Finance (No. 2) Bill

HC Deb 10 April 1984 vol 58 cc248-88

Order for Second Reading read.

7.2 pm

The Chief Secretary to the Treasury (Mr. Peter Rees)

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

A month ago, when my right hon. Friend the Chancellor of the Exchequer presented his Budget to the House, he set it in the framework of a financial strategy for this Parliament and beyond. I think it is fair to say that the Budget caught the imagination of the House—or at least of a majority of the House—and the country, not because it was a give-away Budget—it was nor—but because it showed a firmness of purpose on financial strategy and a determination to initiate radical and imaginative reform of our tax structure.

The debate that followed the Budget rightly concentrated on the broad strategy. Tonight we start on the more technical and prosaic process of examining the Finance Bill. It runs to 123 clauses and 23 schedules. The House will be relieved to hear that I do not intend to take it through them one by one but rather to attempt to show how they reflect the main themes of the Budget.

However, I should point out at the outset that this year's Finance Bill contains rather more than the Budget proposals. Because of the general election last year it includes a number of the provisions introduced originally in the 1983 Bill. As a result, 44 clauses and 10 schedules —nearly half the Bill—have already been the subject of public exposure and public consultation. I am sure that our debates in the coming week will be better informed as a result.

We are also fortunate today to have available the Treasury and Civil Service Select Committee's report on the Budget. I am sure the House will wish to join me in congratulating my right hon. Friend the Member for Worthing (Mr. Higgins) and the other members of the Committee on producing a report so speedily. We shall all wish to study it carefully and at leisure. For the moment, while I may not be able to agree with all the Committee's conclusions, I was encouraged that it found a number of measures in my right hon. Friend's Budget both imaginative and welcome. I shall refer to some of its other conclusions later.

We understand and respect the reasons that make it impossible for the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) to be here tonight, particularly as we understand that he is giving a memorial lecture for a well-liked and respected former Member of the House whose absence we all deplore. I am sorry that we shall not hear his contribution to this debate but I am sure that there will be other opportunities to hear him.

The Budget was indeed imaginative and radical, but the reforms were set within the financial framework which we have pursued over the past five years and are determined to continue. We shall continue to reduce the rate of monetary growth and the level of public borrowing as a proportion of national output. This will maintain the pressure to reduce inflation and interest rates and so provide the financial stability which is crucial for our private enterprise economy.

At the same time, we intend—let there be no doubt about this — to maintain firm control of public expenditure. We realise, of course, the difficulties to which the Select Committee has drawn attention, but we are determined not to relax our grip and thus to keep open the probability of a sustained policy of tax cuts which would improve incentives and assist the continuing improvement in the supply side performance of our economy.

In those ways the Budget provides the continuing basis for the sustained non-inflationary growth that has been the aim of all Governments since the war, although it has eluded many.

I hope that the House will allow me to remind it of what has been achieved so far. It is three years now since the trough of the recession. By the end of 1983 output was 7.5 per cent. above its low point, fixed investment was up by about 13 per cent. and manufacturing productivity up by 11.5 per cent. At the same time, inflation and interest rates have continued to fall.

In the month since the Budget further evidence has accumulated of the strength of the recovery. We have seen a cut in United Kingdom short-term rates—now 1.5 per cent. below United States short-term rates—a cut in the mortgage interest rate, continuing good news about inflation, record figures for exports in February, with encouraging figures for manufacturing exports, and further evidence of a healthy and necessary rise in company profits.

Outside forecasters who claimed six months ago that Treasury forecasts were over-optimistic are now bringing their forecasts closer into line with ours.

On the jobs front, while there has been an encouraging increase in the employed labour force over the past year, the recent figures on unemployment have undeniably been disappointing. But this Bill contains measures—notably the abolition of the national insurance surcharge and the corporation tax package—which will directly encourage job creation. More important, however, it reflects a strategy which tackles the problem at its roots.

Sustained improvement on the jobs front depends above all on our success in fostering a vigorous, confident and enterprising private sector able to compete successfully at home and abroad and eager to exploit opportunities. That is the objective of my right hon. Friend's Budget. That is why this is a Budget which improves the prospects for jobs.

However, it is the implementation of the Budget strategy in tax matters which is the heart of the Bill. There are two main themes that I commend to the House: first, a modest shift from taxing people's income to taxing their spending through an extension of the VAT base, on the one hand, and an impressive real increase in basic income tax allowances, on the other; and, secondly, a simplification of the tax system and the removal of undesirable distortions, particularly in corporate taxation, but not restricted to that area.

I hope that it will help the House if I follow the general ordering of the Bill in exemplifying those themes and bringing out the major points of interest. In chapter 1, we propose to raise most excise duties in line with inflation, with the exception of tobacco and the balance between wine and beer duties. I hope that the House will accept our proposals as fair.

Within our general approach, I draw attention to clause 5, which proposes exemption from vehicle excise duty for recipients of war pensioners' mobility supplement, and clause 8, which provides for the freeports foreshadowed in the Budget speech last year and announced in February.

The next chapter deals with VAT, in particular the extension of the tax to building alterations and hot takeaway food and drink. It would be naive to imagine that such an imposition or extension of a tax will be universally welcomed, but I hope that the House and the country will look at the matter in the round.

First, I should emphasise that the total yield from the extensions will be £650 million in a full year, making, in other words, a major contribution to the cost of increasing the income tax thresholds. I also emphasise, returning to a point that was much debated in the summer of 1979, that VAT is not a tax on the poor or a tax on necessities. It remains, to quote one of my more distinguished predecessors, Lord Barnett, "mildly progressive".

Mr. Robert Sheldon (Ashton-under-Lyne)

Whether VAT is mildly progressive or mildly regressive depends both on its rate and its incidence. The rate has increased to 15 per cent. and the tax is now being levied on foods that quite poor people buy in their working day. If the trend continues, VAT could become an extremely regressive tax.

Mr. Rees

The right hon. Gentleman has a long familiarity with VAT and, dare I say it, with manipulations of the rate. He should not anticipate anything that might happen in this or any subsequent Parliament. We are considering two relatively modest extensions.

Dr. Keith Hampson (Leeds, North-West)

Will my right hon. and learned Friend confirm that builders acting for the public sector will still be exempt, but that private builders who buy from the public sector to do up properties will be caught under his proposals? Has he looked at that again?

Mr. Rees

We shall take on board all the points made by hon. Members. It is not strictly accurate to say that the public sector is exempt. Government Departments pay VAT, though it is a circular payment. Local authorities are effectively relieved of the tax.

I remind the House that even after the proposed changes, only half of consumers' spending will be subject to VAT in the United Kingdom—the lowest proportion in the European Community.

Both the extensions that we have announced will remove difficult border lines that have been a source of confusion and anomaly. There is no sensible reason for taxing a hamburger consumed inside McDonalds or Wimpy bars at 15 per cent., but zero-rating those eaten outside.

Of course, every borderline has its difficulties and the press has had a field day in conjuring up images of cold chips and warm bread. Would that we had the wit and perspicacity of Sir Gerald Nabarro in our debate. However, I believe that the public can readily understand the distinction between cooked food eaten in a cafe or taken away and raw materials bought at a shop.

The extension of VAT to building alterations will also remove a major source of confusion, by eliminating the borderline between repairs and alterations, which has been the source of much unproductive litigation. We have been told that every increase in, or extension of, VAT will boost the black economy, but I believe that removing these difficult border lines should make it easier to tackle evasion in the construction industry.

I do not expect the building industry to applaud the extension, but I ask it to see the change alongside other elements of the Budget that will be of benefit to the industry, in particular the abolition of NIS, the reform of corporation tax, the cut in stamp duty and the raising of the threshold for development land tax. I ask the House to recognise that three quarters of all building operations will still be zero-rated or tax deductible by the purchaser.

I have no doubt that the House will wish to consider the details of these measures in Committee, but I should like to take the opportunity to mention two small extensions of existing reliefs. First, the relief for lifeboats is being extended to lifeboat carriage and launching equipment supplied to the Royal National Lifeboat Institution. Many hon. Members, not excluding myself as the Member for Dover, are seized of the importance of that apparently modest extension. Secondly, the existing VAT relief for motor vehicles designed or adapted for use by the handicapped will be extended and matched by a new car tax relief. The effect will be that neither VAT nor car tax will apply to family cars designed for disabled people or substantially adapted for their use.

There was some confusion about the precise words used by my right hon. Friend the Chancellor of the Exchequer in his Budget speech. I hope that the matter has been cleared up and that the House and the country will appreciate that the press release put out by the Customs and Excise on Budget day, with the full authority and knowledge of my right hon. Friend, merely clarified and amplified his intentions on that relief.

I know that my hon. Friend the Member for High Peak (Mr. Hawkins) will wish to mention the scope of that relief, particularly in relation to an early-day motion that stood on the Order Paper at one stage.

On the income tax and corporation tax provisions, I hope that I can say without exaggeration that clauses 17 to 21 are some of the brighter jewels in the budgetary crown.

The revenue obtained from broadening the VAT base has been used to help raise the basic income tax allowances. The details are set out in clause 21. The increase of about 12.5 per cent. in the basic allowances is some seven percentage points more than required for indexation. It is one more step on a path that we have pursued since 1979, as resources have permitted, and that we intend to continue to pursue in future years. Basic income tax thresholds are 16 per cent. higher in real terms than they were in 1978–79.

Some hon. Members will recall that it was Conservative votes that put the indexation provisions on the statute book. That was done against the opposition of the then Labour Government, although we were joined on that occasion by the hon. Member for Birmingham, Perry Barr (Mr. Rooker), to whom I am happy to pay tribute.

Mr. John Maxton (Glasgow, Cathcart)

Joined? My hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) moved the amendment.

Mr. Rees

I am sure that the House will recall the notable part played by my right hon. Friend the Chancellor of the Exchequer on that occasion. Since bouquets are in order, I present one to Mrs. Audrey Wise, whose absence from the Opposition Benches is no doubt regretted by Labour Members. We have made some progress in taking the low-paid out of tax, but we need and intend to go further. I am sure that the hon. Gentleman will support us in what we are doing now.

There has been some criticism that we should have used the funds available to increase child benefit to make a bigger impact on the poverty trap. As I stressed in the Budget debate, the decision about child benefits will be taken and announced at the proper time—after the May RPI figures become available in June. There is some misunderstanding about the interaction of child benefit and tax and I hope that the House will allow me to examine the facts briefly.

Let me start with the poverty trap — that is, the position facing some people in employment who pay income tax and receive means-tested benefits at the same time. If they earn more—up to a certain point—the loss of benefit coupled with increased tax may mean that their net income hardly rises and in extreme cases may even fall. The marginal rates are highest for families receiving family income supplement. An increase in child benefit by itself will not touch that problem. It does not affect the rate at which tax is charged or means-tested benefits withdrawn, nor will it reduce the number of people in the Tax-FIS trap. Only if an increase in child benefit is accompanied by a reduction in means-tested benefits will the number of families in the trap be reduced. In practice, that would mean reducing the amount of FIS. If that were done, the incomes of the families involved would not rise to reflect the increase in child benefit and that approach would not improve the unemployment trap. I doubt whether that is what enthusiasts for child benefit in or out of the House intend.

Mr. Brynmor John (Pontypridd)

The Chief Secretary is advancing a most interesting argument, but why have the Government decided to study child benefit in isolation from the tax system if the interaction between the two is as closely allied as he argues?

Mr. Rees

I did not say that we had decided to study child benefit in isolation from the tax system; merely that the decision would be considered. I have much ground to cover——

Mr. Laurie Pavitt (Brent, South)

Answer.

Mr. Rees

As I am only halfway through my answer, perhaps the hon. Member will do me the courtesy of allowing me to complete it. I said that the problem must be considered in relation to the May to May figures and announced at that time. The House will recall—I do not remember hearing any protests from the Opposition at the time—that in 1981 it was not possible to index the tax thresholds, yet child benefit was increased.

By contrast, raising tax allowances has a number of advantages. First, it relieves some families from the poverty trap by taking them out of tax altogether. Secondly, it benefits all taxpayers whether or not they are in the poverty trap or have children. Six million families receive child benefits. Twenty million families and single people benefit from an increase in tax thresholds. Thirdly, it improves the unemployment trap by raising net income from work across the board.

I do not pretend that what we have done solves the problem, but it makes a real step forward — a more effective step than an exclusive concentration on child benefits. I notice that the Select Committee did not recommend how to tackle the problem of the poverty trap.

Mr. Ralph Howell (Norfolk, North)

Can my right hon. and learned Friend explain how, despite raising the tax threshold by 12.5 per cent., we have released only 850,000 people from taxation whereas last year and the year before we released 1.2 million?

Mr. Rees

That is because the rate of increase in incomes was not of the same order.

I shall deal now with the measures designed to remove distortions and simplify the structure of company taxation. Clause 18 provides for the progressive reduction in the main rate of corporation tax to 35 per cent. by 1986–87. Clause 20 provides for the immediate reduction of the small company rate to 30 per cent. Clause 47 abolishes stock relief. Clause 57 and schedule 12 provide for the progressive removal of first year and initial capital allowances and their replacement by a system of writing down allowances.

