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Lord MacGregor of Pulham Market: My Lords, like other noble Lords, I congratulate my noble friend Lord Blackwell on the subject that he has chosen for today's debate and on its timeliness. I agree entirely with his philosophy and arguments and will therefore attempt, without I hope too much repetition, only to embellish them with some practical illustrations from my own political experience.

I base my case on four propositions in support of the Motion. The first clearly reflects my own political philosophy—and here I follow the latter part of the contribution of the noble Lord, Lord Skidelsky. I was rereading over the Recess the autobiography of my
 
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noble friend Lady Thatcher. Very early on in the book, I came across this passage, which she wrote about the start of her government in 1979, on the role of a government in a free society. It underlies, for me, what the debate is all about. She said:

"It was the job of government to establish a framework of stability . . . within which individual families and businesses were free to pursue their own dreams and ambitions. We had to get out of the business of telling people what their ambitions should be and how exactly to realise them".

I would add to that, on dreams and ambitions, that it has always been a Conservative philosophy to encourage as many people as possible to own their own homes and to build up their own savings and pensions. High taxation regimes hinder that; tax incentives can help.

My second proposition is that, unless the Government specifically aim for a low-tax economy, there will be inexorable pressures to increase public expenditure, many of the increases being new creations of spending by the Government themselves. Without the determination to keep a low-tax economy, I do not believe that there are constraints. I shall illustrate that point later.

My third proposition is that the public sector uses resources less efficiently than the private sector, not least because it is not exposed to the cost pressures of competition facing businesses. One illustration of that is the recent statistic that health expenditure has increased in real terms by 28 per cent, whereas the increase in output is only about 6 per cent. Nor is the public sector often wealth-creating.

The fourth proposition is that we now face intense international competition from the low-cost economies of India and the Far East, especially China. That is a very important new factor. I follow what my noble friend Lord Blackwell said on that matter. If I have time, I shall say a word or two more about the subject.

It is worth recalling the last time we had a high-tax economy in the United Kingdom. I first came to the other place as a Member of Parliament in 1974 and spent the first five years in opposition. During that period, I believe that I was involved in every Standing Committee on the Finance Bill, in company with some of my other noble friends. It was a very salutary experience.

It is hard to remember now the ambition of that Labour Government, but noble Lords will recall that the noble Lord, Lord Healey, talked about taxing the rich "till the pips squeaked". We had a top rate of tax of 98 per cent in the pound, with all the disincentives that that produces. I really do not believe that a top tax rate of 98 per cent encourages people to work harder for that extra 2 per cent. There was also the impact on the black economy, the brain drain and so on. Coupled with that, we had exchange, dividend, price and income and nationalised industries controls, and high levels of government expenditure, despite the high taxation, based on government borrowing. I recall in the middle of one Standing Committee being told that the Chancellor had had to dash back from Heathrow because of the risks with the IMF in relation to
 
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lending. As a result of all of this we had a low performing economy, which caused us to be called the "sick man of Europe".

Over the Conservative years we changed all that. The immediate abolition of so many controls led 364 economists to predict dire consequences—and how wrong they were. That had a major impact. Making the tax changes inevitably took time, but as they took effect they energised the economy, brought about huge increases in the self-employed and small businesses, huge increases in what individuals were able to keep of what they earned for themselves and their families, and in savings, and entrepreneurs multiplied. Coupled with many other reforms we gradually turned things round to the strong economy that Labour inherited. We also demonstrated that high marginal tax rates do not yield high revenues; indeed, the reverse is true.

The present Chancellor continued this general approach—prudence, of course, was the name of the game—keeping public expenditure under control in his first three years. I believe that his long-term reputation will rest on that although he has largely squandered it since. My noble friends Lord Blackwell and Lord Lamont clearly illustrated the increases that have occurred in public expenditure since 1999—I do not intend to repeat those—and how the tax take has risen. There is an important point here. Although income tax rates themselves have not increased—although I agree entirely with what my noble friend Lord Lamont says about the starting point of higher rate tax—that should not allow the impression to be given that we continue to have a low-tax economy as so many other tax increases have occurred which have resulted in an increase in the overall tax revenue. I refer to the 66 tax rises during the Chancellor's period in office; the non-indexation of thresholds; the many stealth taxes; the national insurance increases; the new taxes comprising the £5 billion taken away from pensions; the substantial reductions in savings and incentives due to tax; and the enormous increase in the yield and the levels of stamp duty, which now, because of the increase in house prices, constitute a major tax take from many families. As the inheritance tax has nothing like kept in touch with the increase in house prices it now constitutes a real wealth tax on large numbers of families. The CBI calculates that businesses have faced a £7.9 billion per year increase in taxes since 1997. There has undoubtedly been a major shift towards a higher tax economy.

