Finance Bill

HC Deb 29 April 1986 vol 96 cc805-84

Order for Second Reading read.

[Relevant document: Fourth Report of the Treasury and Civil Service Committee, House of Commons Paper No. 313 of Session 1985–86.]

4.45 pm

The Chief Secretary to the Treasury (Mr. John MacGregor)

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

The Finance Bill embodies the legislative implications of my right hon. Friend's Budget six weeks ago. That Budget was set in the context of an unprecedented drop in the oil price, which meant the prospective loss of half our oil tax revenues from the North sea. But the underlying strength of the United Kingdom economy, and particularly the healthy growth of profits, mean that non-oil tax revenues are buoyant. So my right hon. Friend was still able, within the context of a prudent and cautious Budget, to propose a further net reduction in the burden of taxation of almost £1 billion, while at the same time announcing a modest reduction in the planned public sector borrowing requirement for 1986–87 to £7 billion.

Against the background of the fall in oil revenue, the imaginative proposals in this very positive Budget have come as a pleasant surprise to many who had perhaps underestimated the underlying strength of the economy and overestimated the degree to which, so it was thought, we remained an oil-based economy. Both perceptions have now changed, not least internationally.

The Budget has also received an encouraging initial response which has been maintained ever since. It was welcomed by representatives of business, large and small. To quote a survey of business opinion by Binder Hamlyn:

Businessmen are by and large happy with Nigel Lawson's Budget last week. The result is seen as good for their companies, with positive effect on macro-economic indicators, too. The moves to spread share ownership further were welcomed by the stock exchange and the Wider Share Ownership Council; the moves on charities were given a unanimous welcome by all those involved in charitable work and the arts. The Secretary-General of the Arts Council saw the move as an important and much-needed supplement to basic government funding. The Association for Business Sponsorship of the Arts was reported as seeing a direct benefit of £7 million a year—with the potential to go much higher. The president of the Union of Independent Companies described the scrapping of capital transfer tax on lifetime gifts as the most significant shot in the arm for the unquoted independent company sector for 50 years". The fact that the Chancellor did not need to increase duties on drink raised the spirits of the Scotch Whisky Association and the brewers.

But the positive reaction was not confined to those with a direct interest in the Budget. The prudent yet imaginative course that the Chancellor was able to steer has meant that interest rates have fallen—base rates have come down 2 per cent. since Budget day. That, in turn, has allowed major building societies and banks to lower their interest rates, by 1.75 to 2 per cent., with an extra reduction of 0.5 per cent. for many of those with endowment mortgages. This will be of direct help to the eight million home owners with a mortgage loan. That, in turn, has contributed to the prospect of a rapid fall in inflation. Even before the mortgage reductions, inflation had fallen from 5.1 per cent. in February to 4.2 per cent. in March.

So the prospect now is for low inflation combined with sustained growth. That was acknowledged by the Treasury and Civil Service Select Committee in its report on the Budget, which was published with its usual impressive speed last Friday. Today is not the time to discuss the Committee's report in detail, as it makes no comment on the tax changes in the Budget, which is what today's debate is about, but concentrates on the conduct of monetary policy, which my right hon. Friend the Chancellor discussed comprehensively in a speech to the Lombard Association on 16 April. The Government will respond to the Committee's recommendations in due course.

In this year's Bill, the most important change, in terms of its impact on the majority of taxpayers, is the reduction in the basic rate of income tax to 29 per cent. in clause 15.

The Government's objective has been, and remains, to reduce the burden of income tax for people at all levels of income. In 1979 my right hon. and learned Friend the then Chancellor cut the basic rate from 33 per cent. to 30 per cent., helping the vast majority of taxpayers, and reduced the higher rates to a much more realistic level, improving incentives for those in the higher income brackets. I note that the Labour party has already declared its intention of restoring—indeed, even worsening—the position of those people. To raise the £3.6 billion of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) from this group would mean not only increasing the severity of capital taxation and reintroducing investment income surcharge at the indexed equivalent of their 1978–79 levels, but imposing a 70 per cent. tax rate on all taxable incomes above £18,600—hardly the way to retain incentives in the economy and encourage enterprise and risk-taking. I firmly predict that if the Labour party ever returned to power, that commitment, like so many of its others, would be a job destroyer.

Up to 1985–86 there was no further change in the basic rate, while the main personal allowances were progressively increased in real terms by a fifth over their 1978–79 levels, taking 1.4 million people out of the income tax net altogether compared with an indexed 1978–79 tax regime.

This year, as my right hon. Friend explained in his Budget, as I did during the course of the Budget debates, we decided that it was right to concentrate tax cuts on the 95 per cent. of all taxpayers for whom the basic rate of tax is their marginal rate, both to reduce their tax burden and to improve their incentives. It was for that reason, against the background of the substantial real increase in allowances under the Government, that my right hon. Friend this year announced a cut of 1p in the basic rate. That cut also improves incentives for unincorporated businesses, 90 per cent. of which pay tax only at the basic rate, and we have mirrored it with a reduction to 29 per cent. in the small business corporation tax rate.

The reduction of 1 per cent., which is all that could be prudently afforded this year, is in itself relatively modest. But, as my right hon. Friend explained, that 1 per cent. reduction is a further step towards achieving our long term objective of reducing the basic rate to no more than 25 per cent.

I have already dwelt at some length during the Budget debate itself on the case for this cut in basic rate this year as against concentrating resources entirely on thresholds, so I shall not dwell on those arguments again today. But let me add one further point. The case for reducing the basic rate this year is reinforced when one looks at our international competitors. The United Kingdom's income tax thresholds, which, as I have said, we have increased substantially in real terms since 1979, are around the middle of the range compared with other major developed countries. Indeed, as a proportion of average earnings, our thresholds are significantly higher than those in the United States, Canada and West Germany. However, they are still below the levels of certain other countries, notably France.

It is on the starting rate of tax that we are really out of line. In the United States and Japan the starting rate is 15 per cent., or less. In France, West Germany and Italy the percentage rates are no higher than the mid-20s. Our starting rate of 29 per cent. is still the highest of the seven major industrial countries, and that is a further reason for acting on the basic rate this year.

But the Government remain committed also, to raising the level at which people start to pay tax. The Green Paper on personal tax reform shows how we could increase thresholds in a way which is more cost-effective and recognises the changes in a family's needs over its life cycle.

This year, not only have we reduced the basic rate, but the main personal allowances will still be indexed under the provisions of section 24 of the Finance Act 1980, so there is no need for this to be provided for in this year's Bill. As the House knows, the higher rate thresholds are all increased by £1,000—less than the amount needed to index fully the thresholds for the 45 per cent. and above higher rates. The effect is to reduce the gains from the basic rate cut for those on higher incomes, so that the 60 per cent. taxpayer, for instance, gets broadly the same as under statutory indexation without a basic rate cut.

The overall effect of the income tax changes this year is not at all inconsiderable. The cumulative effect of successive Conservative Government Budgets is very considerable indeed. Income tax liabilities in 1986–87 will be about £8 billion lower than if the rates and allowances which we inherited from the Labour Government in 1979, indexed to 1986–87 levels, were in force. That is the true mark of the difference between us so far. As for this year's changes, one has to take into account not the tax changes alone, but the beneficial effects which have flowed from the interest rate changes since the Budget itself and which a prudent Budget helped to encourage.

For a married man on average earnings, with a typical outstanding mortgage of £15,000, the Budget income tax changes, combined with a 1.75 per cent. cut in mortgage rates since the Budget, can mean a total gain of £5.80 a week. That is a significant figure, and I repeat the message that I gave in the Budget debate: that employers and employees should take heed of this boost to real take-home pay—a boost which does not damage the competitiveness of British goods—and take it very much into account in their pay negotiations.

Mr. John Townend (Bridlington)

Did the Treasury take that into account when it recently made an offer of 6 per cent., which I would have thought is rather high in view of the estimated level of inflation?

Mr. MacGregor

That was obviously one of the factors that was taken into account, but I remind my hon. Friend that the negotiations that he is talking about in relation to Civil Service pay relate to the pay year for which most settlements have already been decided. Therefore, it is significantly below the settlement for the same year for the local authority manual workers, the full amount that the teachers are getting in that pay year and the private sector generally. I am talking here particularly about the pay settlements that are to come.

A number of other major points arise from the Bill which I should briefly draw to the attention of the House, and I deal just with clauses 2 and 3. The House will recall that, despite the dramatic fall in oil prices and the consequent loss of tax revenue, my right hon. Friend introduced a Budget which was tax-neutral for the motorist, to the surprise and delight of everyone but the Opposition. The increase in road fuel duties over revalorisation was, of course, offset by the standstill on vehicle excise duty for cars and most other vehicles, so the burden of duty on the motorist was not increased in real terms.

When announcing that move, my right hon. Friend said that there was no need for the pump price of petrol to go up at all. The Opposition no doubt felt that they had to try to get some political mileage out of the motorists' package, so they attempted to pour heavy scorn on my right hon. Friend's judgment on that point. The right hon. Member for Sparkbrook said: I can't understand why Mr. Lawson said he believed they wouldn't pass it on, they are a monopoly, they rig their prices. The idea that they might say Mr. Lawson would like us not to pass the price on so we won't is frankly ludicrous. In a television programme in which I took part the right hon. Member for Leeds, East (Mr. Healey) said that my right hon. Friend was silly and foolish to imagine that they"— the oil companies— wouldn't add this tax to the price to the consumer. The Opposition, led by the right hon. Member for Islwyn (Mr. Kinnock), demanded the immediate imposition of a windfall tax on oil company profits to force them to make the move.

Once again, competition, rather than Government interference, has had its effect and proved my right hon. Friend to be totally correct. His judgment, as against that of the Opposition, has been wholly vindicated. There is a marked variation in prices, because competition is working, and in some garages prices are now below 160p a gallon.

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

In some areas.

Mr. MacGregor

But what is clear is that petrol prices have not only absorbed the increase in road fuel duties; they have actually come down since the Budget.

Mr. Campbell-Savours

Does the Minister accept that in many parts of the country there has been very little movement in petrol prices? It was to those parts of the country that we were addressing ourselves. What is he going to do about those areas? Does he intend to do nothing about them?

Mr. MacGregor

I believe that it was across the country as a whole to which the Opposition were addressing themselves when they talked about petrol prices. In most parts of the country petrol prices, as the AA confirms, are now well below the levels at which they were during the Budget. What is more, within individual parts there is wide variation. Therefore, taking the generality, what I say is right and my right hon. Friend has been proved to be correct.

Mr. Roy Hattersley (Birmingham, Sparkbrook)

Will the Chief Secretary tell us whether he thinks the reduction in petrol prices reflects the reduction in oil prices before and since the Budget? Does he not understand that had there not been the imposition of this tax, there would have been a further movement downwards to reflect the reduction in oil prices?

Mr. MacGregor

That is extraordinarily different from what the right hon. Gentleman was saying at the time of the Budget, so he has admitted that my right hon. Friend's judgment was right. In tax terms there has been no real increase for the motorist at all as a result of the Budget. Therefore, the drop in petrol prices—which is, of course, because of the fall in oil prices before and after the Budget—has been properly reflected. What the right hon. Gentleman was trying to get over was that somehow or other petrol prices would go up in real terms as a result of the Budget changes. That has been proved to be totally wrong.

I wish next to draw the House's attention to clauses 26 to 30 of the Bill, which contain the provisions for my right hon. Friend's proposals to extend the scope for charitable giving. Our aim is to stimulate giving by both companies and individuals. Non-close companies will now be able to gain tax relief for single gifts to charities up to a limit of 3 per cent. of ordinary dividend payments, and individuals will be able to take advantage of the abolition of the higher rate limit on convenanted donations and the new payroll giving scheme which will operate from next April.

These provisions have been warmly received by charities. For instance, the Institute of Charity Fund-Raising Mangers has said: This is the most exciting and imaginative Budget for charities there has ever been. The Charities Aid Foundation described them as more radical and far-reaching than we could have hoped for. I am sure that the House will share those sentiments.

Mr. Patrick Jenkin (Wanstead and Woodford)

Can my right hon. Friend offer some comfort that the Government will look at the provisions of clause 29, which makes a perfectly reasonable effort to curb abuse of the private foundations? There is a widespread view that the numbers written into the clause have gone too far and may damage some very important charitable bodies.

Mr. MacGregor

I know that my right hon. Friend shares our intent in the proposals in clause 29, to which he drew attention. These are aimed at misuse of the tax reliefs for charities, which it was felt were justified anyway, but especially now, I think, in the light of the substantial extensions of tax relief. They are not intended to apply to the ordinary charities that do not misuse them. They apply only to a restricted class of private indirect charities, not to charities which spend at least 90 per cent. of receipts on genuine charitable activities. I am aware of the concern of genuine charities, and I know that representations are being made. I believe that we shall have a full discussion of these points in Committee. I take note of my right hon. Friend's point.

Mr. John Butterfill (Bournemouth, West)

I notice that my right hon. Friend did not refer to clause 31. I hope that he will take credit for that clause, which will make an important contribution to curbing some of the abuses that we are all anxious to curb.

Mr. MacGregor

I did not refer to it because I do not think that I can refer to all the clauses in what turns out to be, yet again, a rather large Finance Bill. However, I am grateful to my hon. Friend for his point, and I am glad that he has made it.

I turn briefly, to corporation tax. There are no major changes to business tax this year, which sees the completion of the reforms begun in 1984. These reforms were aimed to reduce the distortions imposed by the tax system—notably the bias in favour of capital and against jobs—to improve efficiency and encourage enterprise. We see no case for changing this structure, and believe business welcomes the stability and certainty which our approach provides. The United Kingdom's corporation tax rate is now, at 35 per cent., the lowest of any major industrial country, and the reduction in the basic rate of income tax has enabled us to reduce also the small company's rate of corporation tax to 29 per cent. When one bears in mind that at the time this Government took over from the previous Labour Government the small business rate was 42 per cent., one sees the significant reduction in the small business corporation tax to 29 per cent.

Chapter II of part II of the Bill does, however, include two detailed business tax measures—first, to bring the mines and oil wells allowances regime broadly into line with the new structure of capital allowances. Secondly, the Bill would allow a full measure of depreciation for tax purposes for short-life agricultural building and works by providing the option of making balancing adjustments on their disposal.

I deal next with the provisions in the Bill on stamp duty, two of which I wish to refer to particularly. As the House will recognise, it is not possible to consult fully ahead of the Budget on tax changes. First, the new tax proposed in the Budget on the creation of certificates representing the deposit of shares, such as American depositary receipts, or ADRs, has led to a good deal of misunderstanding of the Government's intentions. Let me correct that misunderstanding.

We do not want to discourage American investment in British shares. We recognise, as many of the British companies concerned have told us, that it can have advantages for them. It can make it easier for them to raise money and to expand sales in the United States. We have had extensive consultations with the companies and we understand their views about that.

Our concern is only to protect the tax revenue. Stamp duty on shares, even at the new 0.5 per cent. rate, should bring in £600 million during the current year, and we cannot allow that large sum to be put at risk by investors turning to the purchase of depositary certificates, which trade free of stamp, instead of the underlying shares. There is the possibility, especially after the big bang, of more use of ADRs by British investors, although I recognise that ADRs have some disadvantages for them.

The solution we have sought is to tax these depositary certificates—and similar arrangements—at a rate which will, broadly speaking, eliminate the incentive to use them for tax avoidance. This means that the tax on the creation of the certificate must broadly recompense for the loss of stamp duty on subsequent sales and purchases. From the point of view of the investor, he will be getting a transferable "season ticket." He pays more now, but subsequent transfers are free of duty.

We have re-examined the rate of the tax against this criterion and in the light of the representations we have received. We have decided that the revenue should be sufficiently safeguarded if the tax on conversion of shares into ADR and similar forms were put at 1.5 per cent.—three times what the duty on registered shares will be after the big bang. This is the multiple that has applied for some years to issues of shares into bearer form, and ADRs themselves are effectively bearer certificates. The tax on all bearer shares from the big bang will also therefore be set at the level—1.5 per cent.

The rate of 1.5 per cent. on conversion of shares into ADRs will apply from 19 March. This rate, we judge should be sufficient to safeguard the revenue without adding unreasonably to the financing cost of United Kingdom companies overseas. It compares with the rate of 1 per cent. that applied before the Budget. I must, however, give due notice that if after big bang it looks as if ADRs are being used as a means of avoiding stamp duty by United Kingdom residents, we would have to reconsider the rate of tax.

I now turn to loan stocks. The Budget proposed that most of these should bear stamp duty at the rate of 0.5 per cent.

Since the Budget there has been a sharp fall in long-term interest rates, and there are signs that the sterling corporate bond market is reviving.

Mr. Robert Sheldon (Ashton-Under-Lyne)

Does the right hon. Gentleman know how much the Revenue will lose as a result of ADRs moving from 5 per cent. to 1.5 per cent.?

Mr. MacGregor

One has obviously to make estimates, but I shall come to that in a moment, if I may.

There is also some evidence that the withdrawal of exemption from stamp duty is diverting some borrowers in issuing bearer and Euro-sterling stock.

In the light of this, we have decided that it would be right to restore exemption for those categories of loan stock that were previously exempt. Registered convertibles will, however, continue to be taxed like equities, as they were before the Budget. We shall make proposals accordingly in Committee. If they are agreed, the exemption for ordinary loan stock would be restored one month later.

Details of these changes will be given in a parliamentary written answer and Inland Revenue press release later today. The estimated yield from stamp duty, as forecast at the time of the Budget, remains unchanged. Any reduction in revenue arising from the changes that I have just announced should be offset by the higher yield we now expect from the application of stamp duty to takeovers.

The adjustments that I have just announced to our proposals for stamp duty will help maintain the range of options available to companies in financing investment. They will also help maintain the depth and breadth of London's financial markets, and London's role as a major financial centre. I am glad also to be able to announce now a proposal that, though not part of the Finance Bill, should help further in both respects.

We have decided to remove the constraint imposed by the Banking Act which prevents companies from financing themselves by issuing sterling commercial paper—that is, by issuing sterling debt securities of less than one year maturity. The establishment of a sterling commercial paper market should provide a useful alternative for companies to bank borrowing and also extend the range of sterling markets available in London to investors. Further details are being provided in a written reply published in today's Official Report.

I should mention two further measures that the Government will have to introduce at a later stage. The first will set out provisions to withhold tax at source from payments made to non-resident entertainers and sportsmen, announced in the Budget. The second will give effect to the proposals announced by my right hon. Friend the Home Secretary in written answers, on 26 February at columns 564–5 and on 27 March at column 549, to make changes to the structure of the ITV levy.

I move on now to the enterprise and small business package in the Budget. Some of the measures—for example, in relation to the loan guarantee scheme—do not require legislative action in the Finance Bill itself, but the business expansion scheme does. The scheme has proved a great success, attracting more than £100 million a year from subscribers.

The Peat Marwick report, published on Budget day, found that, on the basis of a survey of 1983–84 investments, 70 per cent. of the money invested would not have been raised by companies in the form of equity and almost half would not have been raised at all. Two thirds of the total BES finance raised in that year was invested in companies less than five years old—those which typically have greatest difficulty in raising finance through other methods. The BES has been particularly helpful to firms wanting to raise relatively small amounts of capital. More than half of the companies in the survey raised no more than £50,000.

That survey, and much anecdotal evidence of the benefits of BES since, have justified the introduction of the scheme and shown that, broadly speaking, it is achieving its objectives. Clause 38 provides for the indefinite extension of the scheme and for improvements to ensure that capital is not diverted to low-risk investment in companies with high asset backing—in other words, that it is targeted on the original objectives. This scheme is enhanced with the provision of capital gains tax exemption for the first sale of new BES shares.

These proposals have also been widely welcomed by the CBI, by the Union of Independent Companies and by other representative bodies. I was glad to see that the right hon. Member for Islwyn, in response to the Budget, was moved to say: we sincerely welcome some aspects of the Budget. I think, for example, of the provisions relating to the business expansion scheme both in its continuation and its exclusions, which appear to be sensible and helpful."—[Official Report, 18 March 1986; Vol. 94, c. 185.] I am delighted that he has become converted to the encouragement of risk-taking and of venture capital investment through the tax system.

We have made a further important move to boost enterprise. We have had repeated representations from those who work hard to build up family businesses and family farms, and then, as they expand, face a potentially crippling capital transfer tax charge. That is no way to encourage enterprise and initiative. That is the main reason why we propose to abolish CTT on lifetime gifts to individuals. Part V sets out our proposals, which include detailed provisions to protect the continued charge on transfers on death. It is significant that 74 per cent. of the business men surveyed by Binder Hamlyn immediately after the Budget felt that the change would help here.

Mr. Campbell-Savours

They were not going to say no. Grow up, man.

Mr. MacGregor

I do not think that the hon. Gentleman has any conception of what it is to build up a small business, to expand, and then find, all over the place—

Mr. Campbell-Savours

I have built up a small business.

Mr. MacGregor

In that case, the hon. Gentleman has no conception of what most others in the business world say about the impact of capital transfer tax. It is significant that some of the fastest expanding small businesses regarded this as one of the most significant moves that could be taken in the Budget. It is also significant for family farms. We shall be introducing additional inheritance tax provisions at a later date, first, to ensure that regular premium payments made after Budget day under an insurance policy taken out before then are taken out of the gifts with reservation regime, and, secondly, to deal with the consequences for the heritage of the shift to inheritance tax.

Mr. Robert McCrindle (Brentwood and Ongar)

Why does there appear to be some retrospective effect in this year's Budget? Any individual who effected a tax mitigation scheme on the morning of or up to 3.30 pm on Budget day is being caught in a retrospective way and in a fashion that I cannot recall having been introduced in a Budget before.

Mr. MacGregor

I know the point that my hon. Friend is making, but I am sure that he will recognise that my right hon. Friend the Chancellor must have a point at which tax changes are introduced, and they are normally when the Budget is introduced.

Mr. McCrindle

I apologise for pressing the point further. That would be understandable, but my hon. Friend will recall that the Budget was introduced at 3.30 pm on 18 March. I am referring to legitimate arrangements, effected before that time on that day, which are being eliminated. That introduces an element of retrospective legislation.

Mr. MacGregor

There is a difference between such changes in the law and when the Chancellor announces genuine retrospective legislation. This matter can be looked at when we come to the detailed points in Committee.

The final strand in our enterprise package is to encourage people to put their money into business. We have already made exceptional progress with our target of broadening share ownership. New figures from a poll carried out by National Opinion Polls reveal that the proportion of individual shareholders in the population has doubled since 1979, from 7 per cent. to roughly 14 per cent. With all the statistical qualifications that anyone might wish to make, there is no doubt that that shows that this is a solid and most encouraging advance. Interestingly, over half of all shareholders are now from socio-economic groups C, D and E. The revolution in attitudes towards individual investment has begun.

We are determined to build on this success. A key element will be the new personal equity plan. As the House knows, the Bill provides the outline of the scheme. Our intention is to allow tax-free build-up of investments of up to £200 a month in shares over a minimum period. The details will be set out in regulations, after consultation with interested parties.

Sir Peter Hordern (Horsham)

My hon. Friend talked about research into the socio-economic groups that has been done through National Opinion Polls. Does he agree that some people in those groups who may not know much about investment would be better protected by being allowed to invest in investment trust shares, thereby gaining a wider spread? Will investment trusts be included under the Bill's proposals?

Mr. MacGregor

Again, this is a matter on which we have been receiving representations and my right hon. Friend the Chancellor will take them into account in the consultations. The consultations will enable us to tailor the scheme to meet the requirements of potential investors and plan managers, and thus ensure that it can be taken up as widely as possible. That is our intention. This scheme will give the private investor a substantial incentive to take a direct stake in British business, and it will also help to counterbalance the considerable fiscal advantages already enjoyed by institutional investors.

Finally, there is one area of remaining concern in the economy which, although not in the Bill, the House might expect me to mention—employment. Last Thursday, in the House, my right hon. Friend the Lord Privy Seal suggested that it could appropriately be discussed today. Of course, the latest unemployment figures were disappointing. However, perhaps that obscured the encouraging announcement of a fact that emerged at the same time of the success of the economy in creating net new jobs—almost 1 million since June 1983. Continued employment growth can be expected as output grows this year and next, and it will be faster still if pay increases more in line with productivity.

The Budget has supplemented what was already an ambitious and wide-ranging Government programme of specfic employment measures. By 1988–89 we shall be spending nearly £3 billion on employment measures, plus the youth training scheme. I shall not discuss them in detail today as we did that in the Budget debate. However, I must repeat that those are substantial sums.

We are often urged to spend more by Opposition Members and recently by the Select Committee on Employment, which put forward proposals aimed, so it claimed, at creating 750,000 extra jobs. The Government have considered the proposals in that report. On the Committee's own assumption it would be necessary to look for 1.25 million extra jobs to support the 750,000 the scheme was designed to create. That could be done only at substantial extra cost. The Department of Employment estimated that the net cost would be £4 billion on top of what we are already spending.

The report was short on prescriptions on how to finance that. If it were financed by reducing expenditure elsewhere, the net effect on jobs would be much smaller. Indeed, it could be negative because it would be replacing more cost-effective employment measures. If it were financed by higher taxation, incentives would be damaged and that would lead to job losses. If it were financed by higher borrowing, the likely result would be higher inflation and interest rates and higher costs to industry. So the job creation programme on that scale would end up destroying jobs in the private sector. Temporary jobs would be bought at the expense of permanent jobs in the rest of the economy.

Those who wish to see a major expansion of employment measures also ignore the practical constraints. It is not clear that there is scope for a major expansion of places on the community programme or similar schemes. There are limits to the number of cost-effective schemes that can be developed. There are limits to the extent which health and social services could absorb unskilled labour. There are limits on the number of sponsors we could attract.