A system of corporation tax with low rates and few and simple reliefs must be preferable—I hope that that is common ground in the House—to one with high rates offset by complex and indiscriminate reliefs. It is in no one's interest that decisions on investment projects should depend so much on the details of tax legislation and the advice of lawyers and accountants rather than the commercial appraisal and business acumen of those engaged in manufacture and trade.

The House will have noticed that the general secretary of the TUC said in evidence to the Select Committee that there are a lot of nonsenses in the way corporation tax is operated", and that the TUC would not argue with the need to reform the structure of corporation tax". Sir James Cleminson, on behalf of the CBI, said that the new tax system will be more favourable than the old and that the Budget has made it more possible for business to achieve the growth that we need". The reduction in United Kingdom corporation tax rates leaves the levels below those of most of our competitors both in Europe and in America. It is worth reflecting that these measures, coupled with those in chapter VI on controlled foreign companies, will make it more attractive to take a profit here than overseas. These measures will be good for business, good for enterprise and good for jobs.

Part II contains much else which should have lasting benefits for companies.

The share option schemes are improved in clauses 38 and 39. The new relief proposed for approved share options will replace the income tax charge with a capital gains tax on disposal of shares and should help companies to attract and motivate key managers on whom so much depends. The corporate finance package contained in clauses 35, 36, 41 and 62 includes a number of measures which should give companies greater flexibility in raising finance and so give a modest stimulus to a revival in the corporate bond market. We shall be able to scrutinise the details of the Bill in Committee.

On capital gains tax, I should, however, like to draw the House's attention to the provision that will allow gifts to heritage maintenance funds to be treated as other gifts as has long been urged by the Historic Houses Association. That is followed by other provisions designed to remove distortions in savings and investment. The provisions relating to life assurance premium relief are contained in clause 70.

I should mention a further relief that we propose to introduce in Committee as an amendment to the Bill in relation to industrial life assurance business only. It will enable an industrial assurance policy to continue to be eligible for relief if it was prepared for issue before 14 March 1984 and the fact of that preparation was recorded in the books of the company or society before that date. That will provide much assistance for such companies and societies, because their position is slightly different from that of the straightforward life assurance policy.

Mr. Ian Wrigglesworth (Stockton, South)

Will the Chief Secretary confirm that the Government's policy is to treat all savings equally in tax terms? Is he aware that that decision has given rise to great concern in many sectors of the savings industry? It would be helpful if the Government had discussions with those in the industry to ensure that equality of treatment was given.

Mr. Rees

We are open-minded on that matter and we shall listen to any representation that may be made to us. I fully appreciate the hon. Gentleman's point.

There are adjustments in the corporation tax regime for the oil and gas industry in clauses 75 to 79 and minor changes in petroleum revenue tax.

The next two lengthy sections of the Bill contain measures to counter tax avoidance. Clauses 80 to 89, together with schedules 16 to 18, deal with controlled foreign companies. Clauses 90 to 97 and schedules 19 and 20 are concerned with offshore funds. Both of those major pieces of legislation have been the subject of full consultation in advance, and in the light of some late representations we shall be bringing forward further amendments to offshore funds legislation in Committee.

On this subject, I should also touch on the implications of the recent decision of the House of Lords in Furniss v. Dawson. I am aware of the acute interest in that case. Taken with the decision in Ramsay's case, it is now clear that the widespread assumption based on the Duke of Westminster's case in the 1930s—that the courts will always look at the form rather than the substance of a transaction or various transactions—is no longer valid.

The House of Lords made it clear that this is an evolving area of law, but the emerging principles do not in any way call in question the tax treatment of covenants, leasing transactions and other straightforward commercial transactions. Nor is there any question of the Inland Revenue challenging, for example, the tax treatment of straightforward transfers of assets between members of the same group of companies. I also assure the House that, in accordance with normal practice, the Inland Revenue will not seek to reopen cases when assessments were properly settled in accordance with prevailing practice and became final before that decision.

The Board of Inland Revenue will also see whether clearance for types of case of special importance or general guidance for the benefit of taxpayers and their advisers can be given. The principle in Furniss v. Dawson should lead in future to greater simplicity in our tax system and will, I hope, enable us in time to prune out provisions which owe their existence to the complexities of a high rate— some might say a confiscatory rate—tax system with a multiplicity of special reliefs. I am sure that the whole House will welcome that.

The changes that we propose in capital transfer tax and stamp duty reflect our determination to simplify the system and lighten the burden of tax. The changes in development land tax similarly reduce the incidence of taxation and should assist industrial and commercial development.

This Bill has not just changed and simplified the structure—it has abolished taxes too. Excise duties on kerosene and the investment income surcharge have gone and the abolition of investment income surcharge will, I hope, be received with enthusiasm and certainly without regret. It discriminated against investment, was unfair to many retired people who could not by any stretch of the imagination be called rich and was particularly discriminatory against those who retired from self-employment with no prospect of a company pension and had to rely on income from the proceeds, sometimes in the form of annuities, of selling their businesses or professional practices. Opposition Members who referred to people with capital of £70,000 must have overlooked the fact that there are many people who fell within the investment income surcharge who do not have disposable sums of capital. I believe that what I have described will be widely welcomed by such people.

Finally, this Bill sees the end of the national insurance surcharge. I will not labour the case for abolition. I doubt whether the tax ever had many enthusiastic supporters even during the darkest hours of the last Labour Government. However, I repeat that the reduction of this tax on jobs since 1979 from 3.5 per cent. to zero is worth some £3 billion a year to employers and has removed a substantial inducement to employers to keep down employment. I hope that it will be common ground between us that this is a tax that we should be without.

I have been privileged to take part in debates on many Finance Bills, but I have to admit that some have been of limited general interest and high technicality. I would, however, claim that this Bill is of a different order. Basing ourselves on the solid economic achievements of the past five years, and without compromising those achievements, we have designed this Bill as a further important step to a fairer, simpler, less distortionary tax system. Of course there will be individual points on which some hon. Members will have reservations. We shall have to consider some of them further in Committee, but, viewed as a whole — and I ask the House to view this Bill as a whole—I claim, without I hope naive enthusiasm, that this is an important Finance Bill, a reforming Finance Bill and a Finance Bill which will take us a long step further towards creating a healthy fiscal climate in which individuals and businesses can flourish. On that basis, I ask my hon. Friends to give it a Second Reading tonight.

7.34 pm

Mr. Jeff Rooker (Birmingham, Perry Barr)

The Chief Secretary's final words are important, because he said that this is a different Finance Bill. It is weighty, and I accept his point about the number of clauses that have previously been published.

Bearing in mind the scale of the changes that the Bill makes in respect of people's incomes, company taxation and the scale of the increases in taxation that it will create, I should have thought that its 123 clauses would have caused the Chief Secretary to spend a little more time giving us more details about what the Government have in mind. As far as I am aware, he has highlighted at least two cases of the Government bringing forward amendments. They are substantial, but I do not accord them any priority. He has outlined amendments that will be presented in Committee. The notes on clauses that were available when the Bill was published are littered with a sentence to the effect that the Government will bring forward amendments in Committee. Substantial changes have been made, although the Bill has been in gestation for a considerable time. The Chief Secretary therefore should not, and I believe will not, complain When the Committee examines the changes that the Government are making to their own Bill which they have spent the best part of 12 months creating.

This is the first real Finance Bill since the general election and the first real statement of financial policy in the Government's second term of office. I should have thought that they would have got many more details set and organised. I shall pick up the example of the Royal National Lifeboat Institution, which the Chief Secretary mentioned. Were the Government unaware of the problem before the Buget statement? Did they not realise what problems the imposition of a VAT bill of £45,000 on the RNLI would create? They have suddenly discovered. on Second Reading of the Finance Bill, that it is a good idea to table an amendment to cure the anomaly. With a little more consultation, that unfortunate problem, and others, could have been avoided.

The Bill is presented when the tax burden in Britain is at an all-time high. I do not believe that anyone will quarrel with that statement. The Chief Secretary, said as much at the Tory party conference last year when he said: I must emphasise that the dilemma facing any Chancellor is that a high tax system is only supportable with a complex system of reliefs built in. That was last year, not three or four years ago. To deploy part of the Opposition's case, I must spell out how the disposition of the tax burden arises, just in case people are under the impression that there have been massive tax reductions because of what the Chief Secretary has said about thresholds. The Bill makes the tax burden heavier.

The Government have told us that taxes in 1984–85 will yield £127.5 billion. That figure was given in a parliamentary answer on 20 March. The tax yield in 1978–79 at 1984–85 prices was £105 billion. Taxation this year is therefore £22.5 billion higher in real terms, after this Budget, than in the last year of the Labour Government. The Chief Secretary has highlighted the fact that abolition of the national insurance surcharge has saved £3 billion, but we must still deal with the rest of the tax burden. Corporation tax is up, as is North sea tax. Believe it or not, capital taxes and stamp duty are up in real terms even after the Bill. National insurance contributions from employees and employers are up, as are local authority rates and taxes on expenditure. Of all the items that the Government gave in a breakdown of the increased burden of taxation in a parliamentary answer on 28 March, only income tax — which is down £300 million — and the national insurance surcharge are reduced. Every other tax which makes up the tax burden is up in real terms after five years of Conservative Government.

Even so, it is worth pointing out that in the financial year 1983–84, the Government stated that the real tax burden, compared with 1978–79, was up £17 billion. That figure was given at Question Time on 22 December 1983.

It is up £22.5 billion in real terms, with one year's difference in prices and inflation at 5 per cent. We are talking about the difference between £17 billion in one year and £22.5 billion in another year—£5.5 billion extra one year with another in real terms. Knock off the inflation rate, and one is left with a substantial increase in the tax burden in the year that has just gone, which was election year, as against the year that has just started.

Mr. Chris Hawkins (High Peak)

Would the hon. Gentleman tell us how much higher the tax burden would have been if the Government had implemented the claims continually made by the Labour party that it would spend more on education, health, roads and so on?

Mr. Rooker

I look forward to the hon. Gentleman asking the Government why they are increasing the tax burden on the British people so severely in the year following the general election. It will be interesting to see what answers he will get from the Government Front Bench.—[Interruption.] Of course I am not answering the question. That is the job of the Government. The Government are imposing an extra burden of £5 billion on the British people this year compared with last year. I am not accountable to the House for that imposition. It takes a brass face, when there is an increase of approximately £5 billion, to say that the Budget is neutral, and that the Finance Bill gives tax cuts. Of course, there are tax cuts in the Finance Bill, and we shall come to some of the people who benefit from the tax cuts, because those tax cuts are paid for by other people, as they must be if the overall tax burden has increased so severely. That is why this substantial Finance Bill, as the Chief Secretary has said, is different from any other Finance Bill presented to the House, and it has to be debated fully.

Mr. Tim Smith (Beaconsfield)

Has it not occurred to the hon. Gentleman that the simple explanation might be that real incomes have risen substantially over the last five years?

Mr. Rooker

The hon. Gentleman can look at the breakdown of the figures in Hansard of 28 March and see how the £22.5 billion is made up. Then he can read in Hansard of 16 January, at column 23, how the £17 billion is made up. He will see for himself that, while real incomes have gone up, and while real taxes on incomes have gone up, the tax burden has increased across the board, except on the two items that I mentioned—the national insurance surcharge and income tax in its narrower form. On all other counts, real taxes have gone up. That is not all attributable to the increase in real earnings. I look forward to the hon. Gentleman's speech, because he obviously has some questions for the Government Front Bench.

Let us look at how the massive increase has been shared. The increase is made worse as a result of the Finance Bill. We are, of course, grateful to Ministers for answering the detailed questions that they were prepared to answer after, but not before, the Budget.

The Chancellor constantly reminds the country that the Government have reduced the basic rate of tax from 33p to 30p, but forgets to say that the starting point of tax when the Government came to power in 1979 was only 25p in the pound for many people. It seems that this is a minor matter for the Chancellor. It had a substantial effect on the very low paid and assisted in keeping down the tax burden of the average wage earner.

I have been selective in quoting from Hansard, because I wish to give good examples of the unfairness implicit in the Finance Bill. I suggest that we take the last year of the Labour Government and look at the proportion of income attributable to tax, national insurance and child benefit, where appropriate, of a person on two thirds average earnings—and that means the majority of people in the country. Sixty per cent. of workers earn less than the average earnings that are so often quoted. I therefore assume two thirds average earnings in my examples.

In the last year of the Labour Government, a single person on two thirds average earnings paid only 27.7 per cent. of his or her income in tax and national insurance. After the Budget and Finance Bill, it is not 27.7 per cent., but 29.5 per cent. In the last year of the Labour Government, a married couple were paying 22.2 per cent. of their income in the tax take, again assuming two thirds average earnings. After the Budget and Finance Bill, a married couple will pay 24 per cent.—an increase in the proportion of their income taken in tax. In the case of a married man with two children, the figure is 12 per cent. in the last year of the Labour Government, and 13.1 per cent. after the Budget and Finance Bill which allegedly cut taxes.

