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Unemployment has already reached 2.4 million and is rising, and we have to remember that it is the direction rather than the level of unemployment that has an impact on economic activity. When the level of unemployment rises, those without work feel little prospect of getting jobs, and those still in jobs are worried about joining the dole queue. When unemployment starts to fall, hope is restored and anxiety is diminished, but consumer demand is likely to be very fragile until unemployment turns.

Let us look at employment. The great boom in jobs has been in the public sector, which now employs no less than 5.8 million to 6 million people, or about one in five of the working population. That is not entirely surprising because, with the help of Brussels, over the past 12 years we have seen a deluge of new rules and regulations, many of which have been gold-plated by our Civil Service, and the creation of endless new quangos and inspectorates. Of course, several people have referred to the Finance Bill as the sort of thing that causes extra employment. I hope that when my honourable friend Mr George Osborne becomes

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Chancellor, his target will be to cut as many pages out of the financial legislation as this Government have put into it.

By contrast, I remind the Minister that manufacturing in the United Kingdom now accounts for only 13 per cent of GDP. Mr Ed Miliband is trying to reduce it more by insisting that a significant proportion of our energy should be generated from wind power, which is no greener than nuclear power but less reliable and twice the cost. That is the way, as the Prime Minister might put it, to price British workers out of British jobs.

We were challenged a few moments ago by a most distinguished former Minister about the scope for spending cuts. Perhaps I may give an example which I mentioned last week. Now that the new Home Secretary has announced that ID cards should be voluntary, there is no possible excuse for setting up a new ID card system with its own database. We have a perfectly good voluntary passport system with its own database, so we could abandon ID cards in favour of passports and that would save hundreds of millions of pounds. There are plenty more ideas where that came from but I do not have time to give them now.

Finally, we come to the top tax rate of 40 per cent, which has survived for 20 years and, I believe, has played a real role in giving the City of London the opportunity to become one of the world's great financial centres. The noble Lord, Lord Sheldon, particularly singled out this rate of tax but I am reminded that the House of Commons, for the only time ever, had to be suspended in disorder during a Budget speech, such was the rage of the Labour Party when my noble friend Lord Lawson, then Nigel Lawson MP, introduced that rate in 1988. Interestingly, the Labour Party subsequently felt that it had to give an undertaking in three successive election manifestos that it would not raise the top rate above 40 per cent. Of course, it has now broken that promise. I wonder whether, in its next manifesto, it will guarantee not to raise income tax above 50 per cent.

It was very interesting to hear the noble Lord, Lord Sheldon, because I remembered that he and the noble Lord, Lord Barnett, were the two acolytes of one of our most distinguished-in some respects, at any rate-former Chancellors, the noble Lord, Lord Healey. The noble Lord, Lord Sheldon, was Financial Secretary from 1975 to 1979; the noble Lord, Lord Barnett, was Chief Secretary from 1974 to 1979; and the noble Lord, Lord Healey, was Chancellor from 1974 to 1979. When the noble Lord, Lord Sheldon, was speaking, I almost wondered whether I could hear the noble Lord, Lord Healey, squeezing his orange juice.

When I last spoke-in our economic debate on 7 May-I raised points on credit card debt. I pointed out that in the UK alone, the debt on which interest was being paid was well over £40 billion. As the interest rates on credit card debt are very high indeed, I suggested that much of that debt could prove to be toxic. I then made some suggestions about what the Government should do to prevent excessive exuberance in the use of credit cards. It is perhaps no coincidence that, last Wednesday, American Express announced that it had stopped its pension contributions to its

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60,000 employees worldwide, which includes its 6,000 UK staff. Frankly, stopping paying your staff is hardly an indicator of financial viability. I suspect that the toxicity lurking in the unpaid credit card debt, which is therefore subject to interest, could explode into a fresh drama in the financial world. Is the Minister able to say whether HMG are more relaxed than I am at this prospect?

Today I received the Minister's letter dated 14 July, for which I thank him, in which he referred to the consumer White Paper published on 2 July which set out proposals to improve protections for credit card borrowers. Although I am grateful for his letter, I wish I had not had to wait 10 weeks for it and indeed that I had received it earlier than the day of our debate. It would seem from the White Paper, which I welcome, that the Government are now minded to move along some of the lines I suggested. Perhaps I should congratulate the Government on reading Hansard for 7 May. However, the White Paper does not deal with all my points, especially two crucial ones. I would therefore very briefly like to refer to my original proposals.

