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Taxation and Public Spending

3.8 p.m.

Lord Strathclyde rose to call attention to the rise in personal and business taxation under this government, and the warnings of the International Monetary Fund on the dangers of the planned record levels of public spending; and to move for Papers.

The noble Lord said: My Lords, I am delighted to bring the issue of the massive increase in taxation over the past few years to the attention of the House this afternoon. There are two reasons for initiating this debate. First, I strongly agree with the increasing number of noble Lords who argue that this House should be given more chance to debate financial matters. For this to happen on an Opposition Motion is not satisfactory. Ideally, we should hold a major economic debate as a matter of routine in government time soon after a Budget, without prejudice to the later right of the House to examine a finance Bill. I hope that, in his response, the noble Lord, Lord McIntosh of Haringey, will confirm that in future we shall do so.

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However, for the time being, we have given the House this opportunity. Indeed, when I look at the distinguished list of names on the speakers' list, I believe that that decision was right.

The second purpose of the debate is to explore the Government's economic record and their steady drift from new Labour back to old, perhaps the only example of alchemy managing to transform something shiny into something depressingly familiar. Higher tax, higher spending, more waste, no delivery; the broad facts are incontestable.

There have been 45 tax increases since 1997, adding up to the equivalent of 10 pence on the basic rate of income tax. According to the Chancellor's own figures, the overall tax burden has risen by 3 per cent of GDP since the Prime Minister said that new Labour would not need to raise taxes.

The Red Book also shows that the Chancellor has collected £8 billion more in tax this year than predicted only a year ago. I know that the House will not be deceived. Such modest tax cuts as were conceded in the Budget are not a refund of this windfall tax bonanza. They will do little to offset the effects of rising national insurance contributions, higher taxes on company cars and the imposition of even more absurd new taxes, such as the energy levy, which the CBI has warned will seriously damage UK competitiveness. The energy levy will do nothing for our environment. It will hit, though, many of our hardest pressed industries, including farming. We will reverse it.

As taxes have soared over the past few years, are we not entitled to ask what is the nation actually getting for its money? John Lewis shops have a slogan--"Never knowingly undersold". For Labour's spin doctors it is, "Always knowingly oversold". The Chancellor revels in a slogan that would bankrupt any business copying his example--"Less for more".

Let us look at the real world outside Mr Campbell's briefing room. Everywhere, people and businesses are getting less while they are paying more. In the NHS, hospital waiting lists are longer, GPs are in despair, nurse recruitment is in crisis. In education, class sizes in secondary schools are bigger, schools are drowning in bureaucracy, teacher shortages are worse than ever. In the fight against crime, there are now 2,500 fewer police officers than there were and violent crime is higher. In transport, the rail network is in crisis, by-passes around country towns and villages have been axed, and the London Underground has stagnated for four years while the Deputy Prime Minister has failed to make a single decision. And today the countryside faces ruin. How can anyone admire such a record? More effort has gone into re-presenting the same figures than into achieving a single additional police officer.

I hope that the House will agree that it could all have been so much better. In 1997, the Labour Party inherited an economy that was exceptionally strong. Unemployment was falling fast. If it had continued falling at the same rate as in the last three years of the previous government during the first three years of this Government, we would have broken through the

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1 million barrier of unemployment on the claimant account last July rather than waiting until today. Inflation was low and falling; tax levels were lower than those of most of our main competitors; strikes were a thing of the past; and our economy was growing 1 per cent faster than the EU average.

Initially, the Government seemed to have learnt from the disastrous record of their Labour predecessors. They claimed that they had abandoned tax and spend; they made a great show of following the spending plans of the previous Conservative government. They basked in the rewards that followed. I welcome good news as much as anyone. It is good that unemployment has gone on falling and inflation remains under control. But, at the same time, would it not be just to recognise that the foundations of that success were laid long before this Government came to power? After all, even this Government's prudence was borrowed.

Sadly, in the past 18 months, the Chancellor has thrown off the mask; old Labour is on the move again. Taxes have soared; tax increases are hitting the creative and hard-working; regulation is now our greatest growth industry; our share of world trade has declined; and our growth rate has now sunk below the EU average.

