§ [Relevant documents: European Community Documents: No. 10156/83, Annual Economic Report 1983–84, together with the final version as adopted by the Council.]4.19 pm
§ The Secretary of State for Employment (Mr. Tom King)
It is a convention that the Opposition give some guidance about the aspects of the Budget on which they wish to concentrate on certain days. My presence reflects their interest in the subject of employment. I welcome the opportunity to concentrate on that aspect of the Budget debate.
As Secretary of State for Employment, I believe that this is a Budget for jobs, for a stronger economy and for a more prosperous Britain. Hon. Members would not dispute the fact that the most intractable problem faced by all Western Governments—be they Socialist in France, Christian Democrats in Germany or Liberals in coalition in Holland—is the scale of unemployment. Those in government know that there are no easy panaceas to the problem.
Oppositions pretend that there are instant solutions. Governments must deal with reality, not with pretence. None pretend more than members of the Labour party. Every Labour Government have promised to reduce uemployment, and every Labour Government have increased it. They fail because they never understand that there is no short cut or special measure that can cause a lasting change to real employment.
The first essential requirement to change the position must be a strong and competitive country. No other major country depends so much on winning its share of orders in world markets and, therefore, there is no other country in which the importance of efficient and competitive production matters more. We can look at the background to our recent history and reflect on the number of markets and products in which we used to lead the world. I do not 523 know how many people remember that, only 30 years ago, we were the largest car exporting nation in the world, that the British motor bike was a world beater and that once even 25 per cent. of the world's shipping was produced in British yards. From that proud position of great achievement, the history of too many of the post-war years has been a story of decline and retreat. Poor design, bad productivity, shoddy quality and late delivery contributed to that sad story.
Was it the fault of management, the unions, or the Government? There was poor investment, amateur marketing, bad industrial relations and too many strikes. Throughout the period there was an unwillingness to recognise the seriousness of the problem. Even in the 1970s, we were prepared to pay ourselves more than 300 per cent. more for only 17 per cent. greater output. That is the background of retreat and decline against which we have been struggling in the past few years and about which reality is at last beginning to dawn.
I strongly assert that there is now no serious doubt that recovery is under way. The outlook for the economy is brighter than it has been for years. There is now momentum in the economy, and the Budget's object is to sustain and increase it.
Our first priority has been the conquest of inflation. Inflation—the destroyer of so many jobs in the 1970s—is at its lowest for 15 years. From a peak of 27 per cent., inflation is now down to 5 per cent. My right hon. Friend the Chancellor of the Exchequer forecast—and my right hon. and learned Friend the Chief Secretary to the Treasury confirmed—that, by the end of the year, inflation will have fallen to 4.5 per cent. As the custodian of the RPI, I draw the attention of the House and those who have been studying recent figures to the increase of 1.8 per cent. in the RPI in the past six months. I suggest that that figure gives every encouragement that the Chancellor's forecast on inflation will not be exceeded.
I am sorry that the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) is unable to be with us. I was intrigued to see that last May the right hon. Gentleman specifically forecast—later the right hon. and learned Member for Monklands, East (Mr. Smith) can stand up for his right hon. Friend and explain the basis of the forecast—that there was no doubt that inflation would be in double figures by the end of 1983 if a Conservative Government were re-elected. I was interested that yesterday the right hon. Member for Sparkbrook wisely avoided any further forecasts and concentrated on asking questions. He will be better informed if he follows that approach rather than his previous practice.
Productivity is now at record levels. At last, our production costs are better controlled than at any time in the past 20 years. With that improvement comes increased profits, and that is the key to more investment and more jobs.
§ Mr. Bryan Gould (Dagenham)
If our industrial costs have improved, as the right hon. Gentleman says, how does he explain the fact that the IMF index of relative normalised unit labour costs shows a decline in our competitiveness since 1979 of 30 per cent.?
§ Mr. King
The hon. Gentleman knows that the degree of competitiveness is affected by a number of factors, not just the level of productivity in industry. Exchange rates have much to do with that.
Against that background—I hope that no hon. Member will underrate the achievements—we certainly cannot afford to be complacent. We are doing better, but not as well in some crucial areas as some of our competitors. It is vital, if we are to provide jobs, that we should be competitive. We cannot afford to relax. Even now, Japan, the United States of America and West Germany have lower inflation rates than Britain. If we lose our competitive edge, jobs will certainly be put at risk. I endorse what my hon. Friend the Minister of State, Treasury said last night—sensible pay settlements and continued improvements in productivity are vital to our future success.
§ Mr. Nigel Forman (Carshalton and Wallington)
On the point of competitiveness, will my right hon. Friend say something now or on a more suitable occasion about the need for us to avoid supply-side bottlenecks, especially with regard to skilled labour, training and retraining? I am sure that those factors must make an important contribution towards sustaining the economic recovery.
§ Mr. King
I shall say something about that later. I accept fully the importance of my hon. Friend's comment.
There are reasons for encouragement in the recovery and present path of our economy. The greatest difficulty that Britain and other countries face is the problem of unemployment. In the past three years, the fierce winds of recession hit us when, to a great extent, we were unproductive, under-trained and uncompetitive. That is why we lost so many manufacturing jobs. As the House knows, last year that trend was checked. For the first time since 1979, the latest figures show a real increase in the number of people in jobs. As my right hon. Friend the Chancellor mentioned in his speech, between March and September 1983—the latest period for which figures are available—the number of people in work increased by 80,000. That is the first increase in the past three years in the number of people in work.
The decline has been reversed. About 200,000 more people were employed in the service sector in the first three quarters of last year. The fall in manufacturing employment has begun to ease. There have been encouraging signs of more recruitment even in some of the manufacturing sectors, such as textiles and footwear, which people were readily writing off as the sunset industries. The latest available figures from my Department and from jobcentres show that last December, January and February the jobcentres placed 390,000 people in jobs compared with 335,000 placed in jobs in the equivalent three months a year ago. That is an increase of 16 per cent. Interestingly, that increase comes at a time when the unemployment figures are rather disappointing, as I said in my recent announcement.
I was talking to one of the major executive recruitment agencies which for many years has done a regular monitoring of executive advertising in the newspapers. The interesting point was made to me that executive advertising for management, senior management, and senior technological posts is running this year at double the level of last year and is at the highest level for 20 years. That is another encouraging indicator of an improvement in the prospects for the economy.
525 It is against that background of improvement, but with a recognition of the real difficulties that we face in the problems of unemployment, that we have seen a substantial increase by this Government in the funds coming through my Department in measures to help employment and training. We shall spend this year more than £2 billion, four times as much in this area as was spent under the last Labour Government in their last year of office. In total, 670,000 people have benefited this year from the various measures. There are 124,000 long-term unemployed taking up places in the community programme. One of the most exciting new developments has been the encouraging start to the enterprise allowance scheme, which is designed to help people start up businesses of their own.
As important as any other measure that we have introduced, there are 320,000 people who entered the youth training scheme. This is the largest and most comprehensive training scheme for young people ever introduced in Britain. I hope that, despite certain earlier comments, Opposition Members will, like the TUC, give the scheme the support that it needs. It has wide support among the TUC, trade unions and many employers and others who have been actively involved with it. For the first time in our history, all 16-year-olds have the chance to learn basic skills, to make the most of their ability and so to have the best chance for employment. I believe that increasingly it will be the way in which more and more young people come into jobs, with training that all too often in the past they have not had.
Against that background of the serious situation that we face, but of the encouraging prospects that we now see for the economy, I come to the measures that the Chancellor announced in his Budget statement. I said at the outset that I regarded it as a Budget for jobs, and I welcome the steps that my right hon. Friend has taken—without putting at risk the basic strength of the economy and that continuing improvement on which the greatest hope for jobs must continue to depend—to help in that respect.
I believe that I carry the whole House with me in welcoming the abolition of the national insurance surcharge. We have finally got rid of that surcharge—Labour's tax on jobs—and there could not be a clearer indication in the Budget of the priority that we give to employment: £1,350 million in a full year, £865 million of it for the private sector, a major improvement for its cash flow, with funds available for the greater development of its businesses, and with further opportunities for jobs.
I welcome the changes proposed in company taxation. I not only accept the absolute correctness of the changes that my right hon. Friend has announced, but welcome also, from the employment point of view, the accelerator to the bringing forward of investment in buildings and plant for companies that wish to take advantage of the maximum allowances before their phased reduction. That will be encouraging for investment.
I welcome in the Budget the measures to help small businesses and the raising of the tax thresholds in real terms, which will help employment. I particularly welcome, in the interests of employment, the announcement by the Chancellor of the changes in the VAT requirements for importers. Ending the unfair advantage that importers have enjoyed is to be warmly welcomed and must be in the interests of employment.
526 As important as any of the individual measures is the confidence that the Budget can create. It sets the framework in which business will be operating in the next four years. Those of us who served some of our lives in industry recall the late 1950s and 1960s, years of what seemed endless stop-go, when one knew the damage that was being done, the sapping of confidence, the undermining of industry and the difficulties that were being posed for investment decisions.
There can be no gainsaying the importance of confidence and of industry really having some assurance that policies once established will be sustained. Industry can now feel confident that we are determined to keep, as our first priority, the achievement of low inflation, that we are determined to keep the tightest control on Government borrowing and that we are determined to reduce company taxation, so creating a climate that will encourage investment.
Even before I rose to speak today, the first evidence of the benefits that can flow from the Budget was seen, with the announcement of the reduction in interest rates. That will be of enormous benefit, and will act as a stimulus for investment. Not just business men in this country have the message of our determination to maintain a sound economy. Business men abroad have got that message, too. They also see our determination to maintain our commitment to membership of the EEC.
Who really thinks that the companies which are now starting to invest in Britain, and which see here a base for their operations within the European market, would have invested here under the economic policies of the Labour party, or under their foreign policy—if I may accord it such a grand title—of withdrawal from the European Community which they peddled at the last election?
Would we have heard of the investment of Nissan or Shin-etsu from Japan or of United Paper Mills from Finland coming into Shotton to take over the paper mill there? Would we have had Northern Telecom coming from Canada with its investment; Texas Instruments; or National Semiconductor with one of the largest investments ever made in Scotland in new technology? Would we have had the investments by 3M, Bristol Myers, Columbus Foundries, Unimation, Commodore and United Technologies? They are all coming here because they have confidence to make investments here, and they will provide jobs for people in Britain.
That is something in which I take great pleasure and pride. I know that such investment would not have been available if we had isolated ourselves from the economies of western Europe or submitted to the same old economic policies of the Opposition.
§ Mr. King
I am surprised that the hon. Gentleman even begins to challenge that. I do not know his industrial and commercial experience, but he may know that business men like to look before they invest and be confident about what is happening. They need confidence that their investment will be competitive in the near future, is likely to stay competitive in the years ahead and is operating in a stable economic climate. Whatever technical and tricky 527 questions the hon. Gentleman asks, if he is seriously trying to tell the House that there will be fewer jobs and less investment in an economy that is unstable where there is lack of control over economic policy, what he says flies in the face of all experience. We are starting to attract more investment, which is welcomed generally, and I would be very surprised if the hon. Gentleman was seeking to despise rather than welcome it.
The Budget comes at a crucial time in our history, when we face serious employment problems. It offers a great challenge to our people. We have, as my right hon. Friend the Chancellor says, a special combination of low inflation, higher productivity and faster growth, which has eluded us for all too long.
The question that we must ask is whether we can use the real opportunities for business, industry and commerce offered by that combination of factors, in order to succeed. The Budget gives us a chance to seize that challenge and put the country on the road to jobs, prosperity and greater strength in the economy. In that spirit, I am delighted to support the Budget in the House today.
§ Mr. John Smith (Monklands, East)
The major difficulty facing the Secretary of State for Employment in opening this stage of the Budget debate, which was painfully apparent in his speech, is that, unike the Chancellor, he cannot simply ignore unemployment, given his public office.
Casting our minds back to the Chancellor's Budget speech, we can recollect his predictions, assertions and promises on financial and economic theory, the forms of monetary theory, the prospects for output, the path of inflation and the size of the borrowing requirement. The Budget documents contain a mass of details, some of which starkly show the consequences of the clampdown on services and pay, especially for the public sector. Details of the increase in output contradict the supposed recovery of our economy.
There is a gaping hole in all that argument and philosophical, financial, actuarial and economic detail. There are no predictions of the Budget's impact and that of its promised successors on Britain's major problem, which is an unemployment total of at least 3.5 million, even on the Government's manipulated figures.
Britain has by far the highest level of unemployment among the OECD's major industrial nations. It is an ignominious record by international comparison and in terms of our industrial history. Britain's economy is founded on the work of its people, yet we tolerate the addition of well over 2 million people to the dole queues since the Government came to power.
Two statistics with horrendous consequences for Britain and its people are, first, the highest level of unemployment in our history and, secondly, the fact that we have slipped into a trade deficit in manufactured goods for the first time in our manufacturing history. Significantly, the Budget is totally irrelevant to both considerations.
The level of unemployment is disastrously high, with many long-term unemployed. There are, regrettably, more than 1 million long-term unemployed—1,188,000 at the last count in January. In addition, 589,900 have been out of work for more than six months. The total of those two 528 figures is higher than the overall total of unemployment in 1979, when the Government took office complaining, if we can believe it now, that Labour was not working.
We see an ominous new social problem of gigantic dimensions in that figure of 1 million unemployed. What is worse, that appalling total will remain for at least two to three years. Even worse than that, the proportion of long-term unemployed will not diminish and we shall have 3 million unemployed and 1 million long-term unemployed, which is a crucial sea change. Put plainly, Thatcher unemployment is long-term unemployment.
What prospect is there for the long-term unemployed after two or three years? On a 10-year basis, as the Green Paper hints, there are no plans in present Government thinking to assault unemployment, long-term or other wise. The other alarming and deeply distressing feature of our unemployment scene is that 1,259,700 people under 25 are unemployed, even when those on a training scheme have been removed from the register.
Youth training scheme trainees ask continually, "What will happen after the year of training is up?" A generation has been denied the life-enhancing opportunity to do creative work and to participate fully in the activities of their community. They are denied the opportunity to develop careers that will provide personal satisfaction and make a distinctive contribution to our wealth and culture.
What will be the consequences for those young people as they grow older without work, and for those coming up behind them who face the same chilling prospect at the end of their formal education? Who is to say what the final social consequences will be on marriages and families which have been founded in the disillusioning and dispiriting framework of almost certain continuous unemployment? I do not know the final result. Indeed, which of us does? We know how adaptable is the human spirit, how socially stable are our communities, and how sturdy are our people. Perhaps those qualities will help the long-term unemployed, the young unemployed or others to weather their adversity better than we might be entitled to expect.
The depression of the 1930s left its cruel mark on more than one generation. I believe that this self-induced depression must leave its mark, too, in different ways. I know, too—indeed, I believe, and on behalf of the Labour party I assert—that it is deeply wrong to tolerate such a level of unemployment in our society. We must quickly realise that it is our greatest social, economic and political problem.
If the problem is of such dimensions and so important socially as well as economically and politically, why is it ignored in the Budget? Why are there no plans to mobilise the resources in the Budget? Why are there no plans to mobilise the resources of the state to bring down unemployment? Having listened to the Chancellor, and having read some of the comments in the financial columns of the press since, it is clear to me that he and those writers have little concept of the misery and waste of unemployment. Otherwise, the right hon. Gentleman would surely be moved to act. Instead, he boldly and simply but wickedly left unemployment out of account. A future historian reading the Budget speech would scarcely be aware from the internal evidence that the Chancellor was describing an economy in which 3.5 million people were out of work and the cost of their maintenance was £17 billion per year.
529 No doubt as the debate unfolds we shall be referred to features of the Budget which might help unemployment—indeed, the Secretary of State has done so already—but there is clearly no plan, no strategy and no determined attempt to bring down unemployment to any sizeable extent. It may be said that all is not lost because the odd measure in the Budget may marginally help, so we should not scorn it. One feature may indeed help, and the Secretary of State mentioned it first. The abolition of the national insurance surcharge is to be welcomed, but what will its impact be? It is clear to any observer that the previous reductions, bringing the surcharge down from 3.5 to 1 per cent. did not of themselves have a major impact on unemployment, which regrettably continued to rise steadily. It is plain that hopes of a significant reduction in unemployment cannot rest on the slender base of that change and the somewhat exaggerated terms in which the Secretary of State presented its financial consequences.
§ Mr. Terence Higgins (Worthing)
Does the right hon. Gentleman agree that the effect on unemployment will be a great deal better if the money involved does not go in high wage settlements rather than in any other way?
§ Mr. Smith
I hope that such benefits as come to employers will not be frittered away in excessive profit-taking either. In terms of employment potential, the best course is for the money to be invested in the future of the enterprises that receive the benefit. As the right hon. Gentleman knows, the difficulty is that one cannot predict whether it will go in higher wages or dividends or in greater investment. To what extent, therefore, the effect on the economy is uncertain. I make no bones about the fact that we welcome the change, but, given the scale of the problem, as a job-creating or job-saving scheme, regrettably its impact is likely to be minor.
Reference has been made to changes in company taxation, although the Secretary of State did not make much of them. Most commentators have noted, no doubt correctly, that the changes are not easy to assess, but they appear to be tilted against manufacturing industry. It is ironic that the abolition of capital allowances, which will operate against manufacturing industry, will be used through the technique of delaying its introduction to bring forward some capital purchases which may be a welcome boost to the supplying industries. That welcome effect—a Keynesian intrusion on the monetarist scene—will, however, be short-lived and unrepeatable. The fashion of Government thinking seems to be against manufacturing industry and its capital re-equipment. We should remember that we cannot all be employed in creative financial services, software computer firms, silicon glens or other manifestations of the new economy, however desirable all those things may be in their various ways.
Neglect of manufacturing industry has reduced us to the status of a net importer of manufactured goods. A great deal of our wealth depends on manufacturing industry. That is true in all areas of the country, but especially those not in the southern part. Recovery which brings fuller employment depends not only on the sustenance but on the development of manufacturing industry. Regrettably, however, the only aspects of the Budget that could remotely be considered as marginally helpful in terms of employment are clearly outweighed by other features working heavily in the opposite direction.
With the construction industry toiling as never before—starved of work, riddled with bankruptcies and with 530 hundreds of thousands of construction workers on the dole—why on earth has the Chancellor decided to hit the industry even harder by extending VAT to building alterations? The Secretary of State need not take my word for that. I shall quote the Budget news release of the Building Employers Federation. To be fair, it begins by congratulating the Chancellor on easing the burden of stamp duty, which it believes will boost the private house building sector. I see the Secretary of State nodding his approval. I hope that he will take as careful note of the rest of the federation's views.
The press release states:The Chancellor's helpful move on Stamp Duty has been more than offset by his deplorable decision to impose positive VAT Rating on building alterations.This is a savage blow to the building industry. h will put thousands of reputable bona-fide firms at a severe trading disadvantage against tax-dodging 'cowboy' operators.Bringing building alterations into the VAT net will threaten the jobs of thousands of building workers in an industry where unemployment is already at record levels.Whatever the case for including alterations in the VAT structure, why on earth was it done now, when the construction industry is almost the hardest hit by the recession and unemployment in the industry is especially acute but the prospects of getting people back to work for relatively modest sums of investment are probably the highest on the entire industrial scene? It is a measure of the Government's insensitivity to the employment consequences of the financial measures in the Budget.
Perhaps the most ominous feature of all in terms of future employment are the forecasts for public spending in the Budget and the public expenditure White Paper. The Government clearly intend to impose on public sector workers a savage wage limitation, well below the expected rate of inflation. On the basis of the Government's public expenditure proposals, there will be continuous pressure on all public authorities to reduce both manpower and quality of services—an ominous prospect for the people employed in those areas.
The Budget as a whole is not neutral on unemployment. It may be neutral in financial terms, but it is certainly not neutral in employment terms. Above all, it is not neutral because it makes no basic change in the policies of deflation that have caused our present tragedy. The Chancellor talked about our being set on course as though we had done well in the past five years and should thus continue with the same prospectus, but if there is no change in the policies followed in the past five years, we shall have the same or worse results in terms of unemployment.
I shall not be the only person to ask why the Chancellor did not accept the advice to embark on even a modest public works programme. The proposals are well understood by the nation. The Government have frequently been urged to do that by all sectors of industry, all parts of the nation and many parts of the political spectrum both within and outside the House. It is undeniable that our inner city infrastructure needs to be renewed. Our transport system needs to be modernised. The Victorian sewerage systems in many cities will collapse unless fairly urgent action is taken. The railways should be electrified. Much of our housing stock, especially in the public sector, urgently requires modernisation. All those things have been neglected. One 531 Victorian value that the Chancellor and his colleagues might seek with profit to emulate is the Victorian emphasis on proper public provision of certain essential services.
Why are those urgent tasks to be so wilfully postponed? They are necessary, and if they are not carried out this year the need will be even more pressing next year and in the year after that. That those tasks will have to be undertaken is incontrovertible, and what is incomprehensible is that the Government should choose not to do them now, when they have unused resources on a massive scale and an army of unemployed who are desperate for work. Now is the time to match unmet needs with unused resources—in particular, unused human resources. Only the blind ideologues of the Government cannot see either the need for or the overwhelming desirability of a public works programme. I hope that the Secretary of State for Employment urged that point upon the Chancellor. If he did not do so, he was neglecting his special responsibility to the unemployed. The absence of some such programme from the Budget and the public expenditure proposals is a national disgrace.
There will be no relief for the unemployed either this year or in the years ahead, and many of those at work feel—quite reasonably—apprehensive about the security of their employment. I condemn the Budget, not just because of that, but also because it shirks completely the moral responsibility of caring for the victims of the situation which this Budget and its predecessors have begotten.
The problem of long-term unemployment is clearly here to stay. Many people have asked the Chancellor to extend long-term supplementary benefit, if not to all the long-term unemployed, at least to those with families. The case for doing so is overwhelming. All other recipients of supplementary benefit move automatically from short-term to long-term benefits with the passage of time. Only the unemployed have been singled out in the past, under successive Governments, for different treatment. The basis for that difference was always said to be that unemployment, unlike invalidity or sickness, was often temporary. That cannot be said now, when there are a million long-term unemployed, whom we know will remain unemployed for years. The cost of giving special help to families with children would have been less than that of many of the other measures, and trivial in comparison with many of the Government's concessions to the financial sector.
The treatment of child benefit falls into the same category. The technical answer given by the Government when we complain about child benefit is that they have not yet made the announcement. Who, inside or outside the House, believes that if the Government intended to update child benefit by more than the rate of inflation they would not have referred to that fact in the Budget? Their silence on the matter is conclusive proof that they intend to increase it by only 35p a week. That is disgraceful, especially when compared with the abolition of the investment income surcharge.
I have read with incredulity the opinion in the financial press that the abolition of the investment income surcharge should be regarded as the removal of an impost on elderly people living in retirement on slender resources, who had been heavily penalised in the past. I give credit to the hon. Member for Enfield, North (Mr. Eggar) who expressed his discontent yesterday evening with the Chancellor's scale 532 of priorities. Anyone with investment income of over £7,100 a year must have capital of between £70,000 and £100,000, and only such people will benefit. As my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) said yesterday, it is strange that capital accumulations of over £70,000 are not regarded as wealth when, for the purposes of supplementary benefit, a sum of £3,000 is regarded as wealth beyond belief.
