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There was, however, one thing that I did understand about it in my day which comes up again today: the scale of the tax avoidance industry. I remind noble Lords that it was my right honourable friend the present Prime Minister who devoted his time as Chancellor to trying to do something about tax avoidance, but I am afraid that it was rather like the many-headed hydra: the more you cut off one scheme, two more sprang up.

We got our Finance Sub-Committee because of the efforts of Lord Williams of Mostyn, our late lamented friend. As I listened to some of the stuff—I was going to use a even worse word—coming from the opposition Benches, I asked myself, “Didn’t they have 18 years in power? What did they ever do of that sort?” What did they do about tax avoidance? There were too many of their friends in the business, to be perfectly honest. I shall not make too many political points, but I think that they ought to recall that they were in power for quite a long period. When they make a fuss about the economy, we should ask: was it not their Government who raised the unemployment level to 3 million? Now they have the nerve to criticise the present Government because it is the fashionable thing to do. They ought to reflect on their record, to which I shall come on a rather more significant scale. I hope that the noble Baroness, Lady Noakes, when she speaks for the Opposition, will respond appropriately.

My contribution to today’s debate will be confined to economics and macroeconomic policy. This is not to deny the significance of political aspects of policy. After all, those who enter political life do so because they believe that politics are important and I do not criticise them for making political points. Equally, I became an economist because I was convinced of the relevance of economics in elucidating and solving economic problems, not least those to do with economic policy. I still believe that; I still believe that our economic problems are solvable; and I shall go even further by boasting that I think that I know what we ought to do.

My remarks will be dismal to the point of harshness. I expect to make few friends, if any, in your Lordships’ House. Certainly, I expect to make no friends on the Front Benches either on this side or opposite. I do not believe that the political leadership of any of the main parties will welcome what I have to say. I am coming near to the end of my time anyway, so I am not at all sure that I really care.

There is no doubt that the rise in food prices is externally generated. There was a small movement in the period from 2001 to 2007 and then a surge in real

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food prices, but real food prices now are still well below those of the 1980s and have only recently passed those of the 1990s. The cause simply is that demand has risen and supply, as is normal in this area, has responded slowly. Therefore, the real price of food goes up. No one predicted—I certainly did not—the effect of biofuels, which was supposed to be so good, on food prices. Supply has responded slowly but, in the end, it always adjusts in the case of food. In my judgment it will adjust but we have to bear the consequences of what has happened until the adjustment takes place. In my view, in an obese society, it does no harm that we have to bear some of the consequences.

Equally—and no one doubts it—the energy price rise is also externally generated, and is due to the monopoly power of the OPEC cartel and to additional speculation. Both those price rises are relative but, with other prices slow to fall, which is normal in our economy, the price level rises. On any understanding of the economics of this, the rise in the price level is not the same as inflation. Some noble Lords may never have had an economics lesson, but that is absolutely the case: it is not the same as inflation, in any technical economic sense. It becomes inflation only if firms and households respond by trying to raise other prices and wages and if the Treasury and the MPC facilitate their ability to do so. The Treasury has the main task of seeing that that does not happen. I have not read today’s papers but if what noble Lords have said is in them, the Treasury seems to be doing the opposite of what I am saying—but that is my bad luck.

First, the Treasury must under no circumstances subsidise food or energy. It dawned on at least one commentator in the Financial Times a couple of weeks ago that that is the right thing, although not on most other commentators. On energy in particular, economic theory tells us that when confronted by a monopoly we must first all take the hit; when the real price of energy has gone up, our real standard has to go down. That was a lesson that we did not learn in the previous Labour Government, which is why we ended up with the IMF crisis; we thought that we did not have to take the real hit, but we did—and by “we” I mean all of us have to take it. The sooner that we take that real hit, the better, and the quicker we can get the economy right. Therefore, noble Lords will not be surprised to know—and the noble Lord, Lord Marlesford, is aware of my view—I would have increased the excise duties drastically rather than postpone their increase. But that is just me. The point is that it lowers the demand for oil, hits the profits of the oil cartel, which is the only thing it understands, and causes speculators in oil to start to worry whether their speculation is not suddenly going to reverse itself. They will panic and their speculation will shift the other way. We need to take a ruthless approach to this, but we cannot get away from the fact that we will have a real hit, at least in the immediate future.

I go further—and the point was made following the Question put by the noble Lord, Lord Higgins, yesterday, which I purposely did not join in on, as I told him, because I wanted to say save my remarks for today. My noble friends Lord Barnett and Lord Sheldon also said that fiscal policy must be tightened, not loosened.

