Budget Resolutions and Economic Situation

HC Deb 24 March 1986 vol 94 cc628-712

[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).]

Mr. Speaker

No fewer than 27 right hon. and hon. Members have applied to speak and eight of them are Privy Councillors. In fairness to the House, I propose to interleave the calling of Privy Councillors with Back-Benchers and I propose to adopt a 10-minute limit on speeches between 7 pm and 8.50 pm. I hope that the Privy Councillors who are called before that time will bear that limit broadly in mind.

4.25 pm

The Chancellor of the Duchy of Lancaster (Mr. Norman Tebbit)

My right hon. Friend the Chancellor of the Exchequer has presented to the House a Budget which carries forward the objectives of this Conservative Government.

No Budget can stand alone, and I am glad to see that many commentators have noted the manner in which, in many respects, this Budget has taken further the aims and reforms of earlier Budgets. It is a Budget that continues the drive towards the kind of economic way of life—a freer way of life—which has been endorsed twice by the electorate of this country, and will be endorsed again.

No one on this side of the House has ever deluded himself into a belief in instant prescriptions. When we set out in 1979, we said that we were setting out on a long and difficult task. The world recession made the task more difficult, as did that final futile spasm of the old guard antidemocratic union bosses, the coal strike. They have both been overcome.

We had a coherent view of how the reversal of our relative economic and industrial decline could be achieved. It is a view which experience has reinforced. The cornerstone of the work has been the reduction and control of inflation. Friday's figures for the retail price index and my right hon. Friend's forecast of 3½ per cent. inflation by the end of this year, when compared with an average level of inflation at 15½ per cent. during the previous Labour Government, underline this achievement.

Of course, our success on that front has led some to forget the dangers of inflation. Indeed the question is sometimes put, should not we be prepared to accept a little more inflation to create more jobs? Memory should not be so short. It is not that long ago that, in that graphic phrase of the day, Britain was drinking in the last chance saloon, and yet even now there are those who would dash straight back in and call for another round—a round of spending and borrowing that would give us another inflationary hangover—[Interruption.] The hon. Member for Middlesbrough (Mr. Bell) may not be old enough to remember it, but it was fewer than 10 years ago.

Those were the days so rightly condemned by the right hon. Member for Cardiff, South and Penarth (Mr. Callaghan) who in 1976 said: Higher inflation, followed by higher unemployment. That is the history of the last twenty years". He was speaking of the 20 years from 1956 to 1976.

The right hon. Member for Leeds, East (Mr. Healey) spoke for almost everyone when, according to The Times of 18 March 1976, he told the Labour party: There is a direct relationship between the level of pay received by those who have a job and the number of jobs the economy can support". My right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath) put it in even harder and clearer terms when he said that inflation, if left unchecked, presents the biggest single threat to the standard of living of every person in the land". In contrast to our Labour predecessors, we have not been limited to occasional pious thoughts on these matters. We have taken the necessary actions, consistently over a period. To defeat inflation requires a consistency of purpose, a consistency of action, and yields a consistency of effect. Too many Chancellors in the past have been forced into mismanagement by the call for instant solutions. They converted economic cycles into roller-coaster rides that left the stomach in the mouth.

As we know, for many years in each successive cycle the peak of inflation was higher than its predecessor. My right hon. and learned Friend the Foreign Secretary, in his Chancellorship, broke that precedent. My right hon. Friend has built upon his success.

There is no safe level of inflation. It is the job of Government, through sound monetary and fiscal policies, to ensure—

Mr. David Winnick (Walsall, North)

Oh!

Mr. Tebbit

I shall read the figures to the hon. Member for Walsall, North (Mr. Winnick) if he is not clear about it.

It is the job of Government to ensure that there is both consistent downward pressure on inflation and room for growth in the economy. Of course, success in overcoming inflation cannot guarantee a fall in unemployment, but a rise in inflation will certainly lead inexorably to an increase in unemployment. Cause and effect are not near simultaneous. Jobs are not lost as soon as prices go up, nor are they recreated quickly when prices are brought under control. None the less, the benefits of a steady and consistent approach can be seen. Since the sharp and deep recession, we have seen five years of economic growth alongside a sizeable reduction in inflation. As my right hon. Friend said, 1986 is set for output growth of 3 per cent. and inflation falling to 3.5 per cent. It is a record many ex-Chancellors would have dearly wished for during their term of office.

Mr. George Foulkes (Carrick, Cumnock and Doon Valley)

It is an economy for the whizz kids.

Mr. Tebbit

In real terms, we now have an economy, and an industry, including manufacturing, which is growing, not declining. It suits the Opposition not to hear the facts. The hon. Member for Carrick, Cumnock and Doon Valley (Mr. Foulkes) in particular finds difficulty in hearing while he is talking, and I suggest he stops talking.

Total fixed investment in the economy last year was at an all time record in real terms. The CBI's latest trends inquiry gives the best combined response on prospects for output and prices since the inquiries began in 1975. Manufacturing exports are at an all time high. Of course the right hon. and learned Member for Monklands, East (Mr. Smith) will no doubt remind us that we have a deficit on our trade in manufactured goods. That is a tendency which has been growing—consistently exports were growing less quickly than imports—during the period of the last Labour Government as well as this Government. Manufacturing profitability is at its best since 1973 and productivity has increased by an average of 6 per cent. a year over the past five years.

Mr. John Smith (Monklands, East)

I am grateful to the right hon. Gentleman for giving way so early in his speech. In the interests of accuracy, will he point out that there was a substantial surplus on the balance of trade in manufactured goods when the Government took office? Now, for the first time in our history, there is a substantial deficit, and we are heading for a deficit of £4.5 billion. Can the right hon. Gentleman tell us how, under this wise Government, this has come about?

Mr. Tebbit

I said that there was a long established tendency in that direction because manufacturing exports were growing less quickly than manufacturing imports. That is not a new feature. It has continued and, not unnaturally, if such a tendency continues for long enough one moves from surplus into deficit.

In the meantime, in contrast to the Labour Government, we have maintained consistently a surplus on balance of payments.

Mr. Smith

What about oil?

Mr. Tebbit

Here we go again. I wonder whether the right hon. and learned Gentleman would say that in such a dismissive way if it was coal? What is wrong with exporting oil? It is not many weeks since the right hon. and learned Gentleman was saying that the whole of our strategy depended on revenue from oil. We have lost half of that in a matter of weeks. The economy still looks to be in very good shape.

It is only fair to recognise that some industrial capacity has been lost. It is only fair to agree that our competitors have not stood still waiting for us to catch up. We have begun to close the gap. Of course there are effects on unemployment. Our competitors have shed labour in manufacturing industry as they have raised productivity faster than demand has expanded and we have had to go faster still to close the gap in competitiveness.

A sign of the strength of the recovery is shown by recent figures for the mechanical engineering industry. This strength of recovery is most notable in the output of the machine tool industry—a business in which the Opposition would have written us off years ago. Output rose by 20 per cent. last year, and that was the first rise for a long time.

Those in industry see good prospects and are encouraged by the Budget, despite the halving of oil revenues. It is fair to ask, in the light of what the right hon. and learned Gentleman and others have said on the matter, how the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) would have reacted to the dramatic change in oil prices had he been Chancellor. I imagine that, as usual, he would have over-reacted. People often do under stress, and he would have the stress of commitments to an extra £24 billion a year of public expenditure—alongside self denial of £4 billion to £5 billion of revenue from privatisation. He would have to wheel out the whole dreary paraphernalia of state intervention—the National Enterprise Board, the National Investment Bank, planning agreements and the like, with reactionary union bosses forced on to company boards while the right hon. Gentleman's penal tax policies would drive our most talented managers either to despair or to California. For luck he would direct pension funds money into a new generation of Meriden co-operatives, Scottish Daily News's, and the like. We know how he would react. We have seen him in office in the past when he was Secretary of State for Prices and Consumer Protection or, as his local newspaper the Birmingham Post referred to him, "Mr. Rising Price".

In an article in the Birmingham Post the right hon. Gentleman said: We spent a lot of time in the last month looking at potato prices … once the drought has worked its way through and the pound has stabilised, we can expect a period when the inflation rate is going to move down again. We are on course, but we are travelling more slowly than we would have wished to". Thus it would be back to the consideration of the price of potatoes by some wretched board and some other unfortunate Minister spending more time on that than ministerial duties warranted. [Interruption.] The right hon. Member for Sparkbrook says he would like to attack his record and is most willing to do so. We now have the prospect of stable prices and low taxes—the right hon. Member for Sparkbrook could not control the price of potatoes—with individuals and companies able to take their decisions in a free market, with fewer state monopolies, less state intervention, less fiscal bias and freedom to allow incentives to work and rewards to be available for hard work and success.

It is free enterprise and free consumers, not Governments, that will continue the process of creating jobs. The measures we have seen in this Budget and earlier Budgets show clearly how the prospect can be realised.

Mr. Richard Hickmet (Glanford and Scunthorpe)

Why is my right hon. Friend being so selective in his attack on the Opposition Front Bench? Would he care to comment on the proposal of the right hon. and learned Member for Monklands, East (Mr. Smith) to double the expenditure of the Trade and Industry Department? Will he comment on the effect of that and its cost upon our national finances and economic situation?

Mr. John Smith

Watch out, it is a trap.

Mr. Tebbit

Perhaps the right hon. and learned Gentleman will be kind enough to allow me to answer the question. I am always extremely selective in what I say about the Opposition Front Bench. I select each of them in turn. I treat them with great courtesy and I tell the truth about them, which is a sad thing to have to do. My hon. Friend is right. The right hon. and learned Gentleman has proposed a massive increase in spending through the DTI.

Mr. Smith

Not doubling the expenditure.

Mr. Tebbit

I do not know whether it is double or merely 50 per cent. I do know that when the right hon. and learned Gentleman's Government left office there was massive spending in the DTI, not on new technologies or on bringing forward new industries, but on loss subsidies on the old fashioned state industries because they could not bear to deal with those industries' problems.

It is essential that tax reductions should be made where they do most good and that they should be matched by tax reform to ensure that tax does the least possible damage to incentives and enterprise and the maximum possible to promote a growing, flexible and responsive economy. One welcome consequence is the cut in tax on unincorporated businesses and the matching cut in corporation tax for small companies. This is only the latest in a series of reforms that have transformed the tax environment for business.

Perhaps most important, the business tax reform of 1984 is now coming fully into effect—a cut in special tax reliefs, matched by a cut in corporation tax rates. The main rate in 1986–87 is down to 35 per cent., which is the lowest rate in any major industrial country, and the small companies rate is only 29 per cent., which is the marginal rate for about 90 per cent. of unincorporated businesses. The result is not a fall in revenue—far from it.

The aim of the reforms is to reduce distortion, to improve the quality of investment and to strengthen incentives to enterprise and growth. Of key importance is the aim to see the basic rate of taxation down to 25 per cent. I understand that that aim is shared by the Social Democratic and Liberal parties. I take it that that is why they will vote against the 1 per cent. cut in the basic rate tonight.

Many of our critics may say of our tax policy, "Jam tomorrow". We already have a lower basic rate than at any time since the second world war. It is four percentage points down so far and there is the prospect of more to come. It is jam tomorrow—just like yesterday and today. Under this Government, the incentives to enterprise will grow. Schemes to encourage employee shareholders will bring a greater identity of interests between workers and their firms. It is dividends in the pockets of workers that may do more to increase harmony in the factories than union bosses in board rooms. These Budget measures will help to create jobs in the economy. At the same time, more direct help will be given to help the long-term unemployed back into work by individual advice, training and allowances for those who take jobs on less than £80 a week.

The hon. Member for Kingston upon Hull, East (Mr. Prescott) must be easily patronised—he said that he found these measures patronising—if he finds these measures patronising. They are a positive reponse to those who must feel left behind as others—some 400,000 in February alone—enter and leave the unemployment register. The increase of 55,000 in the community programme and of 35,000 in the number of enterprise allowance places offer renewed scope for those on the unemployment register to get back into work.

Mr. Foulkes

Rubbish.

Mr. Tebbit

There are limits, however, on how far it is possible to substitute Government schemes for jobs created in the market place without destroying more jobs. For many years, the United Kingdom suffered economic decline relative to our competitors. That has been halted or reversed.

Mr. Foulkes

Rubbish.

Mr. Tebbit

The hon. Gentleman says, "Rubbish". He should examine the facts. Since 1979, we have grown at the same rate as France and Germany.

Mr. Eric S. Heffer (Liverpool, Walton)

A real comedian.

Mr. Tebbit

In 1983 and 1985, the United Kingdom topped the European Community growth league. Productivity growth in the United Kingdom's economy as a whole since 1980 has been much higher than that in France or Germany. Those are the facts, although Opposition Members may not like them.

Our growth in manufacturing productivity since 1979 has been second only to Japan among the seven major industrial countries. Since 1981, United Kingdom manufacturing exports have grown at least as fast as world trade. The average of United Kingdom inflation, as compared to inflation in the OECD, has fallen from being 60 per cent. higher under the Labour Government to only some 10 per cent. higher between June 1983 and December 1985. In absolute terms, the average level of inflation in the United Kingdom under Labour stood more than six percentage points above that of our competitors, whereas in this Parliament it has been only one fifth of 1 per cent. higher.

Mr. Winnick

If there is such a success story, and if enterprise culture, as the Chancellor described it last week, works, why does mass unemployment continue and why are many of our fellow citizens denied the opportunity to work? Why is the number of people who have been jobless for one year or more increasing? Is the right hon. Gentleman saying that unemployment will be substantially lower by next year's Budget?

Mr. Tebbit

The hon. Gentleman knows better than to try to tempt an ex-Employment Minister of any party to forecast unemployment.

Mr. Winnick

Answer my question.

Mr. Tebbit

I have explained more than once that jobs can be lost very swiftly and that they take a long time to regain. [Interruption.] That certainly applies to Labour Governments. They never last long and take a long time to get back into office.

Perhaps I might explain to the hon. Member for Walsall, North (Mr. Winnick) once again that, in 1979, our average productivity levels, especially in manufacturing industry, were way below those of our rivals. We would have had to shed many jobs just to reach the level that they were at in 1979. Since then, they have got further ahead. We are still pursuing them and having to shed jobs in many areas to reach the new levels. If the hon. Gentleman does not understand that, he has understood very little of his life so far. He has only to ask that great patron of the Labour party, Mr. Robert Maxwell, how many people he will have to dismiss from his newspaper to achieve productivity levels found in the rest of the world to get an answer to part of his question about unemployment.

Mr. John Townend (Bridlington)

How does my right hon. Friend explain the fact that there are more long-term unemployed in the south of England than in the north, where I come from, when it is clear to everyone that the south is far more prosperous?

Mr. Tebbit

That is a matter which may be explained better as my right hon. and noble Friend the Secretary of State for Employment's plan for counselling and advice for those who have been unemployed for more than a year works through the country.

Our record on inflation is far better than that of the Labour Government, when the right hon. Member for Sparkbrook and Mrs. Shirley Williams tried to control prices. So, as the hon. Member for Walsall, North asked, are the jobs that we would expect to be generated by the growing and more productive economy appearing?

Mr. Foulkes

No.