For £360 million—the cost of the concession on the investment income surcharge—the Chancellor could have done something for the children of the long-term unemployed and improved child benefit across the board. The fact that the Chancellor has dodged the problem is a disgrace. To be fair to the victims of the recession is not a matter for fine economic or social choices or the balancing of different considerations. In my opinion, and that of my party, there is a moral obligation. If we cause this distress, we must alleviate it. The means are well known, they are to hand, and their use was well within the Chancellor's capability.
That failure will stimulate the tide of indignation about unemployment which is beginning to rise in the country. The British people are slow to rouse themselves in such circumstances, but my impression and that, increasingly, of my colleagues is that people realise that for too long they have tolerated the levels of unemployment inflicted on them. The flash point for anger is people's realisation that their children are to be denied the opportunities which any decent society should offer them. I believe that it is the parents of children who are denied employment who will provide the main engine for change, rather than those who are directly affected. We have a lamentable record in terms of protecting jobs, securing jobs for the future, and treating with justice the victims of the Government's policies.
It would not be proper to pass judgment on the Chancellor and the Government without taking account of some of the features upon which the Secretary of State remarked at the beginning of his speech. He said that the history of Britain's economic development had been one of retreat and decline. He painted a picture of a steady erosion of Britain's economic growth over the years until 1979, when the Conservatives inherited a terrible legacy. According to the Secretary of State, they have been struggling against that great misfortune ever since.
The Secretary of State and other apologists for the Government ought to paint the full picture. There have been endemic problems in the economy—although Conservative Members do not take their effects into account when judging the previous Labour Government and some of their difficulties. However, the Government have differed from all their predecessors, not just in terms of their policies, but in terms of the benefits which they have enjoyed.
The true legacy which this Government inherited was North sea oil revenue, which no previous Government had enjoyed. The Government did not work for, plan for, or earn those revenues. They were bequeathed a legacy which has amounted to £25 billion since 1979. Every year a Conservative Chancellor has been able to spend between £7 and £9 billion of North sea oil revenues. Those revenues have had a desirable effect on the balance of payments and on the balance of trade, and their existence has masked the true effects of the deflationary policies of the Government 533 on the balance of payments and the balance of trade. As the revenues of North sea oil dwindle, those problems will become more starkly evident.
The revenues from North sea oil are not the only benefit, but let us consider what the Government have done with their inheritance. They have not spent the revenue on re-equipping industry, retraining our people, improving the social infrastructure, giving us the best education system in Europe, improving housing stock, improving the Health Service or doing anything that a Government might reasonably be expected to have done with such a windfall. They have spent every penny piece on paying for the extra unemployment that they have created.
The Select Committee on Employment has calculated that every unemployed person costs the Government a minimum of between £5,000 and £6,000 a year in unemployment benefit, social security benefit, lost insurance contributions and lost value added tax. If one estimates the number of extra unemployed caused by the Government's policies at 2 million—a conservative estimate—the cost of supporting them must be £12 billion a year—far more than the annual revenue from the North sea.
It was my good fortune to be a Minister at the Department of Energy before those revenues came in. At that time, work was being done to secure the developments which were subsequently of benefit to the present Government. I thought then that there would be a major argument about the use of North sea oil revenues. I thought, perhaps naively, that the argument would be conducted on the traditional lines of dispute—that the Left, broadly speaking, would argue for the money to be used by the community in communal spending, regional policy development and the rest, while the Right, generally speaking, would argue for the money to be handed out in tax cuts to allow individuals rather than the community to make economic and political choices. If anyone had said in the years 1976 to 1978, when we began to think about North sea oil revenues, that we would follow neither course but have a special plan by which we would save it all up to pay for the extra cost of unemployment that our policies would cause during the time in which we had North sea oil revenues he would not have been believed. It is unbelievable, and future historians will find it staggering.
§ Mr. Nicholas Lyell (Mid-Bedfordshire)
Does the right hon. and learned Gentleman really believe the argument that he is advancing? Does he believe that increasing our wages by 300 per cent. while increasing productivity by only 17 per cent. was not the reason why our businesses were not competitive and why we were out-sold from abroad? Does he believe that, if it had not been for North sea oil, we should, with a Labour Government, have been able to go on spending on health, education and roads? If that is his case, does he believe it?
§ Mr. Smith
That was not my case. I am sure that the hon. and learned Gentleman will read with profit the case that I was making if he did not comprehend it by listening. I was arguing that the money we receive in North sea oil revenues matches that which we have spent on extra unemployment. It does not seem unreasonable to correlate the two.
I am asked to posit what might have happened if a Labour Government had continued in office. If such a 534 Government had kept the level of unemployment at its then level, we should have had all this money to spend on other things, as we should not have created the new level of unemployment because we would not have followed the savage deflationary policies that have undermined the competitiveness of British industry through an over-valued pound, high interest rates and all of the other features that have emerged since 1979.
§ Sir William Clark (Croydon, South)
The right hon. and learned Gentleman is advancing an intriguing argument. What would the Labour Government have done about the world recession, and how would they have opted out of it?
§ Mr. Smith
I am gratified to learn that the hon. Gentleman finds my argument intriguing. I hope that it is more than that—I hope that it is educative. I also hope that he and others will pay attention to it. Of course the Labour Government would have been affected by the world recession and by the fact that other Governments in Europe have followed the same stupid policies as the Conservatives followed here, but we would have attempted to moderate the effect of that recession rather than redouble its effect as the Conservatives have done.
The hon. Gentleman brings me to the historical point about the record of the previous Conservative Government as opposed to the previous Labour Government. I remember the first Budget of the Chancellor's predecessor, now the Foreign Secretary. I checked up on it the other day to ensure that my recollection was correct. He said that it was a Budget of incentive and tax reform. I clearly recall Conservative Members, in the flush of postelection victory, waving their Order Papers. They told us that new politics and new economics had come to Britain. Not for them the continual decline of the past—this was a new era of prosperity. The Government had a great inheritance in terms of North sea oil revenues. They faced some problems from the world recession, but who was to think then that the cheering Conservatives and the Government they supported would lead us into the greatest post-war depression and into the highest levels of unemployment in our history? Where are the galvanised entrepreneurs now? Where are all those people whose energy was unleashed by the tax incentives that the former Chancellor gave? Why have they not been able to revolutionise the British economy and take us to new heights of productivity and efficiency? I deduce that Conservative Members have not learnt the lesson.
The present Chancellor has a more difficult task, as he will find it more difficult to find excuses if his performance fails. His predecessor and the Prime Minister have been past masters at excuses. Each time they faced a problem they would find a cause that emanated from the United States, the Arabs, the Labour Government, the trade unions or the fecklessness of British working people. A series of excuses were readily made available. However, after five years of Conservative Government in which to make their policies work, it will become increasingly difficult to find scapegoats, despite the expertise that has been developed in the past five years.
§ Mr. Robert McCrindle (Brentwood and Ongar)
What excuses are being offered by the Socialist Government in France, as they have tried all the policies to which the right hon. and learned Gentleman has drawn our attention and have signally failed?
§ Mr. Smith
I am glad that the hon. Gentleman has drawn my attention to that comparison, perhaps out of a sense of misplaced generosity. I had not intended to bring it to the attention of Conservative Members, but there are several significant differences between Britain and France. First, France does not have the benefit of North sea oil revenues. Indeed, it has the massive problem of importing energy on a huge scale. Secondly, France's unemployment is nothing like as high as ours, because the French Government have followed policies to keep it down. Thirdly, France is not assisted by the deflationary policies of the Right-wing Governments in Europe, including Britain, which make its task all the more difficult.
I would cheerfully exchange policies that are orientated towards full employment such as those in France for those that are being followed in Britain. As my right hon. Friend the Member for Sparkbrook said yesterday, and as we shall constantly remind the Government, no recovery without a reduction in unemployment is or should be acceptable to a civilised society. I believe that that will be asserted increasingly by Opposition Members and demanded by British people who for too long have suffered unemployment and the sterile policies that have produced it.
§ Sir Ian Gilmour (Chesham and Amersham)
I do not believe that speculation about what another Labour Government would have done after 1979 is fruitful or attractive, so I shall not follow the right hon. and learned Member for Monklands, East (Mr. Smith).
My right hon. Friend the Secretary of State for Employment made a civilised, good and short speech. I hope that he will not think it ungracious of me if I begin with something that he did not mention—the Government's failure to give long-term supplementary benefit to the unemployed. I agree strongly with the right hon. and learned Member for Monldands, East on that, but the fact that the Labour Government failed to do the same thing puts his argument in some perspective. It is difficult for people to say that they care about the unemployed and then continue to support discrimination against them. The long-term unemployed are among the poorest in the country and it is quite indefensible that they are not properly treated.
My right hon. Friend said that this was a Budget for jobs. Like him, I greatly welcome the abolition at long last of the national insurance surcharge. However, we must be careful of the thin ice of which my right hon. and learned Friend the Chief Secretary to the Treasury was not aware yesterday—if we boast too much about the final abolition of the national insurance surcharge and the good that it will do, one wonders why it was not done a bit earlier. Some of us have been asking for its abolition for about three years. Nevertheless, I am extremely grateful that it has happened and hope that it will do the good that my right hon. Friend hopes for.
I do not fully follow my right hon. Friend's description of the Budget as a Budget for jobs. The Treasury seems pretty happy about the economy. If anything, my right hon. and learned Friend the Chief Secretary was even happier yesterday than was my right hon. Friend the Chancellor on Tuesday. Some of the reasons for happiness are good—inflation is greatly reduced, interest rates are coming down, the mortgage rate is coming down tomorrow, output is rising, there has been a large increase 536 in productivity and the balance of payments is still in surplus. The Treasury seems to think that all this has happened as a result of its actions in the past five years—its successful attempt to control the PSBR and its less successful attempt to control the money supply.
There are two points to be made about the euphoria and the claim. First, to be happy about the economy, one must forget unemployment, which is rather a large factor to forget. It takes a heroic effort of abstraction, and my right hon. Friend the Secretary of State made no such effort. He put it in the forefront of his speech this afternoon. Many people, including myself, have pointed out that the increase in output since early 1981 has been less than the increase in our capacity to produce and, therefore, it does not qualify as a recovery because unemployment has continued to rise.
In January, nearly three years after the trough of the depression, unemployment was probably at its highest since the war. Hon. Members will recall the recessions in 1958 and 1962, which were large enough to produce considerable political repercussions. But even in those years, output rose, as it did in every year between 1949 and 1973, a period about which my right hon. Friend was so scathing as years of stop-go. Those years saw a considerable increase in our prosperity and standard of living, which was greater than during any other period in our history. The relevant definition of recovery, then as now, is whether the expansion is large enough to bring down unemployment. On that criterion, the recovery has not yet started.
My second point is that the Treasury must not pretend that history began in 1981: it began in 1979. That presents a slight difficulty. The Government praise themselves for the recovery since 1981, but take no responsibility for the previous recession. Hence the recovery is due to the Government and the recession due to the world. Similarly, the reduction in inflation has been brought about by Government policies but the increase in unemployment has not been caused by the Government's policies. It is in the nature of an act of God.
By general consent, in 1979–81 the recession was far more serious than any other in the post-war world, so hon. Members should be distinctly alarmed if the Chancellor of the Exchequer meant what he said when he said that he wouldcontinue the policies that we have followed consistently since 1979".—[Official Report, 13 March 1984; Vol. 56, c. 286.]Policies like those of the past five years would eliminate inflation but would also generate a further vast increase in unemployment, cause investment to fall, real output to be further reduced and industrial production to be decimated. As oil production is about to fall, our balance of payments would deteriorate catastrophically. Between 1980 and the last three months for which figures are available, the volume of exports, excluding oil, fell, while imports rose by nearly 20 per cent.
I cannot give a clear interpretation of what the Chancellor of the Exchequer meant when he said that the Government would continue the policies they have followed since 1979, since these were all designed in terms of intermediate targets—the money supply and so on—which were seldom met. It is impossible to explain what has happened to the economy in terms of what the Government have done.
537 Unfortunately, the Government's long-term strategy is still expressed in intermediate targets—the formidable, ever-increasing battery of monetary aggregates and the PSBR—none of which has the slightest importance in itself. The continued resort to intermediate targets conceals, it seems to me, the fact that there is no economic strategy. I see it as politically expedient, if what happens to the economy cannot be coherently related to the policy gestures which have been made. The Treasury is therefore free to claim any favourable event as a success and anything unsuccessful as none of its business and outside its control. That shows considerable political ability. It is a way of absolving oneself of responsibility for what goes wrong. That may be good politics, but it is not good for the economy.
The Treasury forecasts further growth for the next 12 months, although it will hardly be fast enough to reduce unemployment. I am sure that that work is done with competence and integrity, but the period taken is too short.
The strategic predicament is crucial, and contains the following elements. There is little prospect that in the next few years unemployment will fall significantly, and to take a longer-term view, it seems more likely that it will rise slightly. The Minister pointed out some encouraging signs, which we greatly welcome. It is excellent that there is a slight increase in employment, but the last two months have been disturbing and I hope that they are out of line. Paragraph 2.19 of the "Financial Statement and Budget Report 1984–85" does not make a reasoned forecast, but assumes that the average growth rate for the next five years will be 2.25 per cent. a year. That is well below the rise in output, of which the Government have naturally been proud during the vast year, and which has been accompanied by a substantial increase in unemployment.
Secondly, the trends in external trade are still extremely bad. If oil is excluded, exports have fallen and imports risen rapidly during the past five years, and that adverse movement continues. Yet the Government's figure for the current year shows it to be the best year for oil. It is the peak year, after which the oil balance will deteriorate and any real recovery will encounter a balance of payments constraint.
Thirdly, the major problem in the future may continue to be inflation. Control of inflation is the Government's greatest achievement. It is a considerable achievement and has been caused largely by falling commodity prices, the high pound and high unemployment. Even with 3 million unemployed, inflation may edge up as well as edge down. We urgently need clearly thought-out policies to deal with these strategic issues. Now is the time to act, before the problem becomes acute and we have to act under duress, when our economic condition makes it essential to act.
I am not equipped to give an exact description of or to devise such a large-scale strategy, but it should include the following elements. There must be an expansion of investment to pay for the imports we shall need when our oil production slows down. There must be a climate of good will with trade unionists, so that when we have an expansion worth that name we can have it without rekindling inflation. We shall need international cooperation. No country, not even America, can act with anything like complete independence. The costs associated with the European Community budget pale into complete insignificance compared with the costs we shall incur if we fail to co-ordinate our fiscal, trade and payments policies with our European allies. In other 538 words, we must face each major obstadle to sustained growth and, recognising the risks involved. devise measures appropriate to each.
Thus, for all the bravura of the Chancellor of the Exchequer's brilliant performance on Tuesday and for all its excellent ingredients, especially the abolition of national insurance surcharge, the Budget is strong on tactics and weak on strategy. On its own figures, it will not significantly reduce unemployment and it does nothing to improve the treatment of the unemployed, which is a shameful omission. Despite the Chancellor's imagination, integrity and courage, the Budget fails to deal with the fundamental problems of the economy.
§ Mr. Brynmor John (Pontypridd)
The Minister of State, Treasury is the latest of several Ministers who have tried to edge us away from discussing social security during the debate on the Budget on the basis that, as my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said, the statement on social security will not be debated until June. I understand why the Minister said that, but he is completely wrong. We cannot discuss the Budget without also discussing the social security benefits that affect, directly or indirectly, 40 million of our fellow countrymen.
There are four reasons why those benefits should be a proper and central part of the Budget debate. First, as my hon. Friend the Member for Birmingham, Hodge Hill (Mr. Davis) reminded the House, in 1977 the present Secretaries of State for the Environment and for Foreign and Commonwealth Affairs, and the right hon. Member for Guildford (Mr. Howell), said that child benefit was part of the attack upon the tax burden, and demanded a debate on child benefit. Now the Government have changed their mind.
Secondly, next year the social security budget will represent 29 per cent. of all Government expenditure, which is far and away the largest element of Government expenditure. If we discuss the Budget without including that element, it would be like Hamlet without the prince.
Thirdly, as my right hon. and learned Friend said, some of the Chancellor's decisions have already been made. From what he said in his Budget statement, we know that child benefit and other social security benefits have already been decided. He might as well have written the May or June statement today, because we know that benefits will not increase by more than the level of inflation.
Fourthly, in any Budget debate there is a swapping of arguments about fundamental differences of idealism and an examination of its objects. That is welcome and can never be changed, but all Budgets have some stated aims in common. In examining the Budget we must compare the methods of achieving those stated aims to see whether they are the best possible methods.
One example of that is the Chancellor's statement that this year he should concentrate on relieving the tax burden through the threshold rates so that the low-paid who are on the margins of the threshold can be taken out of tax. We must consider whether the method that he has chosen will achieve that aim, and that brings us back, inevitably, to social security. That is why social security must be central to any Budget strategy.
It is my contention that the Chancellor should have targeted his special help and attention this year on families 539 with children. During the past four years especially, single people and childless couples have fared markedly better in the burden of taxation than have families with children. The tax break-even point, by which the Child Poverty Action Group measures such benefits, shows a discernable shift against the family with children. That needs urgent revision. Poverty and relative deprivation are found more in families with children than in childless couples. According to the Government's "Family Finance Survey", low-income families, who include social security beneficiaries, have larger families than people on average or above average earnings. The survey shows that 36 per cent. of people with low incomes have three children, compared with the average of 20 per cent.; and 14 per cent. of low-income families have four children compared with an average of 5 per cent.
Threshold increases help those at the margins of taxation, but do nothing to help families who are already covered by the threshold. The most recent figures, which were helpfully provided by the Government, show that 1.5 million children live with families whose incomes did not reach the 1982–83 threshold, so they will not be helped by the Budget. Not only that, but the help given by thresholds increases the higher up the income scale one is. The only way to help families whose breadwinners are either in or out of work—families who pay tax and families who are exempt from tax—and the only way to provide equitable help rather than help that favours the higher-paid, is substantially to increase child benefit.
I have three suggestions to the Minister as to how that could be done. Two of them could be combined and need not affect the great threshold policy that the Chancellor outlined in his Budget statement, but one of them certainly does affect it. However, all the three would benefit families and would not penalise single people or childless couples. I am glad that the hon. Member for Croydon, South (Sir W. Clark) has left the Chamber, because my first suggestion would probably cause him to have a stroke. Instead of reducing the present PSBR requirement of £8 billion by £750 million, as the Chancellor did in the Budget, we should leave it where it stands. That alone would provide, above the 35p a week by which it would be necessary to increase child benefit because of inflation, a further £1.35 for each child a week.
Secondly, the Chancellor could abolish the upper earnings limit on national insurance contributions. In the most moving passage of his speech the Chancellor talked about the burdens on middle and higher managers and higher-paid employees. However, the truth is that the higher-paid have had a free, or relatively free, ride in the national insurance system, because of the upper earnings limit. The difference between the upper earnings limit and average earnings has been reduced, and someone who is earning only one and a half times average earnings is hitting that ceiling for national insurance contributions. There is no longer any reason for the ceiling. The earnings-related supplement has been abolished by the Government, so when the upper earnings limit is reached—which in the coming year will be £250 a week—no further national insurance contributions are paid.
In a full year the Treasury would gain £1,385 million if the upper earnings limit were abolished. That is the size of the opporutnity that is being missed. Taking into account the increase necessary to cope with inflation, that 540 would give to each child £2.50 a week, which is a substantial benefit, far greater than any benefit that might be gained by families by an increase in thresholds.
If the concept of gathering any new revenue into the Treasury is anathema to the Chancellor, there is a third way that does not affect his threshold strategy markedly, but alters it slightly. If I am right in placing the greatest emphasis upon the need to help families with children, why does not the Chancellor choose merely to raise the threshold rates by the level of inflation-5.3 per cent.? That would mean that the single person and the childless couple would be in no worse position next year than they were this year or in past years. The difference between uprating only for inflation and the additional amount in a full year would be £1,130 million. That would provide an increase of £2.05 in child benefit per week per child over and above the increase necessary to compensate for inflation.
Any of the three methods that I have advocated would give a clear advantage to families. If, as the Chancellor said in his Budget, he really does want to help low-income families, that is clearly and indisputably the best way to achieve it. It would give help where it is needed and lay the spectre that is all too common in Britain today that child rearing equals poverty. It is undesirable and unhappy to associate those two but, nevertheless, a young child means poverty for far too many families.
I reiterate what my right hon. and learned Friend the Member for Monklands, East said about long-term unemployment. People become one of the long-term unemployed only when they lose unemployment benefit after a year. In the past the unemployment norm has been to be unemployed for a relatively short period. Now, one third of those unemployed are unemployed for more than a year. Therefore, the need for a long-term unemployment rate is much more acute. It is obvious that a household budget cannot be managed for a long period on the present short-term supplementary benefits.
As the Budget involves taxation, may I remind the Minister, and therefore the Chancellor, that invalids and those in receipt of maternity and sickness benefits are still undergoing a 5 per cent. cut in their weekly income as what is laughingly described as "in place of taxation". A similar cut in unemployment benefit was also in operation until the House forced the Government to retreat, but they are still taxing the invalids on a 5 per cent. flat rate across the board.
The Social Security Advisory Committee at paragraph 5.11 of its 1982–83 report said:Unless taxation can be implemented in the near future we do not believe the benefits should continue to be reduced.Yet a year later there is still no solution either here or on the horizon. The size of the problem can be seen from the fact that in its report the Social Security Advisory Committee estimated that one in 10, or perhaps even one in five, of the people who have been paid invalidity benefits and forfeited their 5 per cent. would not be liable to pay tax if a taxation system were introduced. But when I received a reply to my parliamentary question from the Chancellor yesterday the figures showed that one in four people who receive invalidity benefit would not be paying tax were such a system to be introduced. Why, if the Government are so grotesquely unfair as to penalise one in four of the people in receipt of invalidity benefit, has no system of taxation yet been devised? If no system can 541 be devised, why have not the Government restored the 5 per cent. abatement in invalidity benefit? It is a scandal and an unfairness that ought to be corrected immediately.
My right hon. and learned Friend very properly dealt with house alterations from the point of view of employment and their effect on the building industry. In my area, as in that of my right hon. and learned Friend, there are many Victorian houses that are unfit to live in because they lack one or more of the basic amenities. I was born and bred in a house that lacked all three, but if we are to make these houses fit for the expectations of the modern generation, central heating, double glazing, bathroom extensions, and other alterations are urgently needed. That is not idle, fanciful or academic. We must do that to transform the environment of the old industrial areas. Yet the Chancellor has put VAT of 15 per cent. on those alterations.
Moreover, although commentators on the Budget have missed it, with that must be coupled the fact that improvement grants in my area have now been reduced from 90 per cent. to 75 per cent. That is a double blow. For every job which is valued at £100, under the 90 per cent. scheme and pre-VAT, the person doing the alteration contributed £10. Now that same person will have to contribute £28.75 from his own income for every £100 worth of work done. That will inhibit many people from commissioning the work. It will have a directly detrimental effect not only on the environment of our inner cities but on those employed to put these conditions right.