Let us compare that with a person on five times average earnings—the entrepreneur who will put factories in the green field sites. Such a person, under the Labour Government, paid 52.6 per cent. of his income in tax, national insurance and child benefit, where appropriate. After the Budget and Finance Bill, the figure is down to 45.1 per cent. A married couple on five times average earnings, under the Labour Government, were paying 50.9 per cent. of their income in the tax take. After the Budget and Finance Bill, the figure is 43.6 per cent. In the case of a married man with two children, the drop is from 49.2 per cent., under the Labour Government, to 42.2 per cent. under this Government. Those figures were given in answers on 23 November 1983 and on 5 April this year.

It is clear that the Tory party remains the party of higher taxation if one has not got very much. After the Budget and Finance Bill, the reality is a bigger tax take from the pay packet than under the Labour Government.

There is another way of looking at this, and Ministers will be looking for ways round the arguments. It can be looked at in terms of the effect of tax changes on real net earnings as a result of the Finance Bill. After the Budget and Finance Bill, a single person on two thirds average earnings will have an increase of 7.2 per cent. in his real take-home pay in 1984–85 compared with the position under the Labour Government. A single person on five times average earnings will have a real increase in his net take-home pay of 27.2 per cent. after the allegedly neutral Budget and Finance Bill. Similar figures apply along the scale to different family groups up to the married man with two children, on two-thirds average income, who has a real net increase of 8.4 per cent. compared with a 25 per cent. real net increase in take-home pay for a man in a similar situation on five times average earnings.

We have to look at this yet another way, because this is the way it will be looked at by millions of wage earners who believe some of the propaganda put out by the Government, and the largely popular Budget of the Chancellor, the reality of which is beginning to be perceived throughout the country. This method is to see what the position would be if one attempted to change the tax liability of a person back to what it was under the Labour Government, and what would have to be done to achieve that. The House will remember that that was the "high-taxing" Labour Government who caused all the pop stars to go abroad, thus smashing up industry. The reality, which cannot be denied, is that, after the Budget and Finance Bill, a tax cut equivalent to 9p off the basic rate would be needed to restore the tax burden on a couple on average earnings to the 1978–79 level. I repeat, 9p off the basic rate to get the tax take back to what it was under a Labour Government. That takes account of the 12.5 per cent. increase in thresholds contained in the Bill.

Mr. Tim Smith

Those figures are completely meaningless. The hon. Gentleman has already told us that someone on two thirds averge earnings has enjoyed an increase of 7.2 per cent. in real take-home pay. If the hon. Gentleman is going to give us those figures for taxation, he should also tell us how much worse off people would be if we went back to the last year of the Labour Government, because the standard of living would have to be cut.

Mr. Rooker

Every figure that I have so far given has come from the Government. They do not claim that the figures are wrong. The fact is that to get the tax burden back——

The Chancellor of the Exchequer (Mr. Nigel Lawson)

The tax burden as a proportion.

Mr. Rooker

I shall come to that point in a moment. But what would be needed to get the tax burden back, in real terms, to what it was under the Labour Government? The answer is the equivalent of 9p off the basic rate.

Mr. Christopher Hawkins

rose——

Mr. Rooker

I shall finish my point, because then the hon. Gentleman may not need to intervene.

I accept that the Chancellor of the Exchequer and his Ministers could have said, as has been implied already, that earnings are up ahead of prices. However, they did not say that. They did not say that if earnings stayed ahead of prices, they would belt us with tax. It so happens that the threshold system is tied to the retail price index, not to average earnings.

If, each year, the thresholds are indexed only to the retail price index and wages are ahead of prices, the Chancellor of the Exchequer is getting just as much of a hidden tax take as happened in the mid-1970s. He does not have to come to the House and say that he wants to raise income tax. He may say that he will raise thresholds in line with inflation, but he does not point out that the Treasury's coffers will gain billions of pounds because of the increase in the tax take due to the real increase in earnings. I fully accept that the figure of 9p could be reduced to 3.7p in the pound if one got it back to the average proportional take of income. I accept that, and the figure comes from the Chancellor of the Exchequer. However, we would still require a cut in the basic rate of income tax of 3.7p in the pound to get it back to what it was in the last year of the Labour Government, if income tax represents the same proportion of earnings. Whichever way one does the calculation, the tax burden in real terms and as a proportion is sky high compared with the position under the Labour Government. It does not matter which way one does the sums. The Chancellor of the Exchequer and the Government know that, but clearly Conservative Back Benchers do not.

Mr. Andrew F. Bennett (Denton and Reddish)

Will my hon. Friend confirm that he is saying that the so-called Rooker-Wise-Lawson amendment should have been tied to wages as well as to the retail price index?

Mr. Rooker

No. To prevent someone from standing here to make the case that I have just made, the amendment should have been tied to wages or prices, whichever was the higher. I shall let hon. Members into a secret. When those amendments were being drafted by me and my former hon. Friend, Mrs. Wise — without any help from the present Chancellor of the Exchequer — we discussed whether to index tax thresholds to earnings or prices. We decided consciously on prices. We made that decision because we thought that it might assist our right hon. and hon. Friends who were then Ministers. It was a deliberate decision. There was an amendment which used earnings as well, but it was not, in the Chairman's wisdom, selected. However, I suspect that my hon. Friend the Member for Denton and Reddish (Mr. Bennett) has given Conservative Members some good ideas for the time when that clause is debated in Committee on the Floor of the House.

Mr. Christopher Hawkins

The burden of tax has increased in order to pay for increased Government expenditure in many areas and to reduce the public sector borrowing requirement so that we can keep down interest rates. However, the hon. Gentleman did a bit of sleight of hand when he said that tax rates on average would be lower if we went back to the total tax burden of 1978–79. Before that he spoke about pop stars going abroad because of high tax rates and industry being crippled. That happened because the top tax rates were extremely high—up to 98p in the pound on dividends. The big change has been to bring the top tax rate down in order to increase incentives and to develop industry. Surely the hon. Gentleman will not quarrel with the fact that there is a link between incentives and the top tax rate.

Mr. Rooker

The hon. Gentleman has answered his own question. I was paraphrasing the former Chancellor of the Exchequer who used to complain, when he was in opposition, about the pop stars and entrepeneurs who would flood back to Britain if the top tax rates were reduced. I suspect that the hon. Member for High Peak (Mr. Hawkins) has been a Member of Parliament only since the election and was not here in the summer of 1979. If he had been here since the summer of 1979 he would know that in the Government's first Budget there were big cuts in the top rates of tax. But where are all the entrepeneurs who are supposed to be building factories on green field sites and creating the new environment that was promised when the top tax rates came down? Those rates came down years ago.

Who gains from the Bill? What does someone have to earn to be better off as a result of the Bill? I must apologise to the House, because the answer came only last night and is not in today's edition of Hansard. It comes from the Financial Secretary to the Treasury and updates a question that I had asked earlier. I shall repeat the question, because I do not want to be accused of putting a false argument to the House. I asked the Treasury to update a table which showed what multiples of average earnings someone would need to earn if he was to pay the same proportion in tax, national insurance and child benefit as under the Labour Government.

After this Budget, a single person needs to be on exactly twice average earnings if he is to pay the same proportion. For the purpose of the answer, average earnings were taken at £182 per week in 1984–85. Therefore, it can be said that the tax take is less as a proportion only if the person is single and earning more than £364 per week. That is twice average earnings. After five years, the only people to be better off proportionately—which is what the Chancellor of the Exchequer is concerned about— are single people earning more than £364 per week, married couples earning more than £345 per week, married couples, with two children, earning more than £309 per week and, for some quirky reason, married couples, with four children, who have got to be earning more than £327 per week. The multiples that I was given were 2, 1.9, 1.7 and 1.8. They take into account the child benefit increase in November, which is forecast — according to the Government's public expenditure White Paper—to be 5.5 per cent. The White Paper says that the increase will be announced in June, but I do not think that it will make much difference to the point that someone has to be earning a lot of money every week before he gains after five years of this tax-cutting Tory Government. That is the point.

I think that I have made the case that personal taxation on earnings has gone through the roof under this Government, whichever way one looks at the facts, compared with what happened under the Labour Government.

The Government decided to abolish investment income surcharge — the extra tax on what used to be called unearned income. Unfortunately, because of a quirk in our procedures, about which I make no complaint, the Bill does not contain a clause to abolish investment income surcharge. When abolishing a tax, the biggest ruse is to prevent the Opposition from voting against the move by not including a clause which abolishes that tax. Despite that, we shall oppose the proposal because it is unfair. The clerks and other officers have been very helpful about procedure.

I accept what the Chief Secretary said about annuities, but one must have capital of £80,000 before one pays investment income surcharge. Investment income per week has to be over £140—not an insignificant sum. I accept that the capital might have been earned, but the income is not earned. National insurance contributions are not paid on unearned income. In some cases the tax difference between unearned and earned income is distorted by the effect of national insurance contributions not applying to investment income. All of a sudden 15 per cent. in tax goes, whereas people on earned income are left with the penal 9 per cent. national insurance contribution.

The Government claim that 50 per cent. of the people relieved from investment income surcharge are over 65 years of age. I do not query that. "We must be kind to the pensioners," the Government say. So what? What if half of those involved are over 65? If the Government really had the interests of the over-65s at heart they would not restrict the age allowance increase to the over-65s to 5.3 per cent. compared with 12.5 per cent. for everyone sitting in the Chamber, for example. That is a gross unfairness, and it shows which group of over-65s this Government are interested in. Are they interested in those with a small occupational pension of perhaps £10 or £25 a week, or are they interested in those with capital of £80,000 and an unearned income of over £140 a week? That is the priority for the Government in relation to the over-65s. They cannot argue against that. They have given the country light and sight of their priorities for the over-65s.

We shall debate the restriction of the age allowance on the Floor of the House. We shall be given the opportunity to amend the provision. The short changing in the age allowance will cost a couple £81 a year in net income. A single person will lose £51 a year. I refer to over-65s with small incomes, not the investment incomes to which the Budget is directed. The cost involved is small indeed— only £130 million — whereas the Government are deciding not to collect about £360 million in investment income surcharge — three times the amount that is required to keep the age allowance.

The Chief Secretary rightly said that we might have been unfair in some respects since capital may not be easy to get hold of. For some, the limit is only £80,000. That may be small fry to him, but it is not to the majority. Of the 270,000 people relieved from paying investment income surcharge—that rich group—150,000 are over 65. We learnt from the Treasury that 60,000 of the over-65s had average investment incomes of £15,400 in 1983–84. Their capital was not £80,000, but a minimum of £130,000. That means that half the pensioners that the Government are letting off have, according to a written reply on 9 February, up to £130,000 in capital. That is an example of the Government's priorities in changing taxation law. They are being grossly unfair and insulting 10 million pensioners.

Such decisions must be compared with the decision to abolish relief on life assurance. I do not argue that the two are intertwined, but I want to compare the people affected by the two changes. In general, since the Budget most insurance companies have taken a vow of silence. I accept that hon. Members probably have had occasional representations from insurance companies. I exempt from my criticism two of which I am aware — the Royal Insurance company and the Scottish Equitable Life Assurance society. In general, insurance companies do not seem to me to be too bothered about the change. They do not think that it is particularly unfair.

Life assurance relief has been given for well over 100 years. It was continued even after the Royal Commission on income tax early this century. The reason is as valid today as it was then— it encourages saving by small income earners on a regular basis. That is how the Pm grew to the size that it is today. Regular saving was thought to be prudent and became part of public policy. The Government apparently are no longer interested in that, because they are not interested in small income earners. They are interested only in people with high unearned incomes. That is the priority in the Finance Bill.

The Financial Secretary to the Treasury (Mr. John Moore)

Nonsense.

Mr. Rooker

The evidence is there. The Government are abolishing relief for small income earners, but cutting 15p in the pound off tax for those with an unearned income of £140 a week. The figures speak for themselves.

The Chief Secretary referred to the poverty trap. No one will claim that the poverty trap has been abolished by the Budget, and I do not think that the Chief Secretary said that. However, he mentioned child benefit and its interaction with family income supplement. Another way of solving the problem, which the Chief Secretary highlighted, is to raise the child benefit by more than the other benefits. The Government do not have to cut the other benefits. They could raise child benefit more than family income supplement, scrap the child additions to national insurance and supplementary benefit and create a fair and equitable system. That is one way of solving the problem without cutting incomes.

The Chief Secretary gave us only one alternative. I shall re-read his speech. If I have misunderstood, I hope that he will table an amendment to which we can give our support.