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That seems perfectly obvious. I know that my right honourable friend the Chancellor, out of the goodness of his heart, has been rather too kind to his honourable friends in the other place on these matters. The understanding of my honourable friends in the other place on fiscal issues is minimal at best, and for the most part non-existent. I certainly thought that getting rid of the 10 per cent tax band was a sensible idea. I am also aware that it is immensely difficult to make any change in public policy without hurting some people.

I can cite a classic example of this. I thought that the noble Lord, Lord Forsyth, said that he did not agree with getting rid of the 10 per cent tax band but that he did agree with compensating—but I hope that he did not say that.

Lord Forsyth of Drumlean: My Lords, I very much support getting rid of the 10p band, which was a great simplification. What I objected to was not raising the threshold to the level of the 10p so that it had an onerous effect on the lowest paid.

Lord Peston: My Lords, I know about that, but I would not even have done that, which shows how terribly right-wing I am compared with the noble Lord. The classic example of a correct policy under which some people suffered is the abolition of the corn laws, which goes back a long way in the history of his own party. I strongly believe that the abolition of the corn laws was a great step forward, but there were some people who suffered. Rightly, it would never have occurred to those who wanted to do it that they ought to compensate the losers in order to do that. It is not my view generally that if you are keen on reform you always have to compensate the losers. It is a sad state of affairs, but sometimes reform matters more.

What do I also say to my noble friends and right honourable friends in the Government? For the next couple of years the public expenditure side must be kept very tight indeed. The thought that I had is that public expenditure should be indexed by the same index that the MPC is targeting; namely, 2 per cent. I know that the relative price effect will cause that to mean that public expenditure will really be squeezed and that will affect all sorts of deserving people, for whom there is no shortage of pressure groups, whether they are our soldiers, our nurses or our policemen. They have all got to be told, first, simply, “No way”—but if departments want to help them, they must be told to find it within their own budget. It will be indexed by 2 per cent and the departments will have to find the real transfers and take the tough decisions. Without that, I see no hope of any policy having any chance of success in the immediate future. But that policy would work within a fairly short period of time.

What is the task of the MPC? As we know, the MPC’s target is an inflation target; as far as I know from the history of the MPC, and I was in it from the beginning, the subject to that bit has never been allowed to weigh in their minds in any particular way. I disagree with the noble Lord, Lord Marlesford, in that I believe that the economy requires loosening on the MPC’s side, but only if the fiscal side is tightened. In other words, the right policy mix—and again, this is in response to the noble Lord, Lord Higgins—is to have

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a much tighter fiscal side, which enables the monetary side—well, it is not really the monetary side, because it is not really money. In fact one thing is that despite all the efforts put in to find the measure of the money supply that correlates with inflation—and we are talking about millions of pounds of research money—no one has yet found the measure that works, including those most committed to it. It is strange, but they cannot find it.

My general feeling is that the MPC must wait for a while, until the Treasury demonstrates absolutely that it will not validate inflation on its side or add to inflation expectations. In that case, the MPC can then move—and I hope that that happens sooner rather than later. We must take the income cut without delay because of the oil price rise; there should be no shilly-shallying about the MPC moving when the time is right. But what will really restore confidence is the Treasury talking a very tough story on the fiscal side. Oddly enough, to go a little into politics, if the Treasury were to start talking in that way, that would really restore business confidence and would therefore enable the MPC to do what it needs to do. It would also put the Opposition on the spot and give the Government a chance to fight back—and I intend to put them on the spot now. Instead of the airy-fairy stuff we hear from Mr Cameron, let alone the Liberal Democrats, about what the Conservatives will do some time in a never-to-come future, I should like to know what they would do today. Would they drastically tighten up the fiscal position and then tell us which bits of public expenditure they would cut? I should like to hear also from the Lib Dems what they would do, rather than pretending that eventually there will be efficiency gains. The thing about efficiency gains is that you cannot spend them until you have them, which is a bit too late.

So my view is that, by following my realistic policies, the Government would gain politically and the Opposition would eventually be forced to tell us exactly what they would do to get the economy right.

11.50 am

Lord Stewartby: My Lords, the noble Lord, Lord Peston, said that he was perhaps coming to the end of his time. Many of us in your Lordships’ House profoundly hope that that is not the case. His contributions to our debates are always worth listening to, and you cannot say that of everyone.