In contrast to the Select Committee, the Government's aim is based on providing direct practical help to the long-term unemployed who need it most. The restart programme will mean that everyone unemployed for a year or more will be contacted and offered an interview at a local jobcentre. They will then be offered a range of ways towards finding work.

Mr. Deputy Speaker (Mr. Harold Walker)

Order. I know that conventionally we have a wide-ranging debate on Second Reading, but the Minister is going very wide of the matter before the House. He has invited the House to debate employment measures rather than the Finance Bill.

Mr. MacGregor

I felt it necessary to make a brief reference to those matters because the Lord Privy Seal suggested that they might be raised in the debate.

Mr. Deputy Speaker

Order. The Chair will be responsible for the scope of the debate within the rules of the House.

Mr. MacGregor

I understand, Mr. Deputy Speaker, so I shall move straight back to the position on the economy as a whole.

These specific measures, which we have introduced in the Budget, although I agree not in the Finance Bill, should be seen against the background of the Government's overall economic policy. That strategy is designed to encourage enterprise and efficiency. Low inflation and lower taxes are vital to secure the growth that will produce more jobs. That strategy has produced nearly 1 million new jobs over the past three years. I accept that that is not enough to absorb fully the major increase in people coming on to the labour market, but it is a better record than the rest of our European partners combined.

That strategy would be severely undermined if we were to depart from implementing realistic, practical and cost-effective employment measures. A wholesale boost, at substantial additional public expenditure cost, would create a few temporary jobs, but at the price of putting brakes on economic growth and the accelerator on inflation. That is why I believe that the policies being implemented in the Bill are right.

Mr. Peter Rees (Dover)

There is one area of the economy to which my right hon. Friend has not directed his attention, although there are few measures in the Financial Bill, and that is the production of oil in the North sea. I readily declare an interest as the director of an oil company. My right hon. Friend and the House will be aware that as the price of oil climbed, so the petroleum revenue tax was restructured in various degrees to ensure a proper take for the Government. As the price of oil has declined sharply to the point that it may discourage exploration and development in the North sea, would my right hon. Friend perhaps concede that there might be a case for a further and fresh look at the structure of PRT, especially advance PRT?

Mr. MacGregor

I know that my right hon. and learned Friend takes the closest possible interest in these and all other tax matters. As he knows, the present oil taxation system is durable and flexible and is highly sensitive to movements in oil prices. The Government are not convinced that any change is needed. However, we have made it clear that we shall continue to watch the situation closely and keep in contact with the industry.

I was concluding by saying that, given the financial constraints which limited my right hon. Friend the Chancellor's room for manoeuvre this year, the Finance Bill contains an impressive range of measures of tax relief and tax reform, which will reduce the burden of tax within a sound overall economic strategy. Those measures have been well received by business, those involved in fund raising and those who want to see more people own shares. The fall in interest rates since the Budget has demonstrated the markets' belief and confidence in the course the Chancellor has charted in the year ahead. I commend the Bill to the House.

5.26 pm

Mr. Roy Hattersley (Birmingham, Sparkbrook)

On Budget day my right hon. Friend the Leader of the Opposition said that the Budget of 1986 would be remembered for two characteristics. The first was its irrelevance to the real problem facing this country, and the second was its divisiveness—the help it provided for the rich and its neglect of the least well off. Those two characteristics are reinforced and reproduced in the Finance Bill.

The Chancellor prudently pretends that items such as the niggardly increase in pensions and child benefit are none of his business. He deals with the other part of my right hon. Friend's criticisms by saying that the way in which the British economy has survived the fall in oil prices is a testimony to the fact that his management of the economy has been wise and prudent. He used the word "unscathed" from the fall in oil prices. He used it in the House on 18 March and to the Economic Club of New York on 11 April.

The Chief Secretary, who a moment ago led the cheers, was notably less ambitious, less buoyant and less bullish about the claims he made over the way in which we have survived the reduction in the price of oil. That is not surprising, because since the Chancellor made his grandiloquent claims we have had the April balance of payments figures. Those figures are unique in their depressing quality. They show the folly of the Chancellor's boast that we could pass the reduction in oil prices without cost, and the folly of the policy which the Chancellor sought to justify. It is surprising, even allowing for the rules which from time to time constrain the Chief Secretary, that he did not deal with the principal criticism made of the Budget's application to the economy, the omissions which are, therefore, to be seen in the Finance Bill and the fact that nothing the Finance Bill does deals with the central issue of economic decline, which is that we are too dependent on oil and too vulnerable to changes in oil prices.

Mr. Neil Hamilton (Tatton)

Rubbish.

Mr. Hattersley

The hon. Gentleman must have been elsewhere when the balance of payments figures were produced last week. They denoted the facts of the economy once the oil price is not there to boost and reinforce our neglected, declining and deteriorating manufacturing industry. The Budget and the Finance Bill do very little to deal with those fundamental problems which we tried to draw to the Chancellor's attention six weeks ago. The Chief Secretary takes refuge in the one piece of good news—at which I rejoice and about which I wish to express my pleasure—which is the reduction in the base rate and the fall in mortgage rates which followed.

Mr. Nicholas Budgen (Wolverhampton, South-West)

Will the right hon. Gentleman give way?

Mr. Hattersley

Not yet. I will tell the hon. Gentleman when.

The Chief Secretary told us the good news about the reduction in the base rate. I said during the Budget debate, and I repeat it today, that he obtained a cheer from Conservative Back-Bench Members because they are delighted that an intolerable interest rate has been reduced to an insupportable interest rate. We are still enduring and being burdened by the highest rate of interest in the OECD. The six-month Euro rate is as follows: in Denmark, 4.5 per cent.; in the United States, 6.75 per cent.; in France, 7.5 per cent.; and in the United Kingdom, 10 per cent. Those are the notional figures. If the figures for real interest are compared and calculated, the British interest rate is 2 per cent. higher than the average of our OECD competitors. The fact that there is rejoicing among Conservative Members that the figure should now be only 2 per cent. above the average rate shows how easily they are satisfied. It also shows that the excuses that we have heard for seven years about interest rates have worn thin and disappeared.

Mr. Budgen

rose—

Mr. John Butterfill (Bournemouth, West)

rose—

Mr. Hattersley

I shall let the hon. Gentlemen know when I am ready to give way.

Originally, we were told that interest rates would be brought down below those of our competitors because the Government would cut public expenditure. That did not work. We were told that our interest rates were high because of the rates in competitor countries, but now they are higher than those rates. Sooner or later, the Government will get round to the idea that interest rates are too high because of the follies and failures of Government policy, and not least because the Government are keeping up the interest rate so that they can help to maintain sterling at an artificially high rate as an alternative to a monetary policy.

Mr. Budgen

I thought the right hon. Gentleman said that high oil prices were to the advantage of manufacturing industry. Will he explain that passage of his speech?

Mr. Hattersley

I explained that in my Budget speech, but I shall repeat it now. A reduction in oil prices would be to the benefit of an economy in which manufacturing industry was strong and ready to expand. I said that, thanks to the folly of the Government in allowing the collapse of manufacturing industry, we could not take advantage of a reduction in raw material costs which some of our more successful competitors will enjoy. Last week's balance of payments figures underline the wisdom of the Opposition's insistence that to rely on oil revenues as the Government have done is a disaster for Britain.

It is also a disaster for the Chancellor of the Exchequer, for it allows him to pin another medal on his chest. He can add the largest visible balance of payments deficit ever to the highest level of unemployment ever, to the highest real interest rates ever and to the lowest value of sterling ever, which he has contrived to ricochet up to a height which is so great that it penalises our manufacturing industry and cripples our exports. Yet the Chancellor remains incapable of even imagining that he might be wrong. He does not even acknowledge, far less attempt to resolve, the two great crises to which the Finance Bill should have directed the nation's attention. Those are the crises of unemployment and poverty. Instead of facing those issues direct, with each Finance Bill the Chancellor takes refuge in irrelevancies. This year, the chief irrelevancy was built around and hidden behind the slogan "people's capitalism". The diversion was intended to deflect attention from the Government's failures of personal equity plans in clause 37 and schedule 8.

I hope that when the Financial Secretary replies this evening he will have the grace to concede that personal equity plans help the small investor almost not at all. The small investor already benefits from the £6,300 threshold on capital gains tax.

Mr. John Maples (Lewisham, West)

indicated assent.

Mr. Hattersley

I am delighted to receive endorsement from at least one Conservative Member.

The PEP provides little or no incentive for new share ownership. It offers a further tax privilege to existing share owners, many of whom are already very rich and most of whom will convert their existing holdings into PEP. Those two facts typify the Chancellor's record. It is a gimmick intended to obscure the Budget trivialities, and as well as providing a couple of days' headlines, it puts money in the pockets of the better-off.

I hope that the Financial Secretary will have the grace to concede that the Chancellor's schemes have several other built-in disincentives for the small and new shareholder. The investment must be made through authorised PEP managers, who will charge a fee and who have been open in saying—at least the City in general has been saying—that they are not prepared for them, do not welcome them, cannot cope with them and do not want to manage the small investor's resolution. What is more, unit trusts will be excluded. Although PEP will help existing shareholders with a new form of tax exemption, the Chancellor's claim during the Budget debate that it will bring about a dramatic extension of share ownership in Britain is typically and patently the grandiloquent nonsense that we have heard from him from time to time.

Mr. Roger Freeman (Kettering)

The right hon. Gentleman criticises personal equity plans. Would he propose a more generous scheme for wider share ownership?

Mr. Hattersley

I was about to comment on exactly that point. To show the hon. Gentleman that he did not prompt me into that assertion, I shall read from my notes. I wish to make it clear that I support genuine extensions of share ownership schemes which enable and encourage employees to acquire stakes in their companies. The schemes that I want would carry voting rights proper to share ownership, and would be available to all company employees; they would not simply be another executive and top management bonus payment. The schemes I want would be made available in practice as well as in theory, because many of them will be financed by the share option schemes about which the hon. Member for Horsham (Sir P. Hordern) asked the Chief Secretary but obtained no reply. The funding of those schemes would allow real workers to make small and gradual investments. If the hon. Gentleman who asked the question has doubts about our intentions, let me assure him that we shall seek to amend clauses 21 and 25 in Committee to enable such an extension in genuine employee share ownership to be promulgated, propagated and encouraged.

The Committee will also discuss the proposal for tax relief on contributions to charities, which are obtained in clauses 26 to 31. They are in part the result of the Chancellor's desperate search for a sympathetic headline—[HON. MEMBERS: "Come on!"] Those Conservative Members who are moaning probably do not recall the pressure that my right hon. Friend the Leader of the Opposition put upon the Prime Minister and the Chancellor to provide some tax relief for the Band Aid initiatives, and their hard-hearted replies to our pleas. Only when a body of public opinion built up saying that the Government should be more helpful to charities did the Government decide that that was the popular thing to do.

I shall make the Opposition's view absolutely clear. We applaud the proposal to help genuine charities, but the description of charities is wholly inappropriate to some of the institutions which presently enjoy that legal status. I would like to help Oxfam and Save the Children Fund, but tax exemptions for Eton and Harrow are especially offensive at a time when public education is being starved of cash. The next Labour Government will certainly maintain the exemptions for charities, but a new definition of charities will be provided which will concentrate the help on those institutions which genuinely deserve it.

We will also reintroduce capital transfer tax. That tax is virtually abolished under clauses 70 to 86 except when it is applied as an inheritance tax. As the Chief Secretary to the Treasury must know, inheritance tax is now voluntary or an additional punishment for sudden death. Anyone can avoid inheritance tax by following two rules. The first is to appoint a competent accountant and the second is not to die unexpectedly.

It is impossible—I was going to say difficult, but impossible is not too strong a word to use—to imagine a more arbitrary way of calculating the incidence of a tax; in practice that tax turns out to be another of the Chancellor's concessions to the rich and, often, the very rich. Already, the first £70,000 of estate duty is exempted from tax liability.

Before I discuss the subject which is clearly central to the Budget and the Bill, and the one on which the Chief Secretary naturally concentrated most of his speech—the subject of income tax—I would like to ask the Chief Secretary a question about a subject which I am astonished that he failed to mention. I wish to ask the Chief Secretary about the pension fund surplus. When the Financial Secretary replies, will he tell us why the Government have chosen 5 per cent. as the level of surplus at which the pension funds must arrange one of the three alternatives which the Government require—a contributions holiday, an increase in benefit, or a refund?

I understand, applaud and support the principle of discouraging excessive surpluses, but the figure of 5 per cent. is clearly arbitrary. It is the view of virtually every authority other than the Government—the Trades Union Congress, the Confederation of British Industry, the Institute of Actuaries and the National Association of Pension Funds—that 5 per cent. is too low and that 10 per cent. is a more likely figure. The Financial Secretary should tell us why the 5 per cent. level was hit upon when, in the view of all the authorities that I have referred to, there are considerable risks to the prospects for pension funds in these uncertain and fluctuating times.

The Chief Secretary said, and the Opposition agree, that the principal features of the Budget were the changes made in direct taxation—the £1 billion resulting from the penny off the standard rate of income tax. Before I offer my opinions on that, I want to remind the House of the pattern of tax changes which has occurred during the lifetime of the Government.

We all know that the gross annual tax bill has increased in real terms by almost £29 billion. The overall figures of increased taxes imposed by the Government, who had been elected twice to cut the tax bill, and the pattern of tax increases and their incidence upon the population was revealed in a parliamentary answer in Hansard on 27 March. The written reply on 27 March contained a calculation of income tax, national insurance contributions and child benefits as they apply to various groups within the population.

The figures show that individuals and families on half or two thirds average earnings now pay a larger proportion of their earnings in income tax than they did in 1979. All those who receive half or two thirds of average earnings are paying more, and in some cases dramatically more, of their income in taxes than they did seven years ago.

I am sure that the Chancellor's silent PPS would cry out, with the expertise that he must have achieved through his occasional calls at the Treasury, that they are paying more because their real earnings have increased. The lucky earners who are earning five or 10 times the national average are paying less because their real earnings have increased. The people earning 10 times the national average are paying 15 per cent. less of their earnings in tax than they paid when the Government were elected in 1979.

That confirms the simple phrase which must be engraved on the Government's heart and which is already understood outside the House, that the increase in taxes imposed by the Government has fallen on the poor and the middle-income groups rather than the rich and has produced the position which the Opposition prophesied. There has been a redistribution of income by taking money from the poor and giving it to the rich.

Mr. Maples

While the right hon. Gentleman is discussing the structure of income tax, and as he told us in a previous debate on these matters that he would plan to raise almost £3.5 billion from the so-called better-off, does he agree that the figure given by the Chief Secretary would involve an average tax rate of 70 per cent. on all income in excess of £18,500? If the right hon. Gentleman does not agree with that, what higher rate tax structure does he think would be necessary?

Mr. Hattersley

I have said time after time that the arbitrary and risible way in which the Chief Secretary deals with these matters, fools no one. The Chief Secretary plucks one tax out of the air. At one moment he decides upon 41 per cent. VAT and then he chooses 80 per cent. for income tax.

There are many ways in which the favoured 5 per cent. of the population have enjoyed tax privileges and concessions under this Government. Some of the taxes removed by the Government, like the unearned income surcharge, must be reimposed. However, the real assault on the privileges of the very rich does not concern their marginal rates but should affect their allowances. Most of the money should be raised from that area. That naturally and inevitably leads me to my next point. I understand why Conservative Members complain about, resent and say that they will resist the increases in taxes for the very rich. I hope that they will also understand—

Mr. Butterfill

Will the right hon. Gentleman give way?

Mr. Hattersley

I will not give way now.

I hope that Conservative Members will understand that the tax cuts which they have boasted about are not discrete options. The income which the Treasury has forgone as a result of tax cuts for the favoured income groups, could have been used for other purposes. To choose to cut taxes for one group is to choose to increase taxes or reduce benefits for another.

In relation to that equation and balance, I would like to ask the Financial Secretary to the Treasury several questions which I do not mean to be rhetorical and for which I require answers. How can he justify the balance that the Government have struck between their provision of benefits and welfare and their cuts in taxes for the very rich? How can they justify abandoning the unearned income surcharge when the pension is so low that old people die from the cold in winter? How can they justify abandoning the highest tax band when the long-term unemployed who are now so numerous—there are more now than the total of unemployment when the Government came to office—lose full unemployment benefit after a year? How can the Government justify abolishing capital gains tax when child benefit this year has increased by only 10p?

These are all compensatory factors—one cut in one area accommodates a failure to improve welfare and benefits in another. The Financial Secretary and the Government, over the next few years, will have to demonstrate why their priorities lie, as they do, with the rich and why they hardly ever lie with the groups who in a civilised society ought to receive most assistance. The Chancellor and the Government have chosen to do very little about poverty and absolutely nothing about unemployment.

If the Chief Secretary contests that assertion, may I put to him again a question that I asked during the Budget debate but which nobody answered. The Chief Secretary seemed to be about to answer that question today, but in the end he shied away from it. Why was the £1 billion that the Chancellor said that he had at his disposal used to reduce the standard rate of income tax by 1p? The Chief Secretary said, "We did it because we had not done it before." That is an answer from "Alice in Wonderland". "We do it, because we do it, because we do it," said Tweedledum to Tweedledee. Why did he choose this option when other clearly preferable options were available to him? Why, particularly in the light of the Government's record, was the £1 billion not used directly to tackle unemployment?

I add a note about the Government's employment record, since the Chief Secretary chose rashly to boast about the number of jobs that have been created by this Government. I think he said, "We have created more jobs than the rest of the EEC, put together." That boast is substantiated only by this country having adopted a practice that has not been adopted in the rest of the European Economic Community: the practice of counting part-time jobs as though they were full-time jobs. What is undoubtedly true, according to honest statistics that are genuinely comparable between Britain and the rest of the EEC, is that now 1 million fewer people are employed in Great Britain than were employed in 1979 and that we have lost more jobs than the rest of the European Economic Community put together.

Mr. MacGregor

The right hon. Gentleman asks me a question about a main part of the Budget, the reduction in the basic rate of income tax. I gave several reasons for that reduction in my speech today and also during the Budget debate. If the right hon. Gentleman is so critical, why has he said that he will not oppose the reduction of 1 p in income tax?

Mr. Hattersley

I repeat gladly what I said in the Budget debate. The Opposition believe that the economy needs that boost. However, the Chancellor and the Chief Secretary had five possible ways in which to provide that boost. The question that I am asking, and which the Chief Secretary persists in not answering, is why, of the five possible ways, through which I propose to take the House, did he choose the one that helped unemployment and the poor least but helped the rich most?

I propose to remind the Chief Secretary of those five alternative ways. This afternoon he said virtually nothing about unemployment. People would not have believed it had they been warned in advance that during a 40-minute Second Reading speech on the Finance Bill, only two or three minutes would be devoted to unemployment. If the Chief Secretary had wanted by fiscal means, which is what this debate is about, by tax stimulus, which is also what this debate is about, and by methods that are legitimate to a Finance Bill, and therefore would have been within the rules of order, to concentrate upon reducing unemployment, he could have used his £1 billion upon public sector capital investment and maintenance.

That would have been a quick, cheap and certain way to create jobs. It would have minimised the adverse effects on inflation and the balance of payments. It would have helped to meet the desperate need for new and improved houses, renovated hospitals and the replacement of decaying schools. All of that could have been done by using the £1 billion for that purpose, but still we have not received an answer as to why the Chief Secretary made the choice that he did.

If the Government and the Chief Secretary were remotely concerned about the low paid and the least well off, they could have used the £1 billion to increase child benefit and to concentrate help upon those areas where it is most needed. If the Chief Secretary and the Chancellor had found the compulsion to cut income tax to be overwhelming, because they had to do something to attempt to fulfil the promises that they have so flagrantly and blatantly broken since 1979, why did they choose the standard rate of income tax that helps the rich the most and the lowest paid the least? Why did they not introduce a reduced rate band? Why was there not an increase in the threshold?

The Government have attempted to answer none of those questions. Therefore I put it again to the Chief Secretary: of the five ways of spending the £1 billion that were canvassed before the Budget, why did he choose the one that helps the lowest paid the least and the unemployed not at all, but that delights the 1922 Committee?

Last year the Chancellor called his Budget a Budget for jobs. When measured against the Chancellor's criterion, it was a catastrophic failure. Unemployment has risen by 100,000 since the Chancellor gave that title to his Budget. This year we have had a Budget for the Tory party. That, too, will fail in its objective because the Government's unpopularity has increased since the Budget announcements.

The manipulation that was supposed to do so much for flagging morale on the Government Back Benches and for declining status in the opinion polls has failed for two reasons. First, the general public have higher standards than the Government realise. The voters, if not the Tory party, are concerned about the Health Service, the education system, pensions and, above all, the unemployed. They have contempt for a Government who ask the prosperous members of society to forget or to neglect their least well-off neighbours and simply to rejoice in their own 1p in the pound tax cuts.

The general public, if not the Tory party, also realises that we all have a direct vested interest in financing housing—where again there will soon be a shortage of 1 million dwellings—in financing the additional cost of adequate law andd order and in financing an improved road system and rail network.

The British public is a great deal less gullible than the Chancellor of the Exchequer and the Cabinet believe. It knows that the Government's tax policy has virtually nothing to do with the needs of the economy, the unemployment crisis, the collapse of manufacturing industry and the increasing number of families who are living below the established poverty line but that it has everything to do with the Government's disarray and the Tory party's disintegration. The Government's economic horizon stretches no further than the next general election. They will lose it, because the British people are a great deal more moral, practical and decent than the Chancellor will ever understand.

Several Hon. Members

rose—

Mr. Deputy Speaker

Order. A large number of right hon. and hon. Members are seeking to take part in the debate. Mr. Speaker has asked me to say that he wishes preference to be given to those hon. Members who unsuccessfully sought to take part in the Budget debate. The whole House will appreciate brief speeches from Privy Councillors and other hon. Members.

5.56 pm

Mr. David Howell (Guildford)

First, may I raise with you, Mr. Deputy Speaker, a point of order. It arises out of your earlier comments about what is in order in this debate. Will you confirm that it will be in order for us to discuss the contents of the Fourth Report of the Treasury and Civil Service Committee on the Budget that is on the Order Paper for discussion today? It touches upon subjects that go slightly wider than the contents of the Finance Bill, although they are directly relevant to the conext in which the Finance Bill is cast.

Mr. Deputy Speaker

The Chair will allow that, but it is important to bear in mind that earlier I chided the Chief Secretary for, as I put it, seeming to invite the House to discuss specific employment matters. That would be stretching a little too much the limits of the debate.

Mr. Howell

I am grateful for your ruling, Mr. Deputy Speaker.

The House will not wish to be detained for too long by the featherweight comments that we have just heard from the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), which seem to be curiously unrelated to the economic issues, the economic changes and the remarkable successes that are beginning to develop in the economy, especially the apparently virtuous spiral of downward inflation and interest rates and the rising investment and confidence in the British economy.

I agree with my right hon. Friend the Chief Secretary to the Treasury that this Budget was ingenious and full of a number of extremely lively and important proposals. I should like to comment on a few of them before turning to some broader points about the Finance Bill.

I welcome enormously the heavy emphasis that has been placed on wider ownership and what has been called popular capitalism. This is a vital thrust and a major part of miniaturising capitalism in line with the fragmentation and miniaturising of the labour market and the industrial structure. I greatly welcome that emphasis. As to the proposal for personal equity plans, this is very interesting, but I believe that more work on this scheme will be needed. My right hon. Friend the Chief Secretary to the Treasury told us that regulations will be introduced.

The present difficulty is perfectly straightforward. As my right hon. Friend the Chancellor said, it may be right for the small investor who puts money into individual shares not to go near the tax inspector, but the manager of an investment must approach the company concerned or the Revenue to claim back the tax on the dividend. He will incur a cost. He will have to charge that cost—he cannot live on air—and that will fall on the PEP investor. The charge may be as large as any tax saving that the PEP investor makes from putting his money in a PEP scheme.

If the PEP scheme is confined to individual share investments, I am not that sure that it will run. It will be necessary to consider arrangements through which personal equity plans can be married up with perhaps a new PEP trust so that the cost of claiming tax on all the dividends from the companies that pay dividends on the shares in which investments have been made can be handled in volume and minimised. If that is not done, I do not believe that the scheme will be enormously attractive to the small investor with a capital gains tax exemption of about £6,000.

If it is intended to drive forward the spread of ownership, which has moved a long way already—my right hon. Friends have that intention very much in mind— some modifications to the scheme may have to be produced. The Government should have taken their courage in both hands and gone for a tax-free entry saving scheme—something like the French Loi Monory scheme—which would allow millions of workers to put part of their salary into investments and shares and claim back all the tax. The inducement of a tax-free investment is powerful.

It will be argued that such a scheme will be costly. If my right hon. and hon. Friends had looked at the scheme which was introduced by Lord Vinson and Mr. Philip Chapell of the Centre for Policy Studies, they would have seen a proposal on the same lines as Loi Monory. In theory, the cost would have been about £1 billion a year. In dynamic terms, it would have been considerably less.

If pressed, I am not sure whether I would have said to my hon. Friends that, although I would be the first to urge that we go for the 25 per cent. tax rate, which I think we will achieve before the end of this Parliament—that was the figure that we had in mind long before 1979—this year there may be a case for diverting the funds into a dramatic push on the wider ownership and personal savings side of such schemes. I am slightly sorry that the Government have not shown enthusiasm for going down that route. I hope that they will, that the PEP scheme will be the first toe in the water and that we will now consider more dramatic tax-free schemes.