When a Government decide to cut housing benefit to fund some of their fiscal changes, both aspects must be taken into account by the legislation. The Institute of Fiscal Studies claims that the proportion of families at 4.3 per cent. in the poverty trap, facing a marginal tax rate of more than 60 per cent.—the highest rate of income tax —remains exactly what it was before the Budget, taking into account the housing cuts introduced this month and due to come into force in November. Of the families in the poverty trap, 4.3 per cent. have a marginal tax rate of more than 60 per cent. and this will stay exactly the same after this Budget. Indeed, it is argued that the percentage of families in the poverty trap and with an effective marginal rate of tax of more than 60 per cent., because they are losing benefits as their income goes up, will go up to 5.6 per cent. before the end of this financial year.

I do not wish to be personal, but the Chancellor, on his salary of £813 a week, does not pay tax at more than 60p in the pound. Nor does any other hon. Member. I cite the Chancellor because it is his Bill and his Budget. I do not think he would deny he is not paying a marginal tax rate of more than 60p in the pound, whereas 4.3 per cent. of the families stuck in the poverty trap were before this Bill and will be after it. If the Treasury Front Bench can produce any evidence, now or in Committee, to refute the Institute of Fiscal Studies' figures, I have no doubt that the institute will be pleased to receive the information. I know that I and my hon. Friends would be.

The Chief Secretary also referred to taking people out of tax. When there was an intervention about the apparent discrepancy between tax this year and that in previous years, there was some laughter, but the Chief Secretary gave a true answer—that the threshold has risen a lot higher than earnings.

Taking people out of tax at Budget time is a myth, because the number of people whom the last Chancellor took out of tax in five Budgets was 5 million, but he put 3.3 million of them back into tax. So he took 1.7 million people out of tax, but we know where those 1.7 million people are—they are lining up outside the diminishing number of jobcentres, because they are on the dole queue. So it is nonsense to say, "I have taken all these people out of tax; what a good Chancellor I am". The vast majority of them will be back into paying tax before his next Budget. This ought to be exposed for the myth that it is.

The Chief Secretary replied to an intervention about the comparison between taxes in this country and those in other countries. I do not claim that we are a high-taxpaying country compared to other countries. I do not think that any of us would claim that. I am claiming that the tax burden is unfairly distributed. That is the contention of my hon. Friends. Britain does not even appear in the top 10 countries with the highest top rates of income tax on earned income, but both Sweden and Japan do. They are just two of our economic competitors.

When it comes to tax on investment income, however, I have been surprised to find, trawling through Hansard, that Japan taxes investment income at 75 per cent., which is what we were doing before this Budget—the 60p plus the surcharge. It does not seem to be a disincentive in Japan. But what is the evidence we are getting in this country? There does not seem to be a shred of evidence that any of the money saved from investment income surcharge will be directed towards new investment in the manufacturing sector. I shall not go through all the statistics, but the same tale could be told about a whole range of OECD countries.

Indirect taxes are an important part of this Finance Bill and of the Budget. I mentioned earlier the two parliamentary answers I used to deploy the argument about the massive increase in tax burden in March and January of this year. In this year which has just started, taxes on expenditure are £9.2 billion higher than under the last Labour Government. Last year they were £6.9 billion higher in real terms than in 1978–79, and there has been only 5 per cent. inflation between last year and this year. So we have over £2 billion extra taxes on expenditure from the last financial year—election year—to this year, this Budget and this Finance Bill.

That cannot be claimed to be the result of increased real earnings. [AN HON. MEMBER: "It could be higher spending."] Well, it is a question of how one taxes higher spending, is it not? That is a point which I shall make and which I have no doubt that many of my hon. Friends will make. It is £2 billion extra after this neutral Budget. No one has said that it is a neutral Finance Bill, because clearly it is not.

I do not propose to go through all the clauses because I am detailing the case on various aspects of the Bill and have chosen to concentrate on these aspects. The Low Pay Unit has estimated that the effect of the indirect taxes increases in clauses 1 to 4 will be to add 90p a week to the tax bill of the low-paid, thereby reducing their so-called income tax cut of £1.27 to 36p. Taking into account clause 10 and schedule 6—the VAT extensions—that tax gain to the low-paid is absolutely wiped out.

I noticed the interesting exchange between the Chief Secretary and my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon). It cannot be disputed that expenditure taxes are a higher burden on the low-paid. It is no good quoting a Labour Chief Secretary of five, six or seven years ago. The Central Statistical Office in 1982 and "Economic Trends" in 1983 showed that the bottom tenth of the income group paid indirect taxes as a proportion of income—not in real terms—amounting to 26.3 per cent. of their income. The highest tenth of the income group—and they are very well paid people—paid only 16 per cent. of their income in indirect taxes. Indeed, if one takes the third lowest group, the 20 to 30 per cent. band, who are relatively low-paid people, they are paying 28.1 per cent. of their income in indirect taxes.

I cannot see how anyone can say, on those figures, that the indirect tax burden does not fall more heavily on the poor than on the rich. It is as simple as that, and it is as black and white as that. No amount of juggling or sophisticated words from Conservative Members will change that one iota.

What does the Chancellor propose to do in this Bill? He is to increase indirect taxation in real terms, as is indicated by the widening of the VAT net. I do not intend to make the same points as I made in the Budget debate, but I certainly wish to ask the Chancellor of the Exchequer, since he is here, a couple of questions.

Mr. Lawson

The hon. Gentleman will not get any answers.

Mr. Rooker

The Chancellor says from a sedentary position that I shall not get any answers. That will not stop me putting the questions so that they are on the record, irrespective of whether there are answers, because we shall keep asking the questions until we do get the answers.

I must take the Chancellor up on the extension of VAT and his own words since the Budget. On page 14 the 1970 Tory manifesto made the clear commitment: Value added tax does not apply and will not be extended to necessities like food, fuel, housing and transport. The Chancellor is on record—and he has not written to me and corrected this, although I wrote to him about it. In the Financial Times of 21 March, after the Budget, there was a story headed "Manufacturers condemn suggestion of tax on food". I shall read only the relevant part: The Food Manufacturers' Federation, the major trade body, said it was 'vigorously opposed' to the idea. The rumour was 'floated' by Mr. Nigel Lawson, the Chancellor of the Exchequer, in a radio interview. He said that while the previous Conservative administration had pledged no tax on food the present Administration had given no such undertaking. 'We are free to do what we think is right but I have no plans to move in that direction.' I have written to the Chancellor asking him whether he was incorrectly quoted. If he was, he should put that on record; if he was not, it is a novel interpretation of the mandate.

I ask any Minister, from the Prime Minister downwards, what is the validity of the 1979 manifesto commitment not to put VAT on food, fuel, housing and transport? That commitment was not repeated in the 1983 manifesto. Even though they did not repeat the commitment, they won the election. Are they not bound by that commitment any longer? That is a straightforward question that requires a straightforward answer. Are they saying that they did not need to repeat the commitment because everyone knew that they would not put VAT on those items? Are they saying that they did not need to waste pages in the manifesto repeating something that everyone knew was a commitment — or has the Chancellor been quoted correctly? We must have an answer before the Finance Bill reaches the statute book. Conservative Members should not vote for the Bill until that answer is given.

Following the Budget, the Chancellor gave two private briefings to journalists—one on Wednesday 14 March and another for the Sunday newspapers on Friday 16 March. An article about the latter occasion states—and I shall give the source later: In his briefing for Sunday journalists, Lawson went further. He said that he would widen the VAT net by introducing a multi-tier system. He would start by introducing a second, lower VAT rate which he could use to bring into VAT such things as electricity, public transport and some food (although not fresh food). The Government are not claiming that they intend to tax fresh food. Did the Chancellor say that at the private press briefing? Peter Kellner of the New Statesman said on 23 March: I hope MPs will challenge Lawson to confirm my account of his two post-budget briefings. If he does, he will start to rehabilitate the good name of reform. And if he denies my account, he is lying. Those are the words of Mr. Kellner; I am not accusing the Chancellor of lying. I have not seen any letter from the Chancellor published in the New Statesman denying that article. I have not heard of any writ being issued because of the article.

If anyone has any doubt about the Government's intention to use the thin edge of the wedge in the Finance Bill to tax food, they should read the exchanges during Question Time last Thursday between my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) and the Chancellor. My right hon. Friend said: Can the right hon. Gentleman give a clear undertaking that he has no intention of imposing VAT on basic foods? The Chancellor replied: I have no present intention."—[Official Report, 5 April 1984; Vol. 57, c. 1096.] It is clear that the Chancellor is leaving his options open. He is prepared to renege on the specific commitment in the 1979 manifesto on which the majority of Conservative Members were elected.

Even if anyone believed the Chancellor's argument that take-away food outlets compete with restaurants, there is still sufficient reason to vote against the widening of VAT —we must stop him next year saying, "Last year, the House assisted me to widen the VAT net, and I intend to do it again this year." VAT on take-away foods was debated in detail during the Budget. The Chancellor said that it provided competition for restaurants. The average spend in a take-away food shop is £1.50 per head—about the amount of a tip, or even half a tip, given by Ministers in some restaurants. In addition, 80 per cent. of take-away meals are eaten at home. That does not signify great competition for restaurants.

Many Tory Members today will have been lobbied by small business men, entrepreneurs and family groups— people standing on their own two feet under the Government's tax burdens. They are running small businesses either as owner-operators or franchisees. The Chief Secretary gave the game away when he mentioned hamburgers and the Wimpy and McDonald chains—yet 71 per cent. of all the outlets for take-away foods comprise fish and chip and Chinese shops. They are not the large multinational hamburger chains to which the Chief Secretary referred. Those chains account for only 5 per cent. of the take-away food business.

I have not had time to check all the points put to me and other hon. Members by those who lobbied us today and who feel threatened by the change in VAT. On 7 February, in a written answer, the Government compared VAT on take-away foods among European countries. Yet we are told by those in that business that half of the examples the Government gave were wrong. For example, the Government said that VAT on take-away food in West Germany was 14 per cent., when in reality it is 7 per cent.; that in France it was 18.6 per cent., when it is 5.5 per cent.; that in Italy it was 18 per cent., when it is 10 per cent.; that in Belgium it was 19 per cent., when it is only 6 per cent. Indeed, they said that in Ireland it was 23 per cent. when in reality take-away food is zero-rated. It is 23 per cent. only if the goods include chips or confectionery. In Ireland they serve chips and fish separately to avoid VAT. For the Government to tell the House that because VAT is 23 per cent. in Ireland 15 per cent. in Britain is moderate is misleading the House and the industry. The Government were right about only two countries —Denmark with a figure of 22 per cent., and Holland at 19 per cent.

The Chancellor has brought forward a piece of ill-thought-out legislation that will not stand up to scrutiny in Committee. For example, what about the definition of hot food? In a fish and chip shop in the summer, workers could be working in temperatures of 100 degrees, with the food in a cabinet at 70 degrees. When the food is taken out of the cabinet, the ambient temperature will be lower than the temperature in the shop. That difference between ambient temperature and room temperature shows that the Government have put themselves in a terrible mess in drafting the Bill. I invite hon. Members to study part I of schedule 6 and to consider what the Government meant when they produced the Bill, assuming that they knew.

Mr. Andrew F. Bennett

What will happen to items such as the chip buttie? Will VAT be charged on the chips but not on the barm cake into which the chips are put?

Mr. Rooker

I hope that the Financial Secretary will tell us what will happen to chip butties when he replies. The Chief Secretary talked about cold potatoes in hot bread and cold meat in hot bread. My hon. Friend has produced an example that operates in reverse. How will the chip buttie stand for VAT considerations? What will happen if someone sells frozen pre-cooked food in his shop and places by the doorway a microwave oven for the customer's use after he has bought his food so that he may heat it himself? I am not drawing the Chancellor's attention to anything that has not already been put to him. The provisions on take-away food are chockful of defects and anomalies.

Many hon. Members on both sides of the House deplore the Chancellor's proposal to introduce VAT into some sectors of the building industry. He has argued that there are many anomalies in definitions of repairs and improvements and in determining what is maintenance and what is not. I have been a Member of this place for about 10 years and I cannot remember dealing with a dispute over what is subject to VAT and what is not within the building industry. If there are anomalies, the answer is to remove from the scope of building repairs the work that attracts VAT. The building industry has 400,000 of its ex-employees on the dole queue. It is highly labour-intensive and dependent on small firms.

The Chancellor must know that he has put historic building renovation at risk. Our heritage belongs to us all and it is not a subject of party political bickering. That is why the arrangements for the heritage fund have generally met with approval from both sides of the House. The Chancellor is putting at risk the renovation of historic buildings because of the imposition of VAT, and it is possible that VAT charges will be imposed on thousands of home improvement grants. Over 26,000 householders have applied for home improvement grants in Birmingham. When the grants are made through the city's environmental department—that will happen when the Government allow Birmingham to spend the money that they originally promised to allocate to it—it is probable that each applicant will have to pay £500 worth of VAT.

