HC Deb 18 March 1986 vol 94 cc185-213

Motion made, and Question proposed,

That it is expedient to amend the law with respect to the national Debt and public revenue and to make further provision in connection with finance; but this Resolution does not extend to the making of any amendment with respect to value added tax so as to provide—

  1. (a) for zero-rating or exempting any supply;
  2. (b) for refunding any amount of tax;
  3. (c) for varying the rate of that tax otherwise than in relation to all supplies and importations; or
  4. (d) for any relief other than relief applying to goods of whatever description or services of whatever description.—[Mr. Lawson.]

Relevant documents:European Community Document No. 9792/85, Annual Economic Report 1985–86 and the unnumbered document, Annual Economic Report 1985–86 (final version as adopted by the Council).

4.51 pm
Mr. Neil Kinnock (Islwyn)

I shall observe the convention with the usual relish and congratulate the Chancellor of the Exchequer on the way in which he delivered his speech. This year he did not quite break his own record of one hour and 14 minutes, but it certainly assisted us to have such a clear and crisp delivery, which took such a short time.

Congratulations are especially in order because the Budget was plainly not the Budget which the Chancellor of the Exchequer thought he could introduce this year. Indeed, it was not the Budget which he wanted to introduce this year. Last year, both at Budget time and at the Conservative party conference, he looked forward to tax cuts. It is obvious that this year's Budget was to have been a bribes Budget, which would begin to make tax cuts with the next general election in mind. Instead, the fall in oil prices and the consequent fall in oil revenues has made it into a bits and pieces Budget. It is a Budget which contains promises of there being some scope next year. It is jam tomorrow from a Chancellor of the Exchequer who is plainly in a jam today.

The Chancellor of the Exchequer will have noticed from the Opposition's response that 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. In addition, the provision to relieve victims of Nazism from tax obligations on their pensions is obviously just and will command unanimous support. The concessions favouring charities are equally welcome, although I hope, as the Chancellor implied, that they will be judiciously monitored, as it would be wrong for any suspect bodies to benefit from them.

I echo, and I hope reinforce, the view expressed by the Chancellor that, as a result of his approach, we can ensure that petrol prices at least stay the same. Indeed, they should fall, given the benefits that have accrued to oil companies.

Other matters, including the Green Paper, will need close scrutiny. If the Green Paper's proposals were to result in any disadvantage to married women, or were to act as a deterrent to women considering paid work, the Chancellor could expect to meet hostility both inside and outside the House.

Naturally, other aspects of the Budget can be criticised. One which stands out is the abolition of the gift tax, which is literally a handout to the rich. Following the tradition of the House I propose to leave such detailed considerations to other hon. Members to discuss, but there is one point that I wish to make, because it represents a fundamental cause for concern.

The Budget should have been particularly distinctive, as it is the first Budget of the post-oil boom era. For that reason, it is endowed with a particular and historic importance. Although the Chancellor of the Exchequer is conscious of the loss of resources, and presumably of the impact of that on our economy, he has chosen to do nothing that will effectively promote the building and rebuilding of our manufacturing economy, and to do nothing to help systematically to provide our country with the modern means of making a living in the future. Such provision for training, research, design and development, and for new machines, should have been made in all the Budgets since 1979, and this year they should have been not an ingredient but a primary feature. After all, we find ourselves in difficult times with revenues falling.

The promotion of the redevelopment and regeneration of our economy is not central to this year's Budget, and that makes it a sideshow Budget, and an exercise in taxation juggling that is irrelevant to the main problems of employment and development which face our people and our businesses. The loss of industry during the past six and a half years, and the loss of revenue now facing us, should have made such considerations a primary concern of the Budget, together with compensation for those losses.

Such failures are not the only matters of concern or the only areas in which the Chancellor has sadly failed to make the necessary responses. We must be grateful for the fact that he did not describe his puny package as yet another "Budget for jobs". I suppose that he has learnt from his experience of last year. He then gave it that grandiose title, but the result was that in the first six months after that Budget there was a net increase in employment of 4,000 people—4,000 people in an economy with 3.4 million registered unemployed, and in a year in which total unemployment rose again by more than 70,000. Thus, we cannot be expected to cheer over the addition of 55,000 people to the community programme or over the fact that the wage has been increased by £2 to the princely sum of £67 a week.

The expansion of the job clubs for advice is more of a taunt than a support for the unemployed. The Chancellor of the Exchequer, who must be acquainted with the facts, must know that people will regard that as nothing more than an additional opportunity to have a chat and a cup of tea. In some ways, that is an advantage in itself, because unemployment can be an extremely lonely condition, but that is about as far as it goes, and the right hon. Gentleman knows that well.

During the past six and a half years, poverty has increased significantly. Double the number of families are on supplementary benefit, and an additional 2 million people are so poor that they must depend on supplementary benefit. The Budget said nothing and offered absolutely nothing to the poor. I did not expect that it would, coming from a Government who are weakening wages councils, and who during the next 12 months will make provision to ensure that the old-age pension is worth 3 per cent. less at this time next year than it is now. I could not expect a full-hearted commitment to combating poverty from such a Chancellor. With regard to the 1p reduction in the basic rate of tax, the Chancellor has only to reduce the basic rate by a further 5p to bring taxation down to the level of the 1979 burden.

The same faint-heartedness with which the Chancellor tries to wage war on poverty characterises his approach to the City. During the past six and a half years the institutions and individuals there have benefited stupendously from a variety of Government measures, yet what is to be obtained from them? The answer is nothing more than a sum equivalent to the amount lost to the Exchequer by halving stamp duty—£200 million—at a time when they are doing more than well, and when their conditions and rewards are arousing criticism in the Conservative party and from commentators who are usually slavish in their support for the Chancellor's general strategy. The Chancellor should have taken this chance to ensure that those people on high salaries with high returns pay their way as members of our society.

In all those areas—poverty, jobs and the approach to the City and those who now enjoy positions of great wealth—the Chancellor has seen the need for action, as we know from the way in which he touched on them, but he has backed off from acting effectively. That makes it the fudge-it Budget of a Government who during the past seven years have worn away the industrial base of the nation and wasted huge sums of wealth in a rake's progress financed by oil revenues. The Government have taxed ordinary people more than any other Government in history. They have borrowed more than any other Government in history. [HON. MEMBERS: "No."] Yes. The Government have borrowed £60 billion in five years, compared with the Labour Government, of whom the Chancellor was so critical, who borrowed £40 billion.

Sir Peter Tapsell (East Lindsey)

When the right hon. Gentleman quotes those figures, will he bear in mind that this Government at least borrowed from the British, whereas the Labour Government borrowed from abroad in foreign currrencies?

Mr. Kinnock

Yes, and as Mr. Tim Congdon has reminded us, as a consequence of that borrowing the Government's repayments of interest are running at £19.5 billion, compared with the total of £8 billion which the Labour Government had to pay to an assortment of people during their last period of office. I hope that the hon. Gentleman's patriotism will extend to other areas, especially to sell-offs—the way in which the Government have been raising funds to finance their programme.

The Government have been raising funds by once-and-for-all sales of assets that have been built up for generations by British taxpayers. The sum is exhaustible, and that is a ruinous way to proceed. The Government have had the unprecedented and unrepeatable bonus of £55 billion-worth of revenues from North sea oil. No other Government have ever enjoyed such revenues, and no British Government have ever so wilfully squandered such wealth.

For years the Government have been told in Budget debates, and at many other times, by us and by others that they should use that windfall deliberately and prudently to modernise and restructure British manufacturing industry. They were provided with a glorious opportunity to do that, sheltered as they were from balance of payments pressures, which have affected every Government in the decades before they came to office, with the asset of oil. They did not take advantage of that. Instead, they have used the resources and revenues to pay part of the bill for unemployment, to make tax concessions to the richest and to send abroad funds that have come in handy for our competitors to finance the advance of their industries. The Government have blown our oil wealth completely and have next to nothing to show for it. Indeed, in some respects they have less than nothing.

Manufacturing investment is still nearly 20 per cent. lower than it was in 1979. Manufacturing output is still lower than it was in 1979. During the Government's seven years the healthy surplus in manufactured trade which they inherited has been turned to a deficit of £3 billion this year, having gone into deficit for the first time in modern British history in 1983. Only the Prime Minister's dwindling palace guard believes that that gap can start to be made up by the sale of services. Certainly the British Invisible Exports Council and an assortment of others who make their living in that sphere know that the gap cannot be made up by the sale of services.

In addition to the failure to sustain manufactured output, investment and trade, we have also seen a massive loss of employment. At present 3.4 million people are registered unemployed, and more people have been unemployed for a year than the total number of unemployed when the Government took office in 1979.

These seven years have been the wasted years, the locust years, and the years which on Saturday the Prime Minister with unconscious and untypical accuracy described as the years of excavation. How right she was. During these severn years great holes have been dug which not only have undermined the structure of our society, but, even more painfully and damagingly, have undermined the self-confidence of millions of people. Now, throughout the country young men and women aged 20 to 22 ask, without the merest hint of self-pity or affectation, "Do you think I will ever get a job?"