The Chancellor pontificates about home ownership but he does not understand what it means in many old industrial areas, large cities and industrial valleys to find the sort of cash which makes such alterations possible. Unless the cash for grants is increased, far from just stagnating, the situation will regress. If jobs cost more, as they must do under the VAT system, the money allocated to the councils for such improvement grants in the coming years will cover fewer grants. Therefore, with fewer grants and people having to pay more of their own money towards such improvements we face an unhappy situation for the council and for those who badly need homes.
In those three particulars and in many others the Budget has been in many ways a fascinating technical exercise on the part of the Chancellor, but it has missed what is imperative for Britain in 1984. We have had a Budget for the average shareholder when what we desperately need is a Budget for the average man and woman.
§ Sir Brandon Rhys Williams (Kensington)
There are so many aspects of the present Budget that it is difficult to condense one's comments on them into a short speech. I shall try to touch on several points and I hope that the House will excuse me if I touch on them only briefly.
The British economy today has three serious deficiencies. There is too little investment and too much consumption for the good of the economy, particularly of imports, which is leading to the under-employment of resources. There is inefficiency in the public sector both in the control of capital projects and the management of current operations; and there is a lack of incentive to work and save. The Chancellor is tackling some of those problems quite brilliantly but there is still a great deal which the House should encourage him to do.
542 First of all, in regard to investment, where the private sector is concerned this is an exceptionally well-constructed Budget. I will go through it item by item briefly.
Removing the national insurance surcharge will increase the profitability of business, with particular advantage to the companies which employ a lot of people. These are the companies which we particularly want to encourage to invest at this time.
Ending the investment income surcharge will help investors to think more keenly about ways of increasing their income through the fruitful use of capital to generate new wealth and real profits, rather than by seeking merely to make capital gains through the purchase of existing assets. Right hon. and hon. Gentlemen who have spoken so far have entirely missed the point of this change. It is not just to make things nicer for people with a lot of money; it is to persuade them to use their money to better effect for the sake of the whole economy. This change is long overdue, for it has long been a truism that the capital gains tax has been the lowest tax that could be incurred through the deployment of capital. This is a decisive step to remedy that situation.
Obviously, lowering corporation tax will help to make a generally more robust private sector.
Removing distorting factors such as stamp duty and capital allowances will help businesses to make the most fruitful use of their capital over a period of time. Capital investment is most fruitful when investors can make longterm decisions rather than be guided simply by short-term factors.
Reducing capital transfer tax will help to remove an element of uncertainty which many businesses have not known how to provide for. This uncertainty has induced an attitude of timidity in private companies which has been extremely bad for employment. So that is another very welcome development in this Budget.
The Chancellor's predictions of the trend of company taxation over a period of years will help many firms to take the plunge on investment projects now which have been held in suspense for a number of years during the recession. For really fruitful investment, businesses which want to make long-term predictions are helped by this Budget. They can better foresee market conditions and the trend of profitability, and can have reasonable confidence that investment decisions taken now will prove right. This is a factor which is bound to boost private sector investment. The Budget should certainly induce a spontaneous increase in private sector investment, with resulting gains in employment.
Now, however, I have to express some quite strong reservations. Certain other things are needed, without which economic achievement in Britain will still lag behind what we are capable of.
I am concerned about the effects of the Budget on the availability of funds for investment. The sums released in in income tax cuts are more likely to go into consumption—and perhaps into consumption of imported rather than British-made goods—than into savings.
Secondly, the ending of life insurance tax bonus after a period of years will reduce the flow of funds from the taxpayer into the capital market by about £700 million a year. I know that it can be said that the insurance companies tend to be rather timid investors and that they purchase existing assets rather than put the savings which come from the public, and from the taxpayer in particular, 543 to the most fruitful use. Nevertheless, that is a very big loss of capital flowing into the capital market, and I would hope that we could look to the Chancellor to find other ways of stimulating savings. I should like to make two suggestions.
Why not lift the upper limit on the amount that people can set aside for provision for their pensions to 100 per cent. of income and take away the restrictions which are at present applied under the Inland Revenue rules? The principle behind the taxation of pensions is "save now, pay tax later"; and the beneficiary does indeed have to pay the tax later, when the pension comes to be drawn. So the taxpayer gains in the end if people can be stimulated into putting more money into pension schemes. That is a good way of encouraging investment in the short run.
Secondly, why not put the tax treatment of indexed debentures on the same footing as bank debt? The Government have shown that there is an area in the capital market where funds are looking for investment in indexed stocks with a high degree of security, but it is not accessible to the private investor at the present time. It so easily could be.
I am concerned that the pressure to postpone necessary public sector investment projects is weakening the performance of the whole of the economy, both in the public and the private sector. I understand the Government's concern with the public sector borrowing requirement. Nevertheless, to give an example—I should like to declare a personal interest here because I am speaking from personal and, unfortunately, rather bitter experience—if sewage treatment facilities cannot be provided in a particular district, private investment in that district can be inhibited too. Of course, we have the problem of sloppy control in the public sector and, if I were to take up an hour of the House's time, I could give some excoriating examples in this field.
There is another problem in the public sector which I do not think that either party has overcome. It is the imprudent choice of capital projects by the quangos and the nationalised industries. Our record of success in the choice of investments has not been good either in projects or in processes. But these are managerial deficiencies which need to be tackled directly as such. I am not convinced that merely keeping the public sector short of funds is an effective answer to the need to improve the efficiency and the quality of investment in the public sector. I am sure that it has an inhibiting effect on the private sector as well when, in our mixed economy, public and private investment projects cannot go hand in hand.
I should like, therefore, to see greater latitude in the application of the Treasury rules for joint public and private sector ventures in the investment field. I believe that some relaxation of the Treasury rules could be very helpful, and the ingenuity and knowledge of the private sector could be brought to the aid of the public sector in choosing investments in the short run.
As I have mentioned to the House, I have an interest in this project and I do not want hon. Members to fail to note that I am speaking from personal experience of one project which I think could be an important gain in a district in which I have an interest.
The Chancellor clearly thinks that as a result of his Budget we may feel more optimism about a fall in the level of interest rates. I certainly hope that that is true. To me 544 it seems that the chief benefit from a fall in interest rates would be felt if we could bring the exchange rate for the pound more closely into line with its purchasing power parity. For over 50 years the pound has tended to be an over-valued currency. During that time importers have had the encouragement given by an artificial rate of exchange, and our exporters have laboured under an unnecessary burden. This may have been good for the economy in certain ways, but it has been bad for manufacture and for our position in world trade. So I would like to see a reduction in interest rates carried over into a fall in the exchange rate for the pound, not so much against the dollar as against the other currencies of the European monetary system, and in particular the deutschmark.
It is a characteristic of the British economy that it is too large to be just one of the marsupial economies like Switzerland and Austria, which are carried forward by the progress of the deutschmark. Britain is too big an economy to be an appendage of the deutschmark, but at the same time it is not large enough to succeed as a law to itself, as it could have done in the 19th century and as the United States is able to do now. We have this difficulty, that in some ways our economy is too large and in others it is too small for our policies entirely to succeed.
Looking at our relationship with the Common Market, since the breakdown of the Bretton Woods agreement, the yen area has been putting its act together alarmingly fast and is one of the great success stories of the world economy in the last 10 years. The dollar area, too, is recovering strongly, as might reasonably be expected. But the economies of the European time zone are still in a relatively chaotic condition and are not recovering from the recession as fast as they should.
I believe that we have to recognise that we have only a few years left in which to make a success of our membership of the Common Market. Ten years have already gone by and we are not yet fully integrating the British economy with the economies of the other democracies of western Europe in a way which could bring us enormous benefit. All of us, as member states of the European Community, are passing the time in squabbles about relatively unimportant matters. Every member state is guilty of that. I am not speaking especially about the British Government, who are rightly taking a strong position on some issues. But we are not making the most of our opportunities. In the meantime, the yen and dollar areas are pulling ahead so fast that it will soon be impossible for western Europe technically to catch up with the developments that have been taking place in those competitive economies.
Our main concern should be to create a true common market for services, including the full range of financial services and, most important of all, to create something that is already envisaged in the Rome treaty, and to which we are all committed as member states—a fully integrated European market for capital.
That immediately raises the question of sterling's relationship with the European monetary system. I have not pressed for Britain to join the EMS as it stands. Nobody could be more committed that I am to the idea of European economic integration, but there is a right and a wrong way to proceed. To join the monetary system without adequate preparation would lead only to the same sort of disasters that we encountered previously when we went ahead of our strength.
545 The EMS is a solar system dominated by the deutschmark. If we were to join it, it would become a solar system with two suns moving eccentrically. Inevitably it would break up, perhaps even within a matter of weeks. A real revival of investment confidence in Britain requires a stable, profitable relationship with the other economies of the Common Market.
I want accordingly to make two recommendations about the management of sterling. We should aim to bring it to its purchasing power parity with the Common Market economies, to keep it there and to let it be seen that that is the guiding influence behind the Bank of England's policy of intervention. Secondly, we should seek to stabilise capital movements by progressive integration of the capital markets of western Europe, and especially in Frankfurt and London. If there were really free arbitrage between London and Frankfurt over the movement of capital, speculators in Europe and outside would not expect to see differences developing between market conditions in London and Frankfurt. It is that risk which would make the EMS unstable if we joined it now. There are tremendous opportunities for the City of London in creating an integrated European market for capital. The Government and the Bank of England should seize those opportunities and give our City institutions every possible incentive to progress in this direction.
I wish briefly to deal with the incentive to work and to save. How does the Budget encourage individual citizens to play an active part in the revival of the economy? For those with capital to invest and for those in full-time jobs, there are sizeable new incentives to invest and increase their earnings. We should welcome that; but I am concerned about the large element of the population—more than 7 million people—who are dependent on supplementary benefit. They are not always the same people. Over time, elements of the population move in and move out of dependency on supplementary benefit. Thus millions of people are discovering at the close of their working lives that there is no advantage for them in having savings. They have to run down their savings to qualify for supplementary benefit.
All too many people in retirement have to apply for supplementary benefit because their occupational pensions are inadequate or for other reasons. Tens of thousands of people—perhaps even hundreds of thousands—also find that they have little to gain by taking legitimate employment. That is an extremely unsatisfactory position and quite contrary to the Government's ethos. It also touches upon the question of the efficiency of the public sector.
I do not want to dwell at length on that subject, but certain points must be made. Our system for the redistribution of income is in a disastrous state and is rapidly approaching breakdown. That is coming about more rapidly than the introduction of computers to meet the need; and I believe that the way in which computers are being introduced is wrong. More than 25 million manual entries are made each week in the administration of the pay-as-you-earn system. I asked in a parliamentary question how many manual entries are made every week in the administration of national insurance and supplementary benefit. The answer came to me not through Hansard but in a letter. I was told that the figure is in excess of 90 million. We cannot continue in that way.
To extend to the whole population the incentive to save, we must cope with the poverty problem by a basic income 546 guarantee—a tax credit system, reverse income tax or whatever it may be called—rather than by individual case work and means-tested assistance for the millions. To give the whole population the incentive to work, child allowances for those in work will have to be raised to the same level as we pay to those in need. The hon. Member for Pontypridd (Mr. John) spoke convincingly about the need to increase child benefit. I regret that my right hon. Friend the Chancellor has chosen to aim the changes in personal taxation at the tax allowances for single people and married couples rather than take the opportunity to increase child benefit.
Child benefit is a selective increase in resources for those most affected by rises in the cost of living—those who are most likely to press for inflationary rises in wages. There is much that we could say about that topic. Child benefit is also politically a proper concern for a party that is committed to the institution of the family and concerned about the health and well-being of the next generation. I hope that when the announcements about social security benefits are made later this year, my right hon. Friend will bear in mind the hopes expressed now on both sides of the House that he should recognise the importance of achieving a real increase in child benefit—and not merely of keeping pace with inflation. Obviously, we cannot distribute wealth until we have made it. The Budget is good for the creators of wealth. Future Budgets must restore the unity of the nation.
§ 6.7 pm
§ Mr. Archy Kirkwood (Roxburgh and Berwickshire)
I listened with great interest to the speeches of the hon. Member for Kensington (Sir B. Rhys Williams) and the right hon. Member for Chesham and Amersham (Sir I. Gilmour). I undertake to read the speeches in the Official Report tomorrow, and I hope that the Treasury Bench will undertake to do the same. It could learn a great deal from what was said.
As a new Member who joined the House in June, I was surprised to find that since then a whole series of financial measures have been implemented. The influence of the Treasury has been stalking the Departments of Whitehall in many different ways. For example, there is the way that the external financing limits were changed for the electricity and gas boards and for British Rail. That caused unnecessary increases in prices for the man and woman in the street. A housing benefit cut was forced upon us, which again showed the dead hand of the Treasury in the background. The building societies' tax regime changes were recently put through the courts. The discretionary home improvement grant changes that recently took place in Scotland—and I believe elsewhere—reduced the amount of grant from 90 per cent. to 75 per cent. Rent and rate increases have been foisted upon us by the local authorities because of the constraints on local government spending. The most recent change has been in prescription charges.
I could not understand why those changes were not made in the Budget—until Tuesday, that is, when I eventually discovered the reason. The Chancellor appeared like a smooth, pseudo-radical financial cherub to deploy his Budget, having discounted all the agony previously. I wholeheartedly agree with the right hon. Member for Chesham and Amersham (Sir I. Gilmour), who said that the Budget might have been strong on tactics but that it was short on strategy.
547 The theme of the Budget was twofold—to restrain inflation and to reform the tax system. In so far as those were the Chancellor's objectives, he will probably achieve them, but that leaves many problems unanswered. The financial straitjacket that is imposed by the medium-term financial strategy will do nothing to stimulate the modest recovery that we hope is in its infancy at present. It will do nothing to increase capital spending or industrial investment. It will do nothing, as the right hon. and learned Member for Monklands, East (Mr. Smith) said, to increase employment. Certainly, it will do nothing to help the poor, the sick and the elderly. As Liberal spokesman on social security and taxation matters, I shall address the rest of my remarks to those subjects, bearing in mind the importance placed on them by the hon. Member for Pontypridd.
In our view, the poorly paid pay too much tax. Surely, the number of families who are at present in the poverty trap is a scandal and indefensible. The system that we have—it was rightly criticised by the hon. Member for Kensington which allows any increase in gross income to result in a reduction, in some cases, in net income, following tax increases and reduced benefit entitlement, is indefensible and should be scrapped forthwith. There is nothing in the Budget, even in the Government's 10-year plan, to show that the Government intend to make any serious attempt at changing that system.
The proposal to raise personal tax allowances was welcome in so far as it went. However, it does not restore the balance that existed in 1978–79 in terms of the burden of taxation on people with low incomes. The proposals to change the balance between direct and indirect taxation bear much more heavily on the poorly paid than they do on the better off. The proposal to increase child benefit by less than the proportion by which personal allowances were increased is wrong and indefensible.
We do not believe that the proposed cuts in stamp duty will help first-time buyers, as the Chancellor said they would, because later in his Budget statement he said himself that 90 per cent. of first-time buyers would no longer pay stamp duty, because he had raised the threshold by £5,000. I contrast that with the cuts in housing benefit. In my opinion, neither the housing benefit cuts nor the stamp duty proposals will do anything to help the housing needs of the poor.
In our view, the abolition of the investment income surcharge will not help many needy pensioners. It may have an impact on pensioners who have a nest egg of over £60,000, but that does not qualify them for the definition of "needy". However, to leave the basic pension to be raised only in line with prices—about 5.5 per cent.—will cause hardship. Again, that should be contrasted with the cuts that pensioners have suffered in housing benefits, bearing in mind, too, the fact that personal allowances have been increased by 12.5 per cent.
§ Mr. John Smith
I fully agree with the hon. Gentleman about the investment income surcharge, and I am glad that the Liberal party takes that view. However, bearing in mind that the leader of the Social Democratic party on television two days ago welcomed the abolition of the investment income surcharge, will he tell us what 548 led his alliance partner to an opposite conclusion? What consideration of social justice led the Social Democrats to that view?
§ Mr. Kirkwood
I am fortunate to be supported by my hon. Friend the Member for Ross, Cromarty and Skye (Mr. Kennedy), and I am sure that he will deal with that matter very adequately later.
I come back to what was in the Budget. We do not believe that the revenue deployed by the Chancellor should have been allocated to the better-off in the way it was. We believe that the lower tax thresholds could have been further increased—by up to 5 per cent. Alternatively, if extra revenue was available, the Chancellor should have used it to relieve the increases that he imposed in indirect taxation.
While I am on the subject of indirect and direct taxation, I add that neither the Budget nor the long-term financial plans that we were given on Tuesday do anything to redress satisfactorily the balance between direct and indirect taxation. We believe that there has been a significant shift in the burden of direct taxation away from the rich towards the poor during the past five years. The Low Pay Unit calculates that people earning 10 times the average earnings have benefited from a 23 per cent. cut in overall tax rates since 1978–79, and those on half average earnings, about £90 a week, have suffered an increased tax burden of over one third since 1978–79. On direct taxation, with the indexation of customs and excise duties, the low-paid, according to the calculations of the Low Pay Unit, are expected to pay an additional 91p a week more in indirect taxation. That more or less wipes out any income tax gains that they may make from changes in the thresholds.
I come now to what was not in the Budget. Certainly, there are one or two things that we would have included. We would certainly have indexed child benefit in line with the tax allowances. It is clear from what was not in the Budget that child benefit will be indexed in accordance with the rate of inflation, which we shall not know until the retail price index for May is made available. That 35p increase will be paid only in November. If one applied the increase in the tax allowances to the level of child benefit the increase available in November would be about 80p. If we were to index child benefit, as happened with tax allowances in the past two Budgets, the increase in November would be almost £1. It is interesting to note that the Low Pay Unit calculates that the real value of the married man's allowance has increased at least 13 per cent. since 1978–79, while the real increase in child benefit has been about 2 per cent.
Secondly, we would redress the tax burden for people on lower incomes. The tax-free income is 43 per cent. of the average male manual earnings in 1984–85. That is less than it was 30 years ago. It means that the tax level is now set below the official poverty line, and that cannot be right. It is also true that after the changes in the Budget three out of every four families considered poor enough to receive family income supplement will still be subject to income tax. That cannot be sensible.
The changes to be made in the social security upratings after the May retail price index are not yet known. They will give the Government an opportunity to put some of these omissions right. I draw the attention of the Treasury to the thorny question of housing benefits. If the Government do nothing else, they should replace the £230 549 million cut in here. It is a cause of great hardship, and it deepens the poverty trap. The Treasury should get together with the DHSS and sort out the mess that the local authorities that now administer the scheme are in. Unless they receive help, the introduction of the new rates in April will create a worse mess, and again the poor and vulnerable will be hit. I urge people everywhere to protest about the housing benefit cuts, because that is the only way to persuade the Secretary of State to relent from this mean and callous action.
The only concession for pensioners that I can see in the Budget was the Chancellor's abolition of the duty on kerosene. I found the way that it was introduced quite distasteful. Never mind the problems of safety, condensation and fumes—all that the Chancellor has given the pensioners in direct terms is the abolition of the duty on kerosene. That in itself is a ridiculous indictment of the Budget. The pensioners are faced with a whole series of problems. The death grant level has still not been fixed, and there has been an unexplained delay by the Government in announcing what they will do about it. Pensioners still suffer from the earnings rule, they still have problems of heating costs, and many of those who look after them do not qualify for invalid care allowance. More than 800,000 pensioners still do not claim all their benefit entitlements. Despite all that, the Chancellor does nothing more than abolish the excise duty on kerosene. It simply is not good enough. I hope that the Government will have a change of heart before producing the uprating of social service benefits between now and November.
I notice there are some proposals to change the tax regime as applied to woodlands, under schedule D and schedule B. I give the Treasury Bench notice that we on the Liberal Bench—and I think I can safely include my hon. Friends on the Social Democratic Bench—will be considering carefully the possibility of stopping up the tax relief loophole available to woodland owners in the way that they operate in the forestry industry.
This is a bad Budget. I follow the hon. Member for Kensington in hoping that the Government will be converted, even at the eleventh hour, to some sort of system of tax credit schemes to administer the benefits for the poor, because the interface of the taxation and benefits system operated in this country is ineffably complicated and wholly indefensible.
§ Mr. Terence Higgins (Worthing)
In many previous Budget debates I had the privilege of sitting next to my late right hon. Friend, Maurice Macmillan. He made a notable contribution to a great many of those debates. Alas, he will not be able to give us the benefit of his wisdom today. He was a very kind and humane man, and, if there is one proposal in the Chancellor's speech which would have gladdened his heart, given his enthusiasm for wider share ownership, it is the share option scheme. That is greatly to be welcomed.
Some of my hon. Friends have suggested that we should give the Chancellor two, or two and a half cheers. I think that there is a case for giving him at least three cheers, for in one Budget, he has succeeded in abolishing the national insurance surcharge, with considerable benefit to industry, abolishing the investment income surcharge—and half those who will benefit will be pensioners—and raising the tax thresholds to what I understand is the highest level 550 in real terms since the war, which will certainly make a contribution towards solving the problem of the poverty trap.
I find remarkably little in the Budget to which one could reasonably object, although, having steered the whole of the original VAT legislation through the House some years ago, I always view with some doubt any proposals to change the ideal system which I had the privilege of introducing.
There is no doubt—because we had some debate at the time on fish and chip shops, and whether one took them out or did not take them out—that the new line being drawn will be somewhat difficult to define. That is true also of the other change in the line affecting the construction industry. When the original line was drawn, one would not have had £650 million in a full year from making that alteration, which arises because of the extent to which take-away food has changed in the interim, and because its sales have greatly increased. Much of that of course, comes from teenagers and others who have considerable disposable incomes, compared with some of those who are older and have family responsibilities.
I comment next on the backdating of the holiday lettings proposals, which will certainly be welcomed by my constituents in Worthing, as will the clear assurance by the Minister of State, Treasury that the proposal to abolish the tax position on insurance policies will not extend to those taking out insurance policies for pension purposes.
Sometimes, Budgets hit particular people in a harsh way. I was surprised to receive a complaint from one constituent, who is an airline pilot. Because of the change that has been made in the taxation of those working overseas, one of the biggest tax increases in absolute terms ever imposed on individuals will take place.
I wish to comment on the points made from the Opposition Front Bench, particularly those by the Shadow Chancellor. If one is to help the poorest members of the community, it is a great deal more expensive to dc so in terms of tax forgone that it is to help those who are further up the income scale. None the less, the Chancellor has concentrated his changes very much on the tax threshold, and that should be recognised.
I was intrigued by the force of the shadow Chancellor's argument on child benefit. The implication of his speech as a whole was that child benefit should be taxed on a progressive basis. It was interesting that he did not follow through the full logic of what he was saying.
§ Mr. John Smith
As the right hon. Gentleman is dealing with logic, will he explain the logic of giving a benefit to people with incomes over £7,160 a year from investment income, implying capital of £70,000 to £100,000, which makes them slightly unusual pensioners? Why is it given to them, while only 35p is given to child benefit? Why could not the money be used to help the poorer people, who must be in much greater need, rather than helping the people to whom I have referred, no matter how many of them live in the right hon. Gentleman's constituency?
§ Mr. Higgins
The right hon. and learned Gentleman was not listening to what I said. The cost in terms of revenue forgone is a great deal more if one tries to help those on low incomes than one gains if one hits those on high incomes.
