REDUCTION OF RATE OF VALUE ADDED TAX

HC Deb 27 April 1983 vol 41 cc884-918

'In section 9 of the Finance Act 1972 for the words "15 per cent." there shall be substituted the words "13 per cent ".'—[Mr. Straw.]

Brought up, and read the First time.

4.35 pm

Mr. Jack Straw (Blackburn)

I beg to move, That the clause be read a Second time.

The Chairman of Ways and Means (Mr. Bernard Weatherill)

With this it will be convenient to discuss new clause 5—Decrease of rate of value-added tax.

Mr. Straw

The cost of reducing value added tax by 2 per cent. in this way would be about £1 billion in the first year and £1,380 million in a full year. It would have the effect of reducing the retail prices index by 1 per cent.

Although VAT is a key revenue raiser and its imposition a matter for continuing discontent and controversy, this is the first opportunity that the House has had to debate VAT since the Chancellor of the Exchequer doubled the rate in his first Budget on 12 June 1979. As we near the end of this Parliament, we are afforded an occasion to examine the Government's record on indirect taxation and to advance our case for reducing VAT by 2 per cent. Such a reduction is a component of any strategy to secure the sustained recovery in output and employment that our economy so desperately needs.

On Tuesday we debated at length the Government's broken promises and their dishonoured bribes about direct taxation. Ministers may wriggle and squirm, but they know, we know and the country knows that they promised to reduce the burden of direct taxation, but instead they have raised it for all but the very rich. The Government's record on direct taxation, on income tax and national insurance, is bad enough, but their record on taxation as a whole—on excise duties and value added tax— is appalling. It shows that in 1979 the Government treated the electorate with a cynical contempt that almost beggars belief.

Many Members seem to be suffering from collective amnesia. I shall remind the House of what happened in April and May 1979. Early in the election campaign the Conservatives issued their manifesto and promised to cut income tax at all levels to reward hard work, responsibility and success". As the election campaign progressed, senior Tory spokesmen expanded the manifesto promise and made it clear that they proposed to reduce taxes on earnings, including national insurance contributions as well as income tax. The Conservatives refused to do the arithmetic or make costings to support their bribes, so the Labour party had to do it for them.

We charged the then shadow Chancellor with misleading the nation. We said that there was no way in the world in which Conservatives could reduce direct taxation on the scale that they envisaged without doubling VAT.

We all remember the response by the Conservative party and its lickspittle, the Daily Mail. They said that the suggestion that they would double value added tax was a lie. That was repeated in the Daily Mail of Thursday 28 April 1979. Since the Daily Mail goes on about the Government's inflation record, it is worth rereading that issue of the Daily Mail. The price of that paper has doubled under this Government. It was 9p in 1979 and it is 18p today. It is no better value today than it was then.

The Economic Secretary to the Treasury (Mr. Jock Bruce-Gardyne)

How much did it cost in 1974?

Mr. Straw

I do not know. The Government claim to have a fine record for inflation, and yet the Daily Mail, their mouthpiece and organ, has doubled in price in four years.

We all remember the so-called lies. It was said that we lied when we said that the Conservatives had claimed that there would be no freeze on European food prices. They said that it was a lie for us to suggest that British Petroleum would be hived off, that unions might be clobbered through legislation and that British Airways might be privatised. Above all, it was said that it was a lie for us to suggest that the Conservatives would introduce higher prescription charges. The Conservatives said that they had no intention of increasing such charges. The Chief Secretary should wipe the cynical smile from his face because prescription charges have not doubled or trebled —they have increased by a factor of over six.

The Conservatives also said: We have absolutely no intention of doubling value added tax. We all know what happened. The Prime Minister and the Chancellor came as close to lying as we have ever seen in an election campaign. Within five weeks, VAT had almost doubled at 15 per cent. Of course, once again, they tried to brazen it out. The former Financial Secretary, the right hon. Member for Blaby (Mr. Lawson), asserted that the Government had not, after all, doubled the zero rate.

Besides reminding ourselves about the enormity of the Government's deception in 1979, it is important for us to examine the excuse that the Chancellor gave to the House in his Budget statement on 12 June, when he announced that value added tax would be increased to 15 per cent.

Mr. Tony Marlow (Northampton, North)

I am concerned for the hon. Gentleman because he must be uncomfortable in making his speech. One has heard of the pot calling the kettle black, but, having read various things that the Labour party has put forward, one comes to believe that the raison d'être of the Labour party is to increase taxation on the British people. The hon. Gentleman appears to be making a case against the tax policies of Her Majesty's Government. Is the hon. Gentleman feeling slightly uncomfortable?

Mr. Straw

As usual, the hon. Member for Northampton, North (Mr. Marlow) is misinformed. If he had read Labour's programme with the assiduity with which Treasury Ministers claim to have read it, he would realise that there is no suggestion that we shall increase taxation in the early stages of our Government. This debate is about the Government's record. We did not go into the previous election promising to reduce direct taxation and promising that VAT would not be doubled. The Government's record is under examination today.

Mr. Marlow

Is the hon. Gentleman telling the House that if a Labour Government come to power, which most of us believe will not happen, they will not increase taxation?

The Chief Secretary to the Treasury (Mr. Leon Brittan)

Answer the question.

Mr. Straw

I shall be delighted to answer the question. We make it clear in our programme that we do not believe that an increase in taxation would assist to secure a recovery of the economy and assist in our programme. Indeed, over the period of an expansionary programme, the proportion of taxation as a proportion of our total national income would fall. One of the great ironies is that while the present Government have cut public spending, public spending as a proportion of the national cake has increased, as the Chief Secretary knows to his discomfort.

Mr. Lewis Carter-Jones (Eccles)

Will my hon. Friend give the hon. Member for Northampton, North (Mr. Marlow) a lesson in arithmetic? VAT was 8 per cent.; it is now 15 per cent. The rate has doubled under the present Government.

Mr. Straw

The hon. Member for Northampton, North and his right hon. Friends promised at the last election that direct taxation would be reduced and said scarcely a word about increasing value added tax.

4.45 pm

In his first Budget speech on 12 June 1979 in which he announced that VAT would rise to 15 per cent., the Chancellor said: We made it clear in our manifesto that we intended to switch some of the tax burden from taxes on earnings to taxes on spending." — [Official Report, 12 June 1979; Vol. 968, c. 249–50.] We all know that the Chancellor is keen to try to rewrite history. In his 1982 Budget speech he claimed that two Parliaments would be needed to implement the Government's programme. The Conservatives said in their manifesto: We must therefore be prepared to switch to some extent from taxes on earnings to taxes on spending. They went on to promise that they would simplify VAT. Neither of those statements conveys the idea that they would double VAT. In the same paragraph, the Conservatives promised to tackle the proverty trap. They did indeed tackle the poverty trap by making it much worse. We should have anticipated that the promise to simplify value added tax would mean an increase to a nice round number such as 15 per cent.

Having referred to the Government's manifesto commitment, such as it was, the Chancellor in his Budget statement of 12 June went on to say that increasing taxes on spending, such as value added tax, would be the only way that we can restore incentives and make it more worthwhile to work and, at the same time, increase the freedom of choice of the individual … Moreover, the increase…must be sufficient to provide for substantial and worthwhile reductions in income tax. He concluded that the doubling of VAT would provide scope for further direct tax reductions in later years." —[Official Report, 12 June 1979; Vol. 968, c. 250–51.] So the doubling of VAT was sold to the House on the basis that it would enable the Government to reduce direct taxation not only in the first year of the Government but in subsequent years.

It is a testament and a tribute to the unparalleled mismanagement of the economy by the Government that over the past four years they have pulled off the double of a dramatic increase in indirect taxes and a dramatic increase in the burden of indirect taxation. The average family's overall tax burden is equivalent today to a 7p in the pound increase in income tax, as the Treasury has recently been forced to admit. Figures given in answer to questions from me and then translated by the Library into constant price terms show that a family with two children on average income with the wife not working has seen its overall tax bill rise by £61.65 in 1978–79 to £71.40—a rise of almost £10. Before the Economic Secretary to the Treasury asks whether child benefit is included in that calculation, let me say that the increase for a married couple without children where child benefit does not feature has been even greater. Their direct tax bill has increased not by £10 but by £11.27 over the past four years in constant price terms.

The amounts that the Government are taking out of the economy, as one would expect, have risen dramatically. In 1978–79 indirect taxes, including value added tax, yielded £30 billion in constant price terms. Today, after adjusting the yield for inflation, the figure has increased by one third to £40 billion in 1978–79 constant price terms. At the same time the Government have increased the burden of direct taxation from £27 billion to £33 billion, an increase of 25 per cent.

The increase in value added tax had a further and more serious effect on the economy as a whole. It dramatically forced up the rate of inflation. Inflation was running at 10 per cent. in May 1979 and would not have increased much above that figure by the end of that year.

Mr. Bruce-Gardyne

indicated dissent.

Mr. Straw

Ministers know that to be the case. The increase in value added tax pushed up the retail prices graph vertically. It was the sharpest rise ever. It meant that by the end of that year inflation was running at 17.5 per cent.; by the early spring of 1980 it was running at 19.5 per cent. and it peaked at 22 per cent. in the middle of that year.

Throughout this Parliament we have witnessed an astonishing evasion of responsibility by the Prime Minister and her colleagues. If anything goes wrong, it is always the fault of someone else. The rise in unemployment and the catastrophic fall in production are blamed on forces beyond the Government's control, despite the fact that our collapse has been far greater than that of any of our major competitors, our rise in unemployment has been far greater and we have had the benefit of North Sea oil. We should have been able to ride those problems better than other countries.

When inflation falls, it is all to the Government's credit, despite the fact that the fall in inflation in this country has been little better than that in the countries of our major competitors. When inflation rose, we were told that it was nothing to do with the Government—but it was. The increase in inflation during the Government's first year was not the result of the Clegg wage increase or of the profiteering of oil sheikhs. It followed as a direct consequence of a deliberate Government policy to double value added tax. That decision, combined with general deflationary policies practised by the Government, contributed in a major way to Britain's unique collapse.

Our performance on inflation and unemployment compared with our major competitors is instructive. I hope that the Chief Secretary will listen to this, because it is clear from his speeches that even he is blind to Britain's relative position. The Prime Minister has talked about Britain's spectacular inflation record, but the truth is that it is simply average while our unemployment record is spectacularly bad.

In May 1979, inflation in the western industrialised world was 9.7 per cent. Here, it was 0.6 per cent. more at 10.3 per cent. May I have the attention of the Front Bench for these figures? Inflation in Britain is now 5.3 per cent., but in the rest of the world the average is now 5.7 per cent. In other words, in 1979 we were 0.6 per cent. above the average, and today we are 0.4 per cent. below the average.

However, in 1979 unemployment in the United Kingdom was just above the average for the western industrialised world. It was 5.5 per cent. on a standardised basis compared with 5.1 per cent. It is not true, as the Prime Minister and her Ministers assert, that in the last four years Britain has done no worse than other countries. In no other major western country has unemployment risen faster or further than here. Today, Britain's unemployment rate is 13.3 per cent., while the average in the rest of the western industrial world is only 8.9 per cent. Therefore, the rise in unemployment here has been twice that in the rest of the western industrialised world.

The Government take credit for their record on inflation and somehow suggest that it has fallen as a direct consequence of the monetary policies that they have followed. In fact, the fall has virtually nothing to do with their performance in attempting to control the money supply. If the relationship between the money supply and inflation was what the Conservative party so naively believed when in Opposition, 1982 and early 1983 should have been a period of double-digit inflation on the back of the double-digit growth in the money supply about 18 months or two years previously. That was exactly what one of the British gurus of monetarism, Professor Brian Griffiths of the City university, predicted in the middle of 1981.

The fall in inflation has been due partly to world factors, particularly the collapse in commodity prices, which at the end of last year were in real terms 30 per cent. below their 1980 level, and partly to the penal and unanticipated consequences of monetary policy. The Government thought that that would reduce inflation and increase output and jobs, but instead it turned into a crucifying, old-fashioned deflationary squeeze with record high interest rates to boot. In other words, the fall in inflation has been built on a consequence of that squeeze, high interest rates and an artificially over-priced pound. The price that we have paid has been an extra 2 million on the dole.