I am sure that you, Mr. Deputy Speaker, have encountered such young people, as I have. I am sure that Tory Members have also done so. I wonder what Ministers say when they are addressed in that fashion. Do they dismiss the questioners as grumblers, as the Prime Minister did on Saturday? Do they say, as she did, "We have had only six years and nine months and we are only just beginning."? Six years and nine months ago, the previous Chancellor of the Exchequer, the right hon. and learned Member for Surrey, East (Sir G. Howe), began the Conservative party's period of office with his first Budget, which he described as the Budget for a new beginning. It is six years and nine months from beginning to beginning. That is the story of the Government, yet they continue to say that there is no alternative.

Hardly anyone believes the Government now. Conservative Members, and members of the Cabinet, do not believe that there is no alternative. Some actually want to be the alternative. The Confederation of British Industry does not believe it, the TUC does not believe it, the Select Committee of Employment of this House does not believe it, the Select Committee on Overseas Trade of the other place does not believe it.

I have a list of people who in different degrees have repeatedly endorsed the proposition that there is a serious and constructive alternative, which consists of bringing about a major increase in spending. There is only one thing more expensive than spending, and that is not spending, paying the bills of idleness that go with that, and in particular not spending on our young people, on training, on new technology and on research. These costs will be paid generation in and generation out, apart from the costs that are run up in our society in despair, division and decay. The Prime Minister is almost alone in her belief that the difficulties besetting our society are disconnected from the economic woes inflicted upon our society. Nobody else seriously believes that.

Apart from a commitment to development, to building, to employment, and to construction, it is also obviously necessary, as it has been throughout the years of oil revenue, for money to be expended on renovating our industrial base. That suggestion has come from many quarters, as has the proposition that in both the private and public sectors of manufacturing and services, priority must be given to investment, so that the boost in employment and enterprise is not dissipated in the consumption of imports, or in handouts, which are absorbed in the short term.

There must be strategic answers to the strategic problems which beset our economy. None of those answers has been forthcoming in this Budget. Any prudent and responsible Government would have geared their monetary and fiscal policy to the development of the manufacturing base as an essential bedrock of their economic policy, and a resource for future growth and our standard of living. They would be fighting unemployment as an economic and social evil, instead of using unemployment as an economic and social weapon.

This Government are neither prudent nor responsible. They are prodigal in their waste of resources, and reckless in their attitude to the future of our country. Yet again, this Budget shows that they will not change any of their wasteful ways. This time, that failure to change is even worse. They have been given a clear warning of what life will be like without oil revenues. They have failed to make any effective or constructive response to the reality that faces them and everybody else. That is the dereliction of duty, and that is running away from the problem, and we shall punish that desertion of duty by defeating them at the next general election.

5.16 pm
Sir Kenneth Lewis (Stamford and Spalding)

I have seen a lot of Budgets in the time I have been in this House. I suppose they have been in various categories. Of some Budgets we expect much and get little. With some we anticipate the worst, and get it. In other Budgets, in not expecting much, we are then surprised by the result. This Budget is surprising in its variety, and surprising because almost everything predicted has not been done, and things that we did not expect have happened. I thought the Chancellor put the Budget in its correct context when he said that it was one of swings and roundabouts.

The Budget has done a number of things which must please many people outside of this House, and certainly pleases hon. Members on the Government side of the House, even if it does not please some on the other side. I always feel rather sorry that the Leader of the Opposition has to come straight in with an instant judgment, and answer a Chancellor who has been thoroughly briefed before he rises to speak. I thought that the Leader of the Opposition today criticised across the board rather more heavily than was justified.

The story that the Chancellor had to tell at the beginning of his speech was one of success. Considering that we are losing next year £5 billion in oil revenue, I felt that the out-turn in terms of tax reduction possibility was surprisingly good.

Like many of my hon. Friends and people in the country, I believe that when we come to fight the next general election, the greatest issue will be not whether people have had reductions in tax, but whether we have reduced unemployment—I would say below 3 million. It will take quite a stimulus to reduce unemployment below that figure.

If I had one disappointment today, it was not that the Budget lacked stimulus, for the measures are there to provide such a stimulus. However, the amount of money that has been allocated to he stimulus was rather less than I would have hoped for.

My right hon. Friend would expect me to say that I was delighted that there was an increase in money given to the community programme. That is good for helping the long-term unemployed. The long-term unemployed figure is now very serious. The amount of money that is to be spent on the community programme—and other similar programmes; I think I have got the figure right from my right hon. Friend—is only £198 million.

This includes what has been provided to employers to give work to people aged between 18 and 20. This new incentive to employers is helpful to those who have been on the youth training programme. Many people justifiably ask, if the young are trained on a youth training programme, "Trained for what?" the most important factor is that when they come out of that programme that they will get jobs. This 18-to-20 proposal, to encourage employers to take on more youngsters when they come out of training, is good. The question is, is it enough?

We are told that reducing unemployment is not entirely in the hands of Government. I agree with that. Nevertheless, the Government can do a great deal, particularly on an occasion such as this, when the Chancellor is determining his financial policy for the year ahead. Here is a chance to stimulate the creation of new jobs. It is a mistake to think that Government cannot create jobs. They can help to lose jobs, although the Government are not doing that. They are trying to get industry right; they are making an effort to encourage the creating of jobs. However, if the Budget is short on anything, it is short on actually providing new employment.

Recently, I listened to my right hon. Friend the Prime Minister make the point that in the United States of America, Germany and other countries of the West with capitalist societies, unemployment had been reduced without the Government spending a great deal of money. That is to misread the situation. In America, the national budget and the states' budgets—I have figures into which I shall not go now—show that the Americans spend an enormous amount on the arms and space programmes and the individual states spend large sums on their social programmes, all of which employ many, many people.

I have not looked at the Budget figures yet, so I do not know what the contingency fund for next year is to be. I believe that in that fund there may be scope for the Government, in the next 12 months, to spend more money on providing extra jobs. I hope that they will do that. If there is money in the contingency fund, it should be reduced to good advantage, and that means reducing the dole queues.

Mr. Nicholas Winterton (Macclesfield)

My hon. Friend is developing an interesting and positive argument. Is he aware that in the United States, where a great many new projects are Government-led, if not necessarily Government-funded, this has been done in a big way, creating millions of extra jobs, and it has been done without creating a high level of inflation, which is so damaging to the longer-term sound economy of any country?

Sir Kenneth Lewis

My hon. Friend is right to draw attention to the position in the United States, which also applies to a considerable extent in Germany.

I do not know how large the contingency fund is. I hope that it is as large as or larger than it was last year. If it is, I hope that the money that my right hon. Friend the Chancellor has in his back pocket will be well used.

There is another matter. Although it is commendable from his point of view that my right hon. Friend has been able to keep his borrowing requirement at £7 billion, the same as last year, could we not really afford to have the borrowing requirement go up by another £1 billion? It represents only a small percentage—I believe that it is now less than 2 per cent.—of our gross national product, and we could allow that to slip a bit during the next 12 months.

Although there is much to be said for a large part of the Budget, and there is much that I like about it, there is still missing that element of concentration on getting jobs. I was surprised that my right hon. Friend the Chancellor cut the standard rate of tax as against putting up thresholds to take more people out of tax. We are always saying that there should be an incentive for people to take work, but there is an adverse effect when people can pick up as much on social security and benefits as they can through earnings.

In many parts of the country there are low earnings which are not comparable to those of London and other more prosperous areas. An example is my area. When those who are on low pay see what they can get on social security, rent rebates and the like and then look at the tax deductible from possible wages, is it surprising that too many shy away from work.

I am in favour of bringing down the standard rate of income tax, if we can do both that and raise thresholds, but this year we cannot. Therefore, on balance, to give 1p off the standard rate of income tax is too expensive for what it will achieve. In two or three months' time, nobody will see any difference between paying 30p in the pound and 29p in the pound. If my right hon. Friend the Chancellor had been able to bring down the rate by 3p in the pound, that would have been a reasonable option. Clearly, he could not do that. Obviously my right hon. Friend's judgment is not mine on this matter. Next year, if he wants to make an effective reduction in the standard rate, he will have to bring it down by three points. Will he be able to afford it? This year the 1p reduction is too small to be of any relevance to any whom it affects.

Dr. Alan Glyn (Windsor and Maidenhead)

My right hon. Friend raised the threshold by 5.7 per cent.

Sir Kenneth Lewis

My right hon. Friend raised the threshold by only just the rate of inflation, when he could have raised it by double the rate of inflation and not taken 1p off the standard rate. I am not making a great complaint. It was just a matter of judgment. My right hon. Friend's judgment is that it is better to reduce the standard rate, and my judgment is in a different direction.

Dr. Glyn

My hon. Friend is making a strong argument. Does he agree that if extra money was, as he suggested, used to raise thresholds, it would have a greater effect in inducing people to take jobs?

Sir Kenneth Lewis

This is the point that I have been trying to make.