The revenue calculations behind the Finance Bill and the Budget are based on the assumption that the oil price will be about $15 a barrel in 1986–87. That is optimistic. The price is already $12 a barrel, and it is highly likely that it will fall further. There are no underlying reasons why it should not go lower, as long as the Saudis maintain their output at present levels, as they have every intention of doing, and as long as demand stays low, which I think is likely because there has been a fundamental change in the world's need and thirst for oil.

Many energy experts reassuringly say, "Do not worry. The price of oil will go up and that will make the Budget arithmetic straight. It will also take the heat off the coal industry, the oil industry, and so on." One should regard those predictions with some caution. There may be another oil shock before 1992, although perhaps the expectation will avoid the very thing that people fear. In the meantime, oil prices could remain at low levels for several years.

If the average oil price is $10 or $11 a barrel in 1986–87, we will have to revise our expectations for next year. If, in 1987–88, the price runs at $10 or even lower, which is not impossible, my right hon. Friends will have to ask themselves how their long-postponed, but very important, strategy for cutting personal taxes—I remain convinced that that is the best way to create jobs, because the experience of every nation has been that low taxes and low unemployment go together—will be sustained if the Government have to suffer a further cut in oil revenues.

My right hon. Friend the Chancellor made an interesting speech to the Lombard Association. It was, as it were, part of the Budget speech which he felt should be made elsewhere, not in the Budget speech. The report of the Select Committee on the Treasury and Civil Service commented on that.

My right hon. Friend said, rather quaintly, that the fall in oil prices was the result of a return to prudent monetary policies and that that had been responsible for the oil price collapse. With respect to my right hon. Friend, I do not think that is the position. First, it is highly questionable whether we have returned to prudent monetary policies. Secondly, I believe that the fall in the consumption of oil has occurred because the demand for oil has become detached from the process of output growth in the Western economies.

Sheikh Yamani, whom I greatly respect, is incorrect when he forecasts that, after a while, the West will return to gas-guzzlers and oil heating on a massive scale, that there will be a general switch-around and that demand will rise as supply falls. The truth is that the world has gone off oil. The Budget calculations and the Finance Bill have to be cast on the assumption that oil revenues are not only substantially lower now than they were last November, when there was much heady talk about tax cuts worth £3.5 billion, but are lower than they were expected to be a few weeks ago, and will remain lower. The arithmetic will have to be recast on that basis.

It is not just a matter of losing tax revenues. New downside problems emerge and those are directly relevant to the tax regime and the Finance Bill. We have seen the first signs of alarm and concern over the future of the coal industry which, as far as its planners are concerned, is in a state of total paralysis. If the price of oil were to remain at $15 a barrel—let alone the present price or the price to which it will fall shortly—there would have to be a total revision of all the coal industry's plans, which would make everything about which Arthur Scargill went to war look like peanuts. Those are the serious industrial realities behind the falling oil price.

My right hon. and learned Friend the Member for Dover (Mr. Rees), who is a leading authority on oil industry taxation, both inside and outside Government, reminded us that the oil industry was looking at an entirely different landscape. There have been reports that a major loss of jobs is in prospect in Scotland as a result of the collapse of the demand for offshore equipment. It has been mentioned that 6,000 jobs are at risk. If the recoverable reserves in the North sea are to be reduced substantially, as is estimated now, as a result of the price of oil settling down at about $10 a barrel, it will re-jig the role that the North sea programme has played in the British economy. That may be inevitable.

It is possible that it will give Britain an opportunity to adjust to being a more normal industrial consumer economy than has been the case in recent years. The reality that my right hon. Friends will want to face, and which they must face, is that the changes in the energy economy, which I have described, will involve a further substantial loss of jobs, whereas the changes in the non-energy economy, which can take on board lower-cost energy and expand with new technology, will probably not involve many new jobs. Jobless growth is a worldwide phenomenon. I do not see that Britain will be free of it. We must look ahead. Further moves of a direct kind to assist the problem concerning jobs will have to be contemplated by my right hon. Friends. I am sure that they have some plans.

Tax cuts are the best way of getting new jobs, but there is probably now no escaping some more direct measures of the type I hoped would appear in the Budget and the Finance Bill. I was interested to see the suggestions from the Department of the Environment and departments of housing that the time was approaching when some local authority capital receipts could be released. An article in the Financial Times suggested that the Government were considering that measure. That would be a sensible move.

I have a partial liking for some of the measures to which my right hon. Friend the Member for Henley (Mr. Heseltine) referred when visiting some inner-city areas which are derelict and miserable. The association that some people make between inner-city infrastructure investment and unemployment is cruelly misleading. Not many jobs will be turned on in that way. But the association which needs to be made between grim surroundings and investment is much more valid. What my right hon. Friend the Member for Henley tells my right hon. Friend the Chancellor is that the time has come not for massive handouts of public funds but for a type of seedcorn—a pump-priming operation whereby small amounts of public money bring large amounts of private investment on their back. I urge my right hon. and hon. Friends to consider that course as they monitor the development of their Budget strategy once the Finance Bill is passed.

I hope, Mr. Deputy Speaker, that you will allow me to refer to monetary policy because the report of the Select Committee on the Treasury and Civil Service looked at it in some detail and because my right hon. Friend the Chancellor made an extremely interesting speech on monetary affairs outside the House in what was an annex, as it were, to the Budget speech. I have already mentioned the speech he made to the Lombard Association. He clearly signified that we were saying goodbye to technical scientific monetarism. I am glad to be associated with that goodbye—I was going to say "au revoir", but I hope that it is a permanent goodbye.

My right hon. Friend has made it clear, as has the Select Committee on the Treasury and Civil Service with its usual lucidity, under the guidance of my right hon. Friend the Member for Worthing (Mr. Higgins) with his usual lucidity, that our policy is to use short-term interest rates and the firm exchange rate to act as the main curbs on inflation. It is even questionable whether they will be operated through the mechanism of money supply to curb inflation.

My right hon. Friend the Chancellor in his speech to the Lombard Association said that sterling M3 had gone on an indefinite furlough. It is no longer considered to be a suitable measure. My right hon. Friend referred to its changed velocity, and so on. He also made it clear that the MO position had been reasserted. But it has been reasserted not as a governor of the rate of inflation—something to be influenced which will, in turn, influence inflation—but as an indicator, similar to a dial on a clock. If the dial points too high, short-term interest rates, presumably, will be used directly to curb inflation by curbing credit and other deflationary factors. In short, our policy is to use short-term interest rates and the exchange rate.

What is our exchange rate policy? I am sure that my right hon. Friends will want to address themselves to the difficulty that arises. The impression outside the House is that our exchange rate policy is in mid-air. We are in the European monetary system as a country member but are not involved in the exchange rate mechanism. Will we become involved in it, or will we not? There seems to be some contradictions.

My right hon. Friend the Chancellor has been extremely firm and clear about where we are going with respect to exchange rates. In his speech to the Lombard Association he said: in the right circumstances membership of a formal or fixed exchange rate system can itself provide a very effective framework for monetary policy". He said: over the medium term maintaining a fixed exchange rate against countries who share our resolve to reduce inflation is a pretty robust way of keeping domestic monetary policy on the rails". My right hon. Friend continued: I see no role for an exchange rate target outside a formal exchange rate system … And that, for the UK, means outside the exchange rate mechanism of the EMS". He said: it clearly makes sense … to limit wild swings in the exchange rate, particularly against our European competitors". In spirit and in intention we seem to have moved into the exchange rate mechanism of the EMS and, if so, we have an exchange rate policy. That needs confirmation.

Having made those comments on short-term interest rates and the exchange rate, which seem to be the main two engines of our policy, I must say, a little perversely, that it probably does not matter much whether the policies are being modified. I suspect that the real issue is rapidly ceasing to be inflation and is becoming deflation. I was interested to see this morning in The Times that Mr. Timothy Congdon had changed his tune remarkably and was questioning whether Governments had gone on too long wringing their hands about inflation when, perhaps, the wind had changed. Inflation in Germany is 0.1 per cent. Inflation in Japan is negative and prices are falling. Since 1 January, commodity futures prices in the Western world have fallen 10 per cent. and, since 1979, non-oil raw material prices have fallen by well over 20 per cent. in real terms, according to the Bank of England Quarterly Bulletin.

With prices falling in on all sides, the problem will be how to keep world economies going. I doubt that domestic monetary policy will play much of a role. Nor, as Mr. Congdon apparently thinks, will it be much more than pulling a piece of string to urge more and more interest rate disarmament in the hope that somehow it will keep the economies going. The reality is that probably nothing can be done. If anything can be done, it must be on an international level, not by individual Governments. I imagine that that matter will be discussed at the end of the week in Tokyo among all the talk of global medium-term financial strategies and objective indicators.

Mr. Budgen

Will my right hon. Friend give way?

Mr. Howell

If my hon. Friend will allow me, I shall come to the end of my remarks, because I have delayed the House too long.

I do not know whether the Tokyo conference will have the slightest effect on the scene. I suspect that Ministers are beginning to stand around at these international gatherings saying, "After all, boys, we are all Keynesians." That seems to be the new mood. I suspect that the reality will be more modest. The outcome will simply be that the Japanese need to become more globally minded in using their colossal surplus and buy more Mexican bonds, or whatever will help the balance of the world economy, and that the United States will cut its vast deficit. If those two measures are achieved, I believe that there will be more world stability and a better background against which we can proceed with interesting tax reforms in the Budget. I am sure that my right hon. and hon. Friends are aware of these rocks ahead as they steer their way through the Bill.

6.18 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

I shall refer to some of the points raised by the right hon. Member for Guildford (Mr. Howell), especially oil prices and monetarism.

One of the pleasures of speaking on the Second Reading of the Finance Bill is that one does not necessarily have to join the chain gang on the Finance Bill Committee. I suppose that some of us have either been granted parole or even full remission of sentence.

I should like to refer to an omission from the Bill. One of the pleasures of being a Back Bencher is that one does not have to agree with everything said by one's party. [Interruption.] That will not give much pleasure to the Government. I am concerned, as I am sure is the Chancellor, about the way in which mortgage interest relief is getting out of hand. Two years ago, the cost of mortgage interest relief was £2.15 billion and, in 1984–85, two years later, it was £3.5 billion—a 60 per cent. rise. That is bad enough because, clearly, it will continue. It distorts the housing market and directly adds to the cost of housing, but there are further problems.

There is an increasing sophistication among borrowers. The Government have done much to forment that, with advantage, and I am not against that. That sophistication means that there will be a greater leakage of money, ostensibly for the purpose of housing, going into other areas. Many people have a second holiday on the basis of an extension to an outhouse. Such leaks will continue and the cost of mortgage relief will increase again and again. What are the effects of these expensive subsidies to expensive houses? At one end, it encourages over-housing and at the other end taxpayers living in rotting, decaying and cheap accommodation are subsidising the relief. These opposing positions are getting further and further apart and it is a matter of concern.

The right hon. Member for Guildford (Mr. Howell) raised the important subject of the price of oil and the consequence of the fall in price. That ties in with the fourth report of the Treasury and Civil Service Committee. Once again we are extremely grateful to the right hon. Member for Worthing (Mr. Higgins) and his Committee for producing the report. In paragraph 41 of the report refers to the nature and the lack of a satisfactory explanation by the Government of its response to the oil revenue. The report calls it a "disappointing response", and I agree with that.

The high price of any commodity benefits the producer against the purchaser. However, the total world purchasing power remains the same. It is the distribution which varies. The benefit to countries which import oil is exactly balanced by the disadvantage to those which export oil. The transitional effects are difficult and cause problems. If there is a sudden rise in the price, time is needed for the market to settle down. The OPEC increases in 1974–75 could have been absorbed if those price increases had taken place over a longer period. An oil price shock causes imbalances.

We should have used our oil revenue to increase our growth and investment instead of waiting for the price to fall. If Britain had no oil, our domestic costs would benefit from the lower oil prices. France, Germany and Japan have benefited greatly from the fall in price. Our exports would benefit if our major customers were oil importers and they would suffer if our major customers were oil exporters. We are in a different position because we have oil which we export. At one time our domestic costs benefited in the same way as the non-oil producing countries are benefiting now.

Britain could have reaped the benefits of the profits from North sea oil revenue if we had used it to assist industry. The non-oil industrial countries were unable to do that and Britain had a commercial advantage which we have never used. In a competitive world, it is the oil importer countries, our industrial competitors, that now have the advantage. We have forgone that prime advantage as the rich rewards of North sea oil have been used as an excuse for a high pound, with its debilitating effect on our industry and employment figures. The right hon. Member for Guildford was correct when he said that the oil price would have a consequence on the coal industry.

Britain's advantage lay in talking sensibly with the OPEC countries. A rational sensible oil price should have concerned Britain. It was not of interest to Germany, Japan or France. We forgot our personal involvement in a matter which should have had high priority.

The PSBR is held to be the right one because so much will be obtained from the sale of publicly owned assets. The exchange of a public monopoly for a private monopoly causes us grave disquiet. There are laws in Britain which enable the courts to take action in a way which the Government may not find thoroughly acceptable. However, there is a short history of regulation for the private monopolies. British Telecom regards itself as not having a public interest with regard to 999 calls but that was held to be of public interest before privatisation.

These new super-monopolies require special controls which we do not have and which we are not even thinking of providing. We have only to look at the United States to see the way in which its corporations can circumvent the tight controls. I compare that with our thin, undernourished quangos fighting it out in the jungle with some of the largest industrial corporations. We have discarded ministerial supervision but the replacement is quite inadequate and the public will suffer. The Government should bear in mind that tax cuts would come from the sale of public companies which will then lack adequate supervision as private companies.

One of the most important measures in the Finance Bill concerns the capital transfer tax. It is serious because it illustrates the philosophy of the Government. The Government claim to be radical, but nobody can conceive of returning to something less than the old death duties as a consequence of radical government. What is given is assistance to the idle heirs of those who have been responsible for Britain's misfortunes. I can understand the notion of rewarding those who create wealth. One can give financial inducements to those who create wealth and such inducements have not been considered by the Government. One can make out a case for rewarding the creators of wealth, although I would dispute it.

The emasculation of the capital transfer tax by the 10-year rule and the less onerous death duty provisions have made it a voluntary tax. It is a shameful proposal. The Chancellor of the Exchequer has replaced a useful tax with a voluntary contribution paid only by the miser, the procrastinator or the negligent.

The principles of the capital transfer tax were sensible and equitable. The enjoyment of capital which an individual creates is the right of that individual. However, the enjoyment of capital by virtue of birth has long been regarded as eminently suitable for taxation—a tax which ought to be high and enforceable. That was the basis of death duties long before Socialist Governments involved themselves in these matters. The approach was to make the loopholes smaller. That was undertaken by Labour Governments but has not been undertaken by Conservative Governments, and the result has been a division between the two sides of the House as to how far capital wealth ought to be taxed.

We are all agreed that income tax should be paid, and it should be progressive. We argue about the amount but not the principle. However, with regard to capital transfer tax and a tax on wealth, we argue about the principle. That is a great pity. There is no question but that wealth should be taxed. But we are now back to the old optional tax in an even worse form than before.

I do not know what is the Government's policy towards mergers. There are even many Conservative Members who, like me, had hoped that there would be some form of taxation that would have some effect. However, I do not know how far that is practicable. In the rising stock market, those who have exchanged the long view for immediate profits can see their share prices sharply improve, and can use them as the base for a takeover which may make no industrial sense and which any Government should be concerned with. The Government seem to say that we should forget the industrial logic and concentrate on the one aspect of competition between companies. But the trouble with limiting takeovers to mergers that do not reduce competition is that it encourages the growth of conglomerates.

I thought that the one lesson that we had learnt in all our years of industrial policy and of changes of view was that no firm has such managerial wisdom and expertise that it can rejuvenate and advance any industry that it turns to. I know that many captains of industry are confident of their prowess and that of their managers, and think that there is no firm where they cannot improve the structure or organisation. But we should have a healthy scepticism of such individuals or companies. At a time of a booming stock market, it is wise to call a halt to the fever of mergers and to calm down those frantic companies by introducing a long period of delay and reflection.

Mr. Maples

I think that the extent of recent takeovers and mergers concerns us all. However, the threat of a takeover is just about the only weapon to be held over the head of an inefficient manager of a large public company. If it was removed, assets would be even more inefficiently managed.

Mr. Sheldon

I think that that is true when activity on the stock market is fairly quiescent. However, when the stock market booms, a company that has fashionable shares can make a takeover bid for those companies that are not quite so fashionable. During the period of stability the system works reasonably, but during the period of instability it does not. We are in a period of instability, and it is difficult to justify those mergers. In five years' time, I am not sure how many of them will be vindicated.

The Treasury and Civil Service Committee has once again done us a very good service in drawing our attention to the issue of the money supply. The Chancellor of the Exchequer was insultingly dismissive in his Budget speech about his changes backwards and forwards over the question of money supply. It is useful to turn to the first statement of that medium-term financial strategy. I have a copy of the relevant Budget report, which I treasure as there are not many of them around.

When the concept of the money supply was introduced, there were great hopes and expectations. It was to be the foundations of all prosperity for ever and ever. We know that the Chancellor of the Exchequer wrote the words that I am about to quote even though, at the time, he was the Financial Secretary to the Treasury.

He wrote:

The Government's objectives in the medium term are to bring down the rate of inflation and to create conditions for sustainable growth, output and employment. To reduce inflation it will progressively reduce the growth of the money stock and will pursue the policies necessary to achieve that aim. There is then the wonderful table, with sterling M3 scheduled to reduce from 11 per cent. in 1981, 10 per cent. in 1982, 9 per cent. in 1983 and between 4 and 8 per cent. in 1983–84. The Treasury was so certain about it that it allowed VAT to be increased to 15 per cent. It thought that there would be no effect on inflation because the money supply would do it all. The Chancellor of the Exchequer made a shambles of a speech. He has many ways of estimating the money supply, yet that concept is no longer in use. The last thing that I would advise someone who wanted to know what the Chancellor proposed to do would be to look at the money supply.

The right hon. Member for Guildford was right. There is an interaction between the exchange rate and the interest rate. If the exchange rate seems to be doing badly, up go interest rates. If the exchange rate is doing reasonably well in the Chancellor's eyes, interest rates can fall. The exchange rate is the prime determinant, just as it has been in Britain for the past 20 or 30 years. That little affair with monetarism lasted a few short years and then passed like a thief in the night. We now see the exchange rate mechanism working.

The right hon. Member for Guildford wanted Britain to join the exchange rate mechanism. I am not so sure about that. In the European monetary system we have, in effect, a deutschmark zone. We should not fool ourselves; that is what it is. Thus we either go into a deutschmark zone, or we have the deutschmark and sterling. Having two important currencies in the same zone is not the same as having one dominant currency. That is one problem. Another problem is that we are likely to go in at far too high a rate. I believe that that is a serious point, although the Government may not see it as such.

The right hon. Member for Guildford also pointed out that the immediate danger was not inflation but deflation. That danger is serious. The right hon. Gentleman referred to the wind of change. We have spent too much time giving inflation super-priority. Nobody would doubt that there was a need to reduce inflation, but a change must now come. The danger is that it may come too late. We have suffered greatly from the Government's monetarist policies, and it is time that the agony was ended.

6.37 pm

Mr. Michael Grylls (Surrey, North-West)

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) is a much respected Member of Parliament. Although I might have been tempted to agree with some of his comments on competition policy, I was rather less tempted to agree with his remarks on capital transfer tax. Nearly 2 million people run their own independent small businesses, and they may react adversely to his sideswipe at people's idle heirs and at his comment that they were a good reason for having an effective and tough capital transfer tax.

I believe that the change made represents a central and long-term part of the Budget, which will encourage independent businesses. If it is impossible to pass on a business intact to the next generation of owners or managers, that unit of competition will go. Moreover, why should we encourage people to start firms if they must be sold on their death or retirement? I warmly congratulate the Government on abolishing capital transfer tax, to all intents and purposes, on lifetime gifts.

I listened to the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) and found it sad that he seemed to have learnt or understood nothing about independent businesses. Most, if not all, do not reach their optimum size in one generation. They need to be passed from one generation to another, and to grow at every stage. Thus it is vital that our tax policy should facilitate that.

The passing on of productive assets from one generation to the next is crucial if a free enterprise system is to work effectively, and it is in this area that two thirds of new jobs are currently being produced. I hope that in a purely party political sense people in independent businesses will pay careful attention to what the Opposition have said about their determination, if they are ever entrusted with power again, to reintroduce a swingeing capital transfer tax. I hope that will be noted by everyone.

I want to move away from that subject and speak about a matter that was debated nearly a year ago, that of unitary tax. The House will remember that we had a major debate on that last year. The issue is of great importance not only to the United Kingdom but to the United States and to our main trading partners. The House will remember the debate on Report stage of last year's Finance Bill. It is important that as we debate this year's Finance Bill we should recall that debate. Perhaps during the summer the House will want to encourage the Government to take further retaliatory action to keep up the pressure on the United States Administration.

Last year the House unanimously passed a new clause which is now section 54 of the Finance Act 1985. That gives the Government power by order to withdraw payments of tax credits attached to certain dividends received by companies with a presence in a unitary tax state such as California. I know that many of my hon. Friends carefully follow this issue in the United States and there is no doubt that the passing last year of the retaliatory provision was a milestone that has inspired action in Washington.

On 8 November 1985 President Reagan issued a presidential statement in which he said that his Administration would introduce legislation to abolish unitary tax on a worldwide reporting basis. Secondly, he said that he would enter into negotiations with the United Kingdom to try to amend the United Kingdom-United States tax treaty and try to ensure that when court cases occurred in the United States US interests were represented. In response to the American Administration's initiative our Government also issued a statement. They welcomed the Administration's proposed action and announced that the Government intended to enter into negotiations also to amend the United Kingdom-United States tax convention.

In recognition of the statement issued by President Reagan, our Government announced that they would forbear from initiating retaliatory action under section 54 of the Finance Act 1985 on the strict understanding that the United States legislation—this is an important point for the House to recall—will be passed into law and will take effect by 31 December 1986.

The United States Administration introduced their legislation into Congress last December but, alas, I have to say that it received what at best can only be described as lukewarm Congressional support. Indeed, the legislation did not have as many sponsors as many of us hoped it would have. I understand there was to be a subcommittee hearing in the Senate on 16 May but that intiitial hearing has been cancelled. We are now at the end of April and no further action has been taken in terms of a Bill being heard by the two key Congressional Committees, the Finance Committee in the Senate and the Ways and Means Committee in the House of Representatives. Little progress seems to have been made on the treaty route. The House may want to press the US Administration today and on every other occasion we can to give much more vigorous support to legislation in Congress than they have to date. I hope the Government will pay attention to that comment.

Mr. Ian Wrigglesworth (Stockton, South)

I support what the hon. Gentleman says. Many of us on this side of the House would support the Government if they took that sort of action.

Mr. Grylls

I am grateful for that comment. It is helpful to know that the House is united on this issue. Hon. Members may not be united on many issues but we are united on this one. It is worth mentioning that the early-day motion on the Order Paper on the subject has the support of 240 right hon. and hon. Members from all parties. I hope that my right hon. Friends the Prime Minister and the Chancellor of the Exchequer will take the opportunity at next week's economic summit to tell President Reagan and Treasury Secretary Baker yet again that this House is frustrated at the lack of progress on this issue in the United States, despite all the promises that we continue to receive.

All-party support is important. In that context, I am grateful to the hon. Members for Sedgefield (Mr. Blair) for Stockton, South (Mr. Wrigglesworth) and for Roxburgh and Berwickshire (Mr. Kirkwood) and to my right hon. Friend the Financial Secretary who has given untiring support to this issue even though he has many other things to deal with. It is crucial that the Government continue to give that tough support. It is essential to pay tribute to those British companies that have major investments in the United States and that have launched a campaign to fight this issue. That is vital. Although to an extent it is self-interest, there is nothing wrong with that. Those companies are determined to see an end to this damaging tax.

When he is winding up, my right hon. Friend the Financial Secretary will encourage all hon. Members and British industry which holds United States investments if he confirms that the Government's deadline for action in the United States is still 31 December 1986. If it is not passed into legislation in the United States by that date, perhaps he will confirm that the Government will return to section 54 of the Finance Act 1985 and the retaliatory clause and do something to bring tougher pressure on the United States Administration.

6.48 pm

Mr. Ian Wrigglesworth (Stockton, South)

I am pleased to follow the hon. Member for Surrey, North-West (Mr. Grylls) and reiterate the point that he speaks for hon. Members of all parties in expressing the frustration that we have felt for many years about unitary taxation. I hope that people in Congress especially but also in the United States Administration will take note of the fact that the whole House is united in its frustration.

Our central criticism of the Budget and of the Finance Bill was that the strategy which the Government embarked upon amounted to giving away by a reduction in taxation some £1 billion while spending only some £100 million on efforts to create jobs. That is quite the wrong strategy, and it was for that reason that I and my hon. Friends voted against the cut in income tax from 30p to 29p. We did that because we had the courage of our convictions and followed the strategy that we outlined in our own Budget proposals. That strongly contradicts the strategy that the Government have embarked upon.

It is deplorable that the Labour party did not have the courage of its convictions. Despite the protestations by Labour Members in this debate that they disagree with the Government strategy, they did not follow their voices by their votes and vote against the strategy when they had an opportunity to do so.

Mr. Robert Sheldon

Let me defend the members of the Opposition Front Bench. There was, of course, the factor that a tax cut increases demand in the economy and that is of value. Iain Macleod used to say that one does not turn away Father Christmas because he is not giving exactly what is wanted.