Like every one of their Labour predecessors, this Government never delivers what they promise. They increasingly remind me of one of those postcards that drop through the letterbox decades after it was posted. We are so amazed that it has finally arrived that we ignore its late delivery and overlook that it was written a long time ago and sent to those who have long moved on.

The Government came to office talking of welfare reform, but they have unleashed the biggest extension in means testing in our history. They pledged no tax rises, but have taxed business and families more than any government in memory. What a rich irony it is that the Chancellor of the Exchequer calls himself prudent. The reality is that he has sought out everything that is far-sighted and prudent--and then taxed it. Pensions, savings, insurance, marriage, private health care, home ownership, even the family car, on every one of these items where prudent people try to put something aside, the Chancellor has targeted his tax rises. He has penalised the very virtues that he claims to uphold.

I cannot think of any tax rise more retrograde than his massive tax raid on pensions savings. It has cost people saving for pensions a truly shocking £5 billion a year, rising towards £6 billion next year. How can this assault and battery of prudence be defended? The Sunday Times put it rather well last weekend. It said:

    "it is like Gordon Brown leading a £25 million Brinks Matt robbery every day of the working year".

Little wonder that rumours abound that government Ministers are about to move their summer holiday venue from Tuscany to the Costa del Sol.

There is a simple test for governments who cannot stop patting themselves on the back: let them take pride in their achievements. Do not do it stealthily; do it with pride. Be open, be up-front, be honest. Is it too

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much to ask? Let the Chancellor write to everyone going without because they have been told that they must save more for their pensions and let him explain why he has helped himself to their savings and made their retirements less secure.

Let him do the same to those buying their own home. Let him explain to professional families why it is "prudent" for him to drive them into years of additional debt and sometimes price them out of homes by savage increases in stamp duty. Let him explain to home owners in the south-east how their homes will suck their families into feeding the ever expanding appetite for inheritance tax. Let him explain to savers why he has cut by almost half the amount that anyone can put aside each year in tax free savings. It is no wonder that the savings ratio in this country has plunged to an all-time low, from 10 per cent to 3 per cent. These tax policies demolish government claims to support personal responsibility and long-term saving.

We, on the other hand, will support saving. We admire independence; we support freedom from dependence on the state. We will help 16 million savers by abolishing income tax on savings or dividend income, except at the upper rate, and we will take 1 million pensioners out of tax altogether by increasing the age-related allowance by £2,000 per year.

The Government, on the other hand, will not trust people to take care of their own money in retirement. They insist on their buying annuities; they distrust self-reliance and independence; they want people to look instinctively to the Government for care. The blunt truth is that they want gratitude. Mr Brown believes in the forelock society.

The effrontery of the Chancellor is seen in his expectation that people should be grateful for a feeble tax reduction in the Budget. We welcome the extension of the 10 pence band; we welcome any reduction in taxation from the Government. But what it amounts to is a Chancellor who last year gave us a 75p a week pension increase--and who was affronted when pensioners complained--now giving us a 69p tax reduction.

Well, he should not be surprised if taxpayers are cynical. After all, this is a "10p up, 1p down" Budget. Since 1997, the Government have put up taxation by £28 billion. A recent study by Pricewaterhouse indicated that two-thirds of the tax advantage that we enjoyed over our main European competitors in the mid-1990s has been tossed away. We now pay more tax than people pay in Spain, Germany, Ireland or Japan--not to mention the United States of America, where thanks to the recent defeat of the Democrats, people can now look forward to a 1.6 trillion dollar refund of their own money over the next few years.

Yet it took years before the noble Lord, Lord McIntosh of Haringey, could bring himself to admit what was obvious to everyone in the land--that new Labour had raised tax and broken the Prime Minister's promise that he had no plans to put up tax at all. Sadly, where once Britain was the free enterprise, low tax capital of Europe, it is once again becoming over-taxed and over-regulated.

