independence.

It is crucial for the country to know, from a government who, at some stage when the economic conditions are right, contemplate entry into a single currency, what they think about this issue.

1.49 p.m.

Lord McIntosh of Haringey: My Lords, this has been an interesting debate. I introduced it by saying that these occasions are traditionally an opportunity for Members of the House of Lords to talk about both tax issues as they arise in the Budget and the general economy. That is what I call the "Hound of the Baskervilles", the dog that did not bark in the night. Last year and the year before, was there not huge criticism of the way in which this dreadful Government were taking us to hell in a handcart? Was it not said that this dreadful Government were going to ruin the economy? The predictions of the noble Lord, Lord Newby, were all about how inflation would rise, manufacturing would be destroyed, and our exchange rates would all be in terrible trouble. The noble Lord, Lord Boardman, did a little of that, too. Many other noble Lords spoke about how we were mismanaging the economy.

Where is that today? What have we heard about the mismanagement of the economy? That is what the debate is supposed, at least partly, to be about. The noble Lord, Lord Burns, may be a prejudiced witness because of his past form, but he said that it had been a very good year for the British economy. You could have fooled me if, last year and the year before, anyone had said that that would happen. If I had given the reply that we were not mismanaging the economy, I would have been met with howls of derision from the Benches opposite. I am satisfied with the response which noble Lords have given. I shall deal with the points about the Budget, but I am satisfied that what we have done, not only in this Budget but also in the past two-and-a-quarter years, has been well justified by the record.

The noble Lord, Lord Newby, made a valiant attempt to be pessimistic. I was a little puzzled when he said that it is almost certain that there is uncertainty in economic forecasting. After his fears of last year, he ought not to be making forecasts this year. Could he not put them in a sealed envelope and bring them out again in a year's time? Then we can pay attention to them, as they deserve.

While I am still on the economy, the noble Lord, Lord Burns, talked about a good year for the British economy at a time when the global economy was much more at risk. Indeed, the economy of some parts of the world is failing. I consider it to be quite a compliment to the Chancellor of the Exchequer that I have at no stage needed to pray in aid instability in the global economy as a defence against instability in our economy. It is quite clear that the claim which the Chancellor makes that economic stability is at the centre

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of our economic policy has been well justified, even at a time when there has been considerable instability in the global economy.

The noble Lord, Lord Burns, was worried about the fragility of the economy to some extent and about public finances in particular. He recognised that the other fundamental principle of our approach to our own economy is the principle of making work pay.

We were reminded by my noble friend Lord Desai of the claim by the noble Lord, Lord Lamont, that unemployment was a price not just worth paying but--let us get the words right--well worth paying. The noble Lord, when he was Chancellor of the Exchequer, was not only wrong in moral and social terms--he underestimated the huge damage done to the fabric of our society by unemployment--he was also profoundly wrong in terms of the economy and public finance. Our success, to which I referred at the beginning of my speech, in increasing employment by 400,000 in two years is the key to the proper management of the economy. I heard no reference to that by noble Lords opposite.

Instead, we had, legitimately, a number of detailed criticisms, some complimentary, some uncomplimentary. I start with the elegant speech of the noble Lord, Lord Saatchi. He refrained from saying that tax is too high; he said that the tax burden has increased, with a great deal of Shakespearean and Biblical quotations in between. He was supported in that by the noble Lords, Lord Boardman and Lord Northbrook, and by the noble Viscount, Lord Trenchard. The briefing has gone out about the tax burden from the Opposition's offices at the other end of the building.

Frankly, I regard most of this as being theological rather than of great economic significance. The difference between 37.2 per cent of GDP and 36.6 of GDP is not of economic significance. The fact that those claims about the economy and tax are wrong is neither here nor there. We are talking about percentage of GDP as a difference between two large figures. A slight change not in tax policy but in GDP will make all the difference which has been given such prominence in this debate.

As a result of the Budget, the tax: GDP ratio in 1999-2000 is lower than last year. The tax ratio in the following two years will also be lower than last year. Under the previous government's plans, those rates would have been higher than the latest projections in each of the next three years, even with tax credits scored as public expenditure. Even if the claims were true--and they are not--there is no need for us to spend any more time on the issue.

The noble Lord, Lord Saatchi, spoke about the abolition of the married couples' allowance and claimed that families were worse off. He was well answered by my noble friend Lord Desai. All families with children benefit from above-inflation increases in child benefit. It was increased in April and will increase next year to at least £15 a week. Together with the children's tax credit, it means that help for families is concentrated

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where it is needed, for those with children growing up, rather than being given to lone parents and childless couples.

In a wise speech, my noble friend Lord Desai said that what matters is exchange rate stability. Exchange rate stability is desirable, but it must be the result of other economic policies rather than of taxation policy in itself. We aim to achieve sustained growth, sound public finances and low inflation. That, in turn, ought to promote exchange rate stability consistent with the Government's objective of a stable and competitive pound over the medium term.

The noble Lord, Lord Lucas, in an interesting speech, talked about finance for new ventures and young companies. He quite effectively criticised the business expansion scheme, and I was grateful for what he said about PPP. I am not sure that he has a solution with his decent firm of accountants and lack of absolute principles. I rather think that when we talk of tax relief, it is no good pushing it off to someone else to make the decisions and hoping that it will work out. I do not believe that he has fully recognised what we are doing with the £20 million for venture capital, our support for enterprise investment scheme investors and schemes to encourage corporate venturing where big companies support new growing companies.

The noble and learned Lord, Lord Simon of Glaisdale, made a number of interesting points. His first was about the golden rule, which is the code for fiscal stability; in other words, our attitude to the public debt. Our approach to this has been consistent from the very beginning. We take the view that borrowing for revenue purposes should be neutral over the period of the economic cycle, as opposed to investment which should follow different sustainable investment rules. One admits that there is a problem about knowing where one is in the trade cycle. But the principle that we shall borrow only to invest over the period of the cycle has been explicit ever since the Government came into office. I hope that the noble and learned Lord agrees that here there has not been any change of policy in the Budget. He tempts me to enter into resource accounting--I bore for England on this subject--but I shall resist the temptation.

As to hypothecation of revenue, the noble and learned Lord need have no fear that we are reverting to the situation before the establishment of the Consolidated Fund. We do not determine our spending priorities by the way in which revenue is raised, but, as he rightly said, by looking at each case on its merits.

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