Mr. Marlow

The hon. Gentleman is making comparisons with this and that. What has happened to inflation in France and why has that happened?

Mr. Straw

Inflation and unemployment have been falling for the last four months. The unemployment rate in France is 2 million, not 3° million. Having given way three times to the hon. Gentleman, I hope that he will do something unique and defend the Government's taxation policy. These debates have been characterised by a deafening silence from Conservative Members in defence of the Government's taxation record.

The increase in the price of the pound has meant a dramatic loss of competitiveness, which up to mid-1981 was quite unparalleled in our post-war history. Last November, my right hon. Friends the Members for Stepney and Poplar (Mr. Shore) and for Ashton-under-Lyne (Mr. Sheldon), my hon. Friend the Member for Edinburgh, Central (Mr. Cook) and myself published Labour's programme for recovery. We said that a sustained recovery of manufacturing output and the British economy would not be possible unless Britain's competitiveness was restored, not least by the restoration of the pound to competitive levels. We also said that the impact of such a restoration would need to be offset by cutting industry's costs through the abolition of the national insurance surcharge and by acting directly on the retail price index by reducing VAT.

At the time when we called for a more competitive pound, the response from some Ministers and some sections of the press was as though my right hon. Friends and I had committed gross indecency in a public place. Indeed, the Chancellor, ever anxious to evade responsibility for anything that he does not like, sought to blame us for the fall in sterling that took place in November, despite the fact that the fall had begun a week before publication of our paper. How quickly times change. November's heresy is today's conventional wisdom.

Between last autumn and March, sterling had depreciated against other currencies by about 13 per cent., and the Chancellor and many members of the CBI suddenly discovered the virtue of a more competitive pound. I can do no better than quote the president of the Blackburn chamber of commerce, Mr. Geoff Livesey, a leading member of the north-west region of the CBI. He told the Lancashire Evening Telegraph on 21 January: The message for the last two years has been that the pound was over-valued and has caused enormous hardship for manufacturers. The converse must be that with devaluation of this magnitude, we are becoming competitive again, whether we are exporting or offering an alternative to imports". As my right hon. Friend the Member for Stepney and Poplar pointed out on Second Reading, even the Chancellor began to echo the sentiments about the value of a lower pound, because when he objected to the NEDC report on 11 April and condemned it for its gloomy prognostications about the British economy, he said that it failed to pinpoint the improving economic prospects being created by such things as the lower pound". That sentiment was echoed by the Chief Secretary's brother, the economic editor of the Financial Times, who said that the modest upturn has been amplified in Britain's case by a major improvement in competitiveness, as a result of the fall in sterling since last November". He added: Far and away the most important reason why things were improving in the United Kingdom— has been the depreciation of sterling".

Mr. Marlow

Will the hon. Gentleman give way?

Mr. Straw

Not again.

Mr. Marlow

Frit.

Mr. Straw

We are never frit of the hon. Gentleman. That is usually the case with his hon. Friends on the Government Front Bench, which is why he usually gets more change out of us than he does from them.

The Chancellor has been right to emphasise how crucial the fall in sterling has been in modestly improving Britain's economic prospects. As the Chief Secretary admitted to me in answer to a parliamentary question in mid-December, three quarters of the improvement in Britain's competitiveness has been due to the fall in sterling.

5 pm

There is no question but that what marginal improvement in output has taken place, and is likely under the present Government to take place, has occurred principally as a result of sterling's fall. But the changes in output which have occurred and the prospects for any real recovery in present circumstances are fragile indeed. In a pre-election period, most newspapers, Ministers and the Tories' industrial poodle, the CBI, wish to put the most favourable gloss that they can on any titbit of news which suggests that the economy is doing a little better than it was last year or in 1981, but we notice how reluctant they are to compare the economy today with its performance in May 1979.

The evidence of the fragility of Britain's economy and the falseness of the wild claims by Ministers about any major recovery come not only from our constituencies, where the pace of redundancies continues unabated, but directly from the small print of the CBI's survey of industrial trends, published this morning. For all the headlines in the newspapers today, the truth is that that survey shows that the real changes in the British economy in the last quarter have been marginal. They also show that the economy is still in a greater state of collapse and depression than at any time since the war.

It is clear that 72 per cent. of firms record in that survey that they are still working below capacity, 51 per cent. say that their order books are below normal and only 10 per cent. say they are above normal. But most significant of all are the responses to the questions about future output and employment. In the last four months, only 8 per cent. of firms in Britain took on more staff; 40 per cent. kept the numbers of employees the same; and 52 per cent. declared redundancies. As for the next four months—which, we are told, herald a new economic dawn—four times as many firms are expecting to sack workers as are expecting to take workers on; 40 per cent. as against 11 per cent.

When asked which factors were likely to limit output in the next four months, 89 per cent.—nine out of 10—still say that orders and sales, or a straightforward lack of demand, are the limiting factors. There is no need to look into the crystal ball to see whether economic recovery will take place. We have the facts and they show that it is a simple deception to suggest that we are involved in anything that could seriously be described as a major recovery.

Mr. Bruce-Gardyne

The hon. Gentleman has made virtually no mention of the new clause which he puts before the Committee, nor one word of argument in support or advancement of it. Is it his intention. to withdraw it from our consideration? If so, we might as well know now.

Mr. Straw

I was expecting something better even from the Economic Secretary. If that is all he can do as editor of the Daily Telegraph, there will not be much hope for that newspaper either. I referred in my very first words to the cost of the change and its impact on the retail price index and, when discussing the programme for recovery, I said that we saw a reduction in VAT as an important component of any strategy for recovery. I could not have made it plainer if I tried.

In the last two and a half weeks—we must discuss the question of the economic prospects under the present Government — since the Chancellor attacked "Neddy" for its failure to take account of improving economic prospects through sterling's fall, sterling has appreciated again in value by about 6 per cent. The admitted principal engine of recovery—the fall in sterling—has now gone into reverse and the Government, instead of doing something about it, once again stand on the sidelines unwilling or incapable of taking any action.

It is extraordinary, given the importance of international trade to the British economy, that the Government not only claim not to have an exchange rate policy but genuinely do not seem to have one. The result has been far more volatility in the exchange markets than there need have been and interest rates have been kept unnecessarily high; in real terms, they are at their highest rate ever. An exchange rate policy would not be a magic wand over the markets, and we have never suggested that it would. But if the Government had had an exchange rate policy, the Chancellor — having decided two weeks ago that sterling's level, at about 80, was of great assistance to the British economy — could, and should, have used a reduction in interest rates to meet the temporary increase in sterling's price in the last two weeks. Indeed, if the Chancellor is serious about recovery, he should now reduce interest rates by at least two percentage points.

Mr. Marlow

What about VAT?

Mr. Straw

Hon. Gentlemen opposite do not understand that the case for a reduction in VAT is the case for a strategy which seeks to put our economy on the road to recovery. They do not appreciate that the case for a VAT reduction stands or falls on whether under this Government there will be any sustained recovery.

I call for a reduction in interest rates of two percentage points so that we can see sterling returning to the competitive levels it was at two or three weeks ago. That would still provide a rate of return for lenders at historically high levels while at the same time providing a major boost to British industry in a non-inflationary way. The simple truth is that the Government are not serious about recovery. Indeed, they have no strategy for sustained recovery. That is well illustrated by the deafening silence on the Benches opposite as to the way they would cope with the inflationary pressures that may arise whenever any recovery gets under way.

Although there is some dispute about the exact relationship, it is a matter of simple arithmetic that a fall in sterling would add something to industry's costs, as onethird of what we in this country consume is imported. The Chancellor used to tell us that repeatedly, although since sterling's fall over the new year it is a factor which worries hon. Gentlemen opposite rather less. But we already see wholesale prices rising by 7.4 per cent. —getting on for double the rate of retail price rises—and, unless action is taken, the rise in retail prices later this year and early next year could be 7 to 8 per cent. and on the way up.

It is in that context that our proposal to reduce VAT by two percentage points makes sense. It would reduce the retail price index, on the Treasury's own estimate, by one percentage point and mean that the RPI early next year would be 6 to 7 per cent. rather than 7 to 8 per cent. This proposal is part of a coherent programme to put the nation back on the road to sustained recovery; not to ignore the inflationary implications, as the Government seem to do, but to take action directly to deal with them. It ties in with our proposals, to be debated tomorrow, for the complete abolition of the national insurance surcharge and with our proposals, published in Labour's alternative budget on 8 March, for a careful increase in public spending on housing, construction, major capital projects and the public services.

We need no lectures from hon. Members opposite about the costings of our programme. No Opposition have provided more detail about their programme or better costings than we have, nor shown how our individual policies would have to be contained within an overall programme of public spending. I only wish that the Chancellor and his colleagues had done the same before the last election. Had they done so, they would not have deluded either themselves or the electorate about the likely outcome of their policies.

The country is faced with a simple choice. It has a Government who are bankrupt of fresh ideas and who were elected on clear pledges to create more jobs and greater national output and to lower taxes, all within the lifetime of this Parliament. They are pledges on which they have failed the nation and they have broken every promise they made. What remains offers no hope to the bulk of the people. Or they can choose a party with a programme that places the people of the nation before the prejudices of a few and that will put this country back on the road to recovery. We did that after the war and we will do it again. I commend the new clause to the Committee.

Mr. John Horam (Gateshead, West)

New clause 5 is in the same group as new clause 1, and is in the name of the Liberal and Social Democratic parties. I wish to address my remarks to it. I shall endeavour to stick to the new clause rather than rambling wide and lengthily as the hon. Member for Blackburn (Mr. Straw) did, although he did so in an interesting fashion.

The point of our new clause is to cut VAT in October from its present level to 12.5 per cent. The object is that the Government should take direct action to cut into the rate of inflation when it starts to rise again. We know fairly clearly what will happen over the next 12 months or so on the economic scene. It looks likely that inflation will be back to 6 per cent. and possibly higher, come the autumn, as measured by the retail price index. The reason is the falling pound that we have had over the past four or five months finally feeding through to price increases. It has been helpful to industry, as has been said, but there will be a price to pay—no pun intended—in terms of high prices in the autumn.

Those high prices, as we saw when the Government foolishly doubled VAT when they first came to office, will pass through to higher wages. Not only that, but the small recovery that we are now seeing will lead to higher profits —inevitably and rightly so because we need them—and this will lead to higher wage claims. The workers will expect some share of the higher profits, having made sacrifices when there were no profits.

For those two reasons, both to match the increase in the RPI and to take a share of the higher profits, there will be higher wage claims and higher settlements this autumn. Those higher wages will, in turn, spark off a spiral of higher prices. Many forecasters are saying that by spring next year the RPI could be increasing not just at 6 per cent. or 7 per cent. a year but at 9 per cent. or 10 per cent. a year. That is the forward view on inflation. When we reach that stage, the Government, under their policy, will inevitably have to resort to tight money and higher interest rates to choke the increase in prices. The interest rates will have an effect on business. Business will be facing higher costs anyway with higher wages. It will start to destock, recovery will be hit on the head and unemployment will start to increase again.

That is predicted not just by us but by many leading forecasters. A forecast of the St. James's group, which is one of about 10 groups that regularly make forecasts, was reported in The Economist on 23 April. It states: Faster growth, however, soon peters out. Thanks to fast-rising wages, inflation is rekindled, and is kept below 10 per cent. only by tight money, which produces high interest rates. High costs and interest rates make companies destock, output slows, exports sag and workers are shed again as Britain enters a new recession". That is the basis of the cut-and-run charge that would be rightly made against the Government if they go for a June election. We are now seeing the small glimmerings of a slight improvement and of a new light in the medieval gloom—

Mr. George Foulkes (South Ayrshire)

You are doing well.

The Chairman

Order.