First, credit card companies should be required to do due diligence before issuing a card. That would include checking on what other cards an applicant has, which means a central record of credit card systems, as implied in the White Paper. Perhaps that will come. Secondly, young people should not be allowed more than one credit card. I do not know the Government's view of that. Thirdly, the balances on all credit cards should be cleared at regular intervals, and failure to do so should result in suspension of further credit. That appears to be signposted in the White Paper. Fourthly-and most importantly because it would avoid the Government getting involved in supervision of any of this-a credit card debtor who could show that his credit card company had failed to follow the rules would not have to repay the debt. That fourth proposal would be a real incentive for the credit card companies to, as the jargon has it, put their house in order. Perhaps the Minister would comment on that.

I have one final point. If the Prime Minister were prepared to face reality, he would tell the British people that under his watch he allowed a huge and unsustainable level of consumer credit. The figure in the White Paper is £1.4 trillion, the vast majority of which is mortgages but there is £230 billion of non-mortgage debt, of which the credit card debt is put at £53 billion in the White Paper.

The Prime Minister should also emphasise that to prevent total collapse he has had to mutualise much of the debt; that is, transfer it to all UK taxpayers. That is £493 billion just for the four banks that would otherwise have gone bust. In addition, Mr Brown has allowed a rapid growth of public spending to raise the need for public borrowing well above what may be possible to finance at anything like present interest rates. A number of my noble friends have referred to the potential crisis in funding the national debt.

The British people face years of austerity under whichever party is in power. The financial competence of my honourable friend George Osborne is well illustrated by his decision-and the detailed plans in his policy

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White Paper on sound banking, which was published today-to transfer ultimate control over prudential supervision of the financial sector from the FSA to the Bank of England. I wonder how long it will be before Mr Brown has the confidence to ask the British electorate whether it feels that his experience-in other words, his track record-fits him to be the best steward of this situation, or whether it might prefer a young and vigorous Conservative Government to pick up the pieces. It would at least start with a clean sheet, as have the Obama Administration in the United States.

9.21 pm

Lord Naseby: My Lords, I declare an interest as chairman of Invesco Recovery Trust 2011, quite an apt title for this debate. I would like to be associated with the speeches made by my noble friends Lord Lang, Lord MacGregor and Lord Forsyth. I shall not cover the ground that they have already covered.

I want to highlight three things. The first is savings, which I hold dear. They are the neglected vital ingredient for a successful society. Long ago, when I read economics at Cambridge, Keynesian philosophy was drummed into me. It is basically that savings equal investment and once those savings are made they flow through to good investment. Today, we have a savings ratio of just under 3 per cent. It should be nearer 8 per cent or 10 per cent to be the least bit successful. The only incentive to make anybody save at the moment is the fear of unemployment or the recession. As one looks through the Bill, there are no incentives for savings. There is nothing to encourage the family unit that is in employment to save, or anything about looking to see whether the tax on dividends should be reduced to improve the return on equities and thereby improve the profitability or viability of pension funds. There is nothing about inheritance tax. Why is it that over half the countries in the rest of Europe have already got rid of inheritance tax? It is because they know that inheritance tax is a tax on the family and means families' well earned lifetime savings being double taxed. There is nothing in the Bill about real safety for personal or family savings. There ought to be a flat rate of £100,000 or something of that order.

I said that I would say nothing about savings, but I declare an interest as a trustee of the parliamentary pension fund and remind noble Lords that today the average pension of a former Member of Parliament is £16,160. That is hardly gold-plated, as most of the press seem to think.

Lord Higgins: I do not believe it, my Lords.

Lord Naseby: My Lords, my noble friend says that he does not believe it. Those are the facts, and the trouble is that there are people in the press who do not believe it either. Presumably, my noble friend joins them, but those are the figures in the annual report so he will have to accept them.

Lord Higgins: My Lords, the reason I expressed surprise is that it seems to me that the figure is likely to be much lower than that. I served for 33 years in the Commons and bought eight additional years; even so, my pension is barely the amount my noble friend said, and I must be way above the average.

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Lord Naseby: My Lords, my noble friend's calculations are incorrect, and I draw his attention to the annual report, which he was sent and should have read. He clearly has not done so yet, so I shall send him another copy.

The second thing I want to raise is tax and incentives. I do not want to be too hard on the Government, but they really are the Government who know how to tax. Never have a Government managed to tax the way the Prime Minister Gordon Brown learnt to tax when he was Chancellor. It all started with the £5 billion tax on pension funds. That was the killer blow for defined benefit pensions. Even in last week's press we were told that we will pay £20,000 in tax to contribute to care homes-not ours but someone else's; there is no guarantee that that £20,000 tax on your pension will provide one for you. In the past few days, we have had all sorts of wonderful suggestions for new green taxes on this, that and the other, which frankly are badly thought through.

