§ [Relevant documents: European Community Documents: No. 10156/83, Annual Economic Report 1983–84, together with the final version as adopted by the Council.]4.38 pm
§ Mr. Roy Hattersley (Birmingham, Sparkbrook)
I offer the Chancellor, even in his absence, my sincere congratulations on his artfully constructed Budget and his skilfully delivered Budget speech. He does not need me to tell him that it was received with genuine enthusiasm by his Back Benchers—something that surprised me not at all, for none of them is poor and none is out of work.
Yesterday, the Chancellor did precious little about poverty or unemployment, as I propose to demonstrate. In both areas, the Chancellor's claims were simultaneously modest and exaggerated. He announced what he described asreforms that will help to bring new jobs."—[Official Report, 13 March 1984; Vol. 56, c. 286.]That is hardly a head-on assault against the waste and misery of the dole queues, but I doubt even the veracity of that claim.
To convince the sceptics in the Chamber and beyond, the Chancellor must answer a simple question: does he believe that next March the level of unemployment will be lower than it is today? All the Government's calculations assume that unemployment will stay at its present level—3.5 million—even according to the Government's doctored figures. If the increases in unemployment that were recorded in January and February are repeated during the next few months, the total will increase.
When he replies, I ask the Chief Secretary to tell us whether it is his judgment that as a result of yesterday's Budget unemployment will fall, remain at the same level or even increase. On the Chancellor's current figures—growth of output of 2.5 per cent. and growth of productivity of 2 per cent.—unemployment will remain 414 well above 3 million into the foreseeable future. In the face of that fact, the Chancellor's complacent preoccupation with minor Budget reforms is pathetic. The tax handouts that he has offered to the rich are a disgrace.
What genuine claim to be about jobs can the Budget make when we consider it even in the terms of the Chancellor's arguments? I shall deal with it under two headings. The first is the abolition of the national insurance surcharge, which my right hon. Friend the Member for Bethnal Green and Stepney (Mr. Shore) demanded during last year's Budget debate, and which is wholly desirable.
§ Mr. Hattersley
I knew that one of the weaker-minded Conservative Members would cry that we put it on, and, therefore, I have two things to say to him. If it were right for every Budget to be the same as every other Budget, we would not need to have any Budgets. Secondly, the Budget that is appropriate for a Government who are presiding over fewer than 1 million unemployed is wholly inappropriate for a Government who have pushed up unemployment to nearly 4 million.
I welcome the abolition of the national insurance surcharge. I believe that it is one major part of the Budget that should command our wholehearted support. I suppose that the second claim that the Chancellor makes that the Budget is about unemployment concerns the changes in and reduction of corporation tax and the gradual abolition of the investment allowance.
I give the Chancellor credit for believing that if companies retain more of their profits they will, without inducement or pressure from the Government, use them for investment. That view is wholly at odds with the evidence. Last year there was no shortage of funds that could have been used for investment, but British money flooded abroad—£11 billion altogether. Retained company earnings increased sharply to £30 billion and yet investment last year at £37.6 billion was almost £4 billion lower than during the last year of the Labour Government. The same pattern, despite the increase in profits that the Chancellor has handed to the companies, will apply this year.
§ Mr. Kenneth Carlisle (Luton)
Is that why the right hon. Gentleman's party pursues a policy to impoverish companies so successfully?
§ Mr. Hattersley
I blame myself; I should have realised that it would be a question of that sort. Therefore, I go on to say something upon which I hope that the hon. Gentleman will concentrate and try to understand—as to what will happen next year. There will be a pattern not dissimilar to what happened in 1983—some of the profits that the Chancellor has provided will be exported and invested in jobs in competitor nations; some will be distributed as dividends, but most will remain within companies waiting and hoping for an increase in demand. The real stimulus to investment and growth is an increase in effective demand, which the Chancellor stubbornly refuses to initiate.
I do not expect the Chancellor to accept my word for it, but I wish that he would at least believe the Confederation of British Industry, which makes the 415 position clear in its autumn survey. The most frequently quoted reason for "holding back investment" was the uncertainty about demand.
The Chancellor persists in ignoring that judgment—he is shaking his head—not at his peril but at the peril of British industry. Because he refuses to accept the CBI judgment, he goes on to make the other major mistake in this area—the removal of the capital allowance—thus penalising the high-growth, high-investment and high-technology companies that should be assisted and supported.
I know that the Chancellor claims that many of his other changes in corporate taxation will stimulate enterprise and increase initiative. On the evidence of the Budget, the Chancellor suffers from the common Tory delusion that incentives are important only to men and women on high incomes, while workers lower down the earnings scale have no need of such encouragement. Certainly the concessions that he makes have almost invariably been calculated so as to benefit the rich.
Even the increase in the income tax thresholds, which has been advertised as the Chancellor's attack on poverty, provides much more help for the rich than for the poor—£106 to the couple who earn £5,000 and over £600 to the couple who earn £50,000 a year. If the Chancellor had wanted to alleviate poverty he would, as I shall presently show, have used the money differently, principally on an increase in child benefit.
The duty has been removed from paraffin, and I congratulate the Chancellor on that decision and welcome it, as will many poor families, but it hardly compares with what has been done at the other end of the income scale. The abolition of the investment income surcharge is a disgrace. It is a benefit exclusively enjoyed by people with savings of over £70,000. Last night on television, Mrs. Sarah Hogg, the economics editor of The Times, described it as the Chancellor's pay-off to the City of London. Yesterday the Chancellor described that decision in different terms. He said that some of the beneficiaries were comparatively badly off, were small savers, and were people of humble means. If they are poor, they are poor with £70,000 of savings, and yet someone on social security is rich with £500 in the bank. That is one example only of the Chancellor's extraordinary priorities.
The pattern of tax concessions to the well-to-do must raise questions in the minds of decent people about the standards that the Chancellor employs. If there is money to spare for a cut in the duty on share transactions, why must we increase prescription charges by 20p per item, an increase as great as the total price paid when the Labour party was in power and when the right hon. Lady, who is now Prime Minister, promised that there would be no increase under her Government?
If there is money to reduce the rate of capital transfer tax from 75 to 60 per cent., how can the Chancellor justify a cut of £185 million in housing benefit? The same question can be asked about some of the Chancellor's new taxes. If we are on the recovery road, why must we tax, through the composite rate, small bank savings? There are 3 million small bank savers who hold deposits that would not normally, because of their level of wages, require them to pay tax.
If we are doing so well, why have we cheated the pensioners out of £1 each week? If we are on the road to recovery, why is nothing done to help the long-term unemployed? Those are questions that the Chancellor must 416 answer if he wants us to believe simultaneously that the economy is moving forward and that he has any interest in the wealth and welfare of the nation. Above all, if the economy is bounding forward, why must we have VAT extended to take-away foods? It is a fragile recovery indeed that is dependent upon taxing fish and chips.
I ask the Chancellor one more question: if the prospects for Britain shine so brightly, why are we to have so meagre an increase in child benefit? Not for the first time in the House, the Chancellor was less than frank with us. Great questions arise about a debate that is initiated around documents that are not available to the House but, were they at our disposal, might change the reception that the speaker received. Yesterday he told us that the Secretary of State for Social Services will announce new rates of social security benefit, including child benefit, when the May RPI is known. Most of us suspected the worst when the Chancellor said that, because he has not gone out of his way to shield his colleagues from bad news. I put it no higher than that. Our worst suspicions were confirmed by the Red Book, because it hypothesises and predicts that child benefit will increase by 5 per cent. in the coining year. If the Chancellor wants to tell me that that forecast cannot be relied upon, I shall give way to him at once. if he does not reply, I look forward to hearing the Chief Secretary's comments. If neither the Chancellor nor the Chief Secretary responds, we shall assume that what we already know is true—[Interruption.] I pause, not for the benefit of the hon. Member for Lincoln (Mr. Carlisle), who may intervene if he wishes, but in the hope that by chance the Chancellor wishes to say something about his decision to increase child benefit by less than the rate of inflation while income tax will be increased by 12.5 per cent.
I remind the House, as this is worth repeating, that the Chancellor has given £100 to families earning £:5,000 a year but more than £600 to families earning £50,000 a year. That money would be far better spent on increasing pensions and child allowances, yet it will go to those in least need.
The Chancellor chose the least efficient way of alleviating poverty, if that was his aim, as early-day motion 563 proves. For a two-child family earning up to £18,000 a year, it costs just as much to finance a tax cut of £1 a week as to provide an increase of £3.90 per week in child benefit. The Chancellor ought to have followed that route as it would have most helped low income families, who desperately need that help. They have suffered most under successive Tory Chancellors.
It is worth considering how low-income families have fared in the past five years as compared with richer families, having been required to pay increased national insurance contributions and to shoulder the income tax burden imposed on them since 1979. Let us consider a family with two children. Until yesterday a family earning more than £50,000 a year, that is, six times the national average, had had its tax burden reduced by £98 a week since 1979. A bonus of £11 has now been announced so that that family has had its tax burden reduced by £109 a week over the past five years, including yesterday's Budget.
Let us compare that family with one with average earnings of £180 a week, which has been treated very differently. The past five years of Tory Chancellors, with the four Budgets of the Thatcher Administration. have seen that family's tax burden increased by £3. Yesterday, 417 the Chancellor gave back £1.30. Thanks to five years of Tory Government, that family is still £1.70 down. That family can be compared with a third, earning two thirds of the average income, which is substantially below average. It earns £120 a week and has suffered an increase in the tax burden in the past five years of Tory Government of £3.30 a week. Yesterday, it received £1.30 back. It is, therefore, still £2 down as a result of Conservative policies.
The simple conclusion—indeed, the obvious one to be drawn from those three examples—is that the poorer the family, the greater has been the increase in its tax burden after five years of Conservatism and the richer the family, the more its tax burden has been reduced over the same period.
That approach and, indeed, the Budget is wholly consistent with the Chancellor's philosophy. I doubt neither his conviction nor his fervour. His problem is not that he does not believe in what he is doing, but that what he believes is wrong. We need, but are denied, because of the Chancellor's dogmatism, a substantial boost to demand, largely stimulated by increased capital investment, which should be financed in the public sector by an increase in the PSBR. [HON. MEMBERS: "Inflation."] Hon. Members cry "inflation", with the originality that I have come to expect from the Conservative Benches below the Gangway. When the Chief Secretary speaks later he will probably tell me that selective reflation financed by a relaxation in the PSBR, largely to finance increased public investment, is an outdated Socialist heresy. Let me remind him of others who are thus numbered among outdated Socialist heretics. First, there is the Confederation of British Industry, which believes that PSBR should be £2.5 billion higher; secondly, the chambers of commerce; thirdly, the British Institute of Management; fourthly, and perhaps most important, every other OECD Government who borrow more than us and have an almost universally better economic record than we can boast over the past five years.
The right hon. Member for Old Bexley and Sidcup (Mr. Heath) is the most important of those outdated Socialist heretics. On Sunday he dismissed the notion that Government borrowing automatically increased interest rates and crowded out private investment as "Toytown economics" and he was absolutely right. He went on to ask:What respectable company would run its finances purely on the basis of an income and expenditure account? What respectable company would try to reduce borrowing and run its transactions out of the till?We can answer one of the right hon. Gentleman's questions with some certainty by assuming that a regime that denied borrowing—a company that would not borrow to invest—would not be run by the Chancellor of the Exchequer or the Prime Minister.
The Chancellor first came to public notice through his receipt of a wholly proper and prudent loan that was the largest ever offered by Kensington and Chelsea borough council. I congratulate him on that, and hope that he will apply the rules governing his personal concerns to his operations on behalf of the nation. I have no doubt that the most famous corner shop in the world, the Grantham grocery store where all the financial virtues were learned, was financed by a bank loan.
§ Dr. Jeremy Bray (Motherwell, South)
Does my right hon. Friend think it is in order for the Chancellor to idle away his time on the Back Benches instead of listening to the Opposition Front Bench speaker?
§ Mr. Hattersley
I assure the House that I do not mind at all where the Chancellor is. My only regret about his location is that he remains at the Treasury.
Borrowing for investment in future growth rather than for frivolous or unnecessary purposes is a prudent rule that ought to be applied to the country, just as it is applied to the most successful businesses. Because of the doctrinal rejection of public borrowing by the Chancellor and others of like mind we shall not have growth, but deflation. We are to have a deflationary Budget—[Interruption.] If the Chancellor, now that he has returned to the Front Bench, wishes to intervene rather than just mumble I shall be happy to give way.
Despite all the talk about broad neutrality yesterday, the Red Book reveals another fact that the Chancellor did not think it safe to entrust to the House. He expects a substantial increase in the total tax take next year. The figure for 1984 is well known. There has been an increase of £17.5 billion in the past five years, thanks to Conservative policies. In table 5.6 in the Red Book the tax take in real terms shows an increase of £21 billion over the past five years. I search my mind for any reputable reason why the Chancellor did not tell us that and why he felt it right to talk vaguely about broad neutrality when the tax take had been substantially increased. I see that he is looking this up. It is in table 5.6 on page 39. It means that we are back on the old, dreary path of higher taxes and unemployment and lower borrowing and public expenditure.
Lower public spending is reflected in the Government's plans for public expenditure as reported in the Blue Book. I take those plans for granted because, such is the importance of the subject, we shall soon debate with the thorough detail that they deserve plans for public expenditure which, if implemented in full, will produce an unparalleled austerity in the public service. As a result, the Health Service—supposedly so safe with the Prime Minister—will no longer be able to meet the legitimate demands placed upon it. The education service, which the Prime Minister also pretends to cherish, would be virtually destroyed in many respects if the proposals in the Green Paper were implemented, but that is a debate for the future. Today I simply conclude with a final word about the Government's economic record, the subject with which the Chancellor began his Budget speech.
The Chancellor yesterday described the country's record for the past five years with fine disregard for the facts. I wish to remind him, the House and the nation of some of the things that have happened since 1979. Taxes had already risen by £17 billion and yesterday they rose even further. Unemployment had increased by 2 million even on the Government's doctored figures—a rate of increase twice as rapid as that in any other major OECD country. In 1981, output fell to 5 per cent. below the 1979 level and, despite the Chancellor's phoney diagrams on television yesterday, the figure for the first quarter of this year is still below that which was successfully achieved under the Labour Government. During the Government's period of office 13,421 companies went into liquidation. For every week of Conservative Government, 170 companies have gone into liquidation, and last year the 419 weekly average rose to 270. Between 1979 and 1983, investment in manufacturing industry fell by 30 per cent. while the volume of manufactured imports rose by 20 per cent.
All those things happened at a time when the Government were in receipt of the uncovenanted windfall of North sea oil—a bonus that no other Government have ever enjoyed. Without that £9 billion annual contribution to national revenues that the Government uniquely enjoy, the country would be literally bankrupt. Yet the Chancellor has the effrontery to describe the Government's record as one of success. God grant that we may be spared such success in the years to come.
§ 5.3 pm
§ The Chief Secretary to the Treasury (Mr. Peter Rees)
We have been treated to a vintage performance by the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). I suspect, however, that it is not a vintage of which he will be proud in years to come. It shows, perhaps, that within the calculating figure now seated on the Opposition Front Bench there lurks a demagogue struggling to be free and to join the right hon. Member for Islwyn (Mr. Kinnock) in his soft-shoe shuffle on television—perhaps the only vaudeville act of which the two of them are capable. I shall come in due course to the serious parts of the right hon. Gentleman's speech, such as they were, and to such of his party's economic policies as we have been able to glean from his speeches in the past few weeks. I am sorry that he did not draw attention to the latest striking evidence of satisfaction with the Budget—the cuts in base rate announced today by at least three of the clearing banks.
In a more prosaic vein, I begin with one or two announcements that my right hon. Friend the Chancellor could not fit into his Budget speech yesterday but which the House will wish to hear at the earliest opportunity—[Interruption.] I willingly give way to anyone on the Opposition Front Bench who wishes to announce his resignation either from the office that he holds or from the party to which he affects to belong.
On holiday lettings, my right hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley), then Financial Secretary to the Treasury, announced last year that it was not possible to deal with the tax problems of holiday lettings in the abbreviated Finance Bill following the general election but that we should return to the matter in this year's Budget and Finance Bill. We then issued draft clauses for comment.
Many representations have been made to us about the dimensions of the problem, particularly by my right hon. Friend the Member for Blackpool, South (Sir P. Blaker)——
§ Mr. Rees
We are willing to include the hon. Member for Workington (Mr. Campbell-Savours), too. No doubt there will be an opportunity to discuss the representations in more detail in Committee. I should make it clear here and now, however, that the proposed reliefs for holiday lettings will be backdated and will take effect from 6 April 1982. I hope that this will go a long way to allay the anxieties of those involved in this area who are responsible for an important contribution to our tourist industry.
§ Mr. Eldon Griffiths (Bury St. Edmunds)
In the unfortunate absence of my right hon. Friend the Member for Blackpool, South (Sir P. Blaker), may I ask whether the proposal includes caravans?
§ Mr. Rees
That is a detailed point which might be more properly explored in Committee. It is a refined point as to whether a caravan should be regarded as a house available for holiday lettings. I take note, of course, of my hon. Friend's concern. As he knows, there are many types of caravan, some of which are described as temporary homes, but perhaps we may deal with such refinements on a future occasion.
On the less romantic subject of cable television, capital allowances have been a matter of great concern. The industry and the Inland Revenue have recently had discussions about the tax treatment of providing the protective ducting in which the cable is inserted and the cost of cutting and covering the trenches in which the cable will be laid. The Inland Revenue has taken legal advice on the matter and is today informing the industry that such expenditure qualifies for capital allowances as plant and machinery. Taken in conjunction with my right hon. Friend the Chancellor's announcement about the future rates and allowances, that decision by the Inland Revenue will permit the industry to make its future plans in full knowledge of the tax implications.
As a result of the Government's privatisation programme, which will continue to be a main theme of this Parliament, the Government hold minority residual shareholdings in a number of quoted companies and questions have been asked from time to time about the Government's intention as regards those holdings. It has been suggested that they represent a continuing and deliberate means of exerting Government influence on the companies after they have passed into the private sector. I wish to reassure the House that that is not so. Such an aim would be quite contrary to the main purpose of the Government's privatisation programme. To put the matter beyond doubt, I should make it clear that it is the Government's policy to sell such shareholdings as the circumstances of the companies, the prospectus undertakings and market conditions permit. I assure the House that a full announcement will be made at the time when individual sales are made.
The mechanism of a special share may be used in appropriate cases to safeguard the national interest, as has already been done in the case of Britoil, Amersham International and Cable and Wireless. In line with this approach, minority shareholdings in privatised companies have already been transferred from sponsoring Departments to the Treasury, and this policy will continue.
I now come to the broad sweep of the Budget. It has two themes. It re-emphasises our determination to continue the fight against inflation through sound financial policies, and it introduces a radical programme of tax reforms. Of course, our determination not to compromise our inflation objectives limits what can be done in the tax sphere in the short term. Although my right hon. Friend the Chancellor's task as a tax reformer may be more difficult, his achievements will, I hope, be seen as the more remarkable, particularly his achievements in yesterday's Budget.
Moreover, this Budget should not be seen as a one-off exercise. It will, I hope, set the tone for a Parliament, and 421 will certainly give the lie to those who have suggested—with very little evidence to support them—that this Government have no energy or policies.
This is a Budget buttressed by a medium-term financial strategy covering the likely lifetime of this Parliament and a tax and expenditure Green Paper—to which I shall return later—which carries us into the 1990s. It was noticeable that the right hon. Member for Sparkbrook did not care to approach the Green Paper at all.
A week may have been a long time in politics for Lord Wilson of Rievaulx—and so it must have seemed to him and his right hon. Friends as they limped from crisis to crisis. This Government take a rather longer view of problems and invite judgment of their measures over a longer perspective.
In order to maintain the strongest pressure to reduce inflation and interest rates, we reassert our policy of tight control on the level of Government borrowing. I shall leave to others on the Opposition Benches, perhaps even on my own, a minute analysis of Professor Friedman's writings. The downward path of inflation and upward path of real output over the past two or three years should be sufficient evidence for any fair-minded observer of the success of our policies.
The PSBR was reduced from 5.75 per cent. in 1980–81 to 3.5 per cent. of GDP in 1981–82, and that year marked the start of our recovery from the trough of the recession. The 364 economists who criticised Government policy so savagely then—
§ Mr. J. Enoch Powell (Down, South)
On that point, might I ask the Chief Secretary on what grounds the Government are predicting a continuance of inflation of between 4 and 4.5 per cent. for the next three years?
§ Dr. Oonagh McDonald (Thurrock)
Answer the question. The PSBR will fall to 2.25 per cent. of GDP this year, so inflation should fall too.
§ Mr. Rees
The right hon. Gentleman is absolutely right. Perhaps he will restrain the impetuous enthusiasm of his hon. Friend, who in the next few days will have a chance to apprise the House of her own particular qualities. We await her intervention with keen interest.
For most people, these facts should prove more important than the somewhat theological debates in the senior common rooms of Cambridge and elsewhere. We do not propose to throw these achievements away by any compromises on this front. The level now set for the PSBR in 1984–85 of £7.25 billion, or 2.25 per cent. of GDP, should make it clear to the world that we intend to maintain this central plank in our strategy. I hope that it will also do much to satisfy those who have been urging us to take account of the level of asset sales planned for 1984–85 and the pattern of North sea oil revenues.