5.15 pm

Mr. Foulkes

I am sorry. You are doing extremely well, Mr. Weatherill, and the hon. Member is doing equally well. The hon. Member seems to have been brainwashed by the CBI statement, which is not borne out by the facts, and also by the newspaper report that alleged that there was an upturn. I go back to my constituency every week to deal with more closures, more redundancies and more people on short time. What evidence does the hon. Gentleman have of even a glimmer of an upturn?

Mr. Horam

The evidence is in a patchy improvement in the profit and output of some companies. It is on a very small scale and is very insubstantial. It will not last long and will soon peter out.

Mr. Foulkes

rose—

Mr. Marlow

rose—

Mr. Horam

I shall not give way. Hon. Members on both sides of the Committee are well able to read the newspapers and consult their own constituents and companies in their own areas. They will have their own views. I am stating mine and I am confident that they are well supported by the evidence.

Mr. Marlow

rose—

Mr. Horam

The hon. Member for Northampton, North (Mr. Marlow) intervened three times during the speech of the hon. Member for Blackburn. He is almost the sole representative of the Conservative party on the Government Benches, although he has now been joined by one or two colleagues. He is taking on too much responsibility for supporting the Government. I am sorry, but he must make his own speech. The hon. Gentleman seems to have subsided now.

I shall return to where I was before I was so rudely interrupted. There are small and insubstantial patches of light after four years of almost medieval gloom, but we shall soon be back in a dark era. There is plenty of evidence already, not merely that there is a certain amount of recovery but that the next recession is in sight. That points to the central conclusion that the Government have not brought about, even with all the inevitable small ups and downs and lifts from the bottom of the slope, a substantial and sustained recovery. There has been no permanent improvement in our industrial or economic performance. Nor have the Government broken into the inflationary cycle in a permanent way, which we need to do.

It is the view of both the Social Democratic and the Liberal parties that they will not do so. I believe that it is also the view of many Conservative Members. They will not do so until they take a different approach to what is traditionally called incomes policy. The Government have refused to go into that area. There will be no permanent improvement in inflation or expansion until we embark on sensible proposals there. It is right to say that the Government have no policy for expansion. They have a policy for bumping along the bottom and occasionally going up a little and down a little, but they have no real policy for sustained expansion that would bring new hope to the people.

Mr. Bruce-Gardyne

Before the hon. Gentleman embarks upon the wonders of his party's incomes policy, which we always listen to with enormous interest—I have been following his comments closely, which are the first that relate to the new clause—will he explain one thing? Is it his party's proposition that the £1,800 million that the Libera/Social Democratic new clause would cost in a full year should be recouped from additional taxation in other areas, and, if so, which? If it is not, how is it that forgoing that revenue and the consequential impact on the borrowing requirement would not lead to the rise in interest rates that he claims would follow as a consequence of higher wage settlements and higher profits later in the year?

Mr. Horam

I shall not only address the new clause closely but answer the Minister's intervention clearly. Our plan would not cost £1,800 million because it would run only from October.

Mr. Bruce-Gardyne

I said that that would be the cost of a full year.

Mr. Horam

The Minister referred to a full year, but we are talking about cutting VAT in October. That makes it a six-month period. Moreover, the true net cost to the public sector borrowing requirement is £550 million. That gives a more accurate picture. That is how the Treasury model operates and it is a perfectly defensible statement of the net PSBR cost.

The Minister also asked whether we proposed to match the cost, whatever it might be, with higher taxes or cuts in public expenditure or whether it would be added to the PSBR. Our Budget makes it plain that it is to be added to the PSBR. As the Minister asked the question, I should be grateful if he would pay attention to the answer. We should not increase taxation or cut expansion. The cost would be a net increase in the PSBR.

I believe that that could be achieved without any net increase in interest rates because currently there is no funding problem for the PSBR. The market has not been asked to absorb large amounts of gilts in the past six months or so, and there have been very few rights issues in the past 12 to 18 months. Thus, there is a great deal of institutional money around to mop up any relatively small increase in the PSBR. Indexed gilts, which the Government brought forward with some dissent on their own side, have also helped with the funding of the PSBR. I am glad to see that the Minister agrees. Indeed, there is so little funding problem that the Government have been able to overfund in the past few months in order to massage the money supply figures. The argument that our desire to cut VAT in October would inevitably lead to higher interest rates therefore does not stand up to serious market examination.

In addition—the hon. Member for Blackburn put this rather well — a cut in VAT, whether to 13 per cent. from now as proposed by the Labour party or to 12.5 per cent. from October as we propose, is a good measure in its own terms. First, it will keep inflation down. We saw the powerful effect on inflation of a change in VAT in the reverse sense when the Government almost doubled VAT on coming to power, and they paid dearly for it. A cut in VAT would certainly have a powerful effect in the other direction. Secondly, the Financial Secretary told me that, expressed in terms of the standard rate of income tax, the increase in total tax burden as a result of the Government's measures has been about 7p in the pound. That is a massive extra burden, not just on the poor or the rich but on the average person. One reason for that was the near doubling of VAT in the Government's first Budget. In those terms, therefore, in addition to any economic reasons, it is right to cut VAT as soon as we reasonably can.

In an ideal world, we might not suggest a proposal in exactly these terms, announcing our intention to cut VAT several months in advance, but it is the only way in which we can make the point that in an Alliance Budget it would probably have been right in present circumstances to consider cutting VAT in the autumn. Clearly, this would depend on how the economy behaved between now and then. If the pound fell still further, we should be more inclined to make the cut. On the other hand, if oil prices collapsed without a depreciation in the pound to compensate, thus costing the Government a great deal of revenue, that would certainly have to be taken into account. Although I do not believe that interest rates would inevitably rise as a result of our proposal, the overall fiscal balance would have to be taken into account and I should certainly be concerned if oil prices moved dramatically between now and the autumn. I do not think that they will, but one can never rule out the possibility.

In all the circumstances, therefore, ours is a sensible measure designed both to keep any expansion going and to restrain inflation.

One particular issue has been brought to my attention today. Although we do not propose changes in VAT in specific areas, a cut to 12.5 per cent. would improve the position of the building industry especially. We know of the anomaly whereby new building is exempt but repairs and maintenance are subject to the full rate of VAT. Sensible Members on both sides must concede that that is nonsense. Our new clause does not deal with that directly, but it would lead to a small improvement in the position of the building industry. As we said in our budget, however, the SDP and the Liberal party remain committed to introducing zero rating for building repair and maintenance at the earliest opportunity as a measure to help the building industry and to help the home owner who wishes to improve his own house. Nevertheless, the reduction in the general rate of VAT to 12.5 per cent. would bring some small and welcome relief in that area.

The main argument, however, as announced by the hon. Member for Blackburn and myself, is that direct action of this kind by Government on prices will substantially benefit the economy.

Mr. Marlow

As always, it is my role to try to be as helpful as possible to the House. Indeed, I was trying to help the hon. Member for Gateshead, West (Mr. Horam) when I sought to intervene in his speech. He was groping around for evidence of recovery in the economy. I believe that one of the few members of the hon. Gentleman's faction is a certain Mr. Harvey-Jones, who runs ICI—one of our largest companies. The hon. Member for Gateshead, West may or may not know that ICI has recently reported distinct evidence of recovery in the economy. As there are so few members in the hon. Gentleman's faction, I suggest that he get together with that distinguished member so as to brief himself more properly on the subject.

I can reassure the hon. Member for Blackburn (Mr. Straw). He was keen to have the attention of Ministers, so I should be grateful to have his attention now. Indeed, I can give him pleasure and perhaps even surprise him. I am a firm and convinced supporter of the Government's budgetary and economic policy. What I am about to say may not be precisely in line with what the Government are doing, but that is not entirely due to the Government's economic policy. It is certainly not the fault of my hon. Friend the Economic Secretary to the Treasury and it has very little to do with my right hon. and learned Friend the Chancellor. Other extraneous bodies restrict and restrain the Government in these matters.

Mr. Foulkes

The movements of the planets, perhaps?

Mr. Marlow

I am against new clause 1 because I do not think that it is strong enough or radical enough. I do not wish to reduce VAT by 2 per cent.: I want to do away with the whole rotten tax.

Mr. Foulkes

On a point of order, Mr. Weatherill. I cannot find the hon. Gentleman's new clause on the Order Paper.

Mr. Bruce-Gardyne

It has a damned sight more to do with this debate than what the hon. Member for Blackburn (Mr. Straw) said.

Mr. Foulkes

I understood that the hon. Gentleman was introducing a new clause to reduce VAT to zero, but I cannot see it on the Order Paper.

5.30 pm

The Chairman

I do not think that it is on the Order Paper either. The hon. Member for Northampton, North (Mr. Marlow) was reflecting upon new clause 1 and saying that he does not think that it goes far enough.

Mr. Marlow

My point is that I should like to support new clause 1 but that, sadly, it does not go far enough. I am about to give my reasons. Like my hon. Friend the Minister, I am in favour of a relatively large burden of taxation being levied through indirect taxation rather than direct taxation. I feel that a value added tax that is reduced by only 2 per cent. to 13 per cent., is the wrong means of raising the bulk of our indirect taxation. As to new clause 5, I do not wish to be discourteous but, as my right hon. Friend the Prime Minister said yesterday, a two-headed monster has recently emerged. The kindest and best thing to do is to ignore it and anything that it does.

Napoleon once said that we are, were, or were about to become, a nation of shopkeepers. He might have been trying to make us a nation of shopkeepers or he might have believed that we were. We were not and did not become one. Where Napoleon failed, the bureaucrats of Brussels have succeeded. While we are not precisely a nation of shopkeepers we are a nation of tax gatherers.

Perhaps we should go back to the good old days. We all like to look back to our innocent youth when we were carefree and times were better. In some respects, times were better. In those days, we had purchase tax, which had many advantages over VAT reduced to 13 per cent. One of the advantages of purchase tax was the possibility of having differential rates. A more luxurious item could attract a higher rate of purchase tax than others. In that way, we were rightly able to protect our poorer citizens.

Another advantage of purchase tax as against VAT at 13 per cent. is that there was a lower level of political sensitivity to change the rate of purchase tax. If the hon. Member for Blackburn were to reduce VAT by 2 per cent., it would automatically be reflected in all sorts of other indices which would have a concomitant effect on public perception of Government economic policy, what was likely to happen to interest rates and so forth. Above all, Mr. Deputy Speaker, the big advantage—

The Chairman

Order. We are in Committee.

Mr. Marlow

I am most apologetic, Mr. Weatherill.

There is also the problem of administration. I do not believe that anyone has stood back and examined the vast administrative burden that we put upon our people by this monstrous tax—value added tax. At the moment, there are 1.4 million VAT accounts. That does not mean that 1,400,000 people are involved in working on VAT—Customs and Excise also works on it. For each account, there might be one, two, three or, in bigger firms, 10 or 20 people working on it. If one adds all that up, one will probably find that there are as many people who work on, are involved in or are troubled or pestered by VAT as the entire population of England at the time of Napoleon. Where Napoleon failed, the Brussels bureaucrats have succeeded. We are a nation of tax gatherers.

There are 500,000 VAT accounts under the relatively minute level of £50,000 a year turnover. We call it value added tax but we are not taxing people on a threshold of value added; we are taxing them on a threshold of turnover. Perhaps it would be sensible if people were taxed on a threshold of value added. What is a turnover of £50,000 a year up to which 500,000 accounts are involved and, no doubt, on which perhaps 1.5 million people are employed? What does a turnover of £50,000 a year mean in terms of a business? Such a business employs three people at the most. If it were engaged in selling used cars, the turnover would be a maximum of two cars a month. That is nothing. It is hardly enough to make a living on, yet there are a vast number of accounts at that level.

Perhaps the hon. Member for Blackburn, who wants to reduce VAT by 2 per cent., would have done better to abolish it altogether. If he had not thought of abolishing it altogether, he might have been wiser to tackle the problem of the threshold. What heaven on earth it would have been for many of our citizens if he had advanced that proposition and the House, in its good sense, had agreed with him and allowed it to happen. If the threshold were raised to £20,000, we should be taking six—

The Chairman

Order. The hon. Gentleman is now going very wide of the new clause. Will he please stick to what is on the Order Paper?

