Finance Bill

HC Deb 29 April 1985 vol 78 cc25-114

Order for Second Reading read.

[Relevant document: Eighth Report of the Treasury and Civil Service Committee, House of Commons Paper 306 of Session 1984–85.]

3.41 pm

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

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

Mr. Speaker

I have selected the amendment in the name of the Leader of the Opposition.

Mr. Rees

The House is now being asked to consider the legislative consequences of the Budget. Although it is in a sense a technical tax measure, I think it right in the first instance to set the Bill in its economic and strategic context, not least because we have the benefit of the eighth report of the Treasury and Civil Service Committee, which will, I am sure, make a useful contribution to our debates. However, it may not surprise the House to know that I do not entirely agree with all of its conclusions.

When my right hon. Friend the Chancellor of the Exchequer came to the House about six weeks ago to deliver his Budget speech, he did so against the background of some economic turbulence. At home, the miners' strike had just ended and it was possible to calculate that in 1984–85 it had added some £2¾ billion to the public sector borrowing requirement and had worsened the current account by about £4 billion. Abroad, the unprecedented period of dollar strength was coming to an end, and in consequence the foreign exchange markets were unsettled. The paramount requirement was, therefore, for my right hon. Friend to make it clear beyond any risk of misunderstanding or misinterpretation that the Government were totally committed to reducing inflation still further and would not be diverted from the financial strategy which they had followed consistently since 1979.

I must emphasise that recent policy measures do not reflect any change in policy as some commentators and even, to a degree, the Select Committee have suggested. Rather, they demonstrate the Government's unshakeable resolve to carry out their present policies. The fall in sterling in January posed a clear threat to the ultimate objective of falling inflation. The Government had to react to this in order to maintain sound monetary conditions, and they have taken firm measures to demonstrate that their public sector borrowing and monetary objectives will be met.

Interest rates will remain at the levels that are judged necessary to achieve the right monetary conditions. That does not represent a break with previous policies. As my right hon. Friend the Chancellor of the Exchequer explained in his Budget speech, the precise combination of monetary growth and exchange rates, necessary to keep our financial policy on track, must be a matter of fine judgment.

An increase in the reserve of £2 billion was designed—and I am glad to see that it has been accepted by the Select Committee on that basis—to reinforce the realism of our public expenditure plans and does not indicate any relaxation of our grip there. It serves to underline the continuing pressures in sensitive areas, as the Select Committee has observed, and the continuing need to contain them.

Against that background, it was inevitable that our room for manoeuvre in the tax area should be less than we had hoped last year or at the time of the Autumn Statement. I hope, however, that on closer examination of the Bill the House will recognise that it contains many points of interest an even imagination. As hon. Members study the main features of the Bill, I hope that they will be struck by the number of measures which carry forward the theme of tax reform and simplification which was started in last year's Finance Bill. I hope that they will be struck also by the range of measures designed to promote job creation.

I draw particular attention to the increase in personal allowances—the increase in the married man's allowance, for instance, by 9.5 per cent. and the increase in the single person's allowance by 10 per cent.—in other words, twice that required by statutory indexation. The overall cost of the increases in allowances proposed in the Budget and the Bill is about £1½ billion in 1985–86. This is the fourth successive year that the real value of the basic personal allowances has been increased. They now stand 20 per cent. higher than they were in 1978–79.

It is a familiar and rather threadbare point that the greatest cash benefits from an increase in allowances go to the higher rate taxpayers. In a sense they do, because we have a progressive tax system, but the greatest proportionate gains go to the lower paid. This year, for example, the combination of the increase in personal allowances and the reduction in national insurance contributions for those earning below £90 per week mean that the budget reliefs have been concentrated on lower income groups.

I shall give a few examples. A one-earner couple earning £85 per week—a little below half the average wage—will gain an extra £3.43 per week from the Budget when the reductions have taken effect. This will represent an increase in their take home pay of almost 5 per cent. A married couple on £380 a week—about twice average earnings—would gain £2.50 per week, or just about 1 per cent. on their take-home pay. We expect that a positive effect of these measures will be a general encouragement to people to take up lower paid jobs and a sharpening of the incentive for employers to create more jobs for them.

Another positive effect of these tax measures will be to take a further 800,000 people out of the tax altogether—375,000 more than if the allowances had merely been indexed. For those who argue that many of these people are young people, pensioners and part-timers, I make two points. The first is that we regard it as important—whatever our critics say—to remove as many people as possible with low incomes, whatever the source of that income or their household status, from tax. The second is that the relatively small numbers taken out of the poverty trap show that personal allowances, despite sustained increases under this Administration, are still toe low in real terms. That is one of the reasons why we believe in maintaining a firm grip of public expenditure to keep open the way for further cuts in direct taxes.

I should emphasise also that our ideas of changing to a new system of personal allowances—in fact a move towards a system of transferable personal allowances— will be embodied in a Green Paper which we shall publish later in the year. My hon. Friend the Financial Secretary will refer to that in greater detail when he replies to the debate. This should ensure that we can have an informed debate both in this House and in the country as a whole on the path of tax reform so that we are ready to move when the Inland Revenue has completed its gigantic task of computerising schedule E and case 1 and case 2 of schedule D taxation.

Mr. Nigel Forman (Carshalton and Wallington)

Does my right hon. and learned Friend understand the argument, which is attractive to many of us, that it would not make sense to rush ahead with extensive and far-reaching social security reforms in early legislation if that would preclude the possibility of linking that reform with an overall review of tax and benefits taken together? Will he bear that point very much in mind in considering the time scale in moving forward with both sides of the public accounts?

Mr. Rees

I recognise my hon. Friend's concern, which is shared by both sides of the House. That will naturally be an important question. No doubt there will be opportunities for debate, although this is not a matter for me, when reforms in both sectors are made available to the public.

I draw attention to one further income tax measure—clause 40, which introduces tax relief for half of the class 4 national insurance contributions made by the self-employed. Taken with the measures which the House debated in the Social Security Bill two weeks ago, which cut the class 2 national insurance contributions by £65 per year, these will, I hope, meet the long-felt grievance of the self-employed that their national insurance arrangements put them at a disadvantage as against the employed. Taken together, these two measures will cost around £155 million in a full year. Taken together, they will also, I hope, emphasise our continuing concern for the self-employed, who now number over 10 per cent. of the labour force. They constitute an enterprising, flexible and adaptable element in our economy and will continue, we believe, to make an increasing contribution to our economic growth, particularly as patterns of activity alter.

The considerable reliefs which we are proposing in these sectors need to be balanced by increases in other sectors. That is why we propose increases in excise duties beyond inflation. We have, however, taken careful account of the position of the industries likely to be affeced, including the employment implications of any changes. In particular, the House will note that we have increased the duty on spirits by rather less than inflation. This is designed to give some relief to the Scotch whisky industry, which we accept has recently experienced particular difficulties.

Mr. A. E. P. Duffy (Sheffield, Attercliffe)

Is the right hon. and learned Gentleman aware that the excessive increase in duty on beer is not confined to this year? It has been excessive every year since 1979 and represents the most consistent and longest record of heavy increases in duty on beer.

Mr. Rees

I take the hon. Gentleman's point, and I know that concern has been expressed from both sides of the House. The hon. Gentleman will be aware of the infraction proceedings brought against this country, which made it necessary to adjust the balance between the duties on wine and beer. We felt that it was appropriate to phase these matters in as gradually as possible so that the impact on brewers and consumers was not as sharp as it would have been if we had done it in one year. I understand the hon. Gentleman's concern, but he will understand the constraints upon us, which would have been operative on the Labour Government, of whom he was a distinguished member, if they had still been in office after 1979. He will recall that infraction proceedings had been pending before 1979.

Again, while we have increased the duty on cigarettes by more than the rate of inflation, we propose no increase in that for cigars or pipe tobacco. That is in part because the health risks attached to them are, on the best evidence available, less than those associated with smoking cigarettes, and in part to mitigate the overall effect of the duty increases on employment in the tobacco industry.

I should also perhaps refer to the extension of VAT, proposed in clause 10, to newspaper advertising. While we have respected the sensitivities of the powerful advocates of the written word, we hope that the House and the country will recognise that failure to charge press advertising would remain an anomaly. Other forms of advertising are charged—for example advertising on local radio—and although we are not introducing this measure under pressure from the European Commission, I should mention that newspaper advertising is charged to VAT in Belgium, Denmark, France Germany, Italy and Ireland. The yield in a full year will, I hope, amount to £50 million.

Mr. Robert Sheldon (Ashton-under-Lyne)

The Chief Secretary will be aware that this will particularly affect classified advertising. This is the mainstay of local newspapers, as they do not benefit from customers getting the advantage of the input tax. Therefore, classifieds will bear the full increase, whereas large display advertisements by larger companies will receive the benefit of the input tax and will not be affected in the same way. This is a serious disadvantage for local newspapers.

Mr. Rees

The concerns of local newspapers have been put to us very forcefully by hon. Members on both sides of the House. However, with his long experience in the Treasury, I am sure the right hon. Gentleman will recognise that this has been a continuing anomaly and that this year it was fair to redress the balance between the various forms of advertising.

Mr. Roy Hattersley (Birmingham, Sparkbrook)

I understand why the right hon. and learned Gentleman said that he wanted to rectify the anomaly, and there will be some support from the Opposition for his wish to rectify it in relation to display advertising. However, the problems of classified advertising are the problems not just of small newspapers, but of families who wish to publish notices relating to births, deaths and marriages. Does the Chief Secretary really believe that such people should be taxed without any possibility of recouping it? Will he think about that again?

Mr. Rees

We shall certainly reflect on that, and we shall no doubt discuss the detailed consequences when we debate the matter in Committee. I appreciate that classified advertising is on occasion important to the families concerned, but I wonder whether it forms a large or important part in their budgets. I understand the concern which has been expressed. We can have a useful debate on the subject, but I do not believe that this proposal will have a serious impact.

I come now to the business sector. Last year we set in hand a major reform of corporate taxation, and we see no need to alter or modify the rates of corporation tax which we then mapped out. The House will recall that for large companies corporation tax will be reduced to 35 per cent. by 1 April 1986. The rate for small companies has been reduced to 30 per cent. retrospectively with effect from 1 April 1983. We have, however, listened carefully to the various representations made about our reforms of capital allowances, and in particular the withdrawal of capital allowances next year.

We have considered carefully the argument that the withdrawal of initial allowances next year will lead to a dip in investment. I have to say that we are not convinced of this, for several reasons. First, although allowances will be lower, so too will corporation tax, and business will continue to benefit by nearly £1 billion a year from the abolition of the national insurance surcharge. Secondly, company profits have risen dramatically in recent years, and company finances are in general sound. Thirdly, the new system of allowances will allow most companies to write off their investments against tax at a rate which on average compares favourably with true economic depreciation. Finally, the new rate of allowances has been introduced in three stages and over a three-year transitional period.

We have, however, thought again about the case for modifying these arrangements for assets with a short life. Clause 54 sets out the change that we propose. It will give businesses the option of keeping investments expected to depreciate rapidly—because of technological obsolescence, for instance—out of the main capital allowance pool. If they are then disposed of at less than their written down value within five years, a balancing allowance will be given. As a result, the cost to the business of the asset will be written off over its life. This measure will, I hope, be particularly useful to high technology businesses, whose capital stock is subject to rapid obsolescence.

So as to emphasise to the House that our appetite for further tax reform has not been satisfied, I shall turn now to some specific provisions in the Bill. The first are those contained in chapter II of part I which derive from the work of the Keith committee, which we set up in 1980 to review the enforcement powers of the Customs and Excise and the Inland Revenue.

It has long been felt, we believe, that the powers of these two departments were overdue for re-examination and reform, so as to ensure that they were effective and that a fair balance was struck between the interests of taxpayers and the Government. It was on that basis that we set up a committee in 1980 under the chairmanship of Lord Keith to review this vast and sensitive area. We are greatly in the debt of this committee for its patient, painstaking and thorough review. Chapter II of part I of this year's Finance Bill contains the results of that review in relation to VAT.

I should emphasise that there was very full consultation on the report itself in 1983–84, and on the draft clauses which were published in November last year. Therefore, no one can say with real justification that the proposals have been sprung on an unsuspecting world. I hope also that on close examination they will be seen to strike a fair balance between the interests of the taxpayer and the Government.

In outline—and we shall no doubt have an opportunity to examine the provisions in more detail in Standing Committee—we propose a revision of Customs and Excise powers in relation to VAT control and investigation work, coupled with increased safeguards for taxpayers. We also propose the introduction of a civil offence code for compliance failures and less serious frauds in place of the present quasi criminal sanctions.

I should emhasise that, in deference to the many comments and representations received, we have introduced a number of important changes since the Keith report. In particular, we have increased the rights of appeal to cover situations where the taxpayer considers that there has been reasonable excuse for his failure to comply with the law and that he had exercised all due diligence. The default surcharge and misdeclaration penalties have also been targeted more specifically on persistent late payers and substantial errors. The balance of the proposals has thus been tilted further towards the protection of the taxpayer, without, we believe, losing sight of the aim of improving the compliance of dilatory taxpayers.

If the package commends itself to the House, we expect that it will halve the amount of VAT outstanding—perhaps over £1 billion at any given time—produce an increased revenue flow of £50 million a year, result in a once for all increase in the revenue flow amounting to £600 million by 1988–89, and produce an annual revenue for surcharge, interest and penalties amounting to £150 million over time.

Mrs. Elaine Kellett-Bowman (Lancaster)

With regard to VAT outstanding, will my right hon. and learned Friend, in conjunction with our right hon. Friend the Secretary of State for Trade and Industry, do something about the large number of bankruptcies which are caused by the VAT man taking the first bite of the cherry? The matter is coming up for discussion tomorrow.

Mr. Rees

My hon. Friend puts me in a difficult position. Those who have been bankrupted, to whom my hon. Friend refers, have, after all, been collectors of VAT on behalf of the general body of taxpayers. Although I would be happy to look at any individual cases where perhaps there has been an excess of zeal in exercising powers, it would be difficult to soften the procedures any further. Indeed, I hope that when they are examined in detail it will be seen that the interests of the taxpayer have been safeguarded.

Sir William Clark (Croydon, South)

May I try to elaborate the point which I think my hon. Friend the Member for Lancaster (Mrs. Kellett-Bowman) was making? Where the Customs and Excise is dilatory in collecting VAT and a firm goes into bankruptcy, the Revenue is protected against the other creditors. That is the anomaly that we have to eradicate.

Mrs. Kellett-Bowman

Yes.

Mr. Rees

I apologise to both my hon. Friends. I had not realised that the reference was to the insolvency provisions. It will be a matter for consideration by the House when insolvency legislation is brought before it. I do not think that it will arise out of the provisions in the Finance Bill, but I shall bear in mind what my two hon. Friends have said.

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

Is there not evidence that many companies, in the rather difficult trading conditions of today, are extending more credit and by doing so are delaying the date on which they will receive the VAT payment which is due to them? In those circumstances, in the event that the Minister presses forward in the way that he suggests—I am not wholly opposed to the proposal, but I am opposed to many parts of it—surely the effect will be to impose a VAT burden on businesses which they cannot afford to pay because they have not themselves been paid. When the rules were readjusted, to what extent was that problem taken into account?

Mr. Rees

The rules will not alter the chargeable event by reference to which VAT is collected. They are merely, as it were, the collecting mechanisms when a chargeable event has occurred. The hon. Gentleman is suggesting that because credit has been extended in hard times that necessarily alters the chargeable event. There may be odd occasions when that is so, but in general it is not true. The chargeable event remains the same. I think that there will be a chance to examine the matter in detail in Committee and to consider the point that he has made. He might care to give me advance notice of any particular case that he has in mind, so that it can be measured against the provisions.

Mr. Campbell-Savours

I already have.

Mr. Rees

I think that there are two points to be debated. The first is whether the chargeable event is set at the right moment. The second is whether the collection mechanisms are sufficiently effective, or too effective. We can consider both points in due course.

I now move to another area of reform. We are conscious of the fact that, even with the provisions introduced in 1982, capital gains tax can still be regarded as a levy imposed on inflationary as well as real gains.

Clause 64, therefore, modifies the indexation formula for capital gains tax. The exclusion of the first 12 months' inflation from the allowance for assets acquired after March 1982 is lifted. For assets held in March 1982, indexation on the post-March 1982 gain will be based on the market value of the asset on that date. Indexation will also be extended to losses.

The effect of the changes is that inflationary gains from March 1982 onwards will be fully offset against the capital gains tax liability. The tax will be charged only on real gains from that date. There remains, however, an element of taxation of inflationary gains made on assets acquired before March 1982. I have to say, in all candour, that to extend indexation to inflationary gains before March 1982 completely would have been too expensive in revenue and staff.

Finally, I deal with development land tax. In clause 87 we propose the abolition of development land tax. If this move commends itself to the House, it will be the third tax which the Government have abolished in two years. [Interruption.] I am glad that there is enthusiasm on both sides of the House for that bold and far-reaching measure.

I have to say that it was the least cost-effective tax in the statute book, raising only £80 million last year at an administrative cost of about £5 million. The net cost of abolition will, in fact, be only about £50 million in a full year, as there should be an increase in income tax, corporation tax and capital gains tax yields on gains previously charged to development land tax. But above all, abolition should remove 200 pages of complex legislation from the statute book and will, we hope, bring more development land on to the market and help the construction industry.

There are some who have described the Budget—and so, I suppose, by extension, the Finance Bill—as a dull Budget. I would not be dismayed if either were classed as dull. There are occasions for drama and occasions for self-restraint. What is important is that the Budget and the Finance Bill were and are right for the circumstances of this year. The Budget has, I believe, signalled clearly that we have not faltered in our economic objectives.

The Finance Bill will, I hope, be recognised as a carefully constructed, thoughtful Bill, entirely consistent with our economic strategies, directing reliefs where I believe the country would require them to be directed—particularly to the less well-off, and to the creation of jobs—but also a Finance Bill which carries further forward the process of sensible, enlightened, tax reform which will, over the lifetime of several Parliaments, give us a tax system which is in tune with the times in which we live. It may not dazzle, but nor should it alarm. I hope it will reassure the country that its financial affairs are in firm and competent hands. On that basis, I commend it to the House.

4.9 pm

Mr. Roy Hattersley (Birmingham, Sparkbrook)

I beg to move, to leave out from "That" to the end of the Question and to add instead thereof: This House declines to give a Second Reading to a Bill which fails to face the real problems of the United Kingdom economy, increases the burden of taxation without providing adequate relief for the lowest paid or desperately needed help to pensioners, the sick and families, and is the product of a Budget which was misleadingly described by the Chancellor of the Exchequer as primarily intended to reduce unemployment. The House will have noticed that the Chief Secretary addressed us in a more subdued mood than on the last occasion when he spoke to the House. His new attitude was wholly appropriate for the introduction of this mouse of a Bill, which is not simply regarded as timid but, according to all the evidence, the most unpopular Finance Bill presented to the country since the war—[Holy. MEMBERS: "Rubbish."]—by the most unpopular Chancellor of the Exchequer. That is the clear evidence of the polls.

If the Chancellor of the Exchequer does not recognise that, we are likely to continue to see not only the downward spiral of the Government's popularity, which we naturally welcome, but the continual debilitation of the economy. The one contribution that the Chief Secretary made to the standing of his Government was the repetition with something approaching conviction that the Bill stood for no change in the strategy, an unshakeable resolve to continue as the Government had begun, and the continuation of the policies which the Government have followed since 1979. The Chief Secretary always manages to make that promise as if he did not realise that the continuation of that strategy was the continuation of a strategy which has produced record unemployment, record company liquidations, record real interest rates and a general debilitation of the economy. The right hon. and learned Gentleman may not recognise that, but when one considers his constituency and his majority, one sees that the electors of his constituency will have recognised that by the time of the next general election.

Six weeks ago when the Budget, on which the Finance Bill is based, was presented to the House, some Conservative Members either genuinely believed or pretended to believe that the Chancellor of the Exchequer intended the Bill to be a major assault on unemployment. Six weeks ago that was their excuse for opposing the one package which would have begun to put Britain back to work—the concentration of available resources on public sector capital investment. By now, even the most gullible Conservative Back-Bench Member must understand the truth.

There was little in the Budget, and there is virtually nothing in the Bill, which is intended to reduce unemployment. The changes in income tax thresholds, to which I shall return in detail later, were not proposed for that purpose. On the supply side, the argument that unemployment is high because of a lack of incentive to work is plainly preposterous, as a comparison of pay and unemployment benefit demonstrates. Unemployment is high, not because men and women will not look for jobs, but because they cannot find them.

The demand side case for tax cuts as stimulants to employment can be dismissed in two sentences. First, if there is a need to increase demand, as we believe there is, there are much better ways of using available resources to create jobs, and the best way is investment in public sector capital projects. Secondly, the Government do not believe, and continually repeat that they do not believe, that any increase in demand is necessary. Half the Government's case on unemployment is that demand is adequate. I hope, therefore, that Conservative Back Bench Members who attempt to defend the Budget as a Budget for jobs will not pretend that the reductions to the allowances have anything to do with that objective.

The Bill does not even acknowledge the need to reduce unemployment, nor does it contain anything specifically with that aim in view. It adds to the annual tax bill, thus compounding the fraud of which the Government have been guilty for six years—the promise of tax cuts and the reality of an increase of £29 billion in the annual tax bill from 1978–79 and 1985–86.

The Bill is not the product of a Budget for jobs. If the Budget was for anything, it was for sterling. It was made necessary by the way in which the Chancellor and the Prime Minister bungled exchange rate policy in January. Yet the exchange rate remains at its present level only because interest rates are kept artificially and damagingly high, with catastrophic effects for mortgage holders.

The Chief Secretary rightly said that we must consider the context in which the Bill was introduced. The Bill is introduced with base rates at 12.5 per cent., against a background of a cut in the public sector borrowing requirement, and against a tightening of monetary policy. It increases the tax take by more than £3.5 billion. Against all those background facts, the result of the Bill is far more likely to be an increase in unemployment than a reduction in it. That gloomy fact is confirmed by the Treasury forecast that the underlying rate of growth will fall next year and that there will be no improvement in it the year after.

Two weeks ago, the Leader of the House, knowing what the Bill contained and what the Budget proposed, wrote to his constituents predicting a fall in unemployment before the next general election. I ask the Chief Secretary now, and I shall give way to him at once for his answer, whether, on behalf of the Treasury, he will confirm the prediction by the Leader of the House that unemployment will fall before the next general election. [HON. MEMBERS: "Answer."] I am not surprised that he does not answer. On the radio the Chancellor of the Exchequer pointedly avoided supporting that forecast, and the Secretary of State for Employment has been similarly reticent. That is not surprising, because they both know that what the Chief Secretary this afternoon called the employment creation measures, which are the Government's only gesture to the 3.5 million unemployed within the Budget, of which the Bill is part, will not even be fully effective when we debate next year's Finance Bill.

The youth training scheme will be phased in after April 1986, the expansion of the community programme will come fully into operation in June 1986, and the changes in national insurance contributions take effect next October.

The Bill will not even scratch the surface of unemployment, nor will it satisfy the other hopes which the Chancellor excited during the winter to bolster up his flagging popularity in the Conservative party. There were hints of massive tax cuts and claims of massive tax reforms. The Bill provides neither. The Chancellor has discovered that it is far easier to demand tax cuts than to deliver them, and far simpler to advocate tax reforms as a journalist than to implement them as a Chancellor of the Exchequer.

Last year, at the beginning of his Second Reading speech, the Chief Secretary described the 1984 Bill as a radical and imaginative reform of our tax structure."—[Official Report, 10 April 1984; Vol. 58, c. 248.] He was wise not to make such a claim this year. The Chancellor has chosen to hide behind a Green Paper or, to be exact, two Green Papers. We had one about the taxation of working couples in the last Parliament. The great tax reform rabbit pulled out of the hat on Budget day was that we were to have a second Green Paper on these crucial subjects—most notably, important and significantly, on the taxation of working couples. When the Financial Secretary replies, will he tell us why we have to wait for a second Green Paper? Why was the Green Paper of his predecessors not regarded as a basis for action? Is it, as most people suspect and as I suspect, that the Green Paper is regarded as an alternative to action rather than a promise of progress? The Green Paper on tax reform means that there will be no major tax reform in the lifetime of this Parliament. The switch from direct to indirect taxation has been halted, a change of strategy that Labour Members applaud. But that has happened not because the Chancellor has changed his mind but because the Chancellor has lost his nerve. All the heady promises to eliminate distortions, increase incentives and improve the use of resources have been forgotten or abandoned. The Bill contains only three items which the Chancellor was prepared to describe as tax reform during his Budget statement.

It is true that the Chief Secretary has reminded us today of a default surcharge and some other reforming measures, but those were not measures sufficiently significant to command the Chancellor's attention when he introduced his Budget to the House. In fact, his entire package of reform on that day consisted of three items, two of them simple abolition. The stamp duty on gifts and other minor transactions is to go and so is development land tax. But the one item that the Chancellor would have condescended to call reform in his mood of last year is the simplification of capital gains tax, which, incidentally, I am sure offers a £155 million reduction to those who pay tax.

It may be that the Chancellor would argue—I look forward to hearing the Financial Secretary on this point because his parliamentary answers are significant in this debate—that the changes in national insurance payments that were part of the Budget are in themselves an item of tax reform. Were he to do that he would be conceding what the Prime Minister continually denies—that national insurance contributions are a tax.

I welcome, as did my right hon. Friend the Leader of the Opposition on the day of the Budget, the reduction in employees' contributions. Indeed, we advocated that principle before the Budget as part of the proposals that we made for the sort of Budget that we would like to see. After the Budget we said that the changes were an excellent idea, badly applied. But we have never believed that they could be anything other than an attempt to increase the take-home pay of the lowest paid. We have never believed that an adjustment in the national insurance contributions could be what the Chancellor regards as something synonymous with or comparable to a tax incentive which would in itself create more jobs.

It is worth noting that even now most contributors to the national insurance scheme are paying more than they did under the Labour Government. They were paying 6.5 per cent. of their calculable earnings in April 1979 and now, unless they are earning £55 a week or less, they are paying 7 per cent. So I hope that as the debate goes on we shall not hear grandiose claims of how the measures to reduce national insurance—which is the background to the Budget—are in some way the alternative to the supply side measures, about which the Chancellor talked in a way which might have induced the unwary to believe that they would be included in the Bill.

In any event, the Labour party has never believed that such changes to the cost of labour and employment could contribute to the solution of the central problem of the economy, which is the reduction in unemployment. I repeat what I said a moment ago. A point which the Bill seems unable to understand and does not accommodate is that the problem of the economy is neither that wage costs are too high nor that people will not attempt to find work. The problem of the economy and the unemployment which results from that problem is that there is not enough work available because there is insufficient demand and investment.

Mr. Peter Rees

As I sense that the right hon. Gentleman is leaving the area of tax reform, and as he has told us his position on VAT and, presumably, on indirect taxes, what areas of direct taxation does he feel are ripe for reform which he would tackle if he were Chancellor?

Mr. Hattersley

The aggregation of the married man's and woman's taxation, the working partnership, has to be tackled. I believe at one time that the Government would tackle that by disaggregation. I suspected that when they did so they would not make sufficient compensation for people at the bottom of the income scale, but that clearly must be tackled and, in his Budget statement, the Chancellor talked as if he accepted the need to do so. I cannot understand why, having had one Green Paper on the subject three years ago, he now requires a second Green Paper on the subject before he is prepared to grasp the nettle. My conclusion from that is that he believes that there are solutions which, while they are right socially and fiscally, may be electorally unpopular, and he therefore postpones them rather than faces them in the way that a proper Chancellor would.

Having answered that question, let me return to the subject from which the right hon. and learned Gentleman momentarily diverted me. I repeat that the problem of the economy is neither that wage costs are too high to encourage expansion, nor that wages are too low to encourage unemployment in preference to work. In any event, were those problems to be the difficulties which the Government pretend, putting together the income tax proposals in the Bill and the national insurance proposals in the Budget that go with them, the basic income tax structure of Great Britain remains, like the Government, biased against the low-wage earner.

The national insurance proposals create a series of new wage traps. In a period of tighter money and slower growth they simply result in the encouragement of low paid jobs at the expense of more highly paid employment.

Mr. Terence Higgins (Worthing)

rose——

Mr. Hattersley

I notice that the right hon. Gentleman wants to intervene. Does he want me to give way now or after I have given examples to demonstrate the point that I was making?