422 I come next to our income tax proposals, which mark a further important step in the long-term process of improving incentives and encouraging enterprise. We have repeatedly stressed that our priority is to raise the thresholds of income tax. Our long-term objective is nothing less than to take the low-paid out of tax. It will take several years and tremendous determination—determination above all to keep a tight grip on public expenditure. I hope that we shall have the support of the whole House in that objective and in the means of achieving it.
§ Mr. John Maxton (Glasgow, Cathcart)
Is the Chief Secretary aware that his tight control of public expenditure certainly takes large numbers of people out of tax—by making them unemployed?
§ Mr. Rees
That is a totally fallacious analysis of the situation, but no doubt the hon. Gentleman will have a chance to develop his outworn theories should he catch the eye of the Chair. We shall then have a chance to appraise the depths and maturity of his thought.
In fact, this is the third successive Budget in which the main personal allowances have been increased in real terms. This year, it will amount to an increase of 12.5 per cent. It will mean that the married man's allowance is now higher than at any time since the war—a point that the right hon. Member for Sparkbrook did not touch on or explain at all in his notable intervention—and that the single man's allowance is at its highest for a decade. It will mean 850,000 fewer income tax payers next year, of which 100,000 are likely to be widows.
So much for the right hon. Gentleman's unawareness of the compassion shown by my right hon. Friend. The right hon. Member for Sparkbrook might ponder that when he next addresses his constituents. I hope that this is something which both sides of the House can welcome without reservation. It would be nice if there were a warm and generous response from the Opposition to my right hon. Friend's measures. I would have hoped that we could find common ground on the benefits of his measures.
The cost of the increase in allowances in terms of tax forgone next year will be £1,715 million. The cost of raising these allowances accounts for about 80 per cent. of the full-year cash cost of the income tax reductions in the Budget—so much for the inevitable parrot cry from the Opposition of, "A Budget for the rich," and so much for the stale phraseology of the politics of envy—[HON. MEMBERS: "Boring."] I assure the Opposition that the boredom is on this side of the House, which has heard that theme over the past four years ad nauseam, with less justification than at any time in our nation's history.
My right hon. Friend's Budget represents a small switch from taxation of personal income to taxation of spending, but the increase in indirect taxes has been modest. Most excise duties have been increased broadly in line with inflation, and the judgment of the European Court on the relative taxation of wine and beer has been met by a very modest increase on beer. I am sure that the whole House was touched by the Opposition's solicitude on this point yesterday. Ever sensitive to the needs of the SDP, my right hon. Friend has reduced the duty on wine.
Extensions of taxation in this or any other sphere are rarely welcome, but I hope that the House will accept that the extensions of the VAT base are justifiable on grounds of consistency and fair competition and as important 423 component parts of a package that should be judged as a whole. Opposition Members will also be disappointed to learn that they are not regressive.
§ Mr. Campbell-Savours
Before the decision was taken to introduce VAT on home improvements, did the Government measure the effect that would have on employment in the construction industry? How many tens of thousands of men will lose their jobs as a result of that new VAT addition? Has not the construction industry this morning already begun the protests that will inevitably arise over the next few months?
§ Mr. Rees
The hon. Gentleman and the House should judge the Budget package as a whole. Were representatives of the construction industry to make the points that have been made on their behalf by the hon. Gentleman—with or without their complicity, I know not—I should tell them that they should benefit from the abolition of the national insurance surcharge, the halving of stamp duty, the raising of the threshold and the reduction in the rates of corporation tax. I am sure that those three fiscal benefits will more than outweigh any disadvantages that they may reap from the extension of the VAT base. I cannot speak for the hon. Gentleman's contacts in the construction industry. No doubt they will have a chance to air their point of view through a perhaps more articulate spokesman. [Interruption.] The hon. Gentleman is more than capable of taking care of himself, as I have noticed in many agreeable debates in Committee Room 10. I hope we shall see him again in the course of the summer.
Extensions of taxation in this or other fields are rarely welcome, but I hope that the House will accept that they are an important part of the overall package. Opposition Members will be disappointed to learn that they are not regressive. Indeed, VAT overall is and remains—to quote the wise words of Lord Barnett—"mildly progressive".
The extension of VAT to hot take-away food will remove an odd official distortion in the catering world. Of course, food generally will remain zero-rated. The notion that this measure is a sinister attack on the fish and chips of the poor shows how bankrupt the right hon. Gentleman is of ideas on how to attack the Budget. The fact that he can whip himself into a moral fervour on hot take-away food shows that he must be bereft of budgetary ideas.
VAT on construction work poses a different question.
§ Mr. Hattersley
May I offer the Chief Secretary another portion of moral fervour? I was told this morning that sometimes meals on wheel; are distributed not by local authorities but by what are, by usual standards, private organisations—perhaps legally commercial organisations. May we be assured that they will not be subject to VAT?
§ Mr. Rees
I can give the right hon. Gentleman the assurance that all meals on wheels distributed by voluntary organisations will be entirely unaffected, but I am not going to debate with the right hon. Gentleman at this juncture the many variations of meals on wheels that he apparently has in mind. If he would like to clarify his thoughts and put a precise question to me, I shall give him a precise answer. But I suspect that his ideas on this matter are as woolly as most of his ideas on the Budget themes.
I return to VAT on construction work, which the right hon. Gentleman may find a less romantic subject. I know 424 of his deep and continuing concern for the charitable institutions and I assure him that they will be unaffected by the measure. I emphasise that new building will remain zero-rated. That will be of interest to the hon. Member for Workington, who showed such concern—rightly, of course—for the construction industry. But the present system, under which repairs and maintenance are taxed while alterations are not, has proved increasingly difficult to administer. The borderline is confused and determining it takes up a great deal of administrative and professional time. In the construction industry, I hope that all the various relieving measures that I have listed will do more than compensate for any possible reduction of work.
§ Mr. Dafydd Wigley (Caernarfon)
With regard to house adaptations, would the Chief Secretary clarify whether there will be any effect on those elements that would get renovation grant at present, and say whether people who have renovation grants in the pipeline may therefore be caught by having VAT on the charges, whereas it was not in the estimate on which their grants were made?
§ Mr. Rees
There is no correlation between the VAT measures and home improvement grants. But, as the hon. Gentleman may have noticed yesterday—the point was emphasised by my right hon. Friend the Chancellor of the Exchequer—the change in the VAT rules will not take place until June this year.
Turning to the broader theme of tax reform, hope that——
§ Mr. Hattersley
May I give the right hon. and learned Gentleman another opportunity to demonstrate, by being offensive, that he does not know the answer to a question? The policy of his Government is to encourage local authorities to privatise as much work as possible—including, I think, building work. Will local authorities have to pay the VAT on construction work done on their behalf by construction companies?
§ Mr. Rees
I am not going to conduct a sort of vaudeville act with the right hon. Gentleman. We shall have many agreeable opportunities in Committee for that kind of exchange. For the moment, the right hon. Gentleman should do me the courtesy of permitting me to carry on with my speech. I did not intervene in the course of his rather ill-judged remarks. I hope that he will show a little patience over the remainder of my speech.
I hope that the House will recognise that in the field of tax reform this is a great radical Budget. It is not given to every Chancellor of the Exchequer to abolish two taxes.
§ Mr. Rees
I have given way once to the hon. Gentleman. I am flattered by his interest in the details of my speech, but perhaps he will contain himself for a little longer. I am starting on a new theme. If he has anything to say that is relevant to it, I shall give way to him shortly, but I do not want to lose the thread of my discourse as a result of his blandishments.
I should like to contrast my right hon. Friend's position with that of the right hon. Member for Leeds, East (Mr. Healey), who introduced three new taxes—national 425 insurance surcharge, development land tax and capital transfer tax. Therein lies one of the great divides between Labour and Conservative Chancellors.
It still remains a puzzle to me that a Labour Government—supported by a party which affects to believe that jobs are the paramount issue of our time—should, during a period when unemployment virtually doubled, have introduced NIS, a tax on jobs. So much for the depth of their concern in this respect. But I am more amazed that, having surveyed their handiwork, the Labour Government should actually have increased the rate during their time in office. I also record, in case the House may have forgotten—and in case the hon. Member for Colne Valley (Mr. Wainwright) should feel obliged to gloss over it—that the Liberal party complained at the time that the tax was not introduced at a higher rate.
The national insurance surcharge has now been consigned to the dustbin of fiscal history, but I hope that the record of those involved will be long remembered during our debates, and that we shall be able to test their protestations of concern for the unemployed by their record in office.
The abolition of the investment income surcharge will remove a penalty on thrift and enterprise and will simplify the tax system. It is important that the facts should be stated clearly. This measure will relieve 280,000 taxpayers of a tax charge. Half of them are over 65, and 40 per cent. would, apart from this change, be liable only at the basic rate. It will save 230 Inland Revenue staff. The cost in 1984–85 will be £25 million and in a full year £360 million. Of course, those facts have not prevented and will not prevent the Opposition from using the shop-soiled cliches of the class war.
I am surprised that the Opposition have not yet produced that much-loved figure from their fiscal mythology—the bachelor duke with an investment income of £250,000 a year. I believe that the surcharge will pass unlamented by all but the prejudiced few. If we want more investment—Labour Members affect to believe that we do—we cannot discriminate in this way against personal savings and personal investment.
The disappearance of life assurance premium relief will perhaps be more lamented, since it was introduced in 1799 and has been with us continuously since 1853; in fact, it has become part of the fiscal scene. The younger Pitt, with characteristic Tory concern, introduced it to meet individual hardship. Since then, it has been extended to a much wider range of situations. More importantly, personal saving and direct investment, as opposed to institutional saving and institutional investment, have dwindled. That cannot be right.
I emphasise that the measure that my right hon. Friend proposes to introduce will not affect existing policies. It will not be retrospective in effect, nor will it affect retirement benefit schemes. I know that there has been concern about this. Those who have personally to provide for their retirement will still be eligible, on the same basis as before, for tax relief.
It will, I believe, remain possible for taxpayers to protect their families on death at low cost without life assurance premium relief. In 1982, two thirds of life 426 companies' new premium income came from non-qualifying policies. To reassure the House on this score, I should also mention that in Australia, when a similar relief was abolished, business picked up very quickly.
The essential point is that our tax system should make it possible for people to save—and hold shares directly—without costly and distorting reliefs. Consistent with this theme, we propose the halving of stamp duty and the increase in the thresholds for house purchase. I hope that this reduction will be widely welcomed by home buyers and investors. I hope also that it will help London to compete effectively as an international financial centre. As I have pointed out to the House, it should assist the construction industry in this way.
§ Mr. Robert Maclennan (Caithness and Sutherland)
On the point about London as an international financial centre, how does the right hon. and learned Gentleman justify removing the tax relief for residents of other countries, particularly in the banking sector? This is a feature of the debate which he has not yet covered.
§ Mr. Rees
The hon. Gentleman may recall, as I and the Chancellor do, the, occasion on which that particular relief was introduced. It was, of course, when tax rates in this country were pushed up to the penal levels of 83 per cent. and 98 per cent. Against that background, it was thought right by the previous Labour Administration to make it a little easier for those from outside our shores who wish to do business in London or elsewhere. That measure of relief received support from the Conservative party, and certainly from me, at that time.
Tax rates now are of a quite different order. Indeed, for many of the people whom the hon. Gentleman has in mind, particularly those from the United States, the United Kingdom has become a tax haven. I do not particularly mind that, but in the quite altered situation in which we now find ourselves I do not see that it is necessary to perpetuate this rather narrow and complex tax relief, which it takes quite a lot of Inland Revenue staff to administer. I am sure that on reflection the hon. Gentleman will see that it is fair to remove it now, and I see no reason why there should be an exodus of foreign talent from the City of London or elsewhere.
I come now to the more general field of company taxation. I hope that it will be common ground that a cool look at this is long overdue. We had first the classical and then the imputation system of corporation tax. We have had a complex form of stock relief, first introduced by the right hon. Member for Leeds, East and subsequently refined by my right hon. and learned Friend the present Foreign Secretary. We have lived through a period of declining corporate profits, which have all too often existed on paper only. In a period of recession, local authority rates have often proved a heavier impost on companies than corporation tax. Now, company profits are improving, company liquidity is good and inflation has been brought down sharply, so my right hon. Friend has been moved to take some rather radical steps to bring the system of corporate taxation more in line with the needs of this country in the late 20th century.
It used to be said that we had the most generous system of capital allowances in Europe, but closer investigation suggests that some of the investment generated has been neither justified nor profitable. Indeed, OECD figures suggest that net capital stock per worker in 1980 was 427 higher in the United Kingdom manufacturing sector than it was in Germany, France and the United States of America, but that capital stock was used much less effectively. The truth is that some investment has been dictated more by tax than by commercial considerations. The changes proposed by my right hon. Friend—the reduction in first-year allowances for machinery and plant and initial allowances for industrial buildings—will go some way to correcting that distortion.
More important, the savings from the phasing out of these allowances coupled with the savings from the abolition of stock relief open the way to the really substantial and striking cuts which my right hon. Friend proposes in the rate of corporation tax: from 52 per cent. on profits earned in 1982–83 to 35 per cent. in 1986–87 for larger companies, and an immediate cut from 38 to 30 per cent. for 1983–84 and future years for small companies. To show our confidence in what we propose, the whole programme of reductions will be embodied in this year's Finance Bill.
The House might flinch if I were to describe the United Kingdom as a corporate tax haven. I hope, however, that these measures will serve to re-emphasise the charms of the United Kingdom as a base for corporate activity.
To those who say without much thought—I am sorry that these include the right hon. Member for Sparkbrook, for whom I have a warm regard—that this is not a Budget for jobs, I would reply—look at the evidence. Look particularly at the abolition of NIS. Look at the reduced rate of corporation tax. This will benefit not just that age-old target of the Labour party, the City, but the whole of the business sector. It should lead to more activity, more profits, more investment and more jobs. It used to be said that the United Kingdom was a good place in which to make a tax loss. From now on I hope that it will be a better place to earn profts. In my party's language, "profits" is not a dirty word, because, I repeat, profits mean investment and profits mean jobs.
§ Mr. Rees
I am delighted to hear that. This indeed indicates a sea change in the thinking of the Labour party. Should the credit be given to the right hon. Member for Sparkbrook? That did not shine through his speech. I give him the opportunity to affirm that no longer are "corporate profits" dirty words, that he is here, as we are, to encourage corporate profits. Would the right hon. Gentleman care to respond to my invitation?
§ Mr. Hattersley
I am anxious to see a high level of profits properly used—properly used for investment in industry.
§ Mr. Rees
If the right hon. Gentleman would remove his threats of exchange control, a wealth tax and the rest of the battery of measures that he proposes to introduce, he might find the corporate sector responding to his blandishments. I shall come to that in due course.
I turn now to the Green Paper on the next 10 years, published by my right hon. Friend on Budget day. A Budget must be judged not only against the circumstances in which it is published but also against the long-term pattern of spending and resources. It is therefore singularly appropriate that my right hon. Friend should have published this look into the 1990s at the same time as this great reforming Budget.
428 The Green Paper addresses itself to one of the most important economic issues—some, including me, would say the most important economic issue—of the day: how much public spending can our country afford over the next 10 years? The growth of public spending has over the past two decades been the engine which has driven upwards the burden of taxation.
As a discussion document, the paper does not attempt to project the path of individual programme totals or to give detailed forecasts of how the economy might develop. I make no apologies. Detailed forecasts of economic variables or of individual programme totals so far ahead would be wildly uncertain, depending as they would on a host of factors, including policy decisions not yet taken. To have gone into such detail would have distracted public debate from the main issue which has been so often ignored in the past and has been ignored by the right hon. Member for Sparkbrook in the present debate. The debate should focus on the totals—the totals of national income, taxation and public expenditure. This is the central strategic question. So I hope that the Green Paper will sharpen the debate, and will enable us to judge in this and subsequent debates the realism of the policies which each party proposes.
I come finally, with some relish, to the speech of the right hon. Member for Sparkbrook. He has, as the House may or may not be aware, recently completed a series of speeches about the Labour party's—or perhaps just his personal—economic policies. I must say that I have awaited each instalment with the sort of anticipation one reserves for a repeat showing of "All Our Yesterdays".
In one episode the right hon. Gentleman's patient constituents—one can imagine the scene—sit patiently but expectantly in the Acocks Green school, anxious to hear the right hon. Gentleman's own version of the Budget. It appeared to be a diluted dose—the real dose would have been lethal both for him and for the Labour party's chances—of the mixture served up by the Opposition for many years, over two long periods of Government which few of us will forget. It would be a little unfair to the Bourbons to compare the right hon. Gentleman and his right hon. Friends with that gifted dynasty. That is a rather overworked cliché in our debates and I hope that we can set it to rest once and for all, unless the right hon. Gentleman, with his gripping knowledge of Lord Nelson and his exploits, wishes to assimilate himself to King Bomba of Naples, in which case I am very willing to explore the cliché further.
The mixture is much as before, spiced with a little more envy, suffused with a good deal more prejudice and clouded with a great deal more ignorance of the real world. There will be increased public expenditure, but there is evasiveness about how much more. Exchange control, of course; but what would that do to the exchange rate? The wealth tax, of course; is that what the right hon. Member for Sparkbrook wants? What would that do to investment? Perhaps the right hon. Gentleman will tell us in his next speech in the House about his party's plans for fiscal reform. Is it still wedded to the introduction of a wealth tax?
§ Mr. Hattersley
Of course we are in favour of a wealth tax.
The right hon. and learned Gentleman got the wrong Bourbon. King Bomba is the liberal Pope joke, not the "forget nothing" joke.
§ Mr. Rees
I am well aware which dynasty hon. Members usually refer to, but the right hon. Gentleman was moving his stance and I thought that he had gone to Naples rather than Paris.
At least we have one ringing affirmation of fiscal policy, which I hope the business world—and, indeed, the whole world—will note. The Labour party favours a wealth tax, just as it favours exchange control and selective import controls. What would that do for exports?
We have not been told the cost of Labour's policies. One of the benefits of the long-term debate on public expenditure may be that the country will demand more precision and realism from the Labour party. The remedies of the right hon. Member for Sparkbrook would involve more inflation or higher interest rates or higher taxation or—and this is most likely—a mixture of all three, which would further damage the economy and job prospects.
It is against that background that we should judge the right hon. Gentleman's criticisms of the Budget. He made heavy play of child benefit and social security benefits. I congratulate him and his researchers on their assiduous trawl through the public expenditure White Paper. However, the right hon. Gentleman is wrong. Assumptions were built into that White Paper and, incidentally, the assumption on child benefit was 5.5 per cent. and not 5 per cent. No decisions have been taken, but the decisions on the social security upratings will probably be announced in June and will, of course, be made by reference to the May to May period.
The right hon. Gentleman made predictable comments about the abolition of investment income surcharge—handout for the rich, politics of envy and so on. I do not think that I need weary the House with the facts of that impost.
§ Mr. Rees
The right hon. Member for Sparkbrook enlisted the CBI in his support. I am sure that members of the CBI will be surprised to know that they are described as outdated Socialist heretics, but the right hon. Gentleman's choice of metaphor and language is his own.
I remind the House that the CBI has been forecasting a 7 per cent. increase in investment in the calendar year 1984. That shows the confidence of the CBI in this country's economic prospects and the self-confidence of business under a Conservative regime.
The right hon. Gentleman made a passing reference to the public sector borrowing requirement. I am still waiting for him to tell us what he feels would be a proper figure for the PSBR in the Budget.
§ Mr. Rees
I certainly am. If it were sustained, it would be proof positive of confidence. The hon. Gentleman does not seem to appreciate that we have been living through one of the sharpest recessions that the developed world has seen. Labour Members are never prepared to face unpalatable facts if they do not suit their argument.
§ Mr. Rees
No. The hon. Gentleman has made a fair point, but the published investment intentions of members of the CBI are a pretty good token of confidence in the upturn in the economy. If the hon. Gentleman reads that differently, the House will wait with bated breath for his speech.
I know that the right hon. Member for Sparkbrook is a kindly person at heart, so I pass over his unworthy personal slurs on my right hon. Friends the Chancellor of the Exchequer and the Prime Minister. The most charitable explanation of his speech is that we should not be distracted by his shallow fiscal and economic speculation and that we should regard him and his right hon. Friend the Member for Islwyn as a light comic turn which is not to be taken too seriously.
The hollowness of the right hon. Gentleman's criticisms demonstrates more effectively than I can how substantial, well-balanced and imaginative is my right hon. Friend's Budget. It builds on the foundations so courageously and painstakingly laid by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe). It will depend for its success on a firm and continuing control of public expenditure. It makes a decisive break with the dreary rigmarole of new and ever more complex taxes offset by new and ever more complex reliefs. It lets a draught of fresh air into the stuffier recesses of the fiscal system. It will be good for the low-paid; it will be good for home buyers; it will be good for savers; it will be good for business; it will be good for investment; it will be good for jobs. I have no hesitation in commending it to the House.
§ Mr. Roy Jenkins (Glasgow, Hillhead)
I enjoyed the Chief Secretary's speech, but, in the interests of brevity—we have been set good examples by the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) today and the Chancellor of the Exchequer yesterday—I had better leave aside the right hon. and learned Gentleman's somewhat random incantations. No doubt he had a theme, but, probably because I was so diverted by the brilliance of his aphorisms, I failed to detect it.
I am a little put off by the fact that the Chancellor of the Exchequer is looking so pleased with himself, but I start by paying him a genuine tribute. His speech was not only short—I speak as the perpetrator of the two longest post-war Budget speeches—but it was taut and coherent. The right hon. Gentleman told us where he was going to take us, we could tell at every stage where we were on the map and when we got there he told us where we had been. In addition, the right hon. Gentleman provided from time to time a structure of argument for the 431 choices that he was making, which is unusual for a Chancellor. One might not always have agreed with what he was saying, but one could at least follow it.