Mr. Wrigglesworth

I am disappointed by the right hon. Gentleman. He gives as inadequate an explanation of the lack of courage on the Labour Benches as his own Front Bench spokesmen have done. We criticise not the Labour party for wanting to expand the economy, but the method by which the Government have chosen to give away the money. As the right hon. Gentleman knows, that money could have been spent as his right hon. Friends and we have been advocating for many years—for example, on expanding the economy through spending on infrastructure and housing.

Mr. Jeremy Hanley (Richmond and Barnes)

rose—

Mr. Wrigglesworth

I do not want to pursue this point throughout my speech, but that is where the money should have gone, which is why we opposed the Budget's central strategy. The Labour party was not prepared to do that because it wants to have it all ways. It was not prepared to be consistent in its strategy.

The Chief Secretary painted, just as the Chancellor of the Exchequer and other Government spokesmen have done, a rosy view of the economy's performance. He provided a posse of selected statistics to demonstrate the success which, we are told, the Government's policies are achieving. Not surprisingly, the statistics which have been chosen are based on the economy's recovery from the depths of the recession in 1981.

We hear little these days about what happened to the British economy and British industry between 1979, when the Government came to office, and 1981. Obviously the reason for that is that during that period large sections of our industry were decimated and unemployment increased dramatically. It is like a person who wilfully and pigheadedly risks his health, and, having suffered from the inevitable consequences, expects congratulations on his recovery from his self-inflicted injury.

If one considers the record of the past seven years, not merely the period since 1981, one sees that employment—we have heard a great deal about the number of jobs that have been created recently—is still 1 million below what it was when the Government came to office in 1979. Indeed, that decrease is greater than that of the European Community as a whole. Output is only 7 per cent. above the 1979 level, manufacturing output is still 6 per cent. below the 1979 level, and manufacturing investment is more than 20 per cent. below the 1979 level. That is not a record to crow about. The empty or demolished factories and the 3.5 million unemployed are testimony to that record.

The Chancellor boasts that recently we have moved from the bottom to the top of the European growth league. However, if allowance is made for the effects of the miners' dispute, the 1985 rate of growth was 2.5 per cent. and only just ahead of Germany and Italy, and in the second half of 1985 the United Kingdom, with 2.1 per cent. growth, dropped well below France, Italy and West Germany. During that period West German growth was at 6.3 per cent. Therefore, the real record is dreadful. The most recent figures show a distinct slowing down in the United Kingdom economy, with manufacturing output stagnant during the past nine months and industrial production slowing down.

The Chancellor claims that we have survived unscathed the halving of the oil price. We heard a great deal about that at the time of the Budget. I wonder whether the Government have studied the Bank of England Quarterly Bulletin which points out that real national disposable income will be adversely effected by the impact of falling oil prices on the terms of trade. The Bank's analysis shows that the direct consequence of the recent fall in price is to reduce net disposable income by 1 per cent., since real net oil exports account for 2.75 per cent. of gross domestic product. According to the Bank of England, that accounts for a direct loss to the balance of payments of up to £3 billion a year, at probable 1986 levels of production.

The bank suggests that that could be offset within four years by a 9 per cent. fall in the effective exchange rate. But it adds the crucial qualification that the improvement on the non-oil current account will follow from the beneficial effects of improved competitiveness, which depends on there being no offset to the effects of exchange rate depreciation from higher wage settlements. If rising unit labour costs continue to erode competitiveness, the effect on the balance of payments will be even worse than the £2.5 billion, £1.5 billion and £500 million predicted for 1986, 1987 and 1988 respectively by the Bank's simulations.

Thus, to grasp the opportunity presented by lower oil prices depends on conserving the competitive advantage conferred by lower exchange rate. In that context, it is crucial that wage bargainers recognise that foreign competitors also gain from lower oil prices, which have fallen even further in foreign currencies, and will reduce their pay settlements in line with their falling, if not vanishing, inflation rates.

The Chancellor is clearly prepared to stoke up a consumer boom with real disposable incomes rising by 5 per cent. and consumer spending by 4 per cent. this year. This year demand will be largely fuelled by consumer spending rather than by investment and export. Unit labour costs rose by 5.75 per cent. last year—much faster than those of our competitors. Their unit labour costs rose hardly at all or are falling. It is clear that the Chancellor must seek a bigger decrease in pay settlements than 1 per cent., which is the most that he can expect as bargainers adjust their expectations to falling inflation.

As commodity prices fall and work their way through the economy, wage pressure will start to increase inflation. Much of the credit which the Government have claimed for low rates of inflation and of interest should be put at the door of Sheikh Yamani for his action and of the lower commodity prices throughout the world. The Chancellor will hope to hold the rate of inflation to about 3 per cent. next summer with lower nationalised industry prices and indexation.

The Secretary of State for Employment, after announcing the appalling unemployment figures last month, shared in the general euphoria that Ministers have been expressing by stating that employment had risen by nearly 1 million since 1983. However, the number of full-time equivalent jobs rose by only 16,000 between March 1983 and September 1985. The Secretary of State's figures depend crucially on estimates of the increase in the self-employed—a rise of 440,000 during that period. Growth is welcome, but it depends crucially on that estimate.

Even the growth in the employed labour force to which the Government point is lower than in the previous year. During the next three years we must create an additional 113,000 jobs nationally each year merely to keep pace with the rise in the labour force. On present Government policies, there seems little prospect of our being able to do that and to reduce unemployment levels.

Mr. Butterfill

The hon. Gentleman made an important point about the increase in the labour force. Will he confirm that during the 10 years from 1976 to 1986 the increase in the labour force has been about 2 million people, and that that, rather than the economic policies about which he is complaining, is the major contributor to the present levels of unemployment?

Mr. Wrigglesworth

No, because those people represent an opportunity, not a burden. For every mouth there is a pair of hands. These people can work; they can produce wealth if they have the opportunity. This is why some countries have expanded their population because they want the growth that will come from that. But because of the barmy economic policies that the Government have pursued over this period, we have not had the growth in demand and the growth in opportunities for those people to create the wealth that we would all like to see. The unemployed are not sharing in the consumer boom which the Government are generating, and the Government remain passive and supine in the face of mass unemployment.

The 1p cut in the basic rate of tax will create at most some 30,000 jobs over three years, compared with at least 80,000 through a cut of 10 per cent. in employers' National Insurance contributions, which we advocated. The Government always select the measures which are least effective in creating jobs and which benefit most the relatively better off. It is a macabre achievement of this Government that the direct revenue costs, through benefits and lost direct tax revenue, of the extra unemployment since 1979 amount to £50 billion, almost completely swallowing up the £52 billion that the Exchequer has received in North sea oil revenues during that period. It will be this Government's epitaph that they squandered Britain's golden decade on paying for mass unemployment.

Despite the oil price fall, British industry is still paying a substantial cost in higher interest rates which remain very high and are much higher than is justified by inflation differential with our main competitors. Clearly the Government fear a loss of confidence and a too precipitate fall in the exchange rate. As Roger Bootle, the Lloyds merchant bank economist, has pointed out, the currency markets demand a confidence premium on United Kingdom interest rates to compensate for fears of currency depreciation in the future. As oil price risks should have diminished, the main reason for this must be lack of confidence in the underlying soundness of the economy, or fear of the possibility—and this may be coming in to their reckoning, I suppose—of a Labour Government.

European monetary system entry, openly advocated by the Chancellor and the Foreign Secretary, would in our view help to give more stable and possibly lower interest rates, but there is the danger that the Government might enter at an over-valued and unsustainable rate in order to maintain an anti-inflation discipline. Our view, strongly expressed on a number of occasions over the past months, is that we have had opportunities to go in at a rate chat could have been negotiated. The chairman of the Bundesbank has made it clear that he believes that we should negotiate a lower rate in relation to the deutschmark, that we should go into the exchange rate mechanism in order to bring about that stability and indeed to do the things that, as the right hon. Member for Guildford (Mr. Howell) pointed out from the Chancellor's Lombard speech, are possible if we go into the exchange rate mechanism.

I want to say a few words about the share ownership proposals in the Finance Bill because we on the alliance Benches have a long-standing interest in this matter. The personal equity plan, which unfortunately has only the barest ground rules for its establishment in the Finance Bill, has turned out to be a pretty emaciated mouse. The cost of tax relief for the scheme in 1987–88 is estimated at only £25 million, which will do very little to encourage the spread of shareholding. The incentives for individuals are minute. This point has been recognised by Conservative Members as well as by Opposition Members. Those most helped by the scheme will be the better-off taxpayers and those on the higher rates who are already utilising their £6,300 capital gains tax exemption and who will be able to build up a tax-free fund.

The apparent exclusion of investment trusts and certainly of unit trusts from the scheme means that on a relatively small amount it would be hard to achieve the kind of spread of risk which would make the scheme attractive to small shareholders. Those who do not benefit already from the CGT exemption will only benefit from the tax refund on reinvested dividends. Although the objection to including unit trusts is that they do not represent direct shareholding, the PEP scheme is unlikely to appeal to the small saver without them. The Chancellor's proposals are quite inadequate to achieve a wider spread of share ownership.

In addition, the Chancellor spoke in the Budget of the need to give profit sharing a greater role in total remuneration. He said that it might make sense to offer some temporary measure of tax relief to the employees concerned to help to get profit-sharing agreements of the right kind off the ground. He promised a consultative document. We welcome that and look forward to receiving such a document; we shall certainly be very happy to respond to it. We are pleased that the Government are adopting that approach, because the greater the consensus on this issue across industry and across this House, the better for all.

The Chancellor could have used some of the £1.2 billion that he has given away in the basic rate cut to give new encouragement to direct share ownership. The findings of the NOP poll which the Chief Secretary mentioned on share ownership are, if I can be fairly modest in my language, somewhat surprising. Some people have been rather dubious about them. They considerably exceed the stock exchange's estimates: 2.5 million shareholders as opposed to 6 million projected by NOP. That is a very dramatic difference. We want evidence beyond that of the NOP poll to show that 6 million is the true figure, because it is certainly not borne out by much evidence, both subjective and other, that is available.

Mr. Richard Wainwright (Colne Valley)

Does the hon. Gentleman agree that the wider distribution of shares would be greatly encouraged if the Chancellor, instead of virtually abolishing capital transfer tax in this Bill, had remodelled it in such a way as to encourage wealthy people to make a multitude of relatively small gifts of shares to large numbers of people rather than passing on their inheritance to only one or two members of the family?

Mr. Wrigglesworth

Yes. I hope that we can pursue that point in Committee because it is something that we would like to see. There are other things which we would like to see and which we feel would extend share ownership much more broadly than the Government's measures will.

Whichever of those figures is correct, the fact is that it is well short of the proportion of the population with building society accounts or with bank savings or deposit accounts. Instead of going down the PEP route, the Chancellor should have gone down the route recommended by the stock exchange and provided a modified version of the Loi Monory scheme, a tax incentive-based scheme that has been very successful in France. A tax incentive of £500 in an additional personal allowance, used to buy shares in a qualifying fund, would cost the Treasury about £300 million if 2 million people benefited from the tax concessions. Last year my hon. Friend the Member for Roxburgh and Berwickshire (Mr. Kirkwood) moved a new clause along these lines, and we shall be returning to this issue in Committee.

Mr. Hanley

The hon. Gentleman is clearly in favour of wider share ownership; we all know that. I wonder whether he was in favour of the greatest contribution made to wider share ownership, the privatisation of the past three or four years? How does his party vote on that issue?

Mr. Wrigglesworth

We could support quite a number of the privatisation proposals. The National Freight Corporation has been one of the most successful operations carried out and we have consistently supported it. But the methods by which the Government have privatised some public monopolies and turned them into private monopolies, dominating the market and not giving the consumer real choice or providing real competition, has led us to oppose the most recent privatisation measures.

I do not want to be diverted down this road, but if the Government were prepared to break up the British Gas Corporation into at least four parts and have separate area boards all as private companies, and provide some element of competition where it does not exist under the present proposals, we might support such a move. But all we have is a massive monopoly, with no competition and no consumer choice, being foisted on the public. That is not the way to obtain wider share ownership.

Wider share ownership could be achieved if the Chancellor had also given more direct help to employee share ownership. If he really wants to tackle the adversarial climate which has characterised industrial relations and collective bargaining in Britain for so many decades, he can help to achieve that by giving employees a much more direct stake in the future of their company by giving income tax relief to profit sharing and share ownership schemes or relief from corporation tax in order to encourage them.

Thirdly, if the Chancellor is serious about influencing the current pay round, as opposed to trying to steal our clothes in the consultative document, he should have proposed a payroll incentive of reduced national insurance contributions for companies which concluded longer term pay settlements in line with the expected lower rates of inflation or with productivity improvements. Employees could receive benefits in the form of increased share ownership if they were prepared to negotiate such settlements and could be given substantial tax concessions if they retained their stake in the enterprise.

A reduction of employees' national insurance contributions would help to cut labour costs and to keep firms competitive. We hope that the Government will look again at the PEP and other schemes and be tempted by some of the pressure from their own Members, as well as that to which they are responding from these Benches, as the general election approaches. Nothing concentrates the minds of politicians more than votes. Clearly that is the case with not only the by-elections but the general election approaching. I hope that that will encourage the Government to look more seriously at some of those schemes for really encouraging more people to take a direct stake in their companies and in shares in other companies. We shall want to see something much more effective than the PEP scheme if that is to come about.

7.11 pm

Mr. Terence Higgins (Worthing)

The House will have listened with interest to the frank confession of the hon. Member for Stockton, South (Mr. Wrigglesworth) that the alliance voted against the Chancellor's proposed reduction in income tax. I am sure that we can look forward with equal expectation in the forthcoming by-elections to that being a major plank in the platform of the alliance candidates.

Mr. Budgen

A very high moral stance.

Mr. Higgins

The Second Reading debate of the Finance Bill is typically a mixture of specific comment on individual proposals on the one hand and commentary on the broad macro-economic consequences of all the measures in the Finance Bill on the other hand. I wish on this occasion to follow that tradition and to begin with the good news in the Budget.

One of the disadvantages of the Budget ritual is that on Budget day and the day afterwards the media is full of publicity for what my right hon. Friend the Chancellor is proposing, but the individual proposals are soon forgotten and the Finance Bill does not receive the same sort of publicity. That is unfortunate. Often, local press and radio do not spell out the specific proposals so that those in the constituencies who are affected by my right hon. Friend's proposals are not fully aware of them and so unable to take advantage of them.

In that context it is important that the specific proposals should receive coverage at a local as well as a national level and I want to single out charities for attention, to which my right hon. Friend the Chief Secretary rightly drew attention in his opening remarks. The role of the voluntary sector in our economic affairs is important. It should not be treated as a substitute for Government activity in those areas where the Government can do the job best. For example, I hope that we shall continue to see substantial increases in public expenditure in some areas of the National Health Service.

None the less, the voluntary area is important and deserves to be encouraged. I am glad that the reliefs on some aspects of value added tax have been introduced and, in particular, the two specific proposals on charities which were mentioned—the facility for individuals to make charitable donations with tax relief in individual company schemes and for companies to contribute a sum equal to 3 per cent. of their dividend payments, again with tax relief, to individual charities. That can be important in areas such as my own of West Sussex where companies can, to a considerable extent, make donations to local charities and, in turn, have an important impact on the community's welfare. That having been said, I share the doubts expressed by my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) on clause 29, and I hope that that will receive considerable attention in Committee.

On the macro-economic side, the policy which the Finance Bill implements again brings good news, certainly in the unique combination of reduced inflation and the record rate of sustained economic growth such as we are experiencing. But there are some presentational problems because one of the difficulties of reducing inflation, as we have, from something over 25 per cent. to about 5 per cent., and, I hope in the coming year, to still less, is that we put that forward as a reduction in the cost of living but many of our constituents do not believe that that is the reality. The way in which the cost of living index, or indeed the pensioners' cost of living index, is calculated is not generally understood and that means that people do not believe what is said about inflation.

I hope that my right hon. Friend the Chancellor and his Treasury colleagues will go to some lengths to stress the fact that the cost of living index covers an enormous basket of individual items and is calculated on the basis of individual surveys, which take place every month. When inflation was going up at 25 per cent., big increases in particular items, such as electricity and gas, were submerged, so people were not worried about the cost of living figures. With figures for the overall cost of living down in the 5 per cent. range or lower, a sudden large increase in the price of, say, gas, electricity or rates, casts some doubts on the credibility of the Government's claims. It is important that we should spell out that point.

Another important point came out in the evidence taken by the Treasury and Civil Service Select Committee from the Governor of the Bank of England, many of whose remarks were extremely helpful. The House will recall that the original intention of the medium-term financial strategy was to alter expectations on pay. The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) was so brave as to produce the original medium-term financial strategy document, which was very much concerned with expectations, in particular on pay claims. The Governor in his evidence on page 67 in answer to question 366 in relation to expectation affecting pay settlements said: I think there is a sound barrier at around 5 per cent. where a lot of people feel it is not too bad: 'Surely we can have an increase of that sort of level.' He went on to say that he thought that the point about expectations was now greatly diminished and that, perhaps, is again an important effect of falling inflation.

None the less, the rate of economic growth has been combined with the reduction in inflation and even the TUC, from whom we took evidence, seemed to say that it would be content, if not absolutely delighted, with the 4 per cent. rate of growth. When one looks at the economic forecast one sees that we are on the way to that, but anything much faster than that forecast in the Treasury Red Book might create some real problems in the resurgence of inflation. Let me say a word or two about that.

In particular, I hope that the Select Committee's report, about which several hon. Members have made kind remarks, brings out the way in which policy has changed in relation to the attitude of my right hon. Friend and the Treasury. We have seen a steady progression away from dogmatism in regard to monetarism towards almost complete pragmatism. Indeed, one of the problems that we face at present is the extent to which economic policy has now become opaque. It is very important that we in the House should seek to analyse the difficulties.

In particular, we have moved very much towards what can best be described as an interest exchange rate policy, and I want to say something about that. In his answers to questions 319 and 320, the Governor of the Bank of England agreed that the rate of interest in other countries with which we are competing is something like half the present rate of interest in the United Kingdom. I therefore think it is important to ask why it is that interest rates are as high as they are.

If one looks at the situation from a domestic point of view first, I think that it is worrying. The Governor of the Bank of England, again in a rather graphic phrase—it is remarkable how well the metaphor stood up—described the overhanging glacier of liquidity in the economy which is continuing in its frozen state only because of the very high level of real interest rates. If real interest rates begin to decline, the problem is that that glacier will begin to thaw, which could have disastrous consequences in regard to the resurgence of inflation.

Despite the good performance to which I referred earlier, I personally have considerable concern about whether we shall succeed in maintaining the downward pressure on inflation that we should all like to see, even though it is done against a background of very different trends in commodity prices from those experienced in the early 1970s.

The other reason why from a domestic point of view we have high interest rates is that which the Chancellor himself spelt out. It is because our unit labour costs are rising faster than those in competitor countries. We had some difficulty in the Committee understanding precisely how this mechanism was supposed to operate, although at the end of the day I think there was a slight suspicion that interest rates were high for a rather old-fashioned traditional reason—that, if unit labour costs were rising too fast, then one put up interest rates to exert downward pressure on companies faced with inflation wage settlements. The Chancellor did not seem to go as far as admitting explicitly that that was the problem.

As to the underlying considerations, the way in which it is assumed that the velocity of circulation of currency—however one likes to define the currency—will continue its recent trend is also worrying. This may be a dangerous assumption. It is possible that we could foresee other factors that would alter that situation. If so, the frozen glacier of liquidity again might create serious problems.

Turning to examine why interest rates internationally are high, I think that it is once more the combination of interest rates and exchange rates. There is cause for concern because the danger is that the high interest rates deter investment. On the other hand, if the real interest rates begin to fall, we may find that all those who meanwhile put the liquidity into interest-bearing assets suddenly decide that the thing to do now is to go out and spend the liquidity because the attraction of those interest-bearing assets has declined in real terms. All this is worrying.

Mr. Butterfill

My right hon. Friend expressed concern about investment. Does he not agree that there has been a very satisfactory growth of domestic investment—up 8 per cent. last year—and inward investment from overseas, which is remarkable in the circumstances?

Mr. Higgins

On the second point, I welcome both inward investment and investment overseas by the United Kingdom. I have always been mystified by the way that the Labour party is opposed to its going in either direction.

As to the prospects for investment, my hon. Friend must look at the Red Book, and he will see that much of the increased investment has been due to tax changes introduced in a previous Budget in regard to investment allowances and corporation tax. The investment figure for the end of the period covered by the Red Book is not, I think, a very happy one.

I deal now with the main point that I wish to make in regard to the external situation where clearly interest rates are being affected by exchange rates. We have to look at the difference between the dollar exchange rate and the relationship of the sterling exchange rate to exchange rates elsewhere, in particular in Europe. To the broad extent that it is true that we buy in dollars and sell in deutschmarks, we can welcome the change in differential rates in the last year, which is quite remarkable. Because policy has become so opaque—and M3 that used to be the cornerstone of the whole thing was first discarded completely and then reintroduced for only one year, and it is a very strange thing to have a strategy that lasts only one year—and given that that change has taken place, it seems increasingly to be a policy that turns on the exchange rate.

I think we are in some danger of getting the worst of both worlds. Some people have said recently that the way in which one can best deal with the problem is in effect to pretend that we have joined the exchange rate mechanism of the EMS without actually doing so, thereby getting the best of both worlds. I think there is some danger that we will get the worst of both worlds. Unless the band, range or target for the exchange rate is made explicit, there is considerable uncertainty about what the policy really is. The Chancellor has been reluctant to spell out any such range, indeed, to the extent of constantly repeating that he has no such range in mind.

It seems to me that the arguments for the EMS, the exchange rate mechanism and our joining it have improved in the last six to nine months simply because the relationship with the deutschmark is now much more favourable than it was. I think there is a widespread view, not least in the City, that if we were to join, which would be a clear commitment to stay within that range, there would be a considerable flow of funds into the country, in particular from Germany, because people would think that the uncertainty had been removed and the interest rate differential was still very large. If we had that inflow of funds, in my view it is possible that we would find that we could reduce our interest rates by 1 per cent., 1.5 per cent. or even 2 per cent., thereby narrowing the differential significantly to the great advantage of those who wish to invest in industry.

While there are still doubts, as the hon. Member for Ashton-under-Lyne mentioned, with regard to the problem of there being a bi-polar system if we joined, since sterling and the deutschmark would be the dominant currencies, I am increasingly of the view that, if we were to join, there would be some advantage. I am not convinced by some of the arguments put forward by my right hon. Friend the Prime Minister to the effect that it was a good thing that we did not join some time ago. The fact that it is not worth buying something at a high price does not mean that it is not worth buying something at a much lower price. I think that the exchange rate relativities have improved considerably in recent months.

I wish to give a word of caution on some wider issues. This time last year we discussed at length the dangers of a hard landing for the dollar, in the sense that a sudden collapse of the dollar might mean that interests rates would have to be raised which would cause a major recession in the world with the attendant problems for debtor countries, and so on. I am still worried about that, despite the change that has taken place in the dollar exchange rate over the past year.

More particularly, I am worried about the continued budget deficit in the United States, and about the fact that no real progress has been made in reducing it so that the Federal Reserve bank is still inclined to keep interest rates high to fund it. In turn, that produces a high exchange rate for the dollar, which produces a balance of payments problem. That is still overhanging the situation, and the overall effect is difficult for those debtor countries that are adversely affected, despite the fall in the oil price. There is still a real danger of default, which I hope that the Baker initiatives will do something to help.

Finally, I am worried by the effect of the banking system, particularly in the United States, on agriculture. In that context, many people in the United States who went into farming, perhaps not long ago, and borrowed money, now find themselves, in the light of changed circumstances, with assets worth less than the money that they borrowed. They are voting with their feet and are leaving everything standing.

The oil price, the international debt, the agricultural situation, the dangers to the United States banking system, and in turn, the repercussions that it will have on us, give considerable cause for concern. That will be exacerbated if a trade war develops between the EEC and the system of American agricultural support. That is a real danger that should be given close attention by my right hon. and hon. Friends on the Front Bench, and in particular those in the Treasury.

Having said all that, the Budget, as the Select Committee on the Treasury and Civil Service reports is broadly on the right lines, given the economic situation, although I have considerable concern as to the future stability of the system. By and large, I welcome the Bill, which has many specific proposals that are likely to be beneficial not only in my constituency, but across the country.

7.32 pm

Mr. Michael Cocks (Bristol, South)

This is the first time that I have had the temerity to trespass into a debate on the Finance Bill. Although I am a former Parliamentary Secretary to the Treasury, the House will know that all that is required in that job is a vestigial knowledge of arithmetic. Perhaps the House will be lenient with this first offering.

The Government have made a great deal of the help that is given to charities. It is a pity that their generosity did not extend to other sectors, and make changes that would not have meant much more expense. The first is VAT on headstones for internments and other parts of the necessary funeral expenses, such as flowers and refreshments. The second is the imposition of VAT on sanitary wear for women—something that has always nonplussed me. It is anomalous, because it is a physiological toss of the coin as to which sex we are, so it is wrong to penalise women. Both those sectors need to be changed.

One of the main features of the Budget for my constituency is the swingeing increase in the tax on cigarettes. I understand the pressures put on the Chancellor to impose an increase, but even if those who are out to destroy the tobacco industry eventually do so, the Chancellor, or whoever is Chancellor in future, must not think that that is the end of the story. There are signs already that the same people, or similarly motivated people, are preparing to launch a heavy attack on the alcohol industry. We are already beginning to get calls for a swingeing increase in duties on alcohol, to minimise the risk of cirrhosis of the liver and other alcohol-related diseases. While there is no increase in alcohol duties on the same scale as on cigarettes, the Government should beware of the pressure that will build up—pressure that may be misjudged.