Mr. Higgins

Later.

Mr. Hattersley

Taken together with the Bill, the national insurance proposals leave the Government's basic tax record unchanged. Compared with 1979, taxes are higher for the low paid and lower for the high paid. The richer the taxpayer the bigger the tax cut he or she has enjoyed under the Government. Indeed, the Government have a unique record which has not been duplicated in the past 150 years—a record of taking from the poor and giving to the rich. Let me give the House some examples.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

The right hon. Gentleman talks about taking from the poor and giving to the rich, but how will it help Britain's economy to return to what he says he wants—the highest penal rates of taxation, which we inherited? It means that he wants to go back to the days of 95 per cent taxation—[Interruption.] — or 98 per cent. taxation. Who cares which; there is nothing left anyway. Will that not discourage every person who has ever created any wealth? Will that not ruin Britain? Will his envy and malice not destroy Britain rather than rebuild it?

Mr. Hattersley

All that the hon. Gentleman proves by quoting me as saying that I want to see 98 per cent. taxation is that he reads the Daily Mail and believes it. I have never said that but the Daily Mail continually repeats that I have. During the Budget debate I made it explicitly clear that my objection to 98 per cent. marginal rate of taxation was that even when it was in operation the only people who paid it were pop singers with large amounts of investment income and incompetent accountants. Certainly I want to obtain a higher level of taxation from the better off and certainly I want to reduce——

Mr. Beaumont-Dark

How high?

Mr. Hattersley

I urge the hon. Gentleman to concentrate, as I urged his colleagues to concentrate during the Budget debate——

Mr. Tim Eggar (Enfield, North)

rose——

Mr. Hattersley

I have told the hon. Gentleman on previous occasions that I do not find his winsome ways particularly winning. I propose to answer the hon. Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) and then I shall give way to him.

I urge the hon. Member for Selly Oak to concentrate not on marginal tax rates but on the other forms of allowance that enable the very rich to pay a disproportionately small proportion of their earnings in tax. The hon. Gentleman must explain to his constituents how he can justify a taxation regime that has required higher percentage payments from the worse off and lower percentage payments from the better off. That is an intolerable and unjustifiable system.

Mr. John Townend (Bridlington)

rose——

Mr. Hattersley

No, I must give way to the winsome hon. Member for Enfield, North (Mr. Eggar).

Mr. Eggar

Will the right hon. Gentleman tell us what the highest tax rate would be if he were Chancellor of the Exchequer?

Mr. Hattersley

No, of course I cannot. Such a question is preposterous. [HON. MEMBERS: "Oh."] The idea that the Opposition might find themselves incommoded by their inability to introduce the Budget of 1988 in the spring of 1985 is suitable only for schoolboy humour.

I cannot—and would not as Chancellor—tolerate a situation in which the richest 14 or 15 per cent. of the population enjoys massive tax cuts while the poorest 20 or 30 per cent. pays more. I am determined to redress that balance.

Sir William Clark

rose——

Mr. Hattersley

I promised to give some examples. I shall do so before I give way. As I said before the welter of interruptions, under the present Government, the richer the taxpayer, the bigger the tax cuts that he enjoys. The statement that drew hon. Members so passionately to their feet—the statement that embarrasses them or that they wish would not be repeated—was that the present Government have a unique record in taking from the poor and giving to the rich.

A married worker on average earnings with two dependent children will, after the passage of the Bill, pay 3.1 per cent. more in income tax and national insurance contributions than he or she paid in 1978–79. A worker on half average earnings will pay 14 per cent. more. However, a worker on five times average earnings will pay 13.8 per cent. less, and a worker on 10 times average earnings will pay 23 per cent. less. I shall gladly give way to any hon. Gentleman who can justify a system under which a taxpayer on 10 times average earnings pays 23 per cent. less tax, while a taxpayer on half average earnings pays 3.1 per cent. more.

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

Does the right hon. Gentleman not agree that the people in all the examples that he has given are better off after five or six years of Conservative Government, while they were worse off after the same period of Labour Government?

Mr. Hattersley

Some people at the bottom of the income scale are absolutely better off, but some are not, and that is a disgrace. What is extraordinary is that the Financial Secretary—and, for all I know, the Chancellor—tries to justify the relative changes. Can he justify the fact that the poor pay more tax, while the rich pay less, simply by saying that there has been a small increase in their gross earnings, net income or real income? No one could justify the comparison that I have made, and the country will note that neither the Financial Secretary nor any other hon. Member tried to justify the relative changes in the tax system.

Sir William Clark

The whole House would agree that under no circumstances should the right hon. Gentleman, as shadow Chancellor, say what a future Labour Government would do. Of course he cannot give a categorical assurance about future tax rates. However, will he confirm that, in order to raise revenue, the next Labour Government would introduce a wealth tax and cancel mortgage interest relief?

Mr. Hattersley

In the belief that some hon. Member would be weak-minded enough to ask me about mortgage interest relief, I brought with me a paper from which I could read all the steps that past Labour Governments have taken to assist interest relief to home buyers. The House may be delighted to be reminded of the 11 items of assistance to home ownership introduced by previous Labour Governments. The hon. Member for Lancaster (Mrs. Kellett-Bowman) whispers to me from a sedentary position that that would not amuse her. I shall therefore merely say that the Labour party has no intention whatsoever of abandoning mortgage tax relief. We have made that clear on innumerable occasions. However, as the Conservative party believes that it is in its interests to keep repeating the falsehood, no doubt we shall have to continue to make our position clear.

Mrs. Kellett-Bowman

rose——

Sir William Clark

rose——

Mr. Beaumont-Dark

rose——

Mr. Hattersley

No, no, no. My assurance that there is no such intention could not be more categorical. Any hon. Members who pursue that line of argument simply show how poverty-stricken are their arguments about the state of the economy.

There must be a major change in the structure of our taxation system. We have always advocated such a change, and will continue to do so, in the belief that the neglect of the interests of the lower-paid is one of the great scandals that besmirches the Government's record. A Chancellor who had really wished to help the lower-paid, and to give any veracity to interventions such as that of the Financial Secretary, would have constructed a different Budget. He would have increased child benefit at least by the percentage by which the tax thresholds were changed. It was the clear intention when child benefit replaced child allowance that whenever there was a major revision in the tax thresholds child benefit would be increased by the same amount. Had that not been so, the simple introduction of child benefit would have penalised families. The Opposition believe that there is overwhelming evidence that the most direct and cost-effective way of alleviating poverty would have been substantially to increase child benefit. Low income families with children have suffered more than any other families during the prolonged recession. The available resources should have been concentrated on their urgent needs.

By changing the thresholds, the Chancellor has reduced the annual tax bill for a worker earning, say, £5,000, by £90 a year. However, because of the nature of tax thresholds, the same process reduces the tax bill for a worker on £50,000 a year by £565 a year. His tax reduction is six times as great as that enjoyed by the low-income family. The needs of such high-income groups should not be a high priority. The money spent on ensuring that they receive tax reductions should have been concentrated on the lowest-paid and the poor.

Sir Kenneth Lewis (Stamford and Spalding)

rose——

Mr. Hattersley

That would have been much more effectively done by using the money available for child benefit in preference to other alternatives. The Government have boasted that the adjustment in the tax threshold has taken 800,000 workers out of tax altogether. That boast requires critical examination, some of which the Chief Secretary anticipated. However, while the hon. Gentleman posed a question, he gave no answers.

The hon. Gentleman was right to say—if only because he knew that if he did not say it, we would—that very many, if not most, of the workers taken out of tax are young people, married women, pensioners and part-time workers. Those are the groups on whom the Government rely in many particulars. They are the groups on whom the Government depend for their bogus demonstration that they are increasing employment. On this issue, however, they are a particular group which must be analysed in a particular way. Their earnings are often additions to the principal family income, and taking them out of tax is not a head-on assault on poverty, nor is it a change that provides major relief from the wages trap.

The wages trap bites most severely on heads of households in receipt of family income supplement. Leaving aside the numerous additional wage traps that are almost certainly being created by the new national insurance thresholds which the Chancellor proposes, it is important to examine the wages trap as it applies to and as it might be reduced by the new measures and their removal of 800,000 taxpayers from tax.

Last year's Finance Bill took 450,000 taxpayers out of tax, but only 2 per cent. of them were heads of households and family income supplement recipients, although they were the people who needed the assistance. Only 2 per cent. of them received it in a form that might have done something about poverty and the wages trap. I should like the Financial Secretary to answer three questions about the 800,000 families or taxpayers who, as a result of the Bill, will not pay tax. How many are in full-time employment? How many are family income supplement recipients, as distinct from being on low wages but which receipts are supplementary to the main income in their family? How many were released from taxation in last year's Budget and were recaptured during the financial year, thus enabling the Government to make the same boast twice about the same group of taxpayers?

The answers to those questions will be revealing in terms of the Chief Secretary's claim and in terms of the nature and character of the Bill. The answers will show that the Bill does even less than was originally thought. As neither the Budget nor the Bill was ever thought to amount to much, that is very little. We are debating a trivial Bill which is the product of an inadequate and uniquely unpopular Budget brought in by an inadequate and uniquely unpopular Chancellor, and it does not deserve the House's support.

4.42 pm

Mr. Terence Higgins (Worthing)

The Order Paper draws attention to the report of the Treasury and Civil Service Select Committee on the Budget, which is relevant to this debate. I should like to express my appreciation to the officials of that Committee and to the printers for getting the report out on time. The timetable was tight, because we took evidence from my right hon. Friend the Chancellor, Treasury officials, the Governor of the Bank of England, the Trades Union Congress and the Confederation of British Industry.

The report is part of a trio, as the Committee also reported on the autumn statement and on the public expenditure White Paper. Many of the comments in the three reports should be regarded as an entity and relevant to the overall appraisal of the Chancellor's economic policy.

The central innovation in the Budget, and much of the interest in it, centred on changes to social security payments. It is extraordinary that the Finance Bill contains no trace of those proposals. They were instead incorporated in a Bill which has already reached its Report stage. As a result, the House has not been able to debate in detail any of the proposals for national insurance contributions changes which, in evidence to the Treasury and Civil Service Select Committee, the TUC and the CBI said ought to be debated. The Committee strongly recommends that any further significant changes in national insurance arrangements should be debated fully at all stages.

In eliminating the upper limit of employers' national insurance contributions, rebate is no longer to be given to firms which have contracted out of the Government's pension system. That should be considered. We shall now have three levels at which there is a deterrent for people working overtime or taking on higher paid employment. Although the step is smaller, a greater number of people are affected and deterred. Eliminating the upper limit on employers' contributions will adversely affect high technology, high value added products and those engaged in export industries or in invisible exports, on which we depend heavily. It is wrong that we have had no opportunity to examine those proposals in detail.

It is abundantly clear, however, that the notion of a contributory principle meaning anything in regard to employers' contributions has now been finally and utterly dispelled. As the Select Committee says at paragraph 42: We cannot see any distinction between the employers' contributions and a straight payroll tax which is a tax on jobs. I hope that we shall be able to pick that matter up in the review of social security which is about to be published.

I welcome another omission from the Finance Bill. Before the Budget there were many rumours about the imposition of VAT on books, newspapers and children's shoes and about changes in pension contributions, pension funds and lump sums. None of that is to be found in the Bill. I greatly welcome that, but it shows the need for a real green Budget in the autumn when we can consider real proposals as opposed to rumours about proposals before the Budget and Finance Bill.

When giving evidence to us, the Chancellor seemed to hint strongly that he did not think it a good idea to have any estimate of the fiscal adjustment in the autumn statement. The Select Committee strongly believes that to eliminate it would be a retrograde step. We need the best available information. Indeed, it would be rather quixotic to say that information which is published in the Red Book for several years ahead will not be published in the autumn. Without such a concept it is difficult to see how the basic idea of a medium-term financial strategy can exist. The Committee deals with that matter in some detail. It would be quite wrong for the House to be given less information.

When it came, the Budget did not use the available fiscal adjustment fully. If anything, there was more scope for a reduction in taxation after the autumn statement, but bore the Budget, but that did not happen, and for an obvious reason—the turbulence in the exchange markets between the time of the autumn statement and of the Budget and the introduction of the Bill.

There is considerable ambiguity about the Government's exchange rate policy. There are obvious reasons why they do not publish a target or a floor. The figure might change from time to time and, if it was not reached, that would be seen as a defeat which would undermine confidence. It would definitely be a help to speculators. However, it is naive and unrealistic for the Government to continue maintaining that they they have no view of what the exchange rate should be. In the relevant parts of the Red Book and ministerial statements, we are told of the monetary growth and exchange rate which are needed to keep financial conditions on track. We cannot have the exchange rate which is needed if we have no idea what it should be. This is a big change. Similarly, we are told that short-term interest rates will be held at levels necessary to achieve the conditions desired by the Government's economic policy.

Both these are significant changes. We have seen an evolution of Government policy over time. When the Government first came to office, we were told that the object was to set the money supply targets and then interest rates, and the exchange rate would be determined by market forces. Today, the Chief Secretary was anxious to say that there had not been any change in this respect. However, that does not accord with the facts.

Looking at the way in which the policy has been developing, we see clearly that the Government are intervening in markets not only by way of operations in the market but by the use of interest rates to achieve an exchange rate which they seek to find consistent with their general economic policy. The same applies on the interest rate side. We no longer have a monetarist policy in the sense that the money supply is being controlled. It is not technically possible to have both a money supply policy and an interest rate policy, and it is clear that we now have an interest rate policy.

All this has to be set against a background which has been extremely difficult for the Chancellor of the Exchequer. We understand why the Finance Bill is as unforthcoming as it is because of the general economic environment.

I believe that the present economic situation is extremely hazardous because of the way in which matters have been developing internationally. We have seen the sterling-dollar exchange rate vary by almost 5 per cent. in three hours. We have seen the sterling-dollar rate go up by 25 per cent. since the floor it hit in February. That is of interest in terms of the dollar. It is more worrying that it has also gone up against the European currencies as well, from the point of view of our competitive position.

What worries me is that it does not appear that the present international situation is sustainable. There has been an enormous United States deficit. We have seen an inflow of funds from abroad sustaining that deficit. We have seen a rise in the dollar exchange rate and a substantial deterioration in the United States balance of payments matched by a corresponding inflow of funds. That has continued, but it cannot be sustained indefinitely. Sooner or later we are likely to see a so-called "hard landing"—a collapse of the dollar. That will be of vastly more significance than the fiscal measures which we are considering in detail in the Finance Bill.

That being so, there is an urgent need for a real contingency plan to deal with that possibility. Unless we devise such a plan, the effects may be very serious. The obvious reaction of the United States authorities facing a sudden outflow of funds from abroad is likely to be to raise United States interest rates. That will have serious repercussions on the American banking system, which has had its troubles recently, and disastrous repercussions on such Latin American countries as, Argentina, Brazil, Mexico and so on, which themselves are adversely affected if interest rates go up, but to which a number of American banks are heavily committed.

We need a degree of co-ordination which we do not appear to have at present. If the position which I have described came about, the right reaction would be for a coordinated reduction of interest rates according to where the money was going. We know fairly quickly where it goes. It goes to Japan, Germany or the United Kingdom. A reduction in interest rates would obviate the need for a rise in American interest rates.

It would have to be done very quickly because, as I say, at present we can have a 5 per cent. variation in three hours. In those circumstances, it is difficult to tell whether a collapse is occuring. If we are to deter overall chaos in international markets, the central bankers or Finance Ministers will need to make a statement rapidly.

In the same context, I pick up a point which is not the tactical one but the strategic one. There was some publicity in the Financial Times last Saturday of the response of the Chancellor of the Exchequer to Mr. Shultz's statement about the need for other countries, especially in Europe, to reflate or increase economic activity against the background of the United States rate of growth slowing down. This needs to be considered very carefully. In an earlier report, the Treasury Select Committee stressed the need for action to deal with misalignments of currencies which might go on for a considerable time.

I understand why my right hon. Friend the Chancellor of the Exchequer did not feel that he wanted to go for a general reflation. That has not been his policy. However, we must press for a reduction in the United States deficit and at the same time see whether interest rates generally can be lowered. It does not seem that a degree of international co-operation designed to remove present exchange rate misalignments would necessarily be inconsistent with the view which the Chancellor of the Exchequer expressed the other day.

If we can generally reduce the level of borrowing it may be that we can reduce interest rates and sustain growth to a level which we would all like to see, but I feel strongly that present circumstances are difficult and hazardous and that it is necessary, especially ahead of summit meetings due to take place shortly, that we should clear our thoughts on this.

Other than that, the Finance Bill is not, as the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) described it, the most unpopular one in living memory or in the last 20 years. It was not an exciting Budget, and this is not an exciting Finance Bill. It merely falls into place against the broad international economic background about which I have expressed concern.

4.57 pm

Mr. J. Enoch Powell (South Down)

I make my apology in advance. My contribution to the debate will be entirely interrogatory in character. It will be neither condemnatory nor laudatory, but I shall seek to obtain the answer to a specific question which has puzzled me for a long time as I observed the operations of this Government and of the Treasury under this Government.

On this occasion I have fortified myself against the repeated disappointments I have suffered when endeavouring to pose this question in the unfavourable context of Question Time. I have been able, in the context of a debate, to be forearmed, having attempted to express to the Chancellor of the Exchequer so far as I could the nature of my puzzlement in advance. I look forward with correspondingly greater anticipation to hearing what the Financial Secretary has to say.

Here are a Government who assert as one of their achievements, of their claims to gratitude, that they have reduced the level of inflation. That is a claim of pure causation—of a relationship of cause and effect between the policies of the Government and the decline in the rate of inflation.

I will take no notice of the fact that there has been a noticeably similar trend towards a falling rate of inflation in the outside world. That is the kind of observation which is thought relevant when we discuss unemployment but eschewed by the Government whenever they deal with their achievement in the reduction of the rate of inflation. So I will leave it on one side and assume that the Government are making a just and justifiable claim when they say that the fall in the rate of inflation is the result of their deliberate operations and of the nature of their policies. I inquire as to the particular mechanism by which the Government have brought this about.

There is a curious feature in the Red Book which confronts the seeker for that mechanism. That is the remarkable wealth of vocabulary employed in the various paragraphs to describe the relationship between Government policy and the fall in the inflation rate. It is true that in paragraph 2.01 there is a fairly clear active verb—"achieve". The paragraph states that the strategy is designed to achieve falling inflation". That is a firm statement of intended cause and effect. But two paragraphs lower the document merely states: Inflation has been broadly as envisaged". Then, in a footnote to paragraph 2.09 on monetary policy we are told: The money GDP figure for 1985–86 is a forecast; and in subsequent years the figures are assumptions. So the fall in the inflation rate—though I agree that it is only one of two factors in the movement of money supply GDP—is in danger of being viewed there as a "forecast" rather than the result of an active process.

As the right hon. Member for Worthing (Mr. Higgins) pointed out, paraphrasing paragraph 2.12, the Government's overriding aim is to maintain conditions consistent with a fall in the rate of inflation. But paragraph 2.16 uses the word "projected". It states that inflation is "projected" to fall to certain levels in subsequent years.

Take, however, paragraph 2.23, the fiscal projection for the year 1985–86. Inflation is firmly put there at 5 per cent. Admittedly, as the years recede towards the time horizon, inflation declines beautifully— less by degrees and beautifully less as the poet wrote—to 4.5 per cent., to 3.5 per cent., to 3 per cent.

Here is the basis of my difficulty. If the Government have caused the fall in the inflation rate that we have experienced—if that result is the consequence of their operation of the monetary or other weapons at their disposal—why have they programmed that fall to be 5 per cent., 4.5 per cent., 3.5 per cent. and so on down to a zero which does not appear in any of the tables in the document, although it has featured in the Prime Minister's utterances? If the Government have the secret and are, in fact, working the mangle—in a moment I shall inquire of what nature that mangle might be assumed to be for our purposes—why do they not work the mangle to achieve the Prime Minister's wishes sooner than that distant time to which they have been banished by the projections in the Red Book? Are the Government deliberately ensuring that inflation does not fall below 5 per cent. during the present financial year? That must be the implication. If it was they who brought the inflation rate down from 10 per cent. to 5 per cent., the implication is that the Government will deliberately so behave that inflation shall be 5 per cent.—no more or no less than 5 per cent.—during this financial year, and that they intend so to adjust their monetary mangle during the next financial year that inflation comes out at about 4.5 per cent.

Such is the nature of my difficulty. If the Government have the power to manipulate the inflation rate and are to that extent in charge—if this is not something that has happened to them, not their one piece of economic good luck, but the deliberate result of their intentions and policy—why do they fix the figures exactly where they have fixed them? And how do they set about ensuring that they achieve those figures and not, by some disastrous mischance, a much more rapid fall in the inflation rate, however welcome that fall might be to the head of the Government?

I can make sense of all the Government's various statements on the assumption that they are following a monetarist policy and regard inflation, for practical purposes in modern times, as the consequence of funding a borrowing requirement by borrowing from banks and not from the public. Their assumption is that, as a result of those inflationary forms of financing a budget deficit, Governments entail inflation upon their unfortunate subjects. I do not believe that the Government have resiled from that position; and in that I differ from the interpretation of the right hon. Member for Worthing and, perhaps, of the Treasury and Civil Service Committee, who drew attention to the significance attributed in the Red Book to the exchange rate and to short-term interest rates. I do not believe that those have been brought in as additional primary factors in the act. The part they play is wholly reconcilable with the monetarist interpretation of inflation as the result of inflationary financing of a Government deficit.

The short-term rate of interest is clearly relevant to the Government's ability to finance their borrowing requirement, by borrowing from the public. Clearly, if the Government are anxious to avoid failing to do that, they will jack up the interest rate that they offer to the non-banking public to elicit savings from them and, consequently, to avoid inflationary funding of their deficit. So I can relate the references to the short-term interest rate firmly and definitely to the Government's underlying thesis.

It is in the same context that I believe that we must also understand the Government's movements—I have looked for as neutral a word as possible—in relation to the exchange rate in recent months. When the exchange rate of one's own currency falls, the interest rates available in other countries are correspondingly increased: the effect of a fall in the exchange rate is the same as the effect of a fall in short-term domestic interest rates from the point of view of the Government's funding of their requirements. Therefore, it was a necessary concomitant of the fall in the rate of sterling against the dollar that the Government should shore up their borrowing capability by endeavouring to erect barriers—some in the nature of domestic interest rates, others in the nature of ploys with the exchange rate—against the pull of American interest rates as enhanced by the effect of the exchange rate.

I felt that the right hon. Member for Worthing fell in his warnings of the future into the converse fallacy of failing to note that, should the dollar plummet, we should not be worried so much by the interest rates offered in the United States, because the exchange rate would offset whatever the United States attempted to do with its domestic interest rates.

On the whole, therefore, I am confirmed in the thesis, which, admittedly, it is natural and perhaps convenient for me to adopt, that the Government are still monetarist, as their opponents as well as their friends would say, and that they believe they reduced the excessively high inflation rates which we have experienced until recently by abstaining from inflationary funding of a Government borrowing requirement which they have also attempted to curb.

My difficulty on that assumption comes down to this: since the Government can manipulate the inflation rate by eschewing inflationary funding of Government debt, why do they not do the job thoroughly? Why do they not eschew it altogether, as Hamlet might have said, rather than eschew it to a nicely calculated extent which will assure us of a rate of inflation of 5 per cent. during the current financial year and 4.5 per cent. during the coming year?

My difficulty has been increased by what study I have been able to make of the funding operations of the Government in preceding years. I hope that Treasury Ministers will not think me unreasonably critical if I say that Government funding operations are not always displayed with the greatest promptitude and clarity to the study of the public. Indeed, it is difficult to find out what the Government regard as the leading indicators of the success or failure of the funding of their borrowing requirement.

For the purpose of my speech, I have therefore been obliged to make assumptions of my own and exposed myself to criticism by informing Treasury Ministers in advance what those assumptions would be. In fact, I will take the total of borrowing from the banks and of the rise in the note and currency issue as representing the inflationary element of the funding of the Government's requirements in a particular financial year. Hon. Members will realise how crude that attempt is, but it is, I hope, sufficient for the purpose of expounding to the House and the Government my difficulty in understanding what the Government have been doing over the past three or four years.

I have worked out on that basis as best I can the funding for the past five calendar years. Inflationary funding—from the banks or by an increase in the issue—totalled £3,117 million in 1980, £847 million in 1981, minus £1,811 million in 1982, minus £1,359 million in 1983, and plus £1,265 million in 1984.

If there is any meaning in that pattern—I shall be told before the night is out whether there is or not—it corresponds quite closely with what a monetarist would have expected. He would have concluded that the Government's success in cutting out inflationary funding after 1980–81 had been rewarded in due course in 1982–84 by the fall in the rate of inflation which we have acclaimed. However, he would note that the process seems set to be reversed by the behaviour of the funding mechanism in 1984.

Those figures, or figures like them, must be those which the Government hold themselves capable of controlling, one way or another, if they are serious and honest in their claim that what has happened to the rate of inflation is a result of their policy and stands to their credit.

What I fear is that the Government are deliberately trying to have a certain amount of inflation—not too little and not too much—because they think that they can thereby play things along more easily in the next two or three years. What I fear is that the Government have deliberately reverted in 1984–85 to the admission of an element of inflationary financing in the funding of their requirements and that that decision is reflected in the more or less level figures of projected inflation that we have seen for the previous financial year, the present financial year and the next financial year.

I hope that my puzzlement will be resolved when the debate is wound up. Then perhaps I shall be put out of my agony of wondering why the Government, who are capable of reducing inflation to zero and who were set on the course of doing so between 1980 and 1983, deliberately turned aside from that course in the recent past.

If they did turn aside from it, they are mistaken. I do not believe that by maintaining inflation—still less by renewing and increasing it—the Government will do anything to contribute to the solution of any of our ecomomic problems. It would not be relevant to our trade, to the productivity of our economy, or to the level of unemployment. Instability of the value of money is an absolute evil; it is a fraud practised by Government on the people, from which no good result can flow in any branch of the economy. That is why I hope that I may have been mistaken in my assumptions and will be told so—to my advantage, and perhaps to that of the rest of the House—by the end of the debate.

5.15 pm

Mr. Richard Ryder (Mid-Norfolk)

It is a pleasure to follow the right hon. Member for South Down (Mr. Powell). I am sure that my hon. Friend the Financial Secretary to the Treasury will answer his questions at the end of the debate, but I point out that if public expenditure in the United Kingdom as a whole were as high as it is in Northern Ireland, our inflation rate would not be as low as it is today.

On Budget day, many of my hon. Friends were pondering who would speak for the so-called alliance. Would it be the leader of the Social Democratic party, or would it be the leader of the Liberal party? Many of my hon. Friends were disappointed because it was neither of them. My hon. Friends should not have been surprised that the leaders of the Liberal and Social Democratic parties did not stay in the Chamber for the debate. They scurried out to be questioned by their friends in television and the media, who they knew would give them some easy questions. They did not stay here to be cross-examined about what policies they would have put forward if they had been in government.

The SDP and the Liberals left it to none other than the hon. Member for Rochdale (Mr. Smith), who is renowned for his keen grasp of economic matters and his support for the economic policy of the alliance, to spell out what the alliance would have done if it had been in government.

The hon. Member for Rochdale is guaranteed to provide a little light amusement when he speaks, and he certainly lived up to all expectations on Budget day. He said: I must tell the Government, as an employer, that I do not want wages councils to be abolished, because they protect my business from unfair competition."—[Official Report, 19 March 1985; Vol. 75, c. 817.] Does the hon. Member for Rochdale wish to fix all commercial costs by statute to produce fair competition? If so, he is living in the wrong country.

However, let it be said in defence of the hon. Member for Rochdale that his understanding of economics surpasses that of the leader of the Liberal party. On 17 March the right hon. Gentleman wrote an article in the Sunday Times, in which he called for £4 billion of expansion which, he claimed, would mean a public sector borrowing requirement of £8.9 billion. How on earth, by what calculation, did the right hon. Gentleman reach that figure of £8.9 billion?

Did he think that after the coal strike the Chancellor, on Budget day, would announce a figure of £4.9 billion for the public sector borrowing requirement? The leader of the Liberal party owes the House an explanation for that bewildering assertion. He also owes the House an explanation of the so-called alliance policy on capital spending.