The right hon. Gentleman got into a bit of a snarl-up with the monetary aggregates and some jagged bits of jargon were scattered around the scene, but it was a great improvement on what happened between 1979 and 1981 when the Government looked at only one dial on one panel of instruments—sterling M3—and tried to fly the whole aircraft on that alone. All in all, the Chancellor appeared to have rewritten his speech himself—indeed, he may even have written it from scratch—and that showed through and gave it an unusual lucidity. I congratulate him most warmly upon an exceptional presentation.
Some of the measures were also good in substance but—and it is a very big but—the Budget, although coherent, is fundamentally complacent. It is not so in that imperviously blinkered and blundering way that we came to associate with the previous Chancellor's presentation of Budgets and other financial statements. It was undoubtedly much more politically adroit. However, it is complacent in the sense that it is based essentially on the assumption that the past four and three quarter years of policy-making have been a success, that we are now in a relatively strong and happy position as an economy, and that the general direction can be left on automatic pilot for a time while the Chancellor occupies himself in shifting around some of the fitments and arrangements on the ship. It is essentially "Steady as we go", and some of us remember the last Chancellor who used that phrase. He did, of course, become Prime Minister in due course, but only after a number of considerable vicissitudes to himself and, more important, to the economy.
§ Mr. Jenkins
The Chancellor's view of achieved success and a relatively secure future is one that I fundamentally contest. Our inflation rate has been reduced but so it has everywhere in the industrial world. It still remains higher than that of nearly all our principal competitors. I detected, rather exceptionally, a certain lack of coherence in the Chancellor's view of the inflation rate in future. He opened with some ringing declarations of moving on at almost all costs towards stable prices, but it seemed on closer examination of the documents that were published that he had projected something close to the present position for at any rate the foreseeable future.
Our rate of recovery is currently faster than that of most comparable countries, but so, in all conscience, it should be. Our recession has been deeper than that of others. It started earlier and it has been longer lasting. If there were not a substantial element of rebound, where would we be? Although the rate of recovery at present is faster than most, it is much slower than that of the United States. It will leave us with a greater reduction in our ability to pay our way with non-oil exports than most other comparable countries. We are only just back to 1979 levels of total output and we are still—this was the position at the end of 1983—about 4.5 per cent. down on non-oil output. We paid a heavy permanent price for allowing, and almost encouraging, the exchange rate to go so wildly out of line, with permanent damaging and destructive effects upon our manufacturing capacity in 1980 and 1981.
Nor is our competitive position being fully maintained. There are some disturbing signs—perhaps the clouds are 432 only just beginning to form—that since mid-1983 unit costs are again rising faster in the United Kingdom than in the economies of our principal competitors.
In a sense, the recent recovery is real. It would be amazing if it were not so in view of world history, but it is undoubtedly fragile. I am not sure whether it is so fragile as to be "founded on fish and chips", in the immortal phrase of the right hon. Member for Sparkbrook whose phrase, to judge from his present absence, seems more immortal than his presence.
The projections suggest that the recovery could easily turn down again in the fairly near future. I do not think that the Budget will affect that prospect greatly one way or another. If anything, the Budget may be mildly restrictive, though the effect of privatisation, and the import VAT change on the PSBR, as I think the Chancellor would probably agree, makes it rather difficult to judge on the crude figures. However, it is certain that the Budget contained neither help nor hope for the great majority of the unemployed. They are now taken as given, and the right hon. Gentleman treated them as a problem hardly worth mentioning.
The Chancellor may argue that a further reduction in inflation, if that occurs—this is, as I said, the one issue on which he was not very coherent within his own framework—will generate a spontaneous recovery. I do not believe that there is the slightest evidence that a further reduction in inflation, while in itself desirable provided that an excessive price is not paid for it, would generate a spontaneous growth in employment. It is quite different to believe, as I do, that excessive rates of inflation are the enemy of high employment and to believe that reductions, certainly below a certain level, are in themselves a guarantee, or anything approaching a guarantee, of falling unemployment.
Nor, I believe, will the taxation changes for industry achieve this. I am rather in favour of a number of the changes. I recognise the argument, certainly in the way in which new jobs have developed in the United States, for example, for encouraging a position in which we can have direct investment by individuals in the smaller growth companies rather than having the juggernauts of the institutional funds doing it all. That makes sense in terms of the modern world, but that is quite different from believing that that will have any major impact upon unemployment.
I also believe that lower corporation tax—even if accompanied, as it clearly is, by lower allowances—while it is quite desirable as a framework measure, does not go to the heart of the company sector problem. I feel more strongly than the right hon. Member for Sparkbrook. I think that profit levels have been too low, and are too low in the country at present, but I think that British industry has suffered far more from low profits than from high corporation tax. This has not been a country of high corporate taxation, but much more a country of low profits, and the levels of company taxation are not of great significance if there are not profits on which to pay, or not pay, the tax. I think that a stimulus to the economy from the Chancellor would have done more good than these changes.
There is a much greater danger that we are fairly near the peak of a little boom, from which we may begin to shade down in the absence of any stimulus to the economy in the Budget, and that, if we do so, we shall start the next recession from a level of 3 million-plus unemployed. To 433 start a recession from a level of 3 million-plus unemployed is a pretty frightening prospect. That means, emerging from the many changes that have occurred in the past five years, that there will be not some great sea change, or improvement, in competitiveness, but a step change in the level of unemployment, so that we start from 3.25 million instead of from 1.25 million.
§ Mr. Norman Atkinson
Before the right hon. Gentleman perpetuates more of the myths enunciated by the Chancellor yesterday about unemployment and profits, can I point out that unemployment is an integral part of the Government's policy—they have spelled that out—based on their dependence upon money supply, which is related to unemployment? Secondly, if one looks at the biggest 50 major manufacturing companies, whose profits last year went up from £5.25 billion to £5.5 billion, it will be seen that every one of those companies reduced its work force, despite the rise in profits.
§ Mr. Jenkins
That, if I may say so, is the sort of intervention that gives a bad name to good interventions. It was very much an attempt by the hon. Gentleman to make part of his speech in the middle of mine, and not to make a comment on my speech. I agree with him about some part of the monetary situation, although I do not agree with him that profits are not of importance.
I deal next with what I think is an absolutely central question, the level of fixed public investment. This is disturbingly, almost frighteningly, low, measured by historical statistical comparisons. I have seen some reliable figures suggesting that, in relation to the national income, it is lower today—unless one confuses it by bringing in some defence measures which are irrelevant—than at any time since the outbreak of the 1914 war. It is low as measured by the evidence of one's eyes in every direction. I believe that at least £1 billion of stimulus of direct public sector investment would have been overwhelmingly justified.
I do not believe that a choice would have been necessary in present circumstances. As the Chancellor knows, I can speak as someone who has applied stringent finance, when I believed it necessary. I do not believe that a choice would have been necessary, but, had it been necessary, I would have chosen this, rather than the extra raising of the tax threshold beyond indexation. That in itself is desirable, and the Chancellor referred to it as being "the middle way". I think that it was in this connection that he used that not wholly original phrase. While desirable, it is, however, much less cost-effective in dealing with poverty than are child benefits, and it is much less cost-effective in promoting jobs than a given amount of fixed public sector capital investment, which not only operates on the public sector, but feeds quickly and desirably, with a low import content, into the private sector, and, notably, into the construction industry. To have a substantial jerk upwards to public sector investment is particularly necessary at present, in view of the oil prospect, which is now becoming, rightly so, a dominant factor in our consideration of the outlook for the country.
Although it is difficult to believe it, considering the economic history of the past five years, we in this country should have been uniquely fortunate over the period of the recession. We are the only major industrial country, with the possible marginal exception of Canada, which has a 434 significant oil surplus, but ours is proportionately bigger. Every other major industrial country has a massive oil and indeed total energy deficit. This surplus, as the Chancellor knows, on any likely projection will reach its peak—it is high already—over the next two to three years. Even in 1983, it produced a £7 billion contribution to a balance of payments, which was in surplus by £2 billion only. In other words, without oil, there was a 1983 deficit of £5 billion on our foreign accounts. It also produced an £8 billion contribution to Government revenue. In 1986, it begins to run down, slowly at first, but quickly gathers momentum. The prospect is then of a decline in oil export earnings by £1 billion to il.5 billion a year, returning not to zero output, but to zero contribution to the balance of payments by some time in the early mid-1990s. In these circumstances, it will require prodigious effort to pay our way at all in the world.
However, long before that, once we are over the spate—in other words, in not much more than 18 months' time—there is likely to be a dramatic change in market sentiment about sterling, for such changes in sentiment tend to anticipate, and to exaggerate, the reality. We would in my view be wise to enlist the help of full membership of the European monetary system to keep us a bit more steadily up, just as we would have been wise to have used it to keep us a bit more steadily down three years ago. We could have done with its help both ways round. That transition to a non-oil surplus economy is a position that we have to face.
§ Mr. Nicholas Budgen (Wolverhampton, South-West)
Would the right hon. Gentleman be good enough to explain how the EMS could withstand major changes in sentiment? I think that the House would be well able to understand how it might be able to make corrections at the margin but if there were a major change, how could the EMS do anything about it?
§ Mr. Jenkins
Neither the EMS nor any other system can, or in a sense should, stand against what may be called the swell of the ocean. But it can play quite a substantial role against the tops of the waves, or against exaggerated reactions, with the aid of the reserves of the combined central banks, which would be 10 times our reserves. I am sure that, had we been in that system, we would have had to make upward changes in the central rate and would have to make downward changes in future, but that the changes would have been less extreme. Consequently, the damage to our competitive position and the destruction of our manufacturing industry would have been significantly less than it was three years ago. Sudden changes and their effect might be less in future.
Let no one underestimate how devastating such changes can be. A sharply declining exchange rate will generate great inflationary pressures. In counteracting that, it will be extremely difficult to avoid highly restrictive measures at home. To enter that phase from the starting point of the highest unemployment of any major industrial country, with much of our infrastructure badly run down, even falling to bits, and with a grossly shrunken industrial base and export capacity, is the most lowering economic prospect to have confronted us since 1945.
The Government's primary economic duty is to fortify us in every possible way against such wholly foreseeable dangers. However, the Budget does not do that. It is ingenious and imaginative, but it has lost its way a bit in 435 the book-keeping. I was amazed to hear the Chancellor of the Exchequer talking last night in his television broadcast about the danger of bequeathing our children huge debts to pay off. That is not the danger that confronts this country. We already have the lowest PSBR in Europe and the lowest, I believe, of all the industrial countries. What is, perhaps, less well known is that in relation to national income, our accumulated debt—which I should have thought had the main rational impact on interest rates, because interest rates should be such as to encourage the non-bank public to hold it on non-inflationary terms—is now, in real terms, well below two thirds of our accumulated debt at the end of the long and relatively noninflationary period of Conservative Government from 1951 to 1964.
Of course, to a substantial extent that is a result of subsequent inflation. Nevertheless, it is a significant fact that an accumulated debt or a massive PSBR is not the danger facing this country now. The primary danger is that, from the point of view of strengthening our assets, our infrastructure, the force and range of our industry and our levels of technical skill and training we shall have worse than wasted the period of oil spate.
§ Mr. Jenkins
I shall not give way, as I am concluding my speech. The benefits will have been spent on unemployment pay, or on chasing the false deities of MO, M1, M2 and M3, and the attendant false god of the PSBR in a foolish and wasted sacrifice. That is the real charge against the Government's economic strategy.
§ Mr. Jenkins
I shall not give way, as I am reaching the conclusion of my speech.
It is this Government who will bear the full responsibility for having wasted the long window of opportunity presented by oil. They will have presided over its build-up, its spate and the beginning of its decline. The responsibilities that stem from that transcend all the Chancellor of the Exchequer's genuine fiscal ingenuity.
§ Mr. Esmond Bulmer (Wyre Forest)
Last week, I was talking to a business man in my constituency who said that he hoped that the Chancellor of the Exchequer would have the courage to be boring in his Budget. I thought of the experience of industry in the past 10 years—we have seen interest rates fluctuate between 6 and 17 per cent., inflation fluctuate between 3.7 and 27 per cent., the exchange rate for the dollar, the yen and the deutschmark vary by the best part of 100 per cent., dramatic increases in energy and labour costs and interference from Whitehall and Brussels in every level of business—and I understood what he meant.
However, I join the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) in paying tribute to my right hon. Friend the Chancellor of the Exchequer for having been bold, imaginative and creative. That does not mean that many people in industry will not now be burning the midnight oil working out how particular changes affect them, and fundamentally recasting marketing and business 436 strategies. There will, of course, be people who will be discomfited. However, the Chancellor's commitment to understanding the problems of industry and to setting out a forward programme for a Parliament was particularly welcome. His understanding that jobs come from creating confidence in industry was also welcome, and he has done several things to promote such confidence.
However, we should not fool ourselves that what can be done by stimulating industry can make anything more than a small immediate contribution towards providing jobs for all those who are out of work. Nevertheless, North sea oil gives us the opportunity to cushion the changes that are necessary. I hope that my right hon. Friend the Secretary of State for Employment will put considerable resources into analysing those changes and discovering from where jobs will come in future. I come from the west midlands. It is perfectly clear that in 10 years' time we shall be looking not for toolmakers, but for people who can control the computers to make them. Some skill shortages are already developing.
I come to the measures that my right hon. Friend the Chancellor of the Exchequer has taken to promote industrial confidence and jobs, although I bear in mind that they can only make a contribution. My right hon. Friend properly began by stressing his commitment to controlling inflation. We all recognise what was done by his predecessor, and how unpopular a job it is to grind clown the inflationary expectations of people at work. When inflation was above 10 per cent., it was impossible to plan a business more than a couple of years ahead. The Chancellor is committed to creating a climate in which sensible business planning is possible.
The Chancellor's commitment to the control of public expenditure carries with it the probability of lower interest rates. We all welcome the fall in interest rates today. Perhaps in this Parliament we shall see industry being able to raise long-term money at a fixed single figure rate. Many companies would certainly come to the market if that happened.
If the Chancellor achieves the target that he has set himself, I have little doubt that the value of the pound will rise against some other currencies. That will give us an opportunity to acquire assets and productive capacity in parts of the world where it will be difficult for us to compete otherwise. Labour costs and the attitude to work in the Pacific make industries there formidable competitors. We shall also attract inward investment. Nissan and Sharp are examples. We have much to learn from good overseas management.
I also welcome the Chancellor's commitment to improving industrial competitiveness, to which the abolition of the payroll tax will make a major contribution. The continued attempt to create greater efficiency in the public services is also crucial. Much has been achieved by the privatisation programme, but we still have a long way to go.
Within the DHSS it is not yet possible for the Secretary of State to account for hours contracted to be worked or for hours worked. The Griffiths report is just the beginning. If one compares the costs of services in hospitals in the west midlands one has a yardstick to measure how much still has to be clawed back by more efficient management for the benefit of everyone.
Rates remain the largest burden for many small businesses. The Government's determination to tackle overspending councils is well established. The friendship 437 visit to Cuba, the mayor's jacuzzi and the gay bereavement centre may be caricatures from "Yes, Minister", but they are not always so far from the truth. Recent work by Price Waterhouse in the west midlands suggests that savings of 10 per cent. should be obtainable over a period. I hope that my right hon. Friend will discuss with the Secretary of State for the Environment the speed with which returns can be drawn up to allow business people to compare the performance of local authorities in a meaningful way. The way in which local government is organised makes it almost impossible for competent managers to give time to local government. Through Government initiatives we should be able to tighten the scrutiny of local government and ensure that money is more effectively spent.
About 10 per cent. of local government expenditure represents £2.8 billion. That is a lot of money. I agree with those who would like more spent on capital account. A motorway route from the west midlands to the channel ports would be extremely welcome. Perhaps the most important work on infrastructure is the repair and renewal of our sewers.
§ Mr. Nicholas Winterton (Macclesfield)
My hon. Friend makes an important point. Would he, like the right hon. Member for Glasgow, Hillhead (Mr. Jenkins), put a figure on the amount that he would like to be spent on selective infrastructure projects? The figure of £1 billion was mentioned by the right hon. Gentleman. Does my hon. Friend concede that if such an amount were spent it would not increase inflation and would cause only a modest increase in the PSBR, which would have no effect on inflation or interest rates?
§ Mr. Bulmer
I would not wish to put a figure on it. We can all see how substantial improvements can be made to put people back to work, but we must not prejudice the general thrust of the Chancellor's policies, which are directed towards creating confidence in industry through sound money. My right hon. Friend understands clearly the effects of energy pricing on industry. I welcome the fact that he made no increases in hydrocarbons.
I have talked about the conduct of the mineworkers to constituents who have lost their jobs in the carpet and motor industries. The strong feeling among many in the private sector is that redundancy payments in the public sector are more generous than the offers that they receive. They believe that if it is possible to redeploy people from the old mines, the miners have an obligation to the community at large to ensure that energy costs are as low as possible. If they are kept artificially high, other people lose their jobs.
I give my right hon. Friend the Chancellor high marks for the way that he has concentrated on creating a framework for increased competitiveness. I also award him high marks for his determination to rehabilitate profit. He has 100 years of prejudice to reverse. It is a question of the effective use of resources. Let us use resources effectively and argue afterwards how the cake is to be divided.
It must be right to encourage people to put their savings into industry and not to penalise them for not putting them into Government debt. It must be right to encourage profit sharing. I was glad when the provisions in my private Member's Bill to require companies to spell out what they are doing to encourage profit sharing were put into the 438 Employment Act. One way to hold down industry's costs is to ensure that profits are shared and that break-even points are kept low. That is to be welcomed, as are the steps to allow some extra reward for success to those who are most important in the creation of a successful company. That happens in the United States.
I welcome the Budget. I believe that it will foster industrial confidence and so create jobs.
§ Mr. Bruce Millan (Glasgow, Govan)
The simple test that I apply to the Budget is whether it will reduce our appalling unemployment. In parts of Glasgow male unemployment is more than 40 per cent. That also applies to parts of other major cities. I found terrifying the complacency not only of the Chancellor in making his Budget statement yesterday, but of the Chief Secretary today. They exhibited no recognition of the appalling problems that such unemployment causes at personal, economic and social levels. I approach the measures announced yesterday in that context.
The Chancellor made much of the changes in personal tax allowances. He said that the increases in allowances were considerably in excess of what would have been possible if indexation only had been applied. The effect of going beyond indexation is trivial in terms of money in the pocket. For a single person, the difference is only 69p a week—I use the Chancellor's own figures—and for a married couple the difference is only £1.21 a week. Those are trivial figures in the context of the Budget changes with regard to improving incentives.
However desirable such tax changes may be—and no one argues against the general desirability—they are extremely expensive. Most of the benefit goes not to those on the lowest incomes, but is spread across the whole of the income range. It is an expensive way to grant concessions, and it will have an absolutely minimal effect on creating jobs. If the Chancellor has that additional money to give away, it should be used directly to increase employment. It is a trivial amount for the individual taxpayer, and, with the changes in VAT, the figure becomes even more trivial.
Only the rich will benefit—especially those who will be excused the investment income surcharge. The surcharge on investment income starts at more than £7,100 a year, which suggests a capital of £70,000 to £100,000. It is disgraceful to suggest that people in that category should be a special target for concessions when so many people are suffering from unemployment and poor social security benefits. It adds insult to injury when the Chancellor produces, as an additional justification for that concession, the fact that much of it goes to those over the age of 65. Whatever the merits, it will not improve incentives in the working sector. If we are looking for categories within the over-65 range to whom to grant concessions, surely those with capital of £70,000 to £100,000 should be the last category.
I wish mainly to concentrate my remarks on company and industrial taxation. Although I welcome the abolition of the national insurance surcharge, its effect on company profits or as a stimulus to the economy is grossly exaggerated. It would be better to use the money in a more direct way to create jobs. Although we accept that it is useful to abolish the surcharge, the reductions during the past couple of years have had a negligible effect on stimulating the economy and improving employment.
439 The Chancellor's remarks about corporation tax were not absolutely clear. I understood him to say that the various corporation tax changes would, in the long term, be neutral in their effect. The stimulus to industry, for which he claimed credit yesterday, will arise basically out of the abolition of the national insurance surcharge, and the changes in corporation tax will ultimately have a neutral effect. In other words, the reductions in the tax rate will be paid for by the abolition of capital allowances.
I see some force in the Chancellor's argument. I have always thought it rather foolish to have high nominal tax rates that few people actually pay, because they are not making profits or because they have the benefit of the small businesses relief or large capital allowances. In principle, it is undesirable to have high nominal rates that give the impression of punitive taxation while few people actually pay them.
We must remind ourselves of how we come to be in this position. There was a general feeling that capital investment, especially in manufacturing industry, had been historically inadequate in comparison with some of our more successful industrial competitors, and successive Governments believed that a stimulus to capital investment was required. Yesterday, the Chancellor adopted the argument that a good deal of that investment had been uneconomic, but neither he nor the Chief Secretary produced evidence for that assertion. The Chief Secretary quoted certain OECD figures from 1980 on the under-utilisation of capital. That was more a reflection on our comparatively poor economic and manufacturing performance in 1980 than an argument that the level of capital investment had been too high.
Let us make no mistake about the matter. The Government are saying that the level of capital investment has been too high in the private sector and that they are taking steps to reduce it. The Government are calling for less investment. The position will be obscure during the next couple of years, because the Government are expecting a surge of capital investment to take account of the still high capital allowances and reduced corporation tax rates. On the Chancellor's argument, I presume that the great surge of capital investment will be precisely the sort of uneconomic investment about which he has been complaining. Otherwise, why should it take place?