Many of us, for many years, have wanted wider share ownership. I congratulate my right hon. Friend the Chancellor on creating such a scheme, and I hope that it will gather momentum over the years. We need an enlightened capitalism in which people on the shop floor have an interest not only in the company in which they work, but in others. At the moment, they all have an interest in companies through their pension funds, but they do not realise it. It is better that they should understand that having a personal stake in industry is good for industry, good for them and good for the country as a whole.

The Budget has potential. I know that in the past few years we have not had a second Budget, but in the time that I have been in the House, Chancellors have regularly had second Budgets, and some have even had a third. Perhaps, as we get towards the end of the year, if the price of oil stabilises and more money comes in from North sea oil, my right hon. Friend the Chancellor will feel that he can do what I have suggested, and spend more through creative stimulus.

The old phrase "priming the pump" is not dead, though it may be forgotten. It is important that any Government facing rising unemployment should decide how they can spend money to prime the pump and allow people who feel useless on the unemployment list to get back to work, because there is plenty to do. It is there through the construction industry in housing and other areas. There is plenty of scope for work that does not bring in imports and I want to see the Government spending more on that. I believe that the Budget is very good in parts, but I hope that my right hon. Friend the Chancellor will take heed of the need during the year, for building on some very good initiatives, already taken, actually to provide more jobs.

5.29 pm
Mr. Richard Wainwright (Colne Valley)

Like many other hon. Members, I followed with great agreement the polite but firmly critical approach to the Budget adopted by the hon. Member for Stamford and Spalding (Sir K. Lewis), and the similar interventions made by his hon. Friends the Members for Macclesfield (Mr. Winterton) and for Windsor and Maidenhead (Dr. Glyn).

In 20 years I cannot recall the first speech from the Government Benches after the Chancellor had sat down being so critical. That, of course, matched the noticeably subdued atmosphere in which the Chancellor was received at the end of his speech. As many Tory Members will quietly recognise, today's Budget speech was little more than the elegant performance of a busker to a crowd of long-suffering taxpayers and the unemployed, who have now been told that the real show will not open until March 1987. Although the busking had some of the sparkle that we associate with the Chancellor of the Exchequer—thank goodness for that—it was, on the whole, deplorably complacent.

We are accustomed, in the cut and thrust of politics, to other Ministers producing these phoney figures for British recovery, which we all know are derived from the shockingly low base to which the British economy and British manufacturing descended in 1980, and to the fact that we went into deep recession nearly two years before the other industrial powers. We are used to that kind of sleight-of-hand from other Ministers, but it is a bit much for the Chancellor himself on Budget day to indulge in such phoney statistics, and that feeling will be shared by the commentators and most hon. Members. Manufacturing output has not yet recovered to its 1979 level, and those who are neglected and unrepresented in the Cabinet, who live between the Trent and the Tweed, and west of Reading, are painfully aware of that.

There was also complacency in the Chancellor's admission. After making an excessively robust and over-optimistic assumption about oil prices in last year's Budget, he came forward with only one scenario, based on the single opitimistic assumption of an average price of $15 a barrel in the coming year. Let us hope that he is right, but it would have been prudent for the Chancellor to produce also an alternative scenario with the price at about $9 a barrel. In the meantime, he is pushing his luck.

The Chancellor made a great point about the buoyancy of the other direct tax revenues—corporation tax and income tax. Only a few minutes before he boasted of that buoyancy he was deploring—with a great deal of right on his side—the runaway rise of our earnings to a level far above that of our competitors, because the Government pretend to have nothing to do with an incomes policy. The buoyancy of the revenue is a direct consequence of those runaway earnings. Far from welcoming that, the Chancellor should be seriously perturbed that the position is as buoyant as it is. The buoyancy of corporation tax must be a reflection of the poor level of capital investment by industry, which is not claiming the final year's capital allowances to the extent that one would have seen if manufacturing were in a healthy condition.

As always, the centrepiece of the Chancellor's Budget is that absurd totem of the public sector borrowing requirement, which is not even a measure of the true Government deficit and is now an object of idol worship by people who cannot admit how wrong they have been. There is no need for the public sector borrowing requirement to be confined to such a low figure, except, of course, for the fact that the Chancellor is not prepared to admit that he has changed his mind.

The world is anxious to lend Britain money. Other countries see Britain as a safe country in an unstable world, which has an established monarchy, a healthy three-party system, and which is approaching the liberating event of a general election which may restore sanity to British government. There would be no difficulty in raising money. However, the Chancellor is not prepared to be converted to common-sense economics.

The saddest feature of the Chancellor's speech was the absence of the adventurous monetarist who, if he had been true to form, would at least have wheeled. in a new monetary aggregate. I was expecting the Chancellor, the old confident Chancellor, to produce M2 and to command us to worship at that new shrine. However, so weary is he of the struggle that, blow me, he simply brought back from retirement that miserable, old, failed harridan, M3. He has now said that the upper limit of M3 can be 15 per cent.

The Chancellor is telling us in one breath, as a monetarist, that inflation will come down to a rate of 3.5 per cent., but that the monetary aggregate will rise by up to 15 per cent. That is the final confession of this faltering old doctrine in which no one any longer places any faith.

The distressing part of the Chancellor's recital was his almost contemptuous neglect of the unemployed. What use is it to tell the unemployed that the basic rate of income tax has been reduced from 30 to 29 per cent.? Who has the cheek to tell the unemployed that they can now invest up to £200 a month in a special personal equity plan? What is the use of telling the unemployed that their gifts to others will no longer suffer capital transfer tax?

The Government in this Budget have done nothing worth talking about for the unemployed. The increase in the community programme is small. It should at least have been doubled, and could perfectly well have been. In particular, the biggest gap in the Budget in my opinion—which the House will hear about from the two official spokesmen from the alliance parties during the debates—is the total failure of the Government to do anything about national insurance. They have done nothing about national insurance—the tax on jobs—which reaches a level of 19.45 per cent. in the pound. That tax has remained untouched. What could be a bigger snub to the unemployed than to tell them that the tax on people who want to take them on will remain wholly unchanged? In the alliance's view, there should have been a cut of at least 10 per cent. on all the rates of national insurance contributions as a starting point to eventually getting rid of the tax on jobs.

While I am on this point, I should like to mention that, in order to help the unemployed and to finance community programme schemes and our national assets, there is one step which the Chancellor could easily have taken in the name of common justice. That is the reversal of the crazy situation that has come about under his chancellorship, whereby income from mere investment is taxed substantially less than income from the sweat of one's brow or from the exertion of one's brain in employment.

An employed person pays income tax of 38 per cent.—29 per cent. in so-called income tax, and 9 per cent. in the alternative income tax, known as national insurance. A person who sits back and waits for his dividend to come in pays tax of only 29 per cent. That is a complete reversal of the historic fiscal position whereby unearned income was always taxed more heavily than earned income.

There may be a theoretical case for saying that unearned income and earned income should be taxed at the same rate. I do not necessarily dispute that. However, it is surely unjustifiable to reverse the position so that income from work is more heavily penalised than income from investments.

Mr. Nicholas Winterton

Will the hon. Gentleman concede that, to a great extent, much of the unearned income to which he has referred disparagingly is money saved by people while at work? Therefore, why should that income be taxed at a higher rate? Why should it include the national insurance element, which exists to pay for certain services and facilities which the individual expects from the state?

Mr. Wainwright

Not for the first time, the hon. Gentleman has made an elegant introduction to a point I was about to make—that there must be a reasonable threshold below which income from savings is relatively modestly taxed. Whether the threshold should be £4,000 or £5,000 a year for retired people is a matter for discussion. I accept that income from money saved for retirement should be lightly taxed. The age allowance should certainly be more generous. I was speaking, as I suspect the hon. Member for Macclesfield well knew, of the large investment incomes, of which there are an increasing number, and which are augmented in the City of London at a tremendous rate every working day of the week. People with such unearned incomes should certainly pay more, not less, than wage earners.

The tax threshold remains disgracefully low. It is appalling that some people who are in receipt of only the state pension are assessed to pay income tax because the Chancellor has refused to lift the threshold in a civilised way.

Emphasis has been placed on expanding the experimental job start system from the present nine pilot areas. An employee is paid £20 a week by the state for taking a job in which he will receive £80 or less a week from the boss. That is a subsidy to the employee to persuade him or her to take a low-paid job.

We may judge the effect of extending the scheme to the whole country by looking at what has happened in one of the nine pilot areas—Huddersfield, part of which I represent. Only nine people in Huddersfield have entered the job start scheme since it was inaugurated early this year, due to the efforts of 10 extra staff plugging the scheme. If one extrapolates the numbers involved in the Huddersfield pilot scheme and applies them nationwide—I wish that we could apply much of what happens in Huddersfield nationwide because that would solve many of our problems—one can see that only a few hundred people in the United Kingdom would take part in this rather miserable scheme. I have always thought that it was an insult to human nature to say to a person, "Go on your knees for this meanly paid job and we will make it up to you. We shall slip you twenty quid so that you do not lose too much face with the wife." I do not believe that extending this scheme to the nation will have a significant impact on the appalling and growing unemployment problems.