Mr. Marlow

Of course, Mr. Weatherill. The hon. Member for Blackburn wants to abate the burden of VAT on the economy in various ways. One way in which to do that is to abate the massive burden that it currently puts on people who are involved in industry, business and manufacturing and are trying to boost the economy out of the recession.

The Chairman

Order. With great respect to the hon. Gentleman, that may be so but it is not what the new clause says.

Mr. Marlow

To reduce that massive burden on the people the Government could follow the hon. Member for Blackburn. They should then have to raise other forms of taxation. Alternatively, they could reduce the burden through the VAT system by raising the threshold. They would then have to increase other taxes to balance it. The Government's budgetary sums are right. I agree with and appreciate them. What heaven it would be if some of that burden were reduced. My hon. Friend, a sensible, honourable and compassionate man, wants to do things that will benefit the nation. He would dearly love to do that but, sadly, it cannot be done.

I do not know how many hon. Members realise it, but when asked whether my hon. Friend could increase the threshold of VAT, he answered that article 24(2)(c) of the EC sixth directive on VAT restricted the increase in the registration exemption limit to those which maintained its value in real terms. Although the hon. Member for Blackburn might want to reduce the level of VAT should he wish instead to increase the threshold he will find that he cannot do it. We are not allowed to do it and have not the power to do so, as it belongs to someone else. We are submerged under a foreign institution.

The Chairman

Order. I am terribly sorry to interrupt the hon. Gentleman again but what he is saying has absolutely nothing to do with the new clause. He may well be right, but it is a matter for another debate.

Mr. Marlow

All that I can say, to sum up my point, is that the hon. Member for Blackburn has the wrong new clause, as it goes in the wrong direction. Had he tackled the problem in a different way, which was allied to Britain's sovereignty and our ability to raise and control our own levels of taxation, he would have achieved far more agreement in the House. Sadly, he has the wrong new clause and I must vote against it.

Mr. David Ennals (Norwich, North)

The Minister must be disappointed that only one Conservative Back Bencher is present, apart from the Parliamentary Private Secretary behind him, and that he has received such monumental support for his stance on VAT.

The hon. Members for Northampton, North (Mr. Marlow) and Gateshead, West (Mr. Horam) criticised new clause 1 only because it does not go far enough. The hon. Member for Northampton, North said that VAT should be reduced by another 13 per cent. and the hon. Member for Gateshead, West said that it should be reduced by another 0.5 per cent. I agree with the hon. Member for Gateshead, West that all the pressure for an early general election, which now seems to be on the Prime Minister, arises from the Conservative party's fear of circumstances in the autumn. The cut and run argument is powerful. I should be happy to have an election now, but it would be called because of the Government's fears not only that inflation will increase but that there are no convincing signs, except some patches here and there, of the end of the recession.

I fully support the new clause. The Chancellor's decision to increase VAT from 8 per cent. to 15 per cent. was not only an open betrayal of an election pledge, but the greatest single impetus to inflation in 1979. It increased the cost of living immediately by 4 per cent. The high inflation caused by the Government of more than 22 per cent. began their battle against inflation, which caused massive damage to our industrial base and to employment. Unemployment in Britain is now almost the highest in Europe, and it will become higher. The Chancellor made an appalling mistake in introducing 15 per cent. VAT in his first Budget, and I am glad that my right hon. and hon. Friends have tried to lower the figure. As my hon. Friend the Member for Blackburn (Mr. Straw) said, instead of a decrease in public taxation, there has been a massive increase, except upon the very rich, who represent only a small proportion of the community.

The effect of VAT on charities has aroused great concern on both sides of the Committee, and I am surprised that no Conservative Member is here to say something on behalf of charities. I have proposed—I hope that it will appear under another name in Standing Committee—

Mr. Marlow

On a point of order, Mr. Weatherill. If it is not proper on this new clause to talk about thresholds, is it proper to talk about charities?

The Chairman

I think that we must not have a tit-for-tat on this matter. I listened carefully to what the right hon. Member for Norwich, North (Mr. Ennals) said, and I believe that he is sticking to the new clause.

Mr. Ennals

My point is directly related to the new clause. Charities perform an invaluable service that fits in with the theses of both the Government and the Opposition. They have taken on vast responsibilities in social services. They provide services such as homes for the elderly, the mentally handicapped and children, which would be excluded from VAT if they were provided by local authorities. It is grossly immoral that VAT is imposed on charities. This is relevant to the new clause because any reduction in VAT would give some relief to charities. Even if my right hon. and hon. Friends were proposing only a 0.5 per cent. cut, it would be some help, but year after year the Chancellor, when pressed about this matter, has said that there are problems in the definition of charities. I have a simple definition. When services are provided to the public by a charitable organisation that might otherwise be provided by a local authority social services department, all VAT paid by the charitable organisation should be refunded. That proposition may not be accepted in Standing Committee, but the bodies that may benefit from my proposition or from the new clause include the Spastics Society, Dr. Barnardo's, Help the Aged, the National Society for Mentally Handicapped Children and Adults, the National Children's Home, the Royal National Institute for the Blind, the Royal National Institute for the Deaf and the Save the Children Fund. More than 100 charities, often staffed by volunteers, which provide invaluable service to help to meet the social needs that the Government have, sadly, neglected would benefit from the clause.

5.45 pm

The cost of my proposals for charities would be relatively small—about £1 million to £2 million—but already some charities have had to cut their services to the most needy in our society. It is deplorable that the Government have not stopped the removal of 15 per cent. of funds donated by the public to charities, which goes straight into the Exchequer's coffers.

Mr. Bruce-Gardyne

No, it does not.

Mr. Ennals

It does. If the Government will not completely relieve charities from VAT, at least this new clause will provide modest relief. If there was any political will to ease the burden of taxes, it would be done. The political will has been found to relieve the burden of VAT—

Mr. Bruce-Gardyne

That is a lot of rot.

Mr. Ennals

The hon. Gentleman is making comments from a sedentary position. Why does he not stand up to make them?

Mr. Bruce-Gardyne

Why was that not done between 1974 and 1979?

Mr. Ennals

During that period VAT was at 8 per cent., but this Government have almost doubled VAT. They have not only departed completely from the pledges that they made before the general election, but they have dramatically increased the effect of VAT on charities. The Government had the will to announce that private firms tendering to provide services in the National Health Service would be relieved of VAT so that they could make profits, but they have not done so for voluntary organisations. That is doubly immoral.

The Government should consider some important commodities that should not carry the burden of 15 per cent. VAT. They are presiding over a period of massively increasing crime, especially burglaries, so locks and equipment that would discourage burglars from breaking in should be excluded from VAT—

The Chairman

Order. I am sorry to interrupt the right hon. Gentleman, but the Committee expects me to be fair to both sides. We must not call upon the Government to reduce VAT on some items, because the new clause states that it should be reduced from 15 per cent. to 13 per cent, on everything.

Mr. Ennals

I accept your ruling, Mr. Weatherill. The Government will have heard what I said and, in view of the tribute paid by the hon. Member for Northampton, North (Mr. Marlow) to the sensibility, wisdom, justice and morality of the Minister, no doubt he will consider law and order as well as charities.

The new clause would be of some help to the Government, who have broken many of their election promises. It would be a modest step towards giving credibility to what they say they will do in their next general election manifesto. So many of the promises that appeared in the Conservative party's 1979 manifesto have been broken, but if the Government eased their position and accepted the new clause, some members of the electorate would believe one or two of their statements in future. It would be in their own interests, apart from the interests of the country, to accept the new clause.

Mr. Foulkes

I know that the Economic Secretary to the Treasury welcomes the opportunity to fulfil pledges and to do what he said he would do. I know that he is always pleased to honour commitments, and the new clause gives the Government the opportunity to honour an election commitment. If they agree to accept the new clause, they will reduce tax for those who really need a reduction to take place.

Unlike my hon. Friend the Member for Blackburn (Mr. Straw), the hon. Member for Gateshead, West (Mr. Horam) and others who have participated in the debate, I am not a tax expert. I speak as an ordinary taxpayer—

Mr. Bruce-Gardyne

A very, very ordinary taxpayer.

Mr. Foulkes

—who talks regularly with other ordinary taxpayers. When they see me they say, "George" —they are a friendly lot—"which taxes have been cut? The Tories told us way back in April 1979 that our taxes would be cut. Please tell me which taxes have been cut."I tell them that although I do not wish to be political on the issue I can honestly say that no taxes have been cut for ordinary people. That is the truth.

The introduction of the new clause offers the Government salvation. That is an argument, perhaps, for the Opposition not to support it. If the Government accepted the new clause and it were added to the Finance Bill and enacted, they would be able to say that a tax cut had been made. Acceptance of the clause would lead to a tax cut that would help the ordinary people whom I represent, as well as those represented by, for example, my hon. Friends the Members for Glasgow, Provan (Mr. Brown) and Fife, Central (Mr. Hamilton).

I note that the hon. Member for Croydon, South (Sir W. Clark) has entered the Chamber. He is an old sparring partner of mine in Committee on Finance Bills. He will recall the article that appeared in The Times entitled The Case for Cutting VAT. That article set out the effects of cutting VAT and how they would help ordinary people. It claimed that cutting VAT from 15 per cent. to 10 per cent. — a slightly greater cut than we are suggesting—would reduce prices by about 3 per cent. That would be a substantial reduction.

The Government have an alleged commitment to reduce taxes, and they also want to reduce prices. The hon. Member for Gateshead, West said that the inflation rate will be increasing if things continue as they are. The new clause presents an ideal opportunity to keep down inflation. The article in The Times claimed that to cut VAT would be to increase output. It calculated that a cut from 15 per cent. to 10 per cent. would increase output by about 1 per cent., and we desperately need an increase in output. It was argued in the article that whereas a cut in income tax might result in more saving and less spending, a cut in VAT would result in more spending and would therefore help to reduce unemployment. Again, that is something that the Government need desperately.

All these arguments bear directly on the new clause. It seems clear that the effect of the new clause would be to help the economic situation and, above all, those whom we represent. Statistics show that the burden of VAT falls disproportionately more on the lower quintiles. Ordinary working people find the effect of value added tax much greater than Conservative Members and those whom they represent.

Value added tax is a regressive tax that affects pensioners substantially more than the majority of those whom Conservative Members represent. The Government have already clobbered pensioners enough. There have been clawbacks and the pensioners' year has been increased from 52 weeks to 54 weeks to enable the Government to take money away from them. The removal of the link with earnings was another means of clawing back money from the pensioners. The effect of the Government's latest proposal is a clawback of a further 2 per cent. A reduction in VAT would be of especial benefit to pensioners.

The clause would give the Government an opportunity to fulfil a promise. As they have fulfilled few if any promises, they should accept the new clause with both hands. It gives them an opportunity to introduce a tax cut that would help ordinary working people, pensioners and the poor generally. These are the people who have not benefited from any tax changes that the Government have introduced. Those at the top end of the earnings scale have been the only people to benefit from the Tories' tax cuts.

The new clause is positive and progressive and has been extremely well argued by my right hon. and hon. Friends on behalf of economists and tax experts, those who understand macroeconomics. I speak on behalf of ordinary taxpayers, and I know that it is a new clause that would be welcomed by them.

Mr. Carter-Jones

I am in a dilemma because I do not know how to vote on the new clause. I am prepared to support 15 per cent., but I think that I would have benefited from hearing the Minister's contribution before making my speech. Representations have been made to the Economic Secretary to the Treasury on zero rating for charities. The voting pattern of hon. Members would be affected — whether the rate be 15 per cent., 13 per cent., or 12.5 per cent.—if zero rating concessions were made. If those concessions were made for charities, the hon. Gentleman might find himself in a position very different from that which is likely to result.

I note that the payroll vote outnumbers those on the Conservative Back Benches. However, 89 Conservative Members signed an early-day motion calling for VAT relief for charities. The motion states: This House knows that in 1972 the then Chancellor of the Exchequer gave a commitment"—

Sir William Clark (Croydon, South)

What has this to do with the new clause?