The noble Lord has faced us yet again with some of the tough dilemmas that are inherent in our situation. I do not pretend that everything to do with the difficult economic situation is due to the Government. Not only are large-scale international factors at work in the price of commodities, oil and food, there is disruption and dislocation of the proper functioning of the financial system both globally and in our own country. But one has to come back to the point that most of the profound difficulties faced by any Government in trying to introduce a Budget or a Finance Bill have been made worse due to the Government’s spending binge.

One has to look back to 2002, when this process really began in earnest. Year after year, the Budget provided for increased borrowing requirements. The

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borrowing is cumulative, and in almost every year the actual outturn was worse than had been predicted at the time of the Budget. One cannot go on doing that indefinitely. It is not just the Opposition saying that the national finances are in a mess. Many independent commentators and international organisations, such as the IMF, the OECD, and the EU Finance Ministers, have pointed to the fact that the percentage of debt in this country has exceeded 3 per cent—the Maastricht agreed figure—but the Government have not appeared to take any steps to constrain it. Sooner or later, that has to happen.

That is relevant to the Budget. It means that this year, as in previous years, the Government have had to conduct a desperate search for further sources of revenue. If that comes at a time when individuals are facing a serious squeeze on their personal finances as a result of food prices, energy costs and so on, it goes a long way to explaining why there is such unprecedented taxpayer fury at the impositions in the previous Budget. At the right time, one has to exercise a lot of discipline. As the noble Lord, Lord Peston, said, it may require tough decisions.

I am sure that I am not the only Member of your Lordships’ House who has a clear memory of the 1981 Budget, which was an austere Budget formulated in very difficult circumstances. There had been oil shocks and heavy expenditure by a previous Labour Government. We had to bite the bullet. Doing that, and having the courage to do it, meant that the reaction was not particularly hostile. Many people accepted that it was necessary. We were told that that sort of Budget would be very unpopular and should hardly be contemplated at a time of recession, because it would make it worse. Three hundred and sixty four economists wrote a famous letter saying that the Budget would make things worse. Actually, all economists pretty much agree now that the economy began to recover almost simultaneously with that austere Budget. I expect that it will happen again if that is what takes place this time.

Taxpayers’ sensitivity to changes now is very great. Some of the rows that have followed this year’s Budget and Finance Bill have been fiercer than I can remember on any other occasion. It is because they are being clobbered when they have already been clobbered year after year, and when they do not feel that the higher taxes they have been paying have produced revenue that was wisely spent and where the benefits could be seen to be coming through. That carries with it a lesson that any Government contemplating a Budget in difficult times have to bear in mind.

I do not want to discuss the details of issues such as the 10p band, vehicle excise duty, capital gains tax, non-domiciles, fuel duty and so on, because they have had enormous coverage, including quite a bit this morning. Those issues are generally very well known. However, one has to look at some of the aspects of them because of what they tell us about the Government’s approach to the problems we face.

I shall use the 10p case as an example. There is a vivid phrase used in the military, the “flash-to-bang time”, which measures the time it takes after a detonation for the sound of the explosion to be heard. The

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flash-to-bang time is critical in military terms, but it is also critical in political terms. The flash on the 10p issue came last year with the announcement of the abolition of the rate, but the bang came only a year later when taxpayers found that their latest payslip was incorporating the results. And the lid blew off. It was an explosion that was much louder for having been introduced in that way, louder than it would have been had a more candid assessment been made at the time.

The explosion also produced a very perverse consequence: the Crewe and Nantwich package, which will apparently cost £2.7 billion in revenue. I have read in several places that £2 billion of the £2.7 billion will go to people who did not lose out by removal of the 10p band. That is absolutely crazy, especially since, as the Minister has honestly conceded, it will leave about 1 million households still worse off. That is a terribly bad deal for the taxpayer. It is the sort of deal that, unsurprisingly, is resented. I can only wonder what assessments were made about winners and losers. What assessments were made a year ago when the whole proposal was first floated? What sort of assessment has the Treasury made of the consequences for borrowing—the subject of speeches by my noble friends—as a result of these significant changes?

I am more than 20 years out of date on the inner workings of the Treasury and Finance Bills and so on. But we were always careful to measure the impact of specific tax changes on different types of households or individuals to ensure that they were not too severe in any particular case. Can such a process have been gone through here? I do not believe so; otherwise they would not have come up with the answer they found.

I have lost track now—this is what mariners call dead reckoning, where you work out where you might be if certain assumptions are right, and hope that you have not gone aground in the mean time. However, if you add the extra debt that will arise from the £2.7 billion, it will affect public expenditure not only this year but year after year. Once you have borrowed £2.7 billion, you have an ongoing annual increase in public expenditure of well over £100 million merely to service the debt. You cannot go on doing that year after year. You certainly cannot do it after you have taken a judgment in the Budget, seeking to erode it by adjusting so many of the component parts that the original arithmetic is no longer valid. I do not know what the correct arithmetic is today. We would find it helpful if the Minister could enlighten us.