I turn for a few moments to our present predicament. I re-emphasise that the Prime Minister's strategy, which was geared to ending boom and bust in the trade cycle and financed by borrowing without the means of repaying, has failed. It always will fail, and it was always destined to fail. Now we face the full horror of massive debt. The first rebuilding plank-I hope the Minister will cover this when he replies-is to have a credible spending review now, not at some time in the future when everything is allegedly in position. Now is the time to do it. If it is not done, and if there is to be a delay of six or nine months, overseas creditors, as sure as day follows night, will depart and sterling will fall. Other noble Lords have already made that point. Total government spending in 1993-94 was £283 billion. Today, it is £623 billion. If you allow for inflation, which is perfectly fair, it is £404 billion. That is almost £200 billion of extra public expenditure. Perhaps it is not all wasted, but a huge amount is.

A number of my noble friends know that I am not really a financial man but a marketing man by profession. We in the marketing world learnt long ago that you build on success. Where are the incentives in this Finance Bill to help to rebuild our nation's successes and to encourage entrepreneurship? There is none. The VCT and EIS schemes were two pretty good schemes to encourage private investors, but they have been removed in favour of a flat-rate capital gains charge. Nor is there anything in the Finance Bill to encourage the pharmaceutical industry, advanced electronics, engineering developments, architecture, entertainment, the law or advertising-all successful industries in this country.

Even more important is our biggest industry, the financial services, which is in absolute turmoil at the moment. Back in 1980, the industry accounted for 18 per cent of our value-added measure of GDP. In 2007, it had risen to 32 per cent. How are we going to sustain and rebuild faith in that largest of our industries? We have the expertise in that industry and a lot of advantages; we have a free exchange rate and good lawyers and good financiers who are experienced across all these areas. That creates a unique advantage for this country that we cannot and should not throw away.

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My final point relates to a particular aspect of the industry: the banking system at the moment. Higher banking reserve ratios are being required that clearly will diminish the return on equity unless the return on assets increases. An increased return on assets means that the users of the banking services need to pay more, which in turn is likely to depress the general recovery.

Of course, the banks' return on equity can fall, but if they have to increase their reserve ratios and fund some sort of future contingency fund, they will act as they see fit and where they see profits. We know that the banks at the moment are determined to reduce their risk and to lend only where it is highly profitable. That is not what the economy needs, but it is inevitable unless the authorities realise that their current actions are making the situation worse. The failings of the past regulatory system do not need to be solved overnight. If we need higher reserve ratios they do not need to be installed immediately. But the immediate application of higher reserve ratio requirements that took place last year significantly contributed to the near-collapse of the banking system. Unless the Government understand that, our recovery will be delayed even further.

9.31 pm

Lord Northbrook: My Lords, I always start by welcoming positive items in the Budget. This year, I give praise for the increase in first-year capital allowances, the deferral of business rate payments, the strategic investment fund-provided that it is managed in a sensible fashion-and the car scrappage scheme. I also warmly welcome the increase in ISA limits. They are all small beer in the scheme of things, but they are still welcome. My speech will focus on the economic background to the Finance Bill. Then I will look at one of the main tax-raising measures. Finally, I will move on to discuss once again the excellent Economic Affairs Committee report issues.

The 2009 Budget was delivered against the background of the Budget deficit, as a share of the economy both this fiscal year and next, being the largest since World War II. This year alone the Government will borrow a breathtaking £175 billion, representing 12.4 per cent of GDP. There has also been the worst fall in national output since 1945 and the fastest rise in unemployment in our history. In his opening remarks, the Minister sounded rather complacent. He said that output was stabilising, that public finances would be stabilised for the future and that we would be living within our means. Most worrying is the level of public borrowing. Already this year the Government have borrowed £30 billion. According to June figures, total outstanding government debt has risen to £775 billion, which is no less than £150 billion more than one year ago and equal to 55 per cent of UK GDP.

According to independent forecasters, the latest highest forecast for the debt figure this year is £202 billion, which is already a 15 per cent increase over the Budget forecast of the £175 billion which has already been mentioned. In May, the rating agency, Standard & Poor's, warned that soaring UK public debt levels had led it to put Britain's credit rating on notice that it

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could be downgraded. Standard & Poor's said that the UK's triple-A rating was at risk without a credible plan to put its debts on a "secure downward trajectory".