It is important to distinguish between manufacturing and service industries. There is no doubt that the Government's announcement on capital allowances will be disadvantageous to manufacturing industry compared with service industry. I do not know whether that can be changed during the passage of the Finance Bill. I am glad that the immediate comments of manufacturing industry on the Budget have been cautious. As it begins to appreciate the implications of yesterday's announcements, that caution will turn into apprehension about the effect in the longer term.
It is fashionable in some parts of the Conservative party—and it was reflected in the Chancellor's speech yesterday—to talk down the importance of manufacturing in the economy in favour of the service industries. No one is diminishing the importance of service industries, but manufacturing is an extremely important part of our economy. It has suffered during the past five years when it has been in real decline. The implications for the balance of payments in the long term, especially when North sea oil runs out, are extremely worrying. Even last year imports of manufactures rose by 12 per cent. 440 Manufacturing exports did not increase at all between 1981 and 1983. For the first time last year, we had a deficit on our trade balance in manufacturing goods. That should worry every hon. Member. It is difficult to believe that, in those circumstances, any Government should say that there has been too much manufacturing investment and that we should see less capital investment in future. Nevertheless, that is not just the implication but, presumably, the deliberate intention of what the Government announced yestereday.
I do not believe that one can interpret it simply as a means of improving the quality of investment. That suggests that we should have the same level of investment, but of a higher quality. That will not be the effect of yesterday's announcement. To argue that it may add to the number of jobs, especially in manufacturing industry, is almost a deliberate deceit. If we do not, in comparison with our industrial competitors, invest in new capital plant and machinery, we shall fall even further behind in competitive terms.
Therefore, that change—certainly at the drastic level that we had from the Chancellor yesterday—is misconceived, especially in view of the reduction of about 40 per cent. in manufacturing investment in recent years. The 7 per cent. increase as originally projected for 1984 before yesterday's announcement, will not compensate for the considerable reduction that has taken place in the last four or five years.
I have never believed that capital allowances can produce desirable capital investment if the economic climate is not right. Equally, given the record of manufacturing industry in Britain, it is, to say the least, extremely dangerous to make that sort of drastic change when we are suffering the manufacturing decline that we have witnessed because of the policies that the Conservative Government have pursued in recent years.
The construction industry is crying out for a boost. Because it is labour-intensive, it could have been provided with a boost which would have helped to reduce unemployment. I fear, however, that yesterday's changes will have only a negative effect on the construction industry. It is foolish to suggest that the reduction in stamp duty, for example, will encourage the industry. People seem to have forgotten that the exemption level was £25,000, compared with the £30,000 announced yesterday, and that the first band of stamp duty was only 0.5 per cent. Therefore, the Budget changes in that respect, however desirable they may be, will not help the construction industry in the way that a direct boost to the industry by public sector capital investment would.
When one takes account of the VAT changes on improvements and the abolition of the industrial building allowance as part of the capital allowances package—which, in a couple of years, will have a deleterious effect on capital investment in private industry in terms of buildings—yesterday's announcement will damage the construction industry, as ultimately, when it works through, it will damage manufacturing industry as well.
As the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) and others have pointed out, North sea oil revenues—which, on the Government's figures, will reach their peak in 1984–85 and go into decline thereafter—have, and still do, provide an opportunity to boost the economy. That boost could have been given in this year's 441 Budget. Such an opportunity is not likely to recur, and it will be less available to us as North sea oil revenues begin to decline.
On the Chancellor's figures, as in the Red Book, there is assumed to be a slackening off in growth, despite the disastrous record of the last five years. The growth projection in GNP terms for 1984 of 3 per cent. is less than that projected in the Red Book for the world economy as a whole. The Government believe that the world economy will grow by 4 per cent., whereas they put our growth at 3 per cent. For the coming five years the Government are assuming an average annual growth rate of only 2.25 per cent. That rate of growth is not grasping the opportunities that now exist and will do nothing to reduce the social and economic evils resulting from today's disastrous and inhumane level of unemployment. Rather than a reduction in the PSBR, there should have been an increase over the 1983–84 level to bring it nearer to the average of other industrialised countries of western Europe as a percentage of the gross national product. That increase in the PSBR would have been best directed towards creating jobs by a vastly increased programme of public sector capital investment.
That argument has gone across the Floor of the House on too many occasions for me to go into the detail of where that public investment might most effectively have been deployed. That it has not been so deployed is the basic reason why Opposition Members object to this complacent Budget. It is a complacent and neutral Budget in the face of 4 million real unemployed in Britain. The Government are not facing the realities of the situation. We should have had a Budget designed to get people back to work. This Budget will keep people on the dole.
§ Mr. David Howell (Guildford)
I was glad to hear the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) pay tribute to the Chancellor, for although we have differences on party grounds with that right hon. Gentleman and with some of the nostrums that he uttered, in the post-war pantheon of Chancellors of the Exchequer he holds a high place. It was therefore good to hear him pay tribute to another Chancellor who will, I believe, rank high in that same pantheon.
I have no doubt that we have witnessed a bold Budget, one that has embarked on a major and vital strategy of tax reform. We shall feel its effects and consequences for the better, and for the benefit of society, for many years to come.
For decades, Conservatives have had a dream—and a theme—of the property-owning and capital-owning democracy. We have argued for and believed in—to borrow a phrase from the right hon. Member for Chesterfield (Mr. Benn)—the irreversible shift of wealth into the hands of working people. We believe that that is achieved not by the old collectivist planning but by wider personal ownership.
§ Mr. Howell
Perhaps it was only a dream, but it is starting to acquire the beginnings of reality. We have had to wait for it, but even in yesterday's Budget proposals 442 there are the beginnings of measures to push forward this ambition of much wider ownership in a democratic society.
The proposal to halve stamp duty will increase and encourage trade in equities and in stocks and shares as well as home ownership. The proposal to do away with the investment income surcharge will be a major incentive for younger people to look ahead and save, invest and work hard for their later years. The hint in the Chancellor's speech that he will apply his mind to more thorough-going reforms of capital gains tax will help. Above all, the Chancellor has made a start on lifting the burden of income tax. He said that, given the right conditions—we must do our best to secure those conditions—he hopes to go further along that road.
A measure which I particularly welcome is that for the improved treatment of stock option schemes. The Government would do better still in carrying forward the aim of wider ownership if they amended the proposal slightly. The Government should make the approval of stock option schemes conditional on firms bringing forward wider employee share ownership schemes. Conservative Members, and some Opposition Members, would like all families and workers at all income levels to be provided with greater opportunities to achieve a stake in industry.
The stock option scheme would best represent that spirit if accompanied by, and associated with, further encouragement of employee share ownership schemes similar to those—I strike a bipartisan note—promoted by tax reforms in 1977 under the Labour Government. Those schemes were boosted greatly in the early 1980s, and form an important part of a less centralised society based upon a greater number of owners and earners. I hope that such a scheme will be pushed ahead and adopted by the Chancellor.
So the Chancellor has struck a bold blow for the property-owning democracy, which is a major theme that we are determined to carry forward. But I also welcome the Chancellor to the camp of that godly group, the so-called supply siders. The Chancellor's Red Book places a welcome strong emphasis on putting tax cuts ahead of Budget deficit reductions. He wants to use the space that becomes available to reduce taxes, not push on to the elimination of the budget deficit. There is a massive proviso to this point: the Chancellor must succeed in freezing the real level of public spending. In coming years, the fiercest political battles across the Floor of the House, and in other dimensions, will be around the attempts to achieve that aim.
A week ago, in the debate on the public expenditure White Paper, of which the House took note, we recognised the difficult task facing the Government. It involves major challenges, difficulties and reforms in the structure of the public sector which, if left to itself, has the propensity to grow greatly at rates which have no respect for the growth of output generally, but depend on the development of, for example, high technology in medical care, defence considerations and people's expectations of what the elderly in social market, and neighbouring continental, economies should have. Those matters must be confronted. That is where the challenges lie in the unfolding of the economic strategy of which the Budget is a part.
So the Chancellor is correct in putting cuts in taxation in future years ahead of lower Budget deficits. In fact 443 lower taxes, and the higher growth rate which I hope is associated with them, lead to lower budget deficts. Conversely, the haphazard raising of taxes raises the deficit by jacking up the borrowing requirements and cutting revenues. That is why some Conservative Members, including me, were unhappy last autumn when it was suggested that the Government, in the interests of keeping down budget deficits, intended raising taxes again. We had found from experience, which was patterned elsewhere, that attempts to reduce deficits by that route ended possibly in higher deficits and certainly in higher borrowing elsewhere and inflation of the money supply. In an Alice-in-Wonderland way, the attempt to control the money supply and contain Government borrowing by this means ends by inflating other people's borrowing requirements and producing the opposite of the intended result. I am glad that we have a clearer view of a different set of priorities for the future.
My only qualification to a Budget which contained many hallmarks of excellence is that I wished the supply side proclivity for the economy which the Chancellor and his colleagues show about future years had been applied a little more vigorously to 1984–85 as well. The 1984–85 deficit is forecast to be about £9.25 billion, comprising £7.25 billion in terms of borrowing requirement and £2 billion which will be raised by the sale of Government assets. But I suspect that the deficit will not even be £9.25 billion in the event. First, we are dealing with an unscientific figure, subject to wide margins of error. Second, that figure is related to other figures which Treasury accountants at Great George street have given my right hon. Friend about the alleged cost of tax reductions in the first full year.
We will find that those reductions will not cost as much as Treasury officials have said, because many of the tax reductions and changes proposed by my right hon. Friend will have a dynamic effect. The real fall in revenue will be much smaller and possibly will not occur at all. A good example is what will happen with the halving of stamp duty on stocks and shares. The increased trading and the halt in the slide in business away from London to New York, Tokyo, Paris and so on will more than offset any alleged cut in revenue arising from tax cuts. The Treasury officials have understandably given those figures in advance because they must start from certain sums.
However, I suspect that, in practice, this year's budget deficit will be less than £9.25 billion. I should have thought that this year, looking into an uncertain future in the mid-1980s and thinking of the considerable time necessary to get capital projects under way, there would have been a case for an addition to the budget deficit specifically directed to infrastructure capital investment. That could have been done in a year when many measures were being financed by asset sales. This year would have been the occasion for initiating a boost without damaging the money supply or adding to the pressures on interest rates. Obviously, we would like interest rates to be reduced. We welcome the downward movement in interest rates, which is one of the main intentions of the Chancellor's Budget strategy.
The boost to capital projects would have made a good Budget strategically excellent. It is not too late to add that dimension to the Government's economic measures, as some Conservative Members argued last week. It is possible at any time in the year to set out on a programme leading to expenditure on infrastructure at a higher rate 444 than expected in the public expenditure plans. It takes two or three years for those measures to work through the system. If we envisage the American economy next year not moving with as much vigour as now, and perhaps higher American interest rates, now would be a good time to start laying plans for such additional expenditure. But that point is marginal to the main thrust of the Budget, which I believe is wholly good and right.
Of course, few of the Budget proposals yesterday could hope to overcome the fact that wage costs per unit of output are still too high, although they have improved relatively, or that our capacity to develop competitive and well-designed products is inadequate. We must overcome these basic deficiencies if we are not to face a catastrophic decline in our fortunes when oil and natural gas exports run out. I believe that those who say that that will happen suddenly, at the edge of a precipice, are wrong. I believe that it will be a fairly gradual process.
The oil rundown will almost certainly be slower and the rundown in exports—the amount that we produce over and above what we consume nationally—will be slower than many previous forecasts. There is also the natural gas potential. We should not rule out the possibility of natural gas contributing substantially to our primary product exports over the coming years. We could be talking about a rundown over a decade or more. However, that does not mean that we should not start preparing for it, but I do not think that it requires panic plans of the kind some people are to be heard peddling around the town.
Those are the problems for the future to which we must address ourselves. In the meantime, the Chancellor has done his bit—and more besides; let others now do theirs.
§ 7 pm
§ Mr. Norman Atkinson (Tottenham)
I wish to make just one or two comments about what has been said, and I wish to do so from the trade unionists' point of view, following the admirable lead we had from the Front Bench in response to yesterday's Budget statement. If my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) is looking for any converts or supporters, he can count me among them following the statement he delivered to the House this afternoon. It was an excellent analysis and one with which I completely agree.
The hon. Member for Wyre Forest (Mr. Bulmer) commented about toolmakers in the west midlands. He said that in the future we will be looking not for toolmakers but for people who can operate numerically and computer-controlled machinery. He talked about the possible threat from the far east. The point about capital-intensive technology is that it is a great leveller. There will be no problems coming from Asian industry once that capital intensity takes place, because wages will be of comparatively little significance.
Once an industry is capital-intensive, its unit labour costs are almost minimal. The Americans and the West Germans have said that. They said that their high 'wage systems have many benefits, but that they do not worry about some of the products coming from the far east. Cheap money is a far greater problem in terms of capital-intensive investments than those other matters.
§ Mr. Bulmer
Does the hon. Gentleman recognise that the threat comes in two forms—from high technology industries, to which his point is relevant, but also across 445 the bread and butter of manufacturing items such as clothing, footwear and so on, where it is extremely difficult to compete with the low labour costs from that part of the world?
§ Mr. Atkinson
Yes, but I would consider the matter from the opposite point of view. If we take the 10 leading Western manufacturing nations, we are at the bottom of the wage table. Presumably, on the basis of what the hon. Member just said, that should give us an enormous advantage, but it does not; it gives us many problems because the level of demand and many other things in modern Western economies are so contradictory. I, therefore, do not accept simple analyses of that kind.
The right hon. Member for Guildford (Mr. Howell) spoke about co-partnership and share ownership and about extending the property-owning democracy. Trade unions have had many arguments about co-partnership and share ownership. They do not like such things. They do not believe that it is in their interests to go in that direction.
It would be a contradiction for trade unions to be represented in the board room, taking decisions contrary to their interest. Therefore, they do not want to go in the direction of co-partnership, but even less do they want to go in the direction of share ownership, because they believe that the shop floor bonus is a more direct way of recognising the effectiveness of the work force. I hope that the time will come when we can discuss that issue in greater detail.
Unemployment is deliberate. It is not an act of God. It is man-made or, possibly in this case, woman made. It does not arise by accident; it is an integral part of Government strategy.
§ Mr. Atkinson
The hon. Gentleman says "Rubbish", but it is perfectly true. The Chancellor's analysis confirms that. He admits that what he has been able to deliver to the City has come from the base of over 4 million unemployed people. His statement should have been a vote of thanks to those 4.25 million unemployed people because he was recognising the contribution that they have made to the successes that he chalked up in his speech.
Two revealing comments have been made. The first was by the Prime Minister when she was asked whether unemployment was an embarrassment. She replied that in her opinion unemployment was no longer an electoral factor. In other words, there was no difficulty in having a continuous strategy which includes substantial unemployment, or unemployment arising from the strategies pursued. As that was no longer an electoral factor, the post-war method of having the reflationary process just before an election was finished because we can say to the unemployed now, "So long as this Government continue, they will not be taking electoral factors into account." Presumably, therefore, the strategy will continue.
What did the Chancellor say when he was asked about the manufacturing deficit? He asked who was concerned about manufacturing deficit when there was such a massive surplus coming from oil. He wanted to know why we needed to worry any longer about such matters. Surely that betrays the underlying thinking of the Conservative Front Bench when they talk about the strategy that they believe is so successful.
446 The Budget as a whole was geared to financial rather than industrial capitalism. There is a great difference. When one analyses what the Chancellor has said, it is easy to identify the benefits that he has been able to deliver to financial capitalism. I thought that he was a leading spokesman for the Centre for Policy Studies. It seems that that is the Government's great motivator and that all things relate to the original theories that they were able to propound not so long ago.
In that context, I reiterate an appeal that I made some time ago to the 365 economists who, in 1981, took to the columns of The Guardian and The Times to denounce the Government policies and strategies, and I ask them to emerge and bring the whole of their combined weight to explain to the country how wrong the strategy is and how it is not in the nation's interests. There are a few economists who would go along with many of the statements made yesterday. They said so two years ago, and I believe that they will say so again.
I understand that the Chancellor has now gone to take part in the dancing in Threadneedle street. There is great rejoicing in the City and we are well aware why it is rejoicing. He was able to deliver a great deal yesterday to those people whom he claims to represent—the top 8 million income earners. He also demonstrated his attachment to the stock exchange rather than the labour exchange. The clearest class division emerging in the House is between those who represent the stock exchange and those who represent the labour exchange. Inevitably, that division will grow. To answer this afternoon's unanswered question, I believe that unemployment will increase. The policies propounded yesterday will inevitably cause a rise in unemployment.
§ Mr. Michael Hirst (Strathkelvin and Bearsden)
Does the hon. Gentleman accept that the stamp duty levy on transactions in the City is driving business to stock exchanges outside the United Kingdom so that there is justification for abating stamp duty as a prelude to abolishing it altogether?
§ Mr. Atkinson
The Budget adjustments might have an indirectly beneficial effect on industry, although that consideration is marginal. I am concerned with a major Government strategy and the continuation of mass unemployment, which depends on low incomes. The Opposition's complaint concerns low monetary aggregates and we wonder why the Government repeatedly appeal for workers to accept lower wages. The Chancellor said:Higher profits lead to more jobs. The number of people in work increased by about 80,000 between March and September last year. The loss of jobs in manufacturing has slowed down sharply, while jobs in services increased by getting on for 200,000 in the first nine months of last year … Although our unit wage costs in manufacturing rose by under 3 per cent. last year, our three biggest competitors, the United States, Japan and Germany, did better. The employment prospect would be significantly improved if a bigger contribution to improved cost performance were to come from lower pay rises."—[Official Report, 13 March 1984; Vol. 56, c. 287.]Every Chancellor of the Exchequer of post-war Governments has made an appeal for reduced wage levels, to lower levels of demand and do whatever else is necessary for the economy.
I shall analyse my quotations from the Chancellor's speech. We rarely talk about unit capital costs, which are an important part of industrial analysis. Unit wage costs are necessarily high if unit capital costs are low. We tend 447 to refer to unit labour costs separately whereas they are interrelated. As one goes up, the other comes down. In Germany and the United States unit capital costs have gone up but unit labour costs have come down. That has happened in British industry, too, so if we wish to reduce unit labour costs we should increase unit capital costs. That understanding seems to be missing from the usual analysis.
The Chancellor referred to an increase of 80,000 people in work between March and September. He went on to refer to the loss of jobs in manufacturing slowing down sharply. It has slowed down, and explains the difference of 120,000 people in employment. The total work force increased by 80,000. Jobs in services increased by almost 200,000, so jobs in manufacturing and similar industries must have fallen by 120,000, in direct relation to the Chancellor's policy, which is why he is disaster itself to manufacturing industry. The difference between financial and industrial capitalism is part of his strategy. Yet he claims some credit for it and swanks about it as though it were something of an achievement.
The statement went on to deal with employment prospects, which, the hon. Gentleman argued, would be significantly improved with a bigger contribution from lower pay rises. Our great wealth from manufacturing industry comes from manufacturers paying the highest wages. The greatest insecurity in manufacturing industry is in those establishments paying the lowest wages. That makes sense. No matter what analysis is made, when an industry's buoyancy disappears there will be no profits in that sector and wages will be low. High wages reflect an industry's buoyancy, so we should go for higher rather than lower wages.
The Chancellor was also confused in his reference to productivity, which has continued to improve rapidly. If the manufacturing work force has been reduced, productivity, which is production per individual worker, is bound to increase. If the reduction in production is minimal and the number in work has fallen, productivity must have increased, so the Chancellor takes some credit in terms of the number of people that his strategy has thrown out of work during the year. Production, however, has not increased in manufacturing industry and the Chancellor should be dealing with that instead of productivity, because production, or total output, is very different.
Those are the Chancellor's arguments, not mine, and we should study his statement closely. His strategy, to which our debate has been directed, is the reason for the boom in the City and the slump in industry. It is unbelievable that London is the most successful financial centre in the world, enjoying unprecedented boom conditions, while there is mass unemployment. They can live side by side when a Chancellor or Government pursue the policy announced yesterday. We can clearly see the reasons for that.
I have avoided dealing with the effects of unemployment—the impoverished trade union muscle resulting from the Government's policies, which no doubt the Government welcome, and the reduction in spending money, with which I shall deal in relation to the aggregates to which the Chancellor referred.
I shall make one point in passing, now that the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) has returned to the Chamber. I referred earlier to the top 50 manufacturers. The analysis of their position shows 448 significant developments. As I said in my intervention, their total pre-tax profits over the period referred to by the Chancellor have increased from £5.25 billion to £5.5 billion. In every case, however, the work force has been reduced. Indeed, those companies have been the biggest contributors to the overwhelming reduction during the period under consideration. Only one of the top 50 companies—Vauxhall—is talking about an increase in the work force. The Chancellor should reflect on that when he talks about buoyancy in the economy. Moreover, as the Vauxhall work force was reduced by 39 per cent. in 1982–83 it is hypocritical for it to boast about a 13 per cent. increase in the coming 12 months and to attribute it to the Chancellor's strategy. The CBI itself makes that case. It says that Vauxhall is one of the success stories but that over three years there has been a net reduction an the number of people employed. Profits do not necessarily create jobs, although I accept that a company with no profits and zero investment is unlikely to create jobs either.