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We even have a new phrase in the English vocabulary: "the stealth tax". Recently, the Centre for Policy Studies listed 45 different stealth tax rises. Even in the latest Budget we have seen more, such as the increase in VAT on spectacles planned for June; or the new quarrying tax that will hit industry for £380 million. One tax was so stealthy that the Chancellor did not even mention it: a special levy on middle incomes, a swingeing 7.5 per cent increase in the national insurance threshold. Some 9,000 police officers, 23,000 senior teachers and over 20,000 key NHS workers will be up to £3 a week worse off. Yet the absurdity is that these are the very people Labour says it wants to encourage. The moral of the story is this: there they go again--say one thing, do another.

Indeed, when the Chancellor singles you out for praise, that is the time to reach for your purse. We have already seen how he deals with prudence; he taxes it. Another favourite phrase of his, and of the Prime Minister's, is "the new economy". But look what happens. It gets taxed. The Inland Revenue's notorious IR35, so devotedly defended by the noble Lord, Lord McIntosh of Haringey, will drive the brightest and best firms in the new economy out of Britain in droves.

Another key buzz word is "enterprise". Well, it is a strange kind of help that the Chancellor gives to enterprise--he taxes it. The CBI calculates that the tax burden on British business has risen by £5 billion during this Parliament. New regulations have added another £12.3 billion to business costs. The contraction of manufacturing industry has accelerated, despite all those pre-election promises. Have we not yet learnt from bitter experience the dangers of loading tax on to business?

Government should take far more seriously the growing tide of profit warnings and the torrent of complaints from business about tax levels. The harder we make it for businesses to stay competitive, the harder the decisions they will face. Multinationals do not need to base themselves in Britain if higher tax is the result. Investors do not need to trade in the City and go on paying stamp duty when every other financial centre is cutting it. Small businesses do not need to expand, if all it means is more red tape, more interference and more tax.

The noble Lord, Lord McIntosh, never tires of telling the House how he, as a small businessman, cares for small businesses. But I fear that the noble Lord is becoming increasingly out of touch like everyone else after four years in a ministerial motor. Ministers can read out the brief, but they do not have to live out the life. They give us the highest petrol prices in the world, at huge cost to business and the countryside, but they never have to take out £50 to fill the tank. Indeed, I am told that Mr Brown has never filled up a car in his life.

Ministers do not see small businessmen sitting up night after night wrestling with the morass of inspections, regulations, form-filling and payroll complications that flow from every new Labour Bill. They do not know what it means to labour for a

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lifetime to build and save and to know that it will be taken away on death in inheritance tax. The Conservative Party does understand those fears and worries--and when we return to office we shall not forget.

In the 1980s, Chancellors--most notably my noble and learned friend Lord Howe of Aberavon and my noble friend Lord Lawson of Blaby--set out with the laudable aim of simplifying the tax system. Mr Brown seems to have the opposite aim: to complicate the tax system. Never did I expect to hear the accountancy profession no less--the very people who gain most from Labour's tax complications--crying to high heaven for tax to be simplified. That is the measure of the Chancellor's achievement. It is as if the brewers were campaigning for prohibition.

My noble friend Lord Saatchi will deal with the difficult and uncertain prospects ahead and the alternative strategy that our party will follow. But I worry when I hear Ministers claim that they have conquered the economic cycle. That, after all, is the English translation of the soundbite drivel about boom and bust. We have seen in the past few months in America just how illusory talk of a new paradigm can be, how suddenly a storm can roll up in a previously blue sky, and how fragile business, investor and consumer confidence can be.

Even Mr Micawber would have seen something very troubling in the central Budget strategy of increasing spending faster than national income is likely to rise. When the pro-government Financial Times said that the Government had turned prudence into a matter of faith, not a matter of fact, the Chancellor ignored it. When the authoritative IMF warned of,

    "risks ... tilted to the downside",

and said that it,

    "would be prudent to abstain from introducing significant new spending commitments ... in the March 2001 Budget",

the Chancellor rebuffed the IMF.

Now, financial markets around the world are reflecting concerns about economic storm-clouds ahead as real companies in the real world are seeing their profits decline. But the Chancellor sails on blithely, like a surfer ignoring the red warning flags. If his faith is not rewarded, the people of this country will pay a heavy price in lost jobs, service cuts and even higher tax. As if the families, businesses and professionals of Britain have not already had to pay this new Labour Government far too much, for far too little, for far too long.