Liberals, with our emphasis on redistributing wealth, must be aghast at the cancellation of the gift tax without replacing it with something. We have never held a strong brief for the capital transfer tax in the form in which it was introduced by Labour, because that was a silly tax on the giver. We have always said that a substantial, rapidly ascending scale of gift tax should be imposed on the recipient, according to the size of the gift and the recipient's wealth. This would mean that a person of great wealth who was getting on in years would be given every encouragement through the tax system to divide his wealth into a large number of relatively small portions which would be liable for only a modest rate of accession or gift tax or would escape tax altogether. The millionaire who insisted on endowing only his son or daughter with the whole sum would have to warn his children that they would pay a swingeing tax immediately they received a gift of £1 million. That would have been a step forward. To abolish gift tax altogether is an appalling step back to Victorian times and one which we strenuously oppose.

Dr. Glyn

What is the Liberal party's attitude to the efforts made by my right hon. Friend the Chancellor towards encouraging wider share ownership?

Mr. Wainwright

I am grateful again to a Conservative Member for introducing my concluding remarks. I like to wind up on an agreeable note.

I, for one, give an unqualified welcome to what the Chancellor calls the personal equity plan, which provides a strong tax incentive for those lucky enough to be able to make regular investments. We welcome that measure with some pride of authorship, because we proposed it for many years in various forms during Finance Bill debates. Each time we made that proposal the Treasury spokesman—whether Conservative or Labour—assured hon. Members in stern tones that it would cost the earth, that there would be no limit to the demands it would impose on the Revenue and that therefore they could not recommend that their colleagues should support it. Better late than never—I, for one, want to give the scheme a fair wind. We must bear in mind always, however, that it is a scheme for the lucky—for those who can put aside sums for investment. Alas, at the present time, that is only a fraction of our population.

5.47 pm
Mr. David Knox (Staffordshire, Moorlands)

I should like to congratulate my right hon. Friend the Chancellor on his third Budget speech. His first two Budget speeches were well constructed and to the point, and both were brief, as Budget speeches go. Today, my right hon. Friend has maintained the high standards he established on those two occasions. The House should be grateful to him for that.

I welcome the changes concerning VAT and charities, both on the expenditure side—I think particularly of the concession for talking newspapers for the blind—and especially on the giving side. I welcome the Green Paper "The Reform of Personal Taxation", which was published today. Obviously, I cannot comment at present on that document, but it will be carefully studied in the months ahead.

I am glad that my right hon. Friend has increased income tax thresholds. Like my hon. Friend the Member for Stamford and Spalding (Sir K. Lewis), I should have preferred my right hon. Friend not to reduce the standard rate of income tax by 1p in the pound but to concentrate all the relief on thresholds. Frankly, as my hon. Friend the Member for Stamford and Spalding said, the reduction in the standard rate of income tax is so small that it is unlikely to have any effect, and it is especially unlikely to have any incentive effect. I have no desire to make any great point about this. One always welcomes reductions in taxation even if they are not the selection one would have made oneself.

I welcome the increase in the VAT threshold and the improvement in the business expansion scheme. I particularly welcome the new scheme to encourage share ownership. Like the hon. Member for Colne Valley (Mr. Wainwright) I am a member of the Wider Share Ownership Council and I believe strongly in the spread of share ownership as widely as possible in our society, for the reasons advanced by the hon. Member for Colne Valley and my hon. Friend the Member for Stamford and Spalding. I was pleased to hear about the expansion of the community programme, along with the other measures to help the unemployed. They are nothing like enough, but I welcome those measures as far as they go.

I turn to the general state of the economy and especially unemployment. When I spoke in this debate 12 months ago, I said that unemployment was the principal problem facing Britain. Then the Chancellor introduced what he claimed was "a Budget for jobs". I do not think that it is unfair to say that his expectations have not been fulfilled. Unemployment has continued to rise during the past 12 months and despite the measures announced today, it will at best stabilise and at worst continue to rise in the next year.

Unemployment remains our principal economic problem—as it has been for far too long now. For all the talk about measures to reduce it, unemployment has continued to worsen over the years. I believe that we have now reached the point where this cannot be allowed to continue. This afternoon the Chancellor told us about the Government's success in taming inflation and improving industrial relations. I readily acknowledge and warmly applaud these successes, but for a long time we have also been told that lower inflation and better industrial relations were essential prerequisites for increased manufacturing output and reduced unemployment, yet, last week, I was told by my hon. Friend the Minister of State, Department of Trade and Industry, that manufacturing output was 5 per cent. lower than it was six years ago. We all know what has happened over the last six years and what is continuing to happen today with unemployment. Clearly, lower inflation and better industrial relations are not enough. They have not had the desired effect on unemployment and, frankly, they show no signs of doing so.

I do not believe that the present level of unemployment is necessary or indeed inevitable. From 1945 to 1974, under Labour and Conservative Governments we had full employment. This was achieved on the basis of the policies outlined in the 1944 White Paper on employment, the foreword to which stated: A country will not suffer from mass unemployment so long as the total demand for its goods and services is maintained at a high level. In my view, it was because the demand for goods and services in the British economy was maintained at a high level between 1945 and 1974 that we had full employment during those years.

Mr. John Stokes (Halesowen and Stourbridge)

I have heard my hon. Friend make the same speech for many years. Surely between 1945 and 1974 there was great and hidden unemployment as a result of the massive overmanning in industry, which is the cause of many of our troubles today.

Mr. Knox

I do not want to be diverted too far from my speech. All I would say to my hon. Friend is that there is quite as much under-employment in industry today as there was in those years. If my hon. Friend's point is correct, there would not have been the overall reduction in manufacturing output that there has been over the past six years. It is very worrying to think that manufacturing output today is not only lower than it was in 1979 but is lower than it was in 1973. These facts do not quite substantiate the point that my hon. Friend is making.

I return to what I was saying. I was making the point that in my view it was because the demand for goods and services was at a high level for the years from 1945 to 1974 that we had full employment. Equally, in my view was because the demand for goods and services in Britain has not been maintained at a high level since 1974 that we have had such high unemployment in these past 12 years. I believe that we shall continue to have high unemployment until we return to the demand management policies that were so successfully pursued in the 30 years after the war.

This means that, if we are serious about unemployment, we must raise the level of demand to bring it into line with our productive capacity. This cannot be done straight away. It will take a long time. It will not be easy, but it ought to be done and we ought to start now. The usual retort to pleas for a return to demand management policies is that these were the policies that failed in the 1970s. Far be it for me to say that the 1970s was the brightest decade in our economic history. It was certainly not. But since demand management policies had a proven track record over many years prior to the 1970s, I should have thought that the causes of our problems then were more likely to be those factors that were peculiar to the 1970s—the breakdown of Bretton Woods, the commodity price explosion of the early 1970s, the escalation of oil prices in the mid-1970s and again in the late 1970s, and the flow of oil from the North sea. All these caused economic chaos at home and abroad and they provide, for me, far more plausible reasons for the difficulties we faced in the 1970s than demand management policies based on the 1944 White Paper.

I believe that we must return to this approach to the management of our economy as a matter of urgency, and I regret that that was not announced today. Today's Budget will raise output only by the underlying increase in capacity. It will not raise the level of economic activity sufficiently to take up any slack and so reduce unemployment. In my view, the Chancellor should have taken much stronger action to raise the level of demand and so the level of activity. Only the Government can do this. It can be done either by cutting taxes without decreasing public expenditure or by increasing public expenditure without increasing taxes or by a mixture of the two. In my view the Chancellor should have increased thresholds by even more than he has done and he should have introduced a substantial programme of public expenditure on the infrastructure—on roads, railways, education, the Health Service, housing and, above all, housing improvements.

These measures would be additional measures and no extra revenue should be collected to pay for them. Of course, such a policy would involve an increase in the public sector borrowing requirement. In terms of resources, there is no reason why this should be inflationary because there is plenty of spare capacity. In terms of finance, the initial increase in the public sector borrowing requirement would, to some extent, be reduced as benefit payments to the newly employed fell and tax receipts from them rose. Nor would interest rates be likely to be affected, as their main determinant is the level of international interest rates rather than domestic factors.

At present, the British economy is operating at about 20 to 25 per cent. below capacity. Over 3 million people are out of work. A large number of people are engaged in schemes to alleviate unemployment which are, frankly, not very productive or economically beneficial. Millions at work are under-employed and enormous capital assets are under-utilised. If we are serious about creating jobs and reducing unemployment, the level of demand must be increased. If unemployment is to be conquered, we must go for a rate of economic growth which is faster than the underlying growth of capacity. I regret that the Chancellor chose not to take such a course today.

5.59 pm
Mr. Roy Hughes (Newport, East)

I agree with many of the sentiments expressed by the hon. Member for Staffordshire, Moorlands (Mr. Knox). He has made many speeches of a similar nature in the House and he is to be commended for that.