On monetary policy, I do not believe that the Government's theories are credible. The Chancellor's statements and the Treasury theories about monetary aggregates are sheer witchcraft. If theories of that kind were used by engineers, ships would soon be sinking and bridges collapsing. It is witchcraft to talk as though monetary aggregates had meaning in themselves and constituted a method of adjusting the nation's economic behaviour. Whatever indicators are used—M0, M3 or whatever—they are merely barometers or pseudo-barometers. If they were genuine they would only show what is happening, but they do not even do that, so they are merely pseudo-barometers. In any case, it is no use setting a barometer to "rain" in the belief that rain will necessarily follow. It does not work that way. Whet her it is narrow or broad money, all the Chancellor's figures and aggregates merely reflect what is happening in the economy. They do not constitute a means of controlling or intervening in the economy in any effective way.
The forecasts have all been wrong. Yet the Chancellor went on to suggest that M0, the narrow definition, was more useful for his purposes than any other indicator. He went on to talk about the more important aspect of velocity—the ratio of gross product to the various measures that he mentioned. He then produced a magical figure as though it meant something special to Britain and argued that, whichever indicator was taken, we had to reduce the monetary aggregates. It was clearly spelled out. The level of demand in the economy had to be reduced so as to lower inflation.
Let us compare the situation here with that of our direct competitors. On the same analysis, the ratio in West Germany is exactly double ours. The velocity figure, the ratio between domestic product and M3, is 35 per cent. here but 70 per cent. in Germany and 120 per cent. in Switzerland. In other words, their monetary aggregates are many times those of this country. Yet their inflation is lower and their general living standards higher.
Let us take the second aspect of the Chancellor's analysis of the results of Conservative Government since 1979. The top 8 million incomes in this country take, well over half the total income while the bottom 8 million take less than 10 per cent. Whatever one makes of the Government's performance in terms of class analysis, it is clear that their strategies have brought about a monumental shift of income into the top bracket. The difference 449 between this country and Germany or Switzerland is in the redistributive base. That is why it is nonsense for the Chancellor to use aggregates as though they were accurate or meaningful indicators of what is likely to happen.
I see Conservative Members looking at their watches. The Opposition seem not to be under the same pressure. Nevertheless, I shall bow to the desire of hon. Members to get into the debate and conclude by saying that, once again, the Chancellor has demonstrated the consistency of the policies pursued by the Government. In effect, he was paying tribute to the people that the Government have put out of work. If he can now claim certain results in the economy such as the lowering of inflation, he must recognise that that is due to the fact that the people whom the Government have put out of work now take a very much smaller income than they would otherwise have had.
§ Mr. Richard Ryder (Mid-Norfolk)
As several hon. Members are waiting to speak, I shall be brief.
There is little to be said for stamp duties, apart from the fact that they created the newspaper industry in Fleet street and gave William Wordsworth a decent living. By starting to dismantle stamp duties, my right hon. Friend the Chancellor has overcome Treasury caution, and even the great Wordsworth's advice has been treated wisely. Wordsworth wrote:The good old rule Sufficeth them, the simple plan, That they should take who have the power, And they should keep who can.The emphasis in most previous Budgets was on either taking or keeping, but the hallmark engraved on this one is the reform of our haywire tax system.
Stamp duty, which is about three times the age of the remarkable Lord Shinwell, impedes change by curdling labour mobility and inhibiting personal investors. In short, as my right hon. Friend the Chancellor stressed yesterday, it represents what the Government are pledged to uproot.
A year ago, the Inland Revenue published its consultative document, "The Scope for Reforming Stamp Duties." In his foreword, my right hon. Friend the Parliamentary Secretary to the Treasury, then Minister of State, accepted that the review pointed to the abolition of some charges, but warned that the loss of £1 billion would be difficult for the Treasury to bear. Sadly, though understandably, that proved to be the case in yesterday's Budget. Nevertheless, the Government must aim to abolish stamp duty altogether during the life span of this Parliament.
Despite yesterday's reforms and the welcome rejection of the "slice scale", stamp duty is still a bad tax because it adds to steep transaction costs in the housing market. It is a bad tax because it bears scant relation to the value added, profits, incomes or gains involved. It is a bad tax because it discriminates against people in identical circumstances but who move house with different frequencies. It is a bad tax because it discriminates against achievers and those who, through no fault of their own, lose their jobs but secure new ones in other locations.
Labour mobility remains a stronger check to the pace of economic recovery in Britain than in other major industrialised countries. In order to lubricate labour mobility, and still reduce the costs of moving, I place the 450 abolition of stamp duties beside a searching review of conveyancing—now being undertaken by the Street committee—an examination of the roles and charges of estate agents, and a tapering of the Rent Acts.
The Government, in their second term, must give deeper consideration to labour mobility, just as they must, in tune with their philosophy, simplify and encourage the extension of personal share ownership. My right hon. Friend the Chancellor made a fine start yesterday by boosting share option schemes and halving the stamp duty on share transactions to 1 per cent.
The burden of stamp duty on share deals congeals the stock market and inhibits personal investment at a time when commissions are falling and overseas competition abounds, but stamp duty has at long last been cut down to size. I hope that before leaving the Treasury my right hon. Friend will remove it altogether.
Stamp duty strangles labour mobility by hitting voluntary job changers and involuntary job seekers, in addition to making a mockery of the capital-owning democracy, so lucidly referred to by my right hon. Friend the Member for Guildford (Mr. Howell). For those reasons, it should play no part at all in a Conservative Government's tax system.
§ Mr. Dafydd Wigley (Caernarfon)
I first congratulate the Chancellor on his brevity yesterday—something that was commended by all hon. Members. Unfortunately, although some aspects of his speech were welcome, they did not constitute the majority of it.
The right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) asked whether the Chancellor believed that unemployment would be any lower as a result of this Budget. The question that came to my mind was whether the Chancellor believed that the Budget in any way influences unemployment levels. The impression that we have had from the Government in the past—one that continues in this Budget—is that their strategy is not geared to influencing unemployment levels. There seems to be an assumption that in the fullness of time unemployment may improve, but an attack on unemployment does not appear to be a deliberate objective of policy. Therefore, my condemnation of the Budget is its total lack of strategy in dealing with how unemployment can be overcome.
The hon. Member for Mid-Norfolk (Mr. Ryder) placed great emphasis on labour mobility. We in Wales have been told that labour mobility is the answer to our unemployment, that we must get on our bikes to look for work. However, labour mobility is no use if there is nowhere to go to look for work. The sad truth is that no area in Britain now has an abundance of work, so labour mobility is totally irrelevant to the problems that we face. Instead, we need an increase in the number of jobs, and that problem will not be solved simply by moving people from one place to another merely to be registered as unemployed in a different area.
People have moved to various parts of Wales simply because they prefer to be unemployed in, for example, Anglesey rather than in Birmingham. I can well understand that, but that does not solve our economic problems by a long chalk. It may, in fact, aggravate them.
In many ways the Budget appears to be the pet poodle of the City of London, in that large chunks of it are of little interest or relevance to 95 per cent. of our people. It 451 ignores the fundamental needs of the large majority of our people. The Chancellor spoke of increases in production and projected that there would be increases in the economy of between 3 and 3.5 per cent. over coming years; but, sadly, that does not necessarily mean an increase in employment opportunities. The Government do not appear to have addressed their mind to that.
We ought to acknowledge and welcome some things in the Budget—for example, the elimination of the national insurance surcharge. I do not think that Labour should have introduced it when they did, and the Conservatives should have got rid of it much earlier—but better late than never. We should welcome the increase in personal tax allowances, which will take so many people out of the tax net. However, there is room to go further in respect of the single person. Although the married allowance is the highest since the war, the single person's allowance in the 1940s was at one stage as much as 110 per cent. of the average industrial wage. We are still a long way from recouping that, so there is further room to move in that direction.
Although the increase of allowances is of benefit in that it takes people out of the tax net altogether, it is of greater benefit to those on higher incomes. We must not blind ourselves to that attraction, which no doubt appeals to the Government and their party.
I also welcome the change in VAT on imported goods. That was an anomaly. My only worry is that, given that this is a once-for-all saving of, I think, £1.2 billion, if in the fullness of time there needs to be a policy reversal, we shall face a bill of £1.2 billion. That will present problems.
I further welcome the tax relief on special vehicles for the disabled. The Government could have looked at other examples, such as VAT on charities, but nevertheless I welcome the steps that have been taken as far as they go.
On the other side of the equation, I regret the imposition of VAT on house adaptations and alterations. Earlier, I asked the Chief Secretary whether that would not create anomalies for those receiving grants towards the renovation of their houses. Elements of the work could fall into the adaptation category, and this could prove to be a difficult and grey area. I fear that those who have been awarded grants and are waiting for them to be paid—in Wales there is a backlog stretching back several years—may find VAT included in their final bills. Those sums may not have been included in the original estimates, as a result of which they will have to find more money. I hope that that point can be answered and refuted, because so far it has not been. The Government should make the position quite clear for the thousands of people who could face difficulty. It was, I suppose, inevitable that petrol would be increased again. That badly affects rural areas such as my own.
However, I criticise most of the holding down of the PSBR. Given the productive capacity within the economy and the possibility of triggering greater economic action by a larger PSBR, through capital investment programmes the Government should have risked marginally higher inflation to try to get the economy moving.
I turn from the general position to the position facing Wales. Yesterday the Chancellor made it clear that his policy is to continue those policies that have been followed over the last five years. He said: 452We shall continue the policies that we have followed consistently since 1979 … Economic recovery is well under way and employment is growing."—[Official Report, 13 March 1984; Vol. 56, c. 286.]Frankly, we in Wales do not believe it. There is no sign of the economy moving in Wales. Employment there is not growing. It has decreased substantially since 1979 and is still decreasing. That pattern is true throughout the United Kingdom. Since 1979, civilian employment has gone down by 7.4 per cent. throughout the United Kingdom, but that is not true of other countries over the same period. We are told that it is an international depression, yet in Austria civilian employment increased by 3.6 per cent. in Italy by 1.5 per cent., in Norway by 6.5 per cent. and many other countries have held it more or less steady. But in Wales we have not seen an increase, or even a turnround, in employment opportunities. The converse in fact is true, that in Wales unemployment has increased from 81,000 in 1979 to 175,000 now.
We do not think that the policy pursued by the Government over the past five years is solving our problems or will solve them. It is not sufficient to pursue the present policy and to say, "Steady as she goes." The present policy has been a disaster for Wales, and the Budget's fundamental strategy of retaining that policy is not acceptable.
The magnitude of the error in strategy makes the details of the Budget largely irrelevant. The Welsh economy is largely geared to public spending. Our major industries—the coal industry, the steel industry and electricity generation—are public industries. Even agriculture—an important industry in Wales—is largely dependent on public expenditure. With cuts in public expenditure, there is a likelihood that Wales will suffer even more than other areas. That should be a warning to those engaged in the coal, steel and electricity industries—and also to farmers in Wales. Farmers, who have considered themselves a mile away from dependence on public expenditure, could suffer very much if present policies are continued, in the way that the Chancellor has warned.
Many of our needs in Wales have to be answered by public expenditure. There is a need to improve our road infrastructure—and our appalling housing, which is considerably worse than that of the rest of the United Kingdom. The problems of health care need in Wales can be solved only by public expenditure. With retired people moving into Wales there is added pressure on the social services, with consequent further demand for public expenditure.
From 1980 to 1984, public expenditure in Wales has been reduced by £25 million at constant prices. Over that period public expenditure in Scotland has increased by £135 million, in Northern Ireland by £204 million, and over the United Kingdom as a whole by over £5,000 million at constant prices. The £25 million reduction in public expenditure in Wales has exacerbated the economic and unemployment problems facing us.
We are fearful as we look to the future, and we do so in the context of the Green Paper on the next 10 years. On page 31 of that Green Paper there is a warning of the Government's intention to reduce public expenditure from 39.75 per cent. of GDP in 1983–84 to 34.5 per cent. in 1993–94—a 5 per cent. reduction in public expenditure as a proportion of the GDP. Given our dependence in Wales on public expenditure, the implications of that warning are devastating.
453 Even in areas where the Green Paper recognises probable increases in demand for health care, social services and pensions, none the less it says, in paragraph 67:There should, however, be no general presumption that higher public spending is inevitable if provision in these areas is to be improved, given the scope for a switching from public to private sectors".A switch from the public to the private sector means a reduction in the standard of services and probably also in employment opportunity, judging from what we have seen in the past in Wales.
We are also extremely concerned by what is said in paragraphs 68 and 69 of the Green Paper. It appears from the Government's strategy for the next 10 years that the level of public expenditure and public services will be determined by the available finance, with no reference whatever to social need or the other criteria that should be taken into account. If that is the Government's intention, the prospect for Wales is bleak.
Our criticism is not of the detail of the Budget, in which there are some good things and some bad things; it is of the basic strategy of the Budget. It does not approach the problems of our economy and our unemployed, and until we have a fundamental change in the Government's strategy the prospects for Wales are bleak indeed.
§ Mr. John Browne (Winchester)
I believe that this is an historic Budget, heralding a new dawn for British enterprise. It combines prudence, compassion and courageous innovation. That innovation is vital if we are to achieve the technological revolution. My right hon. Friend the Chancellor of the Exchequer has grasped nettles that should have been grasped by both Conservative and Labour Governments in the past.
I was very pleased to see that the Chancellor made no massive panic injections to gain popularity. Had he done so, the cost in inflation would have been enormous. It would have meant farewell to all the efforts made by people in Parliament, in local government, in the Civil Service, in industry, and in the labour market generally over the past five years.
My right hon. Friend has produced his Budget in the face of the great international difficulties that he outlined—probably the worst recession in a century, an international debt crisis, fluctuations in the oil market, and so on. He has produced his Budget despite the constant calls in this House, particularly from the Labour Benches, to return to the old proven failures of the past which followed from the stop-go policies that we know so well. They ended in disaster for decades following the second world war, and we are all paying dearly for them now—none more than the unemployed.
The Budget maintains the fight against inflation. It has set down a keel. It consolidates the gains that we have made so far, and for that reason my right hon. Friend was able to be compassionate. It continues the much more difficult task of massive reorientation of our entire economy, away from state control, stagnation and overmanning, and towards genuine ownership by the public, enterprise and real jobs.
The right hon. Member for Glasgow, Hillhead (Mr. Jenkins) has now left the Chamber. I was very impressed 454 by his praise of the Chancellor, but I find it hard to see why the right hon. Gentleman feels that 3 million unemployed, although a great price to pay, is a greater price than an overmanning of 3 million, which would have a massive effect in stagnating the economy.
Reference has already been made by hon. Members to compassionate measures such as the special tax treatment for vehicles for the disabled and the raising of allowances by 12.5 per cent., or 7 per cent. in real terms—well above what we expected. My right hon. Friend has lifted many people out of the terrors of the poverty trap. That is the compassionate side of the Budget.
The Chancellor's courageous innovations show the way in which he has grasped the nettle. Contrary to what has been said about the City, I believe that my right hon. Friend has removed many of the tax privileges that were given to institutions in the past at the expense of individuals. That innovation will encourage investment by private individuals. They are much more likely to invest in new and small enterprises than are institutions which have had favoured tax treatment in the past and are the most unlikely source of investment in new and small businesses.
The removal of the tax discrimination which favoured institutions will help to create the vital conduit that the Government must build between the massive accumulations of capital that are available in Britain and the investment opportunities. That conduit has got to be built, and one of the most important things is to re-create individual investors as opposed to institutional investors.
The second main plank of this innovation by the Chancellor is the encouragement and reward of profit and employment—the cuts in corporation tax, stamp duty and capital transfer tax, and of course the abolition of the national insurance surcharge. Anyone who has worked in business or in financial institutions in the City will know only too well that these capital allowances encourage enormous distortions in our economy, because they encourage companies and institutions to invest for tax advantage rather than for profitable business. Those cuts and the cut in the rate of corporation tax will, I believe, make a huge difference in investment decision-making throughout the country. Investment decisions will now be made more with a view to making profits.
I believe strongly that increased profits—particularly increased profits to investors—lead to increased investment. If investment is increased, that leads to growth, and growth leads to more real jobs. Furthermore, the paid real jobs lead to more demand within the economy and therefore to an increase in our national wealth. When that is achieved, we shall be able to afford real spending increases, without inflation, on things such as defence, law and order, and good social, education and health services.
Although I was very glad to see the content of the Budget, there are three areas in which I should have liked to see more action taken. First, I should have liked to see much more generous expansion and simplicity in the business expansion scheme. Secondly, I should have liked to see the complete abolition of stamp duty. Referring just to trading in bonds and shares, where institutions now find it cheaper to trade the American deposit receipts ofBritish companies in New York rather than the same shares on the London Stock Exchange, I believe that we shall not, by cutting it to 1 per cent., pull back any business from New 455 York. We may stop business flowing from here to New York, but we have not gone far enough. I believe that we really should abolish the stamp duty completely.
§ Mr. Budgen
I was very interested to hear my hon. Friend's criticism of the business expansion scheme and his suggestion that it ought to be made more generous. Will he say how it should be made more generous? In particular, I wonder whether he disapproves of the way in which its advantages are no longer to be enjoyed by those who wish to farm.
§ Mr. Browne
I promised to be very brief, but I will answer those questions. First, I absolutely approve of its not being applied to farming schemes. I thought that was outrageous.
Secondly, in order to make it more generous, two matters spring to mind off the cuff. The first is that it should allow for the roll-up of research and development. The second is that we should allow principals involved in entrepreneurial businesses to take full advantage of the scheme, which they are not allowed to do now.
The third thing that I should have liked to see in the Budget is more emphasis in the Government's spending programme upon capital as opposed to current projects.
I believe that this Budget shows quite clearly that the Government will maintain a prudently enterprising course. Critics in the House and throughout the country would do well to remember that between the late 1950s and 1979 hardly a year passed in this country without one, two, three or even four financial crises. Since 1979 there has been none whatsoever. I believe that that speaks millions of words. It shows that the financial management of this country is in very good hands—in very difficult circumstances. After my short period of five years in the House, hearing the Budget statement yesterday made me really believe that the British lion is far, far from dead.
§ Mr. Deputy Speaker (Mr. Ernest Armstrong)
I am grateful for the brevity of the three hon. Members who have just addressed the House. If that is continued, we ought to get in everybody who wants to catch my eye before the Front Bench spokesmen begin.
§ Dr. Jeremy Bray (Motherwell, South)
I note what you say, Mr. Deputy Speaker, about the Government Benches. I take it that that does not necessarily apply to the Opposition side of the House. [SEVERAL HON. MEMBERS: It certainly does.] I am glad to follow the hon. Member for Winchester (Mr. Browne), whose arguments I always find interesting, even though I am likely to put forward a mirror image of the speech he has just made. I certainly join him in congratulating the Chancellor on the ingenuity of his Budget and, in a more sensitive man, I would say also the courage. It is a classic case in the history of Cabinet procedures of a Chancellor bouncing the Cabinet into a set of decisions which it would never have had the courage to make as a body.
In the first flush of enthusiasm felt on the Government Benches for what the hon. Member for Winchester described as a historic Budget we see some of the naivety that is often demonstrated following a Budget such as this—only to be overtaken in the following months by disillusion, as people begin to discover the snags.
The hon. Gentleman referred in particular to the prudence of the Chancellor, but surely it will not have 456 escaped his attention that the Chancellor is paying for the beneficial roll-on of the reductions in the corporation tax rate, exceeding the reductions in the value of the corporation tax allowances, by a once-and-for-all impost on importers. This is all good fun, but it is certainly not something that can be described as long-term prudence—the use of a once-and-for-all gain, such as the advancing of the payments of VAT, to trigger a long-rolling programme of alteration of the structure of corporate taxation.
The Chancellor is seeking to lead the country out of depression into a pre-industrial society. He has put forward policies for a pastoral world of small shopkeepers and craftsmen in a world of high technology and multinational companies. The pastoral world of his vision has no room for institutions. The trade unions, of course, are enemies of the people. They should have been dispensed with long ago. Now they have been joined by the life insurance companies. The idea of corporations having any accumulated wisdom and experience that gives them an edge in judgment and the appropriate use of financial resources is wound down by the reduction of the difference between corporation tax and income tax and the reduction in tax allowances. Community life is under attack through the gloomy picture of public expenditure stretching out over the next 10 years which the Chancellor has put forward in the Green Paper. The very idea of national goals is degenerating to the aphorism that finance must determine expenditure, without any conception that, instead, aspiration can liberate energy and compassion can call forth effort.
The Chancellor lives in—and has put forward a Budget to match—a primitive world with all the economic sophistication of 18th century Scotland—the world of the shopkeeper and the craftsman. All the arguments so eloquently and accurately spelt out by Adam Smith we find reflected in the arguments that the Chancellor was using yesterday. At the beginning of his speech he made it clear that his particular view was justified by the framework which he has set himself and within which he allows himself to roam freely; that he was continuing the policies of the Government and that there would be no letting up in the Government's determination to defeat inflation.
Inflation has indeed fallen, but at what a price. It is not just that inflation has been defeated at the cost of the most enormous increase in unemployment and loss of output, but that the country is being asked to jump up and clown on the grave of inflation when there is no threat at all of it emerging as a threat to the economy today.
That framework, which the Chancellor is relying on, is enforced by a tightness of monetary policy that the Chancellor has made clear he means to maintain. The tightness of monetary policy is no longer measured by his monetary targets. He maintains the fiction of setting sterling M3 targets, but the Government's record of broken targets and the rebasing of targets from year to year has made the wide measures of money no longer credible. Therefore, they have been joined by MO. The other "Ms" provided no sustenance and the Chancellor has ended up with MO.