§ Mr. John Smith
I am sorry not to have communicated with the right hon. Gentleman successfully. My point is that the cost of removing the investment income surcharge is £360 million, the application of which to child benefit, or to long-term superannuation benefit, would make a significant difference. I am talking about the same amount of money.
§ Mr. Higgins
I understand well the point that the right hon. and learned Gentleman makes. None the less, if he pursues that line of thought, he ought to have gone in for the taxing of child benefits, which his right hon. Friend the shadow Chancellor did not do.
The Chancellor put forward some specific micro-economic proposals, and some specific macro-economic proposals, of great importance. Far from being concerned only with tactics, he has concentrated much more than any of his predecessors on strategy. Indeed, he has added to his medium-term financial strategy what is, in effect, a medium-term tax strategy. This introduces an element of greater certainty for those who have to take business decisions than hitherto. Some of the changes that my right hon. Friend has made involve the abolition of taxes. Abolishing tax is surely much the best way to achieve tax simplification, and I hope very much that the earnings rule will be the next thing to be abolished.
On the macro-economic side there are real difficulties in analysing the effect of the Chancellor's proposals. I think, that we have seldom if ever had so many complex financial changes. I cite the proposals for stamp duty, composite rates for banks, the abolition of investment allowances, the radical effect that that will have on leasing by banks and others, and the change made a few days ago as a result of the legal decision in connection with building societies. The effect of changes, and of a number of other proposals, such as VAT on imports and the question of asset sales, will be difficult to appraise. There will have to be a careful examination in the days that lie ahead.
I am glad that the Chancellor did not go along with the proposals to tax the banks. Against the background of the earlier speeches in this debate, it is important that the banks should have adequate funds to help in the recovery. The strain on companies' finances following a recession is often a great deal more than in the downturn. As they seek to expand and recover and increase the level of employment, it is important that the banks should have adequate funds. Many companies have had their gearing—this is the distinction between equity and borrowed funds—seriously affected over the past five years. We shall have to analyse in greater depth the effect of the overall changes.
It is important to consider expenditure and tax proposals together. It is unfortunate, and in contrast with the recommendations of the Armstrong committee's report, that we had a debate last week on expenditure and one this week on taxation. We need to bring the two topics closely together.
I am still not sure whether the procedure within the Government for determining the level of public expenditure in certain areas is a right. First, there is series of bilateral negotiations between the Chief Secretary to the Treasury and others. The controversial issues go to the Cabinet and when those are decided everyone heaves a sigh of relief and says, "That is fine. Thank goodness that 552 is all over." No one stands back at that stage and asks, "Is the result that we have achieved sensible, and are there not some glaring absurdities within the overall picture?"
Secondly, the Government have stated clearly that their policy is financially to determine the level of expenditure. That has been stated on a number of occasions, but I find it slightly difficult to believe. The decisions suggest that the opposite approache is taken. One has the impression that the battle goes on about public expenditure and that at a certain stage it is decided how to raise taxation to pay for it. That is a factor to which we should give more attention.
We must consider also whether the priorities between expenditure and taxation are right. I go along to a considerable extent with one of the arguments of the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood). If the House were able to decide on a free vote whether it was right to save £185 million on housing benefit and sacrifice a tax reduction of a corresponding amount in terms of economic effect, I doubt whether it would declare that that was what it wanted. That is one example, but there are many others.
The method of determining priorities in government is set against a background in which the House is taking a far more active role, as demonstrated by the debate on Thursday on Estimates. We must consider whether the mechanism for making decisions on priorities within the Government and the House of Commons is as good as it could be.
The Government have rightly put great stress on cash limits, but are we giving adequate balance to real resources and considering in sufficient detail the areas of the economy in which there are unused real resources which would be brought into use, especially for investment, without having a serious effect upon the PSBR and the general state of the economy?
I do not believe that the way in which the Government are treating the proceeds from asset sales is the right one in the context of debates in this place. As the Select Committee on the Treasury and Civil Service stated clearly in its report on the autumn statement, if the PSBR is calculated on the basis that the Chancellor suggests, which is treating asset sale proceeds as negative expenditure—that is a weird approach—that presents a distorted picture from year to year depending on how many asset sales take place in one year rather than another.
From a debating point of view, and in terms of ascertaining the Government's real fiscal stocks, I feel that the proceeds of asset sales could be treated as revenue. However, their economic effect is much closer to a means of funding the borrowing requirement, and I feel that that is the right way to view these proceeds from the point of view of debates in this place. For other purposes the issue is more difficult and more technical, but I hope that we shall be able to reach a reasonable decision upon it during the proceedings of the Select Committee on the Treasury and Civil Service.
It is the determination of the Chancellor to reduce the PSBR so that he can fund it at low rates of interest, rather than high rates. That is the right approach. The Government went wrong after 1979 because they had a high PSBR and high interest rates. Some of my right hon. Friends may disagree, but I think that the present approach is right. However, it will be of advantage only if we cut interest rates. In that context, the international situation is worrying, especially the American deficit. The chairman 553 of the Federal Reserve Bank, Mr. Paul Volcker, is to fund its deficit with high interest rates. The combination of the two factors raises difficult questions when one considers the effect that it will have on our exchange rate.
We are very much in a position in which we should welcome what the Chancellor has proposed for specific tax measures. The Budget has been described as imaginative, and that is precisely what it is. There is one feature that gives cause for concern, and that is unemployment. The Red Book figures tell us that the percentage rate of growth in GDP will fall from 3 per cent. in 1983–84 to only 2.5 per cent. in the first half of 1984 to the first half of 1985. It seems that the rate of growth is planned to decline somewhat in the period from the first half of 1984 to the first half of 1985. I hope very much that the Chancellor will be able to deal with this in the course of his further measures. He has set out a clear pattern for the next five years. Indeed, he has done so for the next 10 years in the Green Paper, though that is something that we should debate on another occasion. The Green Paper provides a framework for further study, but no more than that.
The Chancellor's speech showed considerable elegance and cogency. I believe that his proposals will help us achieve greater prosperity. I welcome the Budget. I hope that we shall be able to continue these debates and to go in greater depth into some of the topics to which I have referred.
§ Mr. Bryan Gould (Dagenham)
The Chancellor delivered himself of an extremely complacent Budget statement. He appeared to say that everything was going so well that he could afford to occupy his time in tinkering with the tax rates and tax rules.
It is worth asking what the Chancellor was entitled to feel complacent about. It is clear that he could not have felt complacent, or should not have done, about unemployment. It is still at record levels and it is forecast to rise. Surely he did not feel complacent about business failures. Insolvencies are at record levels and rising extremely fast. Surely he was not complacent about manufacturing output, which has risen from the low point at which virtually 20 per cent. of our industry had been wiped out, but is making only the slowest and most painful of recoveries. He certainly could not feel complacent—indeed, he should be extraordinarily worried—about our performance in the balance of trade in manufactured goods.
Last year, as is now well known, we recorded a deficit in our trade in manufactured goods for the first time. It was not just any old deficit, for it was one of over £5 billion. The latest trend, shown by the first month of this year—I know that it is unfair to take only one month's figures, but that is all that the Chancellor has—shows that the annualised rate of deficit on trade in manufactured goods will be over £9 billion. That should be terrifying to the Chancellor and should not leave him with a feeling of complacency.
Looking forward to our economic performance over the next year or two, and particularly to our trade performance, clearly the Chancellor cannot feel complacent about the competitiveness of British industry. We hear much from Ministers trying to persuade us that the burdens heaped on industry have been justified by an improvement in competitiveness, but the facts are that every index one might choose to use shows the substantial 554 loss of competitiveness. The one that was hitherto most widely used, the IMF index of relative and normalised unit labour cost shows a loss of competitiveness of over 30 per cent. There can be no complacency there.
The Chancellor might feel complacency on investment, but surely not. Investment has plummeted to 36 per cent. below the level that the right hon. Lady inherited when she entered No. 10. He might feel complacency about the level of public expenditure in real terms, the terms that matter, the level of services offered. Surely not, with the National Health Service, housing and education being slashed, with further major cuts in the pipeline. How can the Chancellor have been content to sit back and say that everything was going well? He was presumably relying to some extent on North sea oil, something that has come to the aid of this Government as it never did for any other. It has come to the aid of tax revenues to the tune of £9 billion, to the aid of the balance of payments to the tune of another £9 billion. However, we know that North sea oil production is about to peak and that revenues will fall before production peaks. That means that complacenc3, should not be found on the Treasury Bench, because the Chancellor must know better than anybody that the pitiful performance that has so far been achieved depended entirely on North sea oil.
The Chancellor and the Government still talk about recovery, and we are told that we have turned the corner and are on the way up. It is true that if one throws the economy over the top of a cliff, sooner or later it will start the painful climb back once again. Even this economy has some sort of irreducible minimum below which it cannot sink. Even if we were to wave a magic wand and suddenly leap back to the rates of growth and the position that we could have been in if we had stuck to the trend before the wonderful monetarist remedies were introduced, we still could not argue that that sacrifice had been worth-while.
Such recovery would still have left behind a loss of real wealth and resources that can never be made up. By that I mean not just the material resources not just resources, the lack of which have weakened our industrial infrastructure, but human resources. A whole generation of young people have been thrown on the scrap heap who would in other circumstances have expected higher or further education. Their chance will not come again, and as the economic ship of state has run onto the rocks, and the Government have jettisoned goods and people, we must recognise that we can never go back to pick them up.
It might be said that, painful though it is, this process would be worth-while if we suddenly resumed a sustainable rate of growth better than anyting that we have been able to achieve in the past. Much play is made of improvements in productivity. However, I maintain that those improvements must be viewed in the light of improvements made by our competitors, and there is Little evidence to show that we are making real ground on them. There is little evidence that there is much improved productivity higher than the reviled trend established in the preceding decade. There is also some evidence that those productivity improvements are to a great extent a statistical illusion.
What has happened is that the weaker firms have gone to the wall and the average performance of those that remain appears to be higher. It is rather as though the England cricket captain, worried about the batting performance of his team, decided to improve the average by shooting the tail-end batsman. In the case of the 555 England team, that might not work that way. We can all see what would happen. The average might go up, but the number of runs scored would decline, and this is what happened in the British economy. What is left of the British economy is not leaner and fitter, as the Government would have us believe, but smaller and weaker and that much less able to face the international competition that is intensifying all the time.
Such a recovery as we have enjoyed has been partly the product of American recovery—based on policies that are anathema to the Government—and partly the product of a pre-election boom cunningly contrived and concealed. Treasury Ministers know perfectly well that in the period between the end of 1982 and early in 1983, they deliberately overfunded so as to keep the appearance of tight control over the money supply and then sold that money back through commercial bills to the private sector so as to circumvent their own monetary controls. That produced a boomlet that is about to peter out.
There are some signs that the Government are about to learn a lesson. I recently tabled a question asking if the Treasury would publish a table showing the increase in sterling M3 on the one hand and prices on the other. It declined to do so. However, when I asked what was the relationship between the two statistics, the Treasury replied that it was according to prevailing circumstances. What a departure from the scientific precision with which monetarism was ushered in. All that one had to do was to control the money supply and, two years later, just as though water was being passed through a hosepipe, out would come the same level of prices. That was the theory, but we now know that mercifully the Government have abandoned that theory.
The one thing in the Chancellor's speech which, paradoxically, gave me hope, was that he juggled with M0, MI, sterling M3 and EFL2 in such a way as to make it clear that he has no longer any real expectation of hitting any particular target. He reminded me of nothing more than a darts player who, despairing of his ability to improve his performance, concentrates on an amazingly complicated method of moving the dartboard once the dart has been thrown so that the dart has some chance of hitting the target after all.
If I am right that in practical terms the Chancellor has abandoned the nonsense of monetary policy, what is left? We are left with the age-old crude deflation that Governments for too long have resorted to in an attempt to improve our international competitiveness. We are left with a classic financial orthodoxy which, whenever it has been applied in the past, whether in the 1920s or in the period of the aftermath of the Napoleonic wars, has always produced the same consequences. There is no magic about it—it is predictable that that orthodoxy will produce precisely the consequences of depression, high unemployment, and falling output that we have seen.
Finally, what is left as the basis of the Government's policy is a crude ideological prejudice against the public sector. Ministers, the Prime Minister foremost among them, talk about the public sector as though it were a foreign country. The truth is that the public sector is part of our economy. What harms the public sector harms the economy as a whole. There is a great deal of pejorative talk about borrowing, but whenever resources are moved, for example from the corporate sector to the personal 556 sector, or vice versa, or from the public to the private sector, or vice versa, that is borrowing, but it is a perfectly sensible means of ensuring that all the country's resources are properly used. However, by constantly trying to drive down the economy's ability to use those resources, the Chancellor is ensuring that complacency is the last thing that he is entitled to feel.
The Budget optimism rests on limited objectives. Even that optimism is heroic by comparison with what has been achieved in the past and what the Chancellor's policies are likely to achieve in the future. Without growth, pitiful though it is, without continued success with inflation, the ability to control public spending and all the other assumptions on which the Chancellor has based his strategy, that strategy will come crumbling down. The Chancellor should have introduced a bold and expansionary Budget; instead, he has produced a complacent Budget which does nothing more than fiddle with tax when we need a real approach to our problems.
§ Mr. Alan Howarth (Stratford-on-Avon)
I add my warm congratulations to my right hon. Friend the Chancellor of the Exchequer on his Budget. With great imagination, he has introduced major policy changes which will do much to encourage the creation of wealth and jobs. He has managed even to spring the trap set for him in Strasbourg of making itfelony to drink small beerin the words of a certain great poet from my constituency. In certain respects, I should have liked my right hon. Friend to be, if not bloodier, at least more bold and resolute in his blazing of the trail for the medium and the longer term. Nonetheless I draw much encouragement from the vigour and courage of his Budget.
Since, over some time, I have urged my right hon. Friend the Chancellor and his predecessor to nail their colours to the mast and commit the Government to the achievement of price stability, I applaud my right hon. Friend for having taken that step and for reaffirming the commitment in his Budget statement. An end to inflation would be the greatest benefit the Government could confer on employment prospects, on the most vulnerable in our society and on the economy generally. The Government have the power to end inflation. hi our history, we have had inflation only when Governments have printed money and borrowed unduly. The hon. Member for Dagenham (Mr. Gould) might benefit from studying an interesting article in the April 1983 edition of the journal Economic Affairs. Ronald Halstead has shown that, of all the inflation experienced in the past seven centuries, 96 per cent. has occurred since 1936, when Keynes published the "General Theory of Employment, Interest and Money" and made deficit financing respectable.
My note of reservation about the Chancellor's Budget and strategy is that, although he has willed the end—price stability—he has left it out of sight beyond the horizon of the medium-term financial strategy. That may not be unreasonable, but I am a little more worried that he has not unambigously willed the means of achieving that aim.
The MTFS in its latest incarnation is distinctly modest in its ambitions for the medium term to 1988–89. We are invited to look forward—I do not think this is too crude a paraphase—to prices rising stably at about 4 per cent. per annum between 1985 and 1988. It is then anticipated 557 that inflation might come down to 3 per cent. in 1988–89. The Green Paper, it is true, alludes—only noncommittally—-to stable prices by 1993–94. We are told that the figures for 1985–86 to 1988–89 for the PSBR as a proportion of GDP are illustrative only. For prospects after 1988–89 we must turn to the Green Paper. The MTFS beyond the first year is studiously vague and imprecise, as it fades away from targets, through illustrative ranges, into the hypotheses of the Green Paper.
The trumpet sounds, therefore, somewhat uncertainly over the distant uplands—and in interesting contrast to my right hon. Friend's bravura note for this year. There are bound to be important uncertainties. Unpredictable developments in the world at large will affect our economy profoundly. We know too that it is remarkably difficult, even with the best will in the world, to put salt on the tail of the monetary aggregates, and my right hon. Friend has been wise to seek safety in a proliferation of numbers there.
One great contribution which it is undoubtedly within the Government's technical power to make towards the achievement of financial stability, is for the Government to balance their budget. Having in the past also urged my right hon. Friend and his colleagues to recognise the virtues of a balanced budget, I was intrigued to note my right hon. Friend's genuflection in his speech to thatclassical formula for financial discipline".—[Official Report, 13 March 1984; Vol. 56, c. 290.]I was not quite persuaded by him that the MTFS, as vouchsafed in this year's Red Book, deserves comparable reverence. It lacks precisely the rigour and precision of the classical formula.
It is true that, just as the apparently simple proposition that Governments should not go in for printing money opens a Pandora's box of technical disputation, so there is scope for abundant debate on the proper definition of a balanced budget. That should not worry us. It would be popular with economists, and everyone else would be quite clear about what the Government are driving at. It may indeed be that on a generous interpretation and if we are entitled to attach weight to the assumption in the Green Paper that the PSBR will fall to 1 per cent. of GDP in 1993–94, the Chancellor is moving to a balanced budget. If so, he is doing it fairly stealthily. My own feeling is that he would do better to commit himself clearly, as a necessary concomitant to his pursuit of price stability, to achieving a balanced budget. Markets would then have a firm point of reference. The great majority of people, I believe, would respect and welcome the Government's commitment to something which they could understand and which they would regard as self-evidently prudent.
My right hon. Friend may have taken the view that it is wiser not to give such a hostage to fortune, but he has established expectations in respect of falling inflation, stable or improving public services, lower taxes and sustained growth. I, too, want to see all these things. The Chancellor's confidence, flair and determination will encourage those same qualities among decision-makers in the economy. They are necessary elements and will make strongly for success. None the less, my right hon. Friend has exposed himself to financial and political risks. There could be circumstances in which the Chancellor would need all the powers of wizardry now attributed to him if he is to keep all those balls in the air together.
The Chancellor is banking on continued growth. He anticipates—I would not dissent from his view—growth 558 this year of 3 per cent. I am a little less confident than he is about prospects for a while thereafter. In his speech he perhaps rather hastily passed by two awkward factors. I should be surprised if it did not take the Americans a considerable time to come satisfactorily to grips with their federal finances. Whether the process turns out to involve continuing high interest rates and a very strong dollar or a capitulation to inflation and a very weak dollar, either way it will be bad for world trade. The debt problems of the non-oil, less developed countries are, to say the least, daunting, and that will continue to dampen our export performance for a long while yet. At home, it may well be that the personal income tax cuts which my right hon. Friend has introduced will sustain consumer spending as the savings ratio ceases to decline at its recent pace. I agree with my right hon. Friend that recovery in Britain has come from sound finance and lower inflation, but that reinforces my regret that the Government are not taking a more direct path to substantially lower inflation.
Although, for those reasons, I would not take absolutely for granted the Chancellor's assumption of maintenance of 2.25 per cent. growth over the five years to 1988–89, I warmly congratulate my right hon. Friend on the reforms he has introduced to strengthen the supply side of the economy. His reforms of the financial markets and business taxation will do a great dealto promote good quality growth.
I trust that the phasing out of the capital allowances and the much-praised removal of the fiscal bias against employment will not, however, lead to any falling off in truly productive capital investment. We are as a nation uniquely dependent on international trade, and we shall not for much longer continue to enjoy the same enormous benefit to the balance of payments from North sea oil. We need therefore to improve considerably further our competitiveness in export markets to ensure the growth posited in the MTFS.
This means that British workers must have plant and equipment at their elbow as good as that of their rivals. I know that that is my right hon. Friend's appreciation too, but I have been a shade worried at the somewhat Luddite view, current a good deal in recent weeks, that we must stop displacing people by machines. That is a false antithesis other than in the short term. Of course we must get people into jobs—and that is a cardinal purpose of our policies. To achieve this, we must embrace new technology.
We also need a coherent and thorough-going strategy to reform the labour market, and I welcome important elements of such an approach in the Budget—for example, the easing of the unemployment trap, the abolition of the national insurance surcharge and the reduction in stamp duty on homes.
My right hon. Friend has done all that he responsibly can to promote growth. We should, however, keep a weather eye open for the event that external circumstances do not prove propitious. It is then that my right hon. Friend might have some trouble keeping all those balls in the air at the same time. It might even be that he should be prepared to put one of them down. In the event that growth were disappointing, I wonder whether he would give priority to lower taxes or to price stability.
Not the least of the reasons why I would like to have seen a balanced Budget clearly established as a bench mark and as a necessary condition of success is that in the pursuit of price stability there could be phases when it 559 would be necessary to have higher interest rates or even higher taxes—as the Chancellor was brave enough to warn us last year. These melancholy contingencies would be more readily acceptable to a public who shared their Government's view of its need for a balanced budget.
Another area of potential political difficulty is that if growth, through no fault of the Government, were to be disappointing, the pressures for more public spending would not abate. Indeed, in another recession they would increase, and we should all want to ensure effective help for people in real need.
No doubt there will be other opportunities to debate the matters which are the subject of the Green Paper, but there are some points which I hope it is in order to make in the context of the Budget. There are two pertinent lessons from the years since 1979. One is that, as the Green Paper ruefully acknowledges, there is an inbuilt tendency for spending to rise; and an inbuilt resistance to expenditure reductions. The other is that people prefer it if they are confronted with the truth and are treated as adults.
While I welcome the publication of a Green Paper on public expenditure and taxation over the next 10 years—credit is due to Treasury Ministers for its appearance—it is a disappointing document. The Red Book, musing over the fact that the PSBR will have turned out in the current year to be 25 per cent. above what it was forecast to be a year ago, remarks:Local authority borrowing seems to have been running much higher than expected and central Government expenditure, particularly on non-cash-limited programmes, has exceeded last year's forecast.Quite so.
The disappointment about the Green Paper is that it fails in any adequate sense to discuss the profounder causes of the doubling of public expenditure in real terms in the last 20 years, and it asks us to resign ourselves to the proposition that it is in the nature of public services that demands are "literally limitless". It makes only perfunctory and rather nervous references to the possibilities of transferring some services to the market sector, of charging more for others and of a presentation that would educate people to the real costs of so-called "free" services. The Green Paper then says manfully that the Government intend to continue to hold public expenditure "firmly in check", before in the very same paragraph adumbrating the possibility of the Government, after all, allowing public expenditure to grow by 1 per cent. in real terms.
This hand-wringing, defeatist tone is strikingly at odds with the Chancellor's emphatic stress on the need to limit public expenditure. I do not want to see my right hon. Friend's strategy wounded, possibly mortally, by the pressures for public expenditure that will come at him from all directions and in a period when his revenues from North sea oil and asset sales will fall away. He would, I am confident, have much support from these Benches for a much more radical approach to public expenditure.
I offer not just one practical suggestion to link consideration of taxation policy and public spending. I hope that in the debate that we shall have on the reform of personal taxation, my right hon. Friend will bear in mind the precedent of housing. That is a field in which, by offering a worthwhile fiscal incentive to individuals to 560 provide for themselves in the private sector, public costs have been successfully held down and consumer satisfaction has been outstanding.
Before we succumb too completely to the undoubted attractions of lower rates of income tax, I hope that we will look at the possibility of using some leeway for personal tax reductions to offer systematic encouragement to people to opt away from state provision in spheres other than housing: education, health, pensions and elsewhere. In this way we would truly be tackling the control of public expenditure and the alleviation of taxation together. We should certainly not allow ourselves to be browbeaten by the predictable allegations about dismantling the welfare state and the like. There would be no compulsion in this approach; it would extend choice and allow an opportunity to have growth in those fields where we all want it.