A further proposition in relation to public expenditure is worth developing a little further. In a regime where the Chancellor is happy to introduce so many new taxes and higher rates, an attitude of mind towards public expenditure is created among Ministers, Labour Back-Benchers, civil servants, sections of the media and pressure groups. There is not the same constraint on increases in public expenditure when you are increasingly moving to a higher tax economy.

When I was Chief Secretary to the Treasury I frequently had to say to colleagues, "I am sorry we cannot afford that; I just do not have the money". That is an important constraint that many businesses frequently
 
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face. Today, I would be inclined to say, "You will have to do what so many businesses have had to do in the past few years; that is, cut your costs to make yourselves more efficient". I would always emphasise the need to ensure that we get value for money from every proposition involving more expenditure. However, we have not seen that happening in the past few years. New policies are developed without proper regard to cumulative costs. Sometimes they can look small. During the debates we had in this House on the child tax fund I asked what the administrative costs would be in its first year. The Minister said that they would amount to £10 million. That does not sound very great in terms of total public expenditure, but £10 million here, £100 million there all accumulates and can make a very big difference. My point here is that there is not the constraint to ask every time, is this justified? Therefore, we have huge wasteful or non-priority expenditure and huge increases in management consultancy costs and advertising expenditure even at that level.

New regulations pour out, but every new regulation and every new regulator has a price tag, not just on the sector that is regulated but in government itself, as do most new policy initiatives. New burdens on local government, with local government having to pay the tax bill because there is not a commensurate increase in central government expenditure, lead to ever increasing rises in council tax, which is in fact another tax. Huge out of control expenditure on such things as the Scottish Parliament, the Millennium Dome and regional assemblies all adds up. They do not look big in themselves but cumulatively, if there is not the determination to keep public expenditure down, they cause public expenditure to soar.

I refer also to the number of civil servants; the micro tinkering of the Chancellor; the introduction of the working tax credit, the pension credit and so on and many other measures that have greatly added to the number of civil servants—up, I believe, by 64,000 since 1999. Now the Chancellor has pledged to cut the number of civil servants. I find it somewhat ironic that the man who through his policies has so substantially increased the number of civil servants is now trying to claim some credit for trying to cut them, although he does not seem to have had much success so far.

No wonder the number of tax inspectors has increased twice as fast as the number of new doctors and nurses. The administrative increases are colossal. I believe that the biggest indictment of this lack of attention to the determination to keep public expenditure under control is shown in the results of the Gershon initiative. It shows what a lax public expenditure regime we have had if he concludes that £20 billion plus can be taken out of public expenditure over the next few years.

My conclusion here—this is one of the strong reasons why I am so much in favour of the determination to have a low-tax economy—is that unless you aim for a low-tax economy you will not drill down on public expenditure, keep it under control, and ensure that every new initiative is totally justified in terms of value for money.
 
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I turn briefly to the question of international competition. It was very striking when Christmas shopping to notice how many goods, ranging from clothing, food and footwear to the vast number of children's toys that were purchased, compared even with five years ago, are sourced from India, the Far East and China. We are seeing a great deal of outsourcing of services to those low cost economies. The plain fact is that if we are finding it so difficult now to purchase goods that are manufactured in the United Kingdom, we must realise that the competition of those low cost economies means that we cannot sustain some of our high tax burdens. That new factor is another element in favour of working for a low-cost and low-tax economy.

Finally, above all, it takes time to reverse these trends. It took a great deal of time for our Conservative governments to get to the tax levels and the tax regimes that we set ourselves to achieve at the outset. That is inevitable as it takes time to get real control over public expenditure. Similarly, the other way, increases in public expenditure can occur very quickly and it will take a long time to pull them back. So what has been happening in the past five years—and in the plans for the next three years—is a symptom of an attitude of mind that has ceased to pay regard to prudent running of the economy. The trend is now obvious but the consequences will arise in the period ahead. The next Chancellor will have a very different legacy from the one that the present Chancellor inherited. I think it is common ground now that if a Labour government were returned, taxes would have to rise substantially to pay for that expenditure legacy. If ever the case for a low-tax economy were needed, it can be seen in the contrast between the years 1974 to 1979 and the subsequent years. It looks as though that lesson will have to be learned all over again.

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