On 25 July 1984 the leader of the Liberal party introduced in the House a debate on infrastructure programmes. During the debate he demanded extra capital spending on regional policy, the development of derelict land, environmental upgrading, roads, a national water grid, the sewerage system, bridges and the housing stock, at a cost estimated at £3 billion by the Liberal party's Treasury affairs panel at last year's Liberal party assembly.

After all that, it came as somewhat of a shock to hear the leader of the Social Democratic party say in the House on 15 January this year: we may have to reduce the amount of money that we put into capital spending"—[Official Report; 15 January 1984, Vol. 71, c. 223.] Such fundamental contradictions of policy in the so-called alliance, are not so much tough and tender as disgraceful and dishonest.

The leader of the Liberal party should also reveal to the House how he would operate his incomes policy, if he is ever given the chance to do so.

I should like to remind the right hon. Gentleman of what he said at the Liberal party assembly in 1977, the year that he began cuddling up to his natural allies in the Labour party, and was publicly derided by the leader of the Social Democratic party for the terms on which he did so. The right hon. Gentleman said: What sustains me…is our concern for a self-governing society in which participation is more widespread than bureaucratic control". Again, it came as somewhat as a shock for me to learn that the hon. Member for Colne Valley (Mr. Wainwright), the Liberal party spokesman on economic matters, told the Liberal party assembly last year: The Government must no longer dodge its duty to manage the centre of the economy. Yet his leader at a previous Liberal party assembly had said that he wished to eliminate bureaucratic control. Judging from the Liberal party's plans for an incomes policy, it wants bureaucratic control. Its incomes policy, based on local settlements, would be different for every plant, division and company in every village, town, county and region.

In the unlikely event of that system being comprehensible, let alone workable, matters would all be resolved by a magic wand—in the form of a brand new national council run by our dear old friends at NEDO. The incomes policy which the Liberal party has put forward is so incomprehensible that I do not believe it could work under any circumstances. Perhaps there are secrets which have yet to be revealed, and the Liberal party spokesman may be able to unravel some of the complexities if he catches your eye, Mr. Deputy Speaker.

How on earth will the incomes policy of the Liberal party or the so-called alliance work in the real world? I should like to hear from the Liberal party spokesman and from the leader of the Liberal party, who does not often speak during economic debates. The right hon. Gentleman loves his television appearances and exposure——

Mr. Forman

So do I.

Mr. Ryder

My hon. Friend never fails to astonish us with his great ability in that medium. I regret that he does not appear often enough.

The leader of the Social Democratic party has said: I see certain anarchical tendencies in the Liberal Party which makes it difficult for them to stand firm on key policy issues. Those words, spoken by the leader of the Social Democratic partner of the so-called alliance, mean that he does not trust the Liberal party when it comes to economic matters, which is small wonder.

Some of the examples that I have given about the complexities and inconsistencies of the alliance's policy mean that it owes the House an explanation of what it would have done if it had been able to present a Budget to the House. I hope that the Liberal party spokesman will provide the House with answers if he catches your eye later, Mr. Deputy Speaker.

5.25 pm

Mr. A. E. P. Duffy (Sheffield, Attercliffe)

As the speech of the hon. Member for Mid-Norfolk (Mr. Ryder) was plainly directed to the alliance parties, he will not expect me to follow him.

The Chancellor presented his last two Budgets as "Budgets for jobs". However, there is growing questioning within the OECD about economic policies, in particular the recovery of employment. Hence the attention being paid to the Bonn economic summit due to begin on Thursday.

The Chief Secretary made only two references to job creation when he opened the debate. The Chancellor's jobs promise shows no sign of fulfilment in Sheffield, where unemployment hovers at about the record mark and long-term jobless totals grow. Approximately 44,000 people in the Sheffield area had no work last month. That figure would be nearer 60,000 if those people whom the Government have removed from the register were included. In January, 45 per cent. of the city's unemployed had been jobless for over a year. Since the Chancellor presented his Budget, British Steel has announced the closure of the Tinsley Park works in my constituency with the loss of a further 1,100 jobs.

There is no prospect that this year's Finance Bill will begin to provide alternative employment. It is a recipe for growing low-pay poverty, lengthening dole queues and a deepening divide between the well-off in the south and the unemployment-ravaged north. Even the persistent emphasis, modest though it is, on supply side economics is increasingly regarded as misconceived by some hon. Members on both sides of the House and by some people outside the House.

In a sermon to mark "unemployment Sunday" earlier this year, the Bishop of Sheffield said: Nonsense, I say, is our steady and determined attempt in every walk of life to cut down the numbers of people at work, in the cause of efficiency, lower prices and greater profits. His condemnation of that social evil is not new, but he is right to point out once again that technological developments that increase productivity without regard for the people who lose their jobs is wrong.

There is evidence across the political spectrum that since the Budget more people want to see a more visible commitment from the Chancellor to the creation of real jobs. They are now more sceptical of his plea that only low wages and lower taxes will generate growth. They also wish to see higher public borrowing, higher spending on the infrastructure, lower taxes on jobs and a much more vigorous approach to the hard core problem of the long-term unemployed.

Sheffield city council's attempts to create and defend city jobs through the creative use of its purchasing power and spending has not met with Government encouragement. Government grant cuts and the rate-capping threat have resulted in Sheffield losing £240 million over the last four years. Since 1980, central Government's contribution to spending in Sheffield has dropped from 46 per cent. to 20 per cent.

Urban programme aid to Sheffield is to be held at its present level of £4.01 million in 1985–86—a decrease in real terms of 5 per cent. In four years the city has slipped from third to 14th place in the table of authorities which receive most Government aid, yet a leading business man in a report last month warned that cuts in Government aid to depressed inner city areas were a grave mistake.

The Association of British Chambers of Commerce in its report, to which the Sheffield chamber subscribes, roundly criticises plans to slash the aid budget by £138 million over the next three years. The report says this is happening just when the cumulative effect of nearly seven years of urban assistance is having a considerable influence on the physical appearance of the inner cities and on the attitude of those who live there. Fear of unemployment has led to depressed wages. Low-pay poverty is on the increase. It is creating crisis and division in the north, according to a study by the Low Pay Unit published last month. The "two nations" divide will worsen with the Chancellor's abolition of the wages councils—the only protection left for low-paid workers who have no trade unions to look after them.

The Chancellor has even left the man on the dole worse off if he smokes and enjoys a pint. When the Financial Secretary taunted my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) and invited him to state whether workers paying tax were better off than they were in 1979, he neglected to ask a similar question about the unemployed.

Mr. Moore

I was referring to people in work who pay tax, which was the subject of the question asked by the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley).

Mr. Duffy

I am sorry that my right hon. Friend the Member for Sparkbrook did not whip back with a question about the unemployed because the Financial Secretary would have been obliged to accept that they are about 18 per cent. worse off than they were in 1979.

The duty on beer has increased by about 7.5 per cent. this year compared with the notional increase in inflation of about 5 per cent. or less. Whitbread Yorkshire, which has important facilities in my constituency, tells me that excessive increases have been imposed upon 30 million bitter drinkers every year since 1979. It has experienced the longest run of heavy beer tax increases on record.

Not only have the breweries suffered, but working men's clubs—an increasing number of which are closing in Sheffield—have been affected. One went under in the last three weeks. It was a great blow to me. The hon. Member for Lancaster (Mrs. Kellett-Bowman) has referred to the eagerness with which VAT representatives do their job. The people who most embarrassed my friends in the working men's club to which I referred were the VAT men.

Cheap labour is the main theme running through the claimed job creation schemes in the Finance Bill, which overlaps training proposals for an extended youth training scheme and more community programme places. Those proposals do nothing to create jobs or to offer the quality and training in new technology and other skills that will be needed by the industries of the future.

The continuing decline of manufacturing industry has become a national nightmare. One has only to consider my devastated constituency in the east of Sheffield to appreciate the problem. In the first nine months of 1984 Britain had a negative trade balance of £3 billion in maufactured goods. Of the 2.5 million British workers still engaged in manufacturing, only 2 per cent. have any management qualifications and fewer than 5 per cent. undertook to continue their training in any one year. As a result our skills base is stultified. By modern standards and requirements manufacturing is undermanaged and obviously lacking in incentive. Skill training, management training and professional training are solely needed.

There is not much point in offering training if it leads back to the dole queue. A recent Manpower Services Commission assessment of the YTS shows that four in 10 young people nationwide go straight back on to the dole queue. That overall figure masks the regional variations. The failure of the scheme is only too evident in the youth employment figures for Sheffield, where over 16,000 young people under 25 are unemployed. About 23 per cent. of those aged between 19 and 24 have been unemployed for over two years.

Mr. Roger Freeman (Kettering)

I apologise for not being in the Chamber for the opening remarks by the hon. Member for Sheffield, Attercliffe (Mr. Duffy) but I share his concern about the number of youngsters who cannot find a job after taking part in the youth taming scheme. However, we must compare what is happening today with what would have happened without a youth training scheme.

Mr. Duffy

I accept that. I do not suggest that the scheme should be abolished, but that it should be developed. My anxiety is that the YTS does not provide training in the modern and much required skills that can lead on to jobs.

The right hon. Member for Worthing (Mr. Higgins) referred to the Bonn summit and to the economies of the western world. What should be Britain's attitude to the summit? For some months we have seen signs of an emerging consensus in Europe. As America slows and cuts its excessive budget deficit, so Europe should accelerate by loosening its over-tight fiscal policies.

The British economy has plenty of spare capacity. Extra demand would affect output rather than prices. The Government's fiscal stance is not neutral but extremely deflationary. The national debt is lower in relation to national income than at almost any time since the war. An expanded budget deficit would not cause financial instability.

America expanded, as Paul Volcker, chairman of the Federal Reserve Board reminded us. I had hoped that the Chief Secretary would quote Paul Volcker. Over the past two years American expansion and the impact of increased imports on other countries have been responsible for 70 per cent. of growth against only 40 per cent. of OECD output. That era has ended.

An unmistakable slowdown was reported in the United States in the first quarter. It is time for the Chanellor, in his own words, to "pick up the baton."

5.38 pm

Mr. David Howell (Guildford)

Like others, I shall leave wiser folk to answer the conundrums and deep questions which so perplexed the right hon. Member for South Down (Mr. Powell). However, there might be something of an answer to his perplexities in the fact that inflation is at least partly influenced by global developments, whereas, by definition, the Government's policies are confined to the national scene. Between those two facts the discrepancies that so bewilder him may arise. But I am sure that others are better equipped than I to answer his detailed questions.

There was no need for my right hon. and learned Friend the Chief Secretary to apologise for the fact that the Bill is dull. It seems to be a cautious and prudent affair, but if the alternative is the sort of exciting Finance Bill that we had in the 1970s under a Labour Government, when we spent night after night trying to moderate what later had to be disentangled with colossal and devasting effects for jobs and enterprise, I would rather have fewer exciting Budgets and more dull ones.

Even since the Budget statement—this is a warning about the dangers of trying to pin too many hopes on a Budget plan or Finance Bill—the underlying factors affecting the financial and economic situation of this and many other nations have changed substantially. I have one obvious point to make to which my right hon. Friend the Member for Worthing (Mr. Higgins) referred in his illuminating speech. The exchange rate has gyrated wildly. I recall that estimates for working out oil revenue in dollars, to be translated into pounds for the coming year, were to be based on a figure of $1.10 to the pound. But that figure has been swept away. The exchange rate has risen to $1.28 and we are now back, I believe, to below $1.20, or thereabouts. It is impossible even to pretend to be able to follow the daily violent movements in our exchange rate against the dollar, the deutschmark or any other currency. There have been huge changes since some of the hopeful prognostications at the time of the Budget.

A chill wind has blown out of Washington and New York and there has been the faint suggestion—which may be belied by events—that the United States' rate of growth will be considerably less than forecast. That has been accompanied by one or two little clouds, which I hope will grow no bigger than a man's hand, on the horizon of the United States' financial and banking system. That chill wind, too, has had its effect.

In addition, although our uniquely high interest rates have fallen a little, they still remain very high as a result of various influences, the source of which I find as obscure as the right hon. Member for South Down and my right hon. Friend the Member for Worthing did. I am not at all sure whether our interest rates are being unwound slowly from their high levels simply because it looks bad if they fall too quickly, or whether it is due to some properties of the monetary situation and, if so, which properties. I certainly do not think that it is excessive corporate lending, as has been suggested. Alternatively, it could be to do with a not-too-benign neglect of exchange rates. Whatever the policy, interest rates remain, in real terms, almost uniquely high.

Another development since the Budget is highly relevant to our condition. I refer to the fact that oil prices have continued, after momentarily firming, on their inevitable, ever-softening course. I say "inevitable" because as long as the international oil industry, aided and abetted by the middle eastern oil producers in OPEC—but, thank goodness, no longer, I hope, by this Government—attempts to maintain a ridiculous artificial price, it will promote the very opposite of its objective, and there will be greater instability and a further softening of the price.

All those things have occurred, since the Budget, and they demonstrate something that is obvious to us all—that our Budget and our attempts to impose our national economic policy are very much the creatures of international economic forces. It is no news to any of us that those forces are now in severe disarray. As has been observed, our deliberations, tax policy and Finance Bill are only a short step away from the Bonn summit. There are three great crisis points in the international economy, apart apart from the problem of unemployment and under-occupation which is spread across the advanced industrial countries and which represents a major problem for social conditions and for supply-side issues.

The first great crisis point is the ridiculously large United States' current budget deficit. The second is the huge and growing surplus on Japan's trade with the rest of the world, and the third is the enormous volatility, chaos and weakness within the European currency market, which have led to the oscillations that I have described and to the pound moving, for example, 12 per cent. against the deutschmark in a matter of weeks. That chaos and volatility make it impossible to hedge one's currency—however much one may obtain advice from a financial consultant—or to invest appropriately in forward exchange markets. In practice, it is virtually impossible for the medium-sized exporter to work out his margins, to conduct his trade confidently or to invest in the hope of producing a product for which he has some idea of the profit margin.

Those are the three crisis points, and I hope that the Bonn summit will lead to a determination to tackle them. That is, of course, a very high hope. We know what happens with such summits. The communiqué has no doubt already been drafted and officials will have been working hard on it. One or two small adjustments will be made during long meetings at the time of the summit. But I fear that there will be a string of generalities and agreements, pointing out that such factors are very worrying. Nevertheless, I retain the idealistic hope that a little more than that might be possible.

We must move towards more co-ordinated action. It need not necessarily be at the Finance Minister level. I think that Finance Ministers may be right to recognise that there is no institutional jiggery pokery or machinery that they can operate at their level as long as the underlying forces remain out of control, leading to currency volatility. Thus, I am not suggesting the sort of co-ordinated action that might lead to a new Bretton Woods or to anything like that, but rather that the top political leaders of the West and of Japan should make a much more forceful and coordinated declaration of their intention to tackle the various problems falling directly within their scope.

That means that the Americans must set about their enormous budget deficit with more seriousness and drive than in the past. The President of the United States has now been pleading with his supporters to take the matter seriously. That pleading comes very late in the day, as we have watched the deficit grow with its consequent destabilising—but so far not too negative—effect on world activity and trade. The time has now come when that cannot be allowed to continue.

Secondly, there has been no shortage of words and good intentions about the Japanese surplus. We must have had one or two dozen promises or firm undertakings from the Japanese to the effect that, although they rightly do not intend to curb their efficiency in exporting goods that the world wants, they will open up their own markets. But, of course, nothing much has happened. I do not think that anything much will happen if we merely preach to or tell the Japanese to buy inferior electric toasters that they do not want. But something might happen if the Japanese were made to realise that it is now 40 years since the second world war and that although no one wants to encourage the rise of the awful monsters of militarism and Fascism, it is only reasonable that a nation that produces one tenth of the output of the human race and that is the second richest country on earth should play a reasonable part in defence of the values of the free world that have enabled it to prosper.

The present Japanese defence posture and contribution to defence are grossly inadequate and that, in turn, leads to the conditions in which the Japanese can divert resources into their huge domination of world consumer markets. At first, it was videos, typewriters and cars and now it will be semiconductors, earth-moving machinery and possibly small computers. Meanwhile, others, notably the United Kingdom and the United States, have to divert their resources into necessary but substantial defence obligations. I hope that the Bonn summit is not allowed to pass without some slightly less ambiguous and firmer intentions being expressed by our Japanese friends.

Thirdly, there is currency volatility in Europe, but could anything more be done if we were able to act as a rather more concerted bloc? A more controversial issue is whether we might gain more than we would lose by joining the exchange rate mechanism of the European monetary system. It is true, as my right hon. Friend the Prime Minister has said, that there is no escape from the transatlantic volatility that all currencies have experienced. However, there has also been enormous currency volatility within neighbouring European countries and this has been evident especially in the movement of the pound against the deutschmark.

I share the view of those who say that if we were in the exchange rate mechanism we would be in a slightly more robust ship, if not necessarily in a calm sea. If we are talking about short-term measures—and I agree with my right hon. Friend the Member for Worthing that time is short—there should emerge from the Bonn summit a firm sign that we are making preparations to join fully the European monetary system. if we were able to get just that from a Bonn summit it would help to create a background for steadier currencies. It would halt the slide in confidence and lead towards lower real interest rates, which would create conditions for more prosperity and expansion again. After a cautious and prudent Budget this year we should be able to look forward to a more expansionary Budget next year.

In fact, I think that it would have been possible this year to take what are called risks—I do not believe that they are—with that "tiny" figure which is called the public sector borrowing requirement, which is the difference between two flows either side of £200 billion. I believe that it would have been possible—the Institute of Directors agrees with this—to add another £1 billion to the PSBR without any inflation risk. That might have provided room for a few more expansionary moves this year. In my book that would have meant tax cuts rather than increased public spending.

But now that that chance has come, perhaps it is possible to look forward from the Bill to next year when opportunities might arise. That might seem to be a risk, but that is probably when the next opportunities will arise. What sort of expansion do we then want to see? I have no doubt in putting my money on the tax-cutting horse and in arguing for increased incentives and wider ownership. Imagine the opportunities that would lead from beginning seriously to wind down the level of taxation that is taken by the Government. We could start to wind it down towards the levels that operate in Japan and the United States, although those countries are not without their difficulties.

We read in the newspapers that the Treasury is at its wits' end in its search for new sources of revenue. It is extremely worried about what might happen with existing sources should social security reform move one way politically rather than another. I do not understand why it is at its wits' end because I believe that there is more room than it thinks. First, I take that view for the reasons that I have advanced for adding to the PSBR.

I recognise the importance of the strategy of reduced borrowing as a term of art not as a scientific matter. The idea that we should drive down the PSBR to a precise figure when it is so hopelessly imprecise is an unwise basis on which to rest our policy. Secondly, tax cuts, when costed in terms of what the Americans call static revenue analysis, lead to some disappointing, gloomy and usually inaccurate conclusions. If we deliberately ignore the fact that certain tax cuts produce more revenue by enlarging the revenue base, we shall find ourselves severely constrained.

The Institute of Directors has argued vigorously and rightly that we should consider more seriously the beneficial second-round effects rather than the direct revenue effects, which are costed with accountants' precision, and often accountants' inaccuracy, in the Red Book. If we were to do that, we would find room for some bolder tax cuts than anything that has been attempted this year.

I hope for boldness next year. If we abandoned static revenue analysis the net effect would be enlarged rather than decreased revenues and the borrowing requirement, in so far at that is "vital", would be benefited and not weakened. Other factors reinforcing a prudent control of the supply of money would be strengthened as well. However, I do not believe that I can sell that policy to the Government. I think that it is something that they will come to in due course, but they are not ready for it yet.

So in the meantime we must accept that static revenue analysis will prevail along with the unscientific rigidity of PSBR calculations. This is the reason why the Government will find themselves with little room for manouevre. This will be the more so as we are apparently fenced off from any prospect of changing the pattern of reliefs as they affect mortgages. We have heard that clearly from the Prime Minister and we heard it today from the shadow Chancellor of the Exchequer. It seems that the two Front Benches and the party leaders have ruled that out. If anyone thought that that was an area that he could raid for more money for tax cuts, he would be disappointed. There is the same unpromising prospect for the revenue hunter who is looking for relief on the pension side. Probably that is right and there, too, matters should be left as they are.

What can we do within these severe limits? Perhaps we could consider this year the ideas that have been developed and laid before the American Congress in the Kemp-Kasten Act for lowering top marginal rates. Before an Opposition Member says that that is a terrible thing to do, let us bear in mind that it is a policy which produces the same revenue by means of a flat rate tax throughout. Top marginal rates provide a fiesta for lawyers and accountants. They create unfairness and disincentives and they are costly in social terms and in reducing employment opportunities. The Government believe that we have no room for manouvre, but I believe that we have and that we should make a start towards securing a flat rate tax or some such reform.

Beyond that, of course, I should like to see room found in due course for tax cuts for those on lower incomes. I cannot understand the Labour party's position, for it appears to be miserably hostile to the high taxes that fall on those on low incomes and to the crises in family life that high taxation creates. I should like to hear a more compassionate and understanding attitude expressed by the Labour party and a readiness to consider real needs rather than narrow party interest.

In the meantime, my priority would be to advance on every front to introduce reforms which would encourage personal ownership. I make a tentative plea to the Government—I shall return to it more strongly when I think that the climate is right and the time more propitious—that they consider properly the idea that is called the loi Monory. That means a huge extension of personal ownership by enabling income for tax purposes to be deducted—up to 15 per cent. of total income—for all purchases of new equity capital in quoted and unquoted companies. The French implemented that policy and it had a great and beneficial effect on many working people and working families. It helped spread ownership in France as we must spread it in Britain. We had a great success here with the privatisation of British Telecom and it should be followed up. I hate to see the momentum easing and being lost. I know that my hon. Friend the Financial Secretary is second to none in his drive and enthusiasm in these matters. I hope that he will push for the development of thinking over the next few months which might lead to something like the loi Monory.

I return to the international scene. Most of what I have said will come to dust if things go sour in an international financial context, and there is a considerable danger of that happening. Of course there are dangers in the alternative policy of returning to the tight harness of Bretton Woods fixed exchange rates. However, bearing in mind the three crises that I have described, it is time for the leaders of the West to show a co-ordinated determination to tackle these problems before they drag us all down.

5.59 pm

Mr. Archy Kirkwood (Roxburgh and Berwickshire)

I always listen with great interest to the speeches of the right hon. Member for Guildford (Mr. Howell), and I did so again this afternoon. He must not be too complacent. We must try to strengthen his arm to dissuade his hon. Friends from some of the rigidities and obsessions of the Treasury Front Bench, particularly about the PSBR.

The hon. Member for Mid-Norfolk (Mr. Ryder), rather unwisely, attacked my hon. Friend the Member for Rochdale (Mr. Smith). My only regret is that it is I who have to sit on him this afternoon, and not my hon. Friend, because he would find the latter experience more painful. The hon. Gentleman was a little unfair about my hon. Friend, who made a valid contribution. My hon. Friend's remarks were derived from his personal experience, and the hon. Gentleman was unfair to castigate my hon. Friend as he did.

The hon. Gentleman was also a little unfair to criticise our proposals. I do not know whether he has a copy of them. The hon. Gentleman nods his assent. He will be the wiser for that. He will have to agree that the costings of all the proposals were laid out, and we have to face the fact that they would mean an increase in the PSBR. The net cost to the PSBR would be about £1.9 billion. All these figures have been number-crunched through the various computers which economists use. Our proposals are costed and feasible, but they are feasible only if we have a system of restraining prices and incomes. We face that fact, but other parties do not.

The hon. Member for Mid-Norfolk legitimately asked us how we would restrain prices and incomes. That would depend on the circumstances in which such a policy would have to be implemented, but the machinery for implementing freezes, if freezes are necessary, would have to be resorted to. Other proposals for fiscal measures which could be taken would make it clear to both sides of industry and the electorate at large that we are serious about setting a climate in which the country would not pay itself more than it could afford. We should not have to resort to this Government's pay policy, which necessitates ludicrously and unacceptably high levels of unemployment on the one hand and the inflexible and grinding imposition of low pay settlements in the public sector on the other. That is not fair, and there is a different way to do these things.

Mr. Ryder

I am grateful to the hon. Gentleman for the characteristic courtesy that he has shown in dealing with the points that I raised. Did I hear him say that costing for the extra public expenditure proposed by the Liberal party was £1.9 billion net? Is he aware that in the Sunday Times article the leader of the Liberal party suggested that the PSBR would be only £8.9 billion if the Liberal policies were pursued? How was that figure reached?

Mr. Kirkwood

I do not wish to detain the House, but I can go through the list which I have here.

Mr. Peter Hordern (Horsham)

Do not bother.

Mr. Kirkwood

I have been told not to bother, so perhaps I should have this discussion with the hon. Member for Mid-Norfolk later. I am conscious that other hon. Members wish to make their speeches, so I shall not answer him at length. We could face the fact of an increased PSBR and increased public expenditure on capital projects. Our scheme holds water, and it stands up under any scrutiny.

Some of the speeches that we have heard today, particularly that of the right hon. Member for Worthing (Mr. Higgins), have suggested that the time has come for the Government of the day, of whichever party, to look carefully at the framework for introducing Budget statements. It is now old-fashioned, out of date and in sad need of reform. There was much heartache about proposals which it was suggested might be in the Budget, but which were not implemented, such as pension changes and changes in the VAT rules. This year the Budget has taken on board many items of a non-fiscal, non-monetary nature, such as employment and training, and wages councils.

What is more, the uprating of benefits is now done outside the Budget, in June, while many detailed taxation measures are contained in the Bill. There is thus an incontrovertible argument, one which has already been made by the Select Committee on the Treasury and Civil Service in its report in 1981–82, for changing the procedures that are used before the Budget. We should get the Treasury to come out of its hole much earlier in the year than it does and set a framework within which we can discuss these measures. Proposals can be discussed, so that the Treasury will not lose as many of the arguments as it has this year. It is an unsatisfactory way in which to proceed, and the time has come to review the system.

This is not a Budget for jobs, but it is a lost opportunity. The Finance Bill 1985 will be seen in retrospect as a lost opportunity to reduce the terrible waste in economic resources. If we took employment back to the 1979 level we would be producing £20 billion more in output a year. Large-scale unemployment creates deep personal misery and threatens social and political stability. The Budget is a lost opportunity to get back to the 6 per cent. unemployment levels that we had only five years ago. from the present 13 per cent. plus level. It is a lost opportunity to learn lessons from the experience of the United States, where unemployment has fallen from 11 per cent. two years ago to about the 7 per cent. mark now.

The causes of unemployment are clear. The thing that distresses me more than anything else is that the debate has now been so hi-jacked by the Government that people believe that the financial, fiscal and monetary problems are inevitable. These fears are misplaced, and we should use every opportunity to say so.

The rise in unemployment can be directly attributed to the low level of demand, which has been caused by tight fiscal policy, high tax rates and constraints on public expenditure. The world recession has had an effect, but that is in part due to tight fiscal policies in many countries. It can also be attributed to the high exchange rates that we have had until recently, especially relative to the European currencies. That has made much of our industry uncompetitive and makes it impossible for industry to make sensible plans for the future.

The Bill enshrines Government policy, which is extremely deflationary. We must make it clear that less deflation is not the same as irresponsible reflation. That is an important point which we would all do well to remember. I welcome the comments made by the right hon. Member for Old Bexley and Sidcup (Mr. Heath). I notice too the evidence given to a Select Committee of the other place by the managing director of GEC, Lord Weinstock and the chairman of ICI, Mr. Harvey-Jones. They both took the view that the Government's policies have been inimical to manufacturing industry.

I welcome the setting up of the Employment Institute, with its charter for jobs. It recognises, although it does not spell this out in the detailed way that we do, the need for a prices and incomes policy as a fallback guarantee for future planned expansion. The Government's pay policy does not bear examination.

The tax threshold changes proposed in the Bill are not the best way of getting help to those who most need it, as the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) said. I am impressed by the estimate of the Institute of Fiscal Studies that the higher thresholds in the single and married man's allowances will take out of tax only 10,000 families faced with the poverty trap at effective marginal rates of 75 per cent. or more. That is not a sensible way to proceed. There are better ways of doing so, such as through family income supplement and the methods that we suggested in our proposals.

I am also concerned about the changes in the upper earnings limit for employers' contributions, because, as the TUC said in its evidence to the Treasury and Civil Service Select Committee, that could easily be counter-productive, as employers could offload low-paid workers at the bottom end of the wages scale to cope with increased costs in what is effectively now a payroll tax.