The alternative—which is really what the Red Book and the Green Paper hold out to us, while finding it hard to contemplate it unblinkingly—is a prolonged, heroic exercise in national denial. My apprehension is that in these circumstances, our national finances would remain precarious, our politics would be a matter of attrition and the condition of our society would be recriminatory. If, instead, my right hon. Friend would incorporate into the financial strategy a system of incentives to divert demand away from state provision, he would significantly reinforce his strategy to release the nation into prosperity and responsibility.
§ 7.6 pm
§ Mr. Charles Kennedy (Ross, Cromarty and Skye)
The hon. Member for Stratford-on-Avon (Mr. Howarth) will forgive me if I do not deal with the logic or direction of his interesting soliloquy. I accept that he is strongly in favour of a balanced budget.
Last night, when speaking in another place to my noble friend Lord Diamond, he perceptively acknowledged that the initial impression about any Budget by any Government usually changes by the following Monday, once people have had time to digest it over the weekend. That is interesting in the context of this Budget, which has been given various names. The popular press has called it the take-away Budget and Labour Members have labelled it complacent. Having searched for a phrase with which to describe it, I would call it the Budget of lost opportunity. There can be no doubt that on Tuesday afternoon the Chancellor presented, in a journalistic sense, an astute fiscal package, and by so doing he delivered what I can only regard as his Budget of lost opportunity.
The speech of the Secretary of State for Employment was appreciably selective. For example, he quoted the good news, about VAT on imports, but ignored the bad news about VAT on building alterations and the effect that that will have on the construction industry, already hard hit by reductions in home improvements and repair grants. That is one industry which provides an opportunity speedily to create jobs and in which to take action for the good of the environment, society and the community as a whole. Instead, the Budget has hit that industry.
The Secretary of State spoke of optimism and challenge. If he came to my constituency he would find little of that, not because we face traditional industries in decline, the so-called sunset industries, but because we have had the riduculous situation of so-called sunrise industries closing during the tenure of office of the Conservatives. I refer, for example, to the aluminium 561 smelter at Invergordon and to the pulp mill at Fort William, both sunrise industries which were instituted only in the 1960s, which the Government have allowed to go under. It is difficult for Highlanders to respond to the brave charge to optimism and challenge represented by the Budget.
It is significant that the Chancellor spoke at length and in detail in his Budget broadcast on Tuesday night about several factors, but did not use the word "unemployment". That a Chancellor can go on television to deliver a message to the British people and argue and defend his Budget proposals without mentioning unemployment serves only to increase the strong impression held in many parts of the country that the Government's ears are not tuned to them and that their hearts are not with them, because the Government do not understand. That is the Budget's central difficulty.
The human dimension can be illustrated by the example of someone coming to Britain from another planet. He would not believe that our communities are in decline, that our infrastructure needs support, that our Health Service is understaffed and underfunded and that people are doing nothing while those problems exist. He would not believe that illustration if he came here without any political bias or social background because it is incredible, and little in the Budget will change that position.
The Chancellor made it clear that it was a "more of the same" Budget, a revenue-neutral Budget alongside a slightly redefined medium-term financial strategy. In other words, it is not a surge towards the politics of prosperity but a litany of abeyance of our politics of poverty. The Chancellor was at pains to place his Budget in the context of the Government's tenure of office.
It is only fair when one talks about the politics of poverty, to which the Budget was not addressed, to place the Government's record of poverty in context, too. One aspect cannot be considered without the other. Since 1979 the Government's record has included the repeal of the fair wages resolution, the failure adequately to amend the Equal Opportunities Act, the repeal of schedule 2 to the Employment Protection Act, a cut of 5 per cent. in invalidity benefit and a breaking of the link with earnings. The Government's record includes the abolition of industrial injury benefit, national insurance sick pay for the first eight weeks of illness and earnings-related pensions. Those and other measures have cut £2,000 million from benefit payments by the Treasury, pathetically camouflaged by the larger social security payments caused by the large increase in unemployment. That is the reality. If the Chancellor wishes to argue his case based on the Government's background and track record, he can base his argument on those changes.
The right hon. Member for Chesham and Amersham (Sir I. Gilmour) was right to refer to the long-term unemployed. Unemployment benefit gives the lie to the Chancellor's argument. We saw him on television the other evening, using diagrams to compare Britain's performance in the league table of western European countries. He did not show us the league table of unemployment benefits paid in western Europe. In Great Britain, it accounts for about 25 per cent. of net average earnings, 55 per cent. for a married couple with two children. In Holland, benefit is 85 per cent. of net average earnings, in Denmark it is 87 per cent. and in Germany has been cut from 68 to 63 per cent. Whenever we argue about proportional representation, we are given the example of 562 Germany and other western European countries where coalition Governments have been cobbled together hastily with resulting lower benefits. The German benefit rates have been reduced, but they are still more than twice as high as in Britain. That is nothing to be ashamed of. If a coalition Government have brought the politics of prosperity, that argument in favour of proportional representation should be endorsed by the nation and by the House.
The Government have given us the politics of poverty. Poor people, especially those with children, are suffering, and will continue to suffer, because of the Budget. I make a plea for them. It appears on paper—the Government should appreciate our suspicion—that final decisions will not be made for some time. The Chancellor spoke of lifting people out of the poverty trap. No one would disagree with that sentiment. He raised tax thresholds as a means of achieving that by 7 per cent. which is above the rate of inflation of 5.3 to 5.5 per cent. per year. yet he gave no adequate indication of what will happen to child benefit.
The Conservative party was projecting itself strongly even before 1979 as the party of the family, the pensioner's friend, and so on. When in opposition, Conservative Front Bench spokesmen issued a statement that underlinedThe Conservative party's commitment to treat increases in child benefit in the same way as reductions in taxation.The aim was to securean improvement in the real value of child benefit as part of an overall reduction in the burden of direct taxation.That is taken from a press notice on Commons early-day motion 420 of July 1977.
The Conservative Women's National Committee—it is good to know that there is more than one woman in the party—recommended in its pre-1984 Budget submission thatchild benefit be increased in line with any increases in tax allowances. The committee feels that this would be entirely appropriate remembering that child benefit has replaced the former system of child tax allowances.We were given fair warning just before the Budget that the 12 per cent. increase in tax allowances, at 7 per cent. above RPI, would not be matched by equivalent generosity in child benefit payments.
The Chancellor says that he wants to do something to haul people out of the poverty trap, and the Government must be only too well aware of the body of opinion that increases in child benefit are one way of arresting the flow of people into the poverty trap. That opinion is held in many quarters—for example, by Samuel Brittan, which is a name to conjure with. He wrote in the Financial Times of 27 January 1983 thatthe fact remains that an increase in child benefit has a much more powerful effect in alleviating the poverty and unemployment traps.The Chancellor has not taken that step, although it is not too late to do so. We plead urgently that he should bring forward something better before May or June, whenever the announcements are made.
I shall claim the Daily Telegraph in support of the alliance case at the risk of offending my Liberal colleagues. It observed in a post-Budget leader:Mr. Lawson is wrong to claim that there is no relatively inexpensive way to assault the poverty/unemployment trap. A substantial increase in child benefit would do more to hell) the sort of families who are most penalised by the present system of tax and benefits than a rise in allowances costing an equivalent amount.563 If the Government will not heed the Opposition parties and the SDP-Liberal alliance, they might heed the Daily Telegraph leader writer.
Generally, the Budget was indeed skilful and showed commendable journalistic presentation at the time of delivery—something to sit back and admire. In reality, however, it does not live up to the rhetoric of the Conservative party before and since 1979—as recently as the election campaign of June last year—about the importance of ethical considerations for the family and practical financial support to haul people with children out of the poverty trap by increasing child benefit. I hope that the Government will deal with that omission. Until then, for the unemployed and for the weakest members of society, it remains a Budget of lost opportunity. Through their unassailable parliamentary majority the Government have the means to do good for the most disadvantaged members of society, but they clearly lack the political will to follow that through.
§ Mr. Kennedy
I am about to finish. It is strange to seek to intervene in an hon. Member's peroration.
§ Mr. Kennedy
Perhaps I may finish my point.
The Government lack political will and, sadly, many people in this country lack the means and must by now be losing the human will as a result of the Government's policies. I hope that the Government will reconsider their attitude.
Having concluded my remarks to the Government, I shall now listen to the comments of the Department of Employment in exile.
§ Mr. Smith
I am grateful to the hon. Gentleman for giving way as gracefully as he could. The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood), when I intervened in his speech, promised me—I do not know whether it was with the hon. Gentleman's permission—that the hon. Member for Ross, Cromarty and Skye (Mr. Kennedy) would explain to me why the leader of the SDP approved of the abolition of investment income surcharge. Perhaps the hon. Gentleman will be kind enough to do that. I ask only because I was promised an answer.
§ Mr. Kennedy
I assure the right hon. and learned Gentleman that the alliance always delivers what it promises. I am not sure whether the right hon. and learned Gentleman was present at the beginning of my speech. Perhaps that is why the matter slipped my mind. I certainly intended to deal with it and I am happy to do so now.
My right hon. Friend the Member for Plymouth, Devonport (Dr. Owen) rightly expressed, as the Chancellor pointed out on Tuesday, concern about people who reach pension age without a valuable nest egg and are thus penalised, and in that sense we share the concern. My hon. Friend the Member for Roxburgh and Berwickshire (Mr. Kirkwood), speaking from the Liberal Bench, pointed out in a quite different context that it was immoral and impractical to provide those means when our arguments about child benefit had been overlooked. This is an important point. The Liberal-SDP alliance believes that the entire tax and benefit system should be overhauled and simplified through either tax credits or basic benefits.
564 In those circumstances, situations will arise in which Labour or Conservative Governments bring forward specific proposals in which one sees merit but which, within the overall programme, are objectionable. We have sought throughout to make that clear. I am sorry that the right hon. and learned Member for Monklands, East (Mr. Smith)—the only Labour Member present—is so steamed up about it. Perhaps the Government will acknowledge, as one more Labour Member arrives, that the proportion of alliance Members to Labour Members in the House today is more in keeping with the feeling of the country than it has been for some time.
§ Mr. Charles Morrison (Devizes)
The final comment of the hon. Member for Ross, Cromarty and Skye (Mr. Kennedy) amounted to trying to have his cake and eat it as well. Lest I forget to do so later, I begin by agreeing strongly with my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) about the need to extend long-term supplementary benefit for the longterm unemployed. That is very important and I hope that Ministers at the Treasury and the Department of Health and Social Services will deal with it before long.
In purely economic terms, I thought that the judgment on the Budget of the hon. Member for Ross, Cromarty and Skye was somewhat harsh. In politico-economic terms, however, his strictures may carry more weight in some respects. I agree with him that the Budget was skilful. When we were led to believe some time ago that we were to have a neutral Budget, the proposition did not sound very exciting, but the reality turned out to be very different. It is difficult to imagine any Budget speech a mere 80 minutes long providing more interest, variety, excitement or immediate euphoria. That was due not least to my right hon. Friend the Chancellor's delivery but it was also because, for once, the Budget set out to simplify rather than to complicate the tax system. Any Budget that abolishes two taxes entirely must be notable. One of them, the national insurance surcharge, has been a running sore and a dead weight for employment prospects ever since it was introduced by the Labour party. Naturally, therefore, when it is abolished, relief is enormous and joy overflows.
The change of balance between capital allowances and corporation tax should achieve exactly what my right hon. Friend the Chancellor expects. As he said, it will operateto encourage the search for investment projects with a genuinely worthwhile return, and to discourage uneconomic investment."—[Official Report, 13 March 1984; Vol. 56, c. 297.]We all have our pet hopes about the details of the Budget. Sometimes they materialise and sometimes they do not. In my racing committee hat, I was rather disappointed that the Chancellor felt unable to take any action on general betting duty. It is increasingly believed that the current unduly high level of duty is creating a growth in illegal betting, just as the Royal Commission on gambling predicted. That belief seems to be supported by the fall in betting turnover. The Government should be worried about that, because they will lose revenue but also because they cannot wish to encourage the growth of illegal betting. Nevertheless, I accept that, within the confines of a neutral Budget, a reduction in general betting duty may have been impossible on this occasion.
The abolition of on-course duty, however, would cost a mere £7 million—scarcely more than a blink of the 565 Chancellor's eye—and would encourage not only legal on-course betting but attendances at racecourses, thus helping the racing industry. I hope to be able to return to that later, perhaps during the Report stage of the Finance Bill.
I hope that it will also be possible to include in the Finance Bill suitable measures to guarantee the continuation of capital transfer tax agricultural relief on thoroughbred studs. Business relief is not equivalent for lifetime transfers or even necessarily for transfers on death. Without agricultural relief, many breeders of thoroughbreds may and probably will move abroad, which would have a serious effect on livestock export sales which are now worth a considerable sum and are a great help to the balance of payments. It would also have a limited but important effect on employment prospects in the areas concerned.
I welcome the proposed reduction in capital transfer tax and the halving of the rate for lifetime gifts. That will do much to ensure continuity, especially for small businesses and farmers. However, it seems that the full rate will now not be paid except in cases of incompetence or bad luck—notably in the form of an unexpected death. Incompetence may be inexcusable, but bad luck is not a fair basis for taxation. I hope that the Chancellor will give further thought to that point in a future Budget.
Lastly, I should like to congratulate the Chancellor on his generous increase in income tax allowances. Ultimately, however, the Budget will be judged, like its predecessors, not on immediate tax changes but on its effect on industry, the economy and people. Broadly speaking, industry seems to be excited by the prospects held out in the Budget, and no doubt its hopes will be realised. Likewise, the prospect for a continuation of the economic recovery seems reasonably good, and that will benefit many.
The single most worrying cloud over the economy must be the excessive size of the American deficit, but at home we still have a major problem which should be transient but which is developing a dangerous air of permanency. I refer to the excessively high level of unemployment, coupled with the excessively high level of long-term unemployment. My right hon. Friend the Secretary of State for Employment has rightly said that there are no easy panaceas for this problem. I agree. My right hon. Friend was right to emphasise the importance of competitiveness, and he is also to be congratulated on what he has done to improve training prospects. Sadly, however, I do not believe that the Budget will greatly reduce unemployment. The right hon. and learned Member for Monklands, East (Mr. Smith) has pointed out that we now have the highest unemployment level of any OECD country.
An unhealthy economy is worse for jobs than a healthy economy, but, nowadays, with technology and higher productivity—as my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) pointed out—even a healthy economy can create only marginal improvements in employment, and the fact that there are now more people in jobs is no consolation to those who are unemployed. Furthermore, although the Government can never be praised enough for their achievements in reducing inflation, low inflation will not automatically lead to improved job prospects. The experience of the 1930s should have taught us that.
566 We cannot expect the market alone to reduce unemployment. In my view, the only way in which the Government could help even some of the mass of unemployed is by acting directly. Above all, they should bring in schemes of public capital investment in necessary improvements and replacements to the infrastructure. The need for such schemes has been mentioned several times today. Some of us have drawn attention to it year after year. Each year, the need for improvements becomes greater, and the need to make inroads into the unemployment figures becomes more urgent. Why cannot those needs be met? We ask the question each year. and the Government reply by referring to the adverse effect on the public sector borrowing requirement and the consequences thereof.
I am not particularly brave, but I think that the Government are being unduly fearful. I know that the PSBR is not quite as restrictive as it appears—because of higher revenue and higher asset sales—but this country has, proportionately, almost the lowest PSBR or equivalent among the major OECD countries. The PSBR may be slightly more generous than it seems at first sight, but if the Chancellor had intended to step up capital investment against that background, I think that he would have said so. It should not be forgotten, too, that, although the CBI has expressed delight about the Budget, before the Budget it asked for an increase in the PSBR of £1.8 billion.
We now have an economy in which the Chancellor takes pride. In my view, he could afford to invest in it a little more. He could take the risks that any moderate and sensible investor may take—no more and no less.
On that point, I disagree with my right hon. Friend the Member for Worthing (Mr. Higgins). I agree with him that low interest rates are a great help, but, as he admitted, we are not complete masters in our own house in that respect and, in any case, low interest rates do not directly affect unemployment.
We have a hugely under-employed building industry, and that is the industry which would be most closely involved with the type of project which I suggest. The industry could meet greater demand without inflationary pressure. It should not be forgotten that unemployment itself is inflationary and that, in the end—it may be tedious to repeat this—it must make more sense to pay people to work than to pay them for enforced idleness.
I find it hard to believe that the economic risks of greater public capital expenditure are of any significance, even if they exist, but whatever the economic risks may be, the equation also involves political risks. Last summer, the Conservative party won a famous victory. However, in spite of the size of our majority, the country has swung marginally against us. We won the election because of the remarkable leadership and determination of the Prime Minister during the Falklands campaign and also because of the shambles in the Labour party. The first of those factors is fading into history, and it would be unwise to rely upon a repeat of the second.
Further, there is a paradox of which my right hon. Friend the Secretary of State for Employment should take note. Such is the generous and thoughtful attitude of the electorate at large that, given an improving economy, those who are in jobs will worry more and more about those who are not. That could have serious political consequences, and it would be a tragedy if the Government were caught in the backlash. High levels of unemployment cannot be ignored economically for the waste they 567 involve, any more than they can be ignored politically or personally for the hardship they bring and the threats they engender.
The last thing we want is an American-type budget deficit, but, to my mind, there is a happier medium. I hope that the Chancellor will decide soon to demonstrate even more clearly his own confidence in the economy by moving in the direction that I suggest. If he did so, he would get the thanks of the unemployed, just as much as the employed.
§ Mr. Roger Freeman (Kettering)
In the interests of brevity, I shall not pursue some of the points raised by my hon. Friend the Member for Stratford-on-Avon (Mr. Howarth)—points with which I strongly agreed, especially on capital expenditure. I wish to address myself specifically to pensioners.
My constituency has a comparatively high proportion of people aged over 65. They will welcome the Budget. Many pensioners in my constituency will be especially glad for what the Budget did not do. We should be grateful to the Chancellor that he did not interfere with tax relief on contributions to pension schemes by employers and employees. He also did not touch the tax exemption of pension funds. I strongly hope that he will resist the temptation which has been mentioned by some newspapers recently of coming back next year and removing some of those tax exemptions. I must tell my right hon. Friend the Chancellor and my hon. Friend the Financial Secretary to the Treasury that they should keep their hands off the tax-exempt status of pension schemes.
§ Mr. Freeman
I hope to explain in more detail shortly. There are four features to the Budget which pensioners will welcome. The first is the significant increases in the thresholds that affect pensioners. The second is the abolition of the duty on kerosene and paraffin, which is relevant to many old people.
With regard to investment income surcharge, I took exception to what the right hon. and learned Member for Monklands, East (Mr. Smith), who has now left the Chamber, said, as he seemed to imply that the abolition of that surcharge would benefit only a small section of the community that can well look after itself. I remind him and the House that more than 50 per cent. of people who have paid investment income surcharge are over 65 and that more than 40 per cent. would otherwise have paid the basic rate of tax. I cannot understand the insinuation that people aged over 65 who have paid investment income surcharge are second-class citizens. I do not understand why they should be subjected to a higher marginal rate than the rest of us on earned incomes. I warmly welcome the abolition of that surcharge, as it will benefit many of my constituents.
With regard to withdrawing life assurance relief on new policies—the House will know that relief was available at 50 per cent.—
§ Dr. Oonagh McDonald (Thurrock)
Only about 180,000 pensioners are fortunate enough to have £70,000 or more in capital. That is a tiny proportion of pensioners. The rest have had their age allowance increased only in 568 line with inflation and have not benefited from any other part of the Budget. That is why my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) said what he did about the investment income surcharge.
Many of the pensioners to whom the hon. Lady refers have no other source of income and might not have been included in an occupational pension scheme. I resent the argument that, having paid tax on the earnings for those savings, such people must pay a discriminatory higher marginal rate of tax on the income from those savings. With regard to life assurance, I believe that the abuses to which my right hon. Friend the Chancellor referred in his Budget statement could have been stopped without withdrawing basic relief. He has thrown out an attractive baby with rather dirty bath water. That is regrettable.
I have two suggestions about the tax treatment of pensioners which I hope my hon. Friend the Financial Secretary will take on board in next year's Budget if not in the Finance Bill. The first concerns retirement, and the limit of pension in relation to pensionable salary. The House will know that, if someone's normal retirement age is 65 and he retires earlier than that, the normal two thirds limit, which is the maximum ratio that his pension can bear to his pensionable salary, is reduced. If he retires at 55, the ratio is reduced to 50 per cent. I do not agree with my hon. Friend the Member for Kensington (Sir B. Rhys Williams) who suggested that that limit of two thirds might be raised to 100 per cent. That might be a touch too generous. There is a bigger problem that we should attack now. If we wish to encourage the over-55s to retire early, one way in which to do that—in certain circumstances it will have beneficial effects on employment—is for the Inland Revenue to remove the regulations that abate the two thirds maximum on the pension. I should like the abatement rules to be abolished for everyone who retires within 10 years of their normal retirement date.
There is still room for flexibility and improvement with regard to additional voluntary contributions because they will play an increasingly important role, especially with the withdrawal of life assurance relief. People in a pension scheme operated by employers and wanting to make additional voluntary contributions are at a disadvantage in relation to people who are governed by section 226 of the Taxes Management Act 1970—the self-employed. The first and most important element of discrimination is that some companies do not permit people to make an additional voluntary contribution. That bar should be removed.
The second is that, if a person makes an additional voluntary contribution to save for retirement, works for a company and is a member of its pension scheme, it is difficult for him to vary the sum downwards. A self-employed person who makes an annual contribution under section 226 can increase or decrease his contribution. I am sure that we could bring more people within the ambit of additional voluntary contributions if there ' were such flexibility.
The third element of discrimination lies in the maximum amount of additional voluntary contribution that can be made. There is a 15 per cent. limit on the pensionable salary that can go to a pension scheme run by an employer. For the self-employed that limit is 17.5 per cent. For the sake of simplicity and equity I should like the 15 per cent. limit to be raised to at least 17.5 per cent. My 569 hon. Friend the Member for Kensington made out an argument for withdrawing the rules altogether. That might be some years off—I am looking for some flexibility in the short term.
The Red Book shows clearly that the personal savings ratio has fallen from 14.5 per cent. in 1980 to 9.5 per cent. last year. The Finance Bill and next year's Budget should build on the Chancellor's achievements this year and help rebuild that savings ratio. I hope that the Chancellor will be constructive rather than destructive towards occupational pension schemes. I say to the Chancellor: please, next year, hands off tax exemption of occupational pensions.
§ Mr. Nicholas Winterton (Macclesfield)
I am grateful to you, Mr. Deputy Speaker, for calling me to speak in this important debate. I shall endeavour to be brief, to enable my right hon. and hon. Friends who wish to participate to have an opportunity to do so.
Opposition Members from a variety of parties have accused the Government of being complacent in this Budget. That is an unjustified comment about a Budget which is encouraging to industry and which has met many of the requests made by the Confederation of British Industry. I hope that Opposition Members will agree that the CBI has not always agreed with the Government and has produced propaganda, documents and papers critical of them. The Budget as in no way complacent.