That decision follows a detailed study by Mr. R. B. Johnston who produced a Treasury working paper to which I referred in our public expenditure debate. He showed that even in MO there is such a pace of structural change that the velocity of circulation relative to MO is increasing 3 457 per cent. faster than MO itself. Therefore, there is a differential between MO targets and sterling M3 targets which is necessary to shore up the fiction of monetary targets.
The MO target depends on the rate of financial innovation, as measured by the number of bank accounts and building society accounts and the distribution of maturity between different types of building society loans, continuing in future as it has in the past, which seems extremely unlikely. It could go faster or slower or the nature of MO as a monetary aggregate could change.
That framework is needed not so much because it provides operational guidance on the tightness of monetary policy—plainly, it does not—but because it is necessary to shore up the fictions of the Prime Minister's household economics and the slightly more sophisticated medium-term financial strategy of the Chancellor.
There creeps into the last sentence of the last paragraph on monetary policy in the Chancellor's speech the phrase "the exchange rates" and it is said that they will be taken into account. That is a concession to reality, but the Chancellor did not follow up its implications in his exposition of monetary policy or in tracing the effects on industry. The fiction of the Government's monetary strategy—so splendidly exposed by Mr. Fforde in the Bank of England Quarterly Bulletin in 1983 as rationalising the pursuit of a wildly deflationary policy and creating high unemployment, which made it possible to undermine the bargaining power of trade unions and inflationary pressures of all kinds—is being dressed up in monetary mumbo-jumbo that is not even of operational significance in the money market transactions or overseas currency interventions by the Bank of England.
That framework has gone wrong and the cost of the strategy that has emerged is far heavier than the Government expected when they embarked upon it. We have experienced a sustained misalignment of exchange rates that will lead to the same uncertainties in future as it has in the past.
The current major source of uncertainty is what will happen to the dollar after the American presidential elections and as the campaign progresses. The Chief Secretary's dismissal of high table talk as irrelevant to anything that might colour the Government's policies does not represent the views of his Cabinet colleagues. I am referring not to the baleful influence of the All Souls high table, but to the wellspring of the Chancellor's ideas in Chicago and, in their latter manifestations, in Minnesota and its federal reserve bank in the persons of such distinguished economists as Sargent and Wallace, as well as the elderly guru, Professor Friedman.
I hear from an unimpeachable source who has a strong interest in the vindication of the Chancellor's strategy that at a recent conference in Minneapolis, at which both Sargent and Wallace were present, there was a discussion on exchange rates and currency misalignments and one brave participant proposed that the economists present should vote on whether they preferred fixed exchange rates or fixed monetary targets. The vote was nem con in favour of fixed exchange rates. In the citadel of modern monetarism, there was a switch in policy and strategy from that being pursued by the Chancellor. The intellectual foundations of his case have been destroyed.
458 The Government, having got it all wrong in monetary strategy, have resorted to the translation of their monetary strategy into the pursuit not of sterling M3 targets, but of PSBR targets. The Financial Statement and Budget Report of 1980, when the medium-term financial strategy was first put forward, set out the course for the public sector borrowing requirement:This … is not to be interpreted as a target path. It is a projection of the course of the PSBR based on the assumed growth of GDP and present public expenditure plans that should be broadly compatible with the monetary objectives. Fiscal policy will be operated so that the PSBR for any particular year will be consistent with declining monetary growth in the particular circumstances of the time.The pragmatism has shifted. The PSBR is now the hard target and the choice of monetary targets and the rebasing of monetary targets are rigged so that the borrowing requirement, as a percentage of GDP, can be dragged down to wildly deflationary fiscal balances.
Another absurdity in the choice of the PSBR as a financial target was brought out well by the Institute of Fiscal Studies in its paper on Budget options published just before the Budget. It set out a much more fundamental consideration—the balance sheet of our public sector. There is a huge overall surplus of assets over liabilities of £235 billion. There are huge shifts from year to year. In 1982–83, there was a fall in the balance of £26 billion, which grossly overshadowed the PSBR. Within the financial sector, the shift in the balance of financial assets over financial liabilities happened, by accident, to equal the PSBR in 1982–83, but the net financial liabilities in 1981–82 decreased by £3 billion despite a PSBR of £9 billion. They went in opposite directions.
The Government's financial measures of the public sector are wildly innaccurate descriptions of the true position. The Government derive about £9 billion a year in revenue from the North sea. That is, in effect, the product of running down a national asset. At the same time, we have the unfunded public sector pension liabilities increasing financial liabilities at the rate of £15 billion to £20 billion a year. Is none of these considerations relevant to the financial strategy of the Government, or does that merely deal with the oil in the lubricating system, merely the narrowly defined PSBR and its highly variable impact upon the money supply in each particular set of circumstances?
Having arrived at a set of dogma, and having, in however rickety a manner, disproved, and overtaken by the technical arguments, a framework which has bamboozled the Cabinet, the City and Conservative Members, the Chancellor of the Exchequer feels at liberty to roam freely into the lush pastures of tax reform and the supply side.
I have considered some of the details and I have a certain amount of sympathy and admiration for what the Chancellor has been trying to achieve. On investment allowances, for example, he is a Johnny-come-lately. He is 20 years behind the times. The really distorting effects of investment allowances on the capital structure of industry and unemployment took place during the 1960s and 1970s. They have no appreciable effect given the. present depressed levels of investment. As a Member for Teesside, and where I hope I could have been excused special pleading, I spoke repeatedly in the House about the absurd effect that the investment allowances were having in encouraging the chemical, oil and steel industries to invest in technology with the deliberate intention, in a 459 development area, of replacing every possible job. The effect of the capital allowances was vastly to increase unemployment instead of reducing it.
If the investment allowances had been replaced by something more relevant to the redevelopment of British industry, I would have been warmer in my commendation of what the Chancellor of the Exchequer did yesterday. The hon. Member for Winchester showed the glimmerings of a hopeful way forward when he suggested the rolling-up of research and development in the business expansion scheme. That idea was argued on a much wider canvas by the Select Committee on Science and Technology in another place. The Committee argued that tax allowances should be payable on research and development expenditure generally. That is a good idea and one that I would extend still further.
The development of a business nowadays involves much more than investment in plant and machinery or in research and development. It involves long periods of building up personnel, the training of employees in very expensive ways, the opening up of new markets and new process technologies and new product designs. In this process capital expenditure can be quite small when compared with overall costs.
I offer as an example the cost of getting into silicon chip manufacture. In that sector it is necessary for a company to play itself in with possibly rather low profit margins in product areas where its competitors have a considerable lead. If it does not go through that learning phase, it will never be possible to get into the market at all. If the Chancellor had addressed himself to the cost of entering some of the modern technologies and had worked out the institutional means of doing so, realising what this means in the support of existing institutions and not their destruction or the undermining of them in favour of the isolated individual saver, if he had not relied on the financial system to mediate wholly between the individual saver and the person who is to do the investing and had given more sensitive consideration to the processes of industrial development, it could have been a Budget that deserved the description "historic". However, his prejudices mean that he will not make any move in that direction during this Parliament.
We have ample evidence that technology is an accumulation of know-how and experience within an enterprise. It is not something that can readily be transferred from one country to another or from one firm to another. It has to grow up within the firm. It must be learnt and kept alive within that firm and team and must be built on past success. That continuity of the enterprise is something that the Chancellor went out of his way to undermine in the Budget. Instead, we are moving in the direction of the caricature of the pension fund manager who divides his fund into four entrusts each quarter to one of four merchant banks and annually sacks the bank which performs the worst during the year, inducing absurdly short-term behaviour into the judgment of investment success. Yet that is precisely the direction in which the Chancellor wants to go.
The overall direction in which we have found ourselves moving over the past 10 years has had a remarkable resemblance to the course of events 50 years ago. The course of events of GDP, unemployment and investment from 1975 to 1983 has followed closely the course of 460 events from 1925 to 1933. The question is whether the future course from 1983 onwards will follow closely the course from 1933 onwards.
From 1933 onwards there was a sharp recovery in industrial production, a sharp fall in unemployment and a remarkable transformation in the economy. Today there is little prospect of that breakthrough. The Government point to productivity growth. I commend hon. Members who are interested to study the Brookings papers on economic activity. In the second volume of 1983 Buiter and Miller review the evidence of the scrapping and closures of plant and regard it as accounting for the increase in productivity that has occurred. If hon. Members want to consider the evidence in more accurate company level detail, I commend them to read the excellent report on textiles of the Manmade Fibres Federation, which spells out in physical terms the reductions in capacity that have taken place over the past four years. If the tail is cut off, it is inevitable that the average batting score of the higher level batsmen will be higher, and that is where the increase in productivity has come from.
What are the prospects of the overall economic policy allowing room in fiscal and monetary policy for growth to take place? The gloomy Green Paper has underlined the excessive fiscal——
§ Dr. Bray
The hon. Gentleman is right. The Green Paper says nothing except gloom, gloom and more gloom. It offers no prospect of that gloom coming to an end in the next 10 years. If we are to have a change, we must address ourselves to the exchange rate and competitiveness, to policies that will do something directly about unemployment and investment. It will be necessary to take into account in the assessment of fiscal policy the cyclical and inflation corrections that are applied in the United States. When they are applied to the United States they still leave a huge budget deficit stretching out into the future. When they are applied in the United Kingdom, they show that we are in gross surplus.
The continuation of those accounting methods that the Chancellor is pursuing and his failure to apply the necessary corrections offer us no prospect of relief from the monetary and fiscal constraints which will deny to the country the pace of recovery that it experienced from 1933 onwards. Nevertheless, I would not rule out a recovery, and a continuing recovery, over the lifetime of this Parliament. I would not necessarily share the views of the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) that it will be a short recovery only. I think that it could well be sustained. There is today the technological and human possibility for sustained growth, which is huge if we can only get ourselves organised, and not even this Government may have the wit totally to frustrate the growth that is available.
Faced with the situation of continued possible recovery, I think it would be a mistake for Opposition Members simply to say that there is disaster round the corner. I do not think that there necessarily is. There may well be a continued moderate improvement. We have to underline the prospects of squalor held out in the Government's Green Paper, but, more importantly probably, we have to offer a more coherent strategy, constrasting with the Prime Minister's household economics, and the degeneracy of the Chancellor's doggerel of finishing school economics 461 out of which he drafted his medium-term financial strategy. We need to look at the practical and technical level of those who are facing the music, and writing the score, in industry, and in the contemporary research in modern economics.
The pursuit of the final objectives of full employment, growth and stable prices would lead to a quite different combination of policies from those that the Government have been following. This is not contrary to the basically human and social inspiration of my right hon. and hon. Friends, but I would regard carefully designed work on our own future policies as a necessary concomitant of our human and social concerns.
§ Mr. Steven Dorrell (Loughborough)
The speech of the hon. Member for Motherwell, South (Dr. Bray) was, as always, thoughtful. I agreed with much of what he said about monetary policy, to which I will return later.
People always react to Budgets at two levels. First, there is the level of the specific changes, which are relatively easy to assess, and the reaction is quick, and usually remains unchanged. People also react to a Budget at the level of its overall impact on the direction of the economy. This assessment is much more complex, and it is perhaps that which Iain Macleod had in mind when he said that Budgets that are well received on Budget day tend to look slightly less acceptable three months later. I wish to look at the Budget from both those points of view.
I congratulate my right hon. Friend on a number of very welcome tax changes. First, I congratulate him on the move he has made on VAT on imports which, in the short term, is an imaginative way of squaring the circle of the tax changes that he wanted to introduce this year. It also has the effect of limiting the attractiveness of imports at the stage in the economic cycle at which consumers are tending to suck in imports, and, therefore, to reduce the pressure of imports on the level of output in the economy. As I say, it has the effect of paying for important changes elsewhere in the Budget package.
Secondly, I congratulate my right hon. Friend on the manner and content of the changes that he has introduced in corporation tax. It is absolutely right to put the emphasis on lowering the marginal rates on the profits of companies. If he was going to do that, he clearly had to do something to reduce the levels of allowances against corporation tax. I believe that that emphasis was exactly right. Furthermore, I congratulate him on the way he did it, because the way in which it is to be phased will encourage firms to bring forward capital investment into the next two years at the stage in the cycle at which we should be hoping the investment programmes will be maximised.
On a smaller point, but applying the same principle, just as I welcome the fact that my right hon. Friend is removing some of the allowances for corporation tax, and giving us the benefit of the marginal rate, so I welcome the fact that he is removing one of the allowances which had outlived their usefulness—the allowance which had been provided against life assurance premiums. That is a further extension of a principle that I believe is right, to extend the tax base, and to put the emphasis on the reduction of the marginal rate of tax. I welcome both those examples of that principle.
462 Finally—here my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) may note an apparent contradiction—I welcome the fact that, on income tax, my right hon. Friend put the whole benefit on the increase in the thresholds for the payment of standard rate income tax. That is right in equity for the impact on the poverty trap. It is also right in economic terms in this financial year, because it will put demand into the pockets of those most likely to use the cash to maintain consumer expenditure. To the extent that this recovery has been started off by consumer expenditure, I think that the effect of that decision on tax thresholds will be a tendency to maintain the level of consumer expenditure. That is also welcome.
From those specific tax changes, I move to the more general impact of the package set out by my right hon. Friend. Here I join the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) in congratulating the Chancellor on the clarity with which he expressed his objectives. As the right hon. Member for Hillhead said, we know where we are going, and we know, at least in general terms, why we are going in that direction. Not the least of the reasons why I welcome the fact that the Chancellor went to some trouble to make that clear in his speech is that it also provides those of us who may not agree with every detail of his economic analysis with an opportunity to take him up on one or two of the points that he made, and to express some reservations about the emphasis that he placed.
In 1983, the Government were re-elected because the electorate was prepared to take on trust the claim of the Conservative party, which I believe was justified, that, having taken some unpopular decisions in the Government's first term, if we were re-elected, the opportunity existed for some of the benefits of that medicine to come home. We were effectively saying, "You have had the medicine, re-elect us, and then will come the good news." The good news, in the view of the majority of the electorate, will be measured in terms partly of the number of extra jobs that we create, and partly in terms of improvement in the level of benefits that we can provide, both of which are the direct result of growth. Those of my electors who looked forward to the wages of virtue, after what my right hon. Friend the Leader of the House called three years of unparalleled austerity, will, I suspect, feel a slight twinge of disappointment if the projections of growth included in the documents yesterday turn out to be true. A growth rate that is peaking in the current financial year at just over 3 per cent., and which one sees decaying to barely more than 2 per cent. in the years ahead, will not be enough to reverse the tide of unemployment. There is a danger that it will not even be enough to mop up the extra labour that will flow on to the market as a result of increasing productivity.
While I supported last year the view that, in the early stages of recovery, it was important not to try to push too fast a pace into the economy, I believe now that we should be looking for ways of improving upon the growth projections included in the documents published yesterday. I do not quibble with the principle, particularly in the public expenditure Green Paper, that there is a danger in projecting too fast a growth rate, with the implication that one then makes plans which, in the event, one cannot satisfy. I accept that there is a danger in projecting too fast a growth rate, and making one's plans on that basis. If we are to draw a distinction between a budget and a target, let us at least be clear that our target 463 is higher than our budget. I believe that the combination of high unemployment and relatively high productivity growth offers us the opportunity of promoting more ambitious growth rates than were stated in the documents published yesterday.
For that reason, I am somewhat concerned by the passage in the Red Book and the Budget statement on monetary policy. What my right hon. Friend the Chancellor of the Exchequer had to say yesterday on the various forms of "M" was reminiscent of the earlier Budgets of his predecessor, now the Foreign Secretary. Under the previous Chancellor of the Exchequer, monetary policy had latterly come to be more broadly based. As the hon. Member for Motherwell, South mentioned, it had latterly come almost to be based principally on an assessment of the effect on the exchange rate.
Yesterday, my right hon. Friend the Chancellor of the Exchequer said that the exchange rate would still be relevant. However, his remarks and those in the Red Book seemed to emphasise a return to monetary aggregates. If that is so, it is bad news, for two reasons. First, experience shows that monetary aggregates are an unreliable indicator of monetary conditions within the economy. They cannot be used in the short term as an accurate meter of what is going on in the economy. More seriously, table 2.2 in the Red Book contains figures that project a reduction of 4 per cent. in the rate of growth of monetary aggregates between the financial year starting 5 April and the end of the period. The Red Book says that they are not forecasts or targets but simply illustrative examples. If that is so, it is difficult to argue against them. However, let us hope that they do not come to pass.
If monetary policy is to be tighter by four percentage points at the end of the period than at the beginning, it can only mean a reduction in inflation of 4 per cent. or a reduction in output of 4 per cent. The experience from 1979 to 1981 tends to suggest that, if there is a conflict between those two, it is output not inflation that gives. In making up his monetary policy, I hope that my right hon. Friend will be flexible—as he promised to be, and as the small print clearly says he will be—in the interpretation of those targets and projections. If we are tied to very tight monetary targets and to tight credit, and we consequently lose an opportunity for growth, the electorate, rightly, will not be very happy about it and in my view it will be right.
When assessing monetary policy, the key question is whether additional demand as a result of a looser monetary policy would lead to extra output or to higher prices. If it simply led to higher prices, no one would argue that that policy should be pursued. However, if a looser monetary policy led to extra output, I fervently hope that my right hon. Friend would be prepared to tolerate it and would not put his targets above that assessment.
There is another element of flexibility that concerns the plans for public expenditure. The public expenditure White Paper, which was published a fortnight ago, and the various comments on public expenditure in the Budget documents emphasise the Government's commitment to maintaining public expenditure in real terms for the indefinite future. If the economy is to grow—as all yesterday's figures forecast, albeit rather more slowly than I would like—it is not right to insist that every penny of 464 that growth should go to produce tax cuts rather than extra public services. We all know that there must be a choice between higher public expenditure and tax cuts.
Tax cuts can be, and in many circumstances are, an important part of a Government's strategy, not least because of their impact on output. But in assessing whether the benefit should be felt in tax cuts or extra public expenditure, we must remember that public expenditure can also promote output by, for example, increased training. My hon. Friend the Member for Wyre Forest (Mr. Bulmer) rightly asked for that, because if there are labour shortages we should ensure that training is adequate to meet them. Another form of public expenditure that our competitors undertake, and that we should also undertake, is public expenditure to promote and support the development of competitive enterprises to participate in international trade. The idea that all public expenditure is a burden is not borne out by the facts.
Furthermore, we must remember that there are services which, for the vast majority of our constituents, are supplied only by the state. Education and health are the two most prominent examples, but defence and law enforcement could also be mentioned, as well as all the infrastructure capital investment projects that are provided only by the state. It would be wrong of us to preclude any possibility of spending some of the additional wealth that we create as a result of that growing economy on improving those aspects of our national life, just as it would be wrong to say, when the economy is growing, that we are not prepared to tolerate increases in public expenditure which could result in increased pensions or increased provision for the sick and disabled.
It would be a mistake to imagine that we can assume for the indefinite future that public sector employees will be happy to see private sector employees' living standards rise while theirs are held stable. That is a perfectly acceptable and sensible policy in the short term, and of course we do not want to see public sector wages out of control, but we cannot sensibly imagine that public sector employees will be content indefinitely to see their wages held in real terms while the wages of others rise.
For the moment, I give this Budget two cheers. I give it the first cheer because it gives us a very clear view of what the Chancellor's plans are and where he is going. I give it a second cheer, because it has undertaken some major and important tax reforms. The third cheer will be deferred until my right hon. Friend the Chancellor has delivered a good growing economy. I look forward in keen anticipation and expectation to the day when it is delivered.
§ Mr. David Winnick (Walsall, North)
I regret that I missed some of the earlier debate as I was in a Select Committee and had other commitments in the House. In previous Budget debates I have asked at the start, as I do now, the following question: will the proposals have any effect on reducing the large-scale unemployment?
As we know, unemployment has continued to increase over the past few years. However, this Budget will not do anything to reduce it. Neither the Chancellor in his speech yesterday nor the Prime Minister in her reaction to unemployment or in her response to debates and questions in the House seems to grasp the plight of those who are denied a right to a job. I noticed that the hon. Member for 465 Loughborough (Mr. Dorrell) expressed similar reservations towards the end of his remarks. The danger is that the level of unemployment that we have had for some time will be seen as natural and inevitable. Even if there was a modest recovery, as my hon. Friend the Member for Motherwell, South (Dr. Bray) pointed out, such mass unemployment might still be seen as inevitable. Labour Members totally reject the notion that almost 4 million people have to be denied a job for recovery to take place.
Any Budget that does not deal with that cancer in our society must be considered a failure. Despite all the cleverness of the Chancellor of the Exchequer's presentation yesterday, it will not add up to a success unless the Budget's proposals lead to a substantial reduction in unemployment.
Like my hon. Friends, yesterday I saw Conservative Members standing up cheering and waving their Order Papers at the Chancellor of the Exchequer as he concluded his speech. As I watched, I wondered how many of the unemployed, especially the long-term unemployed, and how many of their families who are desperately trying to live on inadequate incomes would give that speech the same enthusiastic welcome when they heard it on the television or read about it in the press. It is interesting that in yesterday's debate the hon. Member for Staffordshire, Moorlands (Mr. Knox) said:The Budget will … be judged not on the 'technical changes' … but on its general effect on the well-being of the British economy."—[Official Report, 13 March 1984; Vol. 56, c. 323.]He said that the Budget in that respect was "most disappointing."