Mr. Carter-Jones

It has everything to do with the new clause.

The Chairman

Order. The hon. Member knows that the rate of VAT paid by charities is to be debated in Standing Committee. I invite him to address his remarks to new clause 1, which calls for a reduction of VAT from 15 per cent. to 13 per cent.

Mr. Carter-Jones

I can assure you, Mr. Weatherill, that there are Opposition Members who would stay with the Government if a statement were made on the Government's policy for charities. This is the dilemma that we face. I suppose that the Minister's silence is my answer. A reduction to 13 per cent. or 12.5 per cent. would be extremely helpful. I know that the difficulty of providing relief is used as an argument for the Government being unable to introduce zero rating. Hon. Members have been told how difficult the position is. The hon. Member for Croydon, South and I attended a meeting at which he said how difficult the position was. It is difficult to stand in a railway station, a tube station or a shopping precinct, holding out a bag for charity knowing full well that 15p in every pound goes to the Treasury. If the rate is reduced to 12.5 per cent. the position would be more satisfactory. Money would be put into the pockets of charities.

6 pm

Mr. Bruce-Gardyne

As the hon. Member for Eccles (Mr. Carter-Jones) is repeating something that the right hon. Member for Norwich, North (Mr. Ennals) incorrectly stated, I must correct him. There is no VAT on gifts to charities. I trust that he knows enough not to spread around that type of canard, which is without foundation.

Mr. Carter-Jones

If an individual has 10 wheelchairs he does not pay VAT on them, but if a charity bought a wheelchair to be shared by 10 people, VAT is payable on it.

Mr. Bruce-Gardyne

That is not the same point.

Mr. Carter-Jones

It is the same point. When a collection is made, it is made for the relevant organisation.

Mr. Bruce-Gardyne

VAT is not paid on the collection.

Mr. Carter-Jones

VAT is paid on the collection.

Mr. Ioan Evans (Aberdare)

Is it not correct that for every pound that a charity spends it has to spend 15p extra because of the tax imposed by the Government? If people wish a charity to spend a pound, they should give it £1.15.

Mr. Carter-Jones

Precisely. I do not understand why that fact is not realised. It is hard for someone who runs a coffee morning because 15 per cent. is lost from the proceeds.

Those who raise money encounter difficulties. The Treasury have the ability to find a solution to the problem. That fact will condition the way Members will vote. Eighty-nine Conservative Members supported the early-day motion. If the payroll vote were removed and hon. Members voted according to their intentions and priorities — present in the Chamber are hon. Members who signed that early-day motion—the 12.5 per cent. rate would be carried tonight. That is the key to the position. It is interesting to note that people who belong to charities have become adopted Conservative candidates. They have fought the Government on this issue and will have to face it again.

Will the Economic Secretary, when replying, if he can negotiate the rules of procedure, state his attitude towards this policy because it may well influence the voting pattern?

Miss Jo Richardson (Barking)

I welcome the move that the Labour party has made towards reducing the rate of value added tax, but I wish that we could have had some zero-rated items as a preface to rethinking the position of indirect taxation. Reducing the rate from 15 per cent. to that proposed in new clause 1 would greatly assist pensioners and one-parent families, who. are the poor members of our community. They are overlooked in terms of what they have to fork out.

Women pay 15 per cent. VAT on sanitary products and they would welcome a reduction in the rate. They have been campaigning, as have many male and female Members, for a substantial reduction in value added tax, if not for its abolition. I remember the 1979 Budget when value added tax was raised from 8 per cent. to 15 per cent. Outrage was expressed not only by hon. Members but by the public at the thought of the increase in the cost of living, especially on essential items, such as the one I have mentioned. The Treasury in previous discussions on this subject has acknowledged that sanitary products are essential for personal hygiene. I have a letter from the previous Economic Secretary to the Treasury stating that fact. However, there are many "buts" after that. The letter goes on to say that many other products are essential. The famous incident of razor blades for beards has been raised. Almost every hon. Member in the Chamber has used a razor this morning. An exception is the hon. Member for Croydon, North-West (Mr. Pitt) who does not consider razors to be absolutely essential for personal hygiene.

Mr. Robert Sheldon (Ashton-under-Lyne)

He would be better looking if he did.

Miss Richardson

This is a serious matter for women and it varies from woman to woman. Prices vary. One chemist will charge 50p for 10 tampons or 10 sanitary pads whereas another store, perhaps in a village, will charge as much as £1 for the same product. I am, in a way, criticising the profiteering that arises from the pricing of sanitary products as a result of this horrendous tax.

Women's needs vary. Some women in some months are able to use only one packet of sanitary towels. I am sure that I am telling hon. Members what they already know from their own family circumstances. Occasions exist when women need more than one packet. In some months they have to spend more money because they need two or three packets. A woman contacted me recently who had a menopausal problem. During her periods in one month she was using two packets a day.

Others are affected by the level of tax on this product, such as people who are incontinent. Nappies are free from VAT, and it is quite ludicrous that VAT is not excluded from the other products I have mentioned.

I welcome the fact that the Labour party is proposing that VAT should be reduced by a couple of percentage points. Magazines such as Mother, Woman, and prestigious bodies such as the National Federation of Women's Institutes and the National Housewives Association, have supported this move. Those organisations are not normally considered outrageous feminist bodies, but they involve women who are very concerned for their sisters. I cannot wait for a general election and the reinstatement of a Labour Government. In our document we propose to abolish VAT on sanitary products and I am sure that that will be well received by women.

My right hon. Friend the Member for Norwich, North (Mr. Ennals) listed organisations that are constantly battering down our doors because they rightly want relief from VAT. In my constituency a charitable organisation, Abbeyfield, builds and furnishes homes for the elderly. There are two homes in Barking and the organisation is furnishing a third home, which will be greatly welcomed because of the facilities that it will offer to those elderly who need some overseeing and care.

It is slightly ironic that if—as I understand it — a local authority furnishes one of its homes, it does not have to pay VAT, while a voluntary or charitable body has to do so. It is particularly ironic that this Government, who pretend to be on the side of voluntary work and who rightly praise such work, apparently do not want to encourage it by reducing VAT for charitable organisations. As we all know, cuts have been made in local authority and social service spending and that places an even greater burden on charitable organisations. Consequently, it is ironic and cynical that the Government should refuse to help charitable organisations to do the job that the Government have suggested is theirs.

6.15 pm

Mr. William Pitt (Croydon, North-West)

I associate myself with the remarks made by the hon. Member for Barking (Miss Richardson) about sanitary products for women. I was rather shocked to notice the discomfort of some Conservative Members. If they consulted their wives and daughters they would realise the dilemma faced by many women. It is about time that something was done.

It would be out of order to discuss zero rating, because we are discussing a reduction in VAT which will, in turn, reduce inflation. However, a discussion on zero rating would be helpful, and I echo the remarks made by the hon. Member for Eccles (Mr. Carter-Jones) in seeking some response from the Minister. New clause 5 has been tabled by Social Democratic and Liberal Members. The reduction of VAT to 12.5 per cent. would have a significant effect, but it would be wrong, for several reasons, to introduce a cut in VAT before 1 October 1983. For example, the effect of the devalued pound will not come through before then, and the new pay rounds will be starting. According to the Treasury model, if we reduce VAT by 2.5 per cent., we can reduce inflation by about 1 per cent.

In February 1983 the OECD produced figures that enable us to compare inflation rates with unemployment rates in the big five economies: the United Kingdom, Canada, the United States of America, Japan and Germany. They show that Britain has the highest unemployment rate, at 13.5 per cent. and the third highest rate of inflation. The hon. Member for Northampton, North (Mr. Marlow), who is not in his place, asked about France. Its inflation rate is the highest, at 9.2 per cent., but unemployment is only 8 per cent. That says something about the Government's attack on the economy. By screwing down inflation, the Government have greatly increased unemployment in Britain.

Earlier, we discussed the effect of VAT on certain industries. I am sure that many hon. Members have received the letter from the National Federation of Building Trades Employers. The statistics show that about one in eight of those unemployed are associated in one way or another with the building industry. The NFBTE states: The English House Condition Survey emphasised the serious problem of housing deterioration which exists and the continued positive rating of building repairs and maintenance means that the 'cowboy' has a definite advantage over the bona fide builder. If a man offers to do the roof or the garage for cash in hand and says, "You give me the money, no questions asked," the customer has no protection or guarantee that the work will be done, let alone done properly. I echo the sentiments of the NFBTE in its plea for zero rating, but a reduction in VAT would certainly help the building repairs industry. It is a stupid anomaly that new build does not incur VAT but repairs do. I should welcome some Government assurance about that.

Any reduction in the rate of VAT would be positive. Conservative Members cannot deny that when they came to power they almost doubled the rate. It went up by a factor of about 1.9, which is as near to two as makes no odds.

Sir William Clark

rose—

Mr. Pitt

A reduction in VAT would reduce inflation, would give an impetus to the economy — which the Government always claim to desire—and would also assist those most affected by VAT; those in the fifth quintile.

Mr. D. N. Campbell-Savours (Workington)

On 23 April 1979, the former Prime Minister, my right hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) said that the Tories would double VAT to pay for income tax cuts. They had done so by 12 June, despite the denials of the Prime Minister and a scurrilous article run by one of the daily newspapers, entitled "Labour's Dirty Dozen".

Sir William Clark

Perhaps we should get the facts right before the debate continues. When the Conservative party came to office VAT had two rates, at 8 per cent. and 12 per cent. Both were amalgamated into 15 per cent. Therefore, it is quite wrong of the hon. Members for Wokington (Mr. Campbell-Savours) and Croydon, North-West (Mr. Pitt) to suggest that VAT nearly doubled. The 8 per cent. rate may have nearly doubled, but the 12 per cent. rate increased by only three points.

Mr. Campbell-Savours

The hon. Gentleman would do well to recall that the 12.5 per cent. rate represented a very small proportion of the total yield. The great majority of tax was levied at 8 per cent. That figure was nearly doubled. Twice eight is 16 and the rate is 15 per cent.

I shall argue that a 2.5 per cent. cut will not lead to a reduction in the take if the Government pursue a certain course. Instead of examining collection arrangements and stamping out evasion to increase the take, the Government have used the crude tool of doubling the rate and have thus triggered off a massive exercise in tax evasion not only of VAT, but also of income taxes. The problem is that higher VAT rates act as a disincentive to compliance with the law. Furthermore, it has a spin-off effect on income tax receipts, because to keep records for VAT invites the attention of the Inland Revenue. Some say that there is an incentive to register, if only to offset a trader's payment of VAT. However, that is not true because many traders believe that it is better not to register but to pay VAT on purchases and avoid contact with the state.

Raising the VAT threshold in many ways further aggravates the problem, as it serves to legitimise the failure to register and the consequential failure to make genuine returns to the Inland Revenue. Raising the VAT threshold has enabled many to earn higher salaries without having to declare them to the Inland Revenue because they have not been monitored by any department.

Evasion is not exclusively practised by the unregistered — it is also practised by the registered. Businesses providing services do this, and we see many examples in advertisements in local newspapers. When one contacts these so-called skilled people and they come to one's house to carry out a job—this has happened to me—their first question is whether one is paying cash, as one will otherwise have to pay the VAT. It is becoming standard practice by thousands of tradespeople to pursue such arrangements when they seek payment. We all know that that is the truth, and a higher rate of VAT further aggravates the problem. A lower rate acts as an incentive to end that.

