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Lord Haskel: My Lords, I thank the noble Lord for giving way. The point I was making is that the difference between productivity in Britain and productivity among our competitors is, on various measures, between 10 and 20 per cent. If we improve our productivity and introduce more growth into the economy, that is how we shall improve our standard of living.

Lord Boardman: My Lords, I am sure that places can be found where productivity is much higher. But comparing like with like, given the degree of sophistication of the available technology, one must compare growth of 3.7 per cent under a Conservative

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government with 2.9 per cent under the present Government. I raise the point only because the noble Lord raised it in a way that was not entirely fair.

As regards the savings ratio, before the Conservatives lost office the rate of saving was over 6 per cent. Labour's prediction is that the rate will be 2.5 per cent for the year 2001. Those figures are given by Ernst & Young, a highly respected firm of accountants.

The total tax increase under Labour is now said to be the equivalent of 10p on the basic rate right across the board. It comes to about £28 billion, and the rise is the fastest in Europe. For the first time, tax in this country has exceeded the level of that in Germany.

The right reverend Prelate the Bishop of Hereford is not in his place; however, I must refer briefly to VAT on church repairs, a matter that he rightly raised. Originally, the Chancellor said that no VAT would be payable. He found that he was wrong. Europe has said that it will re-examine the matter in 2003. I understand from the Budget that the possibility of zero rating might arise. In the meantime, the Government have said that they will top up the present 5 per cent and give a grant to the Churches, which I very much welcome.

The Chancellor has stated that education and health will each receive about £1 billion. The average person in the street, when asked what the Chancellor is doing for education and health, will say that he is spending £2 billion. We know that the Chancellor has a "triple" approach; when we look at the small print that amount is seen to be spread over three years. The amount that will be spent on education and health each year is nothing like that--the figure will be £380 million for education and £290 million for health.

As I said, one of the things that I find most difficult to understand is the way in which the Chancellor and everyone in government have completely ignored the sum of almost £20 billion pounds in unanticipated SPECTRUM receipts. I should be grateful to know how that bonus is being presented. Surely that windfall must have a dramatic effect on future budgeting. I shall be glad to hear some comment other than the information that is tucked away in the small print in a Budget document.

5.54 p.m.

Lord Stewartby: My Lords, perhaps I may refer briefly to the overall judgment in the Budget. Last week's Budget included the ratification of public expenditure projections for the next few years which had been announced in the Autumn Statement. But, as my noble friend said, it also laid down additional expenditure in the areas of the National Health Service and education.

I am concerned that the Budget gives a stimulus to an economy that is already rather stretched. Consumer demand has been strong; the savings ratio is low; the labour market is increasingly tight; and the current account is in significant deficit. Behind all that, the world economic outlook is increasingly uncertain.

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As a result of the Budget, tax is to be slightly reduced; but public expenditure is to be substantially increased over a number of years. GDP is expected to grow: the central estimate is that growth will be 2.5 per cent over the next year or two. Yet public expenditure is scheduled to increase by more than 4 per cent in the coming year, and by more than 3 per cent in the year after that.

It is much easier to expand public expenditure than to constrain it. It must be remembered that public sector finances are highly geared to changes in the level of the economy. When the economy is buoyant, governments obtain rising revenue as companies pay more corporation tax; people pay a higher proportion of their incomes in tax as those incomes increase and, with more people in work, that again increases the tax take. An expenditure tax such as VAT will be buoyant with the economy itself.

At the same time, in those favourable conditions, welfare payments are naturally reduced and that produces a sharp improvement in government finances, as we have seen in the past few years. The difficulty is that if the economy then weakens, there is likely to be a reversal of the process and all the items that go with it; namely, there will be a loss of tax revenues and an increase in public expenditure on welfare and support services.

The danger is that the Chancellor is banking on a continuation of favourable economic performance but has made his expenditure plans on the assumption that they can move ahead of the rate of growth in the economy, even as the economy now stands. Therefore, any unexpected adverse developments or any shocks to the system could cause problems, leading either to the need to constrain public expenditure again or to raise taxes, or both. It is inherently risky to commit a government to public expenditure over a period of years at a rate exceeding the expected growth rate of the economy.

If there is a large surplus in government finances, it may appear at first sight perfectly safe and sensible to increase expenditure and to reduce taxes. Up to a point that is true. However, it must be remembered that the outlook can change fundamentally, and quickly.