The Budget was prepared by the Chancellor of the Exchequer, who on Budget day surprised me immensely with the lucid way in which he advanced the Government's case and package and uniquely held the House's attention during his entire speech, which lasted about 79 minutes. I have been in the House for almost 13 years and cannot remember a Chancellor of the Exchequer holding the attention of the House as well as my right hon. Friend.
If I have a criticism, it is that the Budget shows a lack of understanding of the needs of industry, although some measures that were announced answered the CBI's call, not least the abolition of national insurance surcharge, which was introduced by a Socialist Government in 1977. I am delighted that we have removed that penal tax, which was a disincentive to employment. It is a pity that we have not heard more about what is good in the package from the Opposition as well as their complaints about what it lacks. It is impossible to achieve everything in a single Budget, but this Budget has gone a long way to restoring confidence.
The Chancellor of the Exchequer had three themes. One was to reduce inflation, which is certainly the enemy of industry and therefore of investment and employment. I welcome that theme and hope that we shall get inflation lower than it stands now.
The Chancellor's second theme was to stimulate investment and enterprise. He has achieved that to an extent, but, with my hon. Friend the Member for Kettering (Mr. Freeman), I deeply regret the abolition of tax relief on life assurance policies. That is a retrograde step and will deprive the City and the institutions, which are by far the biggest investors in industry, of funds which would have found their way into industry through investment and thus provided much-needed jobs. The vast majority of people do not have time daily to read the back pages of the national heavies or to study the Stock Exchange, and they may not be able to employ an accountant or know a broker 570 who could advise them. The life assurance package, which was often presented by some of the more reputable insurance companies, was a fine way to save. I deeply regret that the 15 per cent. tax relief on the premiums has now been abolished.
The hon. Member for Dagenham (Mr. Gould) said that industry was not leaner and fitter, but smaller and weaker. That is wrong. Industry is decidedly fitter, but I agree with him that the manufacturing base is smaller. I am worried that when the real upturn in world economy takes place Britain will not have the manufacturing base to respond to the increased demand for manufactured goods that will result not only in Britain but in countries to which we have traditionally exported.
Unlike some mandarins in the corridors of the Treasury, and with no disrespect to the Financial Secretary to the Treasury, I agree with an extract from the CBI News No. 4 of 24 February 1984. It highlights the importance of the manufacturing industries rather than the service industries and confounds the increasing number of my right hon. and hon. Friends who put their faith in the future totally in the services sector. CBI News states:If we look at value added in the UK in producing our total exports of goods and services, roughly one half is directly attributable to manufacturing. A further quarter comes from supplying services to our manufacturing and helping them to get their products to the ports for sale overseas—everything from shipping to banking and insurance. Therefore three quarters of all our value added in exports is attributable directly or indirectly to manufacturing.I shall relate most of my remarks to manufacturing industry, because it creates real wealth and provides most employment. The cost of unemployment, which is currently more than 3 million people, is unacceptably high in human and financial terms. My hon. Friend the Member for Devizes (Mr. Morrison) said that it would be better if some of the money spent on unemployment, social security, supplementary benefit and other measures of short-term employment were directed to our manufacturing base to provide long-term jobs which would create real wealth, more confidence, more investment and inevitably, therefore, more jobs in the long term.
Although my proposition to the Minister does not refer directly to his Department, I hope that its message will be passed to the Secretary of State for Trade and Industry: would it be possible to extend the small engineering firms investment scheme to the textile and clothing industry? It is one of the largest employers and is currently taking on additional employees, despite massive overseas competition, much of which is unfair. The House and the country can be proud of that.
Our Euro-fanatics should note that these unfair schemes, which operate in Belgium, France and Italy, are to the direct detriment and disadvantage of the textile and clothing industry. The Government have a duty to that industry, which has the finest record in industry for investment, industrial relations and exports, to see whether they can help it, within European Community rules, to be more competitive. They can do that only by investment in the new equipment and high technology that is vital to that industry if it is to compete.
I emphasise that point because I take exception to another measure announced in the Budget—the scaling down of capital allowances for plant and equipment., and for buildings. Plant and machinery and buildings are vital 571 to industry, but here we are depriving industry of allowances which most companies, although there have been abuses, have used wisely.
The Chancellor justified that by saying that he has abolished the national insurance surcharge, and he has also scaled down corporation tax. I welcome his long-term view on corporation tax, but he said that the reduction in that tax would give companies more money to invest out of their self-generated profits. I must tell my hon. Friend that the Treasury is often grotesquely out of touch with what is happening on the ground. He will probably quote many companies in his reply tonight—or one of my hon. Friends will do so later in the debate, perhaps on Monday when we deal specifically with industry—that are turning in handsome profits. As an hon. Member who comes from a small business background, I can tell my hon. Friend that the profits being made by the majority of companies are very small and do not allow for the scale of investment that industry needs if it is to compete.
The Budget was encouraging in many respects. It was presented extremely lucidly, and will lead to another encouraging Budget in 1985. However, the Chancellor must not over-estimate, as he clearly did, the improvement that is taking place in the economy and in productivity.
Industrial costs are of vital importance to industry and commerce. I say with much reluctance, but I say it none the less because it needs saying and it will probably be said by Opposition Members, that the Government have generated unnecessary additional industrial costs. I refer with some tenderness to the Department of Energy—my hon. Friend the Minister used to be Under-Secretary of State there—which has put companies out of business. It has forced utilities to increase prices beyond what they wanted, and for industries where energy is a substantial industrial cost, that has been a killer blow. A typical example is Bowaters, a fairly efficient company in a depressed and deprived area—Merseyside—which was driven out of business purely because its energy costs were vastly above those of countries with which it was competing.
I also criticise what the Government are doing about rates, which are a tax that people pay, not with reluctance, but with anger. Industry pays them with anger just as do domestic ratepayers. The Government are tinkering with the rating system, but we need a fundamental reform to spread the burden of funds that are required by local government across all earners.
Having said that, I congratulate the Government on their achievements on inflation and interest rates. Again I am trying to strike a balance, because often from Conserative Members we hear eulogies about what the Chancellor has said. As a Member from the north-west—[Interruption.] The hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) comes from even further north across the border, and God bless the contribution that the Scots make in many walks of life, not only in Scotland, but in the City of London. Our financial institutions are almost completely controlled by Scots, so if they are unhappy about what is happening in Britain, they have only themselves to blame.
We have a great distance to go to ensure that the present brittle improvement in the economy is maintained. With my hon. Friend the Member for Devizes, my right hon. Friend the Member for Chesham and Amersham (Sir I. 572 Gilmour) and others, although I am not described traditionally as a wet, I am a pragmatist in economic matters. Although it might have meant increasing the PSBR by the £1,800 million for which the CBI asked—I support the CBI in that—the Budget could have included a public sector selective capital projects programme. I regret that omission, because most of the work that would result from that investment would go to the private sector, and it would have a dramatic effect all the way down the line.
The construction industry has been mentioned, but allied to construction are the machinery, aggregates, cement, brick, steel and household furniture and fabrics industries. I could name many more industries that would benefit from such additional money, which would create not just tens of thousands, but hundreds of thousands of jobs. Then Britain would be on the way to a return to work, which I would wish to happen.
I apologise to Labour Members who wish to speak, but many of us have sat throughout the debate, and some Labour Members have only now come into the Chamber. I was surprised that we ran out of Socialist Members and others—if I may describe them as others—who wished to contribute to the debate voluntarily.
Although this year I fully support the raising of thresholds for the basic rate of taxation, and although I support the indexation of the bands further up the scale, next year will be the time—as some hon. Members have said—to pay more attention to helping those who are really in need and are suffering from deprivation. I refer to the proposition put forward by at least two Conservative Members today that the Government should increase child benefit above the rate of inflation. I would benefit from that improvement for only a short time, but I hope that the Government will pay attention to that matter and to the improvement that will be required in due course to long-term supplementary benefit. As someone who represents a region that has suffered, through no fault of its own, from high unemployment, may I say that it is wrong that those who have devoted many years and much skill to industry and now have no job should be forced to rely upon such low benefits. I hope that my hon. Friend the Minister will take on board that message so that, in next year's encouraging Budget, that matter will be attended to.
As someone who has had experience in the construction industry, I regret—I shall accept it and not vote against it—the fact that household extensions and adaptations to property will now come within VAT. That will not bring the return that my hon. Friend wishes, but will increase the black economy. Instead of reputable small builders constructing such extensions to a high standard, the cowboys will come in and do the work for cash behind the back. To bring building extensions within the scope of VAT is a retrograde step.
I want to make a plea on behalf of Britain's war widows, who did not feature in the Budget at all. The contribution made by the families of pre-1973 war widows to the freedoms that we take for granted is under-estimated and is something to which hon. Members do not pay proper tribute. War widows should, as of right, have a pension, as they do in most other countries. Countries such as America and Australia do far more for their war widows than we do for ours. The overall cost would be a decreasing amount because war widows from the first world war are, sadly, dying rapidly. We still owe them a 573 great debt as we do those who were widowed in the second world war, and I hope that at some stage the Government will introduce legislation to give those people a much fairer deal than they have had to date.
The Chancellor has made a considerable reputation for himself in the last week. He has confounded the pundits. His Budget has reassured many of his severe critics, of which I was one, by the way in which he delivered it and the imagination that he showed in drawing it up. I have sought not only to praise him but to criticise those areas where the Government might have acted. We should not be too worried about the level of the PSBR. We have a phobia about that. Putting people back to work, earning money and contributing to Britain's economy and producing goods that can be sold will create a healthier climate from which we shall be able to reduce the PSBR.
Capital allowances will have an effect upon a sector of Britain's industry which featured yesterday at the Dispatch Box, the dairy industry. Many in that industry are substantially in hock to the banks. Many people do not realise that they are not as wealthy as the papers are trying to project. In fact, they are deeply in debt to the banks. It is only because they have land and stock that they are able to borrow the money that they do to produce milk which, until recently, successive Governments have asked them to produce in greater and greater quantities. Now we are shoving the gear into reverse within a matter of 14 days. Many farmers have been in touch with me within the past 24 hours. Their equipment is on lease because they are not making sufficient profits to buy the tractors and the other equipment that they need to run efficient and effective dairy farms.
I hope that the Government appreciate what they are doing to agriculture, not only in the effect that capital allowances will have in this particular area of leasing, but also in the summit. As things stand they will place 5,000 dairy farmers into liquidation and I estimate that about 300,000 prime dairy cattle will be in the market for slaughter in order to meet the requirements, not of the United Kingdom, because we are not self-sufficient in milk, but of the diktat of other members of the European Community. Is it right that France, which is overproducing to the tune of at least 100 per cent., should accept a reduction of only 2.5 per cent., while the United Kingdom dairy farmers have a reduction of 7.5 per cent.?
The Government are gradually but slowly leading Britain back to a sound basis of prosperity for all, with only the odd hiccup. However, I hope that they will realise the impact that some of their policies are having upon vital sectors of industry and people, in particular pensioners, those who are out of work through no fault of their own, and war widows.
§ Mr. D. N. Campbell-Savours (Workington)
The hon. Member for Macclesfield (Mr. Winterton) has turned his philosophy of the past five years on its head. He was a monetarist and now he disowns the PSBR. It is a curious position to take, but perhaps it is consistent. He would do well to establish a consistent position in our debates, because some hon. Members have heard him on a number of occasions over the years and his inconsistency tonight stood out.
To talk of those who support the Common Market as Euro-fanatics is to misunderstand what it is all about. We are not Euro-fanatics. Those of us who, historically, have 574 supported the European Community have a European dimension to our politics. That does not mean that we accept all the blemishes and deficiencies of the Community, but that we simply believe that it is the beginning of something and that it should be fought for, worked at and made to succeed. I hope that the hon. Gentleman will reconsider his remarks about Euro-fanatics.
I have not attended all the debate tonight, because I have been involved in Committee and have only now been able to attend the Chamber. The debate has been marked by the absence of the former Member for Stafford, Sir Hugh Fraser, who always spoke in debates on the Budget. I always remember his contributions and the debate is perhaps less weighty in the absence of his valuable contributions.
I, too, congratulate the Chancellor on his Budget to a certain extent. He has done what many believed for many years should have been done. He has set about dismantling much of the complexity of financial legislation—the conditionality that surrounds the financial legislation on our statute books. If that is the way that he intends to proceed over the coming years, he will make a substantial contribution not only to our debates in Committee but also to the generality of financial legislation.
However, on the substance of the Budget strategy, that there is to be no reflation of the British economy, what the right hon. Gentleman has done is dreadful. In being unwilling to reflate, he has ensured that 3 million people will remain unemployed perhaps until the end of the decade. Indeed, it may be more than 3 million people. The real judgment of the Budget by the people will be its effectiveness in dealing with the problem of unemployment. They will not be concerned with its intellectual input—its willingness to interfere with financial legislation. Within 12 months the shine on the Chancellor of yesterday, which has been adequately illustrated in innumerable publications, will suddenly have to withstand the test of time and the measure will be how many people have been put back to work. To that extent the Chancellor will have failed.
In historical city centres such as London, where developers currently preserve the facade of buildings but rip the guts to pieces and rebuild, there will now no longer be an incentive to do that because they will have to pay 15 per cent. VAT on their work. It will be defined as an improvement of those facades which are being kept for conservation purposes. The only way the developer will be able to proceed and yet ensure that he does not have to pay the 15 per cent. VAT is by knocking the facade down and putting up a new building. I believe that this is strongly against the interests of conservation. I believe that the Chancellor has failed to consider the conservation lobby and I hope that, in the light of my comments tonight, it will make a point of making representations before this item is allowed to reach the statute book, because we are building into financial law an incentive to destroy our heritage. I cannot believe that that could be the policy of any Government.
Secondly, I want to refer to the arrangements governing what are called take-away foods. Clearly, many people throughout this country will be very angry about the arrangements introduced by the Chancellor in that area. In the main it is our supporters who eat fish and chips. There are more fish and chip shops per square mile in my constituency than there are in the plusher areas of 575 Kensington and Chelsea. Perhaps that is a crude way of putting it, but the point is that many people in this country regard fish and chips as part of their staple diet. I believe that this is a penalty that has been imposed upon them by the Government and that the Government should be truly ashamed, because it is our people who will have to pay the price.
My final point in relation to the Budget concerns the arrangements for capital gains and capital transfer tax. Those arrangements this year once again reduce the amount which the Exchequer will receive from the better-off in society. They come only two weeks after a statement which increased prescription charges. I believe that the public is entitled to say that, to fund the tax relief for those who would otherwise pay capital gains and capital transfer tax, the Government are increasing the cost of prescriptions. That is quite appalling and it is part of the general shift of resources that has taken place over these last few years—certainly since 1979—from those who have little to those who have much.
I ask the Minister to put it to his seniors that, during the course of the Finance Bill proceedings, this matter should be reconsidered. Over the last four years, whenever we have debated these matters, we have been totally unsuccessful with our amendments. I believe that the Government should reconsider in that area.
The fight against inflation as pursued by the Government—and, indeed, by the Government of the United States of America under Mr. Reagan, under the general heading of Reagonomics—requires that a very heavy price be paid. This is true not only in the United States of America but equally in Europe and, in particular, in Britain.
I should like to put it on record tonight that I take strong exception—as many people in France must take strong exception—to the statements repeatedly made in the House that in some way the French Socialist Government have been deficient in pursuing the strategy that they have sought to pursue in the last couple of years. France is in trouble today because of Kohl, Reagan and Thatcher. Their pursuit of economic policy in common has grossly undermined the economies of the western world. The fact that the French have been unable to reflate and put back to work the millions of people that they want to put back to work has nothing to do with the invalidity of their policy; if has everything to do with the deficiencies inherent in the whole process of implementing monetarism.
The only way that western Europe is going to rescue itself from the present recession is by ditching the principle of monetarism and pursuing an interventionist reflationary strategy. That is the only way we shall get people back to work. If I agree with the hon. Member for Macclesfield on one small point, it is that we need that programme of public works more desperately today than we have ever needed it in our history.
§ Mr. Nicholas Lyell (Mid-Bedfordshire)
It is a pleasure to follow the hon. Member for Workington (Mr. Campbell-Savours), although I did not agree with his concluding remarks. I was struck by his point on heritage. 576 I can see ways round it and I hope that it will be thought about by my right hon. and hon. Friends on the Front Bench.
I want to talk about unemployment, which is really the central theme of today's debate. Before I do so, however, I wish to welcome very warmly the Budget as a whole. I welcome the simplification of the tax system and I hope it will be followed by an effort to clear the miasma of social security benefits and their interplay with tax. I welcome the fairness shown by concentrating tax relief on the thresholds. That already helps to simplify, and housing benefit is an example.
People with a small occupational pension of perhaps £15 or £20 a week above the old-age pension will find themselves substantially better off as a result of the raising of the tax threshold. If they have lost 41p a week housing benefit, they will have gained £2 a week by reduction in tax. That shows the benefit of simplification.
I welcome very warmly the share option scheme, and I congratulate my hon. Friend the Minister on his part in this. I hope that he will see it through and make it a thoroughly effective way of persuading companies to give wider share options to all their employees and thus help to spread wealth, and the independence which comes with it, among a wider section of the population.
The previous scheme did not work because it was subject to income tax and was far too complex. The Chancellor has cut the Gordian knot by making it subject only to capital gains tax. I hope that he will take every other possible measure to encourage businesses to take this up.
I welcome the emphasis in this Budget on profitable investment. The investment income surcharge might seem at first blush a rather one-sided measure, but there are two overwhelming points in its favour. First, savings such as somebody in a reasonable, middle-range job might hope to build up during his or her lifetime are earned-income savings on which tax has already been paid. It seems to me to be wrong in principle that people should pay an investment income surcharge on them.
The very rich can move their funds about the world as they wish. We want them to invest those funds in Britain—not in the Japanese stock market, or the art market, or a piece of land in Monte Carlo, but here in Britain where they will produce jobs. I believe that this measure will help to achieve that.
I believe that there should be more direct measures to deal with unemployment. By that I do not mean an extra £1.8 billion worth of investment in a particular year. Frankly, I am agnostic as to whether that will greatly benefit us. It can do so only on a rolling basis. It would produce only 100,000 or 180,000 more jobs, if that, and it is not possible to use it more than once. I prefer direct measures, of the kind which have been so successful—the youth training scheme and the community programme—to bring people back into work.
I am conscious of the 3 million unemployed and, while I believe that this Budget is good for jobs and for the long-term health of the economy, I do not believe that anybody would regard it as criticism of the Government to say that the Budget will not solve overnight or over the next two or three years the problem of the 3 million unemployed. It will take time to build up the strength of our economy and fight our way back. During that time there will remain a large number of people who are unemployed and who would love to do useful work if it could be made available, 577 and to train and prepare themselves better. That is why I so strongly applaud the youth training scheme and why I find the community programme so beneficial. There are 370,000 people on the YTS this year, and 162,000 on the community programme.
When studying the Green Paper and recognising our future problems with health, education and the care of the elderly, we must remind ourselves that those out of work—1.2 million under the age of 25—are a resource. It should be the Government's object to get that resource into effective work.
I also read in the Green Paper that the help that the extended family used to provide in the care of the elderly is drifting away. Young people have a part to play. We could set up schemes under which they could offer a service to the community. Much thought has been given to such schemes. The studies that I have made show that there would be a welcome response to such schemes from those working in the social services, the care of the elderly and in education, especially in the education of younger children. Between now and the next Budget, much useful work could be done on that basis. I dare to hope that hundreds of thousands of jobs could be provided on a cost-effective basis that will not only provide worthwhile employment but will bring a fresh insight into community problems.
Young people who help with the care of the elderly or work in a hospital or school will bring fresh life to that work and they will learn more themselves. A great deal can be gained by such schemes. I do not believe that the cost will adversely affect our overall economic problems. I hope that between now and his budget next year my right hon. and hon. Friends will give serious thought to that matter.
§ Mr. Robert McCrindle (Brentwood and Ongar)
Since I have been in the House for some 14 years without hitherto having contributed to a Budget debate, and since I have sat here today for five hours, the House might reasonably expect from me a wide-ranging speech. I am happy to tell hon. Members that they will not get one. I plan to concentrate my remarks on one area of the Budget's recommendations—an area in which the House knows I have an interest, and about which I have long made representations. I refer, of course, to the proposal to withdraw life assurance tax relief.
I declare an interest as the parliamentary adviser to the British Insurance Brokers' Association. But the real interest that I bring in this matter is in large part that of the consumer, who has been well served by the British insurance industry over many years. I have one further interest, in that I represent a constituency that daily sends thousands of people to work in the City of London, many of them in the insurance companies and the large firms of insurance brokers.
It is a pity that I am obliged to make certain remarks while we debate a Budget that has many commendable features. However, my right hon. Friend the Chancellor of the Exchequer has got it wholly wrong in his recommendation that life assurance tax relief should be withdrawn. It is a considerable blow to the industry. I do not doubt that, after a period, the resilient insurance industry will respond and will continue to market its life assurance products with assiduity and success. I also expect that the intermediaries, who are an important part 578 of the market, will return to the fold—perhaps even more aggressively, albeit with products that have a different emphasis. New avenues will be explored.
I do not grieve for the companies, nor for the better-off taxpayer who has had considerable advantages from life assurance tax relief. I could have gone along with my right hon. Friend had he suggested nothing more than that there should be an end to the abuse to which life assurance tax relief is undoubtedly subjected by those companies that have put together packages which, although they may not have violated the letter of life assurance tax relief, have certainly violated the spirit. I could have gone along with him.
The loss of life assurance tax relief risks affecting the ordinary man to a much greater extent than the better-off who, being sophisticated investors, will merely transfer their attentions to vehicles other than life assurance. The ordinary man who has been encouraged by the Government to accumulate capital will be affected by the disappearance of the incentive to save through life assurance. The man buying his property under an endowment house purchase scheme will, as from yesterday, find that it will cost him more to do so. The man who is concerned with protecting his family against his premature death will also be affected.
§ Mr. McCrindle
That is correct. I wish to make it quite clear that those who will be affected are those who have not yet been able or have not chosen to provide for the various contingencies to which I have referred.
The whole thrust of the Government's policy has been to encourage thrift and the development of self-reliance and to create what Conservative Members choose to call the property-owning democracy. The proposed measure on life assurance tax relief will considerably set hack that objective.
No doubt other forms of savings will benefit—the unit trusts, building societies and the banks. I understand that the jargon for that is "fiscal neutrality". Would that in achieving fiscal neutrality we had chosen not to take it away from life assurance but to extend it to those other forms of saving on the basis that, by attractive savings, we discourage consumption, which, at least in part, is one of the Government's aims.
I especially fear that, if we remove the incentive to provide a capital sum on which to rely in old age, we will force more and more people to rely on social benefits. The Government run the risk of saving money now by discontinuing tax relief on life assurance, only to discover that the total amount to be spent in 15 or 20 years on social security and supplementary benefits will substantially increase. I hope that that will not be the case, but the removal of the incentive must mean that there is a greater chance of that happening. It is the antithesis of the Government's hitherto stated aims.
Thrift is being discouraged by the move, as are regular savings. Home ownership is being made more difficult and more costly, notwithstanding the welcome change in stamp duty. We are achieving a short-term benefit, but running the risk of a long-term effect on our social and economic policies that can only be detrimental.