We needed a Budget that stimulated demand in the economy and gave a real boost to manufacturing industry. That is certainly what we need in the west midlands, where, under this Government, unemployment has risen from 5 per cent. to 15 per cent. and to 17 per cent. in my local travel-to-work area. Behind those percentages are the people involved. Such is the economic climate now that, once they have lost a job, or on leaving school cannot find a job, they lose the right to earn a living and—to use a phrase often used by the Prime Minister—the right to stand on their own two feet.
As in previous Conservative Budgets presented by the right hon. and learned Gentleman who is now Foreign Secretary, we were told yesterday that recovery is on the way. That has been a familiar promise in Budgets in recent years. I do not believe that this Budget will be any more successful than those presented by the present Foreign Secretary.
The Opposition welcome the increased tax threshold, because a number of people on low incomes will not have to pay income tax. Many of us have urged that for some time. However, after the changes take effect, more than three out of four families poor enough to receive family income supplement will still be subject to income tax.
The Government have emphasised the shift in the burden of taxation away from the rich towards the poor. We remember the promises about reducing the taxation burden. The promises were believed by many, but the figures show, for example, that only those with incomes of £18,000 a year—about £345 a week—now pay less 466 in income tax and national insurance than they did in 1978–79, the last year that a Labour Government were in office.
For a married couple with two children on two thirds of average income, the tax burden has risen 7 per cent. since this Government took office. Even worse, the tax burden of a couple with two children on half average income has increased by over one third. That is without the increasing burden of indirect taxation on those on limited incomes.
It is estimated that all the proposals in the Budget will mean that the low paid will pay at least 91p a week more in indirect taxation. It will be interesting to see whether the Minister challenges that estimate. If it is correct, it will certainly cancel out much of the income tax gain for such people. The poor suffer most from increased fuel charges, the substantial increase in council house rents and other essential household costs.
I urge yet again that the long-term supplementary rate be given to people who have been unemployed for 12 months or more. It is as if the Government were punishing the unemployed for being unemployed. How ridiculous it is, when it is so difficult in the west midlands and throughout much of the country to find a job, to say that those who have been unemployed for a year or more, through no fault of their own, should be denied the increase. The increase in supplementary benefit may not mean a great deal to Ministers or to Conservative Members, but it would at least give the long-term unemployed the opportunity to provide for their families somewhat better than they can today.
Pensions should be increased more substantially than is likely to be proposed next month. Proposals to contain public expenditure and to continue cuts in all types of public services not only cause harm to the community, but lead to even more unemployment. We must bear in mind that a number of people's housing benefits will very shortly be reduced as a result of Government policy.
For all the reasons that I have described, I believe that the Budget is disappointing. It will do nothing to help those who desperately need a job. It is likely that when the next Budget is presented the unemployment level will the same as it is today, if not worse.
§ Mr. Nicholas Budgen (Wolverhampton, South-West)
The hon. Member for Walsall, North (Mr. Winnick) was right to emphasise the importance of unemployment and the way that it has affected the west midlands. Wolverhampton's experience is similar to that of Walsall. The hon. Gentleman was a little ungenerous in the way that he attacked my right hon. Friend's Budget. I should have thought that he would applaud the abolition of the national insurance surcharge. In previous years I have suggested that that tax should be abolished, and I recollect that the hon. Gentleman agreed with me.
I should have thought that the hon. Gentleman would be pleased at the way in which, albeit gradually, the subsidies given to capital are being reduced. That means that when business men make a choice between robotics and the man in the unemployment queue, the tax system, at least, does not push him towards robotics. I should have thought that the hon. Gentleman would be generous enough to refer to that.
I am one of those who called for the Green Paper on public expenditure. We called for the Green Paper for a 467 basic political reason. We did not want to discuss the minutiae of public expenditure, but we believed that there was a need for a restatement of the Government's political priorities. We felt that we had not cut public expenditure as much as we had hoped in this Government's first Parliament. The general feeling was that the Government lacked direction and decisiveness about public expenditure.
It is heartening that the Budget has given a new sense of decisiveness and direction to the Government's political feel. There is no doubt that, perhaps for the next fortnight or month, the sense of elation and satisfaction on the Government Benches as tax policy is dealt with in a direct, decisive and intellectually distinguished way will carry the Tory party along.
We also need a proper statement on the political preferences for public expenditure. We want to know whether the Government have a serious intent to reform the way in which the NHS is financed. We wonder whether the Government intend to reduce public expenditure on defence. None of those questions is even referred to in the public expenditure Green Paper. The time that it was published shows that the Government know that it is a wholly inadequate response to the political cry from the Conservative Benches. If the Government had wanted to provide even some of the questions, let alone some of the answers, they would have published the document at a time when it could receive proper public discussion and interest. It has been thrown in with an extremely interesting Budget so that the Government can say, "The Green Paper was published and, therefore, we have met your demands."
When my right hon. and learned Friend the Chief Secretary referred to the Green Paper today, he did not say much about it. He was quite right, because there is not much to say about it. We need something more fairly quickly so that the sense of direction that has been lacking is given back to the Tory party in order that it may move forward in an agreed and cohesive way, rather than simply treading water.
My second point relates to the EC. It is obvious that our relationship with the EC is moving towards a critical stage. The Government must make a difficult choice. Some say that there are signs within the corporate character of the Government that they are prepared to risk a break-up of the EC if they do not get what they demand. Others say, "Never mind the rhetoric. They are fudgers and conformists and, in the end, they will not risk a break." I vary between those two positions according to whether I had a good or a bad breakfast. There is plenty of evidence to support either of those positions. No one can tell what will happen.
It is certain that if the forces of fudge win, the advocates of fudge will come to the House and ask for an increase in own resources—the 1 per cent. creamed off VAT. From a technical and legal standpoint, all that is then required under section 1(3) of the European Communities Act 1972 is for an Order in Council to be approved by each House of Parliament. In theory, there could be a short debate after 10 o'clock, and we would then lose control of a further slice of our public expenditure—the Eurocrats would say for ever, and less helpful people would say at least until Britain leaves the EC.
Is it not extraordinary that today we start on the necessary long and detailed journey by which the House of Commons authorises for only one year the extraction of 468 taxes from our fellow citizens? We shall have debate after debate on the minutiae of taxation. Yet the British people run the risk of losing a substantial slab of their money—perhaps for all time—to the EC. The Government propose that it will be lost after one short debate in the House of Lords and one short debate in the House of Commons.
I am sure that it comes as no surprise to you, Mr. Deputy Speaker, that the legal and technical position has been substantially amended by the good sense, kindliness and generosity of Lord Whitelaw. The House may recollect that when the European Assembly Elections Act 1978 was passing through its stages, many people said that if we had direct elections those directly elected would wish to enhance the powers of what they would impudently call their Parliament. It was argued in the House that there should not be direct elections. Lord Whitelaw was wise about that. On 24 November 1977 he responded to those who feared an increase in the power of the European Assembly by saying:We must know exactly what the Bill will do and where we stand under previous legislation and this legislation. I do not imagine that anyone is suggesting that we should have another Act of Parliament if the Assembly wished simply to change some of its own procedures. On the other hand, if it were minded to increase its powers at the expense of national Governments or Parliaments, it is unthinkable to anyone that such a change could happen, or could be allowed, without an Act of Parliament in this House. I should have thought that that was undoubted. If that is the case, it may have to be written into the Bill to make sure that it is so. We ought to know how it will be done and whether, if it be necessary, the Government will introduce a new clause to that effect. No one imagines that it could be otherwise. We simply wish to have it made perfectly clear during the passage of the Bill.My hon. Friend the Member for Bury St. Edmunds (Mr. Griffiths) intervened and asked about further powers. Lord Whitelaw continued:I think that my hon. Friend misunderstands my purpose.This is the authentic voice of generous Lord Whitelaw.I was not seeking to be narrow or legalistic in the matter. If I did not explain myself properly to my hon. Friend, let me try again. If such circumstances as he outlined should arise, making a very clear increase in powers of the Assembly at the expense of national Parliaments and Governments, surely neither he nor anyone else is suggesting that that should not be done by an Act of Parliament here".—[Official Report, 24 November 1977; Vol. 939, c. 1780–81.]I remind the House that the Assembly forms part of the budgetary authority of the EC institutions. The Assembly can—indeed must—approve the budget and it has powers to reject the budget; and, when the funds given to the EEC budget are increased, that is an increase in the powers of the Assembly.
I agree wholeheartedly with what Lord Whitelaw said. If there is to be a fudge and an application by the fudgers to this House for an increase in own resources, let it be done by an Act of Parliament and let public opinion decide on the various complicated factors which will be brought forward. Let public opinion decide, for example, whether it is vital that Spain and Portugal come into the EC. Let all these factors be decided by the people as they apply their interest to an Act of Parliament going through this House.
§ 9.2 pm
§ Mr. Tim Eggar (Enfield, North)
I hope that my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) will forgive me if I do not follow him down the second path that he took. On the first, I, too, argued for 469 the publication of the Green Paper, but I do not take such a pessimistic view of the outcome of that request. It may have been less than we hoped, but it is slightly more than I feared. I hope that it is the base building block on which the Select Committee and individual hon. Members can proceed.
Time makes it inevitable that my remarks will be staccato rather than that I should develop a sustained argument, I shall pick out three detailed points in the Budget. First, the reduction of stamp duty on house purchase is a welcome step towards a more mobile society—a step which I hope my hon. Friend the Minister for Housing and Construction will follow up, particularly in the private rented sector.
Secondly, I welcome the change in the treatment of stock options. That is long overdue. However, I hope that Treasury Ministers will make it clear that firms should take advantage of the generous treatment of stock options, not only for their top executives but throughout their companies, because that is the real way to get employee ownership and participation in capitalist enterprises.
While I welcome those aspects, I doubt the equity of the Chancellor's decision to scrap the investment income surcharge. It is difficult to defend giving away £360 million to people who have capital of perhaps £80,000 each, while measures are being taken to withdraw housing benefit from people with small occupational pensions.
However, the overall judgment of the Budget must not be made on detailed points, welcome or unwelcome as they may be. The detailed judgment must be made on the core of the Budget—the medium-term financial strategy and the corporate taxation reforms.
First, the MTFS. I was concerned, when the Chancellor on super Tuesday spent some time discussing what may be nicknamed "the big M0", that he elevated the monetary targets, giving them an importance that they last had in 1981. I hope that I am wrong about that. I hope that the move to M0 and M2 simply marks the evolution of the management of monetary aggregates, rather than a change and a raising of the importance of those monetary targets. On a careful rereading of his speech, I believe that that was the Chancellor's message. It is important that the Chancellor should continue to look at all the monetary aggregates and the exchange rate.
Initially, I was worried—I agree with other hon. Members—about the PSBR targets. Obviously a reduction from £10 billion, which is this year's likely outturn, to next year's target of £7.25 billion is dramatic. But when that figure is examined in more detail, it is not as restrictive as one might suggest.
Next year, asset sales will be at least £1 billion higher than this year. The cash flow effect of the welcome imposition of VAT on imports will add another £1.25 billion. Those who believe that the PSBR can be higher than it has been in past years can reasonably claim that the target for which the Chancellor is aiming is more likely to be £8.5 billion or £9 billion than the £7.25 billion that he spelt out in his speech.
The most important point, which I believe is buried in the Red Book and has not really been brought out in the press, is that PSBR targets beyond 1984–85 are to stay at £7 billion each year. The Chancellor, consciously or unconsciously, has struck a bargain. He has said to the spending Ministers, "If you agree to keep your spending 470 levels in real terms"—I doubt whether they can achieve that—"I, in my turn, will agree to keep my borrowing requirement level in real terms. In future years, I shall not pull a fast one on you and take back some of the money you have saved by reducing my borrowing requirement; I shall ensure that the excess cash goes into tax reduction." That is a reasonable bargain, to which I hope the Chancellor will stick in the next four years.
I hope that my right hon. Friend the Chancellor—I made this point in the debate on the public expenditure White Paper—will be flexible in his approach to the PSBR, monetary aggregates and total public spending. We must recognise that international events may mean that a plan set now for two years ahead will not be sustainable in the light of changed circumstances. I believe that the Chancellor has the imagination to recognise and act on that point. We must have a slightly more flexible approach to these matters than was adopted in the past.
The most important factor about the changes in corporation tax is that they will liberate a vast army of tax advisers so that they can do something productive. A large number of skilled, qualified, able people in companies and in the City——
§ Mr. Eggar
That may be true—have devoted their energies to rearranging their affairs to cheat the tax man. They have avoided taxation. They have said that they managed their tax affairs as efficiently as they could. The extent to which such practices were adopted was absurd. If the tax changes do nothing else, the liberation of a number of skilled and able individuals will have been extremely important.
I offer one word of caution. At present we all welcome the corporate tax changes. I suspect that, in two or three weeks' time, when the pressure groups and the different industry lobbies have worked out the implications of the tax changes for them, they will come whooshing along to hon. Members. We will be lobbied extensively about why, although the measure is fine as a general approach, it is rotten for a particular firm or industry. My hon. Friends must be stalwart in their defence of what the Chancellor has done. We must remember the greater good, because I am sure that that is to the country's overall advantage.
I hope that in the next Budget my right hon. Friend the Chancellor will apply the robust approach to personal taxation that he has applied to corporate taxation. He has made a start. He has dealt with allowances. He has removed the absurd tax allowances for life assurance investment. I hope also that, by that time, my right hon. Friend the Secretary of State for Social Services will have brought forward a plan on the pensions front. I hope that my right hon. Friend the Chancellor will find room to remove tax incentives on a number of pension investments and will tackle the subject of mortgage interest relief.
If there is one anomaly above all else throughout our tax system, it is the way in which the individual is encouraged to invest in property as against any other form of investment. I believe that we have this whole matter out of proportion. Year by year, the tax cost of investment in housing increases, and we have an almost unlimited bill. It is a difficult subject with which to deal politically and practically, because of the effect on house prices and everything else, but I believe that the Chancellor should apply the same logic to personal taxation as he did to 471 corporate taxation. It is something to which he must address his mind. There are a number of other points I would like to make, but I will finish there.
§ Mr. Michael Hirst (Strathkelvin and Bearsden)
After sitting here for six and a half hours, I am pleased to be able to add a few words in conclusion from the Government Back Benches. I welcome the proposed reform of corporate taxation as a bold and imaginative step. As one who has spent his professional working life as a practising accountant, I know well the difficulties of advising clients on a scheme that seems perfectly reasonable and proper one year but which is promptly turned on its head because of budgetary changes the following year.
Uncertainty has a most corrosive effect upon confidence. It is confidence that the Government have started to rebuild. I saw yesterday's statement by the Chancellor being welcomed, not just because it brought some overdue reforms, but, perhaps more importantly, because it introduced a degree of stability and certainty for the rest of Parliament and, therefore, for the planning and business decisions taken by the business community.
Too often I have seen investment decisions taken on the basis of the tax implications rather than on whether the investment was commercially justifiable. I was known as something of a curious species in my profession because I used to advise people to make an investment if it was worthwhile and profitable, whereas I often found colleagues who advised an investment because there was some significant tax saving to be achieved.
The "new Lotus" syndrome is well known—the successful business man who has a fancy motor car or a new piece of plant which he has bought because some amorphous accountant has told him that it is sensible to do so. I welcome the budgetary measure that will remove the distortion, which I suspect many of us feel that there has been in capital investment. I hope, however, that during the transitional period there will be a stimulus for capital investment and that the investment boom that we see at the moment will be sustained until a lower tax regime is capable of sustaining it naturally.
The right hon. Member for Glasgow, Govan (Mr. Millan) is saying something from a sedentary position that I cannot hear, but I heard him earlier today speaking about his worry over the jobless. Coming from the same part of Scotland as he does, I am well aware of the problem and keenly aware of the anxiety felt there. I believe that lower rates of corporate tax will do much to stimulate business confidence and investment, which will lead subsequently to that virtuous circle of job creation.
I welcome the commitment we heard from the Chancellor yesterday to simplify the tax system. I acknowledge that the Budget goes some way in that direction. I believe that it could have gone further. I listened, for example, to what my right hon. Friend proposed to do for development land tax and how, by raising the threshold, he would remove a third of the cases. How sorry I am that he did not abolish the tax altogether and allow the operation of capital gains tax to tax such gains.
The abolition of development land tax would have been a symbolic gesture greatly welcomed by hon. Members such as myself who yearn for a simpler fiscal regime. I advance that suggestion for inclusion in the 1985 Budget. 472 I proposed in my maiden speech on the Finance Bill when I came to the House last year that stamp duty should he reduced.
Probably the most welcome feature of the Budget is that the Chancellor has mapped out the direction in which the country is going and has given a clear indication of the benefits that can be realised, provided that we continue to be vigilant about the proportion of the nation's resources taken up by public expenditure. Opposition Members should not assert that the Government lack direction or the purpose and will to make radical reforms, which the country needs and wants.
I hate to end on a slightly discordant note, but, after sitting for nearly six hours to hear the Opposition's contributions, my pleasure at the Chancellor's announcement is matched by a certain foreboding and sadness that there has been little recognition by the Opposition that we have taken bold, imaginative and good steps that will help the economy, and play a vital part in creating the investment from which future jobs will come.
§ Mr. Terry Davis (Birmingham, Hodge Hill)
I should like to begin with three comments on the Chief Secretary's speech.
I shall not follow him in style. His speech contained much sarcasm and he will probably conclude, on reflection, that that was unwise. We shall have a long Finance Bill and spend a considerable time in Standing Committee. The Chief Secretary will have plenty of time to reflect that he has put the atmosphere of Standing Committee at risk today. The Committee may not be so agreeable as he would wish. As to his remarks about my hon. Friend the Member for Thurrock (Dr. McDonald), I hope that he will follow them by making a point of being present to listen to her contribution tomorrow.
The Chief Secretary complained that my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) did not discuss the Green Paper, "The Next Ten Years: Public Expenditure and Taxation into the 1990s". We shall be delighted to debate the Green Paper, but today's debate is on the Budget. I agree with the hon. Member for Wolverhampton, South-West (Mr. Budgen) that we need proper time to debate the Green Paper rather than linking it with the Budget debates. We shall be delighted to debate it before the summer recess and we expect the Government to provide time for that.
Listening to the Chief Secretary today and the Chancellor yesterday afternoon, I was struck by the similarity of their measures and their definition of aims to those of Treasury Ministers in 1979. That Budget was also the first Conservative Budget after a general election, with a new Conservative Chancellor. The increase in VAT and indirect taxes was greater than yesterday's increase because Treasury Ministers almost doubled VAT on that occasion. A proportionately larger increase in personal allowances for income tax was also introduced, and it took 1.3 million people out of tax—a higher figure than this year.
The 1979 Budget was also described as a tax reform Budget and an incentive Budget. We were given to understand that it would encourage entrepreneurs and foster enterprise. Today, the Chief Secretary described the aims of the Budget as being to improve incentives and encourage enterprise in almost the same words that we heard five years ago. Yet the result of the 1979 Budget and 473 its successors has been an increase in the amount of taxation and an increase of more than 2 million in the number of people unemployed.
Let us spare a moment to consider some of the details of this Budget. On this occasion, the Government have increased VAT by including take-away food. I wonder how the Prime Minister squares that with her constant exhortation that people should invest their redundancy compensation in new enterprises. Many people have invested their redundancy money in taking on franchises for fast food take-aways. Now they will feel the impact of the Budget.
The construction industry will feel the effect of the extension of VAT to building alterations. I agree entirely with my right hon. Friend the Member for Glasgow, Govan (Mr. Millan). The construction industry will certainly not be helped by the change, and it needs and deserves help. It will also not be helped by the abolition of capital allowances on industrial buildings. The reduction or abolition of stamp duty on houses will have some offsetting effect, but it is doubtful whether it will equal, let alone exceed, the penalties imposed on the construction industry by the other measures.
As my hon. Friend the Member for Motherwell, South (Dr. Bray) pointed out, the extension of VAT to imports for one year only will bring a one-off lump sum windfall of £1.2 billion. It merely brings forward revenue that the Treasury would have received in any case. How will this year's tax cuts be paid for next year? This Budget is supposed to be for this Parliament and beyond. It is like oil revenue, but with a shorter time scale. What will happen next year? Would it not have been better to invest the windfall rather than using it for tax cuts? I put that question to the Chief Secretary and no doubt we shall be able to discuss it further with him in Standing Committee. The Chancellor's response when asked how he will find the £1.2 billion and how he will deal with the longer-term losses when oil revenues begin to decline seems to be that a reduction of tax for people on high incomes will lead to greater enterprise and higher growth. The Government tried that in 1979 and merely made the recession worse than it would otherwise have been.
For most people, the changes in personal allowances will mean £1 per week for a single person and £2 per week for a married couple. People on higher incomes will do better, as one expects with a Conservative Government. The reductions in tax are most welcome at the lower end of the tax scale, but let us not for one moment accept the Government's assertion that those people have been taken out of tax. The Government have not removed all taxes on wages up to £40 a week for a single person or £60 a week for a married couple. National insurance begins at a much lower level than that, at wages of £30 per week, and national insurance is a tax of 9 per cent. on wages. The Government have done nothing about that.
As a result of the changes in tax allowances, a single person earning £40 per week will be about £1 a week better off and a single person earning £500 a week will be £6 better off. A single person earning £1,000 a week—£50,000 per year—will be better off still, while a married couple with the same earnings will be £17 a week better off. Some people with incomes of £50,000 actually work to earn that money, but most do not. In most cases, it is unearned income from investments. It makes little 474 difference whether they are single or married. People with unearned income of £1,000 a week or £50,000 a year will be nearly £150 a week better off as a result of the Budget. Not many people work for £50,000 a year, but rather more work for £25,000 per year. They will be only £6 a week better off, but if the £25,000 is unearned they will be £60 a week better off. There is a difference here, not just between those on high incomes and those on low incomes but between those with incomes from investments and those who work for a living and receive wages. This Budget is not a reward for enterprise or for business men. Nor does the Budget do anything for those who are sick and disabled and cannot work. I qualify that criticism. We all welcome the abolition of the tax on cars designed for disabled people. However, what is there in the Budget for those who are sick? In the first part of the Budget announced last week,, there was an increase of 15 per cent. in charges paid by those people in some parts of the Health Service.