My hon. Friend the Member for Fife, Central (Mr. Hamilton) and I are members of the Public Accounts Committee. One can imagine our pleasure when last week we had the opportunity to examine the chairman of the Board of Customs and Excise, Mr. Fraser, and the director of organisation, Mrs. Strachan. Having checked that I am in order, I shall quote from the evidence that they gave to the Select Committee, which has been published, and which relates directly to the point that I am making. When asked a question about the level of undetected under-declarations, which would be reduced if we reduced the rate to 12.5 per cent., Mrs. Strachan replied: What is noticeable is that the rate of under-declaration being discovered by our control staff has been going up quite substantially and the likely figure for the year ending March 1983 is very substantially up on the year previously. If one looks at that it suggests that the cost effectiveness of VAT control staff is up quite substantially compared with what it was before, whereas for the year ending 31 March 1982 we were getting something like £44,500 per control officer, for the year ending 31 March 1983 it was £87,300 per control officer. She went on to express reservations on certain aspects of the figures that she has quoted. She shows that it is an efficient use of resources to spend money on more control officers, thereby increasing the take, which would have the effect that I have explained.

When Mr. Fraser was asked about staffing, and how that affected the take on VAT, he said: Clearly the allocation of staff to the Civil Service as a whole is a political judgment. He went on to deal with the present arrangement and said: if we want more control staff for VAT we can try to find savings in other areas of VAT, the non visiting area; or we can look at the Customs and Excise bits of the Department or the support services and try to find savings there to release the VAT; if neither those work and we still think we need more staff we can ask for more staff. At that point, the Chairman of the Committee asked what the effect would be if the Customs and Excise were to be given more staff. He asked: Are you saying that you could not use more staff at the moment? The reply came from Mr. Fraser on the behalf of his department: We should be very glad to have more staff. The Chairman then asked: Could you use them more profitably? Mr. Fraser replied: We would undertake to employ them profitably. In the event that the requirements of the Customs and Excise officers were to be recognised by the Government and the staff allocated, there would be a substantial increase in the VAT take, perhaps sufficient to offset the cost of the 2.5 per cent. reduction in VAT outlined in the new clause.

In connection with the reference to the Customs and Excise department and the suggestion that the staff could be drawn from it, it might be worth considering British ports. Dover is perhaps the best example. Customs and VAT control officers have three responsibilities. They must monitor imports, which include commercial consignments, with landing officers. They have a responsibility for dealing with private importations, on which, again, VAT payments are made. Thirdly, of no relevance to the debate, they have a responsibility for export documentation.

Things have deteriorated so much at ports that the customs officers union, and others who have a responsibility for the collection of VAT, have accused the Government of allowing the United Kingdom to become a free port for heroin. I know that that point is clearly out of order today, but it should be formally noted. It is an illustration of the problems of monitoring imports and procedures for the collection of VAT. That is why the customs officers have used that analysis.

The unions have considered industrial action in the ports because of the reduction in manning, and there were even stories in the press last weekend that control and Customs and Excise officers at Dover would take industrial action and withdraw all services by the coming weekend. It is only in the past week that meetings have ensured that those actions will not be taken, pending consultation and discussion between unions and management. The Society of Civil and Public Servants, represented by Judy MacNight, has said: The department reached a stage some time ago when it began to fail to administer proper controls. The department responsible for collecting the moneys that we are discussing has lost 3,100 jobs since 1979. Another 500 jobs are due to go this year and more will continue to go up to 1988. The unions, recognising the downturn in tax takes, are demanding 1,000 more staff, but there has been no response from the Government.

In a recent incident, a solitary customs officer faced a queue of 300 to 400 vehicles at Dover, and in desperation just waved them through because he could not monitor the vehicles as he should have done if he were carrying out his responsibilities properly. On that occasion, there was a VAT loss that could have helped to offset the reduction in VAT being sought in the new clause. On Sundays in Dover it is reported that individual officers have to deal with as many as 40 or 50 coaches, which come into the United Kingdom unchallenged. These are unparalleled developments which demand a response from the Government.

The Economic Secretary has the right to reply if he catches your eye, Mr. Weatherill. He might consider in the meantime that at London Heathrow passenger traffic has increased by 67 per cent in the past 10 years. Cargo traffic, on which VAT could be due if clearance took place at the port and not at the place of import, has increased by 44 per cent. in 10 years, but there has been a 22 per cent. reduction in the number of officers available for carrying out the monitoring and customs procedures. That is disgraceful.

6.30 pm

At Heathrow one person in 100 is challenged at the customs point—again showing a loss of VAT. Less than 2 per cent. of cargo is examined, but only four years ago that figure was 10 per cent. To fund their cuts in the Civil Service, the Government have reduced by four fifths the examination of goods entering the United Kingdom through Heathrow.

The cuts have meant a slacker regime and a lower return to the public purse. The new clause is about the public purse and I submit that if VAT were reduced to 12.5 per cent., accompanied by proper monitoring arrangements and sufficient civil servants, there would be no reduction in revenue. I am also told that yachts are now freely allowed into and out of British ports, often without customs monitoring. To return to the subject that was slightly out of order before, the price of heroin in Britain is now 30 per cent. less than it was two years ago. That means a lot. It means that supply has increased and that can only happen because there has been a reduction in the number of officers available.

Collection in the United Kingdom is becoming slack and shoddy, just as it is in Italy and some other EC countries where evasion is rife. It is not in keeping with the British character to conduct our affairs in such a way, but the Government have opened the door to this form of massive evasion.

There was a report the other day that the Italian foreign minister, Signor Colombo, had asked for the 1 per cent. VAT contribution to EC funds to be doubled. We are told that the reason for that application is that they are trying to earmark more of our overpayment for EC purposes. I put it to the House that that is a stab in the back for the convergence policy which I am told the Prime Minister has been pursuing over the past few years. I hope that the Minister will reply to that point.

Mr. Ioan Evans

It is interesting to record that, although every Labour Member who has spoken in the debate so far has supported the new clause, the only contribution from a Conservative Member was that of the hon. Member for Northampton, North (Mr. Marlow), who thought that the new clause did not go far enough. There is not a single supporter tonight of the Government's VAT policy.

This debate is about the Government's taxation policies. They would not have been elected four years ago if it were not for their promise to reduce taxation. Yet we all know what they have done to direct taxation. The personal tax burden has risen for every person earning less than £550 a week. Everybody in Britain who is earning less than that is paying more direct taxation than he was under the last Labour Government. The average family on average earnings of £160 is paying £7.95 a week more in direct tax than they were under the last Labour Government. But those earning £50,000 a year are paying £24 a week less.

This debate is not about direct taxation, but the case has been proved that the Government have broken their promise to reduce direct taxation and it has been increased. I shall give way to any hon. Member who says that the Government have not increased taxation.

This debate is about indirect taxation. Labour Members would prefer a tax on earnings rather than on spending, but VAT is a tax on spending.

Sir William Clark

We do not.

Mr. Evans

But the Government have imposed taxation on both.

At the last general election there were strong denials from the Conservative party when Labour Members said that a Tory Government would increase VAT. Senior members of the Tory party said that they would not increase VAT. The evidence is there, although I do not have the quotes before me now. There was a famous article in the Daily Mail, which has already been referred to, which said that a Tory Government, if elected, had no intention of increasing VAT and that what the Labour party said was a lie. The Minister shakes his head, but he knows that the Daily Mail said that it was a lie for Labour to suggest that a Tory Government would increase VAT, but they have. They have increased VAT from 8 to 15 per cent.

The Minister made the technical point that VAT on luxury goods is 12 per cent., but that is not the case for a whole range of products in Britain today. On a car valued at £4,000—a lot dearer now than under the last Labour Government—VAT under the last Labour Government was £320 — a substantial amount — but under this Government it has risen to £600. On such a car, a person must pay £280 more in tax under this Government. Under the last Labour Government there was a tax of £24 on a television set worth £300. Under this Government, one must pay £21 more in tax on that television set—a total of £345.

Sir William Clark

Does the hon. Gentleman realise that the Daily Mail did not write the last Tory manifesto? It was made perfectly clear in our manifesto and election addresses that the emphasis was on taxation on spending rather than on taxation on earnings.

Mr. Evans

The Tory party made categoric statements that it would not double VAT. The Government have increased not only income tax but indirect taxation as well.

I do not want to give a catalogue of the whole range of products that have been affected under the Government, but every time people go shopping, with the exception of children's clothing and certain other items, they are paying more tax on their purchases. Another example is petrol. Under the last Labour Government a gallon of petrol cost about 73p. If we are to have an election in June people should remember as they go along to their polling station in their car that under this Government the regular price of petrol has risen to £179.1p. There is all the talk of competition, but wherever one goes the price is £179.1p. Taxation on petrol under this Government is about 98p a gallon. It is not just the petrol companies that put the price up; it is the Government. VAT must be paid on petrol, on cars and on car repairs.

It is right that we should reduce VAT, but I hope that the next Labour Government will go further, because I genuinely believe that it is those with the greatest incomes who should pay the most tax.

The Government have created unemployment for 4 million people. The unemployed may have thought that at least they would not have to pay income tax because they earned nothing, but every time that they purchase goods they have to pay VAT. This Government have got at the unemployed, the pensioners and the disabled. They do not tax them on their incomes because that is insufficient, but they tax them on their spending.

VAT is a Common Market tax. It has been imposed nationally because it is part of the harmonisation within the EC. We should not blame the Italians for talking about increases in VAT, because a document circulated by the Commission states specifically that because Community finances are in such a state revenue must be increased. They hope to do that by increasing VAT.

Before the next election the Tories must deny or confirm whether they plan to increase VAT still further, even though they have already increased it from 8 per cent. to 15 per cent. If they are re-elected, what will the VAT rate be? I hope that they will not be re-elected, and that the people, in their wisdom, will recall the broken promises, throw out the Government and bring in a new party which will look after their interests.

Mr. Bruce-Gardyne

When I listened to the hon. Member for Blackburn (Mr. Straw) I wondered whether I was here on the right day. Eventually he said about half a dozen words on the subject of the new clauses. Other contributions were more closely related to the new clauses and I shall deal with them first.

The right hon. Member for Norwich, North (Mr. Enna1s), the hon. Member for Barking (Miss Richardson) and the hon. Member for Eccles (Mr. Carter-Jones) argued, not for the first time, the case for exempting charities from VAT. If I pursued that for long I should be in trouble with you, Mr. Armstrong. I do not find it all that alluring to listen to right hon. and hon. Gentlemen who had the opportunity to remove VAT from charities in five years of government but did nothing about it, saying today that it is a question of will. They knew then that the subject was more complex than that. I am not attracted by lectures from right hon. and hon. Members who ask us to take action which they were not prepared to take when in office. We shall discuss these matters in greater detail upstairs. It is more appropriate to discuss them then.

My hon. Friend the Member for Northampton, North (Mr. Marlow) made a powerful plea for the abolition of VAT and for raising the threshold. The hon. Member for Workington (Mr. Campbell-Savours) seemed to argue in the opposite direction in favour of lowering the threshold. If I entered into that argument I should be out of order. It is not true that the only obstacle to a substantial raising of the VAT threshold is the European Community's attitude. Many traders are strongly opposed to a large increase in the threshold, although I confess that in terms of tax efficiency there is much to be said for it.

The hon. Member for Workington culled many reports from the Sunday press. I assure him that they were, to a substantial extent, inaccurate. In any case, I confess that their connection with the new clauses is not immediately apparent to me. I concede one matter to the hon. Gentleman. He said that if we reduced the level of VAT that would tend to reduce the incentive for under-declaration. That must be true. It is a fair point and I accept it, but unfortunately there are more substantial objections to taking the action which the new clauses call upon us to take.

The hon. Member for Blackburn ranged wide in his speech. I should love to deal with what he said about exchange rate policy. I made a good speech about it last weekend. I shall send the hon. Gentleman a copy. That would be safer than discussing it this evening.

6.45 pm

The hon. Member said about half a dozen words which were relevant to the new clauses. He said that the increase in VAT from 8 per cent. to 15 per cent. in 1979 was solely responsible, or almost solely responsible, for the increase in inflation from 10 per cent. to 22 per cent. It is unwise for hon. Members on either side to pursue that line, although I accept that some of my hon. Friends did just that after the Labour Government took office in 1974. They said that the course of inflation in the first 18 months of a Government's life is predominantly determined by the Government's actions. I believe that to be untrue. I believed it to be untrue in 1974 and in 1979–80. The fact is that the increase in VAT in the summer of 1979 added 3.5 per cent. to the RPI—that is all. It is nonsense to pretend that it was the sole or even predominant factor in the rise in inflation which followed this Government's assumption to office. The dominant factor was the trend of inflation which the Labour party left behind. It is ludicrous to pretend otherwise.