My Lords, I beg to move for Papers.

3.28 p.m.

Lord Barnett: My Lords, I begin by agreeing strongly with the noble Lord, Lord Strathclyde, at least in his request that, in future, we should have major economic debates at the time of the Budget in government time-- although I am bound to say that we used not to have them for about 18 years previously.

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The noble Lord is right. There have been substantial increases in what the Opposition have come to call "stealth taxes". There have also been, at least in the past year, increases in public expenditure. The noble Lord is therefore right on both counts. He would have more credibility if he were to tell us that all those stealth taxes, as he calls them, would be removed immediately by his party and all the major public expenditure increases would not take place. But, as he knows, the Opposition have agreed that if by any mischance they were to become the government on 3rd May, they would retain all the major public expenditure increases. So the noble Lord lacks credibility in everything he has said on both scores.

I note the expression "stealth taxes" and, as I have said, there have been increases. But the Tory charges in regard to stealth taxes are hard to sustain. Those are not my words. They come from an article in The Times, not a strongly Conservative newspaper. Anatole Kaletsky wrote last week:

    "Tory charges about a massive 'stealth' tax increase under Labour are ... hard to sustain".

Those are his words. He is hardly a Labour supporter or a supporter of this Government.

On public expenditure, the noble Lord did not tell us about the savings that his party could make and intended to make. That is not surprising. However, it is not difficult to find some. After all, public expenditure is somewhere between £300,000 and £400,000 million. So finding the odd million or two would not be too difficult. Indeed, I can give the noble Lord an example: he could scrap the Barnett formula. I was rather surprised that he did not suggest that--or perhaps not, coming from his position.

Perhaps I may turn--as the noble Lord did briefly--to the "warnings" from the IMF mentioned in the Motion. The noble Lord did not speak at great length about them. I understand why. I tried to find them. I see the noble Lord is indicating that his noble friend will deal with them later. I look forward to hearing him. I tried very hard to find those warnings in the IMF document of 23rd February; I had some difficulty. In certain circumstances, and according to certain assumptions, one can, or may, make assumptions that indicate that we shall be in terrible trouble. But on reasonable assumptions, and on reasonable projections, the IMF comes to certain conclusions in its report, which the noble Lord did not quote. I could quote them, but I shall not do so in view of the time. However, if the noble Lord cares to refer to paragraphs 9, 10 and 14 in the report, he will see that they give full account of why the IMF thinks that the present economic position is both sound and, in its words--not those of the Chancellor of the Exchequer--"prudent", which is a favourite word of the Chancellor.

The IMF also concluded that the Chancellor was absolutely right on his "golden rule", as it has been called; in other words, a separation of current expenditure from capital expenditure. The many businesses to which the noble Lord referred make a clear distinction between current and capital expenditure, but perhaps his great business experience

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did not allow him to tell us more about that. Even if the noble Lord could find the public expenditure cuts, he knows, as we do, that they would not be found immediately. So we are told that we would have a situation where tax cuts would be made, without public expenditure cuts. If one reads the IMF report carefully, it is clear that that is precisely the criticism that it is making. It is not making a criticism of the Government; it is making a criticism of the Opposition's policies. Therefore, I am not too surprised that the noble Lord did not quote from the report at length. I look forward to hearing what the noble Lord, Lord Saatchi, has to say.

So has the Chancellor of the Exchequer been prudent in his Budget? Well, he only used the word twice this time in his speech. In the past he has used it much more frequently. He told us that he has been prudent. Others have said the same; the IMF, and another unusual source, the director-general of the Institute of Directors--an organisation not normally so friendly to the Government. They all think he has been prudent. I am not surprised. In my own view, he has been too prudent because the £3.6 billion we have been told will be spent this year, with tax reductions, is, in practice, unlikely to be spent. It was also under-spent during the past year. I believe that he has been prudent. I would have much preferred a little less of the bits and pieces of tax cuts that most people have hardly noticed--and, indeed, will hardly notice--and rather more in the way of public expenditure.