The deadline of 1 June will lead many people to pay their builders before work has been completed. They will do so in the knowledge that the builder may go bankrupt or may decide to do a bunk. They will know that if that happens they will have paid for work that has not been finished and that they will have no redress. An individual may trust his builder and consider him to be reliable. He may decide that it is safe to pay him before 1 June and that he will get on with the job thereafter, but in many instances there will be considerable uncertainty. That is the position in which the Government are placing many of those who have decided to embark upon home improvements. I am not surprised that hon. Members on both sides of the House have been inundated with representations from the building industry and the councils with responsibilities for home improvements.

Mr. Maxton

Two areas of improvement that will be hit by the proposals of the Chancellor of the Exchequer are, first, the renewing of lead pipes and, secondly, energy conservation improvements. My hon. Friend will be aware that lead pipes are a major health hazard in cities such as Glasgow. He will be aware also that the Secretary of State for Energy is supposed to be running an energy- saving programme. I have no doubt that the Secretary of State for Energy is concerned about the Chancellor's proposals. It is clear that energy conservation improvements will be hard hit.

Mr. Rooker

It is within the knowledge of the House that the Secretary of State for Energy is much opposed to the taxing of energy. We know that he is spending enormous sums of public money advertising on television and in the press to encourage the public to save energy and to be energy conscious generally. Did the Chancellor intend, once again, to knock the policy of his right hon. Friend? Was that the Government's intention? I hope that the Financial Secretary to the Treasury will address himself to that issue when he replies. It is riot an unimportant matter.

The issue of the imposition of VAT on charities has never been satisfactorily resolved. It has been the subject of dispute since the doubling of VAT in 1979. The Chancellor of the Exchequer knows that there would be massive all-party support for the proposition that genuine charities—I emphasise "genuine"—should enjoy VAT relief. The Government have the benefit of advice from the Inland Revenue, Customs and Excise and all the tax experts on the Government Benches, but it seems that they cannot find a way of defining a "genuine" charity for the purpose of VAT relief. If that is the stumbling block, I suggest that the answer is for the Opposition to move across the Floor of the House to the Government Benches and for the Government to take the Opposition Benches. If they agree to that course, we shall find an answer to the problem.

We would be content to revert to the rate of VAT to which charities were subject when the Government took office in 1979. We would agree to revert to 8 per cent. If the Government cannot agree to abolish the imposition of VAT on charities, let us return to the position that prevailed in 1979. I understand that before the Government's climb-down after the Budget statement, the Spastic Society was faced with a £120,000 increase in its VAT liability. One third of that increase will be removed as a result of the Government's announcements. However, the society will still have to pay an extra £80,000 in VAT. It should be remembered that it already pays a VAT bill of £650,000. Dr. Barnardo's will face a VAT increase of £125,000 as a result of the Budget. The Royal National Lifeboat Institution will find that it will have to pay an extra £45,000. There has been no concession for the Royal British Legion and it will have to find an extra £200,000. That is its estimate of the extra VAT that will be levied upon it. Will the public give their support to these worthy and long-standing charities merely to pay VAT to the Chancellor of the Exchequer? The answer is, "Not on your life."

I shall refer briefly to company taxation. I know that my hon. Friend the Member for Birmingham, Hodge Hill (Mr. Davies) will deal with the taxation of manufacturing industry. Many companies have stated since the Budget statement that they will pay more tax as a result of the Finance Bill. It is easy for the Chancellor of the Exchequer to talk about global sums when referring to the reduction in corporation tax and the abolition of capital allowances. However, it is the individual company which pays tax and it is not easy for such companies to say, "What we gain with one hand we lose with the other." It seems that manufacturing industry will, unlike other sectors of industry, pay more in taxation. For example, ICI is on record as stating that it will pay more tax. That is not a candyfloss organisation. It is a company that creates wealth, employs labour and makes things. Those are activities on which the Chancellor of the Exchequer does not seem too keen. The company has considerable exports but it will pay more tax net because of the changes set out in the Budget.

Some will say that it is a good thing that companies are to pay more tax but we must give serious attention to the extra tax burden that the Government intend to impose on manufacturing industry. The money will not be channeled into new investment. It will not be used to create new factories and new jobs. According to the Library briefing, Blue Circle and Thorn EMI will pay extra tax but Marks and Spencer's tax bill will be reduced by £39 million. The service sector, so much beloved by the Government, will enjoy redress as a result of the Budget, but our wealth-creating manufacturing industry, which we shall need when our North sea oil is depleted, will be hit.

Profits on investments will be increased. The Chancellor wants more profits, as we do. The difference is that we want profits wisely spent after a surplus has been made. There will not be sufficient profit to offset the abolition of the first-year allowances when inflation is low. There is a problem here in relation to inflation in the coming years. The Chancellor is committed to a zero rate of inflation; we gather that he still wants stable prices. Certain technical problems—we need not go into them now—will be created for many companies.

Profits on existing capital are being boosted by the Budget, and nobody denies that that was the intention. Every forecaster sees a massive squeeze on company corporate liquidity from 1985 to 1987. Is that what the Chancellor intends? It is clear from his figures that money will be taken into the Treasury for a further tax handout just before the next general election. Does the right hon. Gentleman intend there to be a squeeze on corporate liquidity during the transitional period of the abolition of capital allowances? Industry should be told whether that is the case. I shall curtail my remarks on that aspect because time is pressing.

I have a point of detail to raise on corporation tax, and we hope that the Government will come forward with an amendment to clause 20. It is clear from subsection (3) of that clause that a gross unfairness has occurred, whether by design or intent we do not know. However, as the matter is referred to in the notes on clauses, it is clearly not unknown.

I refer to the special rate of corporation tax on industrial and provident societies, which is currently 40 per cent. That puts them below the mainstream corporation tax rate of 52 per cent., although they are paying more than the small firms' tax. It appears from the way in which the Bill is drafted that this special concession to provident, industrial, building societies and the co-ops will be reduced to 35 per cent. However, those who are paying 52 per cent. will also have their rate reduced to 35 per cent.

In other words, there is a relative increase in corporation tax on industrial and provident societies. Is that the intention? After all, if both sectors pay the same rate of corporation tax it represents a relative increase if one compares industrial and provident societies with major companies—[Interruption.] That must be the case. If one group has its rate reduced from 52 to 35 per cent. and another group has its reduced from 40 to 35 per cent., although there is no difference in that they both end up paying 35 per cent., there has been a relative increase for one compared with the other. Was that done intentionally by the Government? Did they intend to reduce that relative gap between those two sectors?

I give notice that we shall raise the matter on clause 20 in Committee. While the co-ops have been rather quiet on the subject, the building societies have raised it. It is clear that this rate of corporation tax affects the building societies, which represent a not unimportant part of the nation's economic structure.

Some of the oil taxation measures contained in the Finance Bill were dealt with by the House in a different form in March 1983, before the general election, and other aspects of the taxation arose in a special measure shortly before Christmas. The Tories have had a windfall from North sea oil that no other Administration enjoyed. Since the last year of the last Labour Government, the benefits have been astronomic. Oil production has more than doubled during those five years; the value of oil and gas production in real terms has trebled, from £6.3 billion to £17.9 billion; the contribution of oil to the balance of payments has risen tenfold, from £1.3 billion to £11.7 billion; and tax revenues from oil have increased by about twentyfold, from £0.5 billion to over £9 billion.

The bonus of North sea oil should have been used as a springboard from which Britain could have leapt ahead of its competitors. As our oil wealth has multiplied, other industrial nations have faced escalating energy bills as a result of the 1979–80 OPEC price increases. It should have been our moment to plan for, and invest in, the long-term future of our production base — a theme which the Chancellor denigrates—and it could have been a time when we exploited our good fortune to combat, and perhaps even overcome, the effects on Britain of the world recession.

The Government did the opposite. They increased interest rates when oil made it possible for them to be cut. They raised personal taxation when oil was providing a vast new source of Government income. The Government slashed public investment when oil was providing opportunities to build new hospitals, schools and factories. The Government intentionally created a slump in the early part of the last Administration and the depression was deepened by the world recession, which they constantly blame for everything.

Oil reserves were used, as they are still being used, to pay the dole bills, when they should have been used to eliminate the dole queues. There is nothing in the Finance Bill to reverse that trend. That is the most serious charge that can be made against the Government. They have no plans for, and there is no prospect of, reducing the dole queues.

Mr. Peter Viggers (Gosport)

What about the national insurance surcharge?

Mr. Rooker

If the national insurance surcharge was such a burden, why did the Conservatives wait five years to abolish it? If it is to be such a bonus for investment and if it has been the major bottleneck to investment and new jobs, why have they waited so long?

Far from leaping ahead of our rivals, we fell into a recession deeper than theirs. Unemployment in the United Kingdom has risen twice as fast as it has in the seven major OECD countries, and it still stands higher than the current level in any of the other major countries. Last year, public sector investment was 25 per cent. below its 1979 level; manufacturing investment fell by over 30 per cent. during the same four years; and company liquidations rose to a record level in 1983, a fourfold increase since the Conservatives were elected to office.

As Britain's domestic manufacturers face the sharpest decline in output this century, the volume of imported manufactured goods has escalated by no less than 20 per cent. For the first time since the industrial revolution, the United Kingdom has a deficit on manufacturing components in its balance of payments. There is nothing in the Budget or the Finance Bill to set that process in reverse.

The Chancellor was talking yesterday about his strategy in the years after the oil runs out, and his remarks are highlighted in the press today. We have had hints that the social services may be cut again. The Chancellor was quoted in the Financial Times this morning as saying that Britain should be able to take in its stride the situation after the oil runs out. I agree, but will we be able to do that?

Consider what the people on whom the Government will be relying when the oil runs out think about the future, the people who are running manufacturing industry, making things, using people and selling goods abroad. Mr. Max Taylor, senior partner in a Birmingham-based chartered surveyors specialising in industrial property, is reported as saying: The heavy sector of industry in the Black Country—I am talking about the tin-bashers and boilermakers — is still suffering quite alarmingly. He made that comment after the Budget.

The regional office of the CBI, it is reported, confesses in private that it is running out of clichés to skate around the uncertainty. Last year it was 'too soon to throw hats in the air.' Now, 'celebrations are still being kept on ice.— That is happening after this wonderful Budget for the manufacturing sector. It is reported that Sir Arthur Bryan, chairman of Wedgwood, the china manufacturer, who has returned to almost his pre-tax profits before the recession, said that he believed the national CBI forecasts to he "over the top" and "too London-orientated". That is quite right.

The director of the National Association of Dropforgers said: To talk about growth is a bit sick. Heavy manufacturing industry depends on such people to provide massive support for the industry's products. The director of the National Association of Dropforgers also said: It is just a question of clawing back a little of what we have already lost. Equally blunt talk came from the owner of a private engineering company in the Midlands, Hi-ton. The Permanent Secretary at the Department of Trade and Industry, Sir Brian Hayes, met the owner when he went to the west midlands on a fact-finding visit. That visit occurred at a time when the sheer devastation of the industry was clear for all to see. An article reports: Mr. Carter's message was simple: 'Yes, there is business about, but it is because our competitors have gone bust. I cannot see any upturn in the economy. Of course, things are better than 12 months ago.' He laughs: 'They could not get any worse'. The Chancellor says that we should be able to cope when the oil runs out. The chairman of the Birmingham board of Barclays bank, Mr. Anthony Rudge, said: Manufacturers may all have the best of intentions but they are not borrowing the money. They are not borrowing the money to invest. Although Britain should be able to recover when the oil runs out, there is not a shred of evidence that the Government, via the Budget and the Finance Bill, are getting Britain ready for that day. Of course revenues from North sea oil will run out many years before the oil runs out. That will have a different effect on the economy. I do not complain that the lights will go out because we shall run out of oil. North sea revenues will be running out before the end of the decade. As I have already shown, the Government are receiving oil revenues at a rate of £9 billion a year. That was new money for the Government, which the last Labour Government did not have.

The Bill makes some changes in capital transfer tax. The Chancellor has given away £49 million in a Budget dealing with billions. One can say, "An amount of £49 million is not very much." The fact is that none of it is going to any of my constituents or to many of the constituents of my hon. Friends. There is no justification for the cuts in capital transfer tax. Given the fact that, in the past five years, the Government have diminished the tax, I am astonished that they have not abolished it. In the past few years, the Government have made changes when dealing with renewing exemptions. I understand that a married couple who transfer almost £400,000 over 30 years do not pay a penny of capital transfer tax. In real terms, we are receiving less from capital transfer tax now than we received from estate duty before the tax started.

It is not that United Kingdom capital taxes are high. As a proportion of total tax, Greece, Belgium, France, Holland and Denmark impose higher capital taxes than Britain.

Mr. Terence Higgins (Worthing)

Do they pay them?

Mr. Rooker

The right hon. Gentleman keeps intervening from a sedentary position. I am looking forward with interest to his speech defending the Government's attitude in the Finance Bill, defending another giveaway, and a tax handout of £300 million to the family of the Duke of Westminster. A Financial Times headline stated that one Cheshire family will get £300 million as a result of changes in capital transfer tax. No one denies that during their lifetime the Duke and his successors will gain that amount.