There is a side effect to what the Government have done that may be of interest, and perhaps the Government will give some consideration to this. I have been contacted by a number of tobacconist-newsagents in my constituency. Following the Budget they had a letter from their proprietor, Kiosks, saying that, because of the size of the increase in the duty on cigarettes, their contracts would be renegotiated to reduce the commission on which they work. The letter says:

it must be clearly understood that the Company makes no profit whatsoever from this additional duty levied by the Chancellor and under the circumstances it simply cannot absorb the commission element. A number of petitions against the increase in the tax have been collected by tobacconists, but those collecting the signatures had little thought that their own livelihood would be eroded by the company that owns the chain. Perhaps the Government will give some thought to that. I have written to the company about this. That was over a fortnight ago. I have not yet had the courtesy of a reply, so I feel that I am entitled to raise the matter.

A similar squeeze is being put on the landlords of pubs in Bristol. Courage, the brewer, is seeking to take a bigger share of fruit machine profits. The point about the example is that the Government say that they wish to help small business men. However, the larger companies can get away with much, but the small people who work for them suffer. I ask the Government to show more imagination.

For example, one small measure—adjustments to the luncheon voucher scheme—would help small firms that do not have large subsidised canteens. That scheme was introduced over 40 years ago. The Government recognised the worth of the scheme, and the 3s. a day tax allowance was brought into force. At that time, one could buy a decent feed, particularly in the British Restaurants, for 3s. The equivalent, 15p, which is still the allowance, certainly will not. I think that the tax allowance should be increased so that small business men can give their employees the same benefits as those enjoyed by people who work for large firms, or those who eat in directors' dining rooms.

The Chief Secretary has already mentioned the levy on goods produced by the entertainment industry and sold abroad. Here we detect the clammy hand of the Treasury at work. Only two days ago. I received a letter from the new chairman of HTV, Mr. G. E. McWatters, informing me that the company had been granted the Queen's award for export achievement. He went on: It seems somewhat sad that the Treasury has recently seen fit to penalise these export activities by a change in the levy arrangements. We do provide a lot of employment in the West Country and hope to expand still further. That company is being penalised for exporting.

The Budget seems to be more geared to the 27 million in work than to the 4 million out of work, and it does not tackle the basic problems of the economy. During the debate on the Gracious Speech on 12 November I spoke about the erosion of the British manufacturing base over a long period of time and under successive Governments.

I should like to deal with the Government's over-reliance on income from invisible earnings. Yesterday my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) spoke about the decline of British shipping and the Merchant Navy. In a similar debate a few weeks ago the right hon. Member for Taunton (Sir E. du Cann) said that our invisible earnings had declined by £2,000 million a year because of the decline of the British merchant shipping fleet.

We rely on tourism. The recently circulated magazine of the British Tourist Authority said that last year 3 million Americans came to this country and spent about £1,600 million. This year there has already been a drop in the number of Americans booking visits here because of the change in the dollar-sterling rate and, much more recently, because of the situation between the United States and Libya. It is worth reminding ourselves that millions of Americans came here during the war not as tourists, but to work with us to throw back the tide of Fascism which lapped across Europe. I am pleased to add that to my remarks. I hope that the present feelings in this country about the United States are temporary and are not shared by many of my constituents.

The two areas of invisible earnings are subject to variables which are so liable to change that the Government should not rely on them. They should concentrate much more on building up the British manufacturing base. The long-term decline in our share of world markets has been categorised. The Confederation of British Industry recently produced figures showing that there was a drop of 16 per cent. in the early 1960s, to less than 8 per cent. now. Each percentage drop in our share of world markets represents about 250,000 jobs. If we take with that the growth of import penetration, where each percentage point represents about 75,000 jobs, I think we have an explanation for the tremendous increase in unemployment in recent years.

During the course of my remarks on 12 November, I said that we should concentrate more on a "Buy British" campaign. I gave an example of somebody buying a Metro or a Maestro with 95 per cent. British content as opposed to a foreign car, saving the Exchequer about £1,000 in benefit payments, because it represents two months work for one British worker. Recently, when the Government announced the placing of an order with Cammell Laird they said that the order represented 2,000 jobs over two years. If buying British is analysed in that way, it should be much easier to persuade people to buy British in order to preserve and create British jobs.

We must use our reservoir of equipment, labour and skills to develop a robust manufacturing base and free ourselves from over-reliance on invisible earnings, which are subject to external variables beyond our control. We should give up blaming the work force. We should overhaul our management techniques, learn from other people and become much more competitive.

The Budget does not measure up to the job required. It is not sufficiently drastic. It does not give us the national catharsis that we require. It really only tinkers with the problem. The situation should be taken by the scruff of the neck. It has been done before. It was done in the post-war period by the 1945 Clement Attlee Government. Millions of people were demobilised from the forces without any large scale unemployment. The economy was changed from a war-time to a peace-time footing without disruption. Although our major utilities had been run on a care and maintenance basis, the country was put back on its feet in a remarkably short period. That is the effort of which the British people are capable. That is the sort of effort that we need, but it is not the sort of effort that the Finance Bill will encourage.

7.44 pm

Mr. Nigel Forman (Carshalton and Wallington)

It is always a pleasure to follow the right hon. Member from Bristol, South (Mr. Cocks) especially when he takes the House into the interesting byways of tombstones and tobacco. As somebody who is actively engaged in the campaign against smoking, I believe their there may be some small connection between those two items. But let that pass.

I intend to do something rather unusual in this debate. I shall try to address the burden of my remarks to the Bill. I realise that it is common for the debate to range widely, and I do not criticise that. However, I believe that it is important that my right hon. and hon. Friends on the Front Bench should hear at least some views on the substance of the Bill as well as a general tour d'horizon of the economy, national or global. I take it as read that a number of satisfactory points about the economy have been well made by my right hon. and hon. Friends and I shall not repeat them.

I wish to devote the brunt of my remarks to three aspects of the Bill in which I am especially interested and which I think are especially valuable. Clause 15 sets out the income tax rates and main reliefs. that is obviously a welcome part of the Bill in the sense that any cut in the standard rate is a good thing. It is also welcome because it should be seen in the context of a broader move towards a standard rate of perhaps 25p in the pound by the end of this Parliament.

Even if we reach that state of nirvana, which will be difficult to achieve because of the cost, I believe that the more important strategic objective for income tax is to achieve a gentler tax gradient from an entry point of, say, 25p in the pound to a maximum rate of 50p in the pound, instead of the present disincentive pattern of income tax. As the House will know, one enters at 29 per cent. and there is then an incredible 11 per cent. leap to 40 per cent., then 45 per cent., 50 per cent., 55 per cent. and 60 per cent. That means that millions of income taxpayers are faced with the equivalent of an income tax cliff which, coupled with the impact of national insurance contributions on employees, is clearly having harmful effects. If one wants to adduce arguments about the disincentive effects of taxation, one need look no further than that unfortunate profile in our income tax system.

I have made a few inquiries about the cost to the Treasury and the Exchequer of seeking to ameliorate or overcome some of the problems I have identified. I remind the House that on latest estimates it would cost about £1,800 million in income tax yield forgone to abolish all the higher rates of income tax. That would be equivalent to getting rid of only about 5 per cent. of total income tax receipts. I am not saying that should be the policy, but I am putting those facts on record simply to remind hon. Members that we have higher rates of tax, even as they stand now, largely for political, social and redistributive purposes, not really for revenue-raising purposes to any serious extent.

If one wants an even more significant figure, it would cost about £7,000 million in a full year to change from the present profile of income tax—the cliff to which I referred—to a gentler and more sensible gradient which is what I and many of my hon. Friends would prefer. The reason is that so much of this cost comes from the standard rate band which, as the House knows, is where the bulk of the revenue is raised. Therefore, if one were to make the transition which I am advocating, it would be sensible to phase it in over several years. The argument that this is completely beyond the pale no longer stands up when one regards it as a project to be conducted over, say, three years. A sum of £7,000 million taken in three stages over three years does not seem excessive.

Furthermore, the argument that it is administratively too complex to move into a new six-band structure does not hold up because we already have a six-band structure. The only thing wrong with it is that its shape is wrong. By the time those changes were feasible, they would be contemporaneous with the introduction of computers into the Inland Revenue. I would like that change to be made.

I hope that the Whip present will note that it would be a good idea to have a further separate debate on personal tax reform in which the House could discuss all these issues.

Clauses 21 to 25 make improved provision for employee shareholdings. I welcome this latest instalment of the general move which the Government have made in that direction, which was already evident in the Finance Acts of 1978, 1980 and 1984. Now is the time for the Government to go much further with larger tax incentives to give what the Chancellor describes as a bigger kick-start to an excellent development that has been in motion under Governments of both parties.

It has become imperative to take a more radial approach to this area for several reasons. First, wider employee share ownership in all its forms leads to improved corporate performance and there is plenty of evidence from the National Freight Consortium, from the John Lewis Partnership and from the United States to support my contention. Secondly, the schemes can encourage a more sensible attitude towards pay at a time when unit labour costs are still one of the major problems of the economy and are increasing far too fast for the national good.

In that connection, there is a close correlation between the ideas which are being supported in these clauses and the slightly more speculative ideas of Professor Weitzmann on revenue sharing, which the Chancellor intends to discuss in the National Economic Development Council and elsewhere. I wish him well with that consultation process. I hope that it leads to early legislation in the next Session.

The third reason why this is such a good direction of policy is that it is manifestly popular with employees and, therefore, encourages more positive attitudes, which will help to overcome the age-old problems of "them and us", which have been so well identified in a recent Stockton lecture by my right hon. and noble Friend the Secretary of State for Employment. It is encouraging to see that tax-exempt, all-employee share schemes have increased from a mere 30 in 1979 to more than 1,000 today. I hope that development will be encouraged further.

Finally, the schemes are an excellent development because wider and deeper employee ownership has external benefits for the nation as well as some small risks for the employees, since they must put many of their eggs in one basket. In view of the extra risk for the employees concerned, there is a strong case in natural justice for more generous tax incentives. That strengthens the argument for what the Government are trying to do in these clauses. These tax incentives need not be built permanently into our fiscal system. They could be time-limited for the companies and individuals involved. But once the habits of wider share ownership become established, the process will grow naturally and spontaneously for the benefit of the entire economy.

My right hon. Friend the Chancellor should heed the warning set out recently in a leader in The Times that his welcome experiment with the personal equity plan should not be allowed to divert our attention, or indeed available resources, from the need to go further to encourage employee share ownership. There is always a danger of the idea of employee share ownership being seen as a perk for senior management and not much more, so I agree with the Wider Share Ownership Council that tax relief for executive share schemes should be conditional on the company's running a scheme for all its employees. That is the right approach to overcome the possibility of "them and us" problems rearing their head again.

I am very much in favour of clauses 26 to 31 providing an attractive package of encouragement for charities and charitable donations. That was an excellent part of the Budget because it recognised in a way which everyone will appreciate the range of good work done by charities and voluntary organisations. In the longer term, it is also important because if the Chancellor is thinking, however gently, of moving away from the holy grail of fiscal neutrality, which in our tax system seems almost impossible, it opens greater opportunities for donations to higher education. I was struck recently by a letter that was sent to me and, I suspect, to other hon. Members who may sit on the Finance Bill Committee, from Birkbeck college in the university of London stating:

There is a precedent for tax relief: membership of professional and learned societies already qualifies. Our suggestion is, therefore, that fees and other costs incurred as a consequence of part-time study should be tax-deductible. Bearing in mind the Government's strategy on adult training and retraining and on the need to invest in human capital, which is what further and higher education is about, that is a point—albeit a small one—worthy of my right hon. Friend's consideration. If we could supplement a healthy volume of public support for higher education by tapping some of the private support which could be released by such fiscal mechanisms, we should do a service not only to the individuals concerned but to the country.

This has been a prudent Budget, which has produced a sound Finance Bill. It contains some interesting and imaginative components which bode well for the future, provided that they are followed through and not regarded as a one-off exercise. In two areas especially, the Finance Bill should be seen as part of a much longer-term policy. The first is personal tax reform, which we must approach in terms that involve more than playing around with personal tax allowances, important though they are. Personal tax reform should be considered much more widely. We do not get more than one chance in a generation to reform such matters.

The second area is the encouragement of worker capitalism, with much greater extension of the interest and involvement of employees in their firms, which must be to their benefit and, much more importantly in the long run, to the benefit of the economy.

7.57 pm

Mr. Sean Hughes (Knowsley, South)

My right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) described the Finance Bill as irrelevant. Those of us who represent constituencies blighted by unemployment will bear testimony to that description. I shall address my few remarks to the glaring omission in the Budget and the subsequent Finance Bill of anything which might begin to tackle the massive unemployment problems.

We should judge the Finance Bill in the context of almost seven years of Conservative Government. They have introduced eight Budgets and eight Finance Bills. In view of their 1979 election slogan "Labour isn't working", we have the right to judge the Finance Bill in the light of promises and performance.

I remind the House what the promises were. In June 1979, we had the Government's first Budget. The former Chancellor of the Exchequer declared: The Budget is designed to give the British people a greater opportunity than they have had for years to win a higher standard of living—for their country and for their families."—[Official Report, 12 June 1979; Vol. 968, c. 263.] Twelve months later unemployment had risen to 1,375,600. Still, we must give new Governments a chance. Historically, every Chancellor has found the economy in far worse a state than he believed before the election. So the Government, so concerned with unemployment before they took office, had to be given time to prove they meant what they had promised.

In his second Budget on 26 March 1980, the then Chancellor declared that the strategy of the Government was the best foundation for higher growth, fuller employment and a return to rising living standards."— [Official Report, 26 March 1980; Vol. 981, c. 1451.] Twelve months later unemployment had risen to 2,333,500.

Perhaps it was to be third time lucky. In his Budget introduced on 10 March 1981, the then Chancellor stated that the Budget would help redress the balance of the economy in favour of business and industry."—[Official Report, 10 March 1981; Vol. 1000, c. 783.] Most of us thought that that would mean jobs. However, 12 months later unemployment had risen to more than 2,800,000.

By the time of the fourth Budget on 9 March 1982, we had all become a little sceptical about Budget claims. However, the then Chancellor made a promise early in his Budget statement that it would be a budget for industry—and so a Budget for jobs. Raising himself to unaccustomed heights of oratory, he concluded that the Budget anticipated a better prospect of employment opportunities for those who look only for the chance to work."—[Official Report, 9 March 1982; Vol. 19, c. 727–57.] Twelve months later, unemployment had passed the 3 million mark.

The fifth Budget, introduced on 15 March 1983 turned out to be full of election promise. In what was to be his last Budget statement, the then Chancellor concluded that it was a Budget for the family, a Budget for enterprise and, most of all, a Budget for Britain's continuing recovery."— [Official Report, 15 March 1983; Vol. 39, c. 157.] Twelve months after that the unemployment figures would have reached more than 3,333,000 had the Government not removed unemployed men between the ages of 60 and 64 from the unemployment figures.

The present Chancellor of the Exchequer continued the delusion of recovery in the Government's sixth Budget on 13 March 1984. He claimed that there was an economic recovery whose underlying strength is now beyond dispute".—[Official Report, 13 March 1984; Vol. 56, c. 286.] Twelve months later, even after fiddling the figures, unemployment had still reached 3,267,000.

In the Government's seventh Budget, in 1985, the Chancellor intoned: There can be no disputing the strength and durability of the economic upsurge."—[Official Report, 19 March 1985; Vol. 75, c. 784.] Scaling new heights of lunacy, the Chancellor declared that the Budget was "a Budget for jobs". Twelve months later, the by now notoriously fiddled unemployment figure had reached 3,323,800.

What then are we to make of the Chancellor's remark in the Government's eighth Budget last month? He said that it was a Budget which was a safeguard for the present and a springboard for the future."—[Official Report, 18 March 1986; Vol. 94, c. 184.] Which chapter of the Finance Bill, which clause, which of its 200 pages, gives any reason to believe that the optimism is justified this time and that the Government mean what they say?

The Finance Bill is perhaps the most important legislation to be considered by Parliament. It must not be allowed to ignore the single most important problem which the economy faces—the problem of massive unemployment. I am not one of those who believe, or indeed would want, the Government to interfere in every aspect of our lives. I do not argue that Governments can be the sole regulator of economic forces. However, I firmly believe that the Government set the tone, and create the atmosphere. The Finance Bill we are discussing tonight certainly does that.

The Finance Bill sets the atmosphere and the tone, for example, with the reduction of stamp duty on share transactions. The Chancellor took great pride in the fact that next year, an adult will be able to invest up to £200 a month in shares. But what relevance does that have to someone living on £30.45 a week -unemployment pay, £29.50 a week supplementary benefit, or £38.30 a week old age pension? People on those incomes have as much chance of investing £200 a month as the England cricket team has of scoring 200 runs in the West Indies. The irrelevance which takes most beating is the provision to abolish entirely the tax on lifetime gifts to individuals. That really set things alight in my constituency.

As I listened to the Chancellor outlining the proposals about lifetime gifts, and the subsequent comments today, I was reminded of the reaction to William Harcourt's death duties when they failed to produce the revenue which had been anticipated. People, it was said, were not dying up to expectations.

The unemployed are wondering whether they figure at all in the Government's expectations. As I listened to the Chancellor and to his hon. Friends, I was confirmed in the belief that he and I occupy different worlds. How else could he justify such an appallingly irrelevant Finance Bill? I would like to tell the House of the reality of my world. In my constituency last month 10,292 people were registered as unemployed and there were 167 vacancies at the jobcentre. There were 707 18-year-olds or younger who had never worked since leaving school and three vacancies at the careers office. The insensitivity of the Government Front Bench is no more than we have come to expect. They flaunt their insensitivity; they do not try to hide it; they glory in it. Like the Edwardian publication The Queen, they proclaim: It is the fashion today to talk of social duty and the right to live, but nobody has the courage to say that we belong to different worlds. The Government certainly have the courage to say that, and that forms the very basis of their policy. That is why the Budget and the Finance Bill are so irrelevant to our real problems.

8.8 pm

Mr. Neil Hamilton (Tatton)

With all the talk of reshuffles, and as a person of modest ambition, I naturally turned my mind recently to the problem of how to get on in the Tory party, and I have taken advice from where it was available. One piece of advice that I received was that one should acquire a nodding acquaintance with the works of the late Mr. Disraeli. Having delved into Mr. Disraeli's novels on the Young England and on the theme of Two Nations, I must admit that I find those novels more entertaining than the exercises in fiction on the same theme by my right hon. Friend the Member for Henley (Mr. Heseltine).

When reading the novel "Sybil", I encountered a character who reminded me very much of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). Appropriately enough, that character was called Mr. Kremlin, who was "distinguished for his ignorance as he had only one idea and that was wrong." The right hon. Member for Sparkbrook has one idea, which is that the cure for all our ills is higher Government spending. Although the right hon. Gentleman tries to wriggle out and deny the fact, we all know that the Labour party's plans for increased spending, which were costed and appeared in the Official Report on 3 March, amount to £24 billion.

When the right hon. Gentleman is asked how that cost would be financed, like a fish landed on the ground out of water, he flaps, gasps and puffs out his gills, but he cannot come up with a convincing riposte or explanation. He fails to explain how the Labour party would encourage investment by taxing at penal rates. I suppose that the right hon. Gentleman is following the illogicality of the previous Labour Government, who, at a time of rising unemployment, attempted to reduce it by putting a tax on jobs. Of course, the Government have abolished that in the course of the past eight years. That was one of the features of the Government's financial policy to which the hon. Member for Knowsley, South (Mr. Hughes) did not feel it necessary to allude.

The right hon. Member for Sparkbrook also failed to explain how he would encourage enterprise and attract managerial ability through the Labour party's proposal for the confiscation of earnings. It was clear from his speech that, if the country has the misfortune to return a Labour Government at the next election, we will be back once again to a 98 per cent. marginal rate of income tax.

The right hon. Gentleman defined the rich as the top 5 per cent. of earners and the right hon. Gentleman's proposals would cover everyone with a taxable income of £16,000 or more per annum. I am not sure whether they are people whom ordinary people would consider to be rich. There are people of relatively modest means who come into that category. The right hon. Gentleman completely failed to tell us how the national income will be increased by supporting Luddite trade union policies, be it Scargillism or that which we find in Fleet street or Wapping.

Lastly, the right hon. Gentleman failed to explain how he will reduce unemployment by increasing taxes and interest rates. Inflation would be the inevitable consequence of those policies.

The policies of the right hon. Gentleman are followed, albeit at a distance, by those who sit on the alliance Benches, although quite whom they have followed at the moment I do not know, because none of them are in the Chamber. Recently I have devoted—I admit that it was a somewhat unrewarding pursuit—some attention to the alliance documents on its economic and financial policies, in particular its Budget recommendations for this year. The document is called "Jobs and Competitiveness." I have found a number of interesting points in that document, about which the House and the nation ought to know. It contains a number of false premises. The document says that Britain is becoming a low growth, low productivity, low skill economy. I had to look once again at the date of the document, because I thought that it might refer not to 1986 but to 1976 under the Labour Government of which all the leaders of the Social Democratic party, although they would like us to forget it now, were enthusiastic members. The contrast is most instructive.

In his Budget speech my right hon. Friend the Chancellor of the Exchequer pointed to this Government's record. The growth rate is relatively high and productivity is increasing. There have been five years of growth at 3 per cent. per annum. That growth rate was exceeded in 1985. Then the growth rate was 3.5 per cent. per annum. It was the highest growth rate in the EEC, and it was higher even than in the United States.

As for low productivity, compared with the period between 1974 and 1979 when manufacturing productivity rose by less than 1 per cent. per annum and when it was the lowest of all the G5 nations, that has been increased in the last six years to 3.5 per cent. per annum. We are second only to Japan. As for the manufacturing sector, about which there is so much misinformation, in 1985 output increased by 3 per cent., productivity increased by 4 per cent. and exports increased by 6 per cent. That is a creditable achievement. It is the result of seven years of sound financial discipline.

I contrast the alliance Budget representations for this year with what it said in its autumn statement entitled "Facing the jobs challenge." It has two plans to reduce unemployment and increase economic activity. According to its latest document, the alliance proposes to spend an additional £3.5 billion to reduce unemployment by 750,000 over the next three years. Six months ago, it proposed to spend £5 billion to reduce unemployment by 1.5 million over four years. One might ask why the alliance is being so modest and moderate in its demands. According to the latest calculations, why not spend £10 billion to reduce unemployment by 2 million or indeed, £15 billion to reduce unemployment to zero?

One might ask why this inflation in the cost of reducing unemployment has occurred during the last six months. In September 1985 the alliance calculated that it would cost £3,300 per job to reduce unemployment over four years, but in March 1986 it calculated that cost at £4,650 per job over three years. It is a great shame that nobody is sitting on the alliance Benches to explain why this arithmetical invention is as it is.

How would all this be financed? The alliance says that it will not increase taxation and that it will be financed by borrowing. How will the borrowing take place? Will the alliance borrow from the public? That would merely divert resources from other productive uses. All it would do, therefore, is to shuffle unemployment around different sectors of the economy.

Would the alliance borrow from abroad? If so, it is a belated convert to Reaganomics, about which it is so scathing, although that is exactly the policy that has been adopted in recent years by the United States, which sustains the United States' artificially high rate of economic activity at the cost of that of western Europe. That has implications for interest rates and the exchange rate. It also assumes no loss of international confidence, despite the new laxity in borrowing that its policies would entail.

Lastly, would the alliance borrow from the banks? If so, the consequence would be that inflation would be bound to increase. It is evident that the alliance is not satisfied with the levels of debt interest that we are paying at the moment—£19 billion a year out of £170 billion of public expenditure. That now accounts for over half the revenue from income tax, or the whole revenue from value added tax.

There is a word to describe this kind of economics. It is Dunwoodyism: the theory that there is such a thing as a free lunch, that one can eat lunch today and that the bill will never come in at the end of the day. As my hon. Friend the Member for Cheltenham (Mr. Irving) proved in his example and as the International Monetary Fund proved during the life of the last Labour Government, there comes a time when the bills have to be paid. Therefore I counsel the alliance to profit by our experiences since the war under Governments of all political persuasions and to realise that there comes a time when the cash runs out.

In the alliance's autumn statement of last September there seemed to be a number of extraordinary muddles about what it should be doing about a monetary policy. It castigates our Government because of their supposed commitment to a failed monetarist policy, but on the same page it calls for a steady monetary policy. It says: An Alliance Government would keep a firm grip on the money supply. In addition, the alliance would stabilise the exchange rate by joining the European monetary system, but it does not say that that would entail even greater reliance upon short-term monetary aggregates and upon interest rates, which supposedly it does not favour.

There is the same confusion about inflation. The right hon. Member for Plymouth, Devonport (Dr. Owen) said: If inflation is held down, unemployment will then begin to fall. Anything less must mean that unemployment will continue to rise."—[Official Report, 29 June 1983; Vol. 44, c. 604.] However, in this document the alliance postulates a rate of inflation, if its policies are followed, of 7.5 per cent. That means that inflation would be more than double what it is now. Before it starts to lecture my right hon. Friends in the Treasury on economic policy in order to put the country back to work, I suggest that the alliance ought to settle the muddle about the premises upon which its policies are based.