I have something of a guilt complex on the question of public expenditure, because I spent more than five years doing something that I never wanted to come into politics to do; namely, cut public expenditure. I readily admit that I am talking about a very different economic environment. In those days, we had not inherited what the present Chancellor of the Exchequer inherited. I willingly concede that he inherited a much better economic environment. However, like the rest of us, the noble Lord, Lord Strathclyde, knows that there is a great demand for more expenditure, especially investment, in all areas of public life--education, health, local authorities, police, transport and, indeed, investment generally. To pretend that one can do all that and, at the same time, make major tax cuts is, frankly, misleading not just to your Lordships but also--if anyone is listening outside--to other people.

There are other areas in which I hope the noble Lord, and all of us, would like to see some improvement. I have in mind, in particular, child poverty. I believe that the Chancellor of the Exchequer is doing far too little when he talks about halving the level in 10 years. We should be doing far more.

I understand that "prudence" should be the slogan, although I point out to the noble Lord and to the House that 1.8 per cent inflation is such that we could, in my view, live with a little higher and a little more public expenditure. That is my personal view. The 1.8 per cent is in UK terms. If one looks at the "European" scenario--if I may be so bold as to mention that word in your Lordships' House--it will be seen that the figure is much lower.

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However, worries have been expressed not only by the noble Lord when quoting selective parts of the IMF report, but also by a certain William Rees-Mogg, who wrote an article in The Times on Monday of this week, as his regular weekly contribution. The article was, as usual, very well expressed. I believe that he is known as the noble Lord, Lord Rees-Mogg, in your Lordships' House, but in the newspaper he is called "William Rees-Mogg". You can tell from the photograph that it is him, even though it may have been taken some time ago! As I say, the noble Lord can be relied on to put his facts very carefully and to express himself well; and he did so in that article. He talked about the disturbing consequences that might be possible for world trade. That is perfectly true: there is the possibility of dangers in that direction. Indeed, we have already seen evidence of that this week with the stock market collapses about which the noble Lord wrote. The noble Lord quotes his colleague, Mr Kaletsky, from whose article I also quoted, who asked last week:

    "How long can Mr Brown keep us this largesse?"

The noble Lord rightly depends on growth assumptions, which he concedes have been particularly cautious. They are likely to be rather better than he has forecast--that is, better than they have been this year. But it could all go wrong in two ways, as the noble Lord, Lord Rees-Mogg, tells us, because of "formidable imbalances" in the United States and the Japanese failure to restructure. Indeed, the noble Lord goes on to say that if they do restructure, it will,

    "cause pain, and probably slow world trade".

That is a fair statement to make; it is also the sort of doom and gloom, no-win scenario, that one expects these days from others in the media rather than the noble Lord.

It is possible that Mr Brown will ignore the potential dangers; it is also possible that we could see the end of the world. That would be something even better to write about! But what would the noble Lord, or anyone else, have done in the event of such a scenario? We are not told. It is like the perennial pessimist: you sit at home worrying about it, doing nothing. On a wall that is situated somewhere near my flat in London, someone has chalked a phrase; namely, "Be pessimistic, you'll always be happy". If I may say so, that really fits the noble Lord's article. It would be absurd to plan now for that kind of catastrophe. We have a strong economy; indeed, if one reads the whole of that article, the IMF makes it quite clear that we have a very sound and strong economy. Therefore, it seems to me to be absurd to act now.

My experience as regards expenditure and tax--regrettably, as Chief Secretary to the Treasury for those five years--is that they are not set in stone. As of now, one can only say that the economic position is good and sound. I commend the Chancellor's Budget to the House.

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3.39 p.m.

Lord Taverne: My Lords, as this Budget is the last of the present Parliament, this is a suitable time to review the record of the Chancellor of the Exchequer and to look forward. I intend to concentrate on the main lines of his stewardship and paint with a broad brush. The noble Lord has made the IMF report one of the issues in the Motion that he has put forward for debate. However, like the noble Lord, Lord Barnett, I was somewhat surprised that there seemed to be no mention of it in his speech, although I understand that that will be remedied later. Until I read the report, I had assumed from press comment that it was rather critical of the Chancellor's stewardship However, it has been grossly misrepresented. The IMF report generally is one of high praise for the Chancellor's achievements. It does not condemn his spending plans or his tax record. Of course, it sounds a note of warning for the future because there are question marks about the impact of a recession in the United States, as the noble Lord, Lord Barnett, pointed out. There are question marks about world trade and about the future of our exports particularly if the pound continues to be strong, or even strengthens against the euro.