This flash-to-bang time business is becoming a bit of a habit. The vehicle excise duty increase was first delayed for six months, and now I understand that the Glasgow announcement means that it will be deferred for even longer. We have these budgets where parts of the components are being suspended for different lengths of time. Getting any grasp of what it means for overall debt is becoming technically very difficult to do.

The following is a very political remark, but I shall say it in a low key. The position has not been helped by the sort of duplicity with which the former Chancellor presented his Budget and his figures, and of which he

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was so fond. One found that all the dirt was in the Red Book, while the Budget speech itself was bland and full of presentational skills. That really does bounce back and explode in one’s face after a very short time once people realise that the measures they heard are no longer the whole truth. They resent it.

The combination of all those factors has led to an unusual degree of disillusionment. It suggests that policy is often made on the hoof; that individual changes are not properly costed; that the costings are not explained; that the proposals are ill thought out and require amendment, while the amendment process itself becomes increasingly foggy; and that decisions are too often seen to be taken as a result of political calculation rather than for the genuine financial and economic needs of the country. Unpicking these Budget measures one by one by varying revenue costs undoubtedly undermines the integrity of the Budget process itself. It encourages taxpayers to regard the overall Budget judgment as flexible and the individual measures as open to renegotiation. You cannot have these jelly-like, wobbly Budgets which significantly change their shape after the Budget is introduced. However you look at it, it is not the way to run our national finances.

12.04 pm

Viscount Trenchard: My Lords, I am grateful to the Minister for introducing the debate but I thought his approach was extraordinarily complacent given the financial situation in which we find ourselves. Like my noble friend Lord Forsyth, I am most surprised that he had nothing to say on the Government’s decision to abandon their fiscal rules. The Minister referred to the sub-committee’s well targeted and useful report but, as my noble friend pointed out in his excellent speech, he completely failed to answer properly any of the serious criticisms in the report. Most devastating was the committee’s conclusion that the formulation of tax policy has been marked by uncertainty of direction, exacerbated by poor examples of consultation.

In debating the Finance Bill each year, noble Lords are rightly ever mindful of the need to respect the supremacy of another place on these matters. I was not fully aware of the emergence of a convention that your Lordships’ House should concern itself only with technical issues of tax administration, clarification and simplification. As your Lordships are aware, the Finance Bill sub-committee’s terms of reference specifically exclude the consideration of rates or incidence of tax. Of course, this is absurd, and the sub-committee’s most helpful report inevitably covered rates and incidence in relation to the effect on international competitiveness of the new rules on non-domiciled persons.

Since the reform of your Lordships’ House in 1999, it has sometimes been questioned whether the statutory restriction of the powers of the House on money Bills is any longer appropriate, especially given the wide disparity in levels of experience and knowledge of such matters in favour of this place rather than another. Even if the present restrictions on your Lordships’ powers are to remain, and perhaps because they exist, it is surely right to question the logic in the restriction on the sub-committee’s right to consider aspects of rates and incidence. On this I agree entirely with my noble friend Lord Higgins.

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In any event, as noble Lords are aware, matters of rates and tax incidence are often discussed in your Lordships’ House during debates on economic or pension matters and many other areas. I welcome the report of the working party of my noble and learned friend Lord Howe, Making Taxes Simpler, and its endorsement of the recommendation of the commission of my noble friend Lord Forsyth to establish an office of tax simplification—although I am not entirely sure about the nomenclature. I also feel an instinctive aversion to the establishment of additional permanent quangos that tend to add to the cost and complexity of the bureaucracy. We certainly need an OTS now, but I would hope that its ultimate aim would be to do itself out of a job once it had achieved its task under a future Conservative Government—which I hope will in any event apply a “keep taxes simple” rule in the Treasury’s management of fiscal affairs.

My noble and learned friend Lord Howe’s report also recommends the establishment of a new joint parliamentary Select Committee on taxation. This sensible proposal should do much to improve the quality of tax legislation over what we have seen in the past 10 years. This Joint Committee would of course have no powers to initiate tax changes, but its duty to consider fully the rates and incidence of taxation should not be restricted in any way by the fact that half its members will be drawn from your Lordships’ House. If such a restriction on a new Joint Committee’s scope were to be established, it would greatly reduce the value of such a committee’s reports and advice.

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