The great panjandrum for the alliance was referred to by the hon. Member for Stockton, South (Mr. Wrigglesworth): that what will keep all these conflicting objectives in line is an incomes policy. The reason for an incomes policy was provided by the hon. Member for Truro (Mr. Penhaligon), who I understand is now the economic guru of the Liberal party, although he has not been present throughout the entire debate. However, as the Liberal party's economic spokesman he said at its assembly last September that we have to commit ourselves to a pay policy, otherwise all that can be said about the economy becomes fluff in the wind. Homespun economics we might expect from the hon. Gentleman, and fluff in the wind is a good description of the alliance's economic policy.

If we look in detail at its proposed incomes policy, we see how absurd and impossible it is that it could contain the inflationary forces that would be let loose if the alliance's other economic policies were to be implemented. In its Budget representations on page 7, it says that the alliance's incomes policy would cover increases in average earnings that exceeded a predetermined inflation limit. That has to be contrasted with what the alliance says in the same document on a previous page: that it would aim at moderating earnings growth and that it would relate it to growth in productivity.

The alliance has to decide what is to be the basis of its incomes policy. Is it to be productivity or inflation? What happens if productivity is greater than inflation? Are wage increases to be held down below the rate of inflation to those of productivity? One could ask the same question the other way round: what if inflation is greater than productivity? Are inflationary wage increases to be permitted, notwithstanding that they are not covered by increases in production? There is no necessary connection between productivity and profits. We know that if Jeffrey Archer sells more books, Debbie Owen makes more money. It appears to me that the alliance policy on incomes control is flawed from the start.

The alliance says that companies with profit-sharing schemes will be exempt from the policy. That is a contradictory objective, because the more successful those companies are in expanding profit sharing, the more ineffective becomes the inflation tax that the alliance proposes as an incomes policy. There are so many exemptions to the incomes policy that one wonders to whom it applies. In addition to firms with profit-sharing schemes, which cover about 5 per cent. of the working population, firms employing fewer than 100 employees will also be exempt. That represents a further 49 per cent. of the working population. Because there will be an inflationary seepage to workers in small businesses, the rest of British industry will be able to give only lower than average increases and increases lower than the average rate of inflation.

The self-employed will not be covered under the proposed scheme. New firms and people who plan to change jobs will not be covered also. The public sector, which represents 25 per cent. of workers, will be exempt from this inflation tax.

One can see the avoidance techniques that would come about if such a scheme were introduced. Techniques such as replacing cash payments by fringe benefits, new job descriptions, people being promoted artificially and changes in hours and conditions of work would prevent the incomes policy from working effectively.

What about the jobs in which productivity cannot be measured? For example, where would Members of Parliament fall in this scale? What about supply and demand in the real world? That does not feature in the alliance's policy. The alliance fails to realise that profits ultimately reflect not productivity but supply and demand, although productivity naturally feeds into it. The same applies in respect of wages.

The retail prices index, which presumably is the basis upon which the alliance would calculate the inflation limit, is itself an average. Some prices go up more than others. The average is the exception rather than the norm, as is the case with incomes. Not all incomes can or will go up by the average. Therefore, why should others not be able to go up by more than the average? Those are the questions that people faced with these decisions will have to answer, and all that will add to the the cost of the bureaucracy. The alliance has not told us how its inflation tax is to work—whether it will tax 100 per cent. of the excess over the predetermined inflation limit, or whether it will be merely a part of it.

We will return to all the palliatives and quangos that have been set up by previous Governments. Statistical necromancers will study the entrails of chickens to decide what inflation will be like in a year's time to place a predetermined straitjacket on the economy. At the end of the day, we shall get the inevitable bust-up. What happens when the quangos make mistakes, as they did in 1974 when the pay board got the calculation of miners' pay increase wrong? That torpedoed the Heath Government, but for what?

At the end of the day, the basis of the alliance's policy is to mistake the cause of inflation. Every year since the Conservative party has been in office, GDP has risen in real and monetary terms. Unfortunately, unemployment has risen also. We can derive from that that unemployment has not a macro-economic demand-related cause but a micro-economic cause to which the Government have devoted considerable attention and which the Finance Bill plays an important part in eliminating.

Instead of trying to drag us kicking and screaming back into the 1960s, as the alliance would seek to do, the Government are continuing, in an effective way, with their imaginative policies. We must base high economic activity and low unemployment on sound financial and economic policies. That is the best way in which the future prosperity of our people will be guaranteed.

8.24 pm

Mr. Austin Mitchell (Great Grimsby)

I will not support the hon. Member for Tatton (Mr. Hamilton) in his devastating attack on the alliance, which had all the power and effect of being hit around the head with a piece of wet, uncooked tripe. It is interesting that alliance Members responded in their usual tumultuous fashion by total absence, instead of the partial absence that is almost normal for the alliance.

The sad, irrelevant, Finance Bill has a couple of things in common with previous Finance Bills which have been introduced by the Government. Most of the Bills have had vainglorious titles. I remember the Budget for enterprise, which was the prelude to our cataclysmic manufacturing decline which practically turned this country into the world's first undeveloping country. Last year the Government brought down a Budget for jobs. Unemployment continued to rise to levels which this country had never seen. Quite frankly, this year's Budget has been a budget for votes, which is almost certainly a guarantee that the Conservative party will lose the next election.

There is another common pattern. Whatever the vainglorious titles of previous Budgets, each has provided a set of give-aways to wealth—a steady pattern of smuggling more money into the back pockets of wealth and power in this country. However difficult the circumstances, however great the need for sacrifice, however strenuous the ceremonising to the rest of the community, there are always five or six handouts to wealth.

There have been handouts in several forms—a fiddle here, a fudge there, a change there, a cut in the rates, an adjustment, a little trimming, some fiddle on the capital transfer tax or a rebasing of the capital gains tax. Behind the deluge of public relations words backing the Budget—the vainglorious rubbish talked about the Budget—a steady dribble of money has been given to the wealthy in the community. On our calculations, this year £3.5 billion has been provided to the top 5 per cent. or so of the wealthy. The Child Poverty Action Group has stated that the richest 7 per cent. will benefit to the tune of £2.6 billion this year as a result of direct tax cuts in the Government's Budgets. The common pattern has been vainglorious titles and a steady dribble of concessions to wealth.

The Finance Bill represents a wasted opportunity. It is the product of mountains which have laboured. It produces an interesting insight into the Chancellor's psychology, because it is the product of somebody with a tricky mind and rather nasty instincts when it comes to considering the people of this country. The Budget and the Finance Bill provided an opportunity to generate growth. We need growth.

The figures cited by the hon. Member for Tatton and the Government about the Government's achievements and the growth they have secured are figures which have been supplied since 1982. It is as if the world suddenly began in 1982. The enormous disaster that the country was dragged into between 1979 and 1981 has been totally ignored. The Government achieve growth by conjuring up the figures from 1982. In fact, every year since the Government have been in power the average growth rate has been 1.2 per cent., which is pathetic. The rate is lower than the average growth rate for the previous Labour Government, which the hon. Member for Tatton castigated. That is the record of the Government. There is a desperate need for growth.

Since the Government have been in office, there has been a catyclismic rise in unemployment. The Government had enormous success in getting down the unemployment figures. The tragedy is that unemployment has continued to rise. The figures have been fiddled to indicate that the Government have got unemployment down. Since the Government have been in office, 15 adjustments have been made to the unemployment figures. Each adjustment has been an adjustment downwards. We need growth to reduce unemployment and to expand the economy.

We need the kind of expansion that President Reagan has provided in the United States, but not in the manner that the hon. Member for Tatton indicated. President Reagan's approach to the economy is to implement Keynesianism without understanding it. His answer is deficit financing. Eight million new jobs have been generated in the three years that he has undertaken deficit financing.

As my hon. Friend the Member for Knowsley, South (Mr. Hughes) put it, this country had an opportunity, in the golden years, the opportunity years, to expand. Oil revenues provided that opportunity. The benefits of channelling North sea oil towards industry would allow growth, provided the pound was kept down. The Government, in the past seven years, have thrown away that opportunity. However, Sheikh Yamani has graciously condescended to provide us with another opportunity. This is Sheikh Yamani's Budget and Finance Bill. He has provided us with an opportunity through the stimulus that the fall in oil prices brings to the economy of Britain and the world. The world economy is expanding. The world faces a benign prospect. We had a chance to seize that opportunity. To do so, we needed to expand and stimulate our economy, especially with lower interest rates and by putting cheap money at the service of the people, not of the financial community—the City and the banks.

Why are Britain's interest rates practically double those of our major industrial competitors? Why are interest rates in Britain so high? The Government have had one consistent element in their policy—high interest rates. There has been a series of excuses, but there has been a pattern of high interest rates. There has been a constant series of rumours that interest rates would decrease, that there would be a drop in the mortgage rate, that the climate was favourable and that the money supply figures provided an opportunity. But interest rates have never fallen as much as we were told, because the reductions have been in terms of half a per cent. here, half a per cent. there, while the increases have been 2 per cent. or more. There has been constant pressure to keep interest rates high.

The so-called success in bringing interest rates down has been the heralding of an expected decrease, which has never quite come. It has been reduction by rumour, not in reality. Britain's interest rates have been consistently higher than necessary. Interest rates have been crucifying borrowers, home owners, people with overdrafts, local government, industry and investment. They have imposed a burden on the whole economy.

The banks, which have been the biggest barrier to enterprise, are always eager to lend to South America—indeed, to anyone overseas—and to rush into the newly industrialising countries. They irresponsibly expose themselves. It is like a flashing filigree in a flimsy farce. The banks are eager to expose themselves in an economically and commercially undersirable way. They lend reluctantly to industry, demanding an instant return—in months rather than years—while not being prepared to finance the long-term investment that Britain needs. They thrust umbrellas at people when it is sunny, but snatch them back immediately a hint of rain is seen on the horizon. The banks' record is counter-productive. They, not the nation, have been made rich by this interest rates policy.

It is interesting, as can be seen from the report of the Select Committee on the Treasury and Civil Service, that the biggest stimulus to the economy was an increase in capital spending. The parliamentary unit of the university of Warwick went through all the possible stimuli to the economy according to the London Business School model. Public spending was so important because it had the greatest and most immediate effect in reducing unemployment and stimulating growth. The second biggest stimulus was a 1 per cent. cut in interest rates. It had a greater effect than a 5 per cent. cut in income tax, a 10 per cent. increase in allowances or a 10 per cent. cut in VAT or in employers' national insurance contributions. A cut in interest rates has a greater effect in reducing unemployment than any of the other expedients.

The Government's excuses for their high interest rates have varied from time to time. When the Conservative party was elected, it told us that, until the money supply was brought under control, interest rates had to be high. That led almost immediately to the folly of 17 per cent. interest rates and the pound being worth, I believe, $2.40. That excuse was withdrawn and the public sector borrowing requirement was blamed. We were told that interest rates would remain high until the PSBR was reduced. Britain's public sector deficit is lower than that of most other countries, but interest rates have remained high. However, the excuse underpinning them has been knocked down.

For a time we were told that, because American interest rates were high, Britain's rates had to be high to follow them, but that excuse has now gone. The Government now have a new excuse: Britain's interest rates are high because we pay ourselves too much because our labour costs are increasing. The report of the Select Committee on the Treasury and Civil Service states that one of the rare points of unity between the evidence of the CBI and the TUC is that that excuse for high interest rates is wrong. The CBI stated that interest rates would be high even if labour unit costs were falling—an interesting reflection on its faith in the Government. The Select Committee concluded:

We ourselves have difficulty in following the mechanism by which high interest rates will produce lower wage increases. Part of the confusion arises because government statements do not always distinguish clearly between cost-push inflation and demand-pull inflation. That is just another excuse in a long series of exploded excuses. The reality is that interest rates are high and the Government's excuses for that reality have changed. Interest rates are high to keep the value of the pound high. A high-value pound is the Government's only effective weapon against inflation. Indeed, it is their only weapon. They say that they will keep inflation down by keeping the cost of imported manufactured goods as low as they can through an overvalued pound. In other words, they say that they will let industry, which must compete with those imports, carry the consequences of the Government's inflationary strategy. That is an inflationary strategy of placing a pistol directly at the head of industry.

High interest rates are a double blow to industry. They cut investment and channel industry's money and profit into the frenzy of takeover and speculation that is occurring in London and all over Britain. It is similar to the last days of the Roman empire. The Government are not doing anything for the long term. Firms are merely going in for tribal cannibalism on an enormous scale. That is the first burden of high interest rates. The second burden is an overvalued exchange rate, which effectively subsidises imports and penalises exports. Our exchange rate is substantially overvalued. That is the only justification one can see for high interest rates, or that is what the Government think.

The Government have no strategy on inflation, except for sermons. It is no use preaching at industry to keep its labour costs down and to stop wage increases, because an industry that is competing with overseas firms has to pay to attract skills, to keep its labour force and to keep that labour force working. Sermons are of no use in the face of such pressure. Companies awash with cash can pay without those difficulties, because they set the market rate.

When directors and top management lavish so much money on themselves, as we have seen in the recent massive pay increases, it is indecent and obscene for them to demand that the rest of the people should hold their salaries at their present rate or accept cuts. They cannot preach with one voice and accept more money in the back pocket, as they have done, with any semblance of morality. There is also the hypocrisy of the Chancellor. Demand is predicated in the forecasts on consumption—consumption sustained by the wage increases that the Chancellor condemns with his other voice.

Costs in the United Kingdom are increasing faster than those in competing countries. Inflation in Britain is higher than in competing countries. I gather that Germany and Japan have enjoyed negative inflation. We should be seizing the opportunity provided by low oil prices, not limping behind the rest of the world and getting less benefit from the growth that is to come. We are limping behind because we are penalising ourselves with high interest rates and an overvalued currency. We are a limping, lame bulldog. We do not even have a licence to bite now, and we are lagging behind the advanced world. The Finance Bill fails to take advantage of the opportunity to escape from that. The Bill is also irrelevant to that need and to the purposes of a better society. The Finance Bill, in this difficult time, insists on handing out more and more to those who have more of it.

The Government are in a trap. We shall try to restore the social justice which has been missing from the Finance Bill. The Chancellor discussed the costs of the inflationary pressure of expansion, but he must bear in mind the cost of running the economy for discipline. We should never forget the damage which has been done by that discipline, nor the horrendous cost in terms of high unemployment and keeping people out of work. The present state of affairs is that Government spending is being cut because of the huge burden of unemployment. That is the result of the economic policies of the Chancellor and his predecessor. The infrastructure is crumbling. It should provide work for the unemployed, but we cannot afford to employ the unemployed to do the work which obviously exists because of the cost of keeping them unemployed.

It is the economics of bedlam and lunancy. The Budget is a wasted opportunity. It does not take up the challenge of expansion or seize the opportunities which lie ahead. It does nothing to ease the position of those who have been forced into unemployment, forced on to supplementary benefit or forced into poverty by the failure of the Chancellor's economic policies. The Government are not fiddling while Britain burns, but fiddling the figures while Britain sinks.

8.41 pm

Mr. John Watts (Slough)

The hon. Members for Great Grimsby (Mr. Mitchell) and for Stockton, South (Mr. Wrigglesworth) have in common an attachment to old-fashioned Keynesian economics plus a less attractive national characteristic, an unlimited capacity for national self-denigration. Their choice of statistics presented the performance of the British economy in the worst possible light. They utterly refused to recognise the realities of the achievements of the medium-term financial strategy—low inflation, sustained growth, rising living standards and a rise in employment.

The alliance conducts this orgy of denigration from a position of smug and cosy affluence. That is the epitome of the alliance person—those who have forsaken wife-swapping for fiscal flagellation with their masochistic opposition to reductions in income tax.

The Budget and the Finance Bill show that mixture of ingenuity and imagination which we have come to expect from my right hon. Friend the Chancellor. That is especially true of the package of measures which relate to small business and charities. I shall concentrate my remarks on those two aspects.

I welcome the decision to make the business expansion scheme permanent. My right hon. Friend the Chief Secretary set out, in his opening speech, the success of that scheme. That success is clearly recorded in the report prepared by Peat Marwick Mitchell. It has enabled small companies to raise risk capital. Amounts of less that £50,000 were raised by over half of the companies which took advantage of the scheme. The decision to make that scheme permanent underlines our determination to maintain a framework in which small companies can be formed and grow.

The extension of the loan guarantee scheme for a further three years provides loan capital for further expansion and that is welcome. In the past there has been a criticism of the level of premium charged and I am especially pleased to see a cut in the premium from 5 to 2.5 per cent. I hope that in a future Budget it will be announced that this scheme is also to become a permanent part of the armoury of measures to assist small and medium-sized companies. The reduction in the small companies' rate of corporation tax to 29 per cent.—my right hon. Friend the Chief Secretary reminded us that it was 42 per cent. under the Labour Government—is a further measure that will assist the small company to continue to grow in profitability.

Therefore we have provided for the four ages of the small company—conceived by the entrepreneur, nurtured with risk capital under the business expansion scheme, funded through its adolescence by loan capital under the loan guarantee scheme and arriving at profitable maturity where not too much of its profit—certainly not as much as previously—will be taken away in taxation. There will be more retained profit to fund further growth.

The fifth age of the small business and, especially the family business, posed the greatest problems. There are an array of measures to help small businesses to become established and grow. However, family businesses, in their maturity, faced a severe dilemma because of the pernicious impact of the capital transfer tax. This tax made it difficult, if not impossible, for the business to be passed on to the next generation of owners and managers.

The abolition of capital transfer tax on lifetime gifts will be of great assistance to facilitate the orderly handover of ownership of a family business from one generation to another. The performance of family businesses, both in their investment record and in their return on capital, illustrates the desirability of finding the means by which they may remain in family control and not be forced by fiscal reasons to be floated or taken over by a conglomerate.

The measures contained in the Finance Bill provide a well-structured fiscal and financial framework to promote small businesses and their growth. However there remains a serious gap in the strategy. Many of the small and medium-sized businesses in my constituency do not look to the Government for handouts of taxpayers' money to support their growth. However, they are looking for more access to greater markets. The Government's expenditure on the purchase of goods and services for the current year will total £34.1 billion. Potentially that is a large market and one to which small and medium-sized businesses must have greater access.

To ascertain the extent to which Government procurement was providing contracts for small businesses I tabled a series of questions to the major Departments of State. I was disturbed to discover that the Ministry of Defence alone was able to give an adequate answer to a fairly simple question: "What is the value and what proportion of your expenditure on the purchase of goods and services provide contracts for small businesses?" With the exception of the Ministry of Defence the Departments replied that they did not keep records in a form which would enable them to answer the question.

The Department of Health and Social Security has £8.8 billion to spend, the Department of Transport has £2.4 billion to spend, the Department for Education and Science £2.3 billion. The Department of Education and Science did say that it intended, from next year, to maintain records which would enable it to identify its contribution to small businesses. Even the Department of Employment, with its responsibility for the small business sector, was unable to do any better than provide the estimate that perhaps 10 per cent. of its purchasing was directed to small businesses.

This inability to identify the extent to which contracts are placed with small businesses suggests a lack of awareness of the need to take account of the needs of small businesses when determining Government purchasing policy. Until this deficiency is remedied a major gap will remain in our strategy for encouraging the development of small and medium-sized businesses.

The scathing and dismissive tone of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) concerning the impressive and imaginative measures to assist charities came ill from someone who was a member of a Government who did nothing to aid charities. Far from being a package designed in a desperate attempt to find something popular for my right hon. Friend the Chancellor to do—both the Bill and the Budget contained many other popular measures—it is but a continuation of the steady progress made in improving the tax environment for charities. First, there was the shortening of the term for covenants to four years. Then there was the restoration of higher rate tax relief within limits that will be abolished by this Bill. The sweeping reforms in the Bill place charities in the best position ever to obtain financial support from individuals and companies.

Like my right hon. Friend the Member for Worthing (Mr. Higgins) I believe that the payroll deduction scheme and the new arrangements for one-off gifts by non-close companies will prove to be especially valuable in providing opportunities for local charities to get support from local companies and their employees. Shortly I will be meeting the chairman of the Slough council for voluntary service to discuss how we can get together to ensure that charities in my constituency benefit to the maximum from this very generous reform of tax law for charities. Because of the imaginative and beneficial measures to which I have referred, and the others which time prevents me from referring to now, it will give me great pleasure and satisfaction to support the Second Reading of the Bill in the Lobby.

8.51 pm

Mr. John Maples (Lewisham, West)

It is disappointing that the Finance Bill does not deal with a fairly major reform of the income tax system. I suspect that the Government also find that disappointing, as it seems that it will take longer to bring that to fruition than might have been hoped.

We have had a Green Paper on personal taxation. It is very interesting, but it basically contains only one idea. It is also in danger of pre-empting the debate on tax reform. Perhaps that is what it was intended to do. Major reforms of the income tax system, probably come only once every 30 or 40 years. They thus warrant a very wide-ranging debate on the different possibilities for reform. I shall outline some of the major problems. First, income tax starts at far too high a rate. People pay no tax and then face a 29 per cent. cliff. In that respect, we are out of line with our EEC partners, where the starting rate for tax ranges from between 7 and 22 per cent.

It is also argued that people in Britian start paying tax too soon and at too low a point on the income scale. In that respect, we are not out of line with the EEC, but we are above average. In any event, it is a subjective judgment. However, it seems to have had great influence on Government policy, which has been substantially directed towards raising tax thresholds, on the argument that that takes people out of tax and helps with the poverty trap. The argument that it takes people out of tax is difficult to sustain. I suspect that when the threshold is raised, they go out of tax, but when they receive a pay rise, they are taxed again. Moreover, those helped are seldom families with one relatively low earner, yet that is where poverty tends to occur. It is difficult to argue that raising tax thresholds helps with the poverty trap. If that trap is to be solved by tax thresholds, the threshold for a married man must be raised to about £5,000. That would obviously be expensive.

The proposals in the Green Paper would achieve that aim by raising the combined threshold to about £6,000. I should be interested in the response of the Minister, but the argument that one can take people out of the poverty trap by raising thresholds is surely overtaken by the proposed reforms to social security. If housing and family credit are to he based on after-tax income, no amount of fiddling with the tax threshold or with tax rates will make much difference. A person's family credit or housing benefit will simply be adjusted in terms of his after-tax income. Raising thresholds after the social security reforms have been brought into operation will have no effect at all on the poverty trap.

It is true that tax is relevant to the unemployment trap, but it is the average rather than the marginal rate that is relevant. One can deal with average rates just as well by dealing with the basic rate of tax as by raising thresholds. The basic and fundamental problem with our income tax system is that, while we have very high marginal rates for almost everyone, ranging from 29 to 60 per cent., we have relatively low average rates of tax. The percentage of income that a person on three quarters of average earnings would pay in income tax is only 15 per cent., but they face a marginal rate of 29 per cent. Someone on average earnings of £10,000 a year would pay an average of 18 per cent., but would face a marginal rate of 29 per cent.

That is built into the system because there are so many deductions. It has bad consequences. It is bad for incentives higher up the scale. It is bad because it promotes the black economy and a general indulgence in too much tax avoidance and tax evasion. It has a serious impact on the present structure of the poverty trap, and has serious repercussions on pay bargaining, because it costs an employer about £1.80 to put £1 net in his employee's pocket.

The reason for very high marginal rates as against low average rates is that about half of personal income is not taxed. The majority of the part that is not taxed is made up of personal allowances. The Green Paper attempts to deal with some of these problems. It deals with the poverty trap in its present form, but after the social security reforms have been made, in those cases where the benefits are based on after-tax income, raising the tax thresholds will have little if any effect on the poverty trap. The Green Paper largely deals with the unemployment trap, but that could be dealt with just as well by reducing the basic rate as by raising the thresholds. The other major reasons given in the Green Paper are the enhancement or promotion of privacy and independence in the case of married women dealing with their tax affairs, and the need for help for the low paid, particularly when a woman ceases work to have her first child.

Those are laudable objectives, and the idea is attractive. However, it would cost £5.5 billion to raise the single transferable allowance to nearly £3,000. 1 should have thought that if we had £5.5 billion to play with—if that is the right word—in the tax reform game, many other reliefs and privileges could be bought with the money.

We could solve the problem of the separate taxation of husband and wife relatively cheaply. We could help low-paid couples relatively cheaply, perhaps through social security benefits. There would still be a lot left over to help with other tax reforms. The problem at the lower end of the tax scale is that people are left with too little money in their pockets, because they have paid too much tax, or do not receive enough social security benefits. But higher up the tax scale the problem is the marginal rate and its disincentive effect. Raising thresholds does not meet both those objectives. The best way of helping the low-paid is to deal with that problem through employees' national insurance contributions. That would focus the money on the low-paid, giving them the relief without having to give it to everybody else.

If my calculations are right, we could abolish the 5 per cent. band on employees' contributions at a cost of only £130 million. That would be a cheap way of focusing help on the low-paid without having to give that relief to everyone else. Once one has dealt with that, there are considerable attractions in an alternative approach to tax reform. Paradoxically, we could abolish personal allowances and tax every pound of someone's income form first to last. Although total personal income in the United Kingdom in 1984 was £200 billion, the revenue from income tax was only £35 billion, or 17.5 per cent. Most people would think that that percentage was much higher. It demonstrates the problem of the high marginal rates and the low average rates.

If we took £5.5 billion off the total that could be raised in income tax, which is the amount that we would have to spend on implementing the Green Paper's proposals, we would have to raise only £30 billion. On my calculations, one could do that with a basic rate of 10 per cent. payable up to average earnings, and 20 per cent. payable up to twice average earnings, with a maximum rate of 30 per cent. thereafter. Obviously, there would be no personal allowances reducing the amount of income that is taxed.