If the Government are intent on going back on the wages councils agreement which has existed in the recent past, they must look at each council in each sector very carefully. I notice that in its evidence to the Treasury and Civil Service Select Committee the CBI advocated that as well. Wages councils have made a valuable contribution in many sectors, although some are more effective than others. I hope that the Government will not swing their axe insensitively and do away with the lot, as that would be a retrograde step.

As to personal taxation, each time I rise to my feet in this House I exhort the Government to consider all possible ways of integrating the benefits and taxation systems. I hope that the Green Paper heralded in the Budget statement will not be pre-empted by any tax proposals in the forthcoming DHSS reviews. I am told that computerisation has now reached the stage at which we would be able to integrate tax allowances and benefits and that that could appear in next year's Finance Bill. The Government should very much apply their mind to that.

The Liberal party did its best to expand employee share schemes last year. I was interested to hear the right hon. Member for Guildford refer to the loi Monory, because that has great potential. The French have used it to great effect, and in its French form it could be introduced almost wholesale to this country, to great advantage.

Last year the Government made a great mistake on capital allowances, especially in relation to their effect on merchant shipping and the way in which they affect partnership farming in Scotland. Many of these partnerships, which have a well-established system of tenant farming, are run skilfully and efficiently, but are still unable to obtain the benefits of the corporation tax which accompanied the changes in capital allowances. That is severely prejudicial to them, and an opportunity should be taken to look at this again.

As for the fishing industry, my experience is that the capital allowances changes have made it extremely difficult for share fishermen to change their boats and to bring new people into the industry.

The package of changes in Customs and Excise and vehicle excise duties has hit the rural areas particularly hard. It is extremely unfair for the Government continuously to increase vehicle excise duty, which has been increased by more than required to keep it within the bounds of indexation. It is also unfair that derv is taxed. The use of this fuel should be encouraged, and to tax it merely increases distribution and travel costs in the rural areas. The financial position of small business men in rural areas, especially in Scotland, because of the revaluation impact north of the border, is now extremely difficult.

When he replies to the debate, I hope that the Financial Secretary will say something about VAT enforcement proposals. I am concerned that the Bill incorporates extra enforcement powers, although I fully appreciate the need to move in that direction. However, so far as I can recollect, the Keith committee suggested some important safeguards which I believe will not come in until next year.

Mr. Moore

That is not right, and, more importantly, the Government have added to the safeguards in the measure which we shall discuss in Committee. If the hon. Gentleman is with us again, we shall be able to go into that in more detail.

Mr. Kirkwood

I cannot say how much I look forward to going back into Committee to engage in long sessions with the Financial Secretary, who deals with these matters in a competent, efficient and courteous manner. I am grateful to him for his intervention.

The charter for jobs, produced by the new Employment Institute, states: The Government claims its policy would reduce unemployment. Instead it has raised it. We offer an alternative policy which responsible people can support. We ask the Government to heed our suggestions and to restore hope to the millions without work. I say amen to that.

6.16 pm

Mr. Peter Hordern (Horsham)

No one seems to have found this Budget or Finance Bill very exciting, except for the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), who said that it was an awful Budget. I agree with my right hon. Friend the Member for Guildford (Mr. Howell), who said that he preferred dull Budgets to exciting ones, but even dull Budgets can be carried to excess.

Some time within the next two weeks, President Reagan will announce the revised version of tax reform which was published by the United States Treasury last November. It would have been helpful had we had before us a tax reform proposal for broadening the tax base, as well as the forthcoming Green Paper. We could even have considered proposed public expenditure at the same time.

No one in the United States can say with any certainty what its proposals will be, but it is widely thought that the United States Treasury's proposals to exempt husband, wife and child for $2,000 each will be carried and that a three-band rate structure at 15 per cent., 25 per cent. and 35 per cent. will remain as originally published. It is already part of the American tax system that if one's income is below $10,000 the taxpayer may claim the difference. Therefore, the Americans already have a tax credit system, whereas we have been talking about one for 13 years. The Americans propose the lowest tax band at 15 per cent., but ours appears to be stuck at 30 per cent. So far as I know, that is the highest rate of tax at the lowest level of earnings in any western country.

Everyone knows that our tax system is crying out for reform and that it is so unsatisfactory because our income tax operates on far too narrow a base. Why is it possible to bring about a major reform of taxation in the United States but not in this country? What more favourable time could there have been to achieve this than in the second year of a Parliament from a Chancellor who is said to favour tax reform? The Finance Bill is a disappointment for all of us who had high hopes of this Budget and my right hon. Friend.

The change in national insurance contributions is important, with its implications of a single unified tax system, but apart from that change the Budget and this finance Bill could have been written on the back of an envelope between lunch and tea on any afternoon—and after a rather long lunch at that.

It is true that we are to have a Green Paper on the taxation of husband and wife and personal allowances, which follows another Green Paper on the same subject some time ago, but, unlike the United States, we are not to have a Green Paper on broadening the tax base. Even worse, all the tax options appear to have been foreclosed. I do not know all the considerations that there may be in taxing pension funds but nobody has suggested—apart from the pension funds themselves—that that was the only consideration. What should have been under consideration was the broadening of the wole of the base of the taxation and a substantial reduction of direct taxation. To have that option foreclosed, and never to consider a radical reform of direct taxation—as is to be done in the United States—is rather a disappointment. It is all the more disappointing because all idea of reform has apparently been dropped because of the lobbying by the pension funds.

I do not know whether the broadening of the tax base, as is proposed in the United States, is a good idea or not. I suspect that it is, but whether it is or not, to surrender the right to publish the options is a defeat, and I do not know where the reductions in direct taxation to which we are committed are to come from. They will not come easily from savings in public expenditure unless the pattern of public expenditure itself is changed, and that seems unlikely. There is a limit to the amount by which the rate support grant may be reduced, if it has not already been reached.

The best course would be to review the whole field of public expenditure and not simply to perpetuate its structure, cutting here and trimming there. As I have said before, it might best be done by the star chamber committee of the Cabinet looking five or more years ahead.

If, as I think, the tax proposals in the Bill are somewhat disappointing, to put it at its best, at least the Chancellor of the Exchequer is a sound money man. His fiscal rectitude and his general monetary stance are, if I may say so, quite admirable.

In view of what I am about to say, I want to make it clear that I have been a monetarist since 1966, preceded in this House by the right hon. Member for South Down (Mr. Powell) and a few of my hon. Friends. As one who voted against the last Conservative Government's wildly inflationary policy—and as chairman of the finance committee at that—I was not only one of the first in this House to be a monetarist but, from the way things are going, I confidently expect to be about the last. Having said that, I do not think that the Chancellor has properly described his monetary policy and its consequences, and I do not think that he is speaking with a wholly consistent voice.

I should like to refer the House to the sale of council houses and to the £5 billion which local authorities have received, of which they are told they may spend only a fraction. The explanation that is offered is that the money received from those sales must be treated as a reduction in the total public sector debt, which in turn affects the PSBR. But what the Government do not say is that the large receipts which the local authorities have are counter-balanced by an equally large debt in the private sector.

The position is described in a very interesting article in the Bank of England's last Quarterly Review, which shows that the personal sector has, within the last four years, amassed the largest personal indebtedness ever seen. Last year, loans for house purchase were up by 50 per cent. in real terms from the previous record. There is no question but that this is a major change of deep significance, but it is one which was always inherent in the sale of council houses.

The change of ownership of council house assets cannot of itself cause any extra demand, and for that reason cannot be inflationary. In fact, if 750,000 people decide to borrow to buy existing assets, they are thereby freezing a substantial proportion of their disposable income in buying those assets. Other things being equal, there will be less for them to spend on other things, which is deflationary and should be counter-balanced by the local authorities spending their capital receipts on new council houses or on repairs and maintenance.

It is perverse to take the public sector in isolation in assessing monetary policy, and doubly perverse not to take into account the use to which those borrowings are being put in the private sector. I am afraid that my right hon. Friend the Secretary of State for the Environment has allowed the Treasury to pull a fast one over him. I do not doubt that the Treasury can do with all the money which is now credited to the accounts of the local authorities. Things have not turned out in other directions as the Treasury hoped, notably in regard to the cost of the coal strike.

It is praiseworthy to have a low PSBR of £7 billion representing 2 per cent. of GDP, but anybody who thinks that £7 billion is all that the Government intend to borrow is under a serious misapprehension. I do not mean that the estimates are wrong; I leave them to the forecasters. I mean that the way in which monetary policy works demands that the Government must borrow whatever sums are necessary to counter-balance what the banks lend their customers over a certain amount, for that is how the measurement M3 is controlled.

The more that business booms, and the more that individuals and companies borrow from the banks, the more the Government borrow. It is known as over-funding, and from March 1984 up to February of this year the Government borrowed £12.6 billion through sales of gilts and national savings to counter-balance in part the £17.1 billion lent by the banks in the same period. It follows that if the banks had not lent so much money to their customers to finance expansion, the Government would not have had to borrow so much.

The consequence is that interest rates will remain high just as long as the economy continues to expand. It has nothing whatever to do with the American deficit; it has nothing whatever to do with the exchange rate; it has everything to do with the Government's need to borrow from the non-bank public to control inflation. That should be spelt out very clearly, for it is wrong for the Chancellor to go about telling people that interest rates are coming down or that he hopes they will. They will not come down until bank lending comes down, and that will not happen until the economy itself slows down. I do not think that the Chancellor wants that.

I do not think it is right that the City should know about over-funding and its consequences upon interest rates and that the rest of business and industry should not. It is also very important that when the banks start lending less money, and if the economy starts to slow down, the local authorities should then be encouraged to spend their money, and blow the PSBR.

There are some things that could be done to increase supply, the most important of which is to repeal the Rent Acts. I believe that the Treasury has objections to that, and I dealt with them in the debate last month. Gas and electricity as well as water should be privatised. That would then allow the local authorities to spend as much of their capital receipts as they like under our present monetary conventions, apart from all the other advantages which privatisation would bring.

I do not think that the tax system is being used as it should be used to help unemployment in the regions. I should have liked to see a differential national insurance contribution or, for example, no contribution for young people in the regions.

It is not enough to say that the control of inflation is sufficient in itself as an economic policy, or even the best way to reduce unemployment in the long run. Of course I recognise what is being done in training for the young, and for the long-term unemployed, but there are all kinds of rigidities in our system which need to be removed.

I have mentioned some of the rigidities—for example, the 100,000 acres of land for development held by local authorities and other public bodies which should be sold or given away. Just as a licence to print money is no kind of economic policy, so controlling the monetary aggregates is not a sufficient policy.

The Bill is, on the whole, a disappointment in comparison with what it might have been. If the United States can contemplate a major reform of its tax system, so can we. I think that the Chancellor could and should have done better, and I hope that he will do so next year.

6.29 pm

Mr. Robert N. Wareing (Liverpool, West Derby)

It could be argued that the principal feature of the Bill is that it flows from a Government economic policy which is based on the outmoded theory that the answer to unemployment is lower taxes and, principally, lower real wages. In his Budget statement the Chancellor of the Exchequer said: We cannot even prevent trade unions from pricing their members out of a job."—[Official Report, 19 March 1985; Vol. 75, c. 791.] He argued vehemently, as he has done on many occasions, that workers have a responsibility to price themselves into work. He has used the argument that reduced consumer demand, which came about as a result of wage restraint, would be quickly offset by increased company spending. There is no evidence whatsoever that lower real wages would lead to firms substituting labour-intensive production processes for capital-intensive systems.

Over the past 20 years manufacturing has increasingly involved the use of high technological systems which displace labour. Investment has often meant the displacement, not the replenishment, of labour. It is unlikely that reductions in real wages, which are an intrinsic part of the Government's policy, will lead firms to jump back into large-scale labour-intensive assembly plants, which were the feature of the economy during the 1950s and, to some extent, the 1960s.

If low wages will encourage the creation of more jobs, we must bear in mind the fact that wages paid to manual labour in the Third world are about one fifth of the cost of wages of manual labour in the United Kingdom. Large multinational corporations have sold our country short for decades by taking capital created by working people and investing it in low-wage economies such as Taiwan, South Korea, Brazil, and supposedly democratic South Africa—so dear to the hearts of Conservative Members. We are hardly likely to see that capital flowing back to the United Kingdom under the regime which the Chancellor of the Exchequer believes or says he believes to be the answer to our unemployment problem. All too often the motive for new technology is not to improve the living standards of working people, nor even to control labour costs. New technology is used as an instrument to control labour itself.

In his Budget statement, the Chancellor of the Exchequer gloated that in 1984 investment rose by 13 per cent., and that that was the biggest single increase in any year since 1973. However, he did not say what that 13 per cent. was 13 per cent. of. We know that in 1984 manufacturing investment was 25 per cent. lower than when the Government came to office in 1979. Indeed, manufacturing investment was even lower than during the three-day week under a previous Conservative Government. The latest figures of the Organisation for Economic Co-operation and Development show that United Kingdom capital investment per head in relation to gross national product is one of the lowest in the developed world. That is where the Government's economic policies have led us, and where we shall continue to be led by Budgets of such an uninteresting nature.

In his bid for lower wages, the Chancellor of the Exchequer also said: Wages councils destroy jobs by making it illegal for employers to offer work at wages they can afford and the unemployed are prepared to accept."—[Official Report, 19 March 1985; Vol. 75, c. 794.] I wish that wages councils had been as efficient in increasing minimum wage legislation as the Chancellor says. Their success has been limited because of a lack of resources. I would complain, not that wages councils have been too successful, but that they have dealt inadequately with the problem of policing minimum wage legislation.

If it is argued that lower real wages mean more jobs, why is it that in my area of Merseyside we have low wages and the highest rate of unemployment in the entire country—20 per cent. unemployment? The Merseyside chamber of commerce, which is not a body which will ballot for affiliation to the Labour party, stated that the loss of special development area status has had a larger negative effect in Merseyside than any positive actions that may have been in the Budget.

Low wages are the real problem. I have in my possession a copy of the Merseyside county council report on working insecurity. It relates to the abysmally low wages which are paid in that area of high unemployment. I can give the example of a security guard who must work for more than 100 hours a week for less than he would get on the dole. I can tell the House of a security officer who works 80 hours a week on permanent night duty for £73.10 a week. His place of work has no adequate toilet facilities, and he is provided with a plastic bin bag. Another worker works from 7 in the evening to 7 in the morning for six nights a week, yet is classed as a part-time worker. Those are the abysmal circumstances which people face in an area of high unemployment and in a trade which does not have a well organised trade union.

It has been argued that lower real wages will increase the international competitiveness of British goods. Again, that is a simplistic argument. It ignores the other issues which arise internationally and which are outside the control of the British Government. The United States visible trade deficit increased from $28 billion in 1981 to $123 billion in 1984. That has resulted in protectionist pressures in Congress, where 20 per cent. tariff barriers are being called for. Who is to say that President Reagan will not give in to such pressures? The other factor which must be borne in mind is that the fortunes of the dollar are likely to be reversed—perhaps we are seeing some evidence of that already—in 1985, possibly with damaging consequences for the export trade of many other countries, including the United Kingdom.

We are told by the Leader of the House that if we continue with the policies that are reflected in the Finance Bill, we can expect a reduction in unemployment by the end of 1985. Not one reputable economic institution is willing to back that claim. None expects a lower unemployment figure than 3.2 million by the end of this year. Only Professor Minford, the Thatcher clone from Liverpool university, expects it to be lower. He suggests an estimated figure of 2.8 million unemployed by the end of 1985. I am not sure whether Professor Minford is a Thatcher clone or whether the Prime Minister is a Minford clone. However, they appear to see eye to eye. If Professor Minford's estimate is to come about, there will have to be an increase of 650,000 jobs, allowing for this summer's school leavers. I can see nothing to suggest that 2.8 million unemployed is a feasible figure, given the Government's policies.

Mr. Richard Page (Hertfordshire, South-West)

Purely for the purpose of the record, my right hon. Friend the Member for Shropshire, North (Mr. Biffen) said that that would be achieved within the lifetime of this Parliament, not in 1985.

Mr. Wareing

That gives him a little breathing space but I see no evidence that unemployment is falling. It will have to shape up before the end of 1985 if his estimate is to come about.

When I hear Conservative Members such as the hon. Member for Kettering (Mr. Freeman), who intervened during the speech of my hon. Friend the Member for Sheffield, Attercliffe (Mr. Duffy), suggest that it is better to have the YTS with no jobs at the end than to have no YTS at all, I retort that one of the purposes of the YTS is to depress real wages. One of its objectives is to ensure that younger, cheaper labour takes the place of older workers in industry. When I said that the Government might believe that joblessness can be dealt with by lower real wages, I was assuming that the Government's aim is not to reduce unemployment, rather that they believe that unemployment is a vehicle of their economic policy for disciplining labour in this period of recession.

I listened with great interest to the speech of the right hon. Member for Guildford (Mr. Howell). He appealed to Labour Members for more compassion. He said that we should have more compassion for tax reforms which reduced taxes not only for the rich but for people lower down the scale. I have news for him. That compassion has been revealed in the Labour party in motion after motion condemning the Government's policies on higher gas and electricity charges and water rates, and their attacks on local authority expenditure levels and the transport supplementary grant. All that has meant higher taxation in terms of real prices for many British people. The people whose shoulders now have to bear the effects of those policies are not those who are best capable of doing so, the richer section of the community, but the poorer members of our population. They are the ones who are made to suffer so that the Government's policies can be carried out.

The Labour party must pursue and propound Socialist economic policies. I listended with interest to the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) eulogising the work of the Employment Institute, but let me issue a warning to some of my comrades in the Labour movement, including my right hon. and hon. Friends in the House. Although it is true that we can create more jobs by building up the infrastructure, by dealing with the outmoded sewerage system, by producing better roads and schools and preserving our NHS, and by improving the social benefits which are likely to be under attack in the next few weeks when the Government have the courage, after the county council elections, to come forward with the social security reviews, we cannot tax ourselves into a more just society. We cannot create Socialism out of taxation.

If we leave untouched the great multinational conglomerates which dominate our economy, we shall be faced with the same problems as faced our economy during the 1960s and 1970s. The solution for Labour Members must be for a speedy interpretation and implementation of Socialist economic policies which will bring industry under democratic management and accountability.

6.45 pm

Mr. Nigel Forman (Carshalton and Wallington)

I do not intend to follow the hon. Member for Liverpool, West Derby (Mr. Wareing) along the lines that he was arguing. However, I cannot resist the temptation to say a word about the speech of the right hon. Member for South Down (Mr. Powell), even in his absence. It was clear, listening to his interesting and somewhat amusing speech, that he was setting the House of Commons an exam, answering his own questions and then awarding himself a starred first as a result.

May I humbly sketch the outline of a couple of points in answer to some of his questions? He might find the locus classicus answer—I deliberately put it that way because I know what a great classical scholar he is—to one of his conundrums about the Government's monetary policy in Hansard column 789 of the Chancellor's Budget statement. I say no more than that.

Secondly, I make the political comment that we as politicians recognise that it is in some strange way, although it might not seem to be the case to a logician, more difficult to nudge, push, cajole or force inflation down from 5 or 6 per cent. to what is called in the jargon stable prices, that it is, paradoxically, to get inflation down from 20 per cent.-plus to 5 or 6 per cent. I do not have the time to outline my reasons for saying that, but there are some powerful political and social reasons for saying so.

I welcome the Budget and hence the Finance Bill which flows from it, especially, if I might say so in a slightly Irish way, that part of the Budget which is not in the Finance Bill—the restructuring of national insurance contributions in favour of the lower paid, which I warmly commend to the House.

As many of my hon. Friends have said already, this year's Finance Bill is much less controversial and exciting than last year's. The reason is easy for us all to see. Its final shape was and is very much the result of the period of intensive lobbying that we all underwent over the few months leading up to the Budget which made it effectively politically impossible at that time either to make significant changes in the range of tax expenditures—I am thinking in particular of ways of cutting them back—or significant extensions to the VAT base.

Like my hon. Friend the Member for Horsham (Mr. Hordern), who made a most interesting speech, I regret the fact that the Chancellor was forced to bury the radical and reforming instincts of his first Budget in this, his cautious and responsible second Budget. We all understand the reasons for that and I shall not weary the House by repeating them, but it is a matter for regret that it was the case. I hope that the change of character and temperament which appeared to be the case in this year's Budget will prove to be only temporary and that he will make a speedy recovery from his illness, if I may put it that way.

I hope that after the various decisions on social security, which I believe will be announced shortly, and the Green Paper on personal taxation, which we understand from the Budget statement is to be made available by the end of the year, the Chancellor will feel free to revert to his true self and that Dr. Jekyll will triumph over Mr. Hyde.

The purpose of my brief speech is to put down a few markers about what I should like to see in future Finance Bills when the time is riper for the Chancellor to be more radical. I agree with my hon. Friend the Member for Horsham that we need an income tax structure characterised by lower average rates of tax—I stress the word "average"—a benefit structure characterised by more generous and specific help for the genuinely needy, and a combined tax-benefit system that could eliminate much of the present bureaucratic churning and duplication between the Inland Revenue and the Department of Social Security.

Fundamental reform of personal taxation along almost any lines must take one of two broad directions. At some point one is bound to reach a fork in the road and to have to decide which road to take.

I will not characterise the roads as left or right. I will leave it to hon. Members to draw their own conclusions. On the one hand, we could strive heroically over a number of years to separate income tax payers from social security beneficiaries, as at the time of the Beveridge report of 1942 and before the last war. We could attempt to create a vast distance of clear water—in boat race terminology—between the point at which one entered income tax and the point at which one no longer qualified for social security benefit. That approach is remarkably reminiscent of the 19th century principle of less eligibility which originated with the Elizabethan poor law and, although something of a historian, I do not find it very attractive.

The approach would achieve certain savings on social security, but on the other side of the account it would entail forgoing income tax revenue, and that would be a matter of concern to my hon. Friends on the Treasury Bench. It would be costly in social terms. The efforts necessary to achieve the stretch of clear water would be painful in an old and well-established society such as ours, where vested interests are fixed like barnacles on the bottom of the political boat. It would also be costly in economic terms. According to the Treasury's figures, it would cost about £2,150 million in a full year to raise all the income tax thresholds on the personal side by 10 per cent. in real terms, and that would have to be done on a sustained basis over a number of years in order to achieve the desired effect. On one point, I agree with the right hon. Member for Birmingham, Sparbrook (Mr. Hattersley). It would be better and more cost-effective to raise child benefit significantly, if one were concerned about family poverty—about the area where the poverty trap bites most acutely. Broadly speaking, therefore, I am not enamoured of the clear water route towards solving the problem.

On the other hand—this is my preferred route—we could attempt a clear and honest integration of the income tax and social security systems based on the eventual introduction of a new, computerised, single tax-benefit system. That would involve a gradually increasing burden of income tax above the line, and a gradually increasing amount of benefit below the line, up to certain predetermined maxima in each direction which would have to be set at relatively modest levels.

Such a system would be much simpler than the present system. It would be elegant and symmetrical, and it would be compehensive. It would not, however, entirely eliminate all poverty traps. As I have argued elsewhere, it is a chimera to think that one can, or should attempt to, eliminate all poverty traps. There should be higher social priorities than that. However, we need to pay attention to the poverty trap, because it is a matter of acute concern to those who have the misfortune to be caught in it.

How can we mitigate the poverty trap, while accepting that we cannot eliminate it entirely? One possibility would be to have a significant band of income—perhaps between £60 and £100 a week before tax—which attracted neither taxation nor benefit. That could create a genuine stretch of clear water. We could index each of those thresholds against the possibility that we might have the misfortune to suffer from inflation in the future. We could guarantee that amount of clear water where the tax-benefit position would follow a median line before branching off either to the payment of income tax or to the receipt of benefit.

If the system that I endorse were to work satisfactorily there would be a need for two other prerequisites. It would imply a consolidation of national insurance contributions into the income tax structure. Hon. Members may ask what would happen to the employers' contribution. As has been said, that contribution is already effectively a payroll tax upon employers. We would merely have to recognise that fact.

Secondly, it would be important in any integrated system that every adult taxpayer should have a single transferable tax allowance, so that a typical family would have two individual tax allowances. The present spread between those who have one and a half allowances and those who have two and a half would disappear.

Such a system would prove more acceptable if the tapers were as gentle and simple as practicable within a structure that contained only a few modest rates of taxation and only a few generous and consolidated social benefits. I take heart from leaks in the newspapers that suggest that the social security review will tend towards a more generous and certainly a more consolidated system of social benefits. I recommend such simplification.

As my hon. Friend the Member for Horsham wisely said, we must learn from across the Atlantic and note the advantages provided by the existing American tax system, let alone by any future system consequent upon present legislative changes. We must attempt to reach a position similar to that outlined by President Reagan's Treasury Department, where there is a higher threshold before one enters tax, fewer tax allowances, fewer bands of tax and a modest top rate. With a structure on those broad outlines, one would probably find—as my right hon. Friend the Member for Guildford (Mr. Howell) also said—that more revenue was raised than with a peaky tax system on a very narrow base with high marginal rates. What is of key importance is the average tax rate and the average tax burden, rather than the marginal rates. As a further advantage, the integration of the Inland Revenue and the DHSS bureaucracies that I have described would probably result in significant administrative savings.

Such a bold plan would be bound to have political implications. Reform always has. However, the political price of funking reform could be equally great. The main disadvantages would obviously be, from the political and social point of view, the loss of non-means-tested benefits for those on average income and above. They would find that they could no longer claim child benefit, maternity allowances and similar benefits. There would also be the loss of the married man's tax allowance and the fairer redistribution of that allowance throughout the income tax structure in the way that I have described in detailing the single transferable tax allowance.

The advantages would be infinitely greater. The present Government and future ones would be able to reduce the burden of income tax at all levels of income. That must be one of our strategic objectives. Social benefits could be more attuned to real needs and, I hope, more generous when they were identified. The combined system would be simpler and cheaper to administer. Above all, it would be more in accordance with some rational principles of social justice such as I would like to see injected into these matters.

Such changes would require great political courage, but it should be possible for this Government of all Governments to press ahead in that direction and to make the changes in a suitably phased way to cushion the losers. We should make no mistake about it, there would be some losers, but nothing that is worth doing is worth doing other than properly. As long as we are honest with people and phase the changes, the plan could be achieved.

The Government should outline proposals such as I have described in the coming year, seek a mandate for them as a central part of our manifesto at the next general election and, if re-elected, as I confidently believe we could be, implement them in the first two years of the next Parliament. It would therefore be somewhat unwise to legislate prematurely and pre-emptively on social security in the coming Session, as I gather might well happen, in advance of substantial decisions on personal tax reform, which I cannot envisage being presented to the House before 1986–87 at the earliest. At the very least those two reforms should be brought forward in parallel, so that they are compatible and make a sensible overall change.

We must focus on average rates of taxation rather than marginal rates in this and future Finance Bills. I deplore the fact that marginal rates of tax have been something of a political obsession for too long. They have been an obsession for the Conservative party because of our fascination with the argument about incentives, which is often misplaced, and they have been an obsession for the Labour party because of its fascination with issues to do with distribution and redistribution without asking often enough how to create fresh wealth and income.

A sensible Government will concentrate on a system such as I have described. This is our last best chance to do this sort of thing, as computerisation will come in soon. The system would be based on the clear principles of equity, efficiency and simplicity, and be a great boon to the British people.

7.2 pm

Mr. Ian Wrigglesworth (Stockton, South)

I congratulate the hon. Member for Carshalton and Wallington (Mr. Forman) on making bold suggestions about what the Government should do. They bear a strong resemblance to proposals that I and my colleagues have studied recently. There might be some differences, but the general thrust of what he said is similar—as he will know, because he is a great expert on these matters—to what our group under Dick Taverne, the former Financial Secretary to the Treasury, has examined. The group led us to propose at the last general election that we should introduce a basic benefit as a first step towards an integrated system such as the hon. Gentleman suggested.

The general tenor of the hon. Gentleman's speech bears out the most striking feature of debates on the Budget. I have not counted them but the majority of Conservative Back Bench speeches have opposed the Government's economic strategy. A range of Conservative Members present, and others who are not here today, have consistently opposed the Government's strategy. Again and again we hear the baleful hope that, next year, there will be a change in strategy. I must tell those Conservative Members that the strategy will not change until votes change it. The votes could be in the House, and produce change more rapidly, or outside it. If hon. Members want the strategy to change, they will have to put their votes where their mouths are. I hope that they will forgive me for being blunt, but many of us, who agree with much of what some Conservative Back Benchers say, wish that they would take more action.