Mr. Tebbit

On the contrary. To an extent they are—680,000 new jobs have been created since June 1983. That is better than the rest of the Community put together. [HON. MEMBERS: "They are the wrong jobs."] They are, none the less, jobs which people are very pleased to have. However, that is plainly not enough. The past five years of manufacturing output growth, now 13 per cent. above its lowest point in 1981, have been reflected not in gains in new jobs but in long overdue gains in productivity, without which there would have been even more closures and even more job losses, as I have just expained to the hon Member for Walsall, North, although I doubt whether he has yet caught on to the point.

The major obstacle to translating that productivity performance into new jobs is the tendency of unit labour costs, fuelled by high wage increases, to outstrip those of our competitors. The problem is not peculiar to the past few years. From 1974 to 1979 there was a relative decline of 25 per cent. in our international competitiveness. Our better performance recently is still not good enough. Industry must control its unit labour costs.

Faced with reality in 1976, the right hon. Member for Leeds, East (Mr. Healey) called for a cut in living standards. He limited pay rises to 5 per cent. when inflation was running at more than 20 per cent. That would be the equivalent of a 10 per cent. pay cut with inflation at 5 per cent. as today. My right hon. Friend is certainly not asking for that, but we cannot exploit our improving productivity and output performance to create enough new jobs until earnings come back more closely into line with increases in productivity and our unit labour costs match those of our main competitor countries. That does not mean wage cuts. Those in work can enjoy an improving real level of earnings, as they have done under this Government—some 2.1 per cent. growth in real earnings per annum compared to less than half of 1 per cent. during the period of the Labour Government.

However, although those pay increases must be related to productivity and competition, as taxes are cut and inflation reduced, low pay rises can still mean a sharply improving standard of living. Moderation in pay helps, above all, the unemployed to be priced back into work. [Interruption.] The hon. Member for Carrick, Cumnock and Doon Valley may sneer, but I shall return to this point later. This Budget, like its predecessors, improves the climate for job creation, but neither it nor any Budget can create—

Mr. Heffer

Rubbish.

Mr. Tebbit

The hon. Gentleman is going on a little. He may one day learn something, and, even if it takes us from the time that he is seven until he is 70, we shall keep trying.

This Budget improves the climate for job creation, but neither it nor any Budget can guarantee that jobs will be created. Foolish pay increases, strikes, poor management, bad product design or indifferent after-sales support, obsolete technology—any one of these can destroy existing jobs or abort new ones. Nor is the process immediate. A customer may be quickly lost and it may take years to regain his favour. The economic facts of life do not change with changes of Government, much as the Opposition Front Bench would like us to believe.

It is instructive to look back 10 years and to see how a Labour Government fared. From his sixth Budget in April 1976, the right hon. Member for Leeds, East careered on through that year along to his ninth Budget in December, swinging from wild and foolish boasting of success to come to dire threats of disaster just ahead. A Labour party press release captures the more windy and vainglorious mood. It says: The right hon. Denis Healey, Chancellor of the Exchequer, speaking at the Annual Dinner of Edinburgh East Labour Party … said:—'The new 4½ per cent. pay agreement between the Labour Government and the TUC can transform our prospects … It means we can be on top of inflation within eighteen months from now. It means more jobs and more in the shopping basket' every prediction was wrong. He went on: Already the tributes to this achievement are pouring in from all over the world". He might have added, "except from the TUC and the trades union members."

As we look back on the sad tale of broken pledges, we can see the huge borrowings and humiliation that came to the right hon. Gentleman at the hands of the International Monetary Fund. Hence the calls that he made for savage cuts in the standard of living for millions of ordinary workers. The deficit on our invisible trade grew, unemployment grew and the whole mess grew worse until it collapsed in the winter of discontent. Would it be any different next time?

Mr. Stuart Bell (Middlesbrough)

Yes.

Mr. Tebbit

It would be worse. In those days, the Leader of the Opposition was one of a small minority undermining the then Chancellor. Next time, he would be in No. 10 undermining his own Chancellor, if he had the chance.

On Tuesday last, the Leader of the Opposition was put up to say that this Government have borrowed more than any other Government in history. Of course, I am sure that his scriptwriters knew, even if they did not tell him, that in real terms they have done nothing of the sort. The PSBR has been brought down from 9.5 per cent. of GDP in 1975–76 to a Budget forecast of 2 per cent. in 1985–86. Inflation has fallen from 26.9 per cent. in August 1975 to about 5 per cent. for a comparable period 10 years on. The two sets of figures are not coincidental.

Mr. Bell

What would be the public sector borrowing requirement without asset sales?

Mr. Tebbit

Higher, but there is nothing wrong with asset sales.

In contrast to the strictures on borrowing, on Wednesday of last week, the right hon. Member for Sparkbrook sought to remove what he termed our prejudice against borrowing. He and the Leader of the Opposition should get their act together. Are they for more borrowing or for less? Are they set once again to go down what the right hon. Member for Cardiff, South and Penarth called the primrose path together, hand in hand?

They are for more borrowing—and not just a little more but a lot more. Last Wednesday my hon. Friend the Member for Lewisham, West (Mr. Maples) asked the night hon. Member for Sparkbrook by how much borrowing would go up. The right hon. Gentleman said he would give the figures, but failed to do so. As he has had some time to think since last Wednesday, I am prepared to give way to him so that he can let us have the figures now. By how much would borrowing go up under a Labour Government? If the right hon. Gentleman will not tell us the answer, we have to do the sums for him, and we shall keep doing the sums and adding them up.

During the debate over the past few days, Labour Members have criticised the Budget, but how proud the right hon. Member for Leeds, East would have been if he could have presented a Budget that was so popular and effective. Labour Members have said that the Budget does nothing for the poor, nothing for jobs, and is all for the rich. Nothing could be further from the truth. The Budget continues the attack on inflation, the cruellest tax which falls most heavily on the poor, not on the wealthy, who have assets to set against it. This tax is one of the worst agents of job destruction. Labour Members ignore the growing economy, which is the source of new jobs. They ignore the further direct employment measures that add to those announced in the autumn statement.

From time to time the Opposition have given us some glimpses, obscure and contradictory, of their economic policies. The right hon. Member for Sparkbrook does not want to tell us about the key to it—how much they would borrow. He refuses every invitation to give us those figures. We have seen it all before. The hon. Member for Kingston upon Hull, East said: we are obliged to spell out precisely where the jobs will come from and the consequential effects on inflation, on the balance of payments and on borrowing "—[Official Report, 20 March 1986; Vol 94, c. 438.] The right hon. and learned Member for Monklands, East will not thank the hon. Gentleman for that, and nor will the right hon. Member for Sparkbrook. The right hon. and learned Member for Monklands, East said that it is important to cost everything in detail—he would say that, would he not?

Nor will we allow the right hon. Member for Sparkbrook to present only those aspects of his policies which he believes would appeal most—that is his call to the many to confiscate from the few. It would not be a joke if the right hon. Gentleman's borrowings and taxings ever came to pass, any more than it was when the right hon. Member for Leeds, East was calling for savage cuts in the standard of living. We shall make sure that all the measures proposed by the Labour party will be considered together. We shall see to what levels of taxes or borrowing they would bring us.

I notice that the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) has not managed to attend the debate today. He has a plan for sneaking through the middle unnoticed. He expects to give a stimulus to the economy, modest in size but far-reaching in its effects. He just cannot let go of that old demand lever. He and his colleagues would take back the 1p reduction in the basic rate of tax, and they would be back into the game of demand management.

The alliance foresees a 50 per cent. increase in the size of the PSBR. Since the Budget there has been a fall of 1 per cent. in interest rates. How adverse a reaction—by contrast with that vote of confidence, and that of the stock market—would there be on interest rates and inflation if we were to follow the course advocated by the right hon. Member for Hillhead? He would not carry the confidence of industry or the markets. Nor would industry welcome his incomes policy proposals. The hon. Member for Stockton, South (Mr. Wrigglesworth) says that we must not have a low-paid, low-skill economy. I agree. But by putting Government controls in place of a free market for jobs and skills, that is what he would bring about.

Mr. Dennis Skinner (Bolsover)

The hon. Member for Stockton and Barclays.

Mr. Tebbit

I do not think that I need any interventions from the hon. Member for Bolsover (Mr. Skinner). I am looking forward to the uncouth sneer being swiped off his face when his attack on the Prime Minister is put in its place very firmly indeed. He will regret having made a fool of himself, just as the right hon. Member for Hillhead will do.

We can see plainly the alternatives to the skilful Budget of my right hon. Friend the Chancellor. The Labour party's approach would be to go straight back to 1976 as fast as it could and straight back to a siege economy. The Liberals and the SDP would get there by a more devious and slower route—what those with long political memories would call the Bassetlaw by-election approach.

Mr. Robert Maclennan (Caithness and Sutherland)

Those with not so very long political memories recall that when my right hon. Friend the Member for Glasgow, Hillhead (Mr. Jenkins) was Chancellor of the Exchequer there were 600,000 unemployed and we had a negative PSBR.

Mr. Tebbit

Those with long political memories will also remember the conduct of the right hon. Member for Hillhead. We recollect the Bassetlaw affair, which was typical of the style of that Government and of the right hon. Gentleman. Two days before the Bassetlaw by-election Mrs. Castle swore that there was no economic freeze on the way. But, just a matter of weeks later, the right hon. Member for Hillhead, as the Labour Chancellor of the Exchequer, announced £250 million of additional taxation, new action to tighten the credit squeeze and all the normal paraphernalia of a Labour Budget. That is the Bassetlaw factor, and it is typical of SDP policies.

We have no urge to go back to the policies from which our ills have sprung. The right hon. Member for Sparkbrook is familiar with this story as he was a supporter of that Labour Government and of the right hon. Member for Hillhead. By contrast, our policies will bring us to where we can see not only an improvement in this country's relative economic position but steady growth in the economy. That is the only way—although nobody would deny that it is a slow and difficult road—to generate enough new jobs to overcome rising unemployment.

Our objectives, to which the Budget is addressed, are to further the development in this country of a new economic liberalism, or people's capitalism—call it what one will. It means people setting up in their own businesses—and 750,000 have done so under this Government. It means people owning the homes in which they live—and more than 800,000 former council tenants now do so in the teeth of opposition from Labour Members. It means people owning shares, joining in the task of providing the capital to build our industry, and determining its future and theirs. Under this Government the number of those owning shares has more than doubled, and this Budget will mean that more can do so.

It means more people owning a stake in the firm in which they work, sharing in its risks and its rewards. More than 1 million employees now take part in share schemes—[Interruption.] Opposition Members may sneer and laugh. They do not like people owning shares in businesses. Above all, they do not like trade unionists doing so. But we want many more to own shares.

The Budget means people keeping more of their income to determine for themselves how it should be saved or spent. It means more individuals and more companies contributing their own money to charities, and helping one another directly. It means more people owning their own pensions. It means more people running their own trade unions. That is something that the Labour Front Bench refuses to accept. It means people knowing that they can seek work without closed shop restrictions, or finding that employers are forced to pay too much, and cannot afford to take them on. It means people being free to choose where and how to invest, without restrictions and distortions, so as to create the wealth that is needed and to create the jobs that are needed.

Those are the Government's and the Budget's objectives. They are the right ones for the country. The Budget takes us in the right direction, towards those objectives, and I commend it to the House.

5.4 pm

Mr. John Smith (Monklands, East)

I shall try hard to avoid being drawn into all the irrelevancies of the peroration of the Chancellor of the Duchy of Lancaster, but I am sure that he will forgive me if I touch lightly on one point. He commended a change in trade union attitudes, for which he accepted responsibility. On behalf of the whole Labour and trade union movement, may I say a very genuine and warm "thank you" to him for instituting the political fund ballot? I think that all the ballots have now been held, and every single one of them has confirmed by a large majority the decision of British trade unions to have political funds. Indeed, some trade unions, which had failed to get political funds before, were able, in the wave of opinion generated by the Chancellor of the Duchy of Lancaster—[Interruption.]

Mr. Tebbit

I am most grateful to the right hon. and learned Gentleman for seeing the good sense of my plans, which he and his colleagues opposed. However, if the facts had been set out fairly in any of those ballots, the result might have gone the other way. But that is the rub of the green. I accept the democratic process, and I hope that the right hon. and learned Gentleman will also accept it when it goes against him.

Mr. Smith

If the right hon. Gentleman has any complaint about the conduct of those elections, and if that is his excuse, he should take up the matter with the Chief Registrar of Friendly Societies. I am sure that he will listen to any complaints. But instead of congratulating the trade unions, the right hon. Gentleman has to concoct another smear. That is typical of him.

There is a rumour among trade unions that there is a trophy called the Margaret Thatcher challenge trophy, which was to he given to the union with the highest yes vote in the ballot. The union is now wondering what to do with it. I suggest that it should present it to the right hon. Gentleman, with the grateful thanks of all concerned.

Mr. Winnick

Does my right hon. and learned Friend agree that it is widely believed that companies should do precisely the same as trade unions, and should have a ballot before donating to political causes? Is it not remarkable that the Chancellor of the Duchy of Lancaster should lecture everyone about democracy when he has not been elected to his position as chairman of the Tory party? Why is there no elementary democracy in the Tory party?

Mr. Smith

I am grateful to my hon. Friend for reminding me about that. The Chancellor of the Duchy of Lancaster is always saying that what is sauce for the goose is sauce for the gander, so now that he is chairman of the Tory party perhaps he will tell us—[HON. MEMBERS: "Talk about the Budget."] The right hon. Gentleman distracted me and I am sure, Mr. Deputy Speaker, that you will bear witness to that. I do want to deal with the Budget. But the right hon. Gentleman has an opportunity now, as chairman of the Conservative party, to acquire a reputation for consistency and fairness and to propose, in the next legislative Session, similar treatment for companies in their donations to his party.

In recent years it has been customary for the final day of debate on the Budget to cover matters relating to trade and industry. It is usual for the Secretary of State for Trade and Industry to open the debate. The Chancellor of the Duchy of Lancaster criticised the right hon. Member for Glasgow, Hillhead (Mr. Jenkins) for not being here, and would no doubt be ready to criticise any other hon. Member for not being here. But he should perhaps note that the Secretary of State for Trade and Industry is not here, and that as far as I can see not a single member of that Department has seen fit to come to the Chamber for the debate.

It was appropriate for the Chancellor of the Duchy to speak in the debate last year, because he was then the Secretary of State for Trade and Industry. This year, however, he appears in a different guise. I wonder why he decided to speak in this debate. Is he worried that he might somehow be forgotten if he does not manage to speak in debates in the Chamber? Why did he elbow aside either the Paymaster General or the Secretary of State for Trade and Industry in order to speak in this debate? Once again the Secretary of State for Trade and Industry was unfortunate. Where is he? Is he or his Ministers away negotiating some other deal to sell off another part of British industry?

There is one happy feature about the right hon. Gentleman being here and it is that he is closely involved in the affairs that may be keeping the Secretary of State for Trade and Industry away from the Chamber. When he was Secretary of State for Trade and Industry, did not the right hon. Gentleman invite General Motors to make an application to take over Leyland Vehicles and Land Rover? Was he not the Minister responsible for starting the secret talks that went on for 18 months until they were flushed out by the Opposition when we found out the information and challenged Ministers?