Judging by the article in the Sunday Times even the Minister may be getting disillusioned and perhaps relying on divine intervention to help out. What are the Government planning to do about the debt problem to rein in spending? The answer is that they plan to do very little in the short term. According to table A1 in the Red Book the impact of the Budget for 2009-10 is to increase net index spending by £5 billion. In 2010-11, there will be little change to net Exchequer spending and in 2011-12, there will be a decrease of £5 billion. The Table A1 figures are made on very optimistic assumptions for economic recovery. GDP growth is assumed at 1 per cent for 2010, which may be achievable, but the 2011 forecast of 3.5 per cent still looks very optimistic. If the growth figures are not achieved, and the Treasury Committee in its report on the Budget is particularly cautious on the Chancellor's 2011 forecast, the debt situation will be much worse. As my noble friend Lord Naseby stated, we need a spending review, and we need it now.

One of the main tax-raising measures in the Budget is the increase in the top rate of income tax to 50 per cent from 2010-11. The Pre-Budget Report last November had originally proposed a new top rate of 45 per cent a year later. The Institute for Fiscal Studies, commenting on the top rate of the original 45 per cent plan, argued strongly that it will cost the Exchequer rather than raise money as it will encourage avoidance schemes and persuade many high earners to leave the country for a lower tax regime. Anatole Kaletsky in the Times of 27 April took the same view, saying it was,

He went on:

"Even in the unlikely event that Mr Darling's pre-election tax gesture did manage to raise the odd billion, thesesums would be far too small to have any impact on public borrowing projections ... the decision to rush forward this reform amidst a recession will do serious damage to the economy and thepublic finances. Hopes of quick improvement in UKeconomic conditions assumed by Treasury forecasts rely more than ever on maintaining the City's role as the dominant centre of global financial and business services".

The Financial Services Global Competitiveness Group, setup by the Treasury, produced a report in May, on the very day of our last economic debate, which the Minister did his best to keep away from us. One of its important conclusions was that,

Can I ask the Minister how that rock-solid report squares up with the shifting sands of a top rate of tax changing in the PBR from 40 to 45 per cent for individuals which then only a few months later in the Budget goes up to 50 per cent? Or how the extra tax on non-domiciles is in line with this report? As Anatole Kaletsky pointedout, the Budget Red Book says that the financial sector provided 25 per cent of the £47 billion of Britain's total corporation tax revenues before the recession, plus a

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But these receipts are expected to decline by £25 billion during this financial year. That is more than half of the total decline expected in tax revenues as a result of the recession. Overall, the new higher rate of tax seems to be deliberately designed to stop the UK's financial and service sectors returning to the predominance they enjoyed. Can the Minister tell the House if this is the Government's deliberate intention?

I now move on to the Economic Affairs Committee report. The first issue tackled is the foreign profits reform package. This is a very complicated area and I am no tax expert, but I quote from a Deloitte Budget commentary:

"One of the most competitive features of the UK tax system in the past has been the lack of any generallimitations on the tax deductibility of interest".

There is now proposed a worldwide debt cap on tax deductibility of interest. This, according to the shadow Financial Secretary Mark Hoban in another place will mean that there is,

Will the Minister say whether the Government will take on board the recommendations of the Economic Affairs Committee and delay implementation of the worldwide debt cap until sufficient consultation has been undertaken? Also, can the Government give assurances that they will not have to resort to retrospective tax legislation in future as a result of the repeal of Section 765?

I now turn to the second major issue covered-REITs. I welcomed their introduction in 2007 as a means of enabling greater efficiency and flexibility in the UK property investment market. However, to date, no residential property REIT has been established. The Economic Affairs Committee concluded that,

The accountants Deloitte also agreed that not enough had been done to help REITs. Does the Minister agree that reforms to REITs did not go far enough?

I turn now to the final topic the committee considered-the pension special annual allowance. The committee reported that,

as my noble friend Lord Forsyth said-

In summary, the Budget does little to give assurance that the Government are on top of a parlous economic situation. We may be over the worst of the banking crisis but serious economic problems remain and the major tax-raising measure is being introduced more for political short-term reasons than for sound long-term planning. This is not the way to ensure economic recovery.

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9.41 pm

Lord Newby: My Lords, I thank my noble friend Lord Vallance and his colleagues on the Economic Affairs Select Committee sub-committee for their report on the Finance Bill. I had the dubious pleasure of serving on the sub-committee in the first two years of its existence at a time when the then Chancellor did everything he could to starve it of information and to try to kill it off. I am pleased to see that it is now such a robust and thorough plant, if a plant can be thorough.

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