It points out that our record on productivity, except perhaps in the past two years, has been poor, especially outside the information, communications and telecommunications sector. However, to invoke this report--as some of the press have done--as some kind of condemnation or criticism of the Chancellor's overall performance is, to put it academically, rather like criticising someone's performance because he has been awarded an alpha minus instead of an alpha plus.

The noble Lord attacked the Chancellor's tax increases. He made the reasonable criticism--as have many members of the Conservative Party--that the Chancellor has rather tried to hide the extra taxes he imposed. Some of the extra tax take is simply the effect of economic growth, but some is due to tax changes. However, like the noble Lord, Lord Barnett, I find it hard to see how the extra money which he has given to schools, hospitals and law and order--in our view rather belatedly--could have been given without some increases in taxation. We on these Benches differ profoundly from the general tenor of the Conservative Opposition's criticisms in that regard.

We applaud the Chancellor for his management of the economy overall. To some extent our sound position was due to the actions of a previous Chancellor, Kenneth Clarke, who for some reason was not mentioned in the noble Lord's speech although he mentioned all the other Chancellors. It is not clear why he has been deleted from the records. While applauding the management of the economy overall, as has the IMF, we go further in our criticism than the IMF. We have three main criticisms. As I said, they are the very opposite of those of the Conservative Opposition. Two of them are connected. The first relates to the public services. The Chancellor boasts that he has avoided stop-go in the economy as a whole. But he has imposed stop-go on the public services with a vengeance: two years of stop, about one-and-a-half

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years of go. At the end of four years he has left public spending as a lower proportion of GDP than it was when the Government took office. It is no wonder that so many Labour supporters feel deeply disillusioned.

You cannot run the health service, education or the police efficiently if you alternate famine with feast. Nurses have left the service; it will take years to replace them. Experienced nurses have left, new ones will take a long time to be trained. Experienced teachers have left. It will take years to train new ones. There has also been a tragic wastage of experienced policemen who will now be replaced with raw recruits.

Unlike the Conservatives we do not criticise the Chancellor for some tax increases. In fact, we would have supported somewhat higher taxation at the start of this Parliament to support a more gradual and even increase in public spending throughout the past four years.

Our second criticism concerns the poor performance in productivity noted by the IMF-- 1.5 per cent per year on average. We did not catch up with our European partners and we fell further behind the United States. Why was that? The IMF blames poor education and low investment. Education suffered because the Government refused to increase Conservative spending plans in the first two years. The Chancellor sought to boost productivity by a series of tax changes. They have made the system more complex. I know of no evidence that they boosted productivity. Low investment has been the key factor and here it is the high pound which has done the damage. It has played havoc with our manufacturing base.

What could and should have been done? I have no doubt that if at the beginning of this Parliament we had announced our firm intention to join the euro at a competitive exchange rate, we could have done so shortly after and the pound would have been much lower for most of the past four years. Industry would have benefited enormously. Of course, there would have been risks and some disadvantages. We would have faced some of the problems which the Irish now have with interest rates which are lower than are ideally suited to their particular circumstances. I accept that. But as the report of the Select Committee of this House on the euro showed, the evidence of all the Irish witnesses was that they had done better inside the eurozone than if they had stayed out and better than they expected before they joined.

Further, as the governor of the Bank of France testified, businessmen throughout the eurozone have no doubt whatsoever that their position has changed dramatically for the better. They all see the benefits of a single currency. Indeed, throughout the eurozone there has been the kind of fundamental restructuring of industry which one saw when the Common Market was first founded. We lost out then because we failed to join; and we are losing out now. We are losing out now because investment and productivity have suffered grievously from an uncompetitive exchange rate.

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Indeed, the Chancellor's announcement about the euro on 27th October 1997 was in our view the biggest single mistake which the Government have made in the course of their tenure. At that time they would have won a referendum with a landslide. I sincerely hope that the chance has not been lost for many years to come.