I do not in any sense want to be a prophet of doom, but we must take account of a number of factors which have appeared recently and which cast some uncertainty, even over the economic projections on which the Budget is based. The two largest economies in the world have problems of their own. They are different kinds of problems. In the United States, there is severe retrenchment in the so-called new economy. That has had a significant impact on certain areas of the US economy, but it has also made an impact on business and consumer confidence in the US. Japan has been struggling for several years. It seems increasingly clear that that country is politically and culturally incapable of taking the measures to bring about the structural change that is necessary.

Only an optimist would say that the UK and continental Europe can remain entirely isolated and insulated from those factors. There is an increasing

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risk that economic conditions in this country will perhaps be a little less favourable--I hope only a little--than they were expected to be until recently. The sudden shake-out in the stock market is something of a warning.

Stock markets are not the most reliable of economic indicators, but they have tended in recent years to give signals about growth or slow-down which have been borne out in practice. The scale of the present setback in the stock market is, therefore, something to which we need to attend. Companies that are giving profit warnings are, in effect, saying that they will have less money to pay to the Government in corporation tax; that they are likely to have to cut back on their levels of staffing; and that, therefore, they are likely to be less enterprising. That will have an impact on the real economy. I do not want to overstate the position, but the scale of the setback in financial markets has been sufficient to give us a warning that it would be unwise to ignore.

Then there are unexpected shocks. During the past few days in this House we have been discussing the impact of the foot and mouth outbreak. Obviously, that is primarily a problem for rural areas and for the agricultural industry. Perhaps I may refer to the experience of my home village in the south of Scotland--although in view of what was said earlier I scarcely dare mention it. The local tea shop has had to close, the garage is experiencing difficulties, the village shop has lost its passing trade and the hotel/pub is struggling. Those experiences are localised and, perhaps, still quite contained problems at the moment in certain parts of the country. However, they can have a wider impact, especially when one considers them in conjunction with the fact that agriculture is now in a very dangerous situation.

I said earlier that I did not want to be a prophet of doom; and I certainly do not want to imply that an adverse economic outlook over the next two years is the only possibility. However, such matters sometimes arise when one is not expecting them. That is why I am concerned that the Chancellor of the Exchequer has made commitments to increase expenditure over the coming years at levels ahead of even his own projections of economic growth.

6.3 p.m.

Lord Islwyn: My Lords, I join other noble Lords in the thanks that they expressed to the noble Lord for initiating this most important debate. However, as several other speakers have pointed out, it is more about the Budget than about the report of the International Monetary Fund which voiced only the mildest of criticisms of the Government's policies.

The Chancellor of the Exchequer reminds me of a sort of latter-day Martin Luther. He is saying, "Here I stand, I can do no other". His text is, "No return to boom and bust". It has been prudence all the way but not without purpose, as his recent Budget has shown. The Chancellor has recognised that an artificially boosted economy, often to try to win a general election, invariably leads to an economic squeeze, high

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interest rates, repossession of properties, redundancies and factory closures. But Gordon Brown has also recognised that the essential ingredient for a successful economy is investment.

At the previous general election, and since, the Prime Minister pointed out that the future is, "Education, education, education". How right he is. The Chancellor has responded by announcing that education spending is to rise by 5 per cent a year above inflation. That should strengthen our education system, and help to improve skill levels. This analysis was endorsed, not criticised, by the IMF. As my noble friend Lord Tomlinson pointed out, there are policies to promote innovation, research and development, competition and entrepreneurship, which will contribute to raising productivity. The Chancellor is seeking the pathway for the achievement of economic success, so that we can compete effectively with our trading rivals in the markets of the world.

Any responsible government have to be concerned about the health of the nation, and must make provision through state funding for an efficient and adequately financed National Health Service. The vision of Aneurin Bevan, the creator of this great service, was immense. When the noble Baroness, Lady Thatcher, was Prime Minister she made the famous statement that the NHS was safe in their hands. I do not know how many people believed her, but some while ago I spotted some figures in one of our daily national newspapers which showed that Italy spent 11 per cent of its GDP on health. Our comparable figure was given as 5.8 per cent. I do not suppose that those figures are now strictly accurate, but they certainly gave me food for thought at the time.