First, let me deal with the good things in the Budget. There are some good proposals, although Opposition Members recognise that they are few and far between. For instance, the tax relief for charities is to be welcomed. One cannot but admire the work done by voluntary organisations in our society today, particularly for the disabled. There has been a great increase in that work. My only proviso is that it is essential to define what is a bona fide charity. I should hate to think that, for instance, Eton school would benefit from those proposals.

The Chancellor has announced an 11p increase on a packet of 20 cigarettes. Such an increase was to be expected. If it is the last straw that assists people to give up that unhealthy habit it is a good proposal.

Petrol taxation must be seen in the context of the rise in the costs of transport, because a rise in transport costs increases the cost of just about everything else. Therefore, it is essential to ensure that the oil companies are brought into line so that petrol prices do not rise. As the Chancellor has pointed out this afternoon, there is no need for them to do so.

It needs to be appreciated that the vast bulk of freight—8 tonnes out of every 10 tonnes—now goes by road in Britain. Likewise, the car is no longer a luxury. In Britain, 25 million people hold a driving licence and nine out of 10 passenger miles are travelled by road. Road taxes now stand at over £12,000 million, yet the national expenditure on our roads is not a quarter of that figure. Therefore, the Chancellor made a wise decision not to increase petrol taxes directly in line with the recent fall in prices due to the collapse of the oil market.

This is the Chancellor's third consecutive Budget. Like earlier speakers, I give him full marks for presentation this afternoon. The right hon. Gentleman's first Budget was described as a Budget for enterprise and he still insists on talking about recovery. But we are entitled to ask him: what recovery? That is particularly so when manufacturing output is still 6 per cent. below the 1979 figure and when manufacturing investment is still 10 per cent. below the 1979 figures. Our new deficit in manufacturing trade is set to shoot up to £4.5 billion in 1986. Training has been drastically cut, with engineering apprenticeships cut to around 9,000. Meanwhile, bankruptcies in 1985 hit a new record. That is the picture of Britain's recovery that the Chancellor chooses to forget.

Last year, the Chancellor's Budget was said to be one for employment. Then unemployment increased by 115,301, so he did not have much success in that respect. Up until a few weeks ago it was said that this Budget would feature tax handouts. Then the bottom fell out of the oil market, so the Budget format had to be changed. We are now presented with yet another Budget for employment. In the months ahead we shall watch the employment figures with great interest. Meanwhile, to pretend that the puny employment measures in the budget will do anything more than scratch the surface of this horrendous problem is simply an exercise in kidology.

Unemployment has been compared to a tap left running—sheer waste. The figures bear out that contention. For instance, the annual cost of keeping 3.3 million people out of work in lost revenue and benefit is conservatively estimated to be nearly £17 billion. That would be enough to abolish VAT or to halve the standard rate of income tax.

Dr. Norman A. Godman (Greenock and Port Glasgow)

Is my hon. Friend aware that one aspect of the reversal of Government policy vis-a-vis the unemployment problem—which was revealed in an answer to a parliamentary question two weeks ago—is the creation of fully 5,400 jobs in local Department of Health and Social Security offices up and down the country?

Mr. Hughes

That is one means of creating jobs, but not exactly the most satisfactory one.

More than 1.3 million have been out of work for more than a year. Half of that number have been unemployed for three years or more. Those figures point to much demoralisation and they engender the social problems which are becoming such a feature of our society.

Mr. Laurie Pavitt (Brent, South)

My hon. Friend has hit the nail on the head. In addition to social problems, unemployment affects health. The Secretary of State continually points to the increasing demands on our Health Service, yet all the research shows that demands on the hospital and family practitioner services have trebled because of the effects of unemployment on health.

Mr. Hughes

My hon. Friend has been in the House a long time and I know that he speaks with vast experience on that subject. A survey carried out in my constituency in Newport some months ago bears out the increase in health problems as a result of mass unemployment. We in the Newport area suffered heavily from massive steel redundancies.

The Government have no political will to tackle unemployment. Many individuals and bodies have recognised the follies of the Government's economic policies. As my right hon. Friend the Leader of the Opposition pointed out this afternoon, there is an alternative. In Wales, on St. David's day this year we had what is known as a declaration on unemployment. Signed by prominent men and women throughout the principality, it said: We are a group of people with different views on political and social questions, but we all think the present level of unemployment in Wales is intolerable. It has destructive social and economic effects, and demoralises those who are not given the opportunity of contributing to the community through useful work. There have been developments in policy to deal with the problem, but there is much more that can and should be done. The objective now must be to achieve a substantial fall in unemployment. We therefore urge the Government to take effective measures to expand the economy, and otherwise to create, for those now unemployed, more opportunities of doing useful work. As I said, that document was signed by a group of non-political prominent citizens in Wales. They know and realise that something can and should be done about the problem of unemployment.

The recent report of the Conservative-dominated Select Committee on Employment put forward detailed proposals for the creation of 750,000 jobs specifically for the long-term unemployed in urban rehabilitation, health care and private industry, with a sweetener of £40 per week to the employer. The cost of the proposals is put at just over £3 billion over three years. That is a third of the amount earmarked for tax cuts in the same period. My right hon. Friend the Shadow Chancellor recently put forward Labour's carefully costed proposals for creating 1 million jobs in two years. Why cannot the Government take some positive action to tackle the horrific problem of unemployment?

Twenty years ago this month I was elected to the House. The following year I recall the Budget of my right hon. Friend the Member for Cardiff, South and Penarth (Mr. Callaghan), on 11 April 1967. He launched his Budget with the slogan "Steady as she goes". Some of us, particularly the new Members, thought that he was being a bit too steady at the time. However, he had some justification for acting in the way he did, bearing in mind that at the time unemployment stood at 610,500–2.61 per cent. of the work force. Now, unemployment figures show 3.3 million people out of work, with countless thousands more ready to take up employment if a suitable vacancy occurs. In that sense, the Budget we have heard this afternoon could well be described as "steady as she sinks".

With this Government, there is no hope for people out of work, but the Labour party has the policies to tackle Britain's fundamental problems. I am increasingly confident that, after the next general election, the Labour party will be given the opportunity to introduce its policies.

6.12 pm
Mr. John Stokes (Halesowen and Stourbridge)

I have always been an admirer of my right hon. Friend the Chancellor, and I believe that his Budget speech today, which was a very clever one, has encouraged his supporters and not given any ground to his critics. In all, I think that he has done a very good job and it will be difficult for the Opposition to try to find much fundamental fault with the Budget.

My right hon. Friend may not be very good at kissing the babies, but he never takes his eyes off his main aim, which is to get the economy right by squeezing out inflation—we have heard so much about inflation from Opposition parties—getting back to honest money and controlling public expenditure, which is always difficult in any democracy. Everyone knows what a difficult task he had this year with the sudden diminution in the oil revenues. I believe that both he and the country will gain in the long run by the great drop in the price of oil. It is bound to be good for world trade, for our manufacturing industry and for my part of the world, the west midlands, where industries have suffered so much during recent years.

The whole trend of the Government's policies is to try to get the state off the backs of our people so that they can harness their energies to help themselves with the least hindrance or interference from Government. I was horrified to hear of one case which will give an example of our extraordinary society. An old lady died of hypothermia in a large town where eight of her children were living nearby. Surely we must try to encourage in every way possible a personal, individual and family sense of responsibility.

We all know that taxation is still far too high. It is now clear that we shall have to wait another year before it can be substantially reduced. However, I welcome what the Chancellor has done this year. I particularly welcome the help to the lower paid. Even so, more needs to be done to give an incentive to all those who wish to work and earn a living if they possibly can.

I also welcome the further measures to help the unemployed—which I do not underplay as some Opposition Members do—and to improve training. Training is vital to our industrial and commercial future and to enable us to fight off foreign competition. I welcome the cut in the stamp duty on shares. Share ownership should extend much more widely until nearly everyone is a shareholder in one way or another. Of course, I welcome the special help given in the Budget to the small investor.

I must now say something from the heart which nobody else has yet said and which I say as a high Tory. I am disappointed that the Chancellor did not tax the banks. As an old-fashioned Tory who much prefers the landed to the moneyed interest, I am always inclined to look with a jaundiced eye on the banks and the working of some of the institutions in the City. The banks could have done more to help the small business man. We all know, from their marvellous offices with their thick pile carpets, their lunches and everything else, that they can easily make money without anything like the sweat and tears of the ordinary industrial business man.

Of course I am proud, and we should all be proud, of the City and of the great part it plays in our national and economic life. However, there are blemishes. My father and grandfather both worked in the City. They were both successful but I think that they were modest men. Certainly, in the Stock Exchange they took enormous pains with the private client. Today that spirit and tone is not as it used to be. A new breed of men, slicker, smarter and more ruthless than ever, have come in and they do not do this country any good.

We know of the dishonesties that unfortunately have affected parts of the City, and I am sure that the Government will tackle those as vigorously as possible. I am surprised that no one has mentioned, the strident vulgarity in the colossal advertising campaign—whole page after whole page in the national press—in the takeover battles. These do no good. To see great companies slanging each other in knocking copy is quite disgraceful. I wish the Chancellor would curb those activities and put swingeing taxes on such advertisements.