The right hon. Gentleman appears to have been involved in bringing the talks to an end. Has he reflected since what they were all about? Last Sunday The Observer told us about the right hon. Gentleman's activities. We were given a blow-by-blow account of these frenetic negotiations. The Observer said: All week they had been in discussions with Mr. Channon and his officials—with Mr. Norman Tebbit coming in and out. The effort was to find a compromise formula that would be palatable to the backbenchers. On Wednesday they thought they had agreement on the 49–51 principle with GM eventually taking the majority after it had proved its 'good citizenship'. Then Mr. Channon came back, saying this would not work, and suggested … an overseeing board". In view of his close involvement in these matters the right hon. Gentleman might have told us something about that. After all, we are discussing trade and industry and the motor vehicle industry is an, important matter for us in the Budget. The right hon. Gentleman has a direct and personal responsibility for the fiasco that the whole British Leyland affair has become. If a charge of anti-Americanism is to be flung at anyone, what about a company like General Motors that spent £1 million on a wild goose chase? Will that company not feel that there is a tinge of anti-Americanism in this Conservative Government—and a rather expensive one at that?

Mr. Tebbit

I hope that the press release of the right hon. and learned Gentleman's speech is now over. He has been on his feet for nearly 10 minutes. Perhaps now we could get on with the debate on the Budget—not least as the whole Treasury team is here eager to discuss the Budget and to hear what level of PSBR the right hon. and learned Gentleman thinks there ought to be in a Socialist Budget. The team is also eager, as am I, to take him to one side later on and show him several different versions in several different newspapers of the recent talks.

Mr. Smith

The easiest way of solving that problem is for the Government to tell us what is going on. They have had many opportunities to do that and if there is a problem of misrepresentation it can be cleared up.

Mr. Hickmet

rose—

Mr. Smith

The hon. Gentleman is stopping me from getting on with the Budget, but I shall give way.

Mr. Hickmet

The right hon. and learned Gentleman's party made its position clear on the link between General Motors and British Leyland. It does not want that link at any price. How will he react if, for example, the operations of General Motors in Britain are wound down as a result of the policy that his party has adopted?

Mr. Smith

I hope the Chancellor of the Duchy of Lancaster will forgive me if I answer that intervention, even though it means I shall have to talk a little bit longer. It is an odd conclusion to draw, is it not, that when the Government initiate a project that invites General Motors to acquire parts of British Leyland and that project does not come off, if General Motors then decides to do something with its plant, that is the responsibility of the Opposition. That is a new one on me.

Whether in his role as chairman of the Conservative party or as an ex-Secretary of State, the right hon. Gentleman had a shot at defending the Budget. However, he made very little attempt to deal with trade and industry. He said little about manufacturing industry and gave us a rather lame and tendentious explanation about the debilitating balance of trade deficit on manufactured goods. There was a substantial surplus when the Government took office and now we are heading for a £4 million deficit. No explanation has been offered about why that has happened under this wise and beneficent Government, and the right hon. Gentleman did not even give us a clue about an explanation.

We know that for a long time there has been what one might call massive scepticism by the Government about manufacturing industry. I know they are trying hard to change their tune, but in 1981 the Chancellor of the Exchequer said in a memorable phrase: I do not understand the importance which the Opposition and some Tories give to manufacturing industry. That is on the record. It is as notable as his other famous prediction that young people in Britain would get not so much low-tech as no-tech jobs. The Chancellor can deny it if he likes but he made both of those statements.

The Chancellor of the Exchequer (Mr. Nigel Lawson)

That sort of dishonest quotation does not serve any purpose. The right hon. and learned Gentleman did not give the full text. What I said was that, although high technology had an important part to play in future, many future jobs would not be so much low-tech as no-tech. I did not say all jobs: I said many of them. That is a fact in the United States and here.

Mr. Smith

The right hon. Gentleman appears to concede that I quoted him correctly. I am not being accused, nor could I reasonably be so accused, of misquoting him. I said, "not so much low-tech as no-tech" and in his intervention the right hon. Gentleman quoted the very words I used. His excuse is that he did not say all the jobs would be low-tech, just many of them. [Interruption.] If we go on the way we are going, that will be the result of the Government's policies. The right hon. Gentleman might learn something by listening, so let me repeat what I said. If the Government continue with their present policies, that will be the result.

What an ambition for our young people! Let us give them high-tech jobs. Would not that be a better ambition for the Chancellor of the Exchequer and the Government? As many as possible of our young people should be obtaining high-tech jobs, and we would be going in that direction if the Government were not turning them away from technical colleges and polytechnics and universities and were encouraging them to stay on at school.[Interruption.] When someone talks about opportunity, all the Government can think about is money. They can never draw the balance between the enjoyment of human opportunity and the reasonable investment required to achieve it.

The Chancellor is trying to change his stance. We saw a rather pathetic attempt at that in his intervention. That is because he is beginning to realise that the plan that was there before will not work. That plan was that Britain could live off service industries and oil revenues and the remittances from foreign investments. It was felt that we could get by quite nicely on that and the Government did not need to worry too much about manufacturing industry. We heard all the speeches at that time about the undue importance attached to manufacturing industry, but even the Chancellor now realises that a number of things are changing. The nation is becoming more and more convinced that the catastrophic consequences of a decline in our manufacturing industry are quite unbearable.

The Aldington report was published last year. All that gets from the Chancellor of the Exchequer is a snigger. The distinguished authors of that report were rubbished before the ink was dry on the document. Not only was it turned down without being read, but attacks were made on its individual authors. That report makes good reading for anyone who wants to understand Britain's industrial predicament. It said what would happen when the volume of North sea oil declined. The report was not able to predict any more than the Government were able to predict that the value of North sea oil would decline in an even shorter period. That has accentuated the problem and the Chancellor knows that more than anyone else in the House, or at least he ought to.

We have now been brought close to the reality of our economic position. North sea oil is not so obviously helping us. Of course it is still of enormous benefit to the Government, although not as much benefit as it was, but still useful in terms of balance of payments and our overall balance of trade and Government revenue. To this Government it has meant tens of billions of pounds and yet they have wasted most of that money. They have had those funds in a way that no other Government have ever had them. They have had that money without having to go through the complicated business of raising it by taxation or by cutting expenditure. [Interruption.] It was taxation which the Government inherited. North sea oil was on stream in 1980 and the Government inherited the revenues. What point are the Government seeking to make? If they are saying that they did not have a marvellous windfall of North sea oil revenues, no one will believe them. [Interruption.] I should like to say what the Chancellor of the Duchy of Lancaster kept saying to my colleagues—if the right hon. Gentleman would listen occasionally, he might learn something to his benefit.

That is why there is apprehension about the crumbling technological base of our manufacturing industry. The failure to invest in British manufacturing industry, to develop our research and development and to provide proper training within industry are at the root of our economic problems.

I should like to consider quickly some of the facts. Manufacturing output stagnated in 1985 and is still 6 per cent. below the 1979 level. Manufacturing investment is still more than 10 per cent. less than the 1979 level. The United Kingdom's manufacturing trade deficit is forecast to increase to £4.5 billion in 1986, although we had a substantial surplus in 1980. One would not guess that that was the position from the Chancellor's complacent survey in his Budget speech. There was one glimmer of light in his speech—one faint dawning of comprehension. Referring to the effect on the economy of the fall in the oil price, the Chancellor stated: This provides British industry with an outstanding opportunity both to increase its exports and to reduce import penetration in the home market, but it will only be able to seize that opportunity if it meets two conditions. First, it must keep firmer control of its labour costs. Secondly, it must spend more of its much healthier level of profits on investing for the future in research and development and in training. Both the opportunity, and the responsibility to see that it is not thrown away, rest fairly and squarely on the shoulders of British management."—[Official Report, 18 March 1986; Vol. 94, c. 169.] First, there was an admonition to industry to keep control of its labour costs. But there was no admonition to the City. There was no feeling that perhaps labour costs in the City were rather high because of the huge salaries that are paid. The "golden helloes" managed to avoid any action by the Government in the Budget. I wonder whether the Chancellor of the Duchy of Lancaster ever says to the stockbrokers, "If you would cut your wages a bit you would create more jobs." On the basis of some of the very large salaries of stockbrokers there must be enormous scope for job creation in the stock exchange.

If the proposition of the Chancellor of the Duchy of Lancaster is fundamentally true and if one divides a stockbroker's salary by five, there would be five more stockbrokers—or at least that is what the right hon. Gentleman says to the workers.

Mr. Tebbit

rose—

Mr. Smith

I am to be given an explanation?

Mr. Tebbit

I say the same to people in the City' as I say anywhere else—that if they allow their costs to become higher than those of their competitors they will lose their market share and jobs, their salaries will fall and the "golden helloes" will turn into brass goodbyes. They understand that lesson more clearly than those in other industries.

Mr. Smith

If that is the lesson which they understand, it is amazing that salaries keep going up instead of coming down. If the right hon. Gentleman has been having chats with them, he has been singularly unconvincing and unpersuasive. Everyone knows that salaries in the City and in the stock exchange are hopelessly out of control. It does not help if the Government say to people who are struggling to make ends meet, "You should be careful about asking for wage increases or for improvements in conditions", because they can see the conditions and wages offered to people on high salaries.

Mr. Donald Stewart (Western Isles)

Does the right hon. and learned Gentleman agree that there is no need to test the theory of the Chancellor of the Duchy of Lancaster about low wages equalling more jobs, because long ago the Low Pay Unit worked out that the areas where wages are lowest are exactly the areas where unemployment is highest?

Mr. Smith

I am grateful to the right hon. Gentleman. He is well aware, as are many other hon. Members, of the fundamental principle which seems to motivate the Government—that we need high wages to give incentives to people at the top end of the wage bracket and low wages to give incentives to people at the bottom end of the wage bracket. We have noticed throughout the Budget the attempt to drive more people into low-paid temporary occupations. The drive is not so much to find jobs as to accentuate the prevalence of low pay in the economy. I am sorry to say that a number of the Budget measures are leading in that direction.

The Chancellor has recognised that there should be more investment in research and development and in training, but the trouble As that he thinks it is simply a matter for industrial management. He thinks that the investment rests on their shoulders and implies that it does not rest on anyone else's shoulders. I believe that it is a matter for the whole community because the whole community will be affected by a failure to invest in industry and in research and development and a failure to develop adequate training. If we had employers like those in West Germany, we could perhaps hand over training to them. The West German employers take their responsibilities serously. No one can say that British employers, left to their own devices, have a good record on training. The Chancellor of the Duchy of Lancaster has an inglorious record, having dismantled 16 of the 23 industrial training boards.

On 12 March 1986, the hon. Member for Bedfordshire, North (Sir T. Skeet) asked the Secretary of State for Education and Science how many of the leading industrial states have progressively increased expenditure on civil research over the past five years; and what is the comparative position of the United Kingdom expressed in real terms."—[Official Report, 12 March 1986; Vol. 93, c. 474.] In an informative answer, the Minister for Information Technology gave some alarming statistics. The increase in gross research and development expenditure from 1979 to 1983—the latest date for which figures were available—was 3 per cent. in the United Kingdom. The increase in the United States was 18 per cent., in Japan 44 per cent., in Germany 10 per cent., in France 10 per cent., in Italy 45 per cent. and in Canada 32 per cent. The United Kingdom is not just bottom of the league but is lamentably bottom of the league, with only a 3 per cent. increase in civil research and development in the past four years from a total budget of $12.6 billion. That is appalling. If Britain continues to invest such a minuscule part of its assets in research and development, it will lose the technological base of its industry and will not be able to develop the new products and processes for tomorrow.

The Government's contribution, through their direct funding of research and development, is pitiful. There is not a research institution or university that is not pleading for more resources for primary research and development. The Government's niggardly attitude is disgraceful. If the Government gave research institutions and universities what they gave in a handout to abolish inter vivos gifts and capital transfer tax, that would be a useful start. Why not give that £55 million to research and development instead of to the rich?

Sir Julian Ridsdale (Harwich)

Does the right hon. and learned Gentleman agree that the increase in profitability to 8 per cent., compared with 0.5 per cent. in 1979, is a means of getting increased research and development in companies?

Mr. Smith

That would be understandable if companies were doing that now. It was only a matter of days ago that Sir Brian Nicholson, the Government Chief Scientist, in evidence to the House of Lords Select Committee on Science and Technology—

The Minister of State, Treasury (Mr. Peter Brooke)

Sir Brian?

Mr. Smith

Yes, as I understand it—the Government's Chief Scientist. He said that the Government were deeply upset at the failure to invest, given the substantial increase in the profits of British companies. I do not think that the Government's excuse will wash. I am given to understand that the Department of Trade and Industry, which is not represented here today, is pressing hard for companies to do that, and so they should.

Why do the Government turn their back on supporting schemes for research and development? Why is there no reference in the Budget to training in industry? Why are there no fiscal incentives, schemes or plans? Why are no ambitions revealed in the Budget? The Government simply have no industrial strategy. They are just moving about the market place, hoping that it will come right. They are not taking any steps, such as those taken by most of our major competitors, to ensure that fundamental aspects such as research and development, training and investment are securely put into place. There is a failure to comprehend that there is more to industry than just giving freedom to the entrepreneur and his wealth. One cannot leave it at that. If the entrepreneur does not invest his wealth wisely, the consequences for the whole of the community are devastating. There may be increased unemployment. There may be diminished opportunity for our young people. There may be a failure to conquer the markets on which the standard of living of us all—not just of the entrepreneur—depends. That is why this is a legitimate matter for community concern.

Today, investment is not being made in new products because we are in the grip of merger mania. When a company that has extra money decides what to do with it, it is far too easy for it to gobble up another company rather than to improve its products and its market share. It may improve its market share but it will do so by eliminating its competitor, because the natural tendency of unregulated markets is towards monopoly. One would have expected even a Conservative Government, recognising that, to adopt a tougher policy on mergers and monopoly, but we do not find that.

Even more lamentably, the present situation in which the creditor can too easily acquire his competition forces industrial managements continually into short-term profits. They must have short-term profits and those profits must be reported to the stock exchange to keep the predator away. When there is a choice between short-term projects—which represent essential defensive security—and long-term investment, long-term investment goes by the board, and the Government look on complacently. The Government have been reviewing competition policy endlessly and continuously for a number of years without doing anything about it. Even the Governor of the Bank of England said the other day that the matter had got out of hand. It is a pity that we do not have a Chancellor of the Exchequer who would say a sensible thing like that.

We need a better investment plan. That is why the Labour party proposes that we should have a national investment bank, which would make sure that long-term investment was secured for British industry. However, when sensible and practical suggestions are put forward, all we hear from right hon. and hon. Gentlemen on the Government Benches are silly party political sniggers. The national investment bank would make sure that there was long-term investment at suitable rates of interest. In West Germany, a billion pounds was invested in small and medium-sized businesses by KFB, an admirable bank to which the House of Lords report paid particular attention. Why should not this country have mechanisms to ensure that there is investment in the wealth-creating sectors of the economy? Why cannot the Conservative party have the intelligence to appreciate a good idea when it is presented with one? [Interruption.] One of my hon. Friends suggests that there is not enough of that commodity to go around. There is distressing evidence that that may be so.

Viscount Cranborne (Dorset, South)

The right hon. and learned Gentleman rightly refers to the manufacturing sector of the economy as the wealth-producing sector. No doubt, like many of us, he reads The Economist. He will have seen there that the wealth-producing sector also embraces the City, about which he has been so disparaging. No doubt he has noticed that the invisible earnings not only contribute to the wealth of this country but contribute a very large number of jobs. In the unlikely event of the right hon. and learned Gentleman returning to power, would he kill the City's earning capacity in his quest for manufacturing industry?