I wish to put a few questions to the Minister. If this move is the beginning and the end of it, we can lament it 579 but, arguably, we can live with it. I wonder whether there is not a suspicion in the minds of other hon. Members, as there is in mine, and as there is in the minds of some correspondents who have written to me over the past few days, about whether this is not just the beginning of a pattern which, if successful, would certainly reduce Government expenditure by a sizeable amount, allowing a substantial reduction in direct taxation, but at a considerable cost.
Can the Minister tell me, for example, that there is no intention, now or in the future, to disallow tax relief against mortgage interest payments? I think I am correct in saying that some Ministers are on record as saying that that is no part of their intention; but if we take away the tax relief on one method of saving, and if we accept that purchasing a home of one's own is another method of saving, where does the fundamental difference lie?
More important still, perhaps, what about pension contributions? Pensions are another way of building up one's entitlement to a standard of living in retirement, but so, too, is investing in life assurance. If we take away the tax incentive on life assurance, why should we not progressively move to taking it away on pensions contributions by the individual? They are on a par, in many ways. Then there is the tax relief on self-employed pension schemes, to which reference was made earlier. They have been adapted over the years so that they are now almost on all fours with endowment policies. Nevertheless, the life assurance tax relief has been removed from endowment policies, but remains—or should I say, remains for the moment—on self-employed retirement annuities.
The House and the country have a right to know whether this is a one-off move on life assurance alone, or whether it is the beginning of a pattern which could result in a substantial reduction in direct taxation, but at a cost that I do not believe the people of this country want to pay. In fact, I would take a small wager with the Minister that if we were to stop the first 100 people outside the House this evening and ask them whether they would prefer to have a reduction of, say 5p in the standard rate, with none of these allowances continuing, or a slower downward movement of the standard rate while the tax reliefs remain, I suspect that a substantial majority would prefer to keep the tax reliefs on the various forms of savings to which they have become accustomed and for which they have budgeted in purchasing a property or a life assurance policy.
Finally, I want to ask my hon. Friend whether it is not too late to suggest that he is taking a sledgehammer to crack a nut. There are undoubted violations of the spirit of life assurance tax relief that should be terminated, but what about the provision of a whole life policy that one cannot take advantage of for tax avoidance reasons? What about a lengthy endowment policy where the same situation applies? Should we not think seriously about retaining tax relief on those policies, while correctly terminating it on those where abuse has been the order of the day?
I was told many years ago that life assurance, which can be a big comfort to people in sudden distress and a great reassurance to those who reach retirement, is not bought; it is sold. I very much regret that, the Chancellor now 580 proposes to withdraw one of the principal aids to selling life assurance. I hope that it is not too late for the Minister to reconsider, at least in some degree.
§ Mr. Dave Nellist (Coventry, South-East)
Two days ago, before the Budget speech, the Chancellor of the Exchequer sat down in No. 11 to a dinner of smoked salmon and smoked trout. At the end of the Budget speech, there was VAT on fish and chips. That sums up for me, not the neutrality that we were promised in the Budget, but the class approach of the Tory Government.
That approach was perhaps better illustrated when, within a couple of hours of the Chancellor sitting down at 5 o'clock, in the after-hours trading on the Stock Exchange, according to the late news on the radio, the Financial Times index rose by 20 points, based on the announcements that the Chancellor had made, adding £4,000 million to the value of stocks on the Stock Exchange. We should set that against the crumbs that working people got in the Budget. Perhaps about 5 per cent. of families in the poverty trap may get a little easement, but the majority of the Budget cake went to the big firms and businesses. That was evident from the glee and the waving of Order Papers by the Conservative business men on the Government Benches as each announcement came along.
The gains for working people—I shall be blunt; perhaps I shall be hard—were pathetic. I cannot believe that the young worker on £35 a week, and four out of every 10 of our 16-year-olds, 17-year-olds and 18-year-olds who are lucky enough to have a job earning about £35 to £38 a week, will really be pleased with an extra 20p from the Budget. I do not believe that a married man on average wages getting a couple of quid a week will be wildly estatic about the Budget. However, the director on £35,000 or £40,000 a year will do fairly well on the £12 extra from the concessions that were made—six times that given to ordinary people in the Budget.
For working people and their families, those rises will be eaten up by the increases in cigarettes, beer, petrol and VAT, and, outside the confines of the Budget, on gas, electricity, prescriptions and spectacles, although the sting was taken out of those rises by mentioning them earlier in the month. Child benefit was mentioned in one of the documents that came out with the Budget. Less than £1 a day is given in child benefit at present, and there will be a rise of 5p a day. What are parents supposed to buy for their children with an extra 5p a day in child benefit?
It was significant that there was nothing in the Chancellor's speech about the unemployed. He made a great statement towards the beginning of his speech that profits were good for jobs. I looked at the Financial Times on 12 March, which said the profits had risen by 25 per cent. this year, but I have seen no equivalent rise in jobs or equivalent reduction in unemployment.
I did not expect the Budget seriously to address the problems of the working people. In fact, when I spoke at 7.40 on Tuesday morning in the debate on unemployment in the Consolidated Fund Bill debate, I addressed myself to that problem, because I did not expect much from the Budget, so I was not surprised when not much came out of it for working people.
I listened carefully and closely to the Chancellor's opening remarks, particularly his predictions for the economy and employment. He said that higher profits 581 would lead to more jobs, that economic prospects were more favourable than they had been for some time, and that the economic recovery could be sustained. What economic recovery? One of the Government's closest confidants, I assume, the deputy governor of the Bank of England, Mr. McMahon, speaking in the west midlands recently, said that the Bank of England had done some calculations and that once allowance is made for depreciationnet investment in manufacturing has been negative in the past three years.If one takes a reduced industrial base—that means fewer factories and fewer workplaces—and disinvestment by those industrial operations that have not been wiped out, what does one get? I quote the governor's words:In response to an increase in domestic demand of 9 per cent. from the low point of the recession, UK manufacturing output has increased by less than 4 per cent., while imports of finished manufactures have risen by as much as a third.Where are the extra jobs in that sustained economic recovery to come from if there has been an increase of a third in imported manufactured goods?
If it had not been for the crutch of North sea oil over the past two years, the economic growth that the Chancellor predicted in his speech of 2.5 to 3 per cent. this year would not be noticed. North sea oil has masked the calamitous decline in British capitalism, compared with Europe and countries in the OECD. Last year, for the first time in 200 years, Britain imported more manufactured goods than it exported. That fact seems to be greeted with complacency and is hardly referred to in Government speeches or by the Chancellor.
What we have heard from the Chancellor in the past few months, talking about the importance of manufacturing industry in creating wealth, is that manufacturing industry can somehow be replaced. On 9 February the Chancellor said in a debate that he was at a loss to understand the selective importance attached by the Opposition, and some Tory Members, to the manufacturing centre. The reason why we attach importance to it is the we get real wealth from manufacturing. We get real wealth only when manufactured goods are produced and the wealth created can be distributed among services and other sectors of the community. In the last two or three decades our share of world trade—British capitalism—has fallen from 25 per cent. a quarter of all world trade, to about 6 or 7 per cent., and now, with a loss of even the domestic market, I would argue that the Budget strategy has been brought about by the loss of manufacturing industry and the refusal to invest.
That net reversal in the amount of manufactured goods traded by Britain has not been affected by the Budget. The Chancellor promises more employment and better times around the corner, but I think that working people will not accept that to be true. If one looks at any of the major competitors of Britain and how they have fared over the last one or two years, one sees them climbing further ahead of British capitalism. The Budget offers nothing to redress that situation.
In the west midlands, and in Coventry, the area which I represent, perhaps we have too high hopes, and wear rose-tinted glasses, because we look to Budgets to provide jobs and improved conditions for working people. How can I go back this weekend to the surgeries in Coventry, when there are 31 vacancies at the jobcentre, and only 700 out of over 5,000 had jobs on leaving school last summer, 582 and tell the school leavers about the Budget speech and its prospects for jobs? What will I say in the west midlands, where half the unemployed in the region have been out of work for more than a year, and where one household in three in the region lives on or below the official poverty line? How will 35p on child benefit, 20p on low wages through tax relief, and £2 a week for a married couple alter the position of mass poverty in what used to be a prosperous area of Britain? We have lost jobs in metals, textiles, engineering, coal, food and drink, yet the Chancellor does not address himself to those problems.
A neighbour of mine in the west midlands is a Minister, the Conservative Member for Coventry, South-West (Mr. Butcher). It may surprise you, Mr. Deputy Speaker, to know that one job in this area has been lost for every half hour that the hon. Gentleman has been a Minister. The Government cannot be proud of that record.
I am talking about unemployment, because in St. Michael's ward, in the south-east of Coventry, 31.5 per cent. are unemployed in the city centre, the Hillfields area of Coventry. With the best will in the world, and the best understanding, I cannot see what the Chancellor is trying to do. I cannot see anything that I can take back with me on Saturday to the surgeries in the centre of Coventry to tell the people, a third of whom are unemployed, about any prospect of jobs around the corner.
It is not that there is no money that could be redirected if the Chancellor had had the will or wit to include such measures in his Budget speech. It has been possible for Governments to lift exchange controls. About £40,000 million has gone abroad to South Africa, Korea, Argentina, Thailand, Singapore and Brazil, countries where the unions are not allowed to function properly, people live at the barrel of a gun, and wages are at slave rates for the workers. The money has existed in this country, but it has gone in search of profits, not in search of jobs.
To reiterate the case that I have made frequently m the House, the point has been reached at which the Chancellor must address himself to how British industry — capitalism in Britain—can ever hope to compete with Germany, Japan and America when, as is admitted by some of the best capitalist economists, there is a difference of £200 billion between the sum that it is necessary to invest in British industry to create jobs and the sum that is necessary to produce a similar result in those countries.
I put to one of the Ministers in the Chancellor's Department a few weeks ago the fact that the Library staff, having looked at that figure, replied that they could not anticipate the gap being narrowed, not only in the next century, but even in the century after that, such is the low pace of investment in manufacturing industry. The Minister's reply was that he could not be bothered about what was happening in the next century, because he had enough problems in this century. I would argue that that was probably a fairly correct reply by the Minister.
I do not think that the financial measures in the Budget go any way towards solving the underlying deep-set crisis in British industry. It offers no hope to the 4.5 or.5 million workers on the dole. It offers no hope—even to those who mistakenly voted Tory in 1979, or in 1980—of lower taxes, or of industry being set free from public expenditure constraints. The Government's policies have driven even more people on to the dole, resulting in greater expenditure on social services, and that burden has to be 583 borne by a smaller and smaller work force. Nothing in the Budget enables us to get to grips with the long-term decline in the British economy.
Some of the facts that I have been able to give tonight are an indictment of the stewardship of the Chancellor, the Prime Minister, and the Conservative Government as a whole of the economy and society. I believe that next Monday the Budget should be rejected. I think that the Chancellor and the Government should resign. The only hope for the millions on the dole and those living in poverty in Britain is when working poeple can have in prospect a Labour Government with active Socialist policies to begin to transform British society. This would be based on public ownership, public accountability and the planning of resources. Money should not be allowed to flood overseas, with speculation in currency, the arts and property. There should be investment in jobs to create wealth to provide the services that we need.
§ Mr. Timothy Yeo (Suffolk, South)
The Budget has come in for a certain amount of criticism this evening from both sides of the House, but the fact remains that it was an outstandingly good Budget this year which has been widely welcomed, and properly so, in the last few days. It did a great deal more than anyone could reasonably have expected, most particularly the Opposition, whose embarrassment and squirming since Tuesday afternoon have caused much entertainment in the House.
The excellence of the contents of the Budget was matched by the Chancellor's presentation on Tuesday afternoon. The debate today reflects the extent to which the Opposition are struggling to make points, in the face of the Government's case.
On the overall strategy, the public sector borrowing requirement chosen by the Chancellor may be a little lower than I would have chosen. In a debate on the public spending White Paper last week I expressed the view that the level of public sector capital formation continues to give rise to concern. I believe resources should be devoted to that area in the coming year. I note that the PSBR has been reduced by the once-off inclusion of the £1.2 billion from the quite proper collection of VAT on imports, so that that may make the balance a little fairer.
The Opposition have bemoaned the very few direct references to unemployment in the Buget measures. Of all the criticisms that could be made, that is the most extraordinary. It demonstrates how little they have learnt. I agree that the Budget is not neutral in its effect on unemployment, but almost every measure in the Budget will have a favourable effect on employment levels.
I shall briefly run through the tax changes in the same order as that in which my right hon. Friend the Chancellor of th Exchequer introduced them. I welcome the halving of stamp duty for its effect in allowing the Stock Market to compete on equal terms in international markets, and, more particularly, for its effect on home purchases. The problem of stamp duty has been largely removed for first-time buyers. This will assist the highly labour-intensive construction industry.
I welcome the exemption of capital gains tax on corporate fixed interest stock that is held for over a year. Lower inflation has revived the prospect of a corporate 584 bond market. That means that companies have a new method of raising money for employment-creating investment, which is to be welcomed.
The House should recognise that the effect of incentives for equity investment feeds through to the creation of new jobs. I hope that next year attention will be given, as my right hon. Friend the Chancellor hinted, to dealing with the problems of capital gains tax which remains a tax on inflation gains for far too many. I hope that some new incentives can be considered for equity investment—direct investment by individuals—that are perhaps, along the lines of the French loi de Monory, allowing individuals to deduct against tax the cost of equity investment. Concessions of that sort could be quite reasonably paid for by the savings which have been made from withholding tax relief from life assurance policies.
A major and historic switch has been instigated by moving away from taxes which penalise labour and encourage the substitution of capital fall-back. First and foremost, we have seen the most welcome abolition of the national insurance surcharge. Labour's tax on jobs bedevilled industry and all employers for so long. The effect of that abolition will permit industry to hire another 200,000 workers without adding a penny to its wage bill. It will be able to do so with the £1 billion and more that will be saved in a full year. Labour Members can huff and puff about the way in which oil resources should be used, but there is no better use of those resources and revenues than to remove the tax on jobs which they introduced when the previous Labour Government were in office.
The Budget measures on capital allowances and corporation tax will help to rehabilitate profits. It cannot be repeated often enough that profits mean jobs. The phasing of these changes is extremely felicitous. With a 75 per cent. write-off available, there is still considerable incentive in the next 12 months for companies to invest in capital equipment. The profits which can thereby be earned will be taxed in due course at diminishing rates down to 35 per cent. The 30 per cent. provision for small businesses is especially welcome.
The old structure encouraged employers to spend capital and not to hire labour. As someone with experience in manufacturing industry, I know that when a company reaches the end of a highly profitable year there is always a temptation to invest in new machinery that will allow increased production in the following year and not an enlarged work force. I hope that by redressing that balance we shall start to make inroads on unemployment.
Everyone knows—even my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour), who unfortunately is no longer in his place—that the greatest single factor that has contributed to unemployment over the past five years has been the colossal rise in wage costs. What level do the Opposition think unemployment would have reached if wage inflation had continued unchecked at the rate which prevailed when the Labour Government left office in 1979? What would have happened if it had continued at the rate which the Labour Government bequeathed to my right hon. Friend the Prime Minister? I believe that we could have seen it rise to 5 million or 6 million. That could have happened if 15 per cent. and 20 per cent. wage increases had been allowed to continue. The reduction in inflation was the greatest single factor in preventing an even more serious rise in 585 unemployment. Despite the endeavours of the hon. Member for Workington (Mr. Campbell-Savours), we are seeing that process in operation in France.
I have mentioned the areas of the Budget in which we have seen helpful measures, but I have some reservations. My first reservation is on the extension of VAT to building alterations at a time when the construction industry is still recovering. This extension will not be helpful in increasing the number of jobs within the industry and I fear that it may cause a resurgence in the black economy.
Secondly, I share the concern that was expressed earlier about the Government's refusal to extend the long-term rate of supplementary benefit to the long-term unemployed. The cost of implementing that extension would not be great and it should be given high priority in future.
Thirdly, I am concerned that there is no commitment in the Budget to increase child benefit by the same amount that my right hon. Friend rightly decided to raise tax thresholds. I welcome the concentration of relief at the bottom end, but I think that when June comes we shall be looking anxiously to see whether child benefit has been raised by the same amount.
Finally, there is one other particular interest of mine, the relief of VAT for charities. The argument that charities are burdened by VAT in a way that neither local authorities nor commercial companies are is well known. I am disappointed that the Chancellor has not been able to grant that relief this year. I am particularly disappointed that, in addition to not getting the relief, many charities will be faced with a much greater VAT bill as a result of the extension of VAT on to building operations. There are many charities that carry out alterations to their premises to adapt them for disabled people, and many families with disabled people resident in their households which will face higher bills as a result. It is a pity that, although he rightly recognised the importance of taking VAT off special vehicles for disabled people, my right hon. Friend has been unable to make a similar gesture on premises.
This Budget is an extremely good one and deserves as much wholehearted support in the House as it will no doubt have from people outside the House.
§ 9.5 pm
§ Dr. Oonagh McDonald (Thurrock)
The mythology about the Budget has grown up already and is twofold. The first is the claim that the Budget helps the low-paid in particular as part of the Government's general strategy to ensure that people who are out of work look for work because they find that they are better off in work than living on supplementary benefit or unemployment benefit. The other piece of mythology that has grown up so rapidly is that this Budget provides a boost for jobs. Neither of these claims is true and the Opposition does not have to squirm about the Budget—all we have to do is look closely at what it entails, and first of all what it does for the low-paid workers.
What it does in terms of increasing the personal allowances and in reducing the tax burden is by no means enough to restore the tax burden on the low-paid to the much lower levels of 1978–79 when Labour left office. We also observe that this Budget makes no significant impact on the poverty trap. The Chancellor raised personal allowances at a cost of almost £2 billion. That took 850,000 people out of tax. However, if he had merely indexed the personal allowances, 500,000 of these people would have been taken out of tax anyhow.
586 All the tables accompanying the Budget make it clear that the rise in child benefit will be only 35p a week, far less than is necessary to end discrimination against families with children. To end that discrimination, the child benefit should have been increased by at least 80p a week, and that will plainly not be done. In this carefully constructed Budget, the resources are no longer there for that purpose and the Chancellor has no intention of making the resources available for it.
The tax threshold is still well below the official definition of poverty. For example, when income tax and child benefit are taken together for a two-child family, the tax-free income that they represent is equal to only 43 per cent. of average male earnings in 1984–85. That is well below the level at which tax becomes payable in most other EEC countries. That is the extent of the Chancellor's so-called generosity.
As for the poverty trap, that has not been touched by raising the personal allowances in the way that the Chancellor has done. There are probably 160,000 low-paid families subject to income tax while in receipt of family income supplement. Those were in April 1983 figures and they have probably gone up since then. An extra £1 in earnings will result in a loss of 39p in income tax and national insurance contribution taken together, and a reduction of 50p in the family income supplement entitlement. The changes the Chancellor has made will affect only 15,000 of those families which suffer the effects of the poverty trap. The Budget has done nothing to help those people. Most of those families suffer from staying in work, paying tax and claiming family income supplement.
Against that background, we must set the effects of the income tax cuts. In May, a married couple will on average receive £2.08 a week in tax benefits. A married couple on £25,000 a year, however, will receive £6 a week, and a married couple on £50,000 a year will receive £11.55 a week in benefit. The cost of reducing the tax burden of higher rate taxpayers will be £140 million. That is getting close to the sums the Chancellor would need—[Interruption.]—in relation to the housing benefit changes announced a few weeks ago. About 450,000 taxpayers in the higher rate band will benefit—a tiny minority of income tax payers. The Chancellor's statements about his Budget's effect on the low-paid are simply a piece of propaganda. Most of the benefits will go to those who are well off in terms of the amount they owe.
We have talked already about the investment income surcharge, which has been defended by some Conservative Members who pleaded the case of widows and pensioners. About 150,000 pensioners—a tiny fraction of pensioners as I said in an intervention—will benefit from the change. This year, the vast majority of pensioners will face two measures from the Chancellor. Their age allowance has been raised only in line with the inflation rate. Many will lose out perhaps because the small occupational pension they receive will be affected by the housing benefit changes already announced. Yet the Chancellor was prepared to spend £360 million on that change in a full year.
The change in the capital transfer tax threshold and rates will cost £49 million a year. Stamp duty alterations, which will benefit a tiny minority of first-time home buyers, will cost £400 million in a full year.
In deciding how he should best spend the money resulting from the tax changes, the Chancellor has 587 carefully directed those benefits towards the wealthy. He has not benefited the low-paid or taken people out of the poverty trap.
§ Dr. McDonald
Nothing in the Budget fits in with the propaganda the Government put out about unemployment—that work is available if only people were not content with the benefits they received and instead were prepared to go out to look for work.
§ Dr. McDonald
That is not true of the Budget. It is a piece of propaganda and mythology which the Chancellor has allowed to grow up in the two days since the Budget was delivered. That mythology has been carefully fostered by Conservative Members who seem to look at the Budget debate with a totally uncritical eye. I do not know what some of them expect from the right hon. Lady the Prime Minister. Perhaps they think that, having made such speeches, they will get a pat on the head or a cup of tea—[Interruption.]—because they have gone along with every change.
§ Dr. McDonald
I do not have to give way. Calm down. Some Conservative Members will not be getting a pat on the head. Nor will they be getting a cup of tea, unless it is tossed at them by the Prime Minister in view of their contributions to the debate. A number of their hon. Friends, however, have taken account only of the propaganda put out by the Chancellor and have not looked critically at the Budget's contents. They are not defending the interests of the majority of their constituents, be they the pensioners, the unemployed or the low-paid.
They had better return to their constituencies at the weekend and explain the Budget changes to which I have referred, and then they will see how much their constituents like what is being done. They will find that they do not appreciate their fish and chips and take-away curry being taxed. Nor do they like the fact that the indexation of various duties will mean the low-paid losing out in indirect taxation by an average of 91p per week. They will see the tax concession which the Chancellor has given as a kind of crumb which will be swallowed up by increased indirect taxes.
Another piece of mythology that has grown up around the Budget is that it will give a boost to jobs as a result of the removal of what Conservatives have described as the jobs tax, the national insurance surcharge. That has involved the removal of the 1 per cent. surcharge, the amount finally left from the 3.5 per cent. which was imposed by the then Labour Government in 1977.[Interruption.] I remind Conservative Members that it was imposed following extremely generous stock relief allowances costing the Treasury, in terms of lost revenue betweeen 1974 and 1979, £6 billion, and that was a boost to private industry in those years.
§ Dr. McDonald
It lasted for longer than the ravages of inflation. [Interruption.] I agree that that is why it was 588 introduced, but by the end of Labour's period of office the inflation rate was down to 10 per cent. The stock relief concession was still in existence and it was only in 1980, as the hon. Member for Suffolk, South (Mr. Yeo) pointed out, that the rate of inflation went up to 20 per cent.
§ Dr. McDonald
I intend to deal with all these matters in my speech. [HON. MEMBERS: "Answer."] I agree that the rate of inflation went up to 25 per cent. the year following the 1974 election. That happened partly because of the energy crisis and partly because of the threshold trigger for wages which the right hon. Member for Old Bexley and Sidcup (Mr. Heath) introduced, the effects of which we felt during our first year in office. It was a major achievement to have got inflation down to 10 per cent., and it was running at 8.4 per cent. in the last three months of our term in office.