We shall debate the changes in stamp duty in Committee. One third of the stamp duty reduction — £160 million—is on shares, not house transactions. The Chancellor has raised the exemption limit on stamp duty for houses to £30,000. He claimed, as he is entitled to do, that 90 per cent. of first-time buyers will now not pay any stamp duty. It follows, therefore, that nine out of 10 first-time buyers do not gain from the halving of stamp duty. Why does the Chancellor make that further giveaway to one tenth of first-time buyers and the other people who will benefit from that change? It is no good the Chancellor saying that he is doing anything for first-time buyers, because his one argument is cut from under him by the consequences of another change.

The Government have abolished the national insurance surcharge, and the Opposition will not vote against that measure. The Government are aware of our view. My right hon. and hon. Friends have been calling for that change for the past three or four years. With 3.5 million on the dole we are in a different position now from when the national insurance surcharge was first imposed. Under this Government, unemployment has trebled. The tax on jobs would have gone much earlier if the Government were serious about doing anything about jobs. The Government keep saying that they want to ease the bottlenecks and the size of the dole queue. The Bill contains no specific measures to decrease unemployment.

Taxes will increase. The Chancellor has said that unemployment will decrease continuously during the next 10 years. Will that decline start this year, or will it start next year or the year after? What is the base year for that test of the Government's performance? The Government have put forward the Finance Bill as a major and novel Bill. The Chief Secretary made a stimulating speech. I suspect that tomorrow we shall not read a repetition of the nasty piece that Malcolm Rutherford wrote about the right hon. and learned Gentleman in the Financial Times following his speech on the Budget. Mr. Rutherford said: One has rarely heard such a dismal performance from a Government Front Bench". I did not hear the Chief Secretary say anything I liked. He merely used more pleasant and less sarcastic terms than he used in the Budget debate.

Last night, the Prime Minister said that the police in this country are superb. If that were true, I reckon the "Old Bill" should have got their hands on the Prime Minister's collar because of the damage she has done to individuals during the past five years in advancing her economic policies. She has put millions on the dole queue. We shall oppose the Finance Bill through its stages, to put the public's hand on the Prime Minister's collar.

8.58 pm

Mr. Terence Higgins (Worthing)

The late Iain Macleod was fond of saying that a Budget which looked popular as the Chancellor sat down on Budget day frequently looked different by the time Second Reading of the Finance Bill was reached. I doubt whether any recent Budget has received such an enthusiastic response as did my right hon. Friend's this year.

Despite the attack launched by the Opposition Front Bench, the Budget and Finance Bill still look extremely good, not least because of the taxes that they abolish and thereby simplify. I say sincerely to the hon. Member for Birmingham, Perry Barr (Mr. Rooker) that the first quarter of his speech was the best that I have ever heard him make. That may not necessarily be true of the rest of his speech, and I disagree fundamentally with a number of points that he made.

It is extraordinary that the hon. Gentleman should have the nerve to ask why we had not abolished the national insurance surcharge before, when he completely avoided the question of why the Labour Government ever introduced such a tax on jobs in the first place. The position then was not the slightest bit different. That tax had an adverse effect on employment. That was so when it was introduced. I am delighted that my right hon. Friend has finally got rid of it in the Budget.

My right hon. and learned Friend the Chief Secretary said that he did not intend to read out the entire Finance Bill clause by clause. We were all glad of that. I do not intend to read out the entire part of the report of the Select Committee on the Treasury and Civil Service relating to my hon. Friend's Budget. The Committee took evidence from the Governor of the Bank of England, the TUC, the CBI, Treasury officials and the Chancellor for some considerable time and received a great deal of written evidence as well. However, the Committee's report is only about half as thick as my right hon. Friend's Finance Bill.

There are a number of points dealt with in the report which are worth commenting upon. I should like to do that and pick up some of the points made by the hon. Member for Perry Barr. The Select Committee has produced three reports in this Parliament on the broad economic structure —the report on the autumn statement, the report on the public expenditure White Paper and today on the Budget. I should like to pay tribute to those who put a great deal of work into getting out the report in time for today's debate.

The Committee picked up a number of themes. The Government have responded to the points that we made in our first report on the autumn statement on asset sales. In today's report, the Committee has returned to the charge about that and remains of the view that to treat the proceeds of asset sales as negative expenditure is a strange way to deal with the problem. The Committee feels that the right approach is to treat them as a means of funding the PSBR rather than reducing it in the first instance. I do not want to pursue that point at this stage, but I want to refer to the comments that the Committee made on the money supply figures.

The House responded in an interesting way to the remarks made by my right hon. Friend the Chancellor of the Exchequer in his Budget speech about the various measures of money—M1, M3, PSL2, "Little MO", and so on. The Committee commented upon that, pursued the matter with the Governor of the Bank of England, and asked whether—if the monetary targets were intended to achieve the Government's intention of conditioning expectations — that was likely to happen when the targets were constantly changed. The Governor of the Bank of England replied: if both the authorities and the market recognise these changes and the reasons for them it does in fact make the credibility of policy stronger rather than undermining it. The Committee noted his views on that, and said: we are doubtful whether the original intention that the monetary targets should have a significant impact on a wider audience, such as trade unionists engaged in wage negotiations, has any relevance now, simply because the monetary targets have been changed so often. One of my colleagues on the Committee, who shall remain nameless, remarked that people in Grimsby engaged in wage negotiations discussed little else but PSL2, "Little Mo", and so on.

However, there is a serious point. While those targets may still have some relevance to the money markets and those engaged in those technical matters, the original intention that they should have an effect on the broader public has been lost, and that is perhaps regrettable.

Another point made by the Committee was that the Government have maintained for some time — the Committee took evidence on this point — that the revenue determines the amount that the Government can spend. That is spelt out in rather greater depth in the Green Paper that the Government published with the Budget— "The Next Ten Years: Public Expenditure and Taxation into the 1990s." The Government say: the growth of public spending has, over the past twenty years, been the motive force which has driven ever upwards the burden of taxation, on individuals and companies alike. The Government believes that it is necessary to reverse this process". I agree with that view, but find it implausible—I think that is the correct word—when at the moment the revenue determines expenditure rather than the other way round. We questioned the Chancellor on this in considerable depth and came to the conclusion, in the light of the evidence, that there was no clear criterion by which the availability of finance was determined. It is merely a matter of judgment. Indeed, the Chancellor himself said that it was merely a matter of judgment. It is therefore difficult for us to understand how the figure which is then taken as a matter of judgment for the level of taxation that can be afforded is effective in restraining expenditure.

The whole budgetary process and the annual sequence of events is such that we do not believe, however desirable it may be, that that is the way the Government act. Therefore, we make a specific recommendation, to which we look forward to receiving a response from the Government, that the House should be told what the firm limits are and the criteria that are used to impose an effective restraint on public expenditure.

In that context, since the Government say that it is the amount of money they can raise through the Finance Bill that determines what happens to expenditure rather than the other way round, I should make a passing reference to the proposed negotiations with the EC. At the moment we have got only what is called a stylised assumption about expenditure on the EC. If, as a result of the negotiations, the amount goes beyond the stylised assumption, will the revenue still determine expenditure, or will it to be the reverse? I hope that we shall be given an indication on this when the Financial Secretary replies to the debate.

Considering the broad picture, the Committee reached the conclusion that, for a number of reasons that we specified, the actual fiscal stance this year is somewhat slacker than it was last year and that the Chancellor, contrary to what he said in earlier speeches when he was Financial Secretary, is not consistently adopting a counter-cyclical attitude to the management of the economy and in particular to the public sector borrowing requirement. We specify a number of reasons why we think the Government stance is now slacker than it was a year ago. For example, because the change with regard to VAT on imports is a once-for-all measure, the Budget is not truly neutral, but would involve a reduction in taxation in the future.

There are other aspects of the economy that need to be taken into account. Some of us are concerned about the industrial recovery and, in particular, the financial effect that the Budget will have on it. Despite doing a comprehensive tour of the entire picture, the hon. Member for Perry Barr did not refer to this. The banks will have difficulty finding sufficient money to finance economic recovery. There is a clear intention by the Government to fund the public sector borrowing requirement 100 per cent. from the non-bank public.

I should like to concentrate briefly on what to me is the main point in our report. We are particularly concerned about the growth rate of the economy and unemployment. It is important that hon. Members should understand the true nature of our present unemployment. I believe that it is different from what we have had in previous recessions

The hon. Member for Perry Bar referred to manufacturing industry. As a result of the rapid increase in the exchange rate, partly because of North sea oil and the general international situation, many firms have greatly reduced the size of their labour force and cut out overmanning. In doing so they have paid out huge sums in redundancy payments, and they will not readily lake back the people whom they have had to make redundant. Therefore, it will be extremely difficult for us to deal with unemployment.

This problem has not arisen before, but the Budget does something to help. In particular, it removes some of the distortions from the relative cost of labour and capital. It is wrong to say, as was said from the Opposition Front Bench, that the measures in the Budget will not help to reduce unemployment. They will alter the labour-capital cost ratio, and the effect on unemployment should be beneficial. At the same time it is important to have a satisfactory rate of growth in the economy as a whole, In that respect there are several worrying aspects to which we refer in our report. I think that hon. Members would benefit from studying them, given that they are based on the evidence that we took.

We are particularly concerned at the way in which the Government are setting out a policy which is said to be aimed at achieving sustainable economic growth. Yet, when we looked at the Red Book, and in particular when we took evidence of what was happening over the five-year period, we found that the present economic growth rate of 3 per cent. per annum was expected, on the Government's own official forecast, to decline in the last part of the period covered by the Red Book forecast and to go down significantly to less than 3 per cent. over the five-year period. That gives cause for concern when the Government are committed to achieving sustainable economic growth because we find a forecast put forward after the Budget measures which shows the rate of growth going down from 3 per cent.—the present rate—to 2 per cent.

The implications for unemployment are important. Our report says: officials told us that the 2¼ per cent. average GDP growth assumption for the five years of the medium-term financial planning period was consistent with declining unemployment levels, since the Department of Employment labour force projections show annual growth of around ½ per cent. per year on average, and on the assumption of productivity growth of 1½ per cent. per year 'there can be a decline in unemployment.' From the figures it is clear that the scope for any reduction in unemployment must be small. When we consider the Red Book figures for productivity, that point is reinforced, because we find that the improvement in productivity has not been 1.5 per cent. In 1981 it was 3 per cent., in 1982 it was 6 per cent., and for 1983 it is estimated to be 6.5 per cent. That improvement in productivity is to be greatly welcomed.

Firms are now working well below capacity on much smaller labour forces than before. Therefore, it is clear that in any sort of upturn there will be a substantial improvement in productivity. That is to be welcomed, but at the same time it has very serious implications for unemployment. For that reason, I think that the overall fiscal stance—although all the evidence suggests that it is slacker than it was a year ago—is still perhaps not sufficient to ensure that unemployment will be reduced. That is not to say that I am in favour of some sort of massive reflation which would result in a resurgence of inflationary pressures, with a corresponding deterioration in our performance and competitiveness in relation to our imports and exports.

The overall position gives cause for concern. None the less, the specific measures in the Budget are — the phrase has been used frequently and it is right that it should be — very imaginative. My right hon. Friend is beginning to remove the existing distortions in the tax structure. He has got rid of two taxes. That is not a bad score for one Budget. I hope that he will go on doing that, despite the extraordinary way in which the Opposition seem to be against abolishing taxes in any shape or form.

With regard to the specific measures in the Bill, the overall picture shows a considerable amount of careful analysis. My concern is with the overall economic position. My right hon. Friend the Chancellor of the Exchequer will be able to take further measures in future. All Chancellors say that that can be done. One of the virtues of the Budget is the introduction of an element of medium-term tax strategy as well as medium-term financial strategy. It would be good if that were to be extended to other taxes beyond those for which my right hon. Friend has already given a forecast of what is likely to happen to the corporate tax structure. If that takes place, I think we shall see an improvement in the overall tax position. I am sure that we would all like to see it for the benefit of all those who are affected by the Bill.

The Bill is basically good and its intentions are right, but, for the reasons that I have mentioned, we should give particular attention to the outlook not only in the short term but in what the Americans, in that dreadful jargon, now describe as the outyears.

9.15 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

We heard with great interest the speech made by the right hon. Member for Worthing (Mr. Higgins), particularly as he is Chairman of the Treasury and Civil Service Committee which, after a shaky start, is settling down and has produced its first high quality report, which I hope and expect will be followed by many others. The right hon.

Gentleman dealt with unemployment at some length and that forms the most interesting part of the Committee's report.

My hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) made an excellent speech—excellent both in depth and breadth. His arguments, analysis and examination of the Bill will, I hope, be repeated in relation to other parts of the Bill. I for one shall enjoy the comments that I anticipate will come from my hon. Friend who has made a distinguished opening speech.