Mr. Smith

I thought that the hon. Gentleman had followed my argument that to depend on the City was not enough. We need to manufacture. The City is rather better at creating jobs in other countries than in our own. The Chancellor boasted about the amount of money that we have invested abroad. He said that we could live like remittance men. He said that there would be a flow of remittances returning from the investments.

The hon. Member for Dorset, South (Viscount Cranborne) is slightly behind the times. He is playing the tune to which I referred earlier—that we can take some chances with manufacturing industry. However, the Government have become a little worried and have changed their stance. It is a pity that the hon. Gentleman has not noticed that. We need to set three engines of recovery in motion. We need a proper investment policy in manufacturing industry, a proper research and development policy and a proper training policy. We are slipping in all three areas.

I must mention one other factor — the near disappearance of regional industrial assistance. I calculate that the Government have more than halved the amount of support for industry that they provide. Hon. Members may recently have seen a very revealing "World in Action" programme on television about some young people from Middlesbrough who went down to High Wycombe to seek work. Although they went by bus, they were following the advice of the Chancellor of the Duchy of Lancaster to get on their bikes. They went to High Wycombe because they could find no jobs in Middlesbrough. One of them found a reasonably well-paid job fairly quickly, because he had a skill — a skill for which there was no use in Middlesbrough. He was clearly a man who wanted to find work. He was prepared to separate himself from his family to find it. I think that he was paid £120 net in the factory. It cost him £57 to pay for his digs during the week and a visit home every week or fortnight—I forget which—to see his wife and children. He explained that he could not go on like that, with so little left after the £57 had been subtracted, and that he was contemplating returning to Middlesbrough.

Mr. John Townend

rose—

Mr. Smith

The hon. Gentleman should listen with a little sympathy and understanding—

Mr. Townend

rose—

Mr. Smith

I will not give way to the hon. Gentleman. He does not deserve to be given way to. If the public could have seen the look on the hon. Gentleman's face as I was describing the predicament of those people, it would have been a telling political indictment.

Another person from Middlesbrough was told that he could go to High Wycombe too. He came down with his girlfriend; they were contemplating getting married. He too found a job—not so well paid—and his girlfriend found a job in a cafe. They put their wages together and decided to try to set up home in High Wycombe. They went to the estate agents to see whether they could buy a house. They tried every estate agent in High Wycombe, but even the cheapest house cost £10,000 or £15,000 more than they could afford. At the end of the programme, the question was asked: what should they do next? The man who had left his family in Middlesbrough could not take them to High Wycombe because he could not afford to buy a house and there were no council houses available. Should he remain separated from his family and continue to pay so much for lodgings and travel?

Mr. Nicholas Budgen (Wolverhampton, South-West)

rose—

Mr. Smith

Should the other couple live perpetually in digs or furnished lettings in High Wycombe because they could not buy a house? Those people followed the right hon. Gentleman's advice, and that is what happened. Any sensible Government would say, "Why not get the jobs in Middlesbrough, and get to the heart of the problem? Why not spend some of our communal resources helping to create jobs in Middlesbrough?" That is what regional industrial assistance is all about.

That story is revealing about life in modern Britain. There are opportunities, wages and jobs in the south, but very little is available in the north, and the term "north" covers an increasingly wide area of the country. There is a deep divide, which is worrying people in the south as well as the north. Our citizens do not wish to live in a country in which the divisions are becoming so sharp and ugly. A sharp and ugly division is growing between the very well-heeled and the growing under-class, and it is an affront to our conscience.

The Conservatives could give long-term supplementary benefit to the long-term unemployed. They could give about £10 a week to poor unemployed families if they did one simple thing—restored the investment income surcharge which was removed a few Budgets ago. The amount thus saved would more or less meet the cost of long-term supplementary benefit. The investment income surcharge was imposed on investment incomes of over £7,000 a year. People had, by definition, to have £70,000 capital before they benefited from the change. What proper society would give the money available to such people and deny it to the suffering long-term unemployed, the poor families and the needy? In my book, that is not a political choice but a moral one. It is one which the people of this country, when these matters have been made even more clear to them than they have been already, will have no hesitation in answering.

The Budget is both unfair and irrelevant. It is unfair to the divisions between north and south and it is unfair to the divisions between rich and poor. It is supremely irrelevant to putting our manufacturing industry and our economy back on their feet. It is a matter of regret for the whole country that this is happening. It is a matter of shame for this Government.

5.40 pm

Mr. Leon Brittan (Richmond, Yorks)

In his speech the right hon. and learned Member for Monklands, East (Mr. Smith) dealt with a number of wide and important issues which have been with us for a considerable period. I do not agree with his conclusions. However, he has been wise, from his own narrow point of view, not to focus very much upon what the Budget actually says. On the other hand, I welcome the opportunity to join those who have congratulated my right hon. Friend the Chancellor of the Exchequer on combining in his Budget a continuing policy of sound finance with the imagination and ingenuity of his proposals.

When I was Home Secretary, naturally I was particularly anxious, as the Minister with responsibility for policy towards the voluntary sector, that the Government should give what help they could to charities. I am delighted that the Chancellor has now been able to give fiscal reality to what were then just a number of embryonic ideas. Equally, I welcome the measures to encourage investment in equities and the proposals to stimulate profit sharing. However, all those measures must be seen in the context of the central Budget decisions on the Government's fiscal and monetary stance.

It is no accident that from the moment when the Government took firm and unpopular action in 1981 to bring the public sector borrowing requirement under control we have seen steady and continuous growth. Therefore, I applaud the Chancellor's decision to continue the downward path of public borrowing as a percentage of gross domestic product and, indeed, to set the public sector borrowing requirement at £7 billion, which is slightly below the level indicated in last year's medium term financial strategy. That is, of course, the key decision in the whole Budget. It is of profound significance that it was that decision, and the Budget constructed around it, that immediately led to a fall in interest rates and the mortgage rate. If one were to ask anyone in industry or business today what single step could be taken which would assist them most in expanding and protecting the jobs of today and providing the jobs of tomorrow, I have no doubt at all that it would be one which would result in a fall in interest rates.

Having taken the central fiscal decisions, the Chancellor had to decide how to distribute the limited amount of largesse that was left to him of about £1 billion. In any Budget there is a certain amount of giving with one hand and taking away with the other—perhaps rather more of that in this Budget than in most—but at the end of the day, on that analysis, there was still only about £1 billion left to play with. That money could, of course, be used to increase spending or to reduce taxes. There are several ways of doing both. All of them are likely to stimulate employment in the short run.

The difference in the extent to which the different measures—increasing expenditure or reducing taxes—would do so is, frankly, not very great. Within the total of only £1 bllion, the differences between the impact on jobs of the various possiblities are very small indeed. So there is simply no question of one route being remotely open to the Chancellor as the right one for jobs, while the others are not.

As my right hon. and learned Friend the Paymaster General pointed out, public works programmes today are far from being the best way of getting the most jobs for any given expenditure. The question of the level of public works or capital expenditure more generally in the public sector should be decided on merit, not as a means of short term job creation. In crude terms, if one were thinking that way—and it would be the wrong way to think—the way to create most jobs in the short term is to employ people directly in the public sector or indirectly through the use of public money by such means as special employment measures.

If expenditure of that kind could make a huge difference to the level of employment, it might be tempting to decide to spend the limited sum of £1 billion on that basis. But with that sort of money, it cannot possibly make any substantial difference. Therefore, it would be wrong to decide what to do on such a short term basis. The decision should be made on longer term structural grounds—on the basis of not of what would give the the most immediate boost, which would be dissipated after a short while, but of what would most help to change the structure of the economy in a way that would make it more productive, more innovative, and more likely to grow in a sustained and sustainable way.

It is because reductions in the burden of taxation are likely to have that longer term structural effect that I think the Chancellor was right to spend about £100 million on specific employment measures and the rest on reductions in taxation. The case for tax cuts on those grounds was immensely persuasively made by my right hon. Friend the Member for Guildford (Mr. Howell) earlier in this debate.

The question then arises: what sort of tax cuts should they be? Should they be personal or corporate, direct or indirect? For some time I have believed that the first priority should be to cut personal taxation but to increase allowances over and above indexation to the greatest possible extent. That gives most help to those who need it most and takes many of them out of tax altogether. It helps most in the poverty and unemployment traps. But in my view the argument in favour of proceeding in that direction became substantially less strong in the face of the reforms of my right hon. Friend the Secretary of State for Social Services. They make a significant difference to the choice between increasing allowances and reducing the basic rate of income tax. Therefore, I became less resolute in my preference for increasing allowances.

That preference was further diminished when I heard the Chancellor announce that at the higher rate he was not indexing thresholds in line with inflation. Indeed, the top rate threshold has been increased by less than half the amount that full indexation would prescribe. In the past, all the thresholds have normally gone up proportionately. The failure to follow that principle this year has not been sufficiently noted. It makes an important difference to the argument and to the impact of the cut in the basic rate of income tax.

I must confess that I was only finally converted to full acceptance that it was right to reduce the rate rather than to increase allowances further when I heard my right hon. Friend the Chief Secretary to the Treasury explain last Wednesday that it was the turn this year—I stress "this year"—of those within the income ranges of £5,000 to £20,000 to benefit and, above all, when I heard him say that in choosing to make a reduction in the basic rate this year the Government are not saying that basic reductions are in some sense better than threshold increases. The proper choice between the two will, I assume, have to be reconsidered afresh next year.

However, I am afraid that if the Government's task of persuasion has been effective as far as I am concerned on this point, I have more difficulty with what has been said in the Budget and with what appears in the Red Book about monetary policy. In the very short term, any weakness in monetary policy may be masked by the overall support that is currently rightly being given to the Government's general economic stance, but that should not be a pretext for ignoring what seems to me to be a real problem that is potentially storing up trouble for the future.

The Red Book says that there is some scope for varying the balance between fiscal and monetary policy. I cannot help feeling that fiscal policy is having to do most of the work this year. I find what is said about monetary policy lapidary, tentative and not wholly convincing. That is not entirely the Chancellor's fault. We have simply not found a monetary aggregate that is credible as a target to seek to follow.

To select instead a couple of aggregates and then to say that the exchange rate will also be taken into account, without saying how in any very cogent way, is hardly likely to produce a convincing monetary policy, especially if one of the targets has proved as broken a reed as sterling M3. As recently as in last year's medium-term financial strategy the target range for sterling M3 was set at 4 to 8 per cent., but it has been rightly felt that the failure to meet that target did not mean that monetary policy has been too lax. Other indications show that it was not.

What does one do about sterling M3? The answer given is that sterling M3 does not behave as it used to behave because of the rapid fall in velocity in recent years. Because of that, a new target for 1986–87 has been set at 11 to 15 per cent.—a near trebling of the lower end of the range and a near doubling of the upper end of the range —compared with what was set for this year only 12 months ago.

Dr. Jeremy Bray (Motherwell, South)

Is the right hon. and learned Gentleman seriously maintaining that monetary policy is lax when we have the highest real interest rates in the world by 6 per cent.?

Mr. Brittan

No, I am not. That is exactly what I have said. I am dealing with a problem, which still exists, of how one handles, sets and determines what monetary policy should be. I was going on to say that if one looks at chart 2.3 in the Red Book, which shows the velocity of the monetary aggregates, it is clear that the velocity has been falling fairly steadily since 1980, and there has certainly not been an acceleration of that fall in the last year to justify so huge an increase in the target range. It is difficult to avoid the conclusion that the target range has been chosen on the basis of what is attainable rather than what has any real significance in terms of the assessment of the appropriate degree of tightness of the monetary policy. That is the answer to the hon. Gentleman.

The lack of real belief in sterling M3 is borne out by two further points. First, the Red Book rather plaintively tells us that

the high proportion of interest bearing deposits within broad money has meant that the immediate response of broad liquidity aggregates to changes in short term interest rates is highly uncertain. In ordinary language, if sterling M3 looks as if it is going wrong, we have no idea whether our only known instrument of affecting it, now that we have given up overfunding, will put it right.

Secondly, it is significant that no target or illustrative range for sterling M3 is given beyond 1986–87, although figures for GDP and MO are given for a further three years up to and including 1989–90. The reality is that, with monetary aggregates in disrepute, monetary policy has increasingly been dependent on exchange rates, but the policy has not been clearly spelt out. The difficulty—and I hope to show why it has practical importance—is that, if monetary policy cannot be spelt out convincingly, the markets are uncertain, the authorities may have to react, and the effect is that interest rates are likely to be higher than they would otherwise be and probably change more often.

Excessive interest rates and frequent changes in them are damaging to industry. Therefore, this is not some theoretical or esoteric argument. If credible and comprehensive monetary policy is likely to lead to lower interest rates, that is a valuable prize for which we ought to strive.

I do not believe that there is any monetary target currently in sight that will provide a more worthy lodestar. The way to achieve a convincing monetary policy is through the exchange rate route. Theoretically, it would be possible to choose our own free standing exchange rate target. In my view, it would be artificial to do so, because for so long it has been Government policy to join the exchange rate mechanism of the European monetary system when the time is right. In the past I have not thought that the time was right for that.

Rightly or wrongly, the pound has been regarded as a petro-currency and it was thought that movements in the price of oil would be likely to push the pound in the opposite direction from the currency of the other European countries which are not oil producers. It was said that our entry would be destabilising for the European monetary system and difficult for us to sustain. It is said, and I agree, that there would be nothing worse than frequent realignment and rushing over to Brussels at times of crisis.

Recent events have completely changed that position. At last the world believes what the Treasury has been shouting from the tree tops for years—that the role of oil in our economy is not nearly as great as has been universally assumed. In recent years, there have been at least eight studies of the impact of oil prices on the exchange rate. Taken together they seem to show that a 10 per cent. change in oil prices leads to a 3 to 5 per cent. change in the effective rate. Therefore, a 50 per cent. change in oil prices ought to have been expected to lead to a 15 to 25 per cent. change in the exchange rate. In fact, in recent months the price of oil has fallen by nearly 50 per cent., but the effective exchange rate has fallen by only about 5 per cent. On top of that, the current rate against the deutschmark is competitive for our exporters while the dollar rate is high enough not to be inflationary.

Therefore, I conclude that the moment is approaching very rapidly—if it has not already arrived—when we should fully join the European monetary system. I understand the risks of pressure on the pound on political grounds — for example, impending elections which momentarily seem likely to be won by parties other than the Conservative party. However, the risk of that is no greater inside rather than outside the European monetary system. We would have to take corrective action in any event. In the European monetary system there would still be the retention of freedom of action in genuinely exceptional circumstances.

Mr. Robert Sheldon (Ashton-under-Lyne)

Has the right hon. and learned Gentleman taken account of the fact that at present the one dominant currency in the European monetary system is the deutschmark? With the introduction of Britain, there would be two powerful currencies operating on slightly different bases, and that could lead to a certain amount of instability.