Perhaps I might echo what my right hon. Friend the Member for Glasgow, Hillhead (Mr. Jenkins) said in the Budget debate. I hope that Conservative Members will not leave it until too late. They might regret the social and economic conditions that are to be found in many parts of the country, but they will bear part of the blame if they do not act to change the Government's economic strategy.

Like others, I find the Finance Bill disappointing. I should like to join the Select Committee in criticising the methods by which we debate changes such as these. We have had other similar legislation and tomorrow we shall have an archetypal example of the wrong way in which to introduce legislation. I refer to the Insolvency Bill. Hundreds of amendments, many of them Government amendments, are being introduced in another place when there should have been a full opportunity for all interested parties to comment before parliamentary proceedings started. We have new procedures to enable draft clauses to be considered. I hope that the Select Committee's proposals about procedure will be taken into account still further. The Government have moved somewhat, but I hope, for the benefit of the country and of good legislation, that they will move further and prevent neurotic debates such as we had before the Budget on the taxation of pensions and other matters, which helped nobody.

The Select Committee report confirms how deflationary the Budget and the Bill are. The Select Committee bears out the criticisms that I and my colleagues made immediately after the Budget concerning the £2 billion increase in the contingency reserve. The figures show clearly that this strategy will further tighten fiscal and monetary policy. That is quite wrong at the moment in view of our domestic circumstances and international ones.

It is regrettable that our fears when we first heard the Budget statement have been borne out, and that it offers no hope to the unemployed that there will be any early change in the direction in which the unemployment figures have been going in recent years. That is borne out by the forecasts which various city institutions have been making—I think of Hoare Govett and of Simon and Coates—of increases in unemployment in the period ahead. That is an abysmal state of affairs for the unemployed to have to face and in our view a quite unnecessary one.

My other comment is on the subject mentioned by the right hon. Member for Guildford (Mr. Howell) about the international scene. The passage of time since the Budget has demonstrated how tragic it was that the Government did not take steps to enter the exchange rate mechanism of the European monetary system. Unfortunately, they have probably missed the boat. Certainly they have missed the negotiating boat because the exchange rate has changed and moved against the pound. I see that today it is knocking on 80 on the index and that the deutschmarksterling rate has gone against us. If we had started negotiating months ago we could have gone in in a much more advantageous position than if we started negotiations today. Helmut Schmidt is to make a speech about this in London this week and will be bearing out the views of Paul Volcker, the chairman of the Federal Reserve Board.

To compensate for what is happening in the United States, if the United States Government are to rein back on their budget deficit, Europe should lead the way in a concerted effort to take up some of the slack that there will be as a result.

We would benefit enormously from having the British pound in that exchange rate mechanism. The European Community could play a much bigger role in the economic world than it is at the moment. It could help to increase stability. It was part of our proposals in the anti-inflationary package that we felt was necessary if we were to expand the budgetary policy in the way that we proposed at the time of the Budget. It is most regrettable that the Government have not moved on that before now.

The hon. Member for Mid-Norfolk (Mr. Ryder), who is no longer with us, made a remarkable speech. He spent all his time commenting on the Budget proposals put forward by the alliance. If that had been the subject under discussion today I should have been delighted to enter into a debate about our Budget priorities published at the time that the Chancellor of the Exchequer made his proposals to the House. My hon. Friend the Member for Roxburgh and Berwickshire (Mr. Kirkwood) referred to those, but I come back to them because we have seen some remarkable contortions from the other Opposition party both at the time of the Budget and since.

I say to the hon. Member for Mid-Norfolk, in his absence, that although he may not agree with some of our proposals and priorities, at least we took the trouble to test them on a widely respected economic model and to test out the consequences of the changes that we proposed. It was from the work that we did on that model that we were able to produce the PSBR figure, which he criticised, of £8.9 billion and which we believed, if anything, was a very modest PSBR considering the current circumstances.

All that I say to the hon. Member for Mid-Norfolk is that if he wants to contrast our figures with others, he should look at the Labour party's proposals. We have seen a terrible exercise in deception by Labour spokesmen, with figures being plucked out of the air, including a fall of 1 million in the level of unemployment in two years. We have seen PSBR figures plucked out of the air as well. None of them add up, and they all lead to the conclusion that they simply would not work.

Mr. Higgins

The Red Book forecast for the per centage change in GDP in 1984–85 is 3.5 per cent. What are the figures under the hon. Gentleman's proposals?

Mr. Wrigglesworth

To answer the right hon. Gentleman's question I shall have to run through the various figures that we put into our Budget proposals. We went further than producing just the ones that we chose. We produced the five different simulations that we tried on the economic model so that people could see the consequences of the different options. The PSBR figure of £8.9 billion net was £1.9 billion above the forecast by the Chancellor of the Exchequer for the forthcoming year, and it can be cut by another £2 billion because of the increase in the contingency reserve. I hope that I shall be able to lay my hands on the growth figure, but I had probably better not delay the House by searching for it amongst my papers now.

I mentioned the Labour party's proposals because one of the biggest holes in what the Labour party proposed at the time and one of the biggest holes in the Government's economic strategy is on the pay front. We hear a great deal from the Chancellor and other Ministers about the level of pay settlements. Looking at various reports such as those coming from Incomes Data Studies and the CBI and the various settlements being made at present, it is clear that the rate of settlements is creeping up. The latest CBI figures show pay increases of between 6.25 per cent. and 6.5 per cent. It is creeping up and up. If it continues, it will have a considerable impact upon the Government's forecasts for the year. Yet there seems to be no alternative other than exhortation from Ministers about the threat of further unemployment and higher inflation. Little action is being taken other than squeezing the economy even tighter to try to stop that occurring.

From the Labour party we have vague words about some sort of agreement with the trade unions, with no flesh being put on the bones and no real acknowledgement that this is the one major area which the country has found to be a problem year in and year out.

We put forward proposals which we believe would help to deal with this problem. We believe that they should be introduced by the Government to contain pay increases that both damage the employment prospects and give rise to the fear of inflation. We propose both a system of pendulum arbitration built into agreements and a suggestion for an inflation tax. I shall not go through those proposals now, but we believe that the Government and all those who take a serious interest in these matters and are prepared to face the consequences of what they say must accept that pay increases are going up, that if the economy is expanded the danger of those pay increases taking off is great, and that some policy must be introduced to contain those pay increases if the entire exercise is not to be aborted by high inflation and lost job opportunities caused by people taking pay increases which, in effect, are losing other people their jobs.

I hope that we shall hear from the Financial Secretary about the level of pay settlements and the Government's attitude towards them. Unless they are able to respond in some way and stop pay increases taking off at an even greater level than they have been over recent times, it is clear that even the levels of increased unemployment that such people as Hoare Govett and Simon and Coates are forecasting will be outmatched as a result.

7.20 pm

Mr. Richard Page (Hertfordshire, South-West)

Today, we begin the technical process of converting the rather broad strategy of the Budget into reality. I shall not detain the House long. One of the advatages of speaking at this stage of the debate is that many of my colleagues have done me the courtesy of making most of my points. I do not propose to gallop over those points too often with great intensity.

Last year I was struck by a remark by my right hon. Friend the Member for Worthing (Mr. Higgins) when he said that a Budget greeted with acclaim on Budget day can look very different on Second Reading. I believe that this Budget, which was well received on Budget day, will look even better as the year progresses. I am one of those who do not want a series of dramatic Budgets; I prefer a steady economic regime, because the companies and people who must operate under the financial laws that we lay down prefer a degree of continuity from year to year. They do not want something similar to the four Budgets a year that came out under the Labour Government between 1974 and 1979. They want stability so that they can plan ahead.

Despite the cheap sarcasm of the right hon. Member for Birmingham, Sparbrook (Mr. Hattersley), I believe that my right hon. Friend the Chancellor was right to make unemployment the taget to hit within the Budget. We must achieve a reduction in unemployment or we shall be the victims of the self-same campaign as we successfully waged in 1979 with the slogan, "Labour isn't working". It will be no good Conservative Members arguing that changing working patterns are responsible for unemployment, that the demographic profile is working aginst us, that the black economy means that there really are jobs or that the highest percentage of the population in work is higher in Britain than in the rest of Europe. That being true will not mitigate the fact that the benchmark of success in the next general election will be the level of unemployment, just as the level of inflation was the benchmark of success in some past elections.

The demographic profile after the next general election will start to turn the other way. Although that will mean a huge pension problem in the early years of the 21st century, it will mean also guaranteed success for the next Government in terms of unemployment figures. I am not pessimistic about achieving a fall in the unemployment figures. Even before this Budget and this Finance Bill have had a chance to work, the number of people in work has increased. During the last general election it would have been difficult to believe a person who had said, "I promise that under our policies half a million more people will be in work 18 months into the period of the next Government." In fact, that is exactly what has happened. Half a million more people are in work than at the time of the last general election. That increase is offset by the increase in the national work force as those leaving education exceed the numbers aging into retirement I welcome the efforts in the Finance Bill to attack unemployment, especially the efforts to erode the poverty trap and launch an assault on the "Why work?" syndrome.

It is not necessary to outline the objections to the present interplay between income tax and benefits, except to say that morally, if for no other reason, it must be right for it to be more advantageous for someone to work than not to work. I believe that every hon. Member would agree. The only argument must be about the size of the advantage to be gained from working rather than not working. Should it be £5 or £10 a week? I sympathise with the Treasury team about the fact that the room for manoeuvre in this direction was dramatically curtailed because of the antics last year of the leader of the NUM. I, too, live in anticipation that next year there will be a further step to lessen the gap.

During debates on previous Finance Bills I have made several pleas regarding the whole sector of small business activity, and tonight will not be an exception. A major cause of our unemployment problem is found in the past treatment of our small business sector.

Mr. Wareing

I am pleased that the hon. Gentleman wants to lessen the gap that separates those who are out of work and those who are in work but are poorly paid. The hon. Gentleman may have heard some of the examples that I gave. How would he solve the problems of a security officer in Liverpool who is employed for 80 hours a week for £73.10? Does the hon. Gentleman advocate giving higher pay to that security officer? If so, how will that be arranged? Will it be done through, for instance, wages councils? Is the opposite the case? Does the hon. Gentleman want an erosion of the present disparate levels of social security benefits?

Mr. Page

To give a full answer to the hon. Gentleman's questions I should have to run through a series of examples showing how a tax benefit system would work. My hon. Friend the Member for Carshalton and Wallington (Mr. Forman) in his valuable and important speech spent considerable time revealing just one method by which the system could work. We have the computer technology to put into effect a system whereby a person could go to work and be paid by his firm, and could, if he was due to receive various benefits from the state system, receive those benefits in the form of negative income tax. He would come away from his 80 hours of work with considerably more money and would not have to go to the state to ask for a particular type of benefit. That would be an immensely simplified system.

Mr. Wareing

Does the hon. Gentleman agree that that smacks a little of the old Speenhamland system? It would encourage employers to pay low wages. If employers pay low wages, they know that the loss to the employee will be made up out of all the jiggery-pokery of the income tax system. Is that not a recipe for lower wages?

Mr. Page

Any scheme can have disadvantages. The ordinary taxpayers would have to be protected from that disadvantage. They could not be expected to finance artificially low wages and high benefits. Although I would be delighted to discuss this matter in greater detail, I must progress to the other aspects that I should like to put forward.

I return to the small business sector. One of our problems is that we adopted a neglectful policy towards small businesses 10 or 15 years ago. People believed that bigger was better and the lack of small business creation at that time has resulted in our not having the number of companies that should be employing 300 or 400 people today.

The nature of the state is changing and the old patterns of state ownership and intervention are dissolving. Therefore, the role of small businesses has become much more important, especially with the arrival of the microelectronic age. If we are to provide the employment required by those changing patterns, we need the flexibility and adaptability of small businesses. That puts a responsibility on us to reduce as much as possible the burdens imposed on those businesses.

There is no doubt that the level at which VAT has to be paid results in an unnecessary and bureaucratic burden that is way out of proportion to the activity of many small businesses. More important, the collection of VAT at present levels is uneconomic for the Customs and Excise. The Keith report mentions the economic aspects of VAT collection and we should not let the loss of an opportunity to increase VAT exemption limits go unremarked.

I am told that the current economic level for the imposition of VAT is £50,000. I see no reason why we should not increase the exemption limit to that level. I know that it would cause difficulties with the European Community, but it is our economy and our income. The exemption limit should be raised.

Mr. William Cash (Stafford)

Does my hon. Friend agree that the inquiry into the burdens imposed by legislation should be vigorously pursued between now and the autumn? We have some good ideas in the pipeline, but we want action as quickly as possible.

Mr. Page

I agree with my hon. Friend. I do not know what I have done to deserve being led away from the points that I want to make, but I agree with my hon. Friend that anything that we can do to reduce the bureaucratic load on small businesses should be encouraged. My plea for an increase in the VAT exemption limits comes in that category.

I welcome the extra category—research and development—that has been introduced into the business expansion scheme. Research and development are vital if we are to keep up with changing technology. I am glad that the Treasury has blocked people involved in property development. The scheme was not set up for such people.

However, while welcoming improvements in the scheme, I hope that we can further improve its operation, especially by broadening the categories of those who can invest in various schemes. I am sure that the extremely attractive scheme is being only partially used. Allowing a more direct line of investment within a family would provide further expansion and more employment prospects.

I am worried that some people may be investing in the business expansion scheme through investment companies that are not finding too many schemes in which to place relatively large sums of money. The business expansion scheme is an imaginative initiative and I hope that it will be given as much publicity as possible.

I am delighted that my right hon. Friend the Chancellor of the Exchequer got rid of development land tax. It was a stupid tax which retarded development and drove up property prices. We are well rid of it.

I am also grateful for the changes in the writing down of short-term assets. The solution will be widely welcomed by companies engaged in some of the new technology on the new frontiers. If they want to stay in the game, they have to change machinery and equipment at a much faster rate than we have seen in the past.

I believe that the Budget will be increasingly appreciated as the years go by. It is a sign of the stability in our economy and I look forward to its provisions being implemented in the Bill.

7.36 pm

Mr. Harry Cohen (Leyton)

There is a joke about the Budget which takes the form of an extract from Hansard. A Conservative Member asks the Chancellor of the Exchequer. "What about the £3,000 million of tax cuts you promised us?" The Chancellor replies, "£2,000 million of tax cuts? I never promised £1,000 million of tax cuts."

There were no tax cuts in the Budget. Indeed, the increase in the tax burden since 1979 has been about £22 billion, with the highest proportion falling on those with average or below average earnings.

The Budget and the Government's policies will have no impact on unemployment, despite £13.5 billion of revenue from North sea oil this year. The Government get more from the oil in five days than the Labour Government got in five years. That money is being squandered to cover up the shambles that the Government have created in the rest of British industry.

Unemployment is the Government's central weapon of fear and they use it to ensure that pay is kept low so that the private profits of the few big companies and multinationals are kept high. The attacks on trade unions are part of that strategy. That is why tackling unemployment is such a low priority for the Government.

Mr. Freeman

The hon. Gentleman's remarks prompt me to refer to the report on the Budget by the Select Committee on the Treasury and Civil Service, which refers specifically to the defect of the Budget on employment. Paragraph 44 points out that advisers to the Select Committee forecast that the national insurance contribution changes alone will have a net effect on employment of between 150,000 and 160,000.

Mr. Cohen

I know a great deal more than the hon. Gentleman about the consequences of the Budget and the Government's economic policies on unemployment in my constituency. I shall mention the national insurance changes later.

The Government claim to want to leave the economy to the market, but they do intervene—not to create jobs, but to enable greater employer exploitation of workers. The contradiction in that is fundamental. In the prevailing economic circumstances, the Government can never create full employment and maintain the domination of the bosses. That unfair domination, which is reflected in low wages, worsening conditions for workers and unemployment, is so unpopular that those who promote it will be swept aside. The Tory wets know that and are worried about it.

The Budget and the Government's policies will do nothing to increase employment. The Government continue to hurt ordinary people with their economic and political measures. Some of them were presented in the Chancellor's cosmetic Budget exercise. Cuts in the National Health Service and in local government are still part of the economic strategy. I could give countless examples of those cuts. I shall give an example which affects local government in London. Between 1979–80 and 1983–84 the Government cut the rate support grant by £1.533 billion, the housing investment programme by £2.257 billion and housing subsidies by £791 million. Those cuts total £4.581 billion. It is no wonder that Londoners face higher rates, housing decline and increased unemployment.

Charges are also up. Since 1979, prescription charges have increased by 1,000 per cent. They are a tax on the sick. Fares, rents, mortgage rates, electricity, gas and petrol have all been forced up to levels which are well above the rate of inflation. Those increases were not presented in the cosmetic Budget. The purpose of the social services reviews is to produce benefit cuts. It is inevitable that the Government will introduce benefit cuts because they are concomitant with their strategy of forcing individuals into low-paid jobs.

It is appropriate that we are having the debate today, because one of those benefit cuts has already come into operation. It represents the Poor Law for our homeless youngsters. The Government are repeating what the Poor Law said: "Get out of this village and go somewhere else." The Government are forcing youngsters to move from area to area to obtain benefit for decent accommodation. They are turning them into gypsies. Many more horrible benefit cuts will come from the Fowler reviews.

Low pay is central to the Budget. It is what the Chancellor and the Tory Right want for other people but not for themselves. Emma MacLennan of the Low Pay Unit outlined the current position of the low-paid in the current edition of Spare Rib. She said: Most low-paid workers are women. Last year, nearly eight and a half million workers in Britain were earning less than the 'decency threshold' for wages specified under the European Social Charter (£108 per week, or £2.75 per hour). Five and a half million of them were women, making up over a quarter of the entire adult workforce.

Mr. Douglas Hogg (Grantham)

The hon. Gentleman has told us about 8.5 million people earning what he calls low pay. How many were part-timers?

Mr. Cohen

I cannot give the hon. Gentleman the figure, but I have quoted from someone who knows the figures. Part-timers often receive low wages. When talking about hourly rates, part-time workers are at the bottom of the scale. The Government want to increase that figure of 8.5 million. They have introduced measures in the Budget designed to achieve that. They are increasing the taxes on spending. Emma MacLennan states in the same article: On average a low-paid householder will pay an extra £1.10 in expenditure taxes … including prescription and water charges. There is a threat to the wages councils. They legally protect the wage levels of about 3 million low-paid workers, of whom 2.5 million are women. The councils set the rates in industries such as textiles and catering. The wage rates are a little over £l per hour. The workers in those industries are the Government's target and scapegoat. The Government make the ludicrous charge that they are overpaid. That is nonsense.

Wages councils are not without faults. As my hon. Friend the Member for Liverpool, West Derby (Mr. Wareing) said, wages councils are not as effective as they should be because of the lack of enforcement. The Government's proposals will increase sweatshops because those employers who want to pay decent wages will be forced into bankruptcy by sweatshop competition.

There is an expansion of the youth training scheme. I believe that it should be called CLUC—cheap labour under the Conservatives. To pay £26.25 for 40 hours is dreadful. Not one Conservative Member would work for those rates. What chance will a youngster have to build an independent life—as many want to—on that wage? There is no training. YTS does not offer a real job, and there is no job when the young people leave. There is also the threat of industrial compulsion. The Government threaten, "Either get on the YTS or lose your benefit." So much for the freedom which the Tories espouse so strongly.

The hon. Member for Stafford (Mr. Cash) is not in his place to hear my comments on the national insurance contribution restructuring. It was outlined in an article by Christopher Huhne in The Guardian on 11 April 1985. He said: The restructuring of National Insurance contributions whereby the low-paid now face lower graduated rates of contribution, payable on all their income when they pass its threshold, will make it cheaper to employ the young and the unskilled. But it will make it a lot more expensive to give them pay rises in return for upskilling or seniority. In other words, it will be another low-wage poverty trap. None of the Government's theories about the low-paid pricing themselves out of a job to apply to the rich. The opposite theories apply to the rich. The Government call them incentives. They have cut taxes for the rich. I asked the Chancellor how much had been given to the top 5 per cent. since 1979. He replied that the official figures showed the figure to be about £3 billion. The truth was given by hon. Friend the Member for Oldham, West (Mr. Meacher) last Monday when he said that the figure was nearer £12.5 billion.

It is all right for the captains of industry to have big pay rises. The chairman of ICI has just been given a 68 per cent. pay rise. His pay has risen to £287,261 per annum. Recent research compared the pay of the 20 highest paid directors with the average wages of male manual workers. The pay of those 20 directors was the equivalent of the pay of 454 manual workers in 1979. Today, their pay is equivalent to the pay of 722 workers. The gap has widened.

On 1 October 1984, The Guardian explained what really happened. Under the heading Gradgrind Lawson prescribes the medicine that Charles Dickens scoffed at, it stated: the Chancellor is now setting his sights on reducing real wage increases so people can 'price themselves' back into jobs. For some reason not fully explained, this theory seems to work best among poorer people. Richer people need to have more money to release their 'incentives' from wherever they have been hidden. By salary and dividend curbs and, above all, by reducing the marginal rate of tax at the highest rates, Mrs. Thatcher has given what is probably the biggest increase to higher salary earners on record. Whether, five years later amid industrial devastation, low growth and record unemployment you can find tangible evidence of the justification of those incentives is another matter. The only consistency in the Government's approach is to give those who have more and to take away from the low paid.

The myth about workers pricing themselves out of jobs was exploded recently by a Cambridge study, which showed that the poorest 10 per cent. of workers took a pay cut yet suffered most from unemployment. They followed the Government's advice and were hit most by unemployment. That is part of the Government's strategy for an enterprise economy similar to that in the United States.

The census bureau in the United States recently showed that 30 per cent. of the population has to rely on welfare assistance. That figure is increasing. About 66,454,000 people need welfare assistance under the so-called wonderful United States enterprise economy. A recent Radio 4 programme entitled "Hunger in the United States" illustrated the problem that exists in the richest country in the world. The Chancellor wants to import that capitalist, enterprise economy to Britain.

We need a different strategy. We need different priorities in all areas. Defence expenditure should be reduced to the proportion of GNP that it is in Europe. We should stop the waste of fortress Falklands, which costs us £3 million a day and the Trident programme which is costing £11.5 million. We must stop handouts to the drug companies and deal with the private drug cheats—which was mentioned during a Standing Order No. 10 application earlier today. The Government have put £75 million aside to hand out to Johnson Matthey if it asks for it. We must also stop bashing trade unions. The miners' strike cost £6 billion. We must reverse tax cuts for the rich and invest in worthwhile projects to create jobs. We must use our North sea oil revenues before it is too late.

The Guardian of 15 October made a prophetic statement when it said: the next generation will wonder incredulously how it was possible to have earmarked literally not a penny of the oil revenue windfall for modernising Britain's productive capital or infrastructure. We must invest in the public sector because that will have a major spin-off for the private sector. We must invest in skills and in building up our manufacturing industry.

Lord Weinstock and his friends complain about the decline of the manufacturing industry. Private capitalists are worried about that industry's rundown and the lack of training in skills. They believe that the decline is a hindrance to future wealth. The Prime Minister has not taken that on board. We should expand both manufacturing and service industries. Instead, the Government are imposing cuts on both industries.

We must assist small businesses, to co-ops and municipal enterprises. Under this Government a record number of bankruptcies have occurred. Since 1979, about 55,000 firms have become bankrupt—that is, 26 per day. That is proof of the bankruptcy of the Tory Government's policies. The enterprise boards should be encouraged.

Direct public ownership is at the heart of the economy. Major investment is needed to match our nation's needs for job creation. The selling of our national assets to spivs and speculators is a scandal and should be ended. That is the way to a fairer share-out of wealth and to properly paid work. The Tories, and their second eleven the SDP and Liberal alliance, are incapable of achieving that.

7.57 pm

Mr. John Maples (Lewisham, West)

The hon. Member for Leyton (Mr. Cohen) spoke with feeling about the consequences of unemployment and low pay, but I shall not discuss those matters because I want to consider tax reform. I am disappointed that the Bill does not propose a comprehensive reform of personal taxation, but I am encouraged by the prospect of a Green Paper, which will provide the opportunity for a wide-ranging discussion on the options. I understand that the Green Paper will cover the waterfront in terms of personal taxation and that it will not deal simply with personal allowances.

I hope that that Green Paper will deal with the basic options—the substitution of an expenditure tax for income tax, which was analysed in detail by the Meade report. I do not favour that proposal, but it is the only comprehensive alternative. I expect that the Green Paper will deal with what appears to be the preferred policy of the Treasury for raising tax thresholds. I can appreciate the objective, but it seems to be an expensive way of achieving that objective.

In terms of alleviating the poverty trap, the proposition will take out of taxation few families with children. To make a significant impact on the poverty trap, the married man's allowance would have to be about £5,000 a year, which would cost about £11 billion. If we had £11 billion to play with in this game, many other options might be more attractive to the Government and to the electorate.

The concept of broadening the tax base and reducing the rates has been mentioned by several of my hon. Friends. It is worth reflecting on what we are trying to do with the income tax system. We are trying to raise £34 billion in revenue for the Government as cheaply, simply and fairly as possible with the minimum pain to the taxpayer and the maximum fiscal neutrality. For such a system we need a minimum number of exemptions from tax and relatively low marginal rates. At present, the opposite applies. We have a relatively low average rate of tax. It would come as a surprise to most people in Britain to be told that income tax revenue as a proportion of total personal income is only 14 per cent. That has been so for 30 or 40 years under Governments of all persuasions. The figure has gone up or down by a percentage point or two, but it has remained at its present figure for a long time.

At the same time, the marginal rates are high. The combination of income tax and national insurance contributions for most people accounts for about 39 per cent. of each additional pound that they earn. For those on higher pay, the figure is 60 per cent. The reason is that, because of the plethora of exemptions from taxation, only about the half total personal income is taxed. Some bad consequences flow from the high marginal rates. I shall refer briefly to three of them.

First, we are all concerned to alleviate the poverty trap. Theoretically, it can result in a marginal rate of combined taxation and loss of benefits of about 108 per cent. Of that, 39 per cent. is the combination of income tax and national insurance contributions. It might well be possible to make a more significant impact by reducing that 39 per cent. substantially than by raising tax thresholds to try to create the clear water mentioned by my hon. Friend the Member for Carshalton and Wallington (Mr. Forman).

Secondly, for almost anyone in work in Britain, the marginal rate of tax and national insurance amounts to 39 per cent. of each additional pound that he earns, he keeps only 61p. If he works an hour of overtime for £5, £2 will be taken away. That is a disincentive and represents quite a substantial take out of very average and sometimes very low earnings. At the other end of the scale there are 60 per cent. tax rates. That hits those whom we seek to encourage because we think that they are a vital factor in the creation of wealth. If they earn an extra £5, £3 will be taken away in tax.

Thirdly, I turn to the consequence of high marginal tax rates for pay bargaining. The combination of national insurance contributions and income tax means that it will cost an employer £1.81 to put an extra £1 after tax in an employee's pocket. That represents a significant contribution to industrial costs and a significant barrier to increased net wages. Those elements are all the result of high marginal rates of tax. The high marginal rates are made necessary because about half of personal income is not taxed. The great bulk of that is accounted for by personal allowances which are intended, of course, to exempt people on low incomes from tax. But in reality they exempt everyone else from tax on those parts of their income, so the tax rate that is charged on the balance has to be much higher than it would be if it was paid by those who should pay tax on every pound of their income.

There are also the very politically sensitive subjects of mortgage interest relief and the exemptions from taxation for pension arrangements. They are made necessary largely by the high rates, because those who pay very high rates have demanded exemptions and we have seen an almost self-fulfilling circle. But despite the politically high profile of both of those exemptions—hon. Members on both sides of the House commenting on reducing mortgage tax relief have got into trouble—it is worth, when discussing a Green Paper on the reform of personal taxation, exploring the possibility of people being willing to give up those exemptions in return for a dramatically lower rate of tax. But they will want to know that they will not be worse off. If one asks people whether they are prepared to see their pension arrangements taxed differently, they will say that they are not, but if one asks them whether they are prepared to see those arrangements taxed differently together with a reduction in the basic rate of tax from, say, 30 per cent. to 10 per cent., they may well agree. The tax structure could be dramatically different if we were prepared to do that.