The Chief Secretary to the Treasury said that this was a big Bill but that much of it had already been discussed because of its earlier printing last year. It is obviously an advantage to have it before the public for a long time, but that can never take the place of the House of Commons. Many of us who are interested in these matters know that, however good the representations that are made to us by those who have a direct interest and personal involvement in the Finance Bill and the way in which the measures that we discuss here will affect industries and concerns outside the House, the fact is that the kind of examination that we bring to bear in the House and particularly in Committee cannot be achieved by any civil servants or industrialists. The examination conducted by the House and the Committee is advantageous and cannot be replaced by any other examination however good or effective it might be.

We have heard from the Chief Secretary today, as we have heard from every Treasury Minister, the usual ritual monetary incantations. Of course, not many of them really believe that nonsense any more. Such relationships between figures are only put forward because they feel that not to do so would be too much of a withdrawal from their earlier commitments. The case for intermediate targetry has now really gone. If one is interested—we all know that the Government are, as everybody has to be—in unemployment, rates of growth and inflation, they can be dealt with directly. If there is insufficient control, it can be dealt with by a variety of measures that do not depend on intermediate targetry. To say that some factors have a bearing on the ultimate objective and then to find that they are not much use in providing any milestones in the journey along that road is not only a waste of time but self-delusion.

It will be in the recollection of many right hon. and hon. Members present this evening that when child benefit was introduced there was an all-party agreement that it should not be regarded as public expenditure. The role of public expenditure has become so encrusted with assertion and dogmatism that that all-party agreement was of enormous importance. Child tax allowances clearly had nothing to do with public expenditure, and when child benefit was introduced in their place in the form of a payment to the child's parents it was agreed that it should not be part of public expenditure.

The changeover took place when the Conservatives were in opposition, and they felt strongly about public expenditure. It occupied almost the same place that it occupies today in the hearts and minds of Conservative Members, but they agreed that the changeover should not affect child benefit, which should be exempt from the ordinary conventions applying to public expenditure and should be raised in line with personal tax allowances. So that as those allowances went up, so would child benefit.

We are now seeing a denial of that agreement, which was intended to give child benefits the same advantages in public expenditure terms as were given to tax allowances.

I hope that there will be just a one-year interregnum, as we had a one-year interregnum when personal allowances were not uprated in 1981, and that we shall return to the concordat that was agreed in 1977. I hope that the Financial Secretary to the Treasury will confirm that that is a reasonable hope.

The Chief Secretary referred to the measures on the control of foreign companies and on offshore funds. We are pleased to see those in the Bill, though they do not go as far as I should like. However, we can debate them more fully in Committee.

The right hon. and learned Gentleman also mentioned the Ramsay case. The implications of that case were unclear and the Chief Secretary's comments will have clarified the minds of those who have responsibilities in these matters about the position on covenants, leasing and transfers between groups of companies. The most important point made by the right hon. and learned Gentleman was that assessments that have been agreed will not be reopened. I am sure that that assurance was greeted with a sigh of relief by a number of individuals, companies and organisations.

Mr. Moore

This is a critical matter and I am sure that the right hon. Gentleman would wish to correct the record. Reference was made to Furniss v. Dawson and not to Ramsay.

Mr. Sheldon

Yes. I apologise.

The right hon. Member for Worthing mentioned the work on unemployment of the Select Committee on the Treasury and the Civil Service. Paragraph 66 of its report said that on the Government's GDP assumptions, annual growth and the assumptions of productivity growth, the scope for any reduction in unemployment must be small. The Committee was showing restraint, because what it really meant was that unemployment will increase. That is the blunt conclusion of its report.

The right hon. Member for Worthing seemed to accept that when he spoke about structural change and the fact that firms that have shed workers will be reluctant to take them back.

I think—though I am not sure—that my conclusion is different from that of the right hon. Gentleman. Millions of people are considered unemployable when, over the past 40 years or so, they were thought to be highly employable. We have to consider what the state should do and in what circumstances it should move in.

The structural change will be difficult to bring about under a Conservative Administration because the economy has become set in the Government's mould after five years. We have seen a counter-revolution from everything that happened in the post-war years and the creation of an expectation that that revolution will continue.

There has been a reduction in the hopes of those who looked forward to an expanding economy to which they had much to give and which might have produced the dynamism that, unfortunately, we are not likely to see. High unemployment will continue in the Britain of the 1980s. The opportunities resulting from North sea oil will not be taken up. Britain will be characterised by the abolition of exchange controls, under which £11 million of our money pours overseas each year.

We have seen the emasculation of capital transfer tax and capital gains tax. My hon. Friend the Member for Perry Barr rightly pointed out that the amount likely to be raised in that way over 10 years will become less. The higher rates of income tax are part of the new structure brought in by the Government. We shall be a financially rather than industrially oriented country. The 4 million unemployed will not find jobs in a financially oriented Britain.

As my hon. Friend pointed out, those who consider the large sums of money that have been handed back to those with great wealth find it astonishing how, after all the years since estate duties were introduced, those vast estates can continue year after year, decade after decade and almost for century after century. One does not have to be a great believer in equalisation or some form of egalitarianism to realise that those great estates have little justification in the Britain that most of us in the House think would be sensible.

Conservative Administrations have dealt with estate duty, capital transfer tax and other measures. By emasculating and virtually destroying them they have retained the hereditary principle of wealth that is one of the weaknesses of our industrial and economic life.

That approach has been continued in the capital transfer tax changes in the Finance Bill. Investment income surcharge is being abolished so that unearned income will be treated in the same way as earned income for the first time since 1907. Investment income surcharge was first imposed at a shilling in the pound for unearned income and at 9d in the pound for earned income. There was a reasonable differentiation between those who earned their living from their own toil and those who did not. It would make as much sense in Britain in the 1980s—in some ways it would make more sense—to have a distinction between earned and unearned income.

Today more cost is involved in earning a living compared to staying at home than in the early years of the century. At that time it was possible to walk down the road to a factory and to earn a living there. The extra costs of earning that living were relatively small. Travel, whether by car or public transport, is now a substantial element in the cost of earning a living. Food and clothing are other expenses. People have unsuccessfully tried to claim some of those expenses as necessary and exclusively incurred while earning a living. Although they have lost their cases they have had the modest advantage of having their earned income taxed in a way which took some account of the cost of earning a living. All that has gone.

We are witnessing the virtual abolition of capital allowances. When capital allowances are reduced to 20 per cent., industry is merely allowing for the writing-off of assets. Service industries, which do not invest as much in machinery as manufacturing industries, are being given an advantage. At paragraph 58 of its report, the Treasury and Civil Service Select Committee says: we have been told repeatedly that the MTFS is designed to reduce inflation and hence interest rates, in order that investment expenditure might flourish. Now, while retaining the MTFS, tax changes have been made which will have the effect of making investment more expensive at the margin. Investment will be more expensive at rather more than just the margins because 100 per cent. tax allowances mean that it is possible to spend substantial sums of money on new investment. That, rather than replacement investment, is the best form of investment in an expanding community. However, the change will mean that manufacturing industry will not benefit as much as financial and other service industries.

Our big problem is that the City is only down the road whereas Ashton-under-Lyne, the midlands, the north and the north-west are far away. The Chancellor has a distinguished City background. I only wish that he had a distinguished industrial background, as he has failed to understand the wealth that industry has created. The City's advantage over the provinces is compounded by the fact that many Conservative Members live in areas that are remote from the country's manufacturing centres. When I walk around the area which I have the privilege to serve, I see the enormous distinction between the advantage given to one part of the country and not the others. People in the more favoured areas are no more able and do not have extra talents; they just happen to be in the area which has a large and successful financial centre.

I do not deny that the City of London is valuable to us. It produces a valuable return on investments overseas and from its insurance services, banking and trading. It is efficient and valuable. If we were a country with a population of 5 million we could happily settle for that and be prosperous, but we have a population of 55 million and we cannot earn our living solely from the efficiency of the City. When we distort our taxation, financial arrangements and the way in which we operate to serve one part of the country, valuable though it may be, to the detriment of the rest, we see some of the damage that is being done and perhaps grieve accordingly. The Treasury and Civil Service Committee, in paragraph 61, said: We believe that of necessity the declining oil revenues will need to be replaced with increased manufacturing exports if future strains on the balance of payments are to be avoided. No doubt, the service sector will also make some contribution, but many services are not internationally tradeable. That is correct. The trouble is that there has been an enormous rise in the revenue and production of North sea oil, and that was when we should have done so much more for manufacturing industry and the manufacturing base in the country. People who say that the oil is still coming and that there is plenty of time forget the most important factor. It is when the increase in the revenue occurs that one has the surplus money. When a plateau is reached, even if that plateau were to be continued indefinitely, it becomes one of the stable factors of the economy and difficult to change. It is in that upturn that the imagination should have been used, when the finances were available to do so much more for manufacturing industry. Even though the decline may be for a long period, as I think is possible, at any rate there will not be the opportunities that were presented to us in the past few years.

Manufacturing industry is of great importance. Services are not internationally traded, a point made in the report of the Treasury and Civil Service Committee. We can hand-finish one another's laundry effectively and have a high level of service, but that is not the trading sector that is required. Manufacturing industry has an importance, not only because of its size and its international trading. It has what I call a multiplier effect. One and a half times the amount manufactured is attributed partly to the service sector that is involved in that manufacturing industry. There will always be a service sector based upon the import of Japanese cars, videos, or whatever the goods may be. If one has one's own manufactured sector, that service industry will be based largely on that manufactured industry.

Sir Terence Beckett has spoken rather more clearly than at any time since his bare knuckle speech of five years ago. In the latest edition of the CBI News of 24 February 1984, he says: I have written to the Chancellor of the Exchequer on a subject which concerns us all — the importance of manufacturing to Britain. My reason for doing so is the concern I feel over remarks Mr. Lawson made in the House of Commons recently. He said he could not understand the selective importance some Members attached to the manufacturing sector. It continues: I am concerned that one or two prominent figures have gone so far as to suggest that Britain's brightest future lies in becoming an up-market service station for our more successful overseas manufacturing competitors. Therefore three quarters of all our value added in exports is attributable directly or indirectly to manufacturing. At the last NEDC meeting I was forced to speak out sharply against those who support the school of thought that United Kingdom manufacturing industry is on the way out. Our loss of market share in manufacturing is not inevitable. That is a forthright statement. Sir Terence Beckett has been under great political pressure, as we know. We know and understand the political pressures that some people in industry have to face. Nevertheless, he has come out more clearly than he has done for many years. This is something that we must take into account. We must look for compensation to be given to industry for some of the savage changes made to it in the Budget.

We once had a scheme for plant and machinery. We had an investment grant scheme, which was very good. However, the bureaucrats got at it and the large chemical plants got an enormous amount of investment grant, which was nonsense. Nevertheless, the idea was basically correct, that grants should be given for the acquisition of modern plant and machinery, because it is through the very latest plant and machinery that Britain can train a highly skilled work force. Therefore, such modern equipment should be given priority over other forms of investment.

It is claimed that the Budget is neutral. That is the trick of the Budget because, as has been said, it is not neutral. Of course, if corporation tax is reduced and the investment income surcharge is abolished in a strictly neutral Budget someone else must suffer. If that sort of money is given, there must be a gain from someone else. As we well know, in practice a very sensible trick was carried out. I refer to the pre-payment of VAT on imports.

Imports are not liable to VAT until they are sold on. However, by ensuring that the VAT is paid almost immediately on importation, £1,200 million will find its way into the Chancellor's coffers. I agree that that should have been done long ago, but we must also ask whether that beneficial change, which involves collecting taxes earlier than before, could be extended. What about the prepayment of certain taxes on banks, for example? Do the Government have something in mind? What about oil taxation? After all, we have advance petroleum revenue tax.

There is also the possibility of the earlier collection of duty on tobacco and spirits. However, the Government's new practice with VAT is odd compared with previous Finance Bills, when they have deferred the duty on tobacco and spirits. Instead of getting the money earlier from duty on tobacco and spirits, they have deferred it.

Thus, in the one case they have deferred duty, and in the other they have advanced it. They should get their act together. After all, if they are to continue this sort of operation, they will need some of that money in their succeeding Budgets.

The change in life assurance is wholly sensible. The tax avoidance industry was making far too much out of life assurance. The number of pages that had to be put into the Finance Bill every year was ridiculous, but was necessary to stop the schemes thought up by clever people. Therefore, that change is sensible. I also appreciate some of the other simplification measures introduced by the Chancellor. However, as some of the nonsenses are demolished, the biggest nonsense of all remains towering above all the others. I refer to mortgage interest relief. If we get rid of some of the other anomalies, the £2.75 billion it costs us appears even more anomalous. It is common ground that some advantage should be given to people who buy their own homes. However, it is nonsense to provide vast sums to people to overhouse themselves and so gain advantages not at the basic rate of tax, but at the highest rate. Trading up seems to be a speciality of the British housing market, but it is a bit of a nonsense and is created by the excessive mortgage interest relief.