Mr. Brittan

That was one of my anxieties. However, for the reason that I have just given, I think that recent developments have removed that anxiety and the advantage of once again having a credible monetary policy would be very great. Such a monetary policy would be a tight one. It would reinforce other pressures on industry not to be lax on the pay front. It is clear that such laxness would not lead to the lowering of the exchange rate to bail out industry in order to restore competitiveness in the short term. Industry would have to play its part in the tight for jobs by resisting excessive pay claims. In that way monetary policy would help the battle against unemployment, as would the lower interest rates which would be likely to come about as a result.

Mr. Budgen

rose—

Mr. Brittan

I hope that my hon. Friend will excuse me, but I am coming to the end of my remarks.

I hope that the hesitancy that I detect in the current statement of monetary policy is caused by the fact that what we are seeing is only a provisional statement and that it will soon be superseded by an approach of the kind that I suggest. I hasten to make it clear that I have no specific reasons for believing that is so. I am expressing a hope. When that happens, the fiscal system and the constructive ingenuity of the Budget which has been so warmly applauded will be complemented by a monetary policy that reinforces the Government's efforts to promote the only kind of economic advance that will endure—an advance that is soundly based and firmly buttressed.

5.58 pm

Mr. J. Enoch Powell (South Down)

I do not share what appears to be the belief of the right hon. and learned Member for Richmond, Yorks (Mr. Brittan) that if we can find a satisfactory form of monetary measurement we can therefore find the means of manipulating it. As to the advantages of having a fixed exchange rate, I shall arrive at an opposite conclusion from him.

Under the pressure of time, however, I want to restrict myself almost exclusively to one economic phenomenon—the balance of payments. The balance of payments is a very amusing toy to play with. All sorts of arithmetical games can be played with it with great satisfaction and occasionally with some entertainment and instruction. The balance of payments has one delightful quality—that is that it balances, is bound to balance, and always must balance, because it is merely a statement of the different motivations with which the same transactions take place within a given period of time. Hence the astonishing conclusion, which people find difficult to absorb, that if one has a surplus on current account, one must therefore inevitably have an equal and opposite deficit on capital account. That is to say—to put it crudely—one must be exporting capital to the value of whatever is the surplus on the balance of payments in which one happens to be rejoicing.

On the subject of the balance of payments, there are two questions that I want to address specifically, one to the Treasury Front Bench and the other to the Opposition Front Bench. It is, of course, a consequence of having a current surplus on the balance of payments that one is exporting capital; and no doubt a considerable factor in the growth of our overseas assets is due to the surplus which we have enjoyed in our trading accounts of the past six years.

The Chancellor of the Exchequer said in his Budget speech: Our net overseas assets have, in fact, risen more than sevenfold from £12 billion at the end of 1979 to almost £90 billion at the end of last year."—[Official Report, 18 March 1986; Vol. 94, c. 168.] There is an interesting feature about that statistic. If one totals up our current account surpluses of the past six or seven years, one will not find that they come to anything near the difference between £12 billion and £90 billion. The deduction from this must be that a massive factor in the increase is reinvestment abroad of the profits earned upon overseas investments owned by residents of this country.

The question I want to put to the Opposition Front Bench is this. I understand that it is part of their policy that they will restore control over capital movements. I want to know three things, though essentially they are all part of the same question. First, would they seek to prevent the export of capital from this country? Secondly, would they finish off the job by attempting to secure the repatriation of profits from investments abroad, and thus remove the other factor which was present in the increase to which the Chancellor drew attention? The third but perhaps most important question is this: do the Opposition realise what the effect of that would be upon the balance of payments?

There seems to be the notion that a surplus on our balance of payments is an expendable item, which we are free to invest either in this country or abroad. There is, in fact, no such possibility, for if we do not send that capital abroad we cannot, by definition, have a current surplus on our balance of payments.

Now, although, as I said earlier, the balance of payments is an amusing contraption in an arithmetical sense, in a real sense it is highly complex. We do not really understand the interaction of the various component parts of that balance. Let me take a crude example. We do not know what would be the result of a given increase in exports; do not know whether that would result in an equal increase in our current payments surplus or whether there would be some adjustment in other parts of the account. In particular, we do not know—here I come very much into the real world—how far our experience with the balance of payments has been related to our experience in unemployment.

In Britain today we are meeting with our exports the cost of acquiring all that we find it advantageous to acquire from the outside world, and still are earning a very substantial surplus of payments year in and year out, a surplus that the Chancellor expects to continue. There is a plausible case to be made that that factor—that changeover of the United Kingdom economy from persistent deficit to persistent surplus—may be not unconnected with our difficulty in dealing with the apparently intractable phenomenon of a high statistical level of unemployment, though there are obviously many other factors that also feed into it.

Therefore, it would be right for the Opposition to think—I hope that they can bring the House into their counsels in this matter—about what they intend to do about capital transactions between this country and the outside world. Do they intend to control them, or aim at reducing them to zero? Do they intend to secure the repatriation of the capital that is reinvested abroad? What effect do they think that will have upon the balance of payments, and, through the balance of payments, upon the economy of the country?

Having given the Opposition Front Bench something to think about, I hope, for it is a serious issue, I now refer to the Chancellor of the Exchequer.

Sir Peter Tapsell (East Lindsey)

I have heard the right hon. Gentleman's interesting analysis of the balance of payments many times over the years, but I have never been wholly convinced by it. How, for instance, does he square his analysis with the Japanese experience? For many years the Japanese have combined a large surplus on their balance of payments with full employment at home, but have not always found it necessary to export large quantities of capital. How does the right hon. Gentleman relate that to his analysis?

Mr. Powell

I am sure that the Japanese have found it possible to combine a surplus on their current account with high employment at home. Different economies, at different stages of development and in different circumstances, will differ in that respect. What I cannot believe is that the Japanese have succeeded in achieving in one and the same year a surplus on current account and also a surplus on capital account, which means importing capital at the same time. In fact, they have been buying assets abroad—[HON. MEMBERS: "Hear, hear."] Hon. Members are with me on that—and that is what has been enabling the Japanese to maintain their continuing large surplus on current account, which appears, although unaccountably to me, to cause so much anxiety.

Mr. Robert Sheldon

Has the right hon. Gentleman taken into account the possibility of industrialisation leading to an increase in the £74 billion of imports that we bring into the country? That could be raw materials, capital goods and such things. Only a 5 per cent. increase would wipe out our balance of payments surplus.

Mr. Powell

I follow the right hon. Gentleman entirely in that I do not think that it is easy to quantify or predict the result of changing a given factor in the balance of payments analysis. Some of the factors which, in themselves, are inherently negative may turn out, in their repercussions and indirect effects, to be positive overall. To that extent, I agree with the right hon. Gentleman.

I now come to the point that I wish to put to the Chancellor of the Exchequer. He said that British industry has the opportunity both to increase its exports and to reduce import penetration in the home market."—[Official Report, 18 March 1986; Vol. 94, c. 169.] I want to ask him what he thinks the consequences will be if that exhortation, hope or prayer on his part is followed by British industry.

In so far as exports are increased and import penetration in the home market is reduced, no doubt the current account surplus on our overall balance of payments will, other things being equal, be that much greater — we shall have an intensification of the phenomenon which we have experienced in the past six years. Is that what the Chancellor aims at? Is that what he hopes for? What is his analysis of the economic consequences—the consequences in terms, first, of the impact on the balance of payments, and, secondly, the impact upon the economy of that impact on the balance of payments?

I come in haste to the matter with which the right hon. and learned Member for Richmond, Yorks was dealing—control of the exchange rate. The balance of payments will operate inexorably, whether or not one messes around with the exchange rate. With an exchange rate entirely free to move, with which the Bank of England is not playing any games, still the inexorable logic of the balance of payments will apply. But if one decides upon a fixed exchange rate policy —or an aligned exchange rate, which is effectively another version of the same thing —then, in addition to everything else, one is deciding to add a further factor, namely, the level of the exchange rate, and bring that into the play of forces which determine the composition of the balance of payments.

If one decides to fix the exchange rate, one does so at one's own expense, in two ways: to keep the rate down one manufactures one's own currency and sells it; to push the rate up one borrows other people's currencies and sells that. It is a simple and rather hair-raising game, is rigging the exchange rate. In the end the cost always recoils on the country which does it—either by the consequences of providing currency of its own in order to depress the rate, or by the consequences of the international debt incurred in operations to force the exchange rate up.

The Prime Minister made a sage observation—indeed, it might have been a deep observation—when, responding to a supplementary of mine, she said, referring to the suggestion that we should tie our exchange rate to a norm not within our own control, that had the Government listened to the suggestions earlier

we would have found ourselves in some difficulty in view of the fluctuation in exchange rates which inevitably comes through having a currency rather different from those in the rest of Europe."—[Official Report, 6 March 1986; Vol. 93, c. 444.] The right hon. and learned Member for Richmond, Yorks evidently believes that we have walked out of history. He believes that we have left behind us the period when factors which none of us foresaw, not years before, but only a few weeks before, could alter the balance of supply and demand for sterling. For myself, I cannot believe that the change in economic variables throughout the world which comes home to roost in terms of a movement of the sterling exchange rate lies behind us once and for all and that therefore it would now be painless to attach ourselves to an external norm. I believe that we would still find ourselves paying dearly to maintain that norm, and ultimately at our own cost.

The right hon. and learned Gentleman is under an illusion when he imagines that the stop-go that would result would be an effective measure against inflation. It is true that it has been used in terrorem by Chancellors of the Exchequer. They threatened the economy, which they were themselves inflating, chat if it did not behave itself, there would be a balance of payments crisis; but still inflation continued and still the balance of payments crisis had to be met by sudden and sharp adjustments of the rate of exchange.

I agree rather with the right hon. and learned Gentleman's fundamental proposition that the Chancellor of the Exchequer and this Administration in general have, by control of public sector borrowing, been utilising the only instrument by which money supply can be increased or controlled or by which inflation can be—to use the rather absurd metaphor—conquered. We would not get any nearer to that by applying the self-punishing mechanism of an externally fixed exchange rate, which would have to be fed in along with all the other factors in the balance of payments.

So I hope that the Government will reflect long and hard upon the philosophy of the Prime Minister's reply, and that we shall continue to enjoy what have proved to be the lasting advantages of an exchange rate which tells us the truth about the worldwide supply and demand for our currency. At least we can do without that additional factor in the already difficult and puzzling make-up of the balance of payments about which both from the Chancellor of the Exchequer and eventually, no doubt after an appropriate period of reflection, from Her Majesty's Opposition I look forward to further enlightenment.

6.14 pm

Sir William Clark (Croydon, South)

The right hon. Member for South Down (Mr. Powell) asked the Opposition Front Bench about the repatriation of capital. British pension funds have already been threatened that unless they repatriate some of their capital invested abroad the fiscal advantage will be withdrawn from them. The Opposition policy is clear.

The right hon. Gentleman mentioned Japan. He did not mention an additional advantage enjoyed by Japan over many years—its small defence budget. It competes with other economies with defence expenditures amounting to an appreciable amount of GDP.

I think that the Budget is clever and far-sighted. It is not a Budget just for tomorrow. The Chancellor has little room for manoeuvre. He has said that the oil factor in our economy is merely 5 per cent. and that the buoyancy of the other 95 per cent. is real. That is borne out in the figures and the Treasury receipts in January which were about £4.5 billion against a forecast of about £2 billion.

The buoyancy in the economy was too conservatively projected in the Budget last year. As a consequence, the Chancellor had some flexibility, albeit only about £1 billion. He has relieved taxation by that amount. That confounds the doom and gloom prophets. I know that Opposition Members think that this is old hat, but productivity, even in manufacturing, is increasing. Growth in the past five or six years has been sustained. Output, productivity and investment in manufacturing are increasing. We should stop talking down the economy. Our economy is extremely buoyant. Ours is not a petrocurrency. Opposition Members do the country a disservice in always talking down our economy.

We are accused of wasting oil revenues. Over the years we have received about £50 billion in oil revenues, but, as the right hon. Member for South Down reminded us, our overseas assets have increased by about £78 billion, from £12 billion to £90 billion. That must be good for the future, whether we invest in dividends or whatever. Opposition Members do not realise that if one invests abroad one can look forward to the dividend, but that in many cases the only way to penetrate the overseas market is to acquire subsidiaries. That has certainly happened in America and in Europe. When people question capital going out of the country they must realise that many other countries such as America and Japan invest here. If we become isolationist and decide not to invest abroad, we shall suffer reciprocity.

We should not forget the background to the Budget. Inflation is coming down. People can plan with far more certainty. Inflation was 26 per cent, today it is just over 5 per cent., and it is bound to come down to about 3 or 3.5 per cent. Any increase in employment will be retarded by high wage demands. I hope that industry realises that.

At one time the CBI appeared to be concerned only with the need to reduce interest rates. The one point drop that we have recently enjoyed is excellent and it will give industry a boost of about £250 million, but a one point drop in wage rates would give industry a boost of £1,000 million. That is how we shall secure more research and development and more jobs, and that is why it is essential to keep down wage demands.

I am sure that everyone welcomes the measures in the Budget to improve training. In addition, we have the loan guarantee scheme, the business expansion scheme and the community programme.

I welcome the suggestion that wages should be tied to profitability. My right hon. Friend the Chancellor of the Duchy of Lancaster drew attention to the fact that the long-term unemployed are being interviewed over three, four or five days with a view to their joining or forming job clubs. A few pilot schemes throughout the country have been successful and I understand from my right hon. and noble Friend the Secretary of State for Employment that they are to be extended generally. It is interesting to note that there has been some deregistering by the unemployed in some areas where clubs have been formed or introduced.

There are 3.2 million who are unemployed and that is disastrous. I hope that the House will not think that I am trying to denigrate the importance that is attached to reducing unemployment. However, we should ascertain how many of the 3.2 million are looking actively for work. We all know that some have taken early retirement and are not looking for work but are registered as unemployed. Some married women who were in employment are registered as unemployed but are not looking actively for work. If we have 3.2 million drawing benefit, I accept that unemployment is far too high—we must ascertain how many are looking actively for work.

Mr. Martin Flannery (Sheffield, Hillsborough)

The hon. Gentleman talks about inflation being reduced, but he has not said that unemployment is increasing massively. It is useless to talk to the unemployed, who expect unemployment to increase, as though everything in the garden is glorious and that nothing is wrong. Is it not a fact that the unemployed have been taken out of a sector where they were able to buy products and that if they returned to it they would be able to buy more products? The spiral of unemployment makes things worse all the time. I ask the hon. Gentleman to accept that reality.

Sir William Clark

I cannot understand the hon. Gentleman's logic.

Mr. Flannery

Of course the hon. Gentleman cannot.

Sir William Clark

I should have said that I cannot understand the logicality of the hon. Gentleman's statement. Surely the reduction of inflation is the greatest boon to everyone, whether he or she is on a small income or a large one. It must be better for inflation to decrease rather than increase. Surely that is obvious to anyone.

My right hon. Friend the Chancellor of the Exchequer told us in his Budget statement that the surplus assets in pension funds will be taxed at 40 per cent. I do not object to that, but I am slightly concerned that the Government Actuary will intervene if the assets of a pension fund are only 5 per cent. more than the fund's liabilities. I am not certain that a surplus of 5 per cent. is a sufficiently high one for the introduction of taxation. I do not agree that the pension funds should hold massive surpluses, but we must not undermine the integrity or the financial stability of occupational pension funds. If the stock market turns down and securities decline, some of the pension funds with a 5 per cent. surplus may be in trouble.