Rough calculations show that a basic rate of tax at 10 per cent. charged on every pound of income up to average earnings, a 20 per cent. rate of tax from average earnings to twice average earnings, and thereafter a maximum rate of 25 per cent. would produce £2 billion more in income tax revenue than the present system. There are, of course, a few problems associated with that which would have to be dealt with. The very low paid—those who earn less than half of average earnings—would be worse off. But they could be compensated fully at about the cost of that extra £2 billion. I suggest that that should be done through the social security system—through housing benefit or family income supplement—or, if we integrate the tax and benefits systems, that it should be done through that mechanism.

In terms of pensions, the big losers will be the big gainers, because those who obtain the maximum tax benefit from the present taxation regime for pensions are also those who would be the biggest gainers if we cut tax rates to a 10 to 25 per cent. regime rather than a 30 to 60 per cent. regime. Therefore, there is not a lot to be lost. However, there are some other issues that need to be examined. For example, if we changed the tax arrangements, would they increase corporate costs and thereby industrial costs by requiring bigger contributions?

Obviously, it is important to ensure that the present level of private pension provision continues, because if it did not, an immense burden would fall on the social security system.

Mortgages are perhaps the most politically sensitive subject. I calculate roughly that, under this system, most people would be gainers, but there would undoubtedly be some losers and they would again be those on low incomes. However, they could be compensated at a cost of about £600 million. That could be done in a variety of ways, such as by phasing out the present system or by going for some other form of help for particular groups of people, such as those on low incomes, first-time buyers and so on.

If we could solve those problems—which are important but relatively minor in the context of a substantial reform of the personal taxation system—we could get the same revenue from a dramatically lower rate structure. We would have achieved a cheap, simple and fair taxation system with much greater fiscal neutrality than at present. Earlier, I picked out three elements. Of those, the poverty trap would be reduced from a maximum of 108 per cent. to 88 per cent. Incentives would be increased, because the marginal rate for most people would fall from 39 per cent. to 19 per cent., and at the top of the scale it would fall from 60 per cent. to 25 per cent. The effect on pay bargaining would be that the cost of putting £1 net in the average person's pocket would be £1.36 instead of £1.81.

I hope that the Green Paper will evaluate a proposal along those lines so that it could at least be a part of the debate. I think that people would give up their allowances and deductions for a 10 per cent. basic rate and a 25 per cent. maximum rate. It is politically attractive, and its consequences would be very beneficial both socially and economically.

8.5 pm

Sir Brandon Rhys Williams (Kensington)

I think that it is generally agreed that Britain has made less progress since the war than many other western industrialised countries. I am sure that the consensus is that this country's tax system is far from ideal and that that is one of the reasons for our lack of progress. I should like to feel that the Bill took a major stride forward in compliance with a long-term strategy for reform of the tax system. There is much that is good in it, but much more could have been done. In particular, the Bill could have done more about the relationship between Britain and the EEC.

Britain's difficulty is that it is still too large, as an economy, to be carried along in a marsupial relationship with one of the other great economies, in the same way as Switzerland is carried along by its relationship with the deutschmark. At the same time, we are too small to constitute a major world economy that can run independent policies and still enjoy the advantages of an economic system of an optimum size, as the Americans and Japanese are able to do.

Thus we have not succeeded in making a success of the sterling area and have not built up a major source of strength through our special relationship with the dollar. Since 1973, we have been a member of the EEC, but we are still not making a real success of our membership. Many people within the Government and outside believe that it is not prudent to become too closely integrated with the EEC. I am reminded of William Blake's saying: Prudence is a rich, ugly, old maid courted by Incapacity. If we continue to sit out every dance and refuse to become too closely involved in the Common Market, we shall not even be rich but just an ugly old maid once the oil has run out. It will then be too late to make the best of our chances under the treaty of Rome.

If we are going to do more about our membership of the EEC, we should be making rapid progress in integrating our tax system with that of the major industrial countries on the continent. Unfortunately the Bill does all too little in that direction. I shall make my points briefly because they could be raised more profitably in Committee. On current account, it is now generally accepted that in the EEC we need to break down the barriers to the movement of trade in goods and services. We are aware of the dangers of resurgent protectionism and we know about the problems of paperwork at the frontiers, which can lead to the holding up of goods, and so on. But our Government should be making positive strides towards putting our VAT and excise duties on the same basis as those taxes in other Common Market countries.

I am not saying that the rates should be identical, or that they should be made identical at once, but we should be making much more progress in our tax systems so that those in business throughout the Common Market operate under the same framework of tax law. We have heard some remarkably good speeches on the reform of personal taxation. We should examine personal taxation and our benefit structure and compare it with the systems of other member states. We are not the most incentive-directed country in the European Community and there is no reason why we should not be. The Government should be setting out to make Britain the place where people want to work because of the incentives and general working conditions. I am sure that I could prove that we could introduce a reform of income tax and social security on a revenue neutral basis which would eliminate many of the incentive problems that we find in the present system of taxation, national insurance and our various forms of benefit.

My hon. Friend the Member for Carshalton and Wallington (Mr. Forman) made an important speech which we shall want to study. I am not certain that I go along with him entirely, because it is my view that we want simultaneous co-ordinated reform and not the integration of tax and social security. However, that is a matter of detail which I shall not go into more deeply at this moment.

In our relationship with the other member states of the Common Market on capital account there is much to be done to create an integrated European market for capital. The interests of the City and Britain as a whole demand that we should move rapidly to the realisation of the ideals of the treaty of Rome for one capital market, one real rate of interest and ultimately one currency for the entire trading zone. If we moved forward towards the integration of the capital market, we would be able to create conditions in which Britain could safely join the European monetary system. As our capital market in London is not yet integrated completely with Frankfurt, we are in doubt whether we can afford to join a currency system which is presently dominated by the deutschmark. The right way to begin is to put the tax structure in which we operate in the capital markets on the same basis in both countries.

I have given some study to the way in which we might amalgamate corporation tax in Britain, Germany and other major Common Market countries. It has to be said that the best way to achieve the amalgamation is to move towards co-ordinated and steady year-by-year reductions in the rate of corporation tax in each of the member states so that ultimately we reach vanishing point. It might be necessary to increase value added tax to provide the necessary revenue as we lose the revenue from corporation tax. That would be a healthier way of drawing money from consumers, which is the purpose of corporation tax, than continuing with corporation tax, which is time-consuming and which helps to divide British businesses from the tax conditions which apply in the Common Market.

I should like also to see a reduction of frictional taxes on the creation of an integrated market for capital. I am speaking about further reductions or the elimination of the stamp duties. It is strange that a Government who are devoted to the success of free enterprise capitalism are still allowing taxes to continue which damage the market for capital in the way that stamp duties do.

Our capital gains tax, too, is still a tax on inflationary gain much more than a tax on real profit achieved through increasing the value of capital. I was disappointed to hear my right hon. and learned Friend the Chief Secretary say that the Treasury could not allow full indexation in the calculation of capital gains tax because of the loss of revenue that would ensue. My right hon. and learned Friend chose to use an extraordinary word. If we are taxing capital we cannot call the proceeds revenue. That would be possible only in an extremely muddled world. The Treasury should do more to distinguish between capital account and revenue account. My right hon. and learned Friend seemed to be adopting the argument of the alcoholic who says that he cannot give up beer because he cannot lose the income from the returns on the empties. We cannot continue damaging our capitalist society by taking money away from private capital through capital gains tax on purely inflationary gains.

Britain must be the part of the EEC where it is most desirable to save capital, to hold capital, to deal in capital and to invest capital in the confidence that in Britain the investor can make ambitious long-term decisions with the greatest likelihood of those decisions proving profitable and right.

I promised to speak briefly, Mr. Deputy Speaker, so I shall conclude by making two minor recommendations which, if accepted, would have important long-term consequences. They arise from the ready availability of indexed Government securities. First, we should allow the purchaser of an indexed annuity to claim the same tax exemption as if the annuity increased on a stated arithmetical formula year by year. I am informed that one can buy annuities which increase by 3 per cent., 5 per cent., 7 per cent. or 10 per cent. per annum as a way of protecting oneself from depreciation. However, if someone tries to buy an annuity which is linked to the retail price index he will not be able to enjoy the tax advantages which go with annuities in the normal way. We should try to find a new formula which corresponds to the actual changes in the value of money from time to time.

Secondly, I repeat the suggestion which I have made in previous years, which is that companies should be permitted to issue debentures or loan stocks on which payments are variable with the performance of the company and are not attached to a fixed rate of interest. The Government are able to raise money now by issuing indexed stocks, but in the private sector companies are not able to do so and to rank such debentures or loan stocks as a prior charge for the calculation of corporation tax. Such a reform would help to fill a gap in the structure of the capital market. It would enable many firms which are now living from hand to mouth and financing their capital position by bank debt to enter into long-term capital commitments. They are afraid to issue equity and they are not able to issue any other form of long-term capital market instrument.

I have raised these issues in the hope that I shall have the opportunity to pursue them in detail in Committee.

8.16 pm

Mr. Ken Weetch (Ipswich)

I shall make only a short contribution to the debate and will direct myself to the fundamentals of the Bill. Its main deficiency is that it does not provide for the expansion of the economy. When the Chancellor of the Exchequer made his Budget statement, he said that it was a Budget for jobs. On that count, the Budget and the Bill are complete misrepresentations. It was not a Budget for jobs and I can find no measures in the Bill that will make any inroads into unemployment and reduce the number on the dole. The Budget and the Bill needed a bold initiative that would put into productive employment those who are out of work but nothing of the sort is likely to happen.

The policy of reflation and expansion would have gone hand in hand with the Government's professed policy of reducing unit costs in British industry. I believe that the many who are unemployed are related directly to the deficiency of demand in the economy. If there is a deficiency of demand and there are many who are unemployed, it means, among other things, that unit costs in British industry must be higher now than if the level of unemployment were lower. The Budget has been a failure on many counts.

The background to our problems could have provided some stimulus to reflation and greater employment. The conditions for reflation are present. Britain has a strong positive balance of payments. We have unused industrial capacity and many are out of work. Those three factors provide the conditions for some form of reflation and economic expansion, but the Chancellor of the Exchequer, who has been described in some quarters as one of our most orthodox Chancellors, is not in the least orthodox. In a major business recession it is the wrong policy to put restraints on public expenditure. It goes in the opposite direction from that which the economy needs.

In my time as a Member, I have listened to 12 Budgets and I have listened to debates on 12 Finance Bills. They have all been aimed at one thing but have all failed. They have failed to stop the industrial degeneration of Britain. They have been aimed at stopping our decline, but we have been declining as an industrial nation since we lost the lead in the industrial revolution. The main reason for that is that our main industrial competitors have been more efficient than we have.

Although the Government point the finger at the fact that British industry is basically uncompetitive, they have the wrong solution to the difficulties. What is needed is a Finance Bill that attempts the long-term restructuring of the British economy, and the long-term aims of the Bill are at fault.

I pinpoint one of the basic problems, and I ask the Chancellor an open question. What will happen to the British economy when the oil runs out? If we did not have this source of revenue, we would almost be in the knacker's yard by now. It is only a matter of time before this pot of gold that we found at the bottom of the garden disappears, and we shall be up against it to pay our way in an increasingly competitive industrial economy.

My next point is my most controversial. In many instances Britain has lost the day in the world of mass cheap manufactures. Many other nations with natural advantages do many of the things better. We did things better 50 or 60 years ago, but the natural advantages have now passed elsewhere. Therefore, the central aim of the Finance Bill should have been to give British industry the push towards high-technology industries, where design and high quality of output would be responsible for penetrating world markets. I do not see this in the Budget either.

It is very disappointing trying to look ahead to see where the British economy is going. How will it create the wealth that we need for a good infrastructure, social services and the rest of the things that have to come out of the increased yield that the economy produces? Unless something radical is done—it cannot be done in this Budget because it is now water under the bridge—and unless the Chancellor reshapes his thinking, the British industrial decline will go on because nothing fundamental is being shaped to put it right. Unless something serious happens and we change our ways, we have a bleak future.

The Prime Minister talks about Victorian values, and I have also heard her talk about how the British economy expanded in Victorian times. However, in those times, we had low industrial costs because we had a cheap food policy. We now have the reverse—a dear food policy because of membership of the EEC. That will continue to be a direct cost on manufacturing business. In other words, the Prime Minister may be pointing to Victorian times as the example for expansion, but we are pursuing the wrong policies on manufactures and the cost of food and raw materials for that.

I see no hope in this Budget. Unless there is radical change in the Chancellor's thinking, the British economy will continue to decline.

8.24 pm

Mr. Tim Yeo (Suffolk, South)

The hon. Member for Ipswich (Mr. Weetch) criticised the Budget for not dealing with unit costs, but he ignored the fact that, by the reduction in the employers' national insurance contribution, the Budget has reacted directly on industrial costs. He bemoaned the fact that we have not recreated the industrial revolution and kept modern. One of the outstanding success stories in business terms, which is on his doorstep and mine, is the Felixstowe docks. It is planning a major expansion, which is justified by the tremendous switch of business from other ports to Felixstowe, which is the most efficient and rapidly growing container port in Britain and the Common Market. The expansion will create 1,000 permanent jobs in Suffolk, and a large number of additional ones during the construction stage, but the hon. Member for Ipswich is opposing it. He is resisting this tremendous job-creating project, which is building up one of the most efficient companies, and it is left to the Conservative party to see the project through in the face of opposition.

The debate has ranged widely and many interesting angles have been raised. I am sorry that there is not time to follow them up, but rather quixotically I wish to talk about the Finance Bill, which has been said to be boring. Like my right hon. Friend the Member for Guildford (Mr. Howell), I was relieved that it was a rather boring Finance Bill, and that a great many things that might have been in it were not. A number of us share the widespread relief that proposals for changes in the taxation of pensions and in the VAT base are not there.

If we are to try to extend the tax base, the only way to do it is in one major step. It is no good tinkering with adding VAT on to one or two things. We need to have a massive extension of VAT so that, at the same time, there can be massive and discernible tax cuts so that people can see the advantages and the disadvantages side by side. The most interesting aspects of the Budget were dealt with not in this Bill but in the Social Security Bill, and I warmly welcome the fact that at last we have dealt with the reduction of both employers' and employees' national insurance contributions.

There are three aspects on which I shall touch. The first is income tax. It is right that a significant and substantial part of this year's overall reliefs should be granted through national insurance contributions. However, given that we are also dealing with income tax, it is also right that some of the give-away should go in raising tax thresholds. I hope that we shall continue to move ahead on both these fronts.

Let us not stop at what we have done on national insurance contributions this year, because their reduction is by far the most effective way of relieving the state's grip on people on relatively low wages. It is important that we should continue to raise the rate at which low earners have to pay the full rate of national insurance contributions. Most people agree that those on low wages are still paying too much in tax and national insurance contributions, and the more that we can lighten that burden the more we will improve incentives for people to take jobs. That is particularly important for youngsters.

The real interest in the future of income tax will come with the publication of the Green Paper, and I look forward to what my hon. Friend the Financial Secretary will say about that. We should look at the reform of income tax in conjunction with whatever we are to do as a result of the social security review. The two issues are closely intertwined. I hope that eventually this will lead to a unified tax-benefit system. I have no doubt that some of my hon. Friends will go on saying that, as they have done for a number of years, and I shall go on saying it as I have over the couple of years that I have been here. I hope that eventually the plea will not be entirely in vain.

Secondly, I confess to some disappointment with what the Bill proposes on capital gains tax. The improved indexation that it introduces is very welcome, but the basic problem remains that by 1982 the rapid period of inflation had ended and had been reduced by the Government or, as the right hon. Member for South Down (Mr. Powell) might say, by factors which were more reflective of international developments. At any rate, it had fallen to relatively low levels.

Long-term investors, particularly those with long-term holdings in private businesses which they were building up, still pay substantial capital gains tax on gains which have nothing to do with real gains but which are merely the consequence of the high rate of inflation during the 1970s. I urge the Chancellor next year to consider extending indexation back to the early 1970s. By definition, that will help long-term investors. Assets which have been held for at least four years would benefit. The real saving would be for those who held their investments for a considerable period, perhaps eight or 10 years. It is important to give them some relief.

My third point relates to VAT. I must record my great disappointment that the threshold for registration of businesses for VAT purposes remains at such a paltry figure as £19,500. The potential loss of revenue to Customs and Excise would be minuscule if that threshold were substantially increased—I would recommend to at least £50,000 without delay. That would be welcomed by small business men throughout the country.

The burden associated with the filling in of VAT forms, the tedious administration which accompanies that, and the extra record-keeping which is necessary is extremely onerous, and any Government who are really interested in helping small businesses should move in this direction without delay.

If the objection to making this change is our membership of the EEC, we should seek to deal with that within the EEC as soon as possible. It is a phoney objection, because our contribution to the EEC budget is based on a formula which is not directly related to the EEC budget is based on a formula which is not directly related to the VAT collected in this country. However, nothing will do more to diminish the popularity of British membership of the European Community if all it does is increase the £20 million a day which is already spent on buying and storing food which no one in the member countries eats and as a consequence blocks desirable and relatively simple reforms such as the raising of the VAT threshold.

I am happy about the extension of VAT to newspaper advertisements in every respect except one—the effect on charities. The charities VAT reform group was bitterly disappointed that no significant VAT relief was granted this year, particularly as the group made constructive suggestions about specific reliefs which could be granted to charities—for example, those which performed services similar to those performed by local authorities.

The extension of VAT to newspaper advertisements is a considerable extra burden on charities. They are not allowed to advertise on television, and use newspaper advertisements as the main method of fund-raising. The research already carried out by the charities VAT reform group shows that 108 major charities in this country will pay more than £1 million a year in extra VAT on newspaper advertisements. The National Council for Voluntary Organisations wrote to The Times on 27 March together with a number of other leading charities, and said: The tax on advertising by charities will be infinitely more damaging to the vast majority of voluntary organisations than the modest benefit which will accrue from the Chancellor's concessions". I urge my right hon. Friend and his Treasury colleagues to think about this further. Nearly all charity advertising is done by reputable charities which carry out valuable work on behalf of the community. Many, such as Oxfam, will be hit for the first time by this new extension of VAT, and others, such as Help the Aged, will suffer a significant increase in their burden. However, with that modest caveat, I am happy to commend this boring Finance Bill to the House.

8.34 pm

Mr. Roger Freeman (Kettering)

In the brief time available, I wish to concentrate on capital investment. The background in the Red Book shows that for 1984 total fixed investment was up in real terms by 6.5 per cent. compared with 1983. In 1985, the rate of increase has slowed to 2 per cent., and in the first half of 1986, compared with the first half of 1985, it is estimated that it will slow again to 1 per cent. If anything, that shows a maturing of the normal capital investment cycle.

That is corroborated by the CBI in its evidence to the Treasury and Civil Service Select Committee, where in paragraph 55 it also confirms that the rate of increase of business investment is slowing down in real terms. There is nothing to be ashamed of about the normal operation of the business cycle when it comes to investment, but the Bill must be judged in that context.

I welcome the Bill for what it contains, but I have three suggestions as to what it should contain, if not this year, then next year. Clause 42 provides for the extension of the business expansion scheme to cover research and development schemes. That is right. Clause 54 relates to the depooling of short-life assets, and, although I am concerned about the mechanical operation of the clause, it should be welcomed. Clauses 61 and 62 deal with a shorter depreciation period for patents and know-how. That is a tidying-up operation, and is to be commended. The Chancellor has also retained the scientific research allowance at 100 per cent., and that is also to be welcomed.

That brings me to the three aspects that I should have liked the Bill to contain. Indeed, at a later stage I hope to table amendments to that effect.

First, the introduction of private sector capital into public sector projects is important. The House will know that since the Ryrie rules were promulgated in 1981, governing the way in which private capital can be introduced into public sector projects, there have been no examples, certainly none that I can think of. While I do not quarrel with those rules, I suggest that, possibly through the establishment of a new kind of company arid a new kind of tax status, the water industry or local government, which converts waste to steam generation and heat, should be permitted to proceed so that we can test whether a project is able to meet the Ryrie rules to protect the taxpayer and not to enjoy any undue preference because of an implicit or explicit state guarantee. Now is the time to adopt such an approach, particularly in the water industry, because if we do not, water industry charges next year will rise at the same rate as this year. If we can meet some of the capital investment requirements of the water industry through private capital, so much the better.

Secondly, a new clause is required to cover the introduction of industrial revenue bonds, which are widely used in the United States. The theory behind them is simple. If industrial companies building new plant and installing new equipment can satisfy local authorities that they are genuinely creating new jobs, they will be permitted, up to a certain limit—say, £10 million per company and perhaps a total limit for the entire economy of £1 billion—to issue those bonds, interest on which would be tax-free.

The whole purpose of industrial revenue bonds is to cheapen the cost of finance to new companies and to lengthen the maturity of those debentures. Such a move would be helpful. If I am challenged on how we should pay for such a scheme, my opinion is that, when the business expansion scheme is reviewed in a year or two, some of that subsidy should be used. It is running at the rate of at least £50 million a year of revenue forgone because individuals can offset the investment against their marginal rate of tax. Some of that subsidy could be used to introduce industrial revenue bonds, which would meet a different industrial requirement.

There is a fine industrial estate in my own constituency, but it is not an enterprise zone. The introduction of new bonds such as these would definitely help business men on that industrial estate who are seeking to expand their enterprises. If a new clause, tabled at a later stage in the progress of the Bill, is unsuccessful, serious consideration should at least be given to it; but we shall return to that.

We must give serious consideration to research and development partnerships. There are medium-sized companies in Britain which have the fruits of excellent research which are not being exploited, either because they do not have access to sufficient capital—perhaps their debt to equity ratio is far too high—or perhaps the hurdle rate for judging investments is so high that certain projects fall just beneath it, but they would still be justified from a general economic standpoint.

I know of many companies in that position. There could be amendment not only to our tax laws but to our partnership laws. I have in mind the Limited Partnerships Act 1907. If we could amend our partnership laws and tax laws to permit companies to set up partnerships where the limited partners would be institutions investing money, the company would remain the general partner and have the right to exploit commercially the fruits of any further development. We could give the City institutions investing in those partnerships the right to pass through the tax benefits upon any expenditure on the research and development projects. Then I believe that we could unlock several projects which at the moment in several companies are unlikely to see the light of day. Therefore, I do not believe that clause 42 goes far enough.

I have talked of the natural investment cycle and the fact that it appears to be slowing down. That is borne out not only by the Government but by the CBI. But the attitude to capital investment at the moment is very good. The profit motive, in which the Government believe, is reflected in the substantially increased levels of profitability. That is good for investment because it gives business men confidence.

Short-term interest rates are far too high. As the CBI pointed out to the Treasury Select Committee, business men believe that those short-term interest rates are kept high—as the right hon. Member for South Down (Mr. Powell) indicated earlier—either for exchange rate reasons or for monetary policy reasons to control the growth in the money supply. Business men believe that those rates will come down soon. That is why the CBI is forecasting 4 per cent. growth in real terms in the GDP this year, and why capital investment is still rising in real terms. Nevertheless, the overall level of capital investment, particularly in the private sector—we understand the reasons for its restraint in the public sector—is still too low.

I have referred briefly to why and how in the public sector we can increase the level of expenditure on public sector projects by introducing private sector capital. In the private manufacturing sector, I have indicated how, through the introduction of industrial revenue bonds, we can bring in new sources of finance and enable companies to borrow long-term at, I hope, a lower fixed rate of interest.

In research and development, I have illustrated how certain projects are being missed and how, if we amend our tax laws, we can permit the introduction of limited partnerships. I hope that those are constructive propositions. I greatly welcome the Bill.

8.43 pm

Mrs. Edwina Currie (Derbyshire, South)

I have previously had the opportunity, during the Budget debate, to speak on some of the general economic issues. Therefore, like my hon. Friend the Member for Suffolk, South (Mr. Yeo) I should like to concentrate on the Bill, and in particular on chapter II, on the implementation of volume 1 of the Keith committee report.

My interest in VAT arose when local traders started to tell me about the problems they were having with the VAT man. I will quote from a typical letter which arrived in September. My constituent wrote to me saying: At the moment I am being hounded by the Customs and Excise (VAT) Office in Derby for £465. My wife has had two visits from, we presume, the Bailiff working for them. As I am out at work all day and into the evening, trying quietly to earn a 'crust', and they, presumably don't work after five, they are unable to call when I am at home, so my wife gets all the 'flak' which is flying about. I have every intention of paying this amount (I'm not going to 'skip' the Country), as soon as I have the money in the bank to do so. I am sorry if this amount is upsetting Nigel Lawson's balance of payments deficit, but I am trying to do something about it. I am at my overdraft limit and the bank will not give me any more money, neither do I wish to increase my overdraft in excess of the present amount, as the interest rates are crippling anyway. That was back in September and they are a bit higher now. If I took up the profession of Sculptor to knock a 'heap' of horse manure into shape, I would be able to get a grant from the Arts Council and would never again have to worry about VAT, but as I am a service industry, I can't. We cannot have that sort of thing in south Derbyshire, so I wrote to the VAT man and received a reply that indicated that my constituent, in common with a fair number of my constituents, is sending his VAT return in late; indeed, his returns have been late seven times since August 1982.

I then sent off another letter concerning a constituent who was also complaining bitterly about being hounded by the VAT man. The reply said that in the case of that gentleman no returns have been rendered at all since June 1980. We might well have prosecuted some time ago for failure to render returns but we have not yet done so. One of my staff visited him in early 1981 to attempt to establish the tax due but found that he was unable to reconcile even those periods up to June 1980 for which your constituent had rendered returns. At that point I thought that there was something to be investigated, and I have to thank Mr. E.N. Taylor, the east midlands collector at Nottingham and his staff, for the painstaking efforts that they made in taking this particularly ignorant Member of Parliament through the intricacies of VAT, and particularly the things that all our constituents get up to.

I should like in passing to pay tribute to the Customs and Excise staff. We should recognise how fortunate we are to have honourable, decent, painstaking men and women such as them. We take it so readily for granted that they do their job in an incorruptible way. There are very few countries in which one can begin to assume that.

Mr. Taylor said to me, "Take a look at the Keith committee report. If that is implemented—especially the part dealing with automatic penalties—our job will be a lot easier. We shall be able to do our job better, recover more money for you, keep the tax base narrow, and not widen it to include more items".

I cannot confess to having read all three volumes of the Keith committee report, but I have read the first volume, which shows an alarming state of affairs. Paragraph 3.1.13 says: the Department estimated for us that the scale of delays in paying VAT during the middle of 1982 meant that on average and at any one time some £1,700 million of tax was outstanding beyond the due date. The paragraph goes on to say: in normal years, with the current structure and rates of tax, the average amount of tax outstanding after due date is some £1,000 million. At an interest rate of 10 per cent. this is equivalent to an interest free unsecured loan to VAT traders worth £100 million per annum. My hon. Friend the Member for Brentford and Isleworth (Mr. Hayhoe) said in this House on 21 March that the figure outstanding was now £1,200 million, which suggests that we have a much improved situation. Certainly the letters from constituents suggest that the VAT man in Derby has been working overtime. Therefore, perhaps in many cases the powers were there all the time and were not used in the way that they should have been.

In the past year matters have come to a head and action has had to be taken. Two out of five VAT inspector visits now find under-declarations. It is estimated that in 1984–85 £390 million was under-declared and only £7 million was over-declared, so the ratio of errors in favour of the payer has been about 55:1.

For 12 years the 1.5 million registered businesses in Britain have had a comparatively easy ride for the payment of VAT. They collect the money from customers, they put it in their own accounts and they fail to account for it separately. They treat is as an interest-free loan to the company and they get very cross when the VAT man does his job, as if he were some latter-day pirate. At the same time they are often asking for Government assistance. They should ask where all that money is supposed to come from.

VAT is the most unpopular tax of all and it is uniquely difficult for small businesses to deal with. I believe that is was Edmund Burke who said: To tax and to please is not given to men". I suspect that it is not given to women either. A public relations task of some magnitude is now required; otherwise many small businesses will not know what has hit them when the Keith committee report is implemented through this Bill. We have to get it across to business men that they have no choice about paying VAT. They are wrong to treat is as a profits tax which is only to be payable when the company is in funds. They are wrong to argue about one assessment while forgetting that others are accruing under their noses. They are wrong to react in a hurt and bewildered way when they are duly pulled up. The VAT man is doing a job on behalf of us all.