The Chancellor and Chief Secretary have told us that the changes in tax allowances will take 100,000 widows out of tax. They also regard as a cause for congratulation the fact that half those who will benefit from the abolition of investment income surcharge are retired. But people with unearned incomes of £7,000—the point at which that surcharge began—have capital of about £70,000. What about all the other widows, widowers and retired couples with small private pensions? They will get nothing from the Budget, because the age allowance has only been indexed. There has been no real increase in that.
Equally, nothing is offered to those pensioners who depend entirely on the state pension topped up by supplementary benefit, except the abolition of excise duty on paraffin. While that is welcome, the Chancellor and the Chief Secretary should not be surprised if pensioners throughout Britain, huddled around their paraffin heaters, are less than grateful to someone who can afford to abolish investment income surcharge but cannot afford to give a real increase in pensions, or supplementary benefit rates for pensioners, or the heating allowances that are given to pensioners through supplementary benefits. They will be especially less than grateful in view of that fact that they often use those paraffin heaters because they cannot afford to turn on the gas or electricity, yet this is the same Chancellor who has forced the gas and electricity industries to put up their prices.
What about families with children? A major omission from yesterday's Budget was any comment, statement or forecast of what would be done to child benefit. When challenged by my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley), the Chief Secretary said that we should not read too much into the figures in the Red Book, which suggest that child benefit will be increased by only 35p. We were told that we must wait until June.
It is not necessary to wait until June if there is to be a larger increase than the rate of inflation. We need do so only if the Chancellor and the Secretary of State for Social Services are waiting for the rate of inflation in May. Had they intended to announce a real and genuine increase in child benefit, it could have been announced today. However, we shall be patient and wait until June, but I should tell the Chief Secretary—I hope that he will tell the Chancellor—that, come June, we expect the increase to be at least 80p a week.
475 That is what the Conservative party promised when in opposition. [Interruption.] It seems that the Chief Secretary is not aware of that promise. It was made in a Conservative party press release in 1977. Even then it was making promises which, I hope, it expected to honour after the general election, because it specifically said:the next Conservative Government which is pledged to major reductions in direct taxation would regard improvements in Child Benefits, which are replacing Child Tax allowances, as part of this process".Elsewhere it was stated that the Conservative party was committed to treating increases in child benefit in the same way as reductions in taxation. It was also said that child benefit was replacing the child allowances, and that therefore any changes in allowances for taxation would be reflected in child benefit. So we shall expect 12.5 per cent. on child benefit; otherwise a commitment that was given by the Conservative party in opposition will be broken. The pledge will be broken unless child benefit goes up by 80p this year, in line with the changes in personal tax allowances.
Let us consider the position of a young couple buying a house. We have heard from several speakers about the reduction in stamp duty. I hope that the Minister, in replying to the debate, will tell us how many people are affected by that change. The Chancellor of the Exchequer said on television that 90 per cent. of first-time buyers would not now have to pay stamp duty, but how many of those people would not have been paying stamp duty before the Budget? The figure then was £25,000 and a house below that figure did not incur stamp duty. Will the Minister tell us how many people will really benefit? Will he also tell us how many of those people will lose the benefit of using a life insurance policy as an endowment mortgage?
I understand from reports in the press that as many as 60 per cent. of people taking out mortagages use a life endowment policy. I doubt whether they will do it in future, because there will be no tax advantage to them. But if the money is available to improve the tax position of people who are buying houses, why do the Government treat so unfairly those people who receive housing benefit? That is a point to which I and my hon. Friends will return frequently during the Budget debates.
The hon. Member for Mid-Norfolk (Mr. Ryder) said that he welcomed the changes in stamp duty because there was a need for greater labour mobility. He urged the Government to abolish stamp duty on all houses because people were needing to move in order to change their jobs or to find work. He received a straight reply from the hon. Member for Caernarfon (Mr. Wigley), who asked where the unemployed were to go in their search for jobs. In the 1920s and 1930s, as the hon. Member for Caernarfon said, the people of Wales went to industrial cities such as Birmingham and often found jobs there. I can tell the House that they do not find jobs there now. The abolition of stamp duty may or may not be a good measure, but it has nothing to do with improving the mobility of labour.
The unemployed will not get anything out of the Budget. As my hon. Friend the Member for Tottenham (Mr. Atkinson) said, they are the people who have made the greatest sacrifice in the fight to reduce inflation. The people who have lost their jobs are the casualties in the fight against inflation. There are no benefits in the Budget for them, unless we are to be told that there will be something for them in June. They are entitled to another 476 £1 a week in real terms if they are not to lose as a result of being unemployed. A single unemployed person should be getting another £1 a week if he is to be treated equally with his colleagues who still have jobs.
The Budget will not do anything to provide jobs or to encourage the provision of jobs. We are told that it will produce many jobs because it is a Budget designed for savings and investment. The Chancellor of the Exchequer talks as if those things are the same. That may be correct from the point of view of economists, but there is a difference between savings and investment and between savers and investors in the real world. This Budget is bad for savers.
I have already referred to the change concerning life insurance policies. One of the first forms of savings to be used by most people who can afford to save is a life insurance policy. I am surprised that this part of the Budget has not been criticised by anyone on the Conservative Benches. Indeed, it was actually welcomed by the hon. Members for Loughborough (Mr. Dorrell) and for Winchester (Mr. Browne). The hon. Member for Loughborough said that the Government were re-elected on the promise of good news to come. I am not sure whether he regards the abolition of tax relief on life insurance as part of that good news. I am confident that he did not include it in his election address, and that no other Conservative candidate included it. Indeed, it was not included in the Conservative party manifesto.
§ Mr. Dorrell
If the hon. Gentleman reads my election address, he will find that I said that the party was committed to reducing marginal rates of tax. Would the hon. Gentleman explain to the House any other way of reducing marginal rates of tax without tackling the problem of tax allowances?
§ Mr. Davis
That is a very interesting point, but the hon. Gentleman did not tell the electorate of Loughborough that the Government were going to abolish the tax relief on life insurance policies. That was not in the Conservative manifesto. It was, however, in the Conservative campaign guide. I concede that point. It was not listed as a promise by the Conservative party. It was listed as a threat from the Labour party. The electorate knows better now.
The Chancellor is also extending the composite rate of tax to interest from bank deposit accounts and interest on money increasingly held in bank current accounts and, I understand, in trustee savings banks. That composite tax is a tax on people who were not previously liable for tax on the interest which they receive on their savings. According to the Committee of London Clearing Bankers, there are 3 million people in that category—3 million people who are now being brought into income tax, as compared with the 800,000 who have been taken out. Some of them may well be the same people.
Furthermore, for the first time a Government will be taxing people on supplementary benefit. It is possible for somebody on supplementary benefit to have up to £3,000 in a bank account without having any reduction in supplementary benefit. Many old people keep money in a bank account which is intended to be used when they die; it is money to pay for their funeral. The income on those small savings will now be taxed at a composite rate, whereas previously it was not taxed.
The composite rate is good for investors, because they are paying much more than the composite rate. People 477 with a large amount of savings will benefit from this change, just as they will benefit from the investment income surcharge. They are people with an investment income of over £7,000 and people who have £70,000 in capital. They will benefit also from the reduction in stamp duty on share transactions. The people who can afford to invest £25 a week in shares through the share option scheme will also benefit. Then there is the reduction in capital transfer tax. That is not going to foster enterprise. That is a reduction in taxes paid by people who are dead.
This Budget may be good for investors, but I question whether it is good for investment. The hon. Member for Winchester thinks it is, but I doubt it very much. I have already mentioned the tax on life insurance policies and the composite rate on bank accounts. Those changes may well lead to less money being entrusted to insurance companies and more money being put into bank deposit accounts because of the effect on people with very high incomes. They may well lead to less investment in new enterprises and to more money being put into bank deposit accounts for the same reason. It pays a person with a very high income to use a form of investment on which the composite rate of tax will be paid, because then less tax is paid.
Then there is the reduction in corporation tax. What is going to happen to that money? How will the higher profits be used? It is quite possible that they will be used to pay higher dividends or that the profits will go abroad, thanks to the change in exchange controls.
The phased withdrawal of capital allowances by 1986 will simply bring forward some investment which otherwise would have taken place in future years. As my right hon. Friend the Member for Govan explained, it will not lead to extra investment, unless it is panic investment for the wrong reasons—the very reasons that the Chancellor deplored yesterday.
The Chief Secretary seemed to accept today that there will be less capital investment as a result of the abolition of capital allowances. He made the point that our capital stock is higher than in other countries. I believe that he is right on that point. The problem, he said, is that our capital stock is used less effectively. I am sure that he is right on that point, too. But the Chief Secretary draws the wrong conclusions.
First, the right hon. and learned Gentleman assumes that our capital stock is as good as that of our competitors. He assumes that the plant and machinery used by British industry is as up to date as that of our competitors; and he forgets that capital allowances are given for investment in new plant and machinery, not existing capital stock. As for his second point about our capital equipment being used less effectively than that of our competitors, the Chancellor expressed the same idea in a different way when he said that we need more profitable investment. But why is our capital stock being used less effectively? The problem is that the slump in our country has been deeper than that in other countries. Profits depend on sales and the size of the market, and the size of the market depends on growth in the economy. The trouble is that the Chancellor does not accept that, in order to achieve a bigger market for industry, we need growth in the economy, and that manufacturing investment leads to economic growth.
Public expenditure and manufacturing investment are the twin engines of growth. The trouble is that the 478 Chancellor has an overwhelming dislike of public expenditure and a general disdain for manufacturing investment. Yesterday, he actually defended his Budget by saying that the abolition of capital allowances and less investment would lead to more jobs. My right hon. Friend the Member for Govan has dealt with that.
Of course, the Labour party welcomes the abolition of the national insurance surcharge, because it will reduce costs. The Government should have done that a year ago, but better late than never. However, that is the only help given to industry, and it will not foster growth in the economy. The reduction in corporation tax will also not foster growth. It has not been introduced as an incentive. If that is supposed to be the reason, why is the reduction to be applied to last year's profits? The phasing out of corporation tax means that it will be better for companies to use creative accounting skills to defer their profits.
The changes, especially when the reduction and abolition of capital allowances are taken into account, will not affect all businesses in the same way. Manufacturing industry pays little corporation tax and will derive little benefit from the reductions because manufacturing companies have built up substantial capital allowances to offset against corporation tax.
However, as my right hon. Friend the Member for Govan said, some services, particularly financial services and the City of London, will benefit, because they do not have capital allowances unless they buy a new computer. Those in the City who do not take advantage of capital allowances will certainly benefit from reductions in corporation tax.
If the Chancellor had really wanted to help industry, he would not only have abolished the national insurance surcharge, but increased the public sector borrowing requirement to pay for public sector capital investment.
This is not a neutral Budget. It is a very good Budget for those with high incomes, but disappointing for the rest. It is a very good Budget for financial institutions, but bad for manufacturing companies. It is a good Budget for the City of London, but mainly irrelevant for the city of Birmingham, the city of Manchester, the city of Newcastle, the city of Glasgow and all the other cities that depend on manufacturing industry.
§ The Minister of State, Treasury (Mr. Barney Hayhoe)
I thank the hon. Member for Birmingham, Hodge Hill (Mr. Davis) for restricting his remarks so that my hon. Friends the Members for Strathkelvin and Bearsden (Mr. Hirst) and for Enfield, North (Mr. Eggar), who had been here all day, could make their speeches. I note that the hon. Member for Hodge Hill took most of that time out of my allocation rather than his own, but he is only paying me back, because last Tuesday he allowed me more than my fair share.
The congratulations to my right hon. Friend the Chancellor of the Exchequer have come from all parts of the House. A welcome and elegant tribute was paid by the right hon. Member for Glasgow, Hillhead (Mr. Jenkins), who has explained that a previous engagement prevents him from being present for my speech.
However, perhaps the most eloquent tributes have been the speeches of the Leader of the Opposition and the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), which were so far below their normal standards that one can only assume that the strength of the 479 content and presentation of the Budget rendered them hardly able to put together a coherent speech. There has been an almost unique reaction from the press, the public and the House to the Chancellor's speech. It was a very remarkable Budget.
Much of today's debate has covered well-worn ground, but some detailed questions were asked and I shall answer some of them.
My hon. Friend the Member for Bury St. Edmunds (Mr. Griffiths) asked about caravans and holiday lettings. My right hon. and learned Friend the Chief Secretary was quite right to say that this is a matter of definition and that if caravans meet the detailed requirements of the definition of holiday lettings they will qualify for tax relief.
The right hon. Member for Sparkbrook asked about meals on wheels and local authority building contracts. When a local authority is providing a meals on wheels service it will not be subject to VAT. If, however, the work is contracted out by the local authority to private contractors, the VAT charged to the local authority by the private contractor would be recoverable by the local authority. Charities that provide similar services will not be affected by the extension of VAT. I hope that that will be welcomed in all parts of the House.
Questions have been asked about local authority expenditure on building works and whether alterations to local authority buildings will be taxed, especially if the work has been put out to private contractors. Work on the repair and maintenance of the same buildings will, as in the past, be subject to tax. The regime will not alter except that it will now extend to alterations. However, local authorities can reclaim that tax.
The hon. Member for Caernarfon (Mr. Wigley) asked about home improvement grants. No special addition to local authority budgets to cover VAT is being allocated. Whether that is due will depend on when the work is done or when payment is made. If the work has been completed and paid for by 1 June, there will be no VAT charge. If the work is unfinished by 1 June but full payment has been made, no VAT will be charged. If the work is unfinished and payment has not been made, VAT will be chargeable. Many improvement grants relate to repairs, which have always been taxable.
Throughout the debate, and including the remarks of the hon. Member for Hodge Hill, there has been a general welcome for the raised thresholds. Different views have been expressed about the priority accorded to this tax relief. The criticism has been made that the cash effects of the relief will be greater for the higher paid. The right hon. Member for Sparkbrook said that the Chancellor has "given away more cash". That shows that Opposition Members are in a frame of mind that leads them to think that the cash belongs to the Chancellor and the Government. It does not. The Chancellor is deciding to take less from the taxpayers' own resources, and we must always insist upon making that distinction.
If we have a progressive income tax system, it is inevitable that the higher paid will enjoy larger cash reductions if a reduction is made in the tax system. In real terms, the tax reductions this year have been concentrated on basic thresholds. There has been no increase in real terms in the higher rate thresholds. If account is taken of the percentage of incomes taken in tax, the average tax rate, the gains are larger for the lower paid than for others. The point is well illustrated in a block chart which appears in the Financial Times, which shows that this year the 480 lower earner has done relatively better than the higher earner, who has not benefited from higher rate bands being increased by more than inflation. That is referred to in the caption and it is useful to get the record straight.
It has been suggested that the increased thresholds will not really help the low paid. It is argued that they do not improve incentives because those who are taken out of tax do not matter all that much. I do not agree with those comments. This year's real increases in thresholds remove from the poverty trap about 10,000 who would otherwise have remained in it. It is a useful change but not a dramatic one. It must be seen in the context of the long-term programme to push up the thresholds to more sensible levels. Unless we make a start in this process, we can never attack the problem that is caused by the tax thresholds being far too low for those earning below and around average earnings. This year's progress is therefore of real value, but what is perhaps more important is that it brings yet more low-paid families within reach of the further threshold increases that we hope to achieve in future.
Reference was made by the hon. Member for Hodge Hill, in his summing-up, to the changes in the thresholds for the elderly. It does not mean, as he indicated, that these have been adversely affected by the Budget. The allowances have been fully protected against the effects of inflation. The result is that some 60 per cent. of elderly households will have to pay no tax in 1984–85. Those who still have to pay tax will gain at least 75p a week, if they are single or widowed, and at least £1.15 a week, if they are married.
§ Mr. Hayhoe
No, that is their gain in real terms, because one is elevating the threshold.
My right hon. Friend the Member for Guildford (Mr. Howell) referred to the aim of the Conservatives to attain a property-owning and capital-owning democracy—the one aim from Anthony Eden, and the other from Iain Macleod. We are making considerable progress, as he recognised, in owner-occupation, and the Budget makes a step, and encourages wider share ownership, directly and indirectly. My right hon. Friend suggested a link—I think that he meant an absolutely firm link—between share option schemes and wider share ownership, save-as-you-earn schemes, within any specific enterprise. I am sure that his suggestions will be carefully considered.
The right hon. Member for Hillhead expressed concern about increases in unit costs damaging our competitive position. I believe that the intention of the Budget is to increase our competitiveness. This reduces business costs, allowing increased profits and keener pricing. That in turn means more output and more investment, and it is good for growth and for jobs. Our economic policies in the Budget present a great opportunity, and it is vital that that is not wasted. In the last couple of years, we have seen unit wage costs in the United Kingdom rise more slowly than in the early 1970s, and productivity has gone up dramatically.
Over the past few years, the level of wage settlements has fallen steadily. Nevertheless, manufacturing wage costs of some of our major competitors—the United States, Germany and Japan—are improving faster than ours. We need to do better, therefore, and it would be disastrous to slip back into our old bad habits of increasing 481 labour costs. This, of course, means lower pay settlements than occur at present. The responsibility rests with the employers and the employees. If too much is taken out in pay, we shall not make the gains of competitiveness that are so vital. I therefore urge all those concerned in pay negotiations to remember that inflation is down, and that it is expected to fall to 4.5 per cent. by the end of the year. Those in work have been increasing their average earnings in real terms, as a result sometimes pricing others out of jobs. Increased profits and increased productivity are not the signal for large wage increases. Excessive settlements put at risk the future of firms, the jobs of people elsewhere, and the prospects of new jobs for the unemployed.
Our policy is to create the conditions for sustained noninflationary growth. I was glad that the hon. Member for Motherwell, South (Dr. Bray) acknowledged that such sustained growth was within our growth. However, excessive wage increases could damage the competitiveness of the goods and services that we produce, and that could fritter away the opportunities now before us.
The right hon. Members for Glasgow, Govan (Mr. Millan), for Sparkbrook and for Hillhead made their concern about jobs a central issue of their criticisms of the Budget. All called for increased public expenditure. The right hon. Member for Hillhead put in his bid at £1 billion. Indeed, he said that he would have preferred £1 billion extra spent on public sector capital spending, if need be by not even increasing the tax thresholds above basic indexation. Table 1.13 of the public expenditure White Paper, which we debated last week, shows that public sector capital spending is running at about £21 billion. Therefore, the right hon. Gentleman is suggesting that an increase of about 5 per cent. will be absolutely decisive. That suggestion typified much of what the right hon. Gentleman said.
The right hon. Member for Sparkbrook said that he wanted to see increased public spending but he did not even put a figure on it. However, last night I heard him say on the radio that, if pushed, he might consider it right to spend £2 billion extra. The right hon. Member for Govan also said that more should be spent, although he did not say how much. He properly acknowledged that it involved an old and basic argument between the two sides of the House. The arguments that we deploy are well known and were pretty central to last year's general election campaign.
Of course, the right hon. Member for Sparkbrook gave his verdict on that debate when he concluded in The Guardian of July last year that Labour's promise thento put Britain back to work—was a net vote loser. Nobody believed that our theories"—his theories— 482could be put into practice".They did not then and they do not now. He continued:Our vague hopes"—his vague hopes—of achieving growth through Government spending were barely understood and rarely believed.The position is just the same now, yet the right hon. Gentleman has even forgotten the words that he then used. Today he put forward the same outdated solutions to our problems. Surely it is time that he learnt and had a new tune that he could play.
I am also grateful for the many other contributions that have been made. My hon. Friend the Member for Wyre Forest (Mr. Bulmer) spoke of the need for much more effective management in the public sector, and explained how he believed that there was scope in both the NHS and local government for considerable efficiency savings, which would thereby reduce the burden on public expenditure and the public purse. I entirely agree with him, and as a result of the Griffiths report we hope to see a considerable improvement in the value for money achieved by the NHS. The resources thus freed can then be made more directly available for patient care.
One has only to look around to see what some local authorities are spending their ratepayers' money on, and the sort of new jobs that they are spending money on, in order to appreciate how many savings could be made.
Questions were also raised by the right hon. Member for Govan and others about the major tax change in the Budget concerning capital allowances and corporation tax. I understand that my hon. Friend the Financial Secretary will reply to tomorrow's debate and will speak on that matter.
Reference has also been made several times to child benefit. That subject was quite properly not included in the Budget, because last year we changed the system so that the uprating for child benefit and other benefits is determined by judging from the increase in the retail price index in May what the uprating will be in the following November. That is the procedure that we shall follow. It is perhaps an indication of the strength of my right hon. Friend's Budget and of his provisions that it is not they that are attacked, and that Opposition Members should single out and attack subjects that are properly a matter for debate on another occasion.
The measures announced in the Budget reinforce the recovery that is clearly under way. The measures will help to sustain economic growth over the longer term. By bringing inflation under control we have laid the foundations for economic success. By keeping it under control we shall ensure that those foundations remain solid.
§ Debate adjourned.—[Mr. Archie Hamilton.]
§ Debate to be resumed tomorrow.