The 11 million occupational pensioners should be aware of what the Opposition have in store for them. As I understand it, a Labour Government would force the institutions—the pension funds—to invest in a national investment bank. The House will recall that the right hon. and learned Member for Monklands, East (Mr. Smith) talked about a national investment bank and investment, but he did not say from where its funds would come. I believe that a good part of the funds will be forced from occupational pension schemes. I have no objection to forced investment if I am satisfied that the person who is to invest my money will do so wisely, but unfortunately the record of most public investment is not all that good. If the funds of the 11 million are to be diverted into a national investment bank and reinvested—no doubt into lame ducks to create jobs, for example—pensioners and their pensions will be put at risk.

The Opposition have threatened that if a Labour Government are returned they will repurchase all the shares that have been bought under our privatisation measures. Of course, a Labour Government would not repurchase the shares that have been bought by small investors. We know that 2 million small investors bought British Telecom shares and we know also that a Labour Government would not wish to upset them. Presumably a Labour Government would repurchase the shares that have been bought by the institutions. Apparently, they will buy them at the same price that the institutions paid for them initially. No allowance will be made for inflation between purchase and repurchase. Similarly, there will be no allowance for any capital growth that has taken place between purchase and repurchase. Again, this will put at risk the pensions of the 11 million occupational pensioners.

I say to occupational pensioners that they should beware of any Labour Government. I have explained what the Opposition intend to do with their money and their future.

My right hon. Friend the Chancellor of the Exchequer knows that I am in slight disagreement with him on how we should relieve the burden of taxation. The reduction of the standard rate of tax by 1p, from 30p to 29p, was excellent, and the same can be said of the indexation of the tax thresholds. However, under the new indexation, a married man will start paying tax as soon as he has earned £70 a week. Surely that figure is far too low when the national average wage is slightly more than £180 a week. A priority for any Chancellor of the Exchequer should be to increase thresholds so that half the national average wage becomes the tax threshold for a married man. When that has been achieved, let us deal with the standard rate tax.

The Budget is a continuation of previous measures in that it encourages wider share ownership and the Government's housing policy, which has led to more than 60 per cent. of houses being owner-occupied. There are over 4 million small shareholders, and that number will increase with the introduction of PEP, which I warmly welcome. More help will be given to charities and some of the strain will be taken from the public purse in looking after people through the various charities.

My right hon. Friend the Chancellor of the Exchequer should be congratulated on the Budget. The exchange rate has been abolished and so has the investment surcharge, along with the tax on jobs which was imposed by the Labour Government in the form of the national insurance surcharge. Development land tax has been abolished and it is time that my right hon. Friend abolished the lifetime gifts tax. As others have said, it is an ingenious Budget. It is also a prudent Budget and it will be welcomed by most of the British people. Furthermore, it is a cautious Budget. I am sure that all my right hon. and hon. Friends look forward to next year's Budget.

6.29 pm

Mr. David Penhaligon (Truro)

I am sure that many hon. Members would agree with the hon. Member for Croydon, South (Sir W. Clark) that one of the better aspects of the Budget concerned the changes for charities. I welcome those changes, and I am not afraid to say that. However, I take issue with the hon. Member for Croydon, South when he implies that charities could substantially help to alleviate some of the enormous social problems in our country. Charities can set standards, have new ideas and manoeuvre a fresh approach to many issues, but, relative to the global problem regarding the relief that they bring for the many people who need help, their contribution can never be that massive. However, I am willing to agree, enthusiastically, that we should encourage individuals to give money to the charity of their choice and to do that through fiscal measures.

The first major point that I should like to make has already been mentioned—the problem that the economy is currently experiencing regarding unit labour costs. The Chancellor identified that problem during his Budget statement, the right hon. Member for Chingford (Mr. Tebbit) at least managed to make passing reference to it, and the right hon. and learned Member for Richmond, Yorks (Mr. Brittan) made substantial reference to that problem and concluded that we should join the EMS.

I have long taken the view—a view held by the alliance—that we should join the EMS, but those who believe that that will solve unit labour cost problems in splendid and wonderful isolation are misled. It is time that the House applied itself more to the problem of unit labour costs than it has done hitherto. In 1979 we were told that the solution was simple—we should control the money supply. There are few in the House now, even among its original, enthusiastic advocates, who would argue for that idea.

At Budget time it is fair to ask the Government, if they see unit labour costs as one of the great problems affecting the economy—and I would concur with that belief—and if they believed originally that control of the money supply was the solution, to tell us what went wrong with the original policy or what they wish to put in its place. The alliance firmly believes that, unless we can get unit labour costs under reasonable control relative to our competitors, there is no prospect of long-term economic recovery. I am not certain that many in the Treasury would disagree with that diagnosis.

It is interesting to analyse the experience of the average British industrial worker compared with that of the average German industrial worker over the past 20 years. I have been trying to find the precise answer to the following question but have not been successful, although I can give an approximate answer: which group of workers, German industrial or British industrial has, in each year received the largest pay increase? The answer would appear to be something like 16:4 or maybe 15:5 in favour of the British worker. It is certain that in most of the past 20 years the German industrial worker has received a substantially smaller increase in the monetary value of his pay than his British counterpart. Yet, when one analyses the changes in living standards that have taken place over that time, it shows how lunatic and nonsensical is the obsession with an individual's yearly pay increase.

We must undertake a major propaganda effort to explain that point and make it more widely known. Indeed, as I sit on the alliance Benches and listen to some of the comments from the Labour Benches, it is apparent that we must do a great deal of work on that matter in the House. If we cannot get industrial pay settlements down to a little over the level of inflation, there is no alternative economic scenario which will get people back to work and rebuild our manufacturing base, for which so many people in this House desperately wish.

The Government have occasionally applied their mind to wages. However, they have taken on the easy targets—the ones that least needed attention. There has been much legislation to reduce the pay of the very lowest paid in Britain. The people creating difficulty in that area are not the ones who immediately flash to mind. The Government have put a lot of effort into taking on an easy target because they wish to duck a far more difficult one. It is not the low paid who are causing the problems; rather it is us—and I use the word "us" in a collective sense to describe those of us in the medium to well paid category. We must somehow persuade people in that category to accept pay rises of rather less than they have been getting over the years if we wish to re-establish our employment record and manufacturing base.

Even more than that—although this is not absolutely fundamental to the Budget statement, there is an implication for it—we have seen the Government's determined and successful attempt to keep down many of the pay settlements in what I describe in the broadest sense as the Government sector. That is causing a potential explosion of resentment which is gradually building up beneath the Government. It is an explosion of demand and a feeling of outrage which I suspect someone at some time will have to pay for.

Much of the Government's progress on inflation is undoubtedly true and real, and the alliance welcomes that, but much is illusory and not necessarily long-term. It is worth pointing out, when the figures comparing this decade with the last decade are so freely given across the Floor of the House, that at this moment, after all the agony that this country has been through, as far as I am aware, there is only one industrially-based nation which can reasonably be compared to Britain. Only Italy has a higher level of inflation than Great Britain. Italy has an inflation rate two or three points higher than ours. All the other nations have lower inflation levels—not much lower, it is true, but it is worth stressing that. Despite the effort, sacrifices and enormous level of unemployment, so far as I am aware, only one country has a higher level of inflation than ours.

Mr. Ian Gow (Eastbourne)

Would the hon. Gentleman care to consider Greece, Portugal and Spain, just to mention three other countries, when he makes those statements?

Mr. Penhaligon

I did say that I was comparing nations roughly equivalent to ourselves. I did not realise that the Government believe that the British economy is now in such a state that we should compare ourselves with Portugal, Spain and Greece. If that is the standard adopted by the hon. Member for Eastbourne (Mr. Gow), so be it. However, when comparing ourselves with France, Germany, Holland, Canada, the United States and nearly all the OECD countries with a large manufacturing base, my previous statement is true. If I need to be corrected, there will be opportunities for that to be done.

The alliance's conclusion—which is not popular and may not attract votes but which is important and fundamental and one which we will argue for with vigour—is that there must be some kind of incomes policy within the economy. That policy should preferably be built on the back of consent; if not, on the back of a mandate. In the final analysis, it should be encouraged to work through statutory fiscal pressures.

My next point concerns the penny off income tax. It has been interesting listening to hon. Members speaking about that. In reality, the Chancellor, having adjusted this and that, discovered that he had about £1 billion to spend. That is his judgment. The alliance took another view in the alternative submission that we put to the House, which was published before the Budget and which we were willing to put through the various economic models. That was a brave and unusual thing for an Opposition party to do. It is certainly something that the Labour Front Bench would not dare to do as the computer is likely to say "submit" or "surrender" before it gets through the first six months of the Labour party's proposals. However, we are willing to put our alternative submission to the test. We believe that we could run a slightly bigger PSBR. I do not wish to discuss that point at present. I should just like to accept the Chancellor's analysis of his £1 billion to spend. One can run a PSBR bigger than that, but let us simply accept the Chancellor's statement about that £1 billion.

In current circumstances, on what would the House collectively wish to spend that £1 billion? That is the decision that the Chancellor had to make. The alliance, in its submission, said that it thought that one of the most effective ways of using that money would be to relieve poverty, create jobs and give the manufacturing base some kind of boost. To do that the money could be used to reduce the employers' national insurance contributions. We accept that there are alternatives. One could have argued that some of the money should go to alleviate the poverty that has undoubtedly increased in our society over the past few years, particularly among the unemployed and the retired. One could have argued that some of the money should be used to build up and repair the infrastructure—houses, roads, sewers or whatever. The alliance argued for a combination of the three in its submission.

The Government decided not to do any of those things. They decided that poverty, jobs and the infrastructure were not important. They chose to spend that miserable £1 billion in the least effective way. They decided to reduce income tax by 1p in the pound rather than to rebuild our industry and infrastructure and relieve poverty.

We know from knocking on doors during election campaigns that few constituents would offer to pay more tax. I am constantly amazed when politicians argue to the contrary. But we believe that the 1p in the pound off income tax is a mistake, and to show that we take that seriously we shall seek to divide the House on that matter tonight. We shall vote against that reduction in income tax tonight because we believe that there are other less selfish ways in which that money could be used.

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

This is obviously an important issue for the hon. Gentleman's party. Why was not income tax mentioned in the budgetary statement, "Jobs and competitiveness," which his party issued in advance of the Budget?

Mr. Penhaligon

Income tax is mentioned. We said—the Minister will be unfair not to recognise this—that we would valorise tax thresholds and tax levels. If the Minister does not know what that means, he has not read far enough. We made it clear that we would increase thresholds in line with inflation, but—and we were not trying to duck it, deny it or wriggle our way out of it—that we must face the economic reality. We would not have reduced income tax by 1p in the pound in the current situation.

We would not have exempted lifetime gifts from tax altogether. It is an obscenity beyond belief that, as a result of the budget, a parent during his lifetime can give a child £10 million and that massive transfer of wealth would not incur one farthing of tax. Previously, the Chancellor would have taken £3 million.

Politically, the Government will get away with that change because most people do not believe that there are people who have £10 million to give to their children. But those who have been Members of the House for a year or two know jolly well that there are many hon. Members who could afford that. With all the poverty and housing problems that we see, it is staggering that, of all the people the Treasury could relieve, it has chosen to relieve people with that sort of wealth. We on this Bench do not argue, and never have, that levels of tax should be such that they represent confiscation. The previous level was one third. Plus or minus a bit, that is about right. Frankly, in all decency, someone who has £10 million to give to a child can afford £3 million in tax.

Mr. John Townend

Does not the hon. Gentleman have the problem in his constituency that many other hon. Members have of family businesses being forced to sell out because of capital transfer tax, with the consequent loss of jobs? Does he accept that some of the family businesses that went out of business or sold up in the 1960s and 1970s would have been the seedcorn that would have provided jobs today? Will he at least exempt family businesses?

Mr. Penhaligon

We have not attacked some of the changes in capital transfer tax.

If one takes £10 million—

Sir William Clark

I did not mention £10 million.

Mr. Penhaligon

I know. I am talking about the consequence of the Government's legislation. Farms are the most difficult area in relation to capital transfer tax in areas such as mine. They already have a 50 per cent. exemption on top of the basic rate. A farmer must own a grand-daddy of a farm for it to be worth £10 million, even with the inflated property values that we have today.

Mr. John Townend

£500,000.

Mr. Penhaligon

Oddly enough, one could argue that capital transfer tax started at too low a level at £71,000. That is where it started previously. I have not mentioned the £71,000 level, but I become extremely angry at the net effect of the removal of capital transfer tax from a sum of £10 million.

The lunacy of the Government's position is that the only wealth we now tax is that which is released from its possessor as a result of his unexpected death. No other wealth is taxed. Everybody knows that they will die in the end, and there is plenty of advice that people can take on that. The only people who will pay large-scale capital transfer tax in future are those who die unexpectedly, or, as my right hon. Friend the Member for Glasgow, Hillhead (Mr. Jenkins) said, those who trust the Inland Revenue more than they trust their own relatives.

Mr. Moore

I apologise for intervening again, but it is interesting to learn the policies of the hon. Gentleman's party. How does the hon. Gentleman combine what he has been saying at great length about capital transfer tax—I trust that he will seek the opportunity to vote against this Budget resolution in order to put his party's position on the record—with the fact that in the past seven years, since 1978–79, the proportion of taxation taken in capital taxation has increased from 1.4 per cent. to 1.8 per cent. and in real terms the revenue yield has gone up by 30 per cent?

Mr. Penhaligon

The right hon. Gentleman will certainly reduce that this time. I rather suspect that a fair amount of capital has been transferred in the past few years in the belief that the regime could not conceivably become more favourable. It just shows what mistakes people can make. If only they had hung on a bit longer, they would have paid no tax at all.

The Chancellor is clearly in a difficult financial position. He lost £5 billion from oil and he takes no blame for that. But the Government must be able to stand up and defend why, within the narrow limits for manouevre that they have in this Budget, they have decided to use £1 billion in the way that they have.

Many Conservative Back Benchers, at least on television, attack that change with as much vigour as I do. If there were a secret vote on this among Government Back Benchers, the 1p in the pound reduction in income tax would not receive a majority.

6.47 pm

Mr. Michael Heseltine (Henley)

I share the broad approval that has been extended, not only in the House but widely outside, for my right hon. Friend the Chancellor's Budget statement which has achieved so many of his central economic aims. Obviously, the Government's prime responsibility to secure control over the economy is self-evident. There is no question whatever that on some of the more important aspects of my right hon. Friend's policy he had a good story to tell. The star of the record was the fact that we now look to the prospect of a 3.5 per cent. rate of inflation. Not even the most enthusiastic Government supporters believed that we would reach such levels as quickly as we have. Without the slightest doubt, falling interest rates and rising output and productivity in an economy that is now growing faster than any comparable economy, with the possible exception of that of Japan, are a remarkable achievement.

We should not lose sight of the fact that part of the growth in output, particularly in manufacturing, is a recovery from a low base but that is now rising and it is part of a growing economy on a consistent year-on-year basis. That is a solid and real achievement. My right hon. Friend the Chancellor of the Duchy of Lancaster was right to draw the attention of the House to the fact that much of the credit for our falling inflation goes to the falling levels of raw materials and changing oil prices, but there is a countervailing force which is much to be deplored. The private sector has been given the most incentive-oriented economy that it ever dreamt it would see, but we are speeding up the potential level of inflation with wage settlements running at nearly double the level of inflation. We shall pay the price for that in lost jobs and lost opportunities as it feeds through into the economy.