The decision on the national insurance surcharge, I remind Conservative Members, represents only a 1 per cent. reduction. During that time manufacturing investment fell by 43 per cent. in real terms, a massive fall. Unemployment continued to rise during that period. The 2.5 per cent. reduction in the national insurance surcharge did not do much for investment or employment prospects then. There is no reason to suppose that a 1 per cent. reduction will do much more now.
The assumption on which the Government's medium-term financial strategy is worked out is that unemployment will stay at roughly the same level over the four-year period. Unemployment went up by 50,000 in January and February, to the consternation of Conservative Members. I noted with interest that they quoted figures ending in September. I am not surprised at that, as the number of vacancies began to fall in September, and has continued to fall. Job prospects do not look hopeful and I doubt whether the 1 per cent. reduction, although we welcome it, could be described as a boost for jobs.
Coming to the changes in capital allowances, the CBI expects that investment will increase by 7 per cent. this year. It points out, however, in its conclusions on the January survey that most of the likely investment will be directed towards improving efficiency rather than expanding capacity and employment. Anyone in his right mind welcomes an improvement in efficiency, but the CBI points out that investment this year will be directed to that end rather than to expanding capacity and employment opportunities. The changes in the capital allowances in the next two years that were announced by the Chancellor in the Budget will do little to help investment prospects. They will certainly not help the high technology industries, which should be given most assistance.
The changes may be in line with the Chancellor's hopes for the development of the British economy. In the Financial Times yesterday, Anatole Kaletsky commented that those changesmay move the British economy closer to the U.S. model, with rapid employment growth, particularly in the low wage service areas. The cost of this in the U.S. has been an internationally substandard investment and productivity performance, which is one reason why most other advanced industrialised countries still believe that the promotion of industrial investment is the key to generating extra jobs.589 I know that the Chancellor feels that one should look to the service industries for future employment prospects. He seems to believe that it is enough to rely on North sea oil to boost our investments, to aid the balance of payments and to provide him with about £9 billion in revenue in the coming year and up to £11 billion in 1986–87. That will probably be frittered away on unemployment.
Let us consider what has been happening in the service industries in the four years to 1983. Most of those sectors, including transport and posts and telecoms, have shown a decline in employment. Only three areas have shown an increase in employment in the past four years—retailing, hotels and catering and the banking, finance and insurance sector. Of those three sectors, only one has shown an increase in employment of more than 1 per cent. Retailing and hotel catering have shown an increase of 0.2 per cent. and 0.6 per cent. respectively, which does not hold out much prospect for growth in employment. Overall, that kind of growth in employment is not hopeful for many people. Growth has been in male jobs and part-time female jobs at the expense of full-time female jobs in those sectors. Therefore, although men may gain marginally from the growth in the service sector that the Chancellor seems anxious to encourage, women will lose prospects for full-time jobs, having already lost a great deal due to cuts in public spending and in various service industries.
To describe the Budget as a boost for jobs bears no relation to the facts. The Government's fiscal stance seems tighter than originally expected, although the aims of the more stringent fiscal policy seem unclear. The Red Book shows no decline in the rate of inflation in the period of the medium-term financial strategy. It will fall only to about 4 per cent. If tightening up on the amount of money borrowed and on the range of monetary aggregates that the Government like to use will not get rid of inflation altogether or achieve the stable prices of which the Government dream, what is the point of doing it when the cost in unemployment is so high?
As we have consistently argued, the Government should increase public spending at the cost of a modest increase in public sector borrowing, which at present is 2.5 per cent. of GDP whereas the average for industrialised countries is 4.5 per cent. We could afford a modest increase to engage in public works, capital investment and improving the efficiency of our economy as well as providing jobs. Even the CBI has called on the Government toincrease capital investment on public projects like transport, communications and sewerage systemsand has insisted that thisneed not mean a return to inflation. It will give the construction industry a much-needed boost, and help create new jobs.For once, the Labour party and the CBI are in agreement. Such a strategy would indeed boost the economy, reflate demand and create new jobs.
For the past 18 months or so the Government have relied on an expansion of consumer credit to provide more demand in the economy. They hoped that that would get them through the last general election, and it certainly helped. In December, consumer credit hit an all-time high of more than £900 million, but it is bound to peter out. Even the Government expect that to happen because, according to their own figures, growth will falter and decline next year. Consumer credit as a boost is bound to 590 falter. Conservative Members may be different, but for most people there comes a point at which they cannot take on new hire purchase commitments because they have to pay off those that they already have. There comes a time when one has to pay back the loan that one has managed to obtain, whether through Access, Barclaycard, the bank or some other means. The boost must therefore be shortlived.
If the Chancellor really wishes to boost the economy, only public sector capital investment can provide a real and continuing source of demand which will provide jobs and improve the economy by giving industry a far more efficient infrastructure than it now has. Yet there is nothing in the public expenditure White Paper, the Red Book or the Budget itself, to suggest that the Chancellor is in any way committed to tackling unemployment in this country.
The Budget speech did not refer to unemployment. As the right hon. Member for Chesham and Amersham (Sir I. Gilmour) rightly pointed out, unemployment was treated in the speech as a kind of abstraction. I think that those were the right hon. Gentleman's words. The Budget speech was constructed as though unemployment at such levels simply did not happen.
Since Tuesday, the Budget has been described as a jobs Budget. That is arrant nonsense. The Budget is not designed to help the low-paid or to provide more jobs. Its tax reforms cannot, perhaps, be described as tinkering with the tax system; they are a cynical exercise in squeezing more out of revenue in order to hand it to those who are well-off at the expense of the poor. If ever the poor bore the rich man's burden, they will do so after this Budget and after four years of Tory rule. The Budget does nothing for most families. It is not a family Budget. It is not a jobs Budget. it is not a Budget for the low-paid. It is a cynical piece of work, designed to help the Government to continue to nurture their friends.
§ The Financial Secretary to the Treasury (Mr. John Moore)
First, I thank my right hon. Friend the Member for Worthing (Mr. Higgins) and the hon. Member for Workington (Mr. Campbell-Savours), who has apologised because he has had to leave the debate. Both my right hon. Friend and the hon. Gentleman paid appropriate and proper tributes to two of our late colleagues—Mr. Maurice Macmillan and Sir Hugh Fraser. On behalf of the House, I should like to welcome those tributes. We miss both our colleagues very much from our debates.
Secondly, I am sure that my right hon. Friend the Chancellor and other Treasury Ministers will look forward with interest to the careful study by the Treasury and Civil Service Select Committee of what my right hon. Friend the Member for Worthing described as a Budget that is complex, difficult to analyse, and worth looking at. look forward to my right hon. Friend's detailed study.
The way in which so much of the Budget has been greeted—not just in the media but in the House—is a vindication of the extent to which the Chancellor has taken a grip on the direction of our taxation and economic affairs and of the way in which over many years we have considered the nature of the highly complicated system of corporation tax. That has been at the core of much of the debate.
Tonight's debate has centred on the nature of jobs, on the potential for employment and on the appalling nature 591 of unemployment, which has rightly been seen as an evil, a sickness and one of the prime difficulties that western society faces. I recognise that totally, and it is therefore crucial for us to indicate why and how we seek to tackle that problem through fundamental changes in—not through tinkering with—the corporation tax system.
All serious analysts have recognised the nature of that system—the complex set of reliefs on high rates that has given us the worst of both worlds. The right hon. Member for Glasgow, Govan (Mr. Millan), in his very good speech last night, talked about the nature of that difficult set of unnecessary reliefs. I quote from a source that described our present system as follows:With a theoretical 52 per cent. rate of corporation tax, companies are now paying some 11 per cent. only of their pretax profits in tax. The ready availability of a wide range of reliefs and allowances reduces the tax base considerably".Those are not the words of a Conservative. They are not an analysis of the direction in which we propose to go now. They are not—despite the words of the hon. Member for Thurrock (Dr. McDonald)—a cynical exercise. Those words on company taxation are taken from Labour's programme of June 1982.
The document continues:We must have a corporation tax system with lower percentage rates of tax than in the past, but with more restrictive reliefs and allowances. It must be less prone to manipulation that can reduce taxable profits below any fair assessment of profitability.I cannot disagree, and I am sure that Opposition Members will have some difficulty when they come to vote on substantial parts of the Budget. We know that the present system has produced an enormous emphasis on tax efficiency and distortion—[Interruption.] I shall get to the fundamentals, if the right hon. and learned Member for Monklands, East (Mr. Smith) will be as patient as I have been. I enjoyed his outstanding speech. Although I did not agree with the fundamentals of what he said, his speech was more than worth listening to and reading.
There is no question in my mind of the need for action. The real question, which my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) and others asked, is why it is so critical to make such a major directional change now. One of the reasons is that, in our four years of office we have witnessed the start of the reemployment of our people in long-term secure jobs. Our prime problem then was to regain control of the economy to stop runaway inflation. We used the firm disciplines of the medium-term financial strategy to break the back of inflation. My hon. Friend the Member for Macclesfield (Mr. Winterton) saw clearly the connection between investment and jobs after the destruction of inflation. My hon. Friends the Members for Stratford-on-Avon (Mr. Howarth) and for Suffolk, South (Mr. Yeo) gave tremendous support to that.
This is the first substantive Budget at the beginning of the Parliament. It was crucial to give a clear sense of direction. Moreover, corporate profits and liquidity have been recovering solidly, so there is a much better opportunity for change. Many right hon. and hon. Members have rightly pointed out that we have nearly 3 million people unemployed. Those of us who are anxious about that do not make cheap political points about it, but we have seen a steady and inexorable structural rise in unemployment since the 1960s. That must be uppermost 592 in our minds when we try to challenge and correct radically many parts of our society, especially the corporation tax structure.
We live in a competitive world and one third of our gross domestic product is involved in trade. It is critical that we are competitive and we must ensure that we get the most effective use of our national resources in terms of people and capital. Whether we do and whether our class system has worked has been questioned in the past few days. The right hon. Member for Glasgow, Govan asked legitimate questions yesterday about our past corporation tax allowance system. It has not worked. If generosity in relation to comparable countries was the key, our system should have produced more investment to better effect. The right hon. Member for Govan asked about data. The data from OECD suggest that our tax distortions could be one of the critical factors behind the poor efficiency of United Kingdom investment.
I shall take the example of the nine years between 1970 and 1979—not for political purposes—to show how much investment there has been in relation to the character of our generous allowances system which should have created more investment than in other comparable OECD nations. During that period, average real growth in investment in plant and machinery in the United Kingdom was 3.4 per cent. per annum, as compared with 5.2 per cent. for the major seven OECD countries.
My hon. Friend the Member for Stratford-on-Avon was worried about a Luddite attitude to investment. We are dealing not with that but with the qualitative nature of investment as a result of the distortions. Whether measured by the rate of return on investment, output per unit of capital or the incremental capital output ratio, the returns on investment in the United Kingdom appear to have been lower than in the United States of America, Germany and France.
For example, in 1979 the return on manufacturing investment was 5 per cent. in the United Kingdom as compared with 17 per cent. in Germany and the United States. The past system has clearly not worked. What do we now propose? We propose first—my hon. Friend the Member for Kensington (Sir B. Rhys Williams) was right to draw our attention to it—to take out the distortions in the corporate tax system as they decrease the quality of our investment and put people at a disadvantage to machines. We are not suggesting the absence of good investment but are simply saying that we should remove the disadvantage to people. It has also been more tax-efficient to borrow.
The right hon. and learned Member for Monklands, East and my hon. Friend the Member for Macclesfield said that we must not simply consider services. I am considering all types of company—industrial, manufacturing and service companies. The reduction will fundamentally improve their profitability, first by the way in which we are doing it. Yesterday my hon. Friend the Member for Loughborough (Mr. Dorrell) drew attention to the fact that we would be phasing in the corporation tax reductions before the removal of reliefs. We recognise the problems of adjustment to change and the difficulties of adjusting to such a radical change in the taxation system. It will especially help companies in the future.
Although the allowances changes and the corporation tax reductions will broadly offset each other in the next few years, in the long term the allowances are a cash flow change, while the abolition of national insurance surcharge and the reduced corporation tax rates are a 593 permanent major benefit to corporate profitability and liquidity. Many hon. Members who have experience of business and industry know that of equal and critical importance to companies is the added emphasis that that gives to management involvement in decision-making. Most investment comes from retained profit. The measures will increase those profits and thus management, not politicians via the taxman, will decide the direction of investment.
The more that companies can rely on internally generated funds, the less they need to rely on banks or the financial markets. My hon. Friend the Member for Kensington and, yesterday, my hon. Friend the Member for Strathkelvin and Bearsden (Mr. Hirst) stressed a feature of the changes that is unusual in British taxation and budgetary policy. By announcing four years of corporation tax rates, we have given companies certainty, a framework in which to work and, critically, encouragement to invest now in projects whose returns will be taxed at lower rates of tax than current projects. That is an opportunity for them.
There has not been sufficient discussion, either yesterday or today, about the benefit to our companies in an unusually competitive world of our corporation tax rate. It would look attractive to those who wish to invest in Britain. The relative rates after the Budget are: for France, 50 per cent.; for West Germany, 56 per cent.; for the Netherlands, 48 per cent.; for the United States 46 per cent.; and for Japan 42 per cent. My hon. Friend the Member for Macclesfield drew attention to the difficulties of small companies. He will welcome—it has been welcomed outside—the fact that the many companies which earn up to £100,000 a year will now pay tax on profits at 30 per cent. That is an unbeatable rate in the developed competitive world. It is a crucial addition to encourage people to invest in British companies.
I entirely accept that there are many factors behind the inexorable growth in unemployment during the past quarter of a century. In the Budget we tried to deal with the 3 million unemployed. I shall consider what the Budget, and the corporation tax package in particular, does for jobs. That question has been asked by the Opposition, first and fundamentally, because it has been the linchpin of Government policies since 1979. The package maintains the consistent approach of the medium-term financial strategy and our resolute anti-inflationary policy. Inflation destroys jobs, and further success in the fight against inflation is the way to secure sustainable growth in output and jobs.
Secondly—some have described them as aspects of supply side economics—the Budget has tried to remove some short and long-term obstacles to increased employment. My right hon. Friend the Member for Chesham and Amersham, my hon. Friends the Members for Kensington and for Devizes, and my hon. and learned Friend the Member for Mid-Bedfordshire (Mr. Lyell) agreed—although my hon. Friend the Member for Macclesfield was a little unhappy about it—with the reform of the corporation tax and allowances. This will add to companies' profitability, and the rehabilitation of profits is the critical feature of what we are doing. It will stimulate and encourage investment, with higher quality returns, which in the long term will produce more sustainable, successful companies and thus more people in work.
594 The Budget removes, as my hon. Friend the Member for Stratford-on-Avon said, the disadvantage under which people suffer by removing the tax distortions chat have clearly gone in favour of machines. That is in no way a Luddite comment. There is no denial of the need for quality investment. My hon. Friend the Member for Devizes complimented the improved thresholds, which will significantly increase incentives and ease the unemployment trap.
§ Mr. John Smith
The Minister said that the first thing which the Budget does to assist employment is to maintain the course of the medium-term financial strategy. Can he tell us how many jobs it has saved to date?
§ Mr. Moore
It has enabled Britain, in the worst recession for half a century, to reach a position from which, one day, we may be not only competitive but able to produce secure employment. [Interruption.] The right hon. and learned Gentleman can try to debate this, and those who have wandered late into the debate can mutter all they wish. It might be of interest to those rot in the Chamber to know that, until 8 o'clock, Conservative members studied the completely empty Benches behind the Opposition Front Bench; that is peculiar, in what is supposed to be one of the most critical Budget debates that the country has seen.
The fundamental destroyer of jobs is inflation, and the destruction of inflation, which has almost been achieved during the past four and half years, is the vital precursor to long-term recovery. The final and almost absolute cheek was the official Opposition's reaction to the abolition of the national insurance surcharge. My right hon. Friends the Members for Chesham and Amersham and for Worthing and my hon. Friends the Members for Kensington, for Devizes, for Macclesfield and for Suffolk, South welcomed the abolition. It is the height of impudence for the official Opposition, who introduced—[Interruption.] The hon. Members sitting on the Benches below the Gangway—who I believe are called the alliance—equal the size of the official Opposition in the Chamber, but I do not seek to equate their presence with the quality of the official Opposition.
It is the height of cheek to criticise a Government who have, in four and a half years and in the face of many difficulties, removed this pernicious tax on jobs. Had we not removed it, it would now cost £3 billion a year. This is the last instalment of the removal, and I am delighted that it is welcomed by the Opposition.
My hon. Friends the Members for Kensington, for Kettering and for Macclesfield were worried about the removal of life assurance premium relief. They believed, as did my hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) that the removal went against the grain of Conservative attitudes towards the saver. My hon. Friend the Member for Brentwood and Ongar, who welcomed the Budget overall, made one of the most responsible and fervent speeches that I have ever heard about saving via insurance. I commend his speech to those who wish to invest via insurance. He also paid a justified compliment to Britain's outstanding insurance industry. As he rightly said, it will adjust to change because of its innate strength.
However, I am unable to accept my hon. Friend's essential point. We are not against saving. On the contrary, we are for it. There is a suggestion that this 595 particular aspect of saving merits a particular form of tax relief. Let me put the figures into perspective, because there seems to be a suggestion that this is the destruction of all potential savings. In 1982, about £2,670 million went into life assurance policies, of which only £1,040 million received premium relief. That £1 billion should be seen in the context of the total personal savings that year of over £30 billion.
§ Mr. John Smith
If the withdrawal of this taxation advantage to the insurance industry will do no real harm, why was it that in the campaign guide issued to Conservative candidates at the election it was mentioned as a threat that might follow the election of a Labour Government?
§ Mr. Moore
One of the great pleasures that I had in the last election was to spend much more time trying to disseminate the Labour party's campaign guide to my constituents than my own.
The Conservative party made its policies clear in the campaign and did not specify every issue on which it would subsequently try to decide Britain's future. I trust and hope that Labour Members will not expect every Government decision to be presaged in the manifesto. That would not be a wise way to seek to govern our country.
§ Mr. McCrindle
My hon. Friend will remember that, towards the end of my speech, I said that this move could either be seen as an end in itself or as the forerunner to the disallowance of the tax advantages now enjoyed on such things as mortgage interest and pension contributions. I asked my hon. Friend to confirm that it was no part of the Government's plan, in their understandable move towards reducing direct taxation, to move towards the disallowance of those areas where tax allowance is granted at the moment.
§ Mr. Moore
I remember, but I have a number of points to answer. I shall make one point clear. On 18 October my right hon. Friend the Prime Minister gave a firm commitment on mortgage interest relief. I do not think there is any debate about that at all.
I found the debate on the investment income surcharge peculiar in two ways. Many of my right hon. and hon. Friends—my hon. Friends the Members for Kensington and for Kettering and my right hon. Friend the Member for Worthing—supported the Budget's proposals on that. However, I had great difficulty in trying to establish the policies of the Opposition and the alliance. Those who were not present might be interested to know that we were told that the Liberal party is morally against what the Government are proposing but that the Social Democratic party is for it. Therefore, we finished up with complete clarity on the official position of the alliance. Having said that, the Opposition's view is bizarre. We do not have time to go into the discussions that we had last night on the elderly, but it is extraordinary how it brought out the Opposition's distaste, not for people earning high incomes but for ownership. At no time during the debate did any of the Opposition compare somebody on an index-linked pension who might, for example, be receiving £20,000 a year and who under the present tax system would pay up to 60 per cent. with those who might have sold their fish and chip shop, their small business, for £70,000, have no 596 other income at all, be on half the income of an index-linked pensioner but be paying up to 75 per cent. The comparison between the owner of modest savings and a person who is in receipt of an index-linked pension is a classic illustration of the Opposition's detestation of ownership.
§ Mr. Kennedy
Will the Minister please do the Alliance the justice of answering a central question, which both my hon. Friend the Member for Roxburgh and Berwickshire (Mr. Kirkwood) and I put forward—what are the Government going to do about child benefits? We quoted the whole range of sources which say that that is the best way of lifting people out of the poverty trap, which, commendably, is what the Chancellor said in his Budget statement he wanted to do.
§ Mr. Moore
I appreciate that the hon. Gentleman has been present tonight, but he was not present last night when my hon. Friend the Minister of State covered the Government's position on child benefits. I am sure that he can read it in Hansard.
My hon. Friend the Member for Devizes (Mr. Morrison) raised points concerning the position of stud farms. My hon. Friend has visited me with a delegation and I appreciate his interest in this. The Inland Revenue will be continuing discussions with the Horse and Pony Taxation Committee very soon and we shall certainly bear in mind the points which my hon. Friend has made.
Many hon. Members raised points concerning the construction industry and the impact of the extension of VAT. The right hon. Member for Monklands, East, his hon. Friend the Member for Pontypridd (Mr. John), my hon. Friend the Member for Suffolk, South, my hon. Friend the Member for Macclesfield and the hon. Member for Workington were all concerned about this. This must be put in perspective. I accept that the extension is not welcome to the construction industry, but there was an extraordinary area of borderline debate and the clearing up of the absurdities concerning the borderline between alterations and repair and maintenance makes it easier to tackle fraud and evasion in this area. Seventy five per cent. of all the expenditure in the construction industry is still not affected by VAT because it is, of course, on new construction.
Equally, I hope and trust that many of the small companies in this area will benefit immediately, as one would wish them to, from the reduction in corporation tax on small businesses.
Many of my hon. Friends and many other hon. Members, but especially my right hon. Friend the Member for Chesham and Amersham and my hon. Friends the Members for Kensington and for Devizes raised again the points that they had made previously in public about public expenditure and the need to increase it. I draw their attention again to page 15 of the Government expenditure plans 1984–85 to 1986–87, table 1.13, which shows, despite views to the contrary, a relatively similar pattern of expenditure to that of the period 1978–79. I appreciate that they may argue that there should be an addition but, drawing their attention again to the 1978–79 outturn figure, in cost terms it is £21.7 billion against £21.65 billion planned for 1984–85.
There is one point that I want to address to the right hon. and learned Member for Monklands, East. He has a couple of times questioned the fact that the Government 597 have not referred to the figures on unemployment. He will know from his previous experience in government that it is the convention to assume no change in unemployment for social security and other public expenditure planning purposes. This was the practice also of the previous Labour Government. No Government have published a forecast of unemployment.
By the spring of 1979, our country had grown used to economic decline. Decline was seen as inevitable. It had become fashionable only to question its pace. Our relative poverty and comparative failure was in marked contrast to what was happening to our European neighbours. As inflation became deep-rooted in our economy and in our attitudes we had come almost passively to accept a pattern of genteel decay.
Our first four years in office radically changed our role. Despite the worst recession in half a century, we broke the back of inflation, brought our borrowing under control, repaid a mountain of foreign debt and saw our people regain a pride in Britain and its role in the world. The discipline and firm control embodied in the medium-term financial strategy will continue. Sound money policies will destroy the cancer of inflation. The Budget confirms that. It also courageously faces some of the deep-seated structural problems that have produced the scourge of unemployment.
Unemployment is an evil that we will not tolerate, but we will not solve it by the failed policies of the past quarter of a century. The Budget looks to the future—a future with stable prices, where people are—
§ Debate adjourned.—[Mr. Major.]
§ Debate to be resumed tomorrow.