Let me turn to the future. For the next few years public investment will increase at a high rate, somewhat higher than the underlying or actual rate of economic growth is likely to be. Stability should not be affected for a while because the public finances can stand the strain. But by 2004 the rate of increase now planned will be unsustainable without major changes, as the IMF pointed out. Either spending plans must be cut back or taxes must go up. That is the fundamental choice we face.

The Conservatives' preference is quite clear: on no account must taxes be raised because high taxes hurt the economy. Their preferred model is that of the United States; so is that of most City commentators. They contrast the low tax, low spending and dynamic economy across the Atlantic with its recent high rate of growth and low unemployment on the one hand, with the so-called "sclerotic" economies across the Channel, weighed down with high taxes and high spending which have resulted in low growth and high unemployment.

I favour the European model. The popular contrast is misleading. Despite its undoubted success in recent years and its many admirable features, it is far from clear that the American model is more successful economically. There has been a kind of see-saw in the relative progress of Europe and America. Sometimes Europe grows faster; sometimes America grows faster. In the past five years, possibly the past decade, the United States has been up. Before that Europe was up. In the next five years Europe is likely to be up again. If one looks at the past 30 to 40 years, Europe has probably been the more successful. Indeed, if one looks at the productivity figures produced by the IMF--they are of great importance and enormously significant--one sees that despite the so-called "sclerosis", the claimed debilitating influence of high taxes in Europe and the great spurt from IT in the United States in the past five years, productivity per hour is higher in Germany and France than it is in the United States. Even in recent years, growth in the Netherlands, Ireland, Spain and Portugal has certainly matched that of the United States.

Of course, there is a downside to the picture. If we compare ourselves with the rest of the European Union, it is clear that they pay more in taxes. The Liberal Democrats sometimes give the impression that the answer to every problem is high taxation, but of course it is not. Taxes can be oppressive, they can limit freedom and they can stifle initiative. Nor does spending money automatically produce results and improve services.

However, certain vital qualities of a civilised society can be achieved only if we are prepared to pay for them. We should not only compare our taxes with

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those of our European partners, but compare our health service with that in Germany or France, or the standard of their secondary schools, their vocational training and the level of skills of the average worker in industry. That is why their productivity is so high. We could also compare their railways and public transport with ours--or, for that matter, the average crime rate or the number of people in jail.

Over the next four years, the next Government will have to choose what kind of society this country wants. I prefer the European route. We do not want new cuts in public spending in the last two years of the next Parliament. If we want to achieve standards in our schools that approach those on the Continent and standards in our hospitals that a modern, civilised society is entitled to demand, public services must have priority, even if some taxes have to rise.

3.51 p.m.

The Lord Bishop of Hereford: My Lords, I am considerably embarrassed to find myself speaking at this point in the debate. I should like to correct any impression that your Lordships may have acquired from my position in the list that I have any expertise in this complex and technical subject where angels fear to tread, let alone Bishops. I had hoped that the Government Whips' Office would slip me in at the end of the list of speakers.

I shall make three simple, brief points from what I hope is a non-partisan point of view. First, as the noble Lord, Lord Taverne, has just said, high taxation is not necessarily to be deplored. Indeed, it is to be welcomed, provided the money raised is used wisely for necessary and beneficial public expenditure in the interests of social justice and for the common good. Samuel Augustus Barnett was rector of Whitechapel at the turn of the last century. St Jude's was a depressed, poverty-stricken parish. He had inherited the traditional Victorian assumption that poverty could be put right by voluntary giving, but he quickly became convinced that that was not the case. He coined a phrase that all Christians ought to know and affirm:

    "God loveth a cheerful taxpayer".

The noble Lord, Lord Taverne, has just compared levels of public expenditure in this country with those in certain other European countries. On public transport infrastructure and some aspects of the education and health services, we are the poor relations. There is nothing to be proud of in that. The Government should boldly resist any mutterings that may come from the IMF and continue to make good the backlog of many years of neglect of public expenditure in this country.