Recently, we have benefited considerably from the change in the price of imports and of oil but the private sector is undermining benefits which should accrue to the whole national economy. That is to be deplored.

I agree with the hon. Member for Truro (Mr. Penhaligon) that the Government have taken an immensely courageous stand in holding down public sector wage claims for a long time. There is an unhappy contrast between how the public sector has accepted that, with great difficulty and with great stress to the Government, and what is happening in parts of the private sector. Everybody knows that significant real increases in earnings are being achieved by many of those who are in work because pay settlements are so far above the level of inflation. Everybody expected that the steps that the Chancellor would take would lead to a fall in interest rates, but it did not seem self-evident to me that we should further encourage an increase in real living standards for those people by giving them a 1p reduction in the standard rate of income tax.

I was slightly at odds with my right hon. Friend the Chancellor of the Duchy of Lancaster—although I agree with much of what he said—because he did not give quite the right emphasis to the sale of capital assets to finance current consumption increases which a standard rate reduction in tax would tend to stimulate. There is too little awareness that the capacity to go on selling assets is temporary. If one stimulates consumption on the basis of capital asset realisation, one is losing sight of the long-term need to use those capital asset realisations for capital growth and capital stimulation as opposed to enhanced consumption, which we might find difficult to sustain when the ability to realise more capital assets is diminished.

I strongly commend the Chancellor and his predecessor, my right hon. and learned Friend the Secretary of State for Foreign and Commonwealth Affairs, for their consistent efforts to incentivise and stimulate the small business economy. It is impossible to underestimate the scale of present incentives to encourage people to become self-employed, to start their own businesses and to develop those businesses into successful, thriving concerns.

If there is a criticism of previous Governments—there are many, especially of the Labour Government—it is that there was a relatively inflexible economy for far too long. We were not sufficiently innovative and, when the recession came, there was not the wide dispersal of industry and activity which might have protected us from some of the worst excesses of that recession. Recently, however—and this Budget continues the policy—we have created a wide range of incentives which are equal to anything that can be offered anywhere in the world.

I strongly support the Chancellor's determination to build on the philosophical and political strength on which the Government have laid such importance—the spreading of ownership. The property-owning democracy of the 1950s and 1960s, to which the Government have added the enfranchisement of council tenants, has played as decisive a role in changing fundamental attitudes to individual responsibilities as any other single feature of modern society. To extend that into wider share ownership must be the priority. Without the slightest doubt, the Chancellor has taken an important step. I hope that he will accept that it is not the last one. There are other incentives, which could easily be copied from overseas, to give greater thrust to our economy. However, all credit is due to my right hon. Friend for taking that important step in the Budget.

I take issue with the hon. Member for Truro on his attempt to win both ways on the taxation of small family businesses. We quite understand that the principal Opposition party, in its guts, has no sympathy or empathy for the flourishing private sector economy and the private businesses that it creates. It has for generations encouraged the incentivisation that encourages publicly quoted companies to buy up family businesses and thus diminish the provincial power base of the industrial heartlands of Britain.

The tax changes announced by the Chancellor mean that those who create businesses will be able to pass them on to their families or to sell them within the community to which they are important. That is an important part of maintaining the capitalist strength of Britain. Nothing is more harmful, other than nationalisation in which so many Opposition Members believe, than forcing, by considerable fiscal incentives and high capital taxes, family business, to sell out to publicly quoted companies. That is another step towards the centralisation of wealth. The branch officer takes the place of the entrepreneur in provincial Britain. The Chancellor has taken a courageous step in trying to reverse that trend. The Labour party has no interest in encouraging such a thriving capitalist base.

The Liberal party says that it favours a capitalist base for small people, but the moment a company becomes successful it will obliterate the company's ability to remain in business. That is a classic example of the Liberal party not being prepared to stand up for either side of the political argument. If one genuinely wants capitalism and for it to be a rival to the centralising process of Socialism, one must recognise that small businesses will, in many cases, become large. It is far better to leave the ownership of those businesses where they were created and where they are relied on than to centralise them by taxation or other techniques.

From the privacy of Government discussions, the Chancellor is as familiar with my views as I am. If I have one criticism of his Budget it is that it has a discretion which I would rather see used differently. I am aware of the limited opportunities available to the Chancellor, but I would have preferred him to have encouraged more direct investment in and stimulation of the underlying strengths of the manufacturing base. I do not intend to expand on that today. I accept that he was faced with limited opportunities, but he should have taken a more purposeful stride forward towards the stress areas associated with inner city deprivation.

I do not intend to take the time of the House describing the conditions which are now characteristic of inner city Britain and comparing them with the more prosperous suburbs, rural areas and, especially, the south. I am the first to say that in every constituency—even in mine, which is relatively prosperous — there are pockets of poverty and individual cases of tragedy. Those of us who represent the more prosperous parts of Britain cannot honestly say that there is not an unacceptable gap between what we see in the stress areas of the inner cities and the prosperous parts of Britain. That is recognised in the harsh conditions of the inner city stress areas and throughout the British political community.

We do not need an endless parade of more statistics because the conditions in those areas have an eloquence of their own. The Government, as everyone is aware, inherited rapidly rising unemployment from the last Labour Government. It is extraordinary to listen to the Opposition Front Bench. If it is so easy to deal with the problems of unemployment, why did the Labour Government of the late 1970s find it impossible to reverse the then upward trend? The Government inherited about 1 million unemployed, which was a post-war record. The Labour Government had no idea how to reverse or grapple with the unemployment which was permeating through the entire Western world. If Labour does not recognise that basic part of its inheritance, it will never command the respect of the country.

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

This is not Blackpool.

Mr. Heseltine

People remember that there were no easy solutions when Labour Members sat on the Treasury Bench. There are no easy solutions today, and there certainly would be none if, by misjudgment, Labour party Members found themselves back on the Treasury Bench.

We should be frank. Although unemployment is unacceptably high, its level has never been seen to be capable of being cured easily or simply by changing the political party in power. The social, fiscal and economic forces of the 20th century have encouraged generations with wealth and discretion to leave the inner cities. They left behind conditions which are increasingly reminiscent of state-dependent pensioner societies. These are the people who have too few personal resources. They tend to be less well educated, elderly and to have no family support. They are the last group in society to whom we can apply the language of self-reliance and a competitive race in which, by their own abilities, they should somehow succeed. They do not have the personal characteristics with which they can fairly be expected to survive in that rather over-simplistic description of life's forces.

The language of self-help when applied to those communities is something of a delusion. There is growing anxiety about the social imbalances and the consequences that flow from them. Those anxieties grew under the previous Government, as under the present one. When the Government came to power, they rightly refused to increase, or even in some cases to sustain, all of the programmes which affected some of those areas. There was absolutely no case for excluding current programmes of local government from the rigours to which the private sector was being subjected by the recession. Nor was there any reason to exclude local government from the appraisals and the insistence upon greater efficiency to which the Government subjected the national Civil Service. There was no case for setting the bureaucracies of local government apart from that long overdue scrutiny of our national performance. If anybody has the slightest doubt about that, he has only to pick up the latest report of the local government Audit Commission to discover that the figures prove that service after service can be provided at a perfectly acceptable level but at significantly lower cost.

There was absolutely no case for suggesting that restrictive practices and over-manning in inner cities should be set apart from the pressures to which British society was subjected. If there is a point to be made on that score, it is that restrictive practices so close to conditions of harshness were even more culpable because they denied resources to those who needed them most.

The Government experimented across a wide range of policy areas. In their experiments with specific urban programmes, the Government, despite the constraints on public expenditure, substantially increased expenditure in real terms on programmes dealing with the worst hardship.

There were two simple objectives. The first was to try to do something to alleviate the conditions of those who had been left behind in stress areas. That does not add up to a whole policy, however; it merely accepts the inevitability of the historic forces that brought such decline about.

The second and essential objective, which the Government developed as policy, was to try to attract back into the stress areas people who would otherwise remain outside. To widen the basis of society in stress areas, we had to try to attract private investment which would have gone—some still is going—to the suburbs, the green-field sites, and the congested south. We recognised that, to bring a new sense of hope and purpose to stress areas, we had to make them attractive. In a free society, we had to encourage people or to produce incentives to enable people to find a way back—people and investment which would not have chosen to go to those areas otherwise, under any Government.

I shall not list the vast range of grants, programmes and experiments that we conducted, but far and away the most significant and successful is to be found in the east end of London. Through the Urban Development Corporation, we have set about rebuilding the east end of London. It is without doubt one of the most exciting pieces of inner city reclamation in western Europe. Some people talk of the clear divide between the public and the private sector, but I am told that for every £1 of public money going to the east end of London through the UDC, £7 of private money is taking advantage of the opportunity which the public purse created. I saw in The Times on Friday a supplement about the north-west of Britain which refers to a land being born again. Virtually every scheme that is referred to in the supplement was born because the Government took public money into the inner cities to create the environment in which larger sums of private money could be attracted. The Government have shown that the public sector can lead and that, where it leads, the private sector will follow, even into the most deprived and needful areas of the country.

My conclusion is therefore clear. We now know what to do and how to do it. It is clear that, to attract back the strengths that have gone during several decades, we must recognise that there is no substitute for the public leadership which clears the dereliction of the Victorian, the Edwardian and, in some cases, the post-war world. No private sector initiative will do it on its own, because this is a loss-making business. There is no profit to be found. Any of us who is asked to advise the private sector whether it should lose money in such endeavours is bound to advise it not to. We must therefore ask whether we leave these vicious circles of despair to continue on their downward journey or whether we will find the resources to clear the dereliction of the past and to make the areas attractive so that, combining public and private endeavour, we can give people there, and the new ones we can attract, a sense of hope and purpose.

It is said that we cannot throw money at these problems. Just what will we throw at them if it is not money? What else will be used to clear up the dereliction? What else will get rid of the appalling squalor in inner cities? I do not mean that we should spend money indiscriminately, but we have now been experimenting for the whole of the decade. If we have learnt nothing, we should be ashamed of ourselves. I believe, however, that we have learnt the answers that we sought. Once we have the answers, it is our responsibility, if the matter is accorded priority, to extend the experiments commensurate to the scale of the problem. It is only the careful balance between the public and the private sectors which can lead us forward as the appalling conditions demand.

In his Budget statement, my right hon. Friend answered the final question which he would be entitled to put to me—where is the money to come from? He reduced the public sector borrowing requirement by £500 million. I do not believe that there was any case for doing that. We have already pursued with great courage a harsh regime to bring the economy back to a condition of which we can be proud and in which it is growing and there is wealth for dispersal. Even in the discussions and forecasts of the present Government, it has never been considered necessary to reduce the PSBR by another £500 million. Indeed, I believe that we could have increased the PSBR by £500 million and there would have been no difference in the acclaim with which my right hon. Friend's Budget was greeted.

Even if my right hon. Friend insisted on reducing the PSBR by £500 million, and did not accept that it could have been increased, he still had £1 billion. It therefore becomes a matter of balance. We know what to do. The judgment is about priorities. We can stimulate jobs and wealth and recognise the social imbalance that the tensions that I have described have created by leading the private sector—the builders, the investors, the strong, and the able—back into areas of deprivation.

We have to create an urban environment which attracts people to live and invest in it. The chance to stride forward with conviction this year has sadly been missed, but there will be another. It is the privilege of Chancellors that, after one week's recuperation, they begin on the public expenditure round as a prelude to next year's Budget. The process is circular and remorseless and it has familiar characteristics about it.

I hope that my right hon. Friends not represented in the debate today, who would not be the Chancellor's natural allies but who represent the policies that are of central importance in giving new life to the inner city areas, will recognise that my right hon. Friend the Chancellor is perceived as having a wider discretion in his hands next year. I hope that, as the public expenditure round that is the prelude to next year's Budget gets under way, all those harrowing stories of how we are not going to make it this time and how the City will not take it and how the pressures on borrowing limits or public expenditure targets are such that there is no room for manoeuvre will, in July and August, somehow miraculously turn out to be an ability to produce tax cuts and PSBR reductions when the Chancellor produces his Budget. I hope that, when all that dialogue goes on, given that there is now more flexibility, there will be a recognition that the Government's task is one not only of economic purpose but of securing a wider social and political purpose which is not compatible with the squalor and hopelessness of inner city Britain.

Several Hon. Members

rose—

Mr. Deputy Speaker (Sir Paul Dean)

Order. I remind the House that the 10-minute limit on speeches is now in operation, and I appeal for the co-operation of those who are called.

7.12 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

Any Member who represents a constituency in the north-west or any other region cannot fail to agree with the right hon. Member for Henley (Mr. Heseltine) about the need for some assistance for the disadvantaged areas.

The right hon. and learned Member for Richmond, Yorks (Mr. Brittan) said that the Government's monetary policy was not wholly convincing. That is one way to put it. I found the Chancellor almost insultingly dismissive. His infatuation with money supply seems to have come to an end and the theory behind the seven lean years has been dissipated. We should rejoice at the conversion of one whose opinions have hitherto been held very strongly.

The Financial Times leader on 21 March said: The plain fact concealed by this technical bashfulness is that the monetary policy is by now in an almost total mess. I do not deplore that. The Chancellor is at last being realistic, and I welcome that note of realism.

This is the first Budget in this Parliament that makes no serious attempt to reduce unemployment. The Chancellor now believes that we have passed the point of no return and that high unemployment will never be materially improved before the next election. He therefore thinks that it is better to spend money not on what he considers to be meaningless measures but on conferring benefits on the better-off, in the hope that they who have gained from the Government might express their gratitude at the next election.

So it is that there remain, and will continue to remain, more favoured parts of the country and more favoured sectors of our national life. It must be emphasised, because this is the cause of the discontent and anger in the north and the other regions, that preference is shown to the south and the City of London, and that this preference is an artificial and Government-made preference due wholly to their policies of a high pound, high interest rates and a contempt for any industrial policy.

My right hon. and learned Friend the Member for Monklands, East (Mr. Smith) put it well, when he said that the high FT index leads to short-term profits to prevent takeover bids coming in, as unwelcome as they are. So we sacrifice the long-term investment and expansion for the short-term profits that are a direct consequence of the actions of the City of London. Such thinking lies behind the paucity even of sops to the unemployed. We have had statistical tricks and deceptions designed to delude us into believing what is unbelievable—that unemployment is not worsening.

It is easy to remove people from the unemployment register on the grounds that they are not really looking for work, as the hon. Member for Croydon, South (Sir W. Clark) pointed out. We know that the higher the levels of unemployment, the more pointless it is for many of the 500,000 unemployed for more than three years to continue the charade of searching for employment. The higher the levels of unemployment, the higher the number of those who genuinely cannot find work and so give up looking for it.

The Chancellor's action on capital transfer tax is one of the most disgraceful parts of the Budget. It is a shameful proposal. The Chancellor has replaced what was a useful tax with a voluntary donation payable only by the miser or the negligent. The principles of the tax were sensible and equitable. The enjoyment of the capital that an individual creates for himself is the right of that individual. It is for him to enjoy the wealth that he has created. The enjoyment of capital by virtue of birth has long been regarded as eminently suitable for high and enforceable taxation. That was the basis of the death duties when they were first introduced, of estate duties and, more recently, of the capital transfer tax.