I turn to the question of VAT anomalies. Much as I disagree with it, it is one thing to broaden the tax base, but it is another to set about changing anomalies. One thing about anomalies is that people get used to them. We get used to paying one rate of tax when we go to a restaurant and another when we take away fish and chips. New anomalies are being created and people will not know where they are. They will cause immense dislocation and resentment. I am looking forward to the debates on the VAT changes on the Floor of the House when we shall discuss at what stage VAT becomes payable.

What about one of the more obvious anomalies—the hot pie and sandwich bar? When does a hot pie become a cold pie? Many places serve both hot and cold pies. I am sure that we can buy both in the House cafeteria. Enormous new problems will be created and the Government will look ridiculous, to no advantage.

Our main task is to restore society's expectation of the beliefs that it had a number of years ago. We should not concern ourselves excessively with efficiency if that means losing too much humanity. We must find a balance. The Labour party, in its best moments, offers and insists upon an efficient, productive and energetic community, as well as one in which each is responsible to the other. The Government do not adopt that philosophy. They may have to give way to a party that does.

9.46 pm

Mr. Graham Bright (Luton, South)

I should like to reflect on small businesses. I welcome the Bill, first because of the decision to continue the reform of personal taxation. Everything and anything that we can do to decrease personal taxation and encourage people to save is important if we are to encourage people to consider starting their own business. It is crucial to encourage people to start in business.

That argument has always been clear to the owners and founders of small businesses. They have had to find the resources to set up and operate their firms in a world stocked with taxes designed to deter them. Even when they succeed they have, until recently, faced the prospect of surrendering a heavy proportion of their achievement to the state via capital gains tax, corporation tax, capital transfer tax and, when they retire or sell their business, investment income surcharge.

The indexation of capital gains and capital transfer taxes has drawn their teeth. I do not doubt that increasing the retirement relief under capital gains tax to £100,000 and cutting the highest rate of capital transfer tax to 60 per cent. will alleviate the position still further.

I am sure that my right hon. and hon. Friends on the Front Bench will understand when I say that further reforms are necessary. We need to think ahead and perhaps consider integrating income tax and capital gains tax. We should aim to replace capital transfer tax with an accessions tax.

Not only has the burden of heavy personal taxation threatened the survival of small firms, but our system of company taxation has favoured the allocation of capital to large companies because they alone qualify for the allowances. The reliefs available for savings in insurance and pension funds have too often channelled resources into the hands of the major financial institutions. This has made it much easier for them to lend to invest in property or in Government securities or in the equity and loan stock of companies quoted on the Stock Exchange. I am sorry to say that all too often it is the small business and the small company that have been left out when they have considered making investments.

The Chancellor's decision to phase out capital allowances as part of a programme to cut the basic rate of corporation tax is a major step in the right direction. It will permit a better allocation of capital resources within the economy, based on the respective performances of the small, the medium and the large firms. We shall have rates of taxation for our companies that will be considerably lower than those of our main competitors and one of the major distorting factors that has encouraged inappropriate investment will be removed. It is this inappropriate investment that I would like to consider for a moment.

All too often, small companies, which do not have the flexibility of large companies, have been forced to make what I can only describe as irresponsible decisions to make rash investments at the end of a financial year to avoid corporation tax. Sometimes they have not necessarily invested in equipment that could improve productivity or further their business. They might even have invested in larger desks or bigger motor cars. I believe that anything that we can do to reduce corporation tax win help companies to make better decisions and better use of internally generated funds.

I ask my colleagues on the Front Bench not to lose sight of the enterprise bond scheme, which I have twice asked them to consider and which would allow small firms to deduct these costs from taxable profits so that they could plan in future years to make investments of their own capital in their own firms. It is very important that we encourage that as much as we possibly can.

The redistribution of taxation in these and other areas has, I believe, a compelling logic. It makes the system simpler and fairer. It cuts business costs and it removes distortion between businesses of different sizes, and that is very important. I am sure that my hon. Friends, who are as committed as I am to seeing small businesses prosper, will recognise just how helpful this will be.

I should have liked the Bill to refer to the loan guarantee scheme and ensuring that this becomes a permanent fixture, because it has made a major contribution over the last few years in getting small companies off the ground, particularly those that were perhaps not quite as viable as many banks would have liked. Despite the fact that we have a report which shows that this scheme has lost money, in cost-effective terms for jobs it has been very cheap—about £1,300 per job provided.

I support the Bill because it applies principles of simplicity and fairness across the board. It offers a better balance between public spending and private prosperity, and I believe that it will keep state expenditure in check and encourage free enterprise. That is the right strategy for recovery, as indeed the people of Britain have twice recognised. Economic growth without inflation and with a lower tax burden can be achieved, and this Bill will help to move us closer to that objective.

9.54 pm

Mr. Brynmor John (Pontypridd)

I thought that the hon. Member for Luton, South (Mr. Bright) apart from what I considered to be a somewhat arid view of the British economy, was making an interesting speech until he delivered that encomium about this Finance Bill applying fairness across the board. I really wondered whether he had read the right Bill or come into the right debate. Frankly, in another context it would have been called a video nasty and legislated against accordingly.

This debate started engagingly enough with the Chief Secretary if not in top form at least in the 2.1 bracket by his standards, giving a quite entertaining and vivacious account of the Bill that he is preparing to pilot through Committee. There were two startling blind spots in the right hon. and learned Gentleman's speech—so startling that I wonder whether he has understood the consequences of the Bill throughout the country.

Clause 10 relates to VAT on home improvements. The Chief Secretary said that we did not need to worry about that because builders, through the national insurance surcharge relief, would have sufficient benefits to compensate. Quite frankly, the builders were never my worry. In one way or another, they will always pass on the increased cost to the customer. My worry, and that of many people throughout the country—especially in the older industrial areas — is the effect upon the person trying to improve his home. The Chief Secretary said not a word about that.

As I said in the Budget debate, which was largely ignored, the effect is twofold. The Government have cut improvement grants from 90 per cent. to 75 per cent., and they have imposed 15 per cent. VAT on home improvements. My hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) estimated that that would mean an additional £500 VAT per home improvement. It will increase the amount that a person must pay from his pocket towards home improvements from £10 in every £100 to £28.75. That is a staggering increase—which, frankly, the Chief Secretary did not appear to comprehend. That is the gravamen of the charge against the Government.

We are not concerned with whether there were anomalies — anomalies are present in all financial systems. It is the Government's job to iron them out without undue difficulty as best they can. In seeking logic in this case, the Government are imposing hardship on many people. It will be an incentive to the black economy.

My hon. Friend the Member for Perry Barr mentioned the current practice of builders asking people to pay in advance for work to beat the VAT. I know of someone who, this week, was asked by a reputable firm — it could have been a different firm—to pay in advance to avoid VAT. There will be hundreds of cases of people who, in good faith, pay for work but then find that the firms go into liquidation or default.

The Government are encouraging the black economy, rather than discouraging it. They are giving it legal sanction. There will be many cowboy operators in the home improvement area. We have struggled hard for many years to improve standards. Now, cowboy operators will offer a quick deal for cash and will say, "Do not ask too many questions about the bill or about the origin of the materials." The Government should consider the matter again.

I am glad to note that my old friend and adversary, the hon. Member for Croydon, South (Sir W. Clark), to whom I did not give a stroke on the last occasion, is here to risk temptation a second time.

I was speaking recently to a representative of a housing association which specialises in new build and refurbishment. He estimates that 6 per cent. will be added to the expense of refurbishing every house because of the VAT imposition proposed by the Government. That is something that the Government cannot wish away. Bearing in mind the plaudits which the Government have given to housing associations, they should give most careful consideration to the effect of the imposition. That will be one of the matters that they will have carefully to take into account when the Bill is considered in Standing Committee.

An argument is developing about thresholds when set against an increase in child benefit. In a sense, I am relieved that a debate is starting on the issue, because when the Budget statement was delivered, the Government were saying that a decision did not need to be taken until the May RPI figures were announced, and that they would not be taking a decision until June. The effect of their response was that we should not be worrying about the matter at such an early stage.

It seems that the Government have abandoned their earlier position. That was apparent from the speech of the Chief Secretary to the Treasury. The change has come, logically, because of the chain of events. The child poverty lobby has made it clear to Members on both sides of the House that there is a great deal of child poverty in Britain and that the greatest hardship is faced by families with young children. It argues that the hardship is best alleviated by increasing child benefit.

The Chancellor of the Exchequer has boasted about the number of people whom he has lifted out of taxation by increasing thresholds. My hon. Friend the Member for Perry Barr has observed that earnings drag will bring them back into taxation during the year and that the Chancellor's claims are pretty illusory. However, 850,000 taxpayers will be removed from taxation during the early part of the year. Fewer than one in eight of these current taxpayers has children, so we shall not benefit families with children merely by lifting thresholds. We shall disproportionately benefit married couples or single people. The poverty trap has a greater effect on families with children. It consists of the interaction of high marginal tax rates with benefits such as FIS and housing benefit, and marginal rates are greatest among families with children. About 80 per cent.

of those on marginal tax rates above 50 per cent. are families with children. They are not, as most would imagine, single people.

The number of people with children who are removed from the poverty trap is a crucial test of the effectiveness of the Budget and of the Chancellor's sincerity in talking about the Government's concern for lower-paid families. The Minister for Social Security told us in a parliamentary answer on 2 May that up to 20,000 of those within the band affected by the poverty trap would be removed from it as a result of the Budget. We know that the ebullience of the Minister rather outweighs his arithmetical calculations.

When the Select Committee on Social Security considered the matter, it found that the figure should be reduced to 10,000. The civil servant who gave evidence to the Committee said that the number of persons removed from the poverty trap would be about 10,000. That figure is fairly small, because the tax threshold, even at the new level of about £60 a week, is less than the level of earnings which most people in the poverty trap receive. This means that the threshold will have to be raised considerably to make an impact on the poverty trap, and that will take several years to accomplish. In other words, what the Chancellor has made a cornerstone of his Budget is admitted by the civil servants in his Department to be something that will not take effect quickly, will not give immediate relief to families with children and will not deal with the central problem of poverty in families.

Another amazing blank in the Chief Secretary's speech occurred when he spoke about the interaction of taxation and social security benefits. There must be a greater realisation that we must maximise benefits by having the best interaction of taxation policy with benefits. The right hon. and learned Gentleman does not appear to realise that the Secretary of State for Social Services has, as one of his three Beveridge-like inquiries into the social security system, set up an inquiry into child support and child benefit which takes no account of taxation policy.

The Chief Secretary did not seem to understand that that inquiry will go on in total isolation from the effect of taxation policy on the welfare of children. I refer him to page 91 of the Select Committee report, where the distinguished economic adviser to that Committee said: The failure to connect expenditure and revenue is particularly glaring in the case of social security benefits and income tax concessions, since the two are to some degree a substitute for each other and should be considered together within the framework of fiscal policy towards households. In the inquiry which the Secretary of State for Social Services will commission into child benefit and child support, will taxation policy and the provision of maximum benefit for families be considered in its fiscal as well as in its social security aspects? That badly needs to be done.

The Chief Secretary also erred when making a stark contrast between child benefit and thresholds. It was as if he was saying, "One either increases thresholds or increases child benefit, and there is nothing in between, save the cost of living increase," which, as we know, will be the likely outcome of the June consideration of the benefit.

There are, however, intermediate steps by which one could give benefit to families without adversely affecting married couples or single people. The first way would be to increase child benefit by the same index percentage as one increased personal allowances, by 12 per cent., so giving an extra 95p a week on top of the 35p to make good the cost of living increase.

The second way—a way that should commend itself to the Chancellor, in that it would be financially neutral— would be to uprate the tax threshold by the 5.3 per cent. necessary to compensate for the rise in the cost of living. That would mean that single people and married couples would be in exactly the same positions as they were previously. The surplus, over and above what had been paid out to index that, could be used towards increasing child benefit.

The result would be startling, even if one was considering only a married couple with one child, for by doing that, one could in a full year increase child benefit by £2.05 over the 35p, and still give that same couple 87p a week in lessened taxation because of the indexation. In other words, for everyone who has a child, raising child benefit is incomparably the best way to benefit families and reduce the burdens on them in industrial Britain today.

I must ask the Minister, because it has become part of the debate, whether, as reported in The Sunday Times last Sunday, there is any proposal to means-test child benefit. That rumour was current at the time of the last general election. The Prime Minister answered me then in these words: There are no plans to make any changes to the basis Oil which the benefit is paid or calculated. If the Government are considering means-testing child benefit, the Prime Minister's honour and word would be involved and she would have been elected on a false prospectus. She and the Government should make their position clear at the earliest possible moment.

While we continue to consider taxation in a vacuum without considering its effects upon the people, we will condemn many to poverty. Even on the Government's figures and expectations, there will be inevitable casualties in the Government's drive to make industry leaner and fitter. The Government should take special care of the future and welfare of those people and of their children. We do not want to perpetuate the injustice from generation to generation. Because the Finance Bill shows no understanding of that point, I hope that it will be fiercely resisted.