I am also concerned about some of the transfer fees, as they are called, and astronomic salaries of very young men in the City which bear no comparison to salaries in industry or anywhere else. That is something which the Chancellor should keep his eyes on.

People expect increases in the taxes on drink, tobacco and petrol, at least as much as the increase in inflation. I think that we have been agreeably surprised this year. The tax on petrol was minimal, there is no tax increase on spirits which, after all, are expensive, and the tax rise on cigarettes was what most people expected. Even so, I much prefer indirect to direct taxation.

We are all looking forward to reductions in the bank rate. However, important as that is, it is even more important for management in industry not to grant wage increases which are greater than the rate of inflation, or greater than the productivity of the organisation concerned.

In spite of all the Government's critics, and all that we have heard this afternoon, there is a great deal now going for the Government. The pound has not collapsed with the fall in oil prices, the stock market is booming and the Americans and other foreigners wish to invest here. Production and productivity are increasing year by year. World commodity prices are falling. International interest rates are falling. Soon house mortgages and credit will be cheaper. In time I believe that, following the drop in the price of oil, the unemployment figures will start to fall—I hope substantially. Industry is much more efficient and one hopes to see British goods taking a greater share of the home market.

Reference was made earlier in the debate to the need to increase demand. But the demand is there. The Sainsburys, the Waitroses, the car showrooms and the shops that sell refrigerators are packed with people. The problem is that they are buying foreign, not British goods. The answer is not to pump more money into the economy but to get British firms to become more efficient. There is no other way. That is what this Government have been trying to do and they have succeeded in doing it. Exports are good and I believe that they will improve still further.

Let the Opposition remember that, despite the black spots—all of us know that there are black spots—people in this country, as we have seen from the official figures in "Social Trends", are more prosperous than ever before. The Government should be able to take some credit for that.

In spite of all the unemployment, I have noticed in my constituency that for the first time many people are buying their homes. Many of them have a motor car and many of them go abroad for their holidays. All of them are becoming Conservatives. They are some of the strongest supporters of this Government. I find that in the main the complaints come from those in the very high income brackets. Fortunately, there are more people in the lower income brackets than in the higher income brackets and I therefore have little fear about the outcome of the next general election.

There is no cause whatsoever for us to try to make the Government change course. To do so would mean that all the sacrifices that have been made in recent years have been in vain. Within a few months the International Monetary Fund would be called in again and there would be a colossal economic and financial crash. Any weakening of resolve, as is suggested by some of our more timorous brethren, would be disastrous. I congratulate my right hon. Friend the Chancellor of the Exchequer. I believe that the country at large will give a very warm welcome to his Budget.

6.22 pm
Mr. Austin Mitchell (Great Grimsby)

The hon. Member for Halesowen and Stourbridge (Mr. Stokes) will forgive me if I do not follow him too far in his revolutionary and daring attack upon the banks. All I would suggest to him is that when he assaults those marble halls he should put Barclays bank, Otley road, Shipley, first on his list.

This is Sheikh Yamani's first Budget in his new period of dominance of the British economy. I hope that Sheikh Yamani will be better as a maker of Budgets than the right hon. Member for Blaby (Mr. Lawson), whose first Budget for enterprise saw our share of world trade drop disastrously and whose second Budget for jobs saw unemployment rise precipitously. Therefore, Sheikh Yamani's Budget might have a slightly better effect.

The Government have been robbed of a confidence trick that they were hoping to play on the British people. It was clearly the Chancellor of the Exchequer's intention to come to this House on Budget day and claim that the benefits to this country of oil tax revenues and their effect upon our economy were the result of the Government's policies and that the fruit of those policies would be tax cuts. That would have been a confidence trick. The Chancellor has been robbed of the ability to play that confidence trick.

Sheikh Yamani's impact in reducing the price of oil is a foretaste of what is to come. It is a foretaste of the problems that lie ahead for the British economy as the oil revenue contribution begins to run out. When that happens, this Chancellor will have left us disastrously exposed. The Chancellor and the Government have weakened and undermined the alternatives to oil by neglecting the manufacturing sector of the economy upon which we used to depend for our balance of payments survival. The Government have destroyed a quarter of this country's manufacturing base. They have destroyed 1.8 million jobs in manufacturing industry. They have turned us from being a net exporter of manufactured goods into a net importer of manufactured goods. That will leave us disastrously exposed when the oil price comes down precipitously, as it already has. We have come to the end of the easy, irresponsible years that the Chancellor and his predecessor have thrown away. We have come to the nub of the problem: what to do after oil.

There were two approaches to the oil wealth which Britain began to enjoy under this Government and which distinguished this Government from every previous Government who did not benefit from oil wealth. The first approach—the sensible approach that the Labour party would have adopted to oil—would have been to invest that wealth in our productive economy. It should have been used to rebuild our creaking productive economy and provide a massive overdraft facility in order massively to expand the economy. Our oil wealth would have allowed us to do that by ending the balance of payments constraints which had checked every previous attempt at expansion. In other words, it could have been used to run the economy in a way which would have produced growth to offset the effects of our oil wealth upon the exchange rate.

It would have been sensible to invest in this country and to build up productive assets and resources, which would have enabled us to grow and expand in a way that had never been possible before. However, the Government chose the opposite approach. They allowed oil to push up the value of the pound. They compounded that process by their consistent policy of high interest rates, which have kept the pound grossly over-valued throughout this period. Consequently, our manufacturing base has been ruined.

The high value of the pound has facilitated the massive export of capital—stashing away overseas the benefits from oil. This has benefited not the whole community, but only some of the community. Our transient oil benefit has been invested not in the productive capacity of this country but in the productive capacity of our competitors. The Government chose that alternative. They have used the balance of payments benefits of oil to pay for imported manufactured goods, which have destroyed jobs in this country. The Government have used the tax revenues from oil to support those who are now unemployed because of the effects of oil on the balance of payments. It has been an absolute and total folly. It has resulted in a waste of oil revenues and it has compounded the industrial and manufacturing problems that we faced before the oil came on stream. Having wasted that asset, the problem is what to do about the situation that the fall in oil prices has generated. There are two responses—

Mr. Nicholas Winterton (Macclesfield)

Will not the hon. Gentleman pay credit to those companies that operate overseas and that last year brought into this country invisibles that amounted to £7.5 billion net? Will he not pay a tribute to industry which has invested £60 billion in new equipment and buildings in this country?

Mr. Mitchell

The bulk of our exports have been in the form of the export of capital and portfolio investment. Last year it amounted to about £20 billion and it was invested in productive capacity overseas. There have been some success stories, but the main reason for firms investing in jobs overseas is that it has not been profitable to invest in this country because of the way in which the economy has been run by this Government.

There were two responses. The first would have been—the Chancellor could have gone for it today—to increase taxation or borrowing to compensate for the loss of oil revenue. According to the autumn statement prediction, that loss must be about £7 billion. That could have been combined with a lower interest rates policy, which would have provided for some expansion of the economy.

The alternative approach would have been to keep interest rates high in order to strengthen the capital account and bring in money to compensate for the weakening of the current account balance of payments, thanks to the falling price of oil. At the same time, demand could have been damped down and taxes cut. The two approaches are alternatives and to a large extent they are mutually exclusive: increase taxes and lower interest rates, or increase interest rates and hope to expand by lowering taxes, which is what the Chancellor has done. The latter has the advantage of no inflationary consequences and no odium for the Chancellor as a result of increasing taxes, but it is the weaker of the two alternatives because interest rates will remain high. There have been persistent rumours, like a kind of continuous mirage dangled before the people, of interest rate cuts coming but never quite arriving. After the mountains have laboured in this fashion, there might be a squeaking mouse of a minor interest rate cut.

Interest rates are much higher in this country than in the countries of any of our competitors. In real terms, allowing for inflation, they are probably double the level of most of our competitors. Although there will be a minor reduction, interest rates will remain high. That imposes a crippling burden on everybody—on the householder, on the person with an overdraft, on local government and, most of all, on manufacturing industry, which needs finance for investment. We need a dramatic increase in investment, bearing in mind the figures given earlier about the fall in investment. This economy will not get the benefit of the expansion that will occur overseas because of the fall in the oil price. As a result of the strategy of high interest rates, there will be no fall in unemployment—the crucial problem that the Chancellor needed to tackle.

Dr. Godman

Is not one of the most realistic indications of the Government's performance over the last few years the fact that almost 40 per cent. of the population of the great city of Glasgow has to subsist on social security?