My second point--this was mentioned by the noble Lord, Lord Barnett--is to welcome the Government's recognition of the problems of child poverty and the attention paid to the issue in the recent Budget. However, even with the help that was announced recently, child poverty will remain a problem and a scandal in this country.

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There must be questions about the Government's ideological link between the best levels of child tax provision and the obligation to work, especially for single parents. Childcare must be an option for parents that carries no financial penalties. I understand where the Government are coming from and acknowledge the vital importance of work to the national economy and the fact that work outside the family home brings a proper sense of dignity, purpose and satisfaction to those who undertake it. However, there can be no more important work than childcare, which, by and large, is best delivered by parents. Means testing--targeting benefits--must make common sense, provided it is comprehensible, the system is manageable and the benefits are claimed. That is a considerable proviso.

My third point is a very specific one, relating to the small print of the Budget. Some of your Lordships may have missed this point. When the rural White Paper finally appeared in November last year, one paragraph in it brought great rejoicing to the hearts of Church people. It was in the context of a section affirming the usefulness of church buildings for community purposes. It stated:

    "We are acting to support the community role of churches in rural areas. ... we have announced that we will seek European Commission agreement to our proposal to reduce the rate of VAT (from 17½ per cent to 5 per cent) payable for repairs and maintenance on listed buildings which are also places of worship".

We had been campaigning for that change for a long time, because the Churches pay far more in VAT on repairs than they receive in English Heritage grants in recognition of the part that they play in maintaining this significant aspect of the national built heritage. The most reverend Primate the Archbishop of Canterbury welcomed that proposal, but, alas, the Chancellor failed to persuade Brussels. We warmly welcome the Chancellor's Budget announcement of financial compensation to offset the refusal of Brussels to allow the reduction. The Churches will in practice benefit from a level of 5 per cent VAT on repairs to listed buildings.

I raise the question of whether the provision should be limited to listed buildings. The heritage constraints on adaptation of listed buildings for community use are very severe in many cases. Church buildings that are not listed are much more readily adaptable. The heritage lobby will not get involved in proposed changes to the internal arrangement and furnishing of such church buildings. If the provision was designed specifically with the aim of making rural churches available for community use, why is it limited to listed buildings? Did the Chancellor believe that Brussels might more readily agree if it were limited to listed buildings? Can that point still be pressed? We warmly welcome the compensation package, but we hope that the Government will continue to press the case in Brussels for a reduction in VAT not just on listed buildings, but on any other church building if the work would make it available for community use. Thus far, we welcome and are grateful for that development.

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3.57 p.m.

Lord Howe of Aberavon: My Lords, I follow the right reverend Prelate with pleasure and acknowledge the importance of some of the points that he made. I hope that he will forgive me if I address the more substantial underlying theme that was so effectively presented by my noble friend Lord Strathclyde. Like the noble Lord, Lord Barnett, I am delighted that this House has an opportunity to consider the Budget at this stage and wish to see further progress in that direction.

I endorse one point made by my noble friend. There is mounting anxiety at the rapidly growing complexity of the tax system. Part of that is due to the changes being made to meet the point raised by the right reverend Prelate about help for children. I recognise the need for that--indeed, I stressed in my maiden speech in the other place a hundred years ago the need for something like a tax credit system that would reach the people who deserved and needed it. However, the complications remain exceedingly difficult and are only one aspect of the tax jungle that the Chancellor is rapidly extending. It was said last year by chartered accountants that the tax system was,

"irrational, confused, damaging the economy and out of control."

I suspect that the Budget will do nothing to improve that. I am grateful that the Chancellor continues to be committed to the Tax Law Rewrite project, which will at least simplify some of the issues.

My real anxiety is that put forward most formidably by my noble friend--the mounting incompatibility between public expenditure commitments and expectations of economic well-being over the longer term. I stress that it is over the longer term, because that was part of the point made by the noble Lord, Lord Taverne.

I was a little disappointed by the speech of the noble Lord, Lord Barnett. Over the years that we have sat opposite each other in this House, I had begun to form the impression that he was something of a reformed character. But his words today could have been taken straight from one of the speeches he made during the years between 1974 and 1979 when the unspeakable defended the indefensible.

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