I should have thought that it would have a dramatic effect on incentives higher up the income scale, on the black economy, and tax avoidance and evasion, if people faced only a 10 or 20 per cent. tax rate rather than a 30 or 40 per cent. rate. It would also have a very dramatic effect on the poverty trap, and a far more dramatic effect than most of the tax threshold-raising that we have been able to afford. I suspect that it would make tax far cheaper to collect. There would, of course, be problems with mortgage relief and pension contributions, but I do not wish to enter what has proved to be a political minefield for all political parties. However, those could either be left in as deductions or rectified by some compensation.

Some working wives would lose if such a proposal were adopted. The biggest problem is that the low-paid would be left worse off in such a system. The break-even point is about £6,000 a year, which is considerably below average manual earnings, and the maximum loss is just over £4 a week. We could make up that loss to the people affected through the social security system by way of housing benefit or family income supplement, that would enable us to introduce a tax system with much lower marginal rates. That is an attractive option and I am sorry that the Government seem almost entirely hung up on a threshold approach to tax. We had that for several years in a row and I thought that this year when the basic rate was reduced and the thresholds were not over-indexed we had got away from that approach. However, the Green Paper suddenly takes us back to it.

I am anxious to see that we do not enter into major reforms of the income tax system with only one idea in the bag. The debate should be much wider and should examine all the alternatives, of which I have outlined just one. My right hon. Friend and the Government, and all of us on the Government side, ought to find the proposition for a tax system with a basic rate of 10 per cent. and a maximum rate of 30 per cent. attractive to taxpayers and beneficial to the economy.

9.1 pm

Mr. John Butterfill (Bournemouth, West)

Time is pressing, so I shall endeavour to be brief. I listened to the description by Opposition spokesmen of the British economy and I find it difficult to recognise it from that description. It is not the same economy as that which is seen by independent observers like OECD and certainly it is not the economy that I recognised when I was recently in the United States and heard the way we were considered by investors there.

The dramatic improvements in the British economy in the last few years are due almost entirely to the imaginative approach to budgetary matters taken by my right hon. Friend and the other members of the Treasury team. The business expansion scheme is one of the most creative measures that any Government have ever introduced and will continue to provide enormous help to young and emerging industries.

I am worried about one of the proposals in the Finance Bill. Hon. Members will be aware of my interest in tourism and leisure, and the Finance Bill contains a proposal to limit or to exclude from the business expansion scheme companies whose net asset backing exceeds 50 per cent. I admit that there have been considerable abuses of the scheme by certain property companies and by companies of that type with high asset backing.

However, in dealing with covered sports centres or leisure centres a problem arises. At the moment the rules lay down that anything that is added to the land, and would normally be thought to be annexed to the land, should be included in the computation. There is no doubt that the provision of such a facility carries a high risk. I hope that it will be possible for my right hon. Friend to consider some amendment in Committee.

I welcome the considerable benefits that clauses 26 to 30 confer on charities. Those benefits have already been dealt with by other hon. Members so I will not go into them in detail. However, it would be churlish to ignore the other changes about charities made in the Budget, especially the VAT changes. These give enormous benefit to charities that provide for the blind and provide medical services.

I should like to quote from a letter sent to me by a charity with which I have been closely associated for some years. It is the People's Dispensary for Sick Animals, which wrote to me immediately after the Budget. The general secretary said: What about the Budget then! As far as we can see, our prayers have been answered and we shall henceforth no longer pay VAT on our drugs … Thank you approximately 150,000 times—that's the amount of VAT which we shall save annually on drugs alone! The Government have not received in the press and elsewhere all the credit they deserve for that particular measure.

Small firms will be particularly grateful for the changes in the rules for capital transfer tax, now to be known as inheritance tax. However, there remains a serious obstacle in capital taxes—capital gains tax. Although it is possible to transfer from one generation to another without incurring capital transfer tax, that transfer will still trigger capital gains tax, which in itself imposes a considerable obstacle to the continuation of small family businesses. The problem with CGT is that it is not so much a tax on true gains as a tax on inflation. That seems to be fundamentally wrong. My right hon. Friend the Chancellor of the Exchequer moved some way in that direction by providing indexation from a base a few years ago. In future, I hope that he may feel able to go further and to remove altogether the purely notional gain that arises from the effect of inflation.

Finally, I congratulate my right hon. Friend because if one thing always makes his Budgets stand out, it is his imaginative approach to problems. We have seen from the success that we have had in housing and the sale of council houses how the growth of home ownership has changed the perspective of great sections of our community. To attempt now through the personal equity plan to extend that to stocks and shares is creditable. A number of hon. Members have pointed out that the scheme as conceived may not be perfect. Indeed, it may be capable of improvement. I hope that I shall be asked to serve on the Standing Committee, and that we shall attempt constructively to improve the scheme. At the same time let us give it enormous credit as being an imaginative measure which may possibly transform the face of British society.

9.7 pm

Mr. Terry Davis (Birmingham, Hodge Hill)

We have had an interesting debate about a most uninteresting Bill. The gap between the Conservative party and the Labour party in our discussion and analysis of the economy, our approach to economic policy, and even our identification of the most important economic issues has shone through the debate.

I listened to all the speeches from Conservative Members, and two points struck me. First, not even the Government's most fervent, loyal supporters, including the right hon. Member for Worthing (Mr. Higgins), could bring themselves to suggest that the Bill was anything other than an exercise in marking time. It is an exercise in waiting to see which way the price of oil will move, which way the exchange rate will move, what will happen to the balance of payments and, above all, in waiting for next year, for an election Budget and an election Finance Bill through which Conservative Back-Bench Members hope to save their seats.

Secondly, the Bill marks the end of the Chancellor's pretensions to be a reforming Chancellor of the Exchequer. Two years ago the right hon. Gentleman was cast as the Rambo of the Exchequer, machine-gunning his way through the jungles of taxation to rescue working people. Of course, it was never true. His role was really that of a latter-day Neville Chamberlain, the man who personified non-intervention, because that is what fiscal neutrality is and always was. It means that working people are left at the mercy of market forces in an economic jungle which the Chancellor's friends in the City of London exploit to their own advantage.

Now all those pretensions of two years ago have been exposed: 1984 was a one-off Bill from a one-Budget Chancellor. Two years later what we have is a mish-mash of odds and ends. In short, this year's Finance Bill is a boring Bill and hardly worth a day in the life of the House of Commons.

It is also an irrelevant Bill because it does almost nothing about the biggest economic and social problem of our time, unemployment and the poverty associated with unemployment, retirement and looking after children.

At no time in his speech did the Chief Secretary mention poverty. It took him more than half an hour to get round to unemployment. However, that was better than most of his hon. Friends, who made no reference whatsoever to unemployment or to the plight of the unemployed.

I can only deduce that all the Conservative Members who have taken part in the debate recognise that, as the Chief Secretary put it in his reference to home owners, the unemployed have no direct interest in this Bill. The Chief Secretary frowns, but that was the phrase that he used. He said that home owners had no direct interest in the Finance Bill, unlike all those bodies listed by him—the stock exchange, the other financial institutions, the businesses, large and small, which have, to the surprise of no one, not even the Chief Secretary, welcomed the Budget.

Of course they have welcomed it. The Budget was their Budget and the Finance Bill is their Bill. It is not a Bill for the unemployed. That was shown most vividly this afternoon when the Chief Secretary eventually spoke about unemployment. As Hansard will show tomorrow, he was ruled out of order because there is nothing in the Finance Bill, in the opinion of the Chair, to reduce unemployment.

The Chancellor of the Exchequer (Mr. Nigel Lawson)

What?

Mr. Davis

The Chancellor of the Exchequer must have been absent at the time and missed the speech of his right hon. Friend. When he looks at Hansard tomorrow, he will see that his colleague was ruled out of order.

The Chief Secretary, like other Government spokesmen, prefers to talk about the figures for employment rather than those for unemployment.

Mr. Forman

The hon. Gentleman has mentioned the connection in his mind between unemployment and the Budget. Since the Finance Bill is, as he knows, the legislative consequence of the Budget, and since the Budget, in its prudence and general approach, was one of the preconditions for the subsequent two points fall in standard interest rates, is that not one of the most important contributions to solving unemployment in this economy?

Mr. Davis

I agree with the hon. Gentleman that a reduction in interest rates will have a beneficial effect on both employment and unemployment. Where we may differ is in our attribution of that fall entirely to the Budget. There were other reasons. Interest rates were going to come down before the Budget. They are at the moment being held artificially high, if we are to believe the press, by the Bank of England, and I assume that the bank talks these days, post-Johnson Matthey, with the Chancellor of the Exchequer.

The Chief Secretary preferred to talk about the figures for employment rather than those for unemployment. I can understand that emphasis. Government spokesmen always want to tell us that more people are employed today than were employed a year ago and that more people are employed today than were employed in 1983. Today was no exception. The Chief Secretary gave us a new figure. He claimed that 1 million new jobs had been created since 1983. I am not sure how that figure has been calculated. It does not seem to have been included in any statistics published by the Department of Employment.

The most recent statistics published a fortnight ago do not justify the claim of 1 million new jobs since the general election. I realise that Lord Young issued a press release on the same day that the figures were published and claimed that an increase of 276,000 jobs in 1985 meant that the increase since March 1983—not since the general election—was almost 1 million. If the Government want to make such claims, they should first publish the detailed figures. Otherwise, they will be treated with suspicion in the House and elsewhere.

But there are more important points to be made about the Government's claim of an increase in employment. There are four things that Government spokesmen do not tell us, four things that the Chief Secretary did not mention this afternoon. The first is that when the Government refer to the number of people in employment, they often include people who are involved in Government employment schemes and training schemes. They include people on the youth training scheme and the community programme. I do not necessarily object to that approach because the Labour party believes in job creation measures, but it really is a bit thick for Government spokesmen to give the impression that those new jobs have been created by the economy rather than the Government.

We want to see more jobs created by the Government, and we take pleasure in the fact that some 350,000 people are counted—when it suits the Government—as employed as a result of job creation measures. But what was their position in 1979? Then the Prime Minister referred to real jobs, and she was not including those jobs covered by Government schemes.

Secondly, much of the increase in employment in the past two or three years has taken place in part-time jobs for women, as my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) reminded the House this afternoon. Again, the Labour party does not object to an increase in part-time jobs for women, but let us be clear about why the number of those part-time jobs is increasing. It is increasing, has increased and will continue to increase as a direct result of the high rate of unemployment. More and more married women are having to seek employment in order to support their families, and the only jobs that are available to them are part-time jobs.

In fact, the increase in the labour force mentioned by the hon. Member for Bournemouth, West (Mr. Butterfill) is also due, in part at least, to the increase in unemployment. The Government's supporters talk about the increase in the labour force as if it were the same thing as an increase in the population or the working population. That is not true. The increase in the labour force is measured as an increase in the number of people who are looking for work. If more married women are having to go out to work to support their families, they are counted as an increase in the labour force. That is where the statistic comes from.

The third point which is ignored by the Chief Secretary and other Government spokesmen in the House and elsewhere is that the figures published by the Department of Employment a fortnight ago show that the increase in employment is slowing down and has slowed down for the past year, despite the so-called "Budget for jobs". Indeed, the increase in jobs last year was down by one quarter compared with the increase in the previous year. There was an especially marked reduction in the number of new self-employed jobs—jobs which the Prime Minister has always boasted about—but the important point is that the total is going down; the rate of increase is declining.

Incidentally, the figures also show that not only is unemployment rising but that it has risen more quickly in recent months than a year ago. The rate is now twice that of a year ago. The Department of Employment's published figures show that during the past six months the increase in unemployment has averaged 12,000 people a month and a year ago, over a period of six months, the increase was an average of only 5,000 people a month.

There is a fourth point which the Government often omit or blur over. We now have the preliminary results of a labour force survey of one year ago.

Mr. Higgins

As the hon. Gentleman was arguing 10 minutes ago that it was out of order to discuss employment, why has he spoken about nothing else since?

Mr. Davis

I am responding to the claim made by the Chief Secretary, which was found to be in order, of the increase in employment in the last three years, and I am commenting quite properly on what the Chief Secretary said. It is, I think, at the discretion of the Speaker whether I am in order. It was not my decision that the Chief Secretary was out of order but the Chair's decision, because, in the judgment of the Chair, there was nothing in the Bill to help the unemployed.

To revert to the labour force survey and the preliminary results published one week ago, the figures show that in this country there are 755,000 people with second jobs. Although those second jobs are excluded from the statistics published in the survey, they are not always excluded from statistics published in the Department of Employment Gazette, as I understand it.

I ask the Chief Secretary to tell the House how many of the 1 million new jobs created since 1983 are second jobs—that is, jobs being done by people who already have a job. To what extent are the so-called new jobs represented by people who are working in the evening or at weekends in public houses? To what extent are they married women who go to work in a local shop on a Saturday? To what extent are they made up, for example, of people such as the man who works in the factory and goes to help in the local bookmaker's on a Saturday afternoon and is classed as having a second job? That is not an increase in employment to be put against the increase in unemployment that we have witnessed for the past seven years.

To be more specific, when the Department of Employment calculates an increase of 276,000 in the number of people in employment in 1985, does the Department include the estimated increase of some 80,000 second jobs a year? Those second jobs do not represent any increase in the real number in employment by any yardstick applied in the real world.

The Government have made so many changes in the way that the employment and unemployment figures are calculated that hardly anybody trusts the statistics any more. A more suspicious man would suggest that the Government change the figure so often to prevent any accurate analysis of their record. But what they cannot deny is that more people are unemployed today than were unemployed when they came to office in 1979. They cannot deny that more people are unemployed today than when we reached the so-called bottom of the recession in 1981. They cannot deny that more people are unemployed today than when they were re-elected in 1983. They cannot deny that more people are unemployed today than when the House debated the Finance Bill one year ago—a Bill which represented a Budget for jobs.

It is a fact that unemployment was too high when the Government took office in 1979, but it was coming down and it had come down for several months in succession. Since 1979, it has not only increased but trebled, and shows no sign whatsoever of coming down. And on the basis of evidence along the lines of the dog that did not bark, it is clear that the Government do not expect any significant reduction in unemployment this year. Treasury Ministers have been asked time and again, but on each occasion they refuse to give the figures. They can give forecasts for inflation, for capital investment, for domestic demand and gross domestic product; they can forecast exports and imports and the balance of payments; but they cannot forecast employment or unemployment.

Why are the Chancellor of the Exchequer and his colleagues so coy? They must have produced a forecast; they must have it in the Treasury. Are they really pretending that civil servants do not have the time to do this calculation, civil servants who, each Monday morning, are given a clutch of press cuttings by the Chancellor and his Chief Secretary to estimate and calculate figures to show the cost of my hon. Friends' commitments, hopes, ideas, suggestions and long-term aims? The Chancellor of the Exchequer smiles. We know what his weekend reading is. He reads Tribune. Each week he takes cuttings from Tribune, gives them to the civil servants on the Monday and asks them to work out what it would cost to implement Labour's plans. I suggest that he uses some of the civil servants' time to forecast unemployment and the cost of the Budget and the Finance Bill. If the Treasury forecast showed any reduction in unemployment, the Government would not be so coy. That is proof enough that the Finance Bill will not reduce unemployment.

Perhaps it is worth reminding ourselves that it is not only the waste of resources in paying men and women to sit at home instead of paying them to provide goods and services—particularly services—that the rest of the community needs, but the sheer poverty associated with being unemployed that concerns Labour Members. Of course, the best answer to that poverty is to get people back to work, and that is why the Labour party has set itself a target of creating 1 million new jobs during the first two years of the next Labour Government.

However, that is not the complete answer, because I million new jobs will still leave thousands of people unemployed and living in poverty. We shall therefore pay the long-term rate of supplementary benefit to the long-term unemployed, because the long-term unemployed are one of the three groups to whom we shall give the greatest priority in our campaign against poverty: the long-term unemployed, the pensioners and parents—single parents and married couples, working parents and unemployed parents. These are the people to whom we shall give priority, not because other people are not living in poverty but because they are living in the greatest poverty and must therefore come first.

What is the response of the Chancellor and the Government to the scourge of poverty? After a careful examination of the Bill, I can find only one section that, by any stretch of the imagination, could be described as alleviating poverty. That section consists of the clause relating to charities. As my right hon. Friend for Sparkbrook explained, we welcome the provisions in so far as they benefit real charities, but look at how much the Chancellor proposes to devote to this much-vaunted scheme. On the most generous calculation, in his Red Book, the Chancellor is giving £55 million a year in tax relief on gifts to charities, adding the provision for gifts by employees and companies together.

Mr. Lawson

What did the Labour Government do for charities?

Mr. Davis

We did not abolish the capital transfer tax, and it just happens that £55 million is also the cost of abolishing the capital transfer tax on gifts from the rich to the already wealthy. As my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) pointed out, that is one of the most objectionable provisions of the Bill.

My right hon. Friend the Member for Bristol, South (Mr. Cocks) and my hon. Friend the Member for Knowsley, South (Mr. Hughes) summed up the Bill. My right hon. Friend described it as a Bill that does not measure up to what is required. My hon. Friend described it as irrelevant, and he was right. Compared with the scale of the problems of unemployment and poverty, the Bill is irrelevant and inadequate—as irrelevant and inadequate as the Government. It is a defeatist Bill from a defeated Government—defeated not in the Lobbies but in the country—defeated by the problem of unemployment, and a Government who will be defeated in an election that not even this Government can avoid for ever.

9.28 pm

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

I start by making it clear to those hon. Members who have not been here throughout our proceedings, and who may have been out enjoying themselves, what precisely the Chair did not rule today. My right hon. Friend the Chief Secretary was rightly discussing aspects of the Finance Bill and of the Budget in relation to unemployment. In its wisdom—the Chair is always right—the Chair ruled that the specific budgetary measures on unemployment that are not in the Finance Bill should not be addressed, and my right hon. Friend immediately responded to that.

I go beyond that to the speech of my hon. Friend the Member for Surrey, North-West (Mr. Grylls). He was supported by all the Opposition parties on an issue which unites both sides of the House—unitary tax. He asked some important questions on this all-party issue. I shall reiterate the Government's position. The timing has not changed. The Government would have wished for greater progress by now, there is no doubt about that. He asked what Ministers would and could do to assist progress in this matter. Ministers have and will continue to take every opportunity to raise the matter of unitary tax with the United States. He commented on the role of the unitary tax group. I join him in paying tribute, on behalf of both sides of the House, to the activities of the Unitary Tax Group, to the Confederation of British Industry and to Peter Welch for mobilising British industry. As my hon. Friend rightly said, the Government have fought against unitary tax in every way possible.

Those of us who were privileged to hear the speech of my right hon. Friend the Member for Guildford (Mr. Howell) regarded it as lucid and fascinating. I listened with great care, as I am sure all right hon. and hon. Members did—[Interruption.] I listened as I have throughout the debate, unlike those who have not been present throughout but seek only to interrupt from a sedentary position. I listened, not only because of my right hon. Friend's former role as Secretary of State for Energy but because he was in advance of most of the world in predicting recent changes. Therefore, we are obviously conscious of his remarks. He went on to discuss other matters, including monetary policy. As my right hon. Friend the Chief Secretary said, the Government will respond to the Treasury and Civil Service Committee recommendation which many of my hon. Friends have commented on.

The right hon. Member for Ashton-under-Lyne (Mr. Sheldon), the Chairman of the Public Accounts Committee, made a wide-ranging and interesting speech. I listened with considerable care to his remarks about privatisation. He well knows that we beg to disagree. This is probably not the occasion on which to debate that particular issue except to say, with respect, that I think that he confuses ownership with regulatory needs.

The right hon. Member for Ashton-under-Lyne also raised the issue of capital transfer tax. It has been raised by other hon. Members during the debate. I can assure him, provided the House agrees, that there will be an opportunity to debate that in detail in a Committee of the whole House, without, as he rightly says, being trapped in the rigours of the Finance Bill Standing Committee. We welcome his comments, as well as those of my hon. Friend the Member for Surrey, North-West (Mr. Grylls) and my hon. Friend the Member for Bournemouth, West (Mr. Butterfill), who expressed a contrary view and said that that part of the Finance Bill was one of the critical features of my right hon. Friend the Chancellor's Budget.

I was sorry to miss the contribution of my right hon. Friend the Member for Worthing (Mr. Higgins) when I disappeared from the Chamber for a few moments. I would be doing the House a service if I drew to the attention of those hon. Members who were not here the question that my right hon. Friend legitimately put to the hon. Member for Stockton, South (Mr. Wrigglesworth), who made pious comments on the nature of the supposed courage of the alliance in voting against the reduction in income tax to 29 per cent. My right hon. Friend the Member for Worthing legitimately asked whether that vote would be a prime plank in their by-election programme at Ryedale and West Derbyshire. I trust that the limited presence of the alliance will not restrict it from ensuring that all the people involved in the by-elections will be well aware of the nature of that vote.

The alliance parties are again sadly without representation, except for the hon. Member for Stockton, South who was unable to be with us for the remarks of my hon. Friend the Member for Tatton (Mr. Hamilton). He gave a devastating analysis of the conflicting nature of the alliance's programme. [Interruption.] The alliance should carefully consider my hon. Friend's points, as some alliance Members were not present to hear his speech.

I welcomed the emphasis which my right hon. Friend the Member for Guildford placed on the Treasury and Civil Service Committee's verdict which came out categorically in favour of the Budget.

The right hon. Member for Bristol, South (Mr. Cocks) legitimately raised, in the special way to which we have all become used over many years, the interests of his constituents, especially in relation to tobacco. I am sure that if we have the privilege of his company in Committee, we shall look forward to his individualistic comments, which will help our deliberations. The right hon. Gentleman will in no way mind the compliments which I have paid him, and which I meant, for the way in which he has consistently argued for the interests of his constituents throughout his long and distinguished career in the Palace.

The remarks of my hon. Friend the Member for Carshalton and Wallington (Mr. Forman) were especially welcome. As always, he made a wise and balanced contribution. I was especially interested in his remarks on wider share ownership for employees—[Interruption.] I have listened to the debate and am now trying to respond to the specific points that were raised. Those hon. Members who, unfortunately, have not had the pleasure of being present will have no knowledge of what occurred during the debate.

I accept the point made by my hon. Friend the Member for Carshalton and Wallington about employee share ownership, although I do not agree with him that our other activities in the area of direct share ownership would divert us from our stated aims in the Budget.

I was especially unhappy—as was my hon. Friend the Member for Slough (Mr. Watts), who robustly criticised it—with that section of the speech of the right hon. Member for Sparkbrook which related to charities. The right hon. Gentleman welcomed part of our charity package. However, he made a relatively miserable response when he sought to suggest that our proposals on charities were simply an alternative to what in his judgment was a disappointing Budget.

The right hon. Gentleman's remarks were interesting. Should there come the benighted time when a Labour Government are in office, those outside the House will wish to examine carefully the extraordinary statement which the right hon. Gentleman made across the Dispatch Box. He said that the Labour Government would redefine the word "charity"—in those lovely Socialist words—to establish who is genuinely deserving. The analysis of that statement, after generations of charity law, will be interesting to consider.

The right hon. Gentleman asked a specific question about pension scheme surpluses, and I was delighted at the thrust of his first remarks. He said that he welcomed the thrust of the proposals and thought that they were correct. He will understand why we could not consult the actuarial profession generally on the details before the Budget. Therefore, on the advice of the Government Actuary, we adopted a careful and prudent approach.

The right hon. Gentleman specifically asked about the 5 per cent. level. The approach advised by the Government Actuary has three related elements. The first is the secure funding method, which is known among actuaries as "projected accrued benefit", and associated with that is a series of prudent actuarial assumptions on which the liabilities are assessed. Secondly, the contingency margin of 5 per cent. which has been allowed was advised on the basis of the secure funding method and the prudent actuarial assumptions that that would safeguard the benefits given to scheme members.

Thirdly, and related to that, are the three options for the funds to reduce the surpluses: contribution holidays or reductions for up to five years, improvements in benefits, and a refund to employers. The right hon. Gentleman focused on the 5 per cent., but one cannot look in isolation only at one element. We are consulting the actuarial profession. We shall also listen carefully not only to what the right hon. Gentleman said, but to views from outside Parliament.

I return to the right hon. Gentleman's fundamental point, referred to by other hon. Members, in particular by the hon. Member for Great Grimsby (Mr. Mitchell) and by my hon. Friends the Members for Tatton and for Lewisham, West (Mr. Maples). They went to the heart of the Finance Bill and to the Opposition's attitude to the taxation of both capital and income.

A great deal of the debate both inside and outside Parliament has been about the Opposition's suggestion that the Government's programme will benefit only the rich and that most of the Government's measures can be corrected by changing the pattern of taxation. I shall deal tonight with the analysis introduced into the debate by the right hon. Member for Sparkbrook. I do not intend to deal with the Opposition's expenditure programme. I shall concern myself only with the suggestion of the right hon. Member for Sparkbrook that they will implement a minimal programme.

On the Jimmy Young programme on 20 March the right hon. Gentleman referred to a £3.6 billion anti-poverty progamme. My hon. Friends have asked me tonight, who are the rich, and how will they pay for this programme? The answers then become rather vague and indistinct. I shall remind the House of the nature of the questions. The right hon. Gentleman seeks to suggest that the financing of the Labour party's minimal programme will be simple and easy, and this was a fundamental part of our debate. Jimmy Young said: When you say rich, Roy, you mean, who's rich? I mean, what income are you talking about? The right hon. Gentleman said: It's people earning more than £25,000 a year. Jimmy Young then said:

Now I've got four figures there. I am told on the Jimmy Young programme by the right hon. Member for Sparkbrook that in fact it is very hard to analyse because the Treasury will not provide all the details. Therefore I shall help the right hon. Member for Sparkbrook and will give him all the details relating to his programme. He asked a second question that I shall also seek to answer. It related not only to the rich but to how they will pay. Jimmy Young said: When you say tax them properly, what sort of level would they be paying tax then?