Mr. Mitchell

That is exactly right, and the Chancellor has not allowed for the horrendous cost of unemployment. It must be costing the Exchequer about £20 billion. I do not know the latest estimate for each person out of work, but it may be £5,000 or £6,000 a year and that represents a horrendous cost to the Exchequer. The Chancellor is in that situation simply because he has run the economy for deflation and for discipline rather than for growth and expansion. The problem he should have faced is what to do now. The prescription the Chancellor should clearly have gone for is one to reduce interest rates as a central aspect of Government policy. There is no point in saying that markets decide interest rates, because interest rates are under the effective political control of the Government and can be brought down by the Government. The minimum reduction necessary is 4 per cent., which would bring us down to somewhere near the level of our competitors. It would not bring us to their level, but it would be somewhere near. That is the key to getting the pound down, because the pound is still grievously overvalued, especially against the deutschmark, where the overvaluation is about 30 per cent. To become competitive with the deutschmark we would need a devaluation of about 22 per cent.

The sterling index, at 74, is now substantially up on its low point of last year—4 per cent. up in money terms and much more in real terms because our inflation rate is that much higher. Unless we reduce interest rates and bring the pound down with them, we will not be able to participate in the world expansion. We will not be able to stem the rising tide of imports and get back into the markets we have lost overseas. That is because our export prices are now some 30 per cent. higher than they were on average for 1973 and 1976, and they were not especially competitive then. How are we to get back into the markets that we have lost without a competitive currency? That competitiveness is conditional on getting interest rates down.

The second approach of the Chancellor should have been to borrow and spend. There is nothing like public spending for stimulating the economy, creating growth and putting people back to work. I should like to offer the Chancellor Mitchell's law. If he looks at the G5 economies over the six years from 1979 to 1984 he will find a direct correlation between the increase in public spending in those economies and the level of unemployment. The biggest increase in public spending—8.6 per cent.—was in the United States, and the unemployment increase in the United States has been only 1.6 per cent.

In Britain, at the other end of the scale, the total public expenditure increase has been 3 per cent. and the unemployment increase has been 8 per cent. The other economies are ranged at intermediate levels depending on how much they have increased public spending. Public spending is the only way of using the under-used resources in our economy and the only way of giving our economy the kind of stimulus that President Reagan gave the American economy and which resulted in the creation of 8 million jobs. There is no point in saying it cannot be done, because 8 million jobs have been created in America in less than three years. That is the kind of expansion we need, spending not on the same objectives of defence and armaments but on useful public purposes.

The Labour party proposes an increase in the public sector borrowing requirement of around £6 billion. That is an increase on top of the present level plus asset sales—in other words, an increase on top of the £12 billion public sector fiscal deficit. That would put unused resources back to work. It would put building workers back into jobs and tackle the housing crisis that is building up. That is what the Chancellor should have got on with.

The third matter to which the right hon. Gentleman should have devoted some attention is clearly social justice. He should take back from the richest 5 per cent. of our population, those earning over £25,000 a year, the benefits that have been showered on them in a continuous dribble of about a dozen concessions in each Budget under this Government. There have been concessions in capital transfer tax and capital gains tax. More benefits in capital transfer tax on unearned income have been repeated today, to an amount of about £3.6 billion annually, and that has all been given to that richest 5 per cent. If that is taken back—and it can be taken back—we could use that money to increase pensions by £5 for a single pensioner and by £8 for married pensioners. We could increase child benefit by £3 and put the long-term unemployed on the long-term supplementary benefit rate, which is where they should have been all along. That would stimulate the economy, because those people spend their money on British goods and not on buying BMWs and on overseas trips. That is a stimulus and a matter of social justice that it is essential to fulfil.

The fourth purpose is an expansion of employment schemes. It is tragic to see how little has been done in the Budget for the unemployed. Why could the Chancellor not take up some of the schemes put forward in the report from the Select Committee on Employment on special employment measures and the long-term unemployed? That Committee put forward three proposals: a building improvement scheme to provide 300,000 jobs; the employment of 100,000 long-term unemployed in the social services and the National Health Service; and the introduction of a subsidy to private employers to take on long-term unemployed in addition to their existing employees. The total cost of those recommendations was only £3.3 billion.

Why has the Chancellor devoted so little of his Budget to the necessary objective of bringing down the horrendous level of unemployment? I concede that the Government have been absolutely brilliant at bringing down the unemployment figures, thanks to all the fiddles, manipulations, changes, doctoring, Tebbitising and sanitising that has gone on. What they have not brought down is unemployment, because it has continued to rise to a point where the long-term unemployed are now four times more numerous than they were at the height of the depression in the 1930s. That is a national tragedy and a waste of human resources, yet all the Government can do is manipulate the figures.

The Government tell us that they have created 700,000 new jobs since 1983. They do not say that most of those jobs are part-time and filled by women. They do not say that the net loss in jobs since the Government came into power is 1.1 million. Those jobs have been thrown away since 1979. Jobs lost in the whole of the Common Market for the same period have amounted to only 500,000, less than half the number of jobs lost by this Government. We have a national tragedy and a national problem because our unemployment level, disguised though it is, is now higher than that of any major industrial country. It is a horrendous burden on the productive economy and that burden must be eased, not only for social justice but for economic efficiency.

Those are the priorities that the Chancellor should have gone for. As usual, being the artful dodger of economics, he has gone for fast footwork and has held out mirages about tax cuts to come next year—the infinitely postponed and never arriving tax cuts which have been the centrepiece of the Government's dangling carrot to lure Back Benchers through to the next election.

The reduction in the oil price provided an enormous opportunity for the economy, which should have been seized in this Budget. It is equivalent to an increase in the money supply. We could have done it for ourselves six, five, four, three, two or even one year ago. We had the ability to give the same stimulus to the economy by increasing spending and even by reducing taxes when we had high oil revenues. Now the benefit is being forced on us by Sheikh Yamani, whose budget this is. We could have done it for ourselves but we had to have it forced on us by the kindly sheikh.

It is an opportunity to expand. Given the way the Government have ruined the manufacturing sector, our need to expand is more crucial and more desperate than that of any other competing economy. It is a matter of national survival. Unless we rebuild the manufacturing sector, expand industry and get the economy to grow again, how are we to pay our way in the world when the oil contribution fades away entirely? How are we to provide jobs for our young people? How are we to provide the growth to improve the standard of living, which is what the modern electorate wants? How are we to provide the public spending to improve the quality of life, which the public have a right to expect? How are we to do all those things and avoid the fate of a miserable, embittered, declining, divided society, which is where we are heading unless we expand the economy and rebuild the productive sector so that we can provide jobs and survive?

At the end of all the wasted years under this Government it will be tragic if we are to go back to the same balance of payments constraint which has strangled growth in almost every decade since the war. If the Government throw away the benefit of the oil price reduction it will be a national tragedy. To make amends to the people, the Chancellor should have done something in this Budget. Instead, with the same old irresponsibility, he is mortgaging the future by continuous and increasing asset sales; he is desperate to pay the cost of unemployment by selling off national assets. What is more, he is selling them off at a cut price.

The prices that the Government are getting are so inadequate that it is almost as if these were distress sales. A business man's Government cannot even get a good price for the assets which they are flogging. What a farce that is. They are not even making sensible use of the money they are getting from those sales. They are laying in store horrendous problems for the time when those assets will no longer produce revenue. Because of the asset sales, particularly gas, there will have to be an increase in taxation. The Government should have used the money from asset sales to deal with unemployment.

This, then, is an irresponsible Budget from an irresponsible Chancellor. The Chancellor should have taken the name of Omar Khayyam, with this Budget as his Rubaiyat. The slogan is, live for today: "Take the cash in hand and waive the rest," or, take the cash in hand and wave the Order Papers, as Conservative Members did earlier. I remind them and the Chancellor that there is still the brave music of a distant drum beating out the toll of what is to come as the oil contribution fades away and vanishes entirely. What do we do then to survive? [Interruption.] It is all right for hon. Gentlemen to make sedentary interjections about services. They will not provide jobs for kids and the wherewithal to survive We have now to provide for the hard future which is to come.

The best ephithet on the Budget comes from a compendium of abuse drawn up by the Chancellor's colleague, the Secretary of State for the Environment. It is a quotation from Kipling which sums up the Chancellor's approach and the economic strategy of the Government:

  • "I could not dig, I dared not rob;
  • Therefore I lied to please the mob.
  • Now all my lies are proved untrue
  • And I must face the jobs I slew.
  • What tale shall serve me, here among
  • Mine angry and defrauded young?"

6.44 pm
Mr. Edward Leigh (Gainsborough and Horncastle)

The Budget will be welcomed precisely because it rejects the calls for fiscal irresponsibility which we have heard from the Opposition. The Chancellor has today reasserted his commitment to what The Times yesterday called stability in the large numbers, designed to vanquish inflation and foster growth combined with supply side changes designed to stimulate industry's response to the changed economic climate. The crucial question facing the Chancellor is how far the Budget will advance us down the road to popular capitalism—the very phrase which he used in his Budget speech.

In three generations, thanks to generous tax incentives, home ownership has increased from 10 to 60 per cent. of the population. The property-owning democracy is a fact. But the share-owning democracy, the industry-owning democracy, the pension-owning democracy, the education-owning democracy and the health-owning democracy remain dreams. The generation of new wealth to finance those dreams from large cuts in the basic rate of taxation will remain a dream after the Budget, although the Chancellor has made an excellent start.