Nevertheless--and very wisely--the Chancellor has now authorised health expenditure to rise by 5.7 per cent above inflation each year. I am a supporter of traditional family life--of two-parent families--but the basic need for any family is to have a roof over its head. The important issue of mortgages comes to the forefront here. To his great credit, the Chancellor has adopted policies that have ensured that mortgage payments are averaging £1,200 a year less than was the case under the previous administration. What a boon this must be to families.

Another vital factor is inflation. We now have the lowest figure in this respect for 30 years. The executive summary of the IMF report states:

    "The UK is experiencing the longest period of sustained, non-inflationary output growth".

With inflation at such a low level, I ask the pensioners of this country: is this not the best possible way to keep the value of your pension, rather than see it eaten away by inflation? Likewise, from next month, all pensioners will receive either the £5 single increase or the £8 increase for a couple. In addition, we have the winter fuel allowance, and there are now free television licences for those aged over 75 years.

Other measures were included in the Budget to help less-well-off pensioners. There was also an expanding 10p tax rate, and a promise of a pensioner's credit in

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the next Parliament to help low-income and middle-income pensioners. Nevertheless, I am not starry-eyed in regard to the Chancellor's proposals for pensioners. I believe that we should return to increases based on inflation and on average earnings, which was sadly taken away in the first period of the Thatcher government.

I turn to the most basic issue of all, employment. The noble Lord, Lord Taverne, in his usual way eulogised the glories of the European Union. However, I read this week that German unemployment now stands at 9.3 per cent, while our unemployment is approximately half that figure. I recall that Germany has joined the euro. There must be a message there somewhere.

The great work of John Maynard Keynes, The Theory of Employment, was essentially about unemployment. For me, unemployment has always been like a tap left running; that is, a waste of economic resources. The Chancellor should be applauded for the fact that unemployment is now below 1 million--the lowest figure for over 25 years; 1 million more people are in work than in 1997 when the Conservatives left office. Over 25,000 young people have been helped into work through the New Deal. Youth unemployment has fallen by more than 75 per cent and long-term unemployment has been halved.

What worse start in life can there be for a young person than to be out of work? Unemployment is the worst scourge of all. I recall that under the previous government at one stage the unemployment figure reached 3 million. If the Opposition were returned to power, they would soon revert to their old failed policies. The result could be catastrophic for our country. Their 18 years of power can be summed up in that little catch-phrase of a decade or so ago, "private affluence and public squalor". The present Chancellor is doing a first-class job. He has a wonderful record of success. He deserves the grateful thanks of the nation.

6.12 p.m.

Lord Hodgson of Astley Abbotts: My Lords, I too begin by thanking my noble friend for giving us the opportunity to discuss this important matter. However, if one is 19th on the speakers' list in a debate of this nature it is perhaps inevitable that many of one's points will already have been made by other noble Lords, no doubt in a far more felicitous manner. I have no wish to weary the House with repetition at this hour.

Like my noble friend Lord Sheppard of Didgemere, I wish to focus on the "how" of taxation as opposed to the "why". It is another area where the Government have "spun" rather than delivered. If that means that I focus on the micro rather than the macro, I make no apology. I comfort myself with the thought that it is at the micro level that our fellow citizens have to live and work.

Until four years ago there was a long-established system for levying tax on private individuals who fell outside the PAYE system. Noble Lords will recall that

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the system had three stages. Information on the individual's tax return had to be submitted by the end of January in respect of the preceding tax year. The Revenue then calculated the tax owed and levied a demand. Finally, in due course, no doubt after some arm-wrestling, the tax was agreed and paid. The contract--if I may use that word--between the Government and the taxpayer was that the taxpayer had one single legal obligation; that is, to submit the correct information on his or her tax return by the due date. The Inland Revenue had the obligation to make the tax calculation and the faster it did so, the faster it could claim the tax.

However, four years ago that whole system was changed with the introduction of self-assessment. Not surprisingly, the basis of the contract between the taxpayer and government changed too. Now, the taxpayer has not only to provide the information; he or she also has to calculate the tax. That saves the Inland Revenue hours of work without at the same time prejudicing its right to reach down and take an individual's tax return for checking. Moreover, the taxpayer not only has to calculate the tax, he or she has to pay it by 31st January each year or face interest or other penalties. Further, he or she has to make--

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