Mr. Stuart Bell (Middlesbrough)

On a point of order, Mr. Speaker. This is not a question of the Jimmy Young show but of "Desert Island Discs." We have already heard this speech from the Chancellor of the Exchequer.

Mr. Speaker

The right hon. Gentleman is making his speech in his own way.

Mr. Moore

Thank you, Mr. Speaker. Truth is always difficult to take.

The second leg of the question that is critical in this area is how the rich will pay. In this instance, the tax level will not change very much, we are told by the right hon. Member for Sparkbrook, because it will all be collected in the form of capital taxes. Let us look at the implications of this proposal before I remind the right hon. Gentleman and the House of how this Finance Bill will continue the process of making everybody, at all levels of income, better off than if we still had to face the hazards and the tragedy of a Labour Government.

As for capital taxes, with which we are dealing in this Finance Bill, let me examine arithmetically what would happen if we had to return to the 1979 position. There are three features of this Finance Bill and of previous Finance Bills to which the right hon. Member for Sparkbrook objects: abolition of investment income surcharge and reductions in capital gains tax and capital transfer tax. If reinstated, what would they produce annually? Investment income surcharge would produce £825 million a year and changes in capital gains tax and capital transfer tax would produce £835 million a year. That is a total not of £3.6 billion but of £1.6 billion.

As the Finance Bill deals with matters such as CTT, it is worth making some points on the effects of the arithmetic. If investment income surcharge were reinstated, it would penalise many who are on the basic rate. More than 60 per cent. of taxpayers who would be affected are those on the basic rate, and 45 per cent. of those affected are elderly. The approach which I hear outside is: "the bloody rich." Because of the reductions in the absurd rate of capital taxes, it is worth drawing attention to the effect of this arithmetic. Our much-improved investment planning has produced a yield of 20 per cent. more, in real terms, from capital taxes since 1979, as my right hon. Friend the Chancellor said in the House on Monday 24 March.

If we returned to the rates that applied in 1979, it is questionable whether they would produce what the right hon. Member for Sparkbrook wants—a yield of £1.6 billion. Let us accept, for a moment, his arithmetic and consider the reality of income tax and the implications at which he laughed earlier. The reality of income tax, in addition to restoring IIS, CTT and CGT reductions, is slightly more complicated. I understand the right hon. Gentleman's difficulty when he appeared on the Jimmy Young show regarding the different allowances and the problem whether one is referring to a single person, a one-earner married couple or a two-earner married couple.

The public want to know the implications of this and previous Finance Bills and the policy of the right hon. Member for Sparkbrook as adduced at the Dispatch Box today. Let me tell the country what his policies would mean. To finance this minimal policy, there would be a jump in the income tax rate of single people to 70 per cent. on taxable income above £18,600, or 70 per cent. on all gross income above £20,935. That is the first definition. The right hon. Member for Sparkbrook is getting very uncomfortable, because this is the first time we have analysed his definition of "rich singles".

What about the one-earner married couple? Again, there would be a jump to 70 per cent. tax on all taxable income above £18,600, or such a couple would pay 70 per cent. on a gross income above £22,255. I remind the outside world of the right hon. Gentleman's definition of rich. According to him, a rich one-earner couple is a couple earning £22,255. Let us remember those figures.

I turn to the critical, final figure—that relating to two-earner couples. There are over 5 million two-earner couples. All two-earner couples would jump to a tax rate of 70 per cent. on a taxable income of £18,600, or would pay 70 per cent. on all gross income above £24,590. The right hon. Gentleman's definition of a two-earner couple would be a husband and wife, each earning about £12,500. That is his definition of the rich.

I have explained who these rich people are. I have explained how they will pay. They are not even in the top 5 per cent. of salary earners. For the benefit of the right hon. Gentleman, when he next appears on the Jimmy Young programme, those people are the top 3.5 per cent. of tax-paying units—not the top 5 per cent.

From the Alice in Wonderland of "Hatteromics", I turn to what the present Finance Bill and other Finance Bills have done since 1979 for the other side of the challenge, as opposed to that absurd pretence that the programme can be financed out of thin air. The other side of the issue concerns what we have done about the burden of tax and the well-being of people at all levels of tax. We had to get control of borrowing. We had to pay the terrifying burden of debts before we reduced the burden of taxes.

The right hon. Member for Sparkbrook was right—some taxes have been increased. North sea taxes have increased. About 40 per cent. of the increase in the tax burden has come from North sea taxes. Equally, VAT has contributed to the increase since 1979 by a little more than 40 per cent. The remaining 10 per cent. plus has come from national insurance charges, which have increased benefits associated with them, and from rates.

In this pattern of Finance Bills, which culminate in this legislation, the fact that many critical taxes have decreased has not been discussed. I refer especially to the taxes on employment. When the Conservative party came to office, the burden of taxation borne by employers was 14 per cent. Primarily because of the abolition of the Labour tax on jobs, that burden has been reduced from 14 per cent. to 9 per cent. Income taxes have fallen. In 1978–79, income taxes were approximately 32.7 per cent. of total taxation. They have now fallen to 26.9 per cent.

The right hon. Member for Sparkbrook specifically asked me what that has meant to taxpayers generally. What has the pattern, which has continued in the Finance Bill, meant? [Interruption.] To help the right hon. Gentleman's supporters, I shall compare the income tax and national insurance contributions paid by a married man under the Conservative Government, with his position if Labour were still in office. [Interruption.] I know that, to some people, that is a terrifyingly long and happy way in the past, but I remind the House of the precise figures. Under our present tax regime, a married man on a third of average earnings pays 7.4 per cent. of his income in income tax and NIC. Under the 1978–79 regime, under Labour and including the benefits of Labour's 6.5 per cent. NIC, such a person would pay 10.6 per cent. in income tax and NIC—higher than the 7.4 per cent. paid under the present tax regime.

For a married man earning half average earnings, the figures are precisely the same—18.9 per cent. at present versus 18.9 per cent. under a 1978–79 regime. For a married man earning three quarters of average earnings, the figures are 25.3 per cent. under our Government and 25.8 per cent. under Labour's 1978–79 regime with its lower NIC rates. The position today in terms of the combination of income tax and NIC is better than under a 1978–79 regime.

A married man on average earnings pays 28.5 per cent. in income tax and NIC but would have paid 29.2 per cent. under the Labour's regime—again a higher figure. A married man earning one and a half times average earnings pays 30.6 per cent. under this Government but would have paid 31.1 per cent. under a Labour regime. I could continue, because obviously the figures become even better. In every instance, the figures are better or the same. That therefore disproves the constant suggestion of the right hon. Member for Sparkbrook that in income tax and national insurance terms, people are worse off than if Labour had remained in office.

I have said repeatedly at the Dispatch Box that we should be concerned, as the right hon. Member for Sparkbrook said, not simply with the proportion taken in tax but with how well off people are, because that is obviously affected by the pattern of their earnings increases as well as the pattern of taxation changes. I shall take the categories I mentioned and the percentage change in real take-home pay. After all, that is what, theoretically, we are all concerned about when we talk about our constituents.

Let me remind the House of the figures on the percentage change in real take-home pay. Under the category of those on half average earnings I can quote any group—single, married with children, married with no children. Under the category of those married with no children, there was a 2.4 per cent. improvement in a couple's real take-home pay after five years of Socialism, but after seven years of Conservatism there was a 14.8 per cent. improvement. [Interruption.] The debate is about whether people in work are better off, and I am simply trying to remind the House of the data.

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

rose—

Mr. Moore

I will give way only to those who have participated throughout the debate.

The figures continue, and they get better. [Interruption.] The Opposition do not like these figures. For a married man on average earnings, with no children, during Labour's five years of office, the percentage change in the real take-home pay went down by 0.9 per cent. What happened in the relevant past seven years? There was an increase of 17.7 per cent. What a contrast—between a person's take-home pay on average earnings going up in real terms by 17.7 per cent. and going down by 0.9 per cent.

What about a couple on twice average earnings? Their take-home pay went down during Labour's period of office by 2.4 per cent. against an increase of 19.7 per cent. during the Conservative period of office.

I have endeavoured to show how the Finance Bill takes account of people on average, below or above-average earnings and how Conservative taxation policies have benefited those in all categories.

I was asked by my right hon. Friends the Members for Guildford and for Worthing and by the right hon. Member for Ashton-under-Lyne for the Government's position on the exchange rate mechanism. I can reiterate the precise position. The time is not ripe and, as has been said many times from the Dispatch Box, the matter is being kept under constant review. We will not enter the exchange rate mechanism unless there is a clear balance of advantage in favour of us doing so. The Government's views were stated clearly by my hon. Friend the Economic Secretary during a debate on 29 January.

My hon. Friend the Member for Tatton made an important contribution. He asked us to consider what is happening in manufacturing. That was raised by three or four other hon. Members. I would remind the House that manufacturing profitability in 1984 was at 6.5 per cent., which was the best since 1973. Manufacturing exports went up by 6 per cent. in 1985 and are expected to rise by a further 6 per cent. in 1986. Manufacturing industry is expected to be a major beneficiary of the fall in oil prices. [Interruption.] Hon. Members ought to listen to the extent to which these are all positive aspects of Government policy on manufacturing enterprises.

In no other recent five-year period has manufacturing been so successful in holding its market share and keeping pace with world output. The Finance Bill offers for incentives a cut in the basic rate, which is of course the marginal rate for 95 per cent. of taxpayers. It offers for business and enterprise a package of measures, including an indefinite extension of the business expansion scheme in recognition of its great success, effective action to prevent family businesses from being broken up for tax reasons, a unique opportunity for individual share ownership through personal equity plans and widely welcomed new reliefs for charitable giving. All that is in the context of a sound economic strategy which has given us, in 1985, the third successive year of both steady growth and low inflation, and an outlook for 1986 which is the best for a generation.

I commend the Bill to the House.

10 pm

Mr. Stuart Bell (Middlesbrough)

I listened with the utmost interest to the Financial Secretary's speech—[Interruption.]—but he did not address himself to several points that formed the basis of his own argument. The right hon. Gentleman referred to the very high—[Interruption.]

Mr. Speaker

Order. The hon. Gentleman has the Floor.

Mr. Bell

The Minister referred to the point that people were better off taxation-wise in relation to earnings, but he did not relate that to the fact that earnings have increased over a period of time. [Interruption.] He did not refer to what those earnings were. It is a pity for the House that he did not do so.

The Minister also failed to meet the point that the Budget had been predicated on the price of oil being $15 a barrel, whereas it is now $12. Those are all important factors in relation to the Finance Bill—[Interruption.] The House is entitled to know what the Government think of those issues, which are very important for the economy. Indeed, the people of this country are entitled to know what the Treasury team's view is, but the Financial Secretary has not told us.

The Minister had half an hour in which to speak, and it is a pity that he did not spend that time on the issues relating to Government policy. Instead, he produced a series of spurious calculations that involved a sleight of hand to show what a Labour Government might do, some seven years after the Labour Government were last in office.

It is a pity that the Financial Secretary refused to spend any time saying what this Government would do, and instead concentrated on what the Labour party would do if it was in government—[Interruption.] From the country's point of view, it is a pity that those points were not clarified. How can the Government put forward a Budget that is based on oil costing $15 a barrel, when the price has fallen to $12? The Opposition want to know how the Chancellor can predicate his Budget on the price of oil when he has lost a further £3,000 million in Government revenue since the Budget statement—[Interruption.]

Mr. Speaker

Order. The hon. Gentleman is absolutely in order to be speaking now, and he should be heard.

Mr. Bell

Having had the attention of the House for the past few minutes, I invite the Financial Secretary to respond to those points in the interests not only of the Opposition, but of the country as a whole.

Question put:—

The House divided: Ayes 264, Noes 190.

Division No. 161]	[10.03 pm
AYES
Aitken, Jonathan	Browne, John
Alexander, Richard	Bruinvels, Peter
Amess, David	Bryan, Sir Paul
Ancram, Michael	Buchanan-Smith, Rt Hon A.
Arnold, Tom	Buck, Sir Antony
Ashby, David	Budgen, Nick
Atkins, Robert (South Ribble)	Bulmer, Esmond
Atkinson, David (B'm'th E)	Burt, Alistair
Baker, Rt Hon K. (Mole Vall'y)	Butcher, John
Baker, Nicholas (Dorset N)	Butterfill, John
Baldry, Tony	Carlisle, John (Luton N)
Banks, Robert (Harrogate)	Carlisle, Rt Hon M. (W'ton S)
Batiste, Spencer	Carttiss, Michael
Bellingham, Henry	Cash, William
Bendall, Vivian	Chalker, Mrs Lynda
Best, Keith	Chapman, Sydney
Bevan, David Gilroy	Chope, Christopher
Biffen, Rt Hon John	Clark, Dr Michael (Rochford)
Biggs-Davison, Sir John	Clark, Sir W. (Croydon S)
Blaker, Rt Hon Sir Peter	Clegg, Sir Walter
Body, Sir Richard	Colvin, Michael
Bonsor, Sir Nicholas	Coombs, Simon
Boscawen, Hon Robert	Cope, John
Bottomley, Peter	Cormack, Patrick
Bowden, A. (Brighton K'to'n)	Couchman, James
Bowden, Gerald (Dulwich)	Cranborne, Viscount
Boyson, Dr Rhodes	Critchley, Julian
Braine, Rt Hon Sir Bernard	Crouch, David
Brandon-Bravo, Martin	Dickens, Geoffrey
Bright, Graham	Dorrell, Stephen
Brinton, Tim	Dover, Den
Brittan, Rt Hon Leon	du Cann, Rt Hon Sir Edward
Brooke, Hon Peter	Dunn, Robert
Brown, M. (Brigg & Cl'thpes)	Durant, Tony

Eggar, Tim	Lennox-Boyd, Hon Mark
Emery, Sir Peter	Lester, Jim
Evennett, David	Lewis, Sir Kenneth (Stamf'd)
Eyre, Sir Reginald	Lightbown, David
Fairbairn, Nicholas	Lilley, Peter
Fallon, Michael	Lloyd, Ian (Havant)
Farr, Sir John	Lloyd, Peter (Fareham)
Fenner, Mrs Peggy	Luce, Rt Hon Richard
Finsberg, Sir Geoffrey	Lyell, Nicholas
Fletcher, Alexander	McCrindle, Robert
Fookes, Miss Janet	McCurley, Mrs Anna
Forman, Nigel	Macfarlane, Neil
Forsyth, Michael (Stirling)	MacGregor, Rt Hon John
Forth, Eric	MacKay, Andrew (Berkshire)
Franks, Cecil	MacKay, John (Argyll & Bute)
Fraser, Peter (Angus East)	Maclean, David John
Freeman, Roger	McNair-Wilson, M. (N'bury)
Fry, Peter	McNair-Wilson, P. (New F'st)
Gardiner, George (Reigate)	Madel, David
Gardner, Sir Edward (Fylde)	Major, John
Garel-Jones, Tristan	Malins, Humfrey
Gilmour, Rt Hon Sir Ian	Maples, John
Glyn, Dr Alan	Marlow, Antony
Goodhart, Sir Philip	Marshall, Michael (Arundel)
Goodlad, Alastair	Mates, Michael
Gow, Ian	Mather, Carol
Gower, Sir Raymond	Maude, Hon Francis
Greenway, Harry	Mawhinney, Dr Brian
Gregory, Conal	Maxwell-Hyslop, Robin
Griffiths, Peter (Portsm'th N)	Mayhew, Sir Patrick
Grist, Ian	Mellor, David
Ground, Patrick	Merchant, Piers
Grylls, Michael	Meyer, Sir Anthony
Gummer, Rt Hon John S	Miller, Hal (B'grove)
Hamilton, Neil (Tatton)	Mills, Iain (Meriden)
Hanley, Jeremy	Miscampbell, Norman
Hannam, John	Mitchell, David (Hants NW)
Hargreaves, Kenneth	Moate, Roger
Harris, David	Monro, Sir Hector
Harvey, Robert	Montgomery, Sir Fergus
Haselhurst, Alan	Moore, Rt Hon John
Hawkins, C. (High Peak)	Morrison, Hon P. (Chester)
Hawksley, Warren	Moynihan, Hon C.
Hayhoe, Rt Hon Barney	Neale, Gerrard
Hayward, Robert	Nelson, Anthony
Henderson, Barry	Neubert, Michael
Heseltine, Rt Hon Michael	Newton, Tony
Hickmet, Richard	Nicholls, Patrick
Hicks, Robert	Norris, Steven
Higgins, Rt Hon Terence L.	Onslow, Cranley
Hind, Kenneth	Oppenheim, Phillip
Hirst, Michael	Oppenheim, Rt Hon Mrs S.
Hogg, Hon Douglas (Gr'th'm)	Osborn, Sir John
Holland, Sir Philip (Gedling)	Ottaway, Richard
Hordern, Sir Peter	Page, Richard (Herts SW)
Howard, Michael	Parkinson, Rt Hon Cecil
Howarth, Gerald (Cannock)	Patten, Christopher (Bath)
Howell, Rt Hon D. (G'ldford)	Patten, J. (Oxf W & Abgdn)
Howell, Ralph (Norfolk, N)	Pattie, Geoffrey
Hubbard-Miles, Peter	Pawsey, James
Hunt, David (Wirral W)	Peacock, Mrs Elizabeth
Hunter, Andrew	Porter, Barry
Hurd, Rt Hon Douglas	Portillo, Michael
Irving, Charles	Powley, John
Jenkin, Rt Hon Patrick	Price, Sir David
Johnson Smith, Sir Geoffrey	Proctor, K. Harvey
Jones, Gwilym (Cardiff N)	Raffan, Keith
Jones, Robert (Herts W)	Rathbone, Tim
Kellett-Bowman, Mrs Elaine	Rees, Rt Hon Peter (Dover)
Kershaw, Sir Anthony	Rhys Williams, Sir Brandon
Key, Robert	Ridsdale, Sir Julian
King, Roger (B'ham N'field)	Rifkind, Rt Hon Malcolm
Knight, Greg (Derby N)	Roberts, Wyn (Conwy)
Knowles, Michael	Roe, Mrs Marion
Knox, David	Sainsbury, Hon Timothy
Lang, Ian	St. John-Stevas, Rt Hon N.
Latham, Michael	Shepherd, Colin (Hereford)
Lawler, Geoffrey	Shepherd, Richard (Aldridge)
Lawrence, Ivan	Shersby, Michael
Lawson, Rt Hon Nigel	Sims, Roger

Skeet, Sir Trevor	Waddington, David
Soames, Hon Nicholas	Wakeham, Rt Hon John
Spicer, Michael (S Worcs)	Waldegrave, Hon William
Stanbrook, Ivor	Walker, Bill (T'side N)
Stern, Michael	Waller, Gary
Stevens, Lewis (Nuneaton)	Ward, John
Stewart, Andrew (Sherwood)	Wardle, C. (Bexhill)
Stewart, Ian (Hertf'dshire N)	Watson, John
Taylor, John (Solihull)	Watts, John
Taylor, Teddy (S'end E)	Wells, Bowen (Hertford)
Tebbit, Rt Hon Norman	Wells, Sir John (Maidstone)
Thomas, Rt Hon Peter	Wheeler, John
Thompson, Donald (Calder V)	Wiggin, Jerry
Thompson, Patrick (N'ich N)	Winterton, Mrs Ann
Thurnham, Peter	Wood, Timothy
Townend, John (Bridlington)	Younger, Rt Hon George
Townsend, Cyril D. (B'heath)
Trippier, David	Tellers for the Ayes:
van Straubenzee, Sir W.	Mr.Archie Hamilton and
Viggers, Peter	Mr. Gerald Malone.
NOES
Abse, Leo	Cunliffe, Lawrence
Adams, Allen (Paisley N)	Cunningham, Dr John
Alton, David	Davies, Rt Hon Denzil (L'lli)
Anderson, Donald	Davies, Ronald (Caerphilly)
Archer, Rt Hon Peter	Davis, Terry (B'ham, H'ge H'l)
Ashley, Rt Hon Jack	Deakins, Eric
Atkinson, N. (Tottenham)	Dewar, Donald
Bagier, Gordon A. T.	Dixon, Donald
Barnett, Guy	Dormand, Jack
Barron, Kevin	Dubs, Alfred
Beckett, Mrs Margaret	Duffy, A. E. P.
Beith, A. J.	Eadie, Alex
Bell, Stuart	Evans, John (St. Helens N)
Benn, Rt Hon Tony	Ewing, Harry
Bennett, A. (Dent'n & Red'sh)	Faulds, Andrew
Bermingham, Gerald	Field, Frank (Birkenhead)
Bidwell, Sydney	Fields, T. (L'pool Broad Gn)
Blair, Anthony	Fisher, Mark
Boothroyd, Miss Betty	Flannery, Martin
Boyes, Roland	Foot, Rt Hon Michael
Bray, Dr Jeremy	Forrester, John
Brown, Gordon (D'f'mline E)	Foster, Derek
Brown, N. (N'c'tle-u-Tyne E)	Foulkes, George
Brown, Ron (E'burgh, Leith)	Fraser, J. (Norwood)
Buchan, Norman	Freeson, Rt Hon Reginald
Caborn, Richard	Garrett, W. E.
Callaghan, Rt Hon J.	George, Bruce
Callaghan, Jim (Heyw'd & M)	Gilbert, Rt Hon Dr John
Campbell, Ian	Godman, Dr Norman
Campbell-Savours, Dale	Golding, John
Canavan, Dennis	Gould, Bryan
Carter-Jones, Lewis	Gourlay, Harry
Cartwright, John	Hamilton, James (M'well N)
Clark, Dr David (S Shields)	Hamilton, W. W. (Fife Central)
Clarke, Thomas	Hancock, Michael
Clay, Robert	Harman, Ms Harriet
Clelland, David Gordon	Harrison, Rt Hon Walter
Clwyd, Mrs Ann	Hart, Rt Hon Dame Judith
Cocks, Rt Hon M. (Bristol S)	Hattersley, Rt Hon Roy
Coleman, Donald	Haynes, Frank
Conlan, Bernard	Heffer, Eric S.
Cook, Frank (Stockton North)	Hogg, N. (C'nauld & Kilsyth)
Cook, Robin F. (Livingston)	Holland, Stuart (Vauxhall)
Corbett, Robin	Howell, Rt Hon D. (S'heath)
Corbyn, Jeremy	Hoyle, Douglas
Craigen, J. M.	Hughes, Dr Mark (Durham)
Crowther, Stan	Hughes, Robert (Aberdeen N)

Hughes, Roy (Newport East)	Randall, Stuart
Hughes, Sean (Knowsley S)	Raynsford, Nick
Janner, Hon Greville	Redmond, Martin
Jenkins, Rt Hon Roy (Hillh'd)	Rees, Rt Hon M. (Leeds S)
John, Brynmor	Richardson, Ms Jo
Jones, Barry (Alyn & Deeside)	Roberts, Allan (Bootle)
Kennedy, Charles	Roberts, Ernest (Hackney N)
Kilroy-Silk, Robert	Robertson, George
Kirkwood, Archy	Robinson, G. (Coventry NW)
Lambie, David	Rogers, Allan
Lamond, James	Rooker, J. W.
Leighton, Ronald	Ross, Ernest (Dundee W)
Lewis, Terence (Worsley)	Ross, Stephen (Isle of Wight)
Litherland, Robert	Sedgemore, Brian
Livsey, Richard	Sheerman, Barry
Lloyd, Tony (Stretford)	Sheldon, Rt Hon R.
Lofthouse, Geoffrey	Shore, Rt Hon Peter
McCartney, Hugh	Short, Ms Clare (Ladywood)
McDonald, Dr Oonagh	Silkin, Rt Hon J.
McKelvey, William	Skinner, Dennis
MacKenzie, Rt Hon Gregor	Smith, C. (Isl'ton S & F'bury)
Maclennan, Robert	Smith, Rt Hon J. (M'ds E)
McNamara, Kevin	Snape, Peter
McTaggart, Robert	Soley, Clive
Madden, Max	Spearing, Nigel
Marek, Dr John	Stewart, Rt Hon D. (W Isles)
Marshall, David (Shettleston)	Stott, Roger
Martin, Michael	Straw, Jack
Mason, Rt Hon Roy	Thomas, Dafydd (Merioneth)
Maxton, John	Thomas, Dr R. (Carmarthen)
Maynard, Miss Joan	Thompson, J. (Wansbeck)
Meacher, Michael	Thorne, Stan (Preston)
Michie, William	Tinn, James
Mikardo, Ian	Wainwright, R.
Millan, Rt Hon Bruce	Wallace, James
Mitchell, Austin (G't Grimsby)	Wardell, Gareth (Gower)
Morris, Rt Hon A. (W'shawe)	Wareing, Robert
Morris, Rt Hon J. (Aberavon)	Weetch, Ken
Nellist, David	White, James
Oakes, Rt Hon Gordon	Wigley, Dafydd
O'Neill, Martin	Williams, Rt Hon A.
Park, George	Wilson, Gordon
Parry, Robert	Winnick, David
Pavitt, Laurie	Woodall, Alec
Pendry, Tom	Wrigglesworth, Ian
Penhaligon, David	Young, David (Bolton SE)
Pike, Peter
Powell, Raymond (Ogmore)	Tellers for the Noes:
Prescott, John	Mr. John McWilliam and
Radice, Giles	Mr. Allen McKay.

Question accordingly agreed to.

Bill read a Second time.