I intend to show how we can continue the Chancellor's work of making those dreams a reality. We should aim in this Parliament and the next, after the Conservatives have won the next general election, for large tax cuts. I can do no better than point to international comparisons and then to the American experience. If we take the single person's liability to basic rate income tax and social security rates in a group of countries, we find that the United Kingdom is still unfortunately top of the league. The amount taken by the state in the United Kingdom is 39 per cent., in West Germany 36 per cent., in the Netherlands 35 per cent., in France 22 per cent., in Japan 20 per cent., and in the United States 18 per cent. That is not a record for a Conservative Government, albeit doing their best, to be proud of. As the Chancellor said, it is no accident that the United States and Japanese economies are the most successful in the world.

What is even more instructive is the United States experience following President Reagan's tax cuts in 1983 which reduced taxes to the average of the 1970s. In an article in Challenge, Alan Reynolds wrote that it was never claimed that such a modest cut in tax rates would instantly raise taxable income enough to offset any revenue loss. The claim was instead that dynamic gains in economic growth over time would reduce spending on subsidies, transfer payments and bail-outs". He added that after tax cuts

the big boost was … from business investment, housing, and consumer durables. Real government purchases actually fell, and true consumption (services and nondurables) was quite weak. Exports staged a good recovery, despite poverty in the developing countries, and imports in 1983 were only 7.5 per cent. of GNP—down from 9.2 per cent. in the weak-dollar years of 1979–80. In the first half of 1984, business investment sped up to a 20 per cent. rate of increase, and real GNP growth averaged a marvelous 8 per cent. between the second quarters of 1983 and 1984. Far from being an inflationary boom, as the monetarists had predicted, or a Keynesian consumer boom, the Reagan expansion has been an investment boom of unprecedented proportions…Clearly, reduced marginal tax rates on capital did induce more investment, and reduced tax rates on labor were favorable to both investment and employment. The efficacy of tax cuts is proved by international experience, and particularly by the American experience in recent years. Cuts in the base rate are preferable to increases in tax thresholds. I did not expect the Chancellor to have the courage to cut the base rate today, but I am delighted that he has done so. I suspect, and I hope, that it augurs a base rate of 25 or 26 per cent. by the end of this Parliament.

I know that the arguments between raising the thresholds and cutting the base rate have gone backwards and forwards over the years. My hon. Friend the Member for Stamford and Spalding (Sir K. Lewis) said today that if a change in the level of base rates was to have any significant effect on, for example, work incentives, it would have to be at least 2p in the pound reduction. I can only say to him, "Where do we start?" We have made a successful start today. The problem facing the Chancellor, of course, is that, because allowances have to be indexed each year, there is a built-in ratchet effect for future years, which means that there is a tendency for base rates to be reduced only in exceptional circumstances.

It is often said that an increase in tax allowances is the way to deal with the poverty and unemployment traps. The Institute for Fiscal Studies, in its budget briefing for 1986 estimates—this is an interesting point—that had the resources used to increase allowances been used to cut the basic rate, it could now be down to 26.5 per cent. The question to be answered now, therefore, is, should we carry on down the road of increasing tax allowances, or should we go for an all-out drive for cutting the base rate?

It is interesting also that the IFS document says: The argument for cutting taxes by raising allowances has frequently been that the poverty and unemployment traps are relieved by taking people out of tax. It has been shown elsewhere (Dilnot 1984; Kay 1984) that raising allowances is in fact a remarkably inefficient way of relieving the poverty trap, and an ineffective way of relieving the unemployment trap. However—the institute says this, not I—

a cut in the base rate has a greater effect on the unemployment trap". Those findings prove to me that there is little appreciable benefit, if we are talking about relieving the poverty and unemployment traps, in going for modestly raising tax thresholds rather than for cutting the base rate. But the great advantage of a cut in the base rate is a psychological one, because whether tax cuts are a good thing or not depends very much on whether they are capable of getting the economy moving. I believe that the American experience proves that they can do so.

What now of the drive towards a real participating democracy in which ordinary people can aspire to personal ownership of the major institutions that affect their daily lives? I am delighted that we are implementing today another successful United States device—a pension shelter. When I was writing this speech this morning, I never expected that the Chancellor would institute such a successful device. In America people are allowed to hold a personal investment account which is not taxable and is set at a $2,000 limit. This tax shelter concept has worked brilliantly in the United States, and the Chancellor will be pleased to hear that it has resulted in some people in their twenties investing $2,000 in a pension fund being offered at retirement no less than $1 million because of the intense competition for their accounts. It seems incredible to us that the scheme in America has actually been making millionaires of millions. The whole point is that it is a tax shelter around an infinitely transferable, personal and regularly itemised account, with personal statements, just like a bank account.

In Britain today we are extending the tax shelter to British industry. Imagine the stimulus that this will give to interest in shareholding and, of course, to British industry. The Chancellor is to be congratulated on overcoming the Treasury's traditional blinkered view of investment accounts. The hon. Member for Colne Valley (Mr. Wainwright) mentioned this. The Treasury has thought historically only in negative terms of forgone revenue. If that Treasury view, which the Chancellor has today overcome, were to be accepted, there would never be any progress towards the kind of supply-side economics that have proved so successful in the United States.

Needless to say, starting in a small way, the investment tax shelters could be extended to health and education schemes. The sale of British Telecom has shown the way forward, but if we are to make shareholding more than just a hobby for the small investor we must use the tax structure to encourage him. These reforms could easily be accommodated, and are being accommodated, within the existing PAYE and social security systems. But if the two systems were fully integrated, as I hope they will be following the issue of the Green Paper today, the political barriers in their path would, I believe, be far fewer.

Mr. Nicholas Winterton

My hon. Friend has made an extremely good point, and he has mentioned British Telecom, which too often, perhaps, is mentioned to hon. Members. Will he also mention, as our right hon. Friend the Prime Minister has mentioned today, the great and growing success of British Aerospace, which was offered on the British stock exchange by the Government and is proving to be an outstanding success involving outside money in something which hitherto was contributed to only by the Government?

Mr. Leigh

My hon. Friend makes a valid point and I concur with his remarks.

I was referring before his intervention to the integration of tax and benefit systems. I am amazed, having done some research into this, at how little research there is, either within the Treasury or outside, into how tax credit systems would facilitate share-owning investment schemes. I should like the Treasury to study how tax credits could be provided for each activity which the Government are clearly desperately anxious to encourage. Would it be possible, for instance, to provide a credit of £X for each individual for housing, which would meet in total the cost of state housing and could be topped up for higher-priced private housing? Would it be possible to give each individual a credit of, say, £Y equivalent to the cost of state education, which could be topped up with taxed income for more expensive private education? Why should these credits not be universally available, not just as tax-deductible expenses, as under the present systems, but as a universal right for the whole population?

All these ideas point in one direction—a new impetus to extending free choice for the individual. That aim demands not consolidation, but, as the Prime Minister has said, and as the chairman of the Conservative party has reiterated again this week, radical policies to ensure that there is real public pressure, not for increases in central and local government spending, but for greater opportunities to relieve the state of the burden of deciding how and what is to be provided for the individual and for letting the individual himself decide his own priorities.

6.57 pm
Mr. Laurie Pavitt (Brent, South)

Budget debates are always about figures and in the three minutes that I have I hope to make five points.

This is my 27th Budget. Having listened to Conservative Members, I believe that one of the problems resulting from the last six or seven budgets—since 1979—is that the country has been divided as never before. Sometimes when I hear Conservatives talking I feel that they live in a very different world from me.

I want to take up a few of the points that emerged as the Chancellor of the Exchequer glowered across the Dispatch Box at us and, as usual, gave us naught for our comfort.

First, I cannot reconcile the right hon. Gentleman's comments about housing with what happens at my Saturday morning surgery. There are 650 homeless families in sleazy accommodation in Paddington, 15,000 people on the housing list, and my ratepayers are paying £40,000 a week, but I hear the Chancellor talking about the marvellous housing that has been provided under the Conservative Government.

I welcome very much what the right hon. Gentleman has done about VAT for charities but, like my right hon. Friend the Member for Islwyn (Mr. Kinnock), I hope that he does not mean that Eton will get a bit more. I hope too, that as a result the Chancellor will do something about the grants for citizens advice bureaux, which are non-political and are under pressure because their grants are being cut off.

I do not have the time to go fully into the question of the unemployed, but I want to add one point to the excellent speech by my hon. Friend the Member for Newport, East (Mr. Hughes). The Minister for Health comes to the House time and time again saying that more is being spent on health but also that more people are ill. I never thought that the Health Service was about more people being ill. However, if there are 3.4 million unemployed, the amount of illness that that generates means that the taxpayer has to find much more money for looking after them.

As the House knows, on 14 February the Chancellor of the Exchequer gave me the figure for taxation on cigarettes. I welcome very much the fact that he has now got £350 million extra. I hope that he will use that to remove prescription charges from very bad cancer cases and will also do something about sports sponsorship.

Debate adjourned.—[Mr. Durant.]

Debate to be resumed tomorrow.

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