The hon. Member for Gateshead, West (Mr. Horam) said more than the hon. Member for Blackburn said about the new clauses. There is common ground on the factual implications of the proposal. New clause 1 would cost us about £1,400 million in a full year and new clause 5 about £1,800 million. If the House decided to give immediate effect to new clause 1, the RPI to be published in June, for May, would probably be about 1 per cent. lower than otherwise. If the House approved the alliance new clause, the RPI for October this year would probably be about 1.25 per cent. lower. One year later, in the index published in June 1984 or the index published in November 1984, that bonus would have disappeared, although the impact of either new clause on the general level of prices would endure. We can agree about that, but the rest is speculation.

Opposition Members argue that the immediate reduction in the RPI would have an effect on attitudes to wage bargaining and that that would have a knock-on repercussion on inflation. I argue that, unless we took steps to recoup the revenue to be forgone by the passage of the new clauses, we would be bound to expect that the higher borrowing rate would lead to interest rates being higher than otherwise, or alternatively that the rate of growth in the domestic money supply would accelerate in a manner that would presage higher inflation. If, on the other hand, we were to recoup the revenue forgone by higher taxation, the secondary effects, for which the hon. Member for Gateshead, West was looking, in inflationary expectations would be negatived by those alternative forms of inflation.

Mr. Horam

rose—

Mr. Bruce-Gardyne

The hon. Member for Blackburn will have an opportunity to reply, so, if the hon. Member for Gateshead, West will allow me, I will continue and conclude my remarks.

Quite apart from what I see as the practical objections of revenue impact and inflationary expectations, there is a more philosophical objection to the new clauses. We have heard from the hon. Member for Blackburn and others about what was said in the Conservative election manifesto. The hon. Member for Blackburn was good enough to say that we had made it clear that we intended to shift from direct to indirect taxation. Why he should then say that we had made it clear that we intended to do the opposite is not clear. What was said in the manifesto was accurate and was, indeed, our intention. That was why my right hon. and learned Friend the Chancellor decided in 1979 to raise VAT to 15 per cent. Even at the 15 per cent. rate, perpetuated in my right hon. and learned Friend's Budget this year, we are by no means out of line with our European partners. Only Luxembourg and Germany have lower standard rates. All the other countries have higher standard rates — some have substantially higher rates. While it was the conscious intention of the Government to tilt the balance back from tax on income to tax on spending, it is worth noting that since 1979 the balance has once again been slipping. In 1979–80, after my right hon. and learned Friend's first Budget, we drew 54.5 per cent. of our tax from spending taxes and 45.5 per cent. from earning taxes. Last year the figures were 51.5 per cent. from spending taxes and 48.5 per cent. from earning taxes. On those grounds, too, the new clauses do not appear attractive to the Government. On those self-same grounds, the new clauses should not appear attractive to the Opposition parties.

Let us consider the record. In the final year of the Government of my right hon. Friend the Member for Sidcup (Mr. Heath), the share of direct and indirect taxes in the total revenue was almost 50–50. Then the right hon. Member for Leeds, East (Mr. Healey) took over and in the first flush of his pip-squeaking populism, shifted sharply in the direction of taxes on earnings to a balance of 53 per cent. of revenue from earnings and 47 per cent. of revenue from expenditure taxes. So far so good. The right hon. Gentleman did not maintain that position. By 1978–79, the right hon. Gentleman's last year in office, the direct tax take was down to 48.5 per cent. and the indirect tax take was up to 51.5 per cent. — precisely the same percentages as in the last financial year. This did not happen in a fit of absent-mindedness. On 30 November 1976—this will answer the points of the hon. Members for South Ayrshire (Mr. Foulkes) and for Aberdare (Mr. Evans)—the right hon. Member for Leeds, East said: It certainly was true 30 years ago that, broadly, indirect taxation was regressive and income tax was progressive, in the social sense. That is no longer true when income tax is paid at levels of earnings below those which qualify for supplementary benefit. It cannot really be regarded as a progressive tax. On the other hand, the structure of the value added tax, which zero rates half—the most important half—of family expenditure, can be shown to be in many respects progressive rather than regressive." —[Official Report, 30 November 1976; Vol. 921, c. 719.]

Mr. Foulkes

Not at all.

Mr. Bruce-Gardyne

That was the verdict of the right hon. Member for Leeds, East. The right hon. Member for Heywood and Royton (Mr. Barnett), whom I am delighted to see in his place, said in that seminal work, Inside the Treasury, about the cut in VAT from 10 per cent. to 8 per cent. in 1974: To my mind, this was a move in absolutely the wrong direction. We should have been increasing indirect taxes, not reducing them. I know that when I first joined the Labour party we all believed that income tax, since it fell on the rich, was good and progressive, whilst indirect taxes … on consumer goods placed an unfair burden on the poor. That principle was justified then, when few workers were paying much income tax, but it has no relevance today, when the greater part of the income tax yield comes from average-paid workers, and when VAT is not levied on necessities such as food". We expect the right hon. Member for Leeds, East to change his views as often as he changes his socks, but we know and respect the right hon. Member for Heywood and Royton as a man of principle. On that basis alone, I hope that he will join us in the Lobby in opposition to the new clause.

To agree to the new clauses would give our fiscal system another lurch in the direction of excessive reliance on direct taxation. On those grounds alone, and for the reasons so cogently argued in the past both by the right hon. Member for Leeds, East and the right hon. Member for Heywood and Royton, the new clauses should be resisted. The way to deal with inflation and the way to maintain our progress towards more stable prices is to follow the course that the Government have been pursuing, which has produced already the lowest inflation in this country since the early 1960s. As I informed the hon. Member for Glasgow, Central (Mr. McTaggart) in a written answer yesterday, over the life of this Government the rise in prices has been barely half that of the previous Government.

By the consistent pursuit of sound and stable fiscal and monetary policies, Britain will enjoy the benefits of a permanent return to stable prices. That is the way to beat inflation. The new clauses are worse than a red herring. They are a snare and a delusion. I invite the House to throw them out.

Mr. Straw

I apologise to my right hon. Friend the Member for Norwich, North (Mr. Ennals) and to my hon. Friends the Members for South Ayrshire (Mr. Foulkes), for Barking (Miss Richardson) and for Eccles (Mr. Carter-Jones) for not being able to deal with the point they raised in the short time that is available to me.

My hon. Friend the Member for Workington (Mr. Campbell-Savours) pointed out that the Government are losing hundreds of millions of pounds through the lack of effective collection machinery for value added tax. My hon. Friend pointed out that a high rate of VAT encourages evasion and he drew to the attention of the House the fact that, over the past four years, the Government have reduced the effectiveness of fraud officers and the collection procedures for value added tax and income tax while at the same time pursuing so-called social security scroungers for benefits to the Revenue which are infinitely smaller.

Both sides of the House have accepted that the cost of new clause 1 would be about £1,400 million in a full year. Unlike the alliance parties, we do not resile from that cost and we do not suggest that the initial cost would be anything like the full year cost. We believe that the costs can be met from borrowing and that there is no need to raise taxation.

Before Conservative Members become completely befuddled by their dogmas, I must tell them that money is available. Figures produced yesterday show that £4 billion is flowing abroad every year under the Conservative Government. The savings of the British people are being forced abroad by city institutions to be invested not in the strength of the British economy but in the strength of our competitors abroad. The reintroduction of exchange controls would make those funds available to the Government and British firms to invest in the health of our economy.

7 pm

As fund managers recognise, if exchange controls were reintroduced, it would be possible for the Government to borrow on a funded basis from the markets without an increase in interest rates. The total cost of our proposals would add about £6 billion to the PSBR, which would still mean a PSBR of 4 per cent. of GDP, well below the average for the other major competitors within OECD.

Our principal reason for proposing a reduction in VAT from 15 per cent. to 13 per cent. is to offset the rise in inflation that is in the pipeline and which is due to the fall in sterling that has already taken place. It was significant that the Economic Secretary did not say a word about the prospects for inflation in the year ahead; nor would he accept interventions. Every Minister knows that, although inflation has come down to about the average for our competitors, it will rise inexorably towards the end of the year to 6, 7 or 8 per cent.

Mr. Bruce-Gardyne

The Red Book published at the time of the Budget stated that the expected rise in the RPI by the end of this year would be about 6 per cent. The evidence since then is that, if anything, that may err on the side of pessimism, and there are reasons to expect that the outturn may be better.

Mr. Straw

We shall see. If that is the case, why are so many Ministers desperate for a cut and run election in June? Indeed, the Economic Secretary, who has an interest in this Parliament running to the end of the century, seems to be the only Minister pressing for the election to be delayed past June.

We do not mind when the election comes, because a central issue will be the Government's record on taxation. They promised to reduce direct taxation, yet they have forced up direct taxation to unparalleled levels. They promised that there would be no doubling of VAT, yet that is what they have done. When the election comes, the people will vote against the Government, not least for the way in which they deceived them on taxation issues at the last election.

The new clause makes some modest recompense to the British electorate for the way in which it was deceived in 1979. It also seeks to offset the unquestionable rise in inflation that will take place towards the end of the year. I commend it to the Committee.

Question put, That the clause be now read a Second time:—

The Committee divided: Ayes 211, Noes 256.

Division No. 134]	[7.03 pm
AYES
Abse, Leo	Booth, Rt Hon Albert
Allaun, Frank	Boothroyd, Miss Betty
Alton, David	Bottomley, Rt Hon A.(M'b'ro)
Archer, Rt Hon Peter	Bradley, Tom
Ashley, Rt Hon Jack	Bray, Dr Jeremy
Ashton, Joe	Brown, Hugh D. (Provan)
Atkinson, N.(H'gey,)	Brown, R. C. (N'castle W)
Bagier, Gordon AT.	Brown, Ronald W. (H'ckn'y S)
Barnett, Guy (Greenwich)	Brown, Ron (E'burgh, Leith)
Barnett, Rt Hon Joel (H'wd)	Callaghan, Rt Hon J.
Beith, A. J.	Callaghan, Jim (Midd't'n & P)
Benn, Rt Hon Tony	Campbell, Ian
Bennett, Andrew(St'kp't N)	Campbell-Savours, Dale
Bidwell, Sydney	Canavan, Dennis