The question of who pays VAT and who does not requires continuing and serious discussion. My hon. Friend the Member for Suffolk, South (Mr. Yeo) raised that matter. At what level should the threshold be fixed, and what are its economic effects at different levels? My hon. Friend said that the threshold should be as high as possible, and we would all support that. No one likes paying tax. It would minimise bureaucracy and assist small businesses, especially those starting up. However, another point of view is put forward by the Building Employers Confederation, which is that the threshold should be at zero. The idea is that everyone will pay, which will reduce the opportunities for cowboys and will be fairer. I suspect that the confederation's confidence in such a change is misplaced because if would certainly increase the black economy, and simply push the threshold effectively to a point at which one either declares for VAT or does not delcare.

I congratulate my right hon. Friend the Chancellor of the Exchequer on managing to take both lines at once. He took the second line of a zero threshold with VAT on building last year, and the first line of raising the threshold overall in this Bill. He has managed to get the matter right, effectively facing both ways at the same time. If we can keep tax income down in that sort of way, there will also be continued pressure to keep public expenditure down. That is an outcome devoutly to be wished.

Overall, I welcome the changes, and hope that after some consideration my slow-paying small business people in south Derbyshire, who work extremely hard to pay the money that they earn, will also welcome them eventually. I look forward to the detailed discussion of these clauses in Committee. I hope that the Chancellor will bear in mind that VAT is a considerable burden, particularly on small businesses which we very much wish to encourage.

8.51 pm

Mr. Robert Jackson (Wantage)

This is the third year of the operation of the business expansion scheme, and it is likely to be a key year which will make or break the scheme. Whether the scheme is to be a significat new development in the market for venture capital will be established by what happens this year.

This third year is so important because it is now that a pattern of interest, or lack of interest, of potential investors through the BES will be consolidated and established. In 1983, its first year, there was a great deal of interest in the BES, but last year, its second year, there was a considerable decrease as investors waited to see how the efforts made in the first year paid off. This year must see a substantial increase in last year's performance if the pattern of the BES is to be one of expansion rather than of contraction and decline after a promising beginning.

I fear, however, that the Finance Bill does not recognise the strategic significance of this year in the development of the BES. I regret that the Bill does not advance new proposals to make BES more attractive. It is a mistake to wait for a review and to overlook the psychological significance of this year.

Mr. Freeman

I know that my hon. Friend is pressed for time, and I am grateful to him for giving way. Does he agree that one helpful amendment to the business expansion scheme may be to permit investors to enter some sort of small business investment company to enable them to attract tax relief at the moment of investment?

Mr. Jackson

I thank my hon. Friend for his suggestion. It is one of many that can be made about the improvement of the BES. I shall refer briefly to it during my speech.

Before I say a few words about such specific measures which may help the scheme, it is worth reminding ourselves why the scheme is so important and deserving of the high hopes which the Government placed in it at its launch. During the past 40 years, since Governments first began to assume a wider responsibility for the overall performance of the economy, successive Administrations have wrestled with the problem of how best to encourage high-risk investment. Historically, the trend has been for Governments to become less confident, in the light of their experience, of their ability to pick winners and to finance them by the direct provision of capital for investment. That has been the case in Britain and, as my right hon. Friend the Member for Guildford (Mr. Howell) pointed out, in other countries, such as France.

This is why we have decided to look at another approach, which seeks to encourage high-risk investment, not only directly but also indirectly—not only by the direct application of taxpayers' money under Government management, but by its indirect application under the management of individual taxpayers or their agents. That is the underlying philosophy of the BES. It is a good philosophy, but it needs to be followed through with greater vigour than is envisaged in this Finance Bill.

If taxpayers' money is to be applied, whether directly or indirectly, it should of course only be applied under careful control. But it is precisely the character and degree of control that is inescapable in the activities of Government Departments in our sort of parliamentary democracy, which has made them such unsatisfactory agents for direct risk-bearing innovative investment. I fear that the character of the control which the Government, through the Inland Revenue, are attempting to apply to their indirect support for risk-taking investments through the BES, may stultify the Government's efforts to promote such investment.

It would be churlish not to recognise the limited positive proposals for improvement in the BES in the Finance Bill. I also welcome the proposal to remove investment in property developments as a qualifying object for BES investment. Obviously, it is right that when the Government provide tax relief to encourage economically worthwhile risk-bearing investments, they should do so only for that limited class of investments.

I do not quarrel with that approach to the control and direction of such publicly supported investments. I am worried, however, about the effect on the BES of other controls and restrictions which are a serious impediment to investment through the scheme.

The details of these restrictions may be dealt with in Committee and I note the suggestion of my hon. Friend the Member for Kettering (Mr. Freeman). Many details need to be considered, and I hope that we shall have the opportunity to do so. I shall cite briefly one of those restrictions which has been operating to our disadvantage and which may be one of the most important of them. It is a requirement of the BES that the investor cannot make his claim for relief at the time of making the investment. Simply to provide the Inland Revenue with an assurance that the money is being genuinely invested in BES, and within a reasonable period, the investor must wait for his relief until after the investment has been made. This has been found to be a serious restriction on the interest that investors have in investing through approved funds under the BES.

We need to reconsider that and to find other ways of dealing with the problem. The experience of the first two years of the BES shows that that and other restrictions have a discouraging effect—for example, restrictions on the deferment of the investment until after the commencement of trade, on the disposal of shares within the five-year period, on dealings in securities at the time of disposal, and restrictions affecting investment in overseas subsidiaries and in minority shareholdings in subsidiaries or sub-subsidiaries. Royalty income has been dealt with in the proposals but we need to look further and deeper at that also. All these represent a serious impediment to investment in business expansion scheme funds, and we must ask whether those restrictions are necessary. Could their object be met in other, perhaps looser but certainly less destructive, ways?

I repeat that we cannot wait for the review because this is a year which will determine whether the business expansion scheme will turn out to be something that will develop and improve in future, or fall back and decline from its worthwhile and useful early beginnings.

Those are serious questions about the working of one of the most important, if not one of the most expensive, policies that the Government are pursuing in the industrial field. A great deal of cost is attached to direct support for investment in the public sector by Government but we must look at the potential for growth in the private sector. The hon. Member for Ipswich (Mr. Weetch) referred to the need to invest in high technology and the way to do that is through such instruments as this scheme.

I welcome the overall thrust of the Budget but I regret that its thrust does not go far enough in respect of the business expansion scheme.

8.59 pm

Mr. Terry Davis (Birmingham, Hodge Hill)

The most significant feature of the debate and the most succinct comment that can be made on the Bill is that hardly anyone on the Government Benches has referred to the Bill. The right hon. Member for Worthing (Mr. Higgins) came to the Bill in the last sentence of his speech, only to describe it as unexciting. The hon. Member for Horsham (Mr. Hordern) dealt with the Bill in his first sentence when he described it as dull and then proceeded to discuss monetary policy and the Government's errors in that area.

After describing the Bill as boring, the hon. Member for Suffolk, South (Mr. Yeo), like the hon. Member for Kettering (Mr. Freeman), told us that he would correct the balance and promised to talk about the Bill. But I had the impression that they both proceeded to spend most of their time complaining about what is not in the Bill. I think that Hansard will show that the hon. Member for Suffolk, South had more to say about the Felixstowe and Railway Dock Bill than the Finance Bill.

The hon. Member for Wantage (Mr. Jackson) made an interesting speech but he discussed the difficulties of the business expansion scheme rather than the contents of even that one clause of the Bill. The right hon. Members for South Down (Mr. Powell) and for Guildford (Mr. Howell) did not mention the Bill at all.

The hon. Member for Mid-Norfolk (Mr. Ryder) treated us to a carefully prepared analysis of speeches made by the leaders of the Liberal and Social Democratic parties and the differences between them, but he did not even mention the words "Finance Bill". His speech drew a predictable response from the hon. Member for Stockton, South (Mr. Wrigglesworth). I shall deny myself the pleasure of commenting on that speech. In particular, I shall not stoop low enough to reply to an accusation of deception from someone who stands as a candidate for one party at a general election and then, having been elected as a candidate for that party, joins a different party and sits in this House wearing different colours without submitting himself to the judgment of the electorate. If that is not deception, I do not know what is.

The hon. Member for Hertfordshire, South-West (Mr. Page) did talk about the Bill, but he began by referring to the Government's estimate of the increase in the number of people in work. He claimed as a statement of fact that 500,000 more people are in work than were in employment two years ago. I shall not go into detail again because I dealt with those phoney figures in the Budget debate on 25 March. I simply remind the House that the Government's figures for the number of people in work have been adjusted by a total of 580,000 for assumed—I emphasise that word—new jobs. I add simply that, as I understand it, the only change since I explained those figures on 25 March has been that the Government have now admitted that one reason that they contain a bigger increase in the number in work since March 1983 is that they have revised downwards the figures for March 1983.

In other words, the Government now admit that fewer people were in work in March 1983, at general election time, than they previously claimed. They exaggerated the number of people in work in March 1983, and we are now asked to believe, on the basis of their new, estimated, revised and adjusted figures for September 1984, which incidentally they have just increased, that there has been an even bigger increase than they had previously claimed in the number of new jobs created. The Government's figures for the number of new jobs arising in the past two years have been revised and adjusted so often that they are simply incredible. However, even on the Government's own figures, 1 million fewer people are in work today, counting employed and self-employed people together, than were in work when the Government were elected in 1979.

The hon. Members for Kensington (Sir B. Rhys Williams), for Lewisham, West (Mr. Maples), and for Carshalton and Wallington (Mr. Forman) also began by praising the Bill. At any rate, they genuflected in that direction. However, they then went on to discuss what one of them called the missed opportunity for genuine reform of the tax-benefit system. In typically thoughtful speeches, all three hon. Gentlemen described their own ideas and the changes that they would suggest, but they were handicapped by the lack of hard informaton about the Green Paper on taxation—what we might call the Green Paper mark 2. The Chief Secretary's decision to leave it to the Financial Secretary to deal with that subject in his reply to the debate does not augur well for the full, open and public debate that will be needed if the Government are interested—this may be a vain hope—in obtaining agreement between both sides of the House about the structure of the personal tax system. How can the Financial Secretary reply to speeches about the Green Paper when no one can comment on the ideas, proposals or arrangements about which we have not been told? The Chief Secretary should have revealed whatever the Financial Secretary is about to tell us. It is an abuse of the wind-up speech to use it for an announcement of the Government's intentions.

The Chief Secretary did deal with the Finance Bill at length. In fact, he scarcely dealt with anything else. That was remarkable in itself. I cannot remember ever having heard such a speech from the Chief Secretary. He carefully avoided giving any carefully selected statistics designed to show that the British economy has never been in better health. I do not know whether I prefer low-key, defensive speeches such as today's or the more offensive—in the sense of aggressive—speeches that we have come to expect from the Chief Secretary. I am perhaps more worried when he is defensive because I wonder what he knows that we do not know. I wonder what bad news may be around the corner. Perhaps I am wrong, and the Chief Secretary is not so much worried as relaxed. In that case, I am even more concerned because those who live and work in this country—or who do not work because they cannot find work—cannot afford to share the Chief Secretary's relaxed attitude.

Although the Chief Secretary's speech was notable for the lack of statistics, he repeated one figure from the Budget debate. It was the one figure that never fails to appear in speeches by the Chief Secretary at this time of year—the figure for the number of people taken out of tax. According to the Chief Secretary, the Finance Bill "takes a further 800,000 people out of tax altogether". Let us set aside the fact that those people are not taken out of tax altogether. They are still required to pay national insurance contributions and the indirect taxes such as VAT that have been increased or extended in scope by almost every Budget or Finance Bill introduced by the present Government. But let us take the Chief Secretary's phrase about people being taken out of tax as meaning that those people are no longer liable to pay income tax and consider his claim that, this year, as a result of this Bill, 800,000 people will no longer be liable to pay income tax.

At first sight, that seems an impressive figure. Of course, it is less impressive than last year's figure as we were told then that 850,000 people would no longer be liable to pay income tax, and it is much less impressive than the year before when the figure was 1.25 million, or the year before that, when it was 1.2 million. That takes us back to 1981, the year when nobody was taken out of tax because the Government did not change personal allowances but went back on all their promises and fine words about the Rooker-Wise amendment. The year before that—1980—was a bumper year, when the Chief Secretary boasted of taking 1.3 million people out of income tax. The figure was the same in 1979 after the general election. If we take all of those years, we find that the Government have claimed to have taken a grand total of nearly 7 million people out of income tax.

Sir William Clark

That is silly.

Mr. Davis

The hon. Member for Croydon, South (Sir W. Clark), the chairman of the Conservative Back Bench committee, has, with his usual quick wit and perspicacity, realised that the figure is bogus. Each year, the Chancellor claimed to have taken thousands of people out of tax, when most of them were the same people whom he had claimed to have taken out of tax the year before. As taxpayers, those people lead a yo-yo existence. The Chief Secretary raises the tax thresholds so that they are not liable to income tax, but their next wage increase puts them dust over the threshold, thus enabling the Chief Secretary to take them out of tax again the next year and to claim the credit all over again.

I must be fair to the Chief Secretary and the Government. I accept that fewer people are paying income tax today than six years ago, but they are 2 million fewer rather than 7 million. A table in the Inland Revenue's statistics shows that the number paying income tax has gone down from 26 million to 24 million. That 2 million is a figure that my right hon. and hon. Friends will recognise, because it is exactly the same as the increase in the number of unemployed. It is no coincidence that, under the Conservative Government, the reduction in the number of taxpayers is exactly the same as the increase in the number of unemployed. To use the phrase of the right hon. Member for South Down, those 2 million people have been put through the monetary mangle.

Those 2 million people would much rather have jobs and pay income tax than sit at home not working and not paying income tax. My hon. Friend the Member for Sheffield, Attercliffe (Mr. Duffy) described those people movingly today. Like my hon. Friend, I never thought that I would see the day when a Christian church would designate an "Unemployment Sunday." As my hon. Friend said, there is no prospect of this year's Finance Bill providing employment opportunities for the unemployed of Sheffield. There are 60,000 such people in that city alone and a further 3.25 million spread throughout the country.

My hon. Friend the Member for Ipswich (Mr. Weetch) reminded us that the Budget is supposed to be a Budget for jobs. Presumably the Government regard the Bill as a Bill for jobs. I have gone through it carefully and, like my hon. Friend the Member for Ipswich, have had great difficulty finding anything which can be described as likely to create jobs or encourage their creation. Indeed, one of its earliest clauses seems designed to kill some jobs. Clause 5 changes the taxation on wines so that the tax on blended wines such as vermouth and some sherries is higher if the blending is done in Britain. One employer has already complained to several hon. Members on both sides of the House that the clause has put 50 jobs at risk in one new town. That is a detailed point which we shall discuss in Committee, but let us suppose that the employer is right and the Bill costs 50 jobs in that new town. How does it help those 50 people to obtain new jobs or, if they are to follow the advice of the Prime Minister, how does it help them to become self-employed?

The Chief Secretary claimed that the Bill is evidence of what he called the Government's increasing concern for the self-employed.

Mr. Peter Rees

Continuing.

Mr. Davis

The Government's concern is not increasing but continuing at its previous level.

Let us suppose that one of these newly unemployed people decides to become self-employed and sets up in business repairing television sets or engages in a similar small enterprise. What is the first provision in the Bill that he finds affecting his new enterprise? He will find that he is taxed when he was not taxed before. Anyone setting up that sort of business will traditionally obtain customers by advertising in his local newspaper. Now, for the first time, he will pay value added tax on his advertisement.

My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) commented on the effect of this extension of VAT on local newspapers. My right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) drew attention to its effect on families. The hon. Member for Suffolk, South referred to charities.

Sir William Clark

rose——

Mr. Davis

The hon. Member for Croydon, South has been notable during the debate by his absence from the Chamber. Throughout most of the debate he has not been present. However, for personal reasons, I shall give way to him.

Sir William Clark

If anyone sets up a new business and advertises, he pays VAT. But no doubt he has sales. He pays VAT on his advertising, but he can set off that against the VAT on his sales.

Mr. Davis

That occurs only when he is registered. I am talking about someone setting up in business for the first time as a small trader. He will not be registered immediately. He will not be able to set off the tax that he pays against the tax which he collects. The very small business man with a turnover which is too low, as the hon. Member for Derbyshire, South (Mrs. Currie) explained, will see an increase in his real costs. If he expands, as we hope he does, and is registered for VAT, he looks further in the Bill and comes to clauses 11 to 32 and two of the schedules, covering a total of 36 pages in the Bill, which provide for the implementation of the Keith report.

The Opposition hold no brief for people who escape paying over to the Treasury the money which in effect they have collected through the VAT which has been charged on their invoices. But is it really necessary to go into this much detail, with 36 pages of a Bill, to collect that money and to provide proper enforcement powers for the Customs and Excise? We shall deal with that in Committee. Meantime, I can tell the hon. Member for Derbyshire, South that the experiences of her constituent are as nothing compared with what will happen if this chapter is enacted. It is obviously a complicated tax, as the hon. Lady's speech showed in a way that she did not realise, and we shall certainly be looking at it.

This new business man who has lost his job as a result of clause 5 and is managing, through his own efforts, to flourish will also be charged national insurance contributions as a self-employed person. No doubt he will come to clause 40, which is one of those recommended to the House by the Chief Secretary. Our new small business man will soon find out that, when he is making £100 a week, he is only 19p a week better off as a result of clause 40. Anyone making £200 a week will be £1.14 a week better off. Someone doing rather better and who is now making £265 a week will receive £1.70 as a result of clause 40. That person is receiving the full amount of £90 a year.

Our new business man will say, "Why should I do it this way? Why have the Government decided to give me tax relief on my class 4 contributions instead of simply reducing the rate of class 4 contributions? Why should I lose cash flow? Why should I be able to get it back only when I settle my income tax? Why should I incur all the additional paperwork which otherwise as a small business man I should not have to incur, because I shall have to include this in my tax return?" If the rate of national insurance contributions for that person were reduced, the position would be much more straightforward and, of course, it would require less paperwork by the Inland Revenue and fewer staff to administer it.

Why not simply reduce the rate? I can explain it to that new small business man. The reason why the Government have chose the most complicated way possible to reduce class 4 contributions is that in that way, just as with any change in tax allowances, they can give more money to the higher paid taxpayer. The person earning more than £45,000 a year and paying the highest rate of tax receives not £90 but £180 a week as a result of this measure. That is one way of ensuring that people on the highest incomes receive more, instead of the people on the lowest incomes.

Mr. John Powley (Norwich, South)

Will the hon. Gentleman give way?

Mr. Davis

The hon. Gentleman has not been present at all for the debate.

Mr. Powley

The right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) will confirm that I was present. I listened intently to what was said. I apologise for the fact that I have not been present for the whole of the debate.

It has been my experience as a small business man during the past 24 years that the burden imposed on small businesses has been onerous under successive Labour Governments but that burden has been eased—although not completely removed—under successive Conservative Governments. The hon. Gentleman should remember that the burden of the national insurance surcharge was imposed on small business men and that acted as a disincentive to jobs. The selective employment tax imposed a further burden on people in small business.

Mr. Davis

That sounded more like a speech than an intervention. It was the speech that the hon. Gentleman could have made if he had taken the trouble to be in the Chamber and had tried to catch your eye, Mr. Deputy Speaker. The answer to the hon. Gentleman's point is that I am not surprised that he remained a small business man.

A whole chapter in the Bill is devoted to the capital gains tax. The Bill refers to a series of changes designed not to tighten up the administration of this tax, like VAT, but to make life easier for people with capital gains of £5,900 a year at a cost to other taxpayers of £155 million a year. I assume that that is one of the points that the Chief Secretary described as being "of interest and imagination." In fact, the Government are using this measure to encourage the return of what is known as bed and breakfasting. This refers not to the type of bed and breakfast arrangements to which increasing numbers of homeless and unemployed young people are being driven—young people being turned into tramps by the social security regulations which came into effect today—but to the arrangement by which people with large shareholdings can reduce their liability to capital gains tax and take themselves out of tax by engaging in paper transactions that have as much real existence as that half a million jobs which the Government claim have been provided during the past two years.

That is the point of the Finance Bill—many little extras for people who are wealthy and little or nothing for people who struggle to make ends meet, the people described by my hon. Friends the Members for Leyton (Mr. Cohen) and for Liverpool, West Derby (Mr. Wareing).

The Bill, like the Budget that it represents, is totally inadequate and almost wholly irrelevant to the problems of unemployment and poverty. The Labour party will therefore vote against it.

9.23 pm

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

I start by joining my right hon. and learned Friend the Chief Secretary in welcoming the report by the Treasury and Civil Service Committee. We have heard two noteworthy contributions—by the Committee's Chairman, my right hon. Friend the Member for Worthing (Mr. Higgins), and by my hon. Friend the Member for Kettering (Mr. Freeman). I know that my right hon. Friend the Member for Worthing will understand when I say that, as we shall be responding later to the Committee's report, it will be more relevant to note his points then.

I should like to touch on one important point which my right hon. Friend the Member for Worthing made in his speech and which was covered in the Committee's report. The report is wrong in its comments on an aspect of fiscal adjustment. The report states that the forecast of a £1.5 billion fiscal adjustment in last year's "Autumn Statement" was not "properly qualified". The text of the "Autumn Statement" stressed the uncertainty of the estimate, as did the Chancellor's autumn statement. The other two instances quoted in the report are my speech to the Sun Life Assurance conference and the Chancellor's Sunday Times article which also—I stress this point—qualified the forecast. I have the relevant references. It is right to point out that the qualifications were significant.

My right hon. Friend the Member for Guildford (Mr. Howell) drew attention to the fact that the PSBR, and hence the fiscal adjustment, is the difference between two large numbers. The gross flows on each side of the account approach £200 billion a year. Therefore, a small error in expenditure or revenue, or in both, results in a substantial error in the PSBR.

The average absolute margin of error around the PSBR forecast made in the autumn for a subsequent year is plus or minus £4.5 billion. That is comparable in size to, if not larger than, the comparable fiscal adjustment, so the publication of the potential fiscal adjustment in the autumn cannot commit the Chancellor to a course of action in the spring, because that must be a matter for judgment at the appropriate time.

My right hon. Friend the Member for Guildford gave us a perceptive overview of the many problems on the world trading and economic scene. I particularly appreciated his comments about tax reductions and wider share ownership. He and the hon. Member for Roxburgh and Berwickshire (Mr. Kirkwood) mentioned the loi Monory. This is probably not the moment to go into that, but the hon. Member and my right hon. Friend have both shown a commitment, which we share, towards wider share ownership. I particularly welcome that.

Mr. Hattersley

Many Opposition Members would welcome the Financial Secretary's comments on the grotesque imprecision of the public sector borrowing requirement calculation. As the imprecision is so huge, how can the Government base so much of their planning on a precise forecast of the PSBR? As it is so huge, why cannot another £2 billion—half the margin of error—be used to stimulate employment?

Mr. Moore

I am surprised that the right hon. Gentleman has only just discovered that such forecasts are hedged with, shall we say, warnings. The right hon. Gentleman should have noted that in the autumn statement and most other speeches on the subject.

My right hon. Friends the Members for Guildford and for Worthing and the hon. Member for Sheffield, Attercliffe (Mr. Duffy) stressed the importance of the Bonn summit. I will draw the attention of my right hon. Friend the Prime Minister to what has been said on that subject.

With typical courtesy, the right hon. Member for South Down (Mr. Powell) had already written to my right hon. Friend the Chancellor of the Exchequer on the point that he elaborated today. It seemed that there were two aspects—the substance and the inflationary financing. I should like to cover them briefly. If the hon. Gentleman wishes, I could come back to them, but perhaps we shall not wish to spend too much time on them. My hon. Friend the Member for Horsham (Mr. Hordern) and one or two other hon. Members are far more erudite than I on this subject, but the right hon. Member for South Down made some important points.

The right hon. Gentleman asked why we would not make faster progress towards zero inflation. The speed at which we get the economy to zero inflation is a matter of judgment. If we go too fast, expectations may not adjust quickly enough and we shall get unacceptable transitional costs. However, the 3 per cent. inflation assumed for 1988–89 is a substantial step down from the 5 per cent. expected for 1985–86.

The right hon. Gentleman's measure of inflationary financing—he rightly said that it is difficult to be precise in some of these figures—showed only part of the story. In 1984, the inflationary impact of increased nationalised industry borrowing from banks was more than offset by additional sales of gilts to the rest of the private sector. As a result, the overall public sector contribution to monetary growth in 1984 was not expansionary by £1.3 billion, but contractionary by just under £1 billion.

The figures showing the public sector contribution to the growth of sterling M3 on the conventional definition—I have the conventional definition and comparisons and I had better put them into a letter for the right hon. Member for South Down—can be derived from the Central Statistical Office publication "Financial Statistics". The Government have no intention of financing themselves in an inflationary way by borrowing from the banks and printing money. The commitment to broad targets and narrow money guarantees that inflationary pressures from elsewhere will not undermine counter-inflationary objectives.

Mr. J. Enoch Powell

The essential answer that the Financial Secretary is giving is that the Government are engineering a deliberate downward movement in the rate of inflation. I am still not clear about the instrument and the delicacy of the instrument which enables them to proceed by 1 per cent. or 0.5 per cent. annual steps on that downward path.

Mr. Moore

The right hon. Gentleman is correct in his assessment as to the degree to which the Government feel that the pace and pattern and the degree to which they are achieving their objectives are different from what some might wish. The debate on the instruments used for fine tuning might be better held at some other time. I know that my right hon. Friend the Chancellor of the Exchequer will be more than happy to address himself to the issue.

In general, the Finance Bill proposes little change in oil taxation, thus helping to create the type of fiscal stability which is welcome to the oil industry at present. There is one aspect of the few minor changes being introduced that has caused some interest. It relates to our proposal to withdraw immediate petroleum revenue tax relief for onshore exploration and appraisal with effect from Budget day 1985.

A number of companies, in particular small British companies operating onshore, have emphasised the extent to which they have made plans and entered into commitments on the basis that that relief would continue as at present. It is the Government's view that the existing immediate PRT relief for onshore expenditure which involves the Exchequer in providing an unnecessary subsidy and distorts the position of companies generally should be removed. We are now satisfied that withdrawing the relief from Budget day this year could create genuine difficulties for companies. We have therefore decided to defer for 12 months the date upon which the revised PRT rules for onshore exploration and appraisal will come into effect.

That will enable those who are or could be affected by the change to revise their plans accordingly. We shall thus be bringing forward in Committee a Government amendment designed to defer the starting date of the onshore change to 1 April 1986.

A great deal of attention has been paid to tax reform throughout the debate. Many right hon. and hon. Members have contributed. Notable was the first contribution of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). There has been what I thought was only somewhat ill-informed comment outside the House, but it has been added to by the right hon. Gentleman who seemed to think that this year's Budget signalled the end of the Government's tax reforming intentions. I hope that I can reassure my hon. Friends the Members for Horsham and for Carshalton and Wallington (Mr. Forman), who made a speech that would merit reading by all hon. Members, that nothing could be further from the truth than to suggest that the Government's tax reforming intentions are over.

The Finance Bill continues provisions that will abolish one tax, and radically reform two others, and a number of measures designed to stop tax losses through artificial avoidance and improve the efficiency with which tax is collected. My hon. Friend the Member for Kettering, in his short but notable contribution, drew our attention to the way in which a chunk of the Finance Bill, which has not yet merited the attention of the House on Second Reading, although it has been noted by outside commentators, continues in clauses 52 to 63 the major pattern of reform of the Income and Corporation Taxes Act 1970. Those clauses introduce a major change to short-life assessment which has been broadly welcomed by both sides of the House and by industry. It was a significant feature of the tax reforming Budget.

The Bill contains several reforms. Clause 87 abolishes development land tax, which was welcomed by my hon. Friend the Member for Hertfordshire, South-West (Mr. Page). This is the third tax which the Government have abolished in the last two years. The tax is costly for the Revenue to collect and for the taxpayer. Abolition will reduce administrative costs for the Revenue, remove a burden from industry and release land for development, thereby benefiting employment in the construction industry.