Cant, R. B.	Kinnock, Neil
Carter-Jones, Lewis	Lambie, David
Cartwright, John	Lamond, James
Clark, Dr David (S Shields)	Lead bitter, Ted
Clarke.Thomas(C'b'dge, A'rie)	Leighton, Ronald
Cocks, Rt Hon M. (B'stol S)	Litherland, Robert
Cohen, Stanley	Lofthouse, Geoffrey
Coleman, Donald	Lyons, Edward (Bradf'd W)
Concannon, Rt Hon J. D.	Mabon, Rt Hon Dr J. Dickson
Cook, Robin F.	McDonald, Dr Oonagh
Cowans, Harry	McKay, Allen (Penistone)
Craigen, J. M. (G'gow, M'hill)	McKelvey, William
Crowther, Stan	Maclennan, Robert
Cryer, Bob	McNally, Thomas
Cunningham, G. (Islington S)	McTaggart, Robert
Cunningham, Dr J. (W'h'n)	McWilliam, John
Dalyell, Tam	Magee, Bryan
Davidson, Arthur	Marshall, D.(G'gow S'ton)
Davies, Rt Hon Denzil (L'lli)	Marshall, Jim (Leicester S)
Davis, Clinton (Hackney C)	Mason, Rt Hon Roy
Davis, Terry (B'ham, Stechf'd)	Maxton, John
Deakins, Eric	Maynard, Miss Joan
Dean, Joseph (Leeds West)	Meacher, Michael
Dewar, Donald	Mikardo, Ian
Dixon, Donald	Millan, Rt Hon Bruce
Dobson, Frank	Mitchell, Austin (Grimsby)
Dormand, Jack	Molyneaux, James
Duffy, A. E. P.	Morris, Rt Hon A. (W'shawe)
Dunlop, John	Morris, Rt Hon C. (O'shaw)
Dunnett, Jack	Morton, George
Dunwoody, Hon Mrs G.	Moyle, Rt Hon Roland
Eadie, Alex	Oakes, Rt Hon Gordon
Ellis, R. (NE D'bysh're)	O'Brien, Oswald (Darlington)
Ellis, Tom (Wrexham)	Ogden, Eric
English, Michael	O'Halloran, Michael
Ennals, Rt Hon David	O'Neill, Martin
Evans, Ioan (Aberdare)	Orme, Rt Hon Stanley
Field, Frank	Park, George
Flannery, Martin	Parker, John
Ford, Ben	Parry, Robert
Forrester, John	Pendry, Tom
Foster, Derek	Penhaligon, David
Foulkes, George	Pitt, William Henry
Fraser, J. (Lamb'th, N'w'd)	Powell, Rt Hon J.E. (S Down)
Freeson, Rt Hon Reginald	Price, C. (Lewisham W)
Freud, Clement	Race, Reg
Garrett, John (Norwich S)	Radice, Giles
George, Bruce	Rees, Rt Hon M (Leeds S)
Golding, John	Richardson, Jo
Graham, Ted	Roberts, Albert (Normanton)
Grant, John (Islington C)	Roberts, Allan (Bootle)
Grimond, Rt Hon J.	Roberts, Ernest (Hackney N)
Hamilton, James (Bothwell)	Roberts, Gwilym (Cannock)
Hamilton, W. W. (C'tral Fife)	Robertson, George
Harman, Harriet (Peckham)	Robinson, G. (Coventry NW)
Harrison, Rt Hon Walter	Rooker, J. W.
Hart, Rt Hon Dame Judith	Roper, John
Hattersley, Rt Hon Roy	Ross, Ernest (Dundee West)
Haynes, Frank	Ross, Stephen (Isle of Wight)
Healey, Rt Hon Denis	Rowlands, Ted
Heffer, Eric S.	Sandelson, Neville
Hogg, N. (E Dunb't'nshire)	Sever, John
Home Robertson, John	Sheldon, Rt Hon R.
Homewood, William	Shore, Rt Hon Peter
Hooley, Frank	Silkin, Rt Hon J. (Deptford)
Horam, John	Silverman, Julius
Howells, Geraint	Skinner, Dennis
Hoyle, Douglas	Smith, Rt Hon J. (N Lanark)
Huckfield, Les	Smyth, Rev. W. M. (Belfast S)
Hudson Davies, Gwilym E.	Soley, Clive
Hughes, Mark (Durham)	Spearing, Nigel
Hughes, Robert (Aberdeen N)	Spriggs, Leslie
Hughes, Roy (Newport)	Steel, Rt Hon David
Hughes, Simon (Bermondsey)	Stewart, Rt Hon D. (W Isles)
Janner, Hon Greville	Stott, Roger
Jay, Rt Hon Douglas	Straw, Jack
Jenkins, Rt Hon Roy (Hillh'd)	Summerskill, Hon Dr Shirley
Johnson, James (Hull West)	Taylor, Mrs Ann (Bolton W)
Jones, Barry (East Flint)	Thomas, Jeffrey (Abertillery)
Kaufman, Rt Hon Gerald	Thomas, Dr R. Carmarthen)

Thorne, Stan (Preston South)	Williams, Rt Hon Mrs(Crosby,
Tilley, John	Wilson, Gordon (Dundee E)
Tinn, James	Wilson, Rt Hon Sir H.(H'ton)
Varley, Rt Hon Eric G.	Wilson, William (C'try SE)
Wainwright, R.(Colne V)	Winnick, David
Walker, Rt Hon H.(D'caster)	Woodall, Alec
Wardell, Gareth	Wrigglesworth, Ian
Watkins, David	Wright, Sheila
Weetch, Ken	Young, David (Bolton E)
White, Frank R.
Whitehead, Phillip	Tellers for the Ayes:
Whitlock, William	Mr. Lawrence Cunliffe and
Willey, Rt Hon Frederick	Mr. Hugh McCartney.
Williams, Rt Hon A.(S'sea W)
NOES
Adley, Robert	Dykes, Hugh
Aitken, Jonathan	Eden, Rt Hon Sir John
Alexander, Richard	Edwards, Rt Hon N. (P'broke)
Alison, Rt Hon Michael	Eggar, Tim
Ancram, Michael	Elliott, Sir William
Arnold, Tom	Emery, Sir Peter
Aspinwall, Jack	Eyre, Reginald
Atkins, Rt Hon H.(S'thorne)	Faith, Mrs Sheila
Atkins, Robert(Preston N)	Farr, John
Baker, Kenneth(St.M'bone)	Fell, Sir Anthony
Baker, Nicholas (N Dorset)	Fenner, Mrs Peggy
Banks, Robert	Finsberg, Geoffrey
Bendall, Vivian	Fisher, Sir Nigel
Benyon, Thomas (A'don)	Fletcher, A. (Ed'nb'gh N)
Benyon, W. (Buckingham)	Fletcher-Cooke, Sir Charles
Berry, Hon Anthony	Fookes, Miss Janet
Best, Keith	Forman, Nigel
Bevan, David Gilroy	Fowler, Rt Hon Norman
Biffen, Rt Hon John	Fox, Marcus
Biggs-Davison, Sir John	Fraser, Rt Hon Sir Hugh
Blackburn, John	Fraser, Peter (South Angus)
Body, Richard	Fry, Peter
Bonsor, Sir Nicholas	Gardiner, George (Reigate)
Boscawen, Hon Robert	Gardner, Sir Edward
Bottomley, Peter (W'wich W)	Gilmour, Rt Hon Sir Ian
Bowden, Andrew	Glyn, Dr Alan
Boyson, Dr Rhodes	Goodhew, Sir Victor
Braine, Sir Bernard	Goodlad, Alastair
Bright, Graham	Gorst, John
Brinton, Tim	Gow, Ian
Brittan, Rt. Hon. Leon	Gower, Sir Raymond
Brooke, Hon Peter	Gray, Rt Hon Hamish
Brotherton, Michael	Greenway, Harry
Brown, Michael(Brigg & Sc'n)	Griffiths, E.(B'ySt. Edm'ds)
Bruce-Gardyne, John	Griffiths, Peter (Portsm'th N)
Bryan, Sir Paul	Grist, Ian
Buck, Antony	Grylls, Michael
Budgen, Nick	Gummer, John Selwyn
Bulmer, Esmond	Hamilton, Hon A.
Burden, Sir Frederick	Hamilton, Michael (Salisbury)
Butler, Hon Adam	Hampson, Dr Keith
Carlisle, John (Luton West)	Hannam, John
Carlisle, Kenneth (Lincoln)	Haselhurst, Alan
Carlisle, Rt Hon M. (R'c'n)	Hastings, Stephen
Chalker, Mrs. Lynda	Havers, Rt Hon Sir Michael
Channon, Rt. Hon. Paul	Hawksley, Warren
Chapman, Sydney	Hayhoe, Barney
Churchill, W. S.	Heddle, John
Clark, Hon A. (Plym'th, S'n)	Henderson, Barry
Clark, Sir W. (Croydon S)	Heseltine, Rt Hon Michael
Clarke, Kenneth (Rushcliffe)	Hicks, Robert
Clegg, Sir Walter	Higgins, Rt Hon Terence L.
Cockeram, Eric	Hogg, Hon Douglas (Gr'th'm)
Cope, John	Holland, Philip (Carlton)
Cormack, Patrick	Hooson, Tom
Corrie, John	Hordern, Peter
Costain, Sir Albert	Howell, Rt Hon D. (G'ldf'd)
Cranborne, Viscount	Hunt, David (Wirral)
Critchley, Julian	Hunt, John (Ravensbourne)
Crouch, David	Irvine, RtHon Bryant Godman
Dorrell, Stephen	Irving, Charles (Cheltenham)
Douglas-Hamilton, Lord J.	Jenkin, Rt Hon Patrick
Dunn, Robert (Dartford)	Jopling, Rt Hon Michael
Durant, Tony	Joseph, Rt Hon Sir Keith

Kaberry, Sir Donald	Rathbone, Tim
Kershaw, Sir Anthony	Rees, Peter (Dover and Deal)
Kimball, Sir Marcus	Rees-Davies, W. R.
King, Rt Hon Tom	Renton, Tim
Knox, David	Rhodes James, Robert
Lamont, Norman	Ridley, Hon Nicholas
Latham, Michael	Ridsdale, Sir Julian
Lawrence, Ivan	Rippon, Rt Hon Geoffrey
Lawson, Rt Hon Nigel	Roberts, Wyn (Conway)
Lee, John	Rossi, Hugh
Le Marchant, Spencer	Sainsbury, Hon Timothy
Lennox-Boyd, Hon Mark	St. John-Stevas, Rt Hon N.
Lewis, Sir Kenneth (Rutland)	Shaw, Giles (Pudsey)
Lloyd, Peter (Fareham)	Shaw, Sir Michael (Scarb')
Loveridge, John	Shelton, William (Streatham)
Luce, Richard	Shepherd, Colin (Hereford)
Lyell, Nicholas	Shepherd, Richard
McCrindle, Robert	Silvester, Fred
Macfarlane, Neil	Skeet, T. H. H.
MacGregor, John	Smith, Tim (Beaconsfield)
MacKay, John (Argyll)	Speed, Keith
Macmillan, Rt Hon M.	Speller, Tony
McNair-Wilson, M. (N'bury)	Spence, John
McNair-Wilson, P. (New F'st)	Spicer, Jim (West Dorset)
McQuarrie, Albert	Spicer, Michael (S Worcs)
Madel, David	Squire, Robin
Major, John	Stanley, John
Marland, Paul	Steen, Anthony
Marlow, Antony	Stevens, Martin
Marten, Rt Hon Neil	Stewart, A.(E Renfrewshire)
Mather, Carol	Stewart, Ian (Hitchin)
Maude, Rt Hon Sir Angus	Stokes, John
Mawby, Ray	Stradling Thomas, J.
Mawhinney, Dr Brian	Tapsell, Peter
Maxwell-Hyslop, Robin	Taylor, Teddy (S'end E)
Meyer, Sir Anthony	Tebbit, Rt Hon Norman
Mills, Iain (Meriden)	Thomas, Rt Hon Peter
Mills, Sir Peter (West Devon)	Thompson, Donald
Miscampbell, Norman	Thornton, Malcolm
Moate, Roger	Townend, John (Bridlington)
Monro, Sir Hector	Townsend, Cyril D, (B'heath)
Montgomery, Fergus	Trippier, David
Moore, John	van Straubenzee, Sir W.
Morris, M. (N'hampton S)	Vaughan, Dr Gerard
Morrison, Hon C. (Devizes)	Waddington, David
Mudd, David	Wakeham,John
Murphy, Christopher	Waldegrave, Hon William
Myles, David	Walker, B. (Perth)
Neale, Gerrard	Walker-Smith, Rt Hon Sir D.
Needham, Richard	Waller, Gary
Nelson, Anthony	Walters, Dennis
Neubert, Michael	Watson, John
Newton, Tony	Wells, Bowen
Page, Richard (SW Herts)	Wells, John (Maidstone)
Parkinson, Rt Hon Cecil	Wheeler, John
Parris, Matthew	Whitelaw, Rt Hon William
Patten, John (Oxford)	Whitney, Raymond
Pawsey, James	Wickenden, Keith
Percival, Sir Ian	Wiggin, Jerry
Peyton, Rt Hon John	Williams, D. (Montgomery)
Pink, R. Bonner	Wolfson, Mark
Pollock, Alexander	Young, Sir George (Acton)
Porter, Barry
Prentice, Rt Hon Reg	Tellers for the Noes:
Proctor, K. Harvey	Mr. Tristan Garel-Jones and
Pym, Rt Hon Francis	Mr. Ian Lang.

Question accordingly negatived.