Reference has been made to clause 64. My hon. Friend the Member for Suffolk, South (Mr. Yeo) wanted us to go further with capital gains tax reform. I remind him that considerable revenue is at stake in the inflationary gains which are not relieved in the pre-1982 period. Clause 64 reforms and simplifies capital gains tax indexation. The indexation provisions will now apply to the first 12 months of ownership of an asset and so will remove from tax any inflationary gains since 1982. The tax will thus only be charged on real gains made on post-1982 acquisitions cost, the tax charge on pre-1982 inflationary gains will be substantially reduced. The proposal to apply indexation to losses as well as gains will meet another longstanding criticism.

The changes will make the tax much fairer. Since the changes enable a form of share pooling to be introduced they will make life simpler for the taxpayer and his advisers. I know that that is hard to believe in view of the complexities involved, but when the reforms are examined in Committee the outside world will understand the reason for the changes.

It is not possible to restore the pooling arrangement in its pre-1982 form since it must take account not only of the indexation relief, but of the provision to base the relief on the March 1982 value of an asset. Our proposals have been widely welcomed because they represent a valuable simplification in an admittedly complex area of the tax law.

Two other tax reforming clauses have been much welcomed by both sides of the House and the outside world. Clauses 65 and 66 reform capital gains tax retirement relief. That should encourage small business men to pass on their businesses to the younger generation rather than to battle on, perhaps in poor health, because of a tax penalty on retirement. Assets will be passed on to more energetic managment and the market opertion will be improved.

Reference has been made to the large number of clauses—74 to 83—which might be boring but which will be of genuine benefit. The clauses simplify and modernise the ancient stamp duties. The majority of nominal fixed duties will disappear and the administration of the remainder will be simplified. This overhaul provides for the repeal of 13 pages of legislation and reduces by over 40 per cent. the number of documents which require stamping. The associated revenue loss will be less than 2 per cent. of the total yield.

Some reforms in the Budget will make the tax system fairer by preventing artificial avoidance devices and by stopping people exploiting the system to the detriment of taxpayers in general. Every person who gets away with not paying tax by exploiting a loophole in the system increases the burden on the generality of taxpayers.

Clauses 69 to 73 give legislative effect to the action announced in February to bring bond washing to an end. I refer to the avoidance of tax by turning income on fixed interest securities into capital gains which are then taxed at the lower rate, or, if held for 12 months or more, not taxed at all. The measures to stop bond washing will take effect next year and are expected to raise £300 million in a full year.

Clause 45 prevents partnerships from manipulating existing rules of partnership taxation to reduce their tax liability. The change responds to criticisms by the Public Accounts Committee about what happened previously and follows consultation last year. Clause 46 closes loopholes on limited partnerships and is related to clause 45.

The Chief Secretary has dealt with clauses 11 to 30 which make changes in the collection and enforcement of value added tax and are based on recommendations by the Keith committee. I pause only to note them as further examples of Government action to improve compliance and to reform tax collection. I was pleased to note the support of my hon. Friend the Member for Derbyshire, South (Mrs. Currie) for that part of the Bill.

Like many right hon. and hon. Members, I shall look beyond this year's Finance Bill to the Green Paper that will be published later this year on the reform of personal taxation. It will cover several aspects of the development of income tax after computerisation. But the centrepiece will be the proposal for single transferable votes—[Interruption.] I should have said the proposal for single transferable allowances. In this House, the last thing that hon. Members forget is votes.

The right hon. Member for Sparkbrook asked whether we were simply repeating another Green Paper. The last Green Paper set out wide-ranging options on the taxation of husbands and wives. We now propose to consult on one key option—fully transferable allowances. Many hon. Members have already welcomed the fact that the forthcoming Green Paper will cover wider issues, such as the possibility of non-accumulation and self-assessment. The idea is that everyone should have the same standard allowance, and married people without enough income to use up their allowance should be able to transfer to their partners the unused balance. Thus the aggregation of the husband's and wife's income for tax purposes would end, and married women would have the privacy and independence that they have a right to expect in tax matters, as elsewhere.

One-earner couples would clearly benefit and the current discrimination against them would end, allowing married women to decide whether to take paid employment or to stay at home, perhaps to bring up children, without the choice being biased one way or another by the tax system. The poverty and unemployment traps would be relieved and future increases in personal allowances would be more effective in reducing the numbers in the traps. Our intention is to phase in the system so that no couples lose in cash terms. With legislation in 1987, the system could be in place by 1990.

Many right hon. and hon. Members have questioned the delay between the publication of the Green Paper and the implementation of the proposals. They have asked why fully transferable votes cannot come in before 1990—[Interruption.] I should have said fully transferable funding, and I apologise to the House for repeating that slip twice. However, I am facing the right hon. Member for Sparkbrook, and am obviously obsessed by that subject.

We need to understand what is needed to run a new system. First, the Revenue will need very detailed information which it simply does not have at present about husbands and wives. Secondly, it will need a completely computerised system, allowing it to switch the information from one office to another in order to enable, for example, people changing their employment to allow their spouses to benefit. We need all the necessary information from something in excess of 12 million married couples. That is not only an extremely labour-intensive job, but obviously, the records are currently all on paper. We shall need to have a system that allows those records to be moved quickly, other than in a paper form, from one tax office to another.

The Revenue is in the midst of two major changes. The first is a fundamental reorganisation and change in the overall system of Revenue tax offices. There are more than 600 offices, and those who know something about the Revenue will be well aware of the enormity of that task. Secondly, the Revenue is engaged in the largest computerisation programme in the western world. The records of 28 million taxpayers are being computerised, including the records of 1.1 million employers and of more than 3.5 million of those who are schedule D linked.

Hon. Members will be pleased to know that that programme is running to time and cost. But its completion is an essential feature, because we cannot begin to operate a new fully transferable computerised system with a data transmission network for the computer-based national index until the full range of facilities is in place, in about 1989.

Mr. Kirkwood

Will the Minister give an assurance that in the midst of that substantial reorganisation the Inland Revenue will have the time to contact the DHSS in order to ensure that nothing in the social security review will cut across any of the future options?

Mr. Moore

I can so reassure the hon. Gentleman. The relationships between the two are close. In the meantime, there are actions that the Government can and must take. First, we must produce the Green Paper, which will recommend a series of major changes and will merit full public consultations. Secondly, we must ensure that the computer systems and software are compatible with the computerisation of the Revenue programmes and with the proposals that we shall put in the Green Paper. Thirdly, we must have legislation ready for the changes to be in place in 1987. Fourthly, we must have Revenue ability, once the tax office reorganisation and computerisation programme is over, to collect and prepare the needed data for the new system. That collection should be starting at some time in 1987–88 depending on the pattern that I have outlined. These are some of the crucial reasons why there is a need for consultation and considerable activity before we can introduce the new system.

Mr. Forman

As many hon. Members on both sides of the House are concerned about the possibility of integrating the two systems, does my hon. Friend accept that in terms of the timetable he has outlined it might be useful either to find ways of speeding up the Inland Revenue's timetable or slightly delaying the social security changes that might flow from the forthcoming White Paper? It is important in one way or another to bring the time scales of the two exercises into line.

Mr. Moore

I hear the point that my hon. Friend is making and I shall concern myself with it. My right hon. and hon. Friends and I have considered with great care the time frame surrounding the Revenue's activities in this area. I am as sure as one can be in this world that it is not seeking to create unnecessary delays. I shall consider what my hon. Friend and others have said about integration.

I shall take up another major theme of the debate which featured in the speeches of the right hon. Member for Sparkbrook and the hon. Members for Birmingham, Hodge Hill (Mr. Davis), for Attercliffe, for Ipswich (Mr. Weetch) and for Roxburgh and Berwickshire. The right hon. and hon. Members addressed themselves to jobs and the degree to which they wondered whether the Government were putting sufficient emphasis in the Bill on the need to create employment. They expressed concern about the budgetary strategy in that respect.

The Government's critics on unemployment fall very much into two camps. First, there are those who argue that the way to increase jobs is to increase nominal demand by running a higher level of public borrowing that is accompanied by faster monetary growth. That argument was adopted by the right hon. Member for Sparkbrook and the hon. Member for Roxborough and Berwickshire. It is their diagnosis that the economy is suffering from a lack of nominal demand but that is quite false. The money GDP rose by 7 per cent. last year and it should rise a little faster this year as the economy recovers from the coal strike. I believe that there is no shortage of demand.

The challenge is to convert that growth in nominal demand into real growth and to damp down the inflationary components. This process will not be aided by increasing the overall level of demand. The answer is to concentrate on improving the underlying supply side performance and the competitive position of the economy. Modest increases in nominal demand will then be translated into real demand for domestic goods and services and will not be dissipated into inflation.

The previous Labour Government and other Governments attempted to achieve growth by stimulating demand. When the Labour Government were in office, nominal GDP increased by 125 per cent. but the increase in real output was less than 10 per cent. and the rest was inflation. Every £100-worth of extra demand generated £8 of extra output and £92 of inflation. That is an insidious process. Every extra fix of demand generates more inflation, threatens the competitive position of the economy and reduces its capacity to convert nominal demand into domestically produced goods, services and employment. Last year nominal demand rose by 7 per cent. and within that real GDP increased by 2.5 per cent. That is a considerable improvement in the split between real output and inflation compared with the position that prevailed in the mid and late 1970s. It reflects an improvement in the supply side of the economy, which is the only effective way of generating lasting employment opportunities.

A second group of critics of our policies does not call for reflation but argues that our limited fiscal leeway should have been devoted to increasing public expenditure rather than cutting taxes, and this has been mentioned today. Such critics misunderstand the nature of the job creation process. Their argument is based on the assumption that the employment effects of higher public spending would be greater than from tax cuts. I agree that, initially, public spending could create more jobs than tax cuts, but it depends on the type of expenditure involved. The extra money devoted to increasing public sector employment will increase jobs, but the demand effects on employment from both higher expenditure and tax cuts will be temporary.

Permanent jobs will be created if the supply side performance is improved, as my right hon. friend the Member for Guildford said. Tax cuts will have this effect by increasing the willingness to work and inducing workers to accept lower wage settlements. The supply of labour and its quality will be improved, industrial costs will be reduced and our competitive position enhanced. These will bring lasting improvements to the supply side of the economy and will provide permanent jobs within a competitive economy.

The right hon. Member for Sparkbrook went, in some detail, into a discussion of the relative nature of the tax and national insurance burdens.

Mr. Hattersley

Does the Financial Secretary believe his comments about employment? I ask him the question that I asked the Chief Secretary. Does the Treasury endorse the judgment of the Leader of the House that unemployment will fall before the next election?

Mr. Moore

It is always better to use the precise words that people have used. There is no difference between the views of my right hon. Friend the Leader of the House and that of the Government. So that the right hon. Member for Sparkbrook can share his obvious knowledge of what my right hon. Friend said, I shall read out my right hon. Friend's words. He said: I believe, however, that the underlying strength of the economy will, in time, reverse this situation. That will be the most decisive moment during this Parliament. I see no way that either I or my right hon. Friend the Chancellor can disagree with that statement.

Mr. Duffy

Are there not some infrastructure arguments—selective, I grant—that would improve the Government's supply side measures?

Mr. Moore

We can always look at legitimate infrastructure problems. When I wound up my contribution to the Budget debate, I addressed in detail the judgment as to the totality, its impact on the overall interest rates and inflation, and the relative performance of Her Majesty's Government in comparison with other Governments in terms of the commitment to the infrastructure, whether it be to roads, sewers, hospitals or prisons. I went into the matter in some detail, but I shall write to the hon. Member for Attercliffe, because he has a valid point. We think that we have the judgment right on the quantum, the quality and the relative terms.

Mr. Wrigglesworth

The hon. Gentleman is replying to his critics, who want to increase demand in the economy. Will he recognise that the conditions today are different from those of the 1970s, when there was an oil price increase in 1973 and 1979? There was also a different balance of payments position then because now we have North sea oil revenues coming into the Treasury.

Mr. Moore

The conditions are different in that we have at last got control of our borrowing requirement and are beginning to get control of the pattern of increasing inflation. To the extent that we have got control of the economy, we shall not lose that control again.

I thought that it was almost an affront to the House that the right hon. Member for Sparkbrook tackled two points about taxation that I should have thought he would have preferred to ignore. One was the burden of taxation on employers. I remind the House of two points. One is that during the period of this Government, the per centage of total taxation carried by employers has been reduced from 14.1 per cent. to 9.1 per cent. Secondly, my hon. Friend the Member for Norwich, South (Mr. Powley) rightly drew attention to the fact that we have removed that burden on employers of the national insurance surcharge—a burden of £3.7 billion.

Secondly, the right hon. Member for Sparkbrook spoke about the impact on those who are least well-off and about the pattern of taxation and national insurance charges during the period of this Government. It is difficult for Opposition Members to understand, but most of us are more concerned with the genuine quality of life of those in work than with attitudes on envy and redistribution—[Interruption.] While the right hon. Member for Sparkbrook giggles, let me remind hon. Members of the relevant data for the pattern of those on half average male earnings during Labour's period of office. The real take-home pay, or real wealth, for a married person with two children went up 4 per cent. That is excellent, but during our period of office over a similar period, that pay has gone up by 12 per cent.

For a person on average earnings, take-home pay went up by 1 per cent. during Labour's period of office, but by 13 per cent. during our period of office. The earnings of a single person went down 3 per cent. during Labour's period of office. These are not palatable figures, but show the reality of what happened to people on lower earnings. They show the way in which those in work have benefited far more during the period of office of the Conservative Government.

Let us take a person on twice male average earnings, which is not excessively wealthy. During Labour's period of office, real take-home pay went down by 2 per cent., whereas it has gone up 14 per cent. in the last five or six years. If one is on five times male average earnings, take-home pay has gone up 28 per cent. under the Conservatives, whereas it went down 17 per cent. under Labour.

I accept that there is a differential between the higher and lower figures because in a progressive tax system, any changes will by definition benefit those further up the scale. It is appalling that Opposition Members should argue as if those in work were worse off. I entirely accept the figures for taxes, because I announce them, but I assumed that those in Government sought to concern themselves with whether or not people were better or worse off. Under our combined policies, people on half average earings are better off, as are those on whole average earnings. That is the relevant point which should be put across.

I know that many of the points that have been made in the debate will be considered by those of us who have the privilege of serving in Committee. Today, we are considering the underlying principles. This Finance Bill contains measures to improve incentives, promote job creation, stimulate enterprise and reform and simplify the tax system. Income tax is reduced, capital gains tax reduced and reformed, stamp duty overhauled and development land tax abolished. There are proposals to assist research and development, high technology industries and the process of innovation. There are new incentives for the self-employed and measures to protect the national heritage and to encourage charitable giving.

The Bill therefore contains specific measures which, taken with the others announced by my right hon. Friend the Chancellor in the Budget, provide the firm financial framework within which industry can create jobs. On that basis, I commend it to the House.

Question put, That the amendment be made:—

The House divided: Ayes 172, Noes 278.

Division No. 195]	[10 pm
AYES
Abse, Leo	Clark, Dr David (S Shields)
Anderson, Donald	Clarke, Thomas
Archer, Rt Hon Peter	Clay, Robert
Ashley, Rt Hon Jack	Clwyd, Mrs Ann
Ashton, Joe	Cocks, Rt Hon M. (Bristol S.)
Atkinson, N. (Tottenham)	Cohen, Harry
Bagier, Gordon A. T.	Coleman, Donald
Banks, Tony (Newham NW)	Concannon, Rt Hon J. D.
Barnett, Guy	Cook, Frank (Stockton North)
Barron, Kevin	Corbyn, Jeremy
Beckett, Mrs Margaret	Cowans, Harry
Benn, Tony	Cox, Thomas (Tooting)
Bidwell, Sydney	Craigen, J. M.
Blair, Anthony	Cunliffe, Lawrence
Boothroyd, Miss Betty	Cunningham, Dr John
Boyes, Roland	Davis, Terry (B'ham, H'ge H'l)
Bray, Dr Jeremy	Deakins, Eric
Brown, Gordon (D'f'mline E)	Dewar, Donald
Brown, Hugh D. (Provan)	Dixon, Donald
Brown, N. (N'c'tle-u-Tyne E)	Dobson, Frank
Buchan, Norman	Dormand, Jack
Caborn, Richard	Douglas, Dick
Callaghan, Rt Hon J.	Dubs, Alfred
Campbell, Ian	Duffy, A. E. P.
Campbell-Savours, Dale	Dunwoody, Hon Mrs G.
Canavan, Dennis	Eadie, Alex
Carlile, Alexander (Montg'y)	Eastham, Ken
Carter-Jones, Lewis	Edwards, Bob (W'h'mpt'n SE)

Evans, John (St. Helens N)	McTaggart, Robert
Ewing, Harry	Madden, Max
Fatchett, Derek	Marek, Dr John
Faulds, Andrew	Marshall, David (Shettleston)
Field, Frank (Birkenhead)	Mason, Rt Hon Roy
Fields, T. (L'pool Broad Gn)	Maynard, Miss Joan
Fisher, Mark	Meacher, Michael
Foot, Rt Hon Michael	Michie, William
Forrester, John	Mikardo, Ian
Foster, Derek	Miller, Dr M. S. (E Kilbride)
Foulkes, George	Mitchell, Austin (G't Grimsby)
Fraser, J. (Norwood)	Morris, Rt Hon A. (W'shawe)
Freeson, Rt Hon Reginald	Morris, Rt Hon J. (Aberavon)
Garrett, W. E.	Oakes, Rt Hon Gordon
George, Bruce	O'Brien, William
Gilbert, Rt Hon Dr John	O'Neill, Martin
Godman, Dr Norman	Orme, Rt Hon Stanley
Golding, John	Owen, Rt Hon Dr David
Gould, Bryan	Park, George
Gourlay, Harry	Parry, Robert
Hamilton, James (M'well N)	Pavitt, Laurie
Hamilton, W. W. (Central Fife)	Pike, Peter
Hancock, Mr. Michael	Randall, Stuart
Hardy, Peter	Redmond, M.
Harman, Ms Harriet	Rees, Rt Hon M. (Leeds S)
Harrison, Rt Hon Walter	Richardson, Ms Jo
Hart, Rt Hon Dame Judith	Roberts, Ernest (Hackney N)
Hattersley, Rt Hon Roy	Robinson, G. (Coventry NW)
Haynes, Frank	Rooker, J. W.
Heffer, Eric S.	Rowlands, Ted
Hogg, N. (C'nauld & Kilsyth)	Ryman, John
Holland, Stuart (Vauxhall)	Sedgemore, Brian
Home Robertson, John	Sheerman, Barry
Howells, Geraint	Sheldon, Rt Hon R.
Hughes, Robert (Aberdeen N)	Short, Ms Clare (Ladywood)
Hughes, Roy (Newport East)	Short, Mrs R.(W'hampt'n NE)
Hughes, Sean (Knowsley S)	Silkin, Rt Hon J.
Hughes, Simon (Southwark)	Skinner, Dennis
Janner, Hon Greville	Smith, Rt Hon J. (M'kl'ds E)
John, Brynmor	Soley, Clive
Jones, Barry (Alyn & Deeside)	Spearing, Nigel
Kennedy, Charles	Stewart, Rt Hon D. (W Isles)
Kilroy-Silk, Robert	Stott, Roger
Kirkwood, Archy	Straw, Jack
Lambie, David	Thomas, Dr R. (Carmarthen)
Lamond, James	Thorne, Stan (Preston)
Leadbitter, Ted	Wainwright, R.
Leighton, Ronald	Wallace, James
Lewis, Ron (Carlisle)	Wardell, Gareth (Gower)
Lewis, Terence (Worsley)	Wareing, Robert
Litherland, Robert	Weetch, Ken
Lloyd, Tony (Stretford)	Welsh, Michael
Loyden, Edward	White, James
McCartney, Hugh	Williams, Rt Hon A.
McDonald, Dr Oonagh	Woodall, Alec
McGuire, Michael	Wrigglesworth, Ian
McKay, Allen (Penistone)
McKelvey, William	Tellers for the Ayes:
Mackenzie, Rt Hon Gregor	Mr. John Maxton and
Maclennan, Robert	Mr. John McWilliam.

NOES
Adley, Robert	Bendall, Vivian
Aitken, Jonathan	Bennett, Rt Hon Sir Frederic
Alison, Rt Hon Michael	Benyon, William
Amery, Rt Hon Julian	Best, Keith
Amess, David	Bevan, David Gilroy
Ancram, Michael	Blackburn, John
Arnold, Tom	Blaker, Rt Hon Sir Peter
Ashby, David	Body, Richard
Aspinwall, Jack	Boscawen, Hon Robert
Atkins, Rt Hon Sir H.	Bottomley, Peter
Atkinson, David (B'm'th E)	Bottomley, Mrs Virginia
Baker, Rt Hon K. (Mole Vall'y)	Bowden, A. (Brighton K'to'n)
Baker, Nicholas (N Dorset)	Bowden, Gerald (Dulwich)
Baldry, Tony	Boyson, Dr Rhodes
Banks, Robert (Harrogate)	Braine, Rt Hon Sir Bernard
Batiste, Spencer	Brandon-Bravo, Martin
Beaumont-Dark, Anthony	Bright, Graham
Bellingham, Henry	Brinton, Tim

Brittan, Rt Hon Leon	Hannam, John
Brown, M. (Brigg & Cl'thpes)	Hargreaves, Kenneth
Browne, John	Harris, David
Bruinvels, Peter	Harvey, Robert
Bryan, Sir Paul	Haselhurst, Alan
Buchanan-Smith, Rt Hon A.	Havers, Rt Hon Sir Michael
Buck, Sir Antony	Hawkins, Sir Paul (SW N'folk)
Budgen, Nick	Hawksley, Warren
Bulmer, Esmond	Hayes, J.
Butcher, John	Hayhoe, Barney
Butler, Hon Adam	Heathcoat-Amory, David
Butterfill, John	Heddle, John
Carlisle, John (N Luton)	Henderson, Barry
Carlisle, Kenneth (Lincoln)	Hickmet, Richard
Cash, William	Higgins, Rt Hon Terence L.
Channon, Rt Hon Paul	Hind, Kenneth
Chapman, Sydney	Hirst, Michael
Churchill, W. S.	Hogg, Hon Douglas (Gr'th'm)
Clark, Hon A. (Plym'th S'n)	Holland, Sir Philip (Gedling)
Clark, Dr Michael (Rochford)	Hordern, Peter
Clark, Sir W. (Croydon S)	Howard, Michael
Clarke, Rt Hon K. (Rushcliffe)	Howarth, Alan (Stratf'd-on-A)
Colvin, Michael	Howarth, Gerald (Cannock)
Conway, Derek	Howell, Rt Hon D. (G'ldford)
Coombs, Simon	Howell, Ralph (N Norfolk)
Cope, John	Hunt, David (Wirral)
Cormack, Patrick	Hunter, Andrew
Corrie, John	Jackson, Robert
Couchman, James	Jenkin, Rt Hon Patrick
Cranborne, Viscount	Jessel, Toby
Critchley, Julian	Jones, Gwilym (Cardiff N)
Crouch, David	Joseph, Rt Hon Sir Keith
Currie, Mrs Edwina	Kellett-Bowman, Mrs Elaine
Dickens, Geoffrey	Kershaw, Sir Anthony
Dicks, Terry	Key, Robert
Dorrell, Stephen	King, Roger (B'ham N'field)
Douglas-Hamilton, Lord J.	Knight, Gregory (Derby N)
Dover, Den	Knight, Mrs Jill (Edgbaston)
du Cann, Rt Hon Sir Edward	Knowles, Michael
Dunn, Robert	Knox, David
Edwards, Rt Hon N. (P'broke)	Lamont, Norman
Eggar, Tim	Latham, Michael
Evennett, David	Lawler, Geoffrey
Eyre, Sir Reginald	Lawrence, Ivan
Fairbairn, Nicholas	Lawson, Rt Hon Nigel
Fallon, Michael	Lee, John (Pendle)
Farr, Sir John	Lennox-Boyd, Hon Mark
Favell, Anthony	Lester, Jim
Fenner, Mrs Peggy	Lewis, Sir Kenneth (Stamf'd)
Finsberg, Sir Geoffrey	Lightbown, David
Fletcher, Alexander	Lilley, Peter
Forman, Nigel	Lloyd, Peter, (Fareham)
Forsyth, Michael (Stirling)	Lord, Michael
Forth, Eric	Lyell, Nicholas
Fowler, Rt Hon Norman	McCurley, Mrs Anna
Fox, Marcus	Macfarlane, Neil
Franks, Cecil	MacKay, Andrew (Berkshire)
Fraser, Peter (Angus East)	MacKay, John (Argyll & Bute)
Freeman, Roger	McQuarrie, Albert
Fry, Peter	Madel, David
Gale, Roger	Major, John
Galley, Roy	Malins, Humfrey
Gardiner, George (Reigate)	Malone, Gerald
Garel-Jones, Tristan	Maples, John
Glyn, Dr Alan	Marlow, Antony
Goodhart, Sir Philip	Mates, Michael
Goodlad, Alastair	Mather, Carol
Gorst, John	Maude, Hon Francis
Gow, Ian	Mayhew, Sir Patrick
Gower, Sir Raymond	Mellor, David
Grant, Sir Anthony	Merchant, Piers
Gregory, Conal	Meyer, Sir Anthony
Griffiths, E. (B'y St Edm'ds)	Miller, Hal (B'grove)
Griffiths, Peter (Portsm'th N)	Mills, Sir Peter (West Devon)
Grist, Ian	Mitchell, David (NW Hants)
Ground, Patrick	Moate, Roger
Grylls, Michael	Monro, Sir Hector
Hamilton, Hon A. (Epsom)	Moore, John
Hamilton, Neil (Tatton)	Morris, M. (N'hampton, S)
Hampson, Dr Keith	Morrison, Hon P. (Chester)

Moynihan, Hon C.	Shaw, Giles (Pudsey)
Murphy, Christopher	Shaw, Sir Michael (Scarb')
Neale, Gerrard	Shepherd, Colin (Hereford)
Needham, Richard	Shepherd, Richard (Aldridge)
Nelson, Anthony	Shersby, Michael
Newton, Tony	Skeet, T. H. H.
Nicholls, Patrick	Smith, Sir Dudley (Warwick)
Normanton, Tom	Soames, Hon Nicholas
Norris, Steven	Speed, Keith
Oppenheim, Phillip	Spence, John
Osborn. Sir John	Spencer, Derek
Ottaway, Richard	Spicer, Michael (S Worcs)
Page, Sir John (Harrow W)	Stern, Michael
Page, Richard (Herts SW)	Stewart, Allan (Eastwood)
Parris, Matthew	Stewart, Andrew (Sherwood)
Patten, Christopher (Bath)	Stewart, Ian (N Hertf'dshire)
Patten, J. (Oxf W & Abdgn)	Terlezki, Stefan
Pattie, Geoffrey	Thompson, Donald (Calder V)
Pawsey, James	Thorne, Neil (Word S)
Peacock, Mrs Elizabeth	Townend, John (Bridlington)
Pollock, Alexander	Vaughan, Sir Gerard
Portillo, Michael	Viggers, Peter
Powell, Rt Hon J. E. (S Down)	Wakeham, Rt Hon John
Powell, William (Corby)	Waldegrave, Hon William
Powley, John	Waiden, George
Prentice, Rt Hon Reg	Walker, Bill (T'side N)
Price, Sir David	Wall, Sir Patrick
Prior, Rt Hon James	Ward, John
Proctor, K. Harvey	Wardle, C. (Bexhill)
Pym, Rt Hon Francis	Watson, John
Raffan, Keith	Watts, John
Rees, Rt Hon Peter (Dover)	Wells, Bowen (Hertford)
Renton, Tim	Wells, Sir John (Maidstone)
Rhys Williams, Sir Brandon	Wiggin, Jerry
Ridley, Rt Hon Nicholas	Wilkinson, John
Rifkind, Malcolm	Winterton, Mrs Ann
Rippon, Rt Hon Geoffrey	Winterton, Nicholas
Roberts, Wyn (Conwy)	Yeo, Tim
Rumbold, Mrs Angela	Younger, Rt Hon George
Ryder, Richard
Sainsbury, Hon Timothy	Tellers for the Noes:
St. John-Stevas, Rt Hon N.	Mr. Michael Neubert and
Sayeed, Jonathan	Mr. Ian Lang.

Question accordingly negatived.

Main Question put forthwith pursuant to Standing Order No. 41 (Amendment on Second or Third Reading), and agreed to.

Bill accordingly read a Second time.