The approach had been to make enforceable that which had been avoided. Under the Government, the tax has been emasculated, first by the reduction in the rates of tax, particularly on lifetime gifts, and then by the 10-year rule whereby one starts all over again every 10 years. Now, we are back to a tax made even more optional because of the greater sophistication of the insurance market. The Chancellor will be taxing only those who were improvident or over-cautious in not divesting themselves of their wealth. Those who repent of their lack of foresight and endeavour to make hurried gifts towards the end of their lives will be penalised.

The Chancellor has decided that the period of repentance should be fixed at seven years, but insurance companies are even now gearing themselves to cover the seven-year rule. So sophisticated are the new instruments that will be devised that there will be virtual freedom from capital transfer tax, as it is now, or inheritance tax as it will be called, for those who are even remotely well advised.

The Chancellor of the Exchequer prides himself on abolishing certain taxes and reducing others. He prides himself on abolishing investment income surcharge, development land tax and national insurance surcharge, which was created when circumstances were different. Then there were high levels of employment and demand was overheating, but we now have quite different problems of unemployment and the need to increase subsidies.

The Chancellor prides himself on abolishing the capital transfer tax. He has reduced the higher levels of income tax and he is equivocating about the capital gains tax, which may be the next one for abolition—after all, it now brings in less than stamp duty, which the Chancellor has cut in half. The investment income surcharge abandoned the distinction between earned and unearned income—the right and proper distinction that all previous Governments had accepted. There is a difference. There are costs associated with the earning of income such as travel to work, meals out, clothing and so on. There is also the underlying security of capital compared with the insecurity of employment, particularly now.

The Chancellor also abolished the development land tax, which attempted to tax development values created by the community. Its disappearance is yet another bonus to the wealthy. Truly, the rich have never had it so good.

Like many in the debate, I take issue with the Chancellor on belittling the value of oil to our economy. Rarely has the beneficiary of great good fortune been so contemptuous of that good fortune. Having won the pools, he claims that his success is due to his merit, and because he has squandered the oil revenues on the high exchange rates that damaged our industry, brought in imports and allowed the avoidance of any balance of payment difficulties, there has been postponement of any attempt to rectify our underlying weakness. How does the Chancellor think that France, Germany or Japan would have dealt with large oil revenues? Are they a good thing or a bad thing? They would have transformed their economies, which were good enough even before that.

But, most importantly, the balance of payments has been the constricting aspect of our economy in all the post-war years. It has been a dominant factor in all of those 35 years. Stop-go was due not to overheating but to balance of payments difficulties and the holding of a reserve currency. What would Rab Butler and Reg Maudling have done if, at a stroke, they had found themselves relieved of these balance of payments problems?

Oil is of enormous importance and its price is also important to us. We should have a view about the price that we are able to obtain for our products. We sell oil cheaply because of an ideology. But a trading nation should not be able to afford an ideology when it comes to something so important to us. Consequently, we should speak to OPEC and should try to get what we can for our assets. Having obtained it, we should put that money to good use in industry, in the deprived areas of our country and in the expansion of our manufacturing base. That is how we should use it, and that is how we should proceed.

7.20 pm

Mr. Michael Morris (Northampton, South)

I should like to use 30 seconds of the 10 minutes allotted to me to comment on the speeches of the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) and of my right hon. Friend the Member for Henley (Mr. Heseltine). I take much of what my right hon. Friend the Member for Henley said, especially as I have been a leader in one of the deprived inner city areas, but the most successful experiments have been controlled by central Government with central Government money. I believe that he should bear that point in mind. I treat the right hon. Member for Ashton-under-Lyne as a right hon. Friend, but he is a far better Chairman of the Public Accounts Committee than he is a Budget analyst.

The Budget was highly creative. My right hon. Friend the Chancellor has managed to squeeze virtually a quart out of a pint pot. I thank him for his provisions on charities. I need say no more than thank you. It was good work; well done. We have made a good start on the share owning democracy with the personal equity plan proposals, but it is only a start. I also say well done for the 1p cut in the standard rate. Whatever colleagues may feel, all the evidence shows that cutting taxes is the best way of boosting long-term jobs and of reducing unemployment.

I repudiate the idea that tax cuts are in conflict with job creation. Although Government expenditure on subsidised jobs may, and I hope will, lead to short-term results, new jobs that are financially self-supporting in the long term have to satisfy market demand. Tax cuts remain the most effective way of increasing that demand.

I am not sure whether the Budget is stimulative or restrictive. At the end of the debate, perhaps I may be told how my right hon. Friend the Chancellor sees it. For example, there is a PSBR of £7 billion with, in addition, £4.25 billion of public asset sales compared with £2.5 billion last year. An analysis of that would suggest that it is a stimulative Budget. But we have lost £5.5 billion of oil revenues, which have to be allowed for in any calculation. Consequently, in a sense, one could say that it is a restrictive Budget. I am not sure whether it is stimulative or restrictive, and commentators in the City are none too sure either.

I query why my right hon. Friend the Chancellor is so coy about fixed capital expenditure. After all, major items of capital expenditure such as the Channel tunnel, Stansted and all the activities, for example, in the east of London were previously substantially just public sector investment. But now there is a mixture. So my right hon. Friend the Chancellor did his cause a slight disservice in not trumpeting the success of that mixed investment. However, I am slightly worried that if interest rates do not fall they may restrict the growth of future capital investment.

I am also worried about North sea oil. It is fortuitous that most of the rig contracts are on a one to two-year basis, so my right hon. Friend the Chancellor has a little time in which to make suitable adjustments. Although it was right to have windfall taxes when oil prices were in the high $30, it must be recognised that we are not likely to return to such figures. The marginal cost in the North sea is perhaps $20 a barrel, and even that seems hardly attainable in the near future. In the United States there is an automatic adjustment below $20 a barrel in terms of the removal of windfall taxes. The North sea is important not only to Aberdeen but to a whole plethora of companies in the midlands, and I hope that my right hon. Friend will ensure that the tax element is not too restrictive.

British Leyland has already been mentioned. It is not for me to dwell on who initiated the discussions with General Motors. However, it might be a subject for the PAC to consider. Nevertheless, I am sure that Land Rover should be sold to the management. It is not surprising that that company should have suffered; it has been deprived of investment resources for 12 to 15 years. Leyland Trucks reputedly has the best product line in Europe, while Bedford trucks reputedly has the worst. One might reflect that Leyland could take over Bedford trucks rather than the reverse.

Last year's Budget was a "Budget for jobs." Any job stimulation takes time to work through. I can speak only for the east midlands, which is my part of England, but unemployment in Northampton is now falling to less than 10 per cent. Last Tuesday, I was somewhat dumbfounded to hear the Leader of the Opposition say:

The expansion of the jobs clubs for advice is more 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".—[Official Report, 18 March 1986; Vol. 94, c. 186.] On the following day, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) mixed up the job start allowance scheme and job clubs. It was quite obvious that he did not understand the difference between the two, and had never visited any of the trial areas. It is not good enough for Opposition spokesmen to criticise such new dimensions when they do not even know what they are all about.

There have been 30 experiments on job clubs. One of those experiments is in Northampton. In about six months we have handled well over 100 applicants from among the long-term unemployed, and of those 65 per cent. have found long-term jobs. It is not just a cup of tea and a chat. People have to come on four mornings a week for two weeks. They are given help in how to apply for jobs and are given free telephone calls, mock interviews, help with their curricula vitae, postage facilities, a room with a typewriter and a room with photocopying equipment. Indeed, they are given general help with how to get a job.

The public has a great deal more confidence in a Government who carry out pilot schemes which, when found successful, as the job club has been in Northampton, are then introduced nationally than it has in the Leader of the Opposition or in the Opposition's economic spokesman. Those right hon. Gentlemen do not understand the difference between job clubs and job starts and cannot be bothered to visit them.

This is a creative Budget. We have two more to come in this Parliament in 1987 and 1988 and I look forward to a 25 pence standard rate of income tax in that time. The economy is growing and inflation is falling, and because of that we will see a considerable reduction in unemployment.

7.31 pm

Mr. Doug Hoyle (Warrington, North)

I must declare an interest as president of ASTMS. That gives me an opportunity to say that we recently won the political fund ballot by a massive majority. That will not bring any joy to the faces of Members on the Government Benches, but it is certainly good news for the Opposition.

The Budget is totally irrelevant and has nothing whatever to do with the problems that are facing us. As has been said several times, despite the drop in oil prices, the Chancellor has suddently found that he has £1 billion to give away. To whom did he give that money? Did he give it to the people who are facing problems, to the poor or to the unemployed? Did he use it for the benefit of manufacturing industry? He did not. He used it to reward those who already have quite a lot of money anyway, to reward the wealthy.

The penny reduction in income tax will benefit those who earn the most. What is the business expansion scheme? It means that the rich can use their dividend windfalls, the rebates from the taxman, to invest or gamble in schemes which are supposedly for small businesses. Even the Chancellor had to admit that a lot of money will go into farmland and development. The hon. Member for Truro (Mr. Penhaligan) talked about the abolition of the tax on lifetime gifts. That scheme is a scandal. What relevance does it have to industrial constituencies like mine in the north? What relevance does it have to the problems of Merseyside, to the north-east, to Scotland or to Wales? What relevance does it have to the impoverished north as against the prosperous south? It has none whatever. It will not begin to solve any problems.

I am sorry that the Chancellor of the Duchy of Lancaster is not here. He introduced the debate in his usual manner of the Chingford charm school. His method is to denigrate his opponents, to be short on facts, to say nothing about Government policy and to present it overall with the manners of a house-trained aardvark. He has not changed at all. His chief topic was inflation. As has been reasonably said, our inflation rate is still higher than the inflation rates of our competitors. It is higher than the rates in Japan, the United States, Canada, France and West Germany. What a price we have had to pay for getting inflation down. We in the north and the unemployed have had to pay that price. Nothing in the Budget will do anything for the unemployed.

The Chancellor missed a great opportunity because he could have used that £1 billion to stimulate employment. He could have used it for public works and to develop our infrastructure. The right hon. Member for Henley (Mr. Heseltine) talked about the inner cities, but regenerating the inner cities means far more than giving Liverpool a garden centre. It is about building houses which the council in Liverpool has been trying hard to do in face of all the restrictions. It is about building the roads and the docks that we need and about building schools and hospitals. Schemes like that would provide real jobs.

The Government have no strategy for industry. They are quite happy to rely on privatisation and to try to bring about mergers that have collapsed. That happened in the case of General Motors and Leyland Vehicles. We look forward to hearing the facts when they come out and learn what part the Chancellor of the Duchy of Lancaster played in that. Apparently, he initiated it and then advised against it. The Government have allowed the American company Sikorsky to take a stake in our only independent helicopter manufacturer. As we have seen, the trade unions there which supported the employers are now paying for that support because we now see Westland withdrawing recognition from the foremen and chargehands at Weston-super-Mare. Because of the American influence, will we see a non-union company develop at Westland?

The amount of money sloshing about in the City has given rise to a spate of mergers. There is a proposed merger between Allied-Lyons and Elders IXL. We have seen the bid for the Distillers Company, first by Gulliver and then by Guinness, and there has been an attempt by GEC to take over Plessey. What relevance has that for employment? The spate of takeovers will lead to asset stripping, and unemployment will grow. The Government are not prepared to do anything about any of those things. The Budget should have been used to develop an industrial strategy, but all that it does is react too late to the needs of industry and crisis piles upon crisis.

The Government have no policy, and it is not just the Opposition who are saying that they ought to have a policy for industrial regeneration, because voices are also being raised on the Government side. I wish that some of the people saying that the Government ought to have a fiscal policy to begin to regenerate industry had been giving the same message when they were in Cabinet. We seem to hear them only when they resign. As the number of resignations from the Government grow, so the number of voices grow that say we ought to do something about the regeneration of industry. Nothing is done.

The only thing talked about by most Conservative Members who have spoken is the benefit that will accrue to the City, the benefits that will accrue to those who have and who are not interested in British manufacturing industry, but are more likely to invest in manufacturing industry in rival companies in Japan or the United States or in the developing world. Those pople are not interested in regenerating British industry or in creating prosperity.

The Government ought to use their fiscal policy to ensure that the banks, the insurance companies and the City institutions invest in British industry. Failure to do that will mean that not only will more and more people join the ranks of the unemployed, but we will also become a low tech country. The hon. Member for Eastbourne (Mr. Gow) said the rate of inflation in Greece is higher than ours. That is the level to which Conservative Members are prepared to stoop. They believe that in industrial terms we can be compared to Greece and Portugal. I am happy to say that there are others with more vision, but we cannot expect vision from a Government who are leaderless, rudderless and powerless to stop the ship of state drifting on to the rocks of destruction.

The sooner this Government make way for a Government who are prepared to put the interests of the British people first, especially those of the ordinary people, the better. The sooner the Government end the great divide between north and south, the better. Instead of confrontation, there should be compassion. We should use all our resources to bring people together. We should begin to rebuild the base of manufacturing industry on which the Government were created. We should be assisting the new industries of the future. Although this Government will not do that, I hope that we shall not have to wait three years before it is done by a new Government.

7.40 pm

Mr. Ian Gow (Eastbourne)

Nearly seven years ago, my right hon. Friend the Member for Blaby (Mr. Lawson) arrived for the first time at Treasury Chambers. He found as Chancellor of the Exchequer my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) who is now Foreign and Commonwealth Secretary. In the early months of 1980, the then Chancellor and the then Financial Secretary established for the then Government and their successor what is described as the medium-term financial strategy. I pay tribute to my right hon. Friend the Chancellor for the consistency and persistency of purpose which he and his predecessor have shown in managing our economy during the past seven years. Consistency and persistency in economic policy have been tragically lacking in the fashioning of British economic policy since the war.

When my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath) formed his Administration on 18 June 1970, it was not his intention that we should pursue a statutory prices and incomes policy. It was not his intention that there should be a dramatic increase in the money supply in the closing years of his Administration. It was not the Labour party's policy, when it came into power in the early days of March 1974, that, before barely two years were out, it should go cap in hand to the International Monetary Fund and reverse some, although not all, of the disastrous policies which it had been pursuing in the two preceding years.

What has marked out this Government, not only from the two whom I have mentioned but from all previous Governments since the war, is that we have had consistency of purpose. Consistency of purpose offers for the British people not only the best prospect of economic growth but the best long-term prospect of creating more jobs.

The shadow Chancellor for the Liberal party —the hon. Member for Truro (Mr. Penhaligon)—is not in his place, but the solitary representative of the Liberal party, the hon. Member for Ceredigion and Pembroke, North (Mr. Howells), is welcome. We listened with considerable interest to the hon. Member for Truro tell us that, if we had a Liberal Chancellor, there would be a prices and incomes policy with statutory back-up.

Mr. Richard Ryder (Mid-Norfolk)

He did not explain.

Mr. Gow

My hon. Friend is right. Who ever heard a Liberal explain anything with cogency or conviction?

On the second day of the Budget debate the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) was challenged, wisely, by my hon. Friend the Member for Lewisham, West (Mr. Maples) on what would be the public sector borrowing requirement if the right hon. Gentleman happened to be in Great George street. The right hon. Gentleman replied: I shall give the figure in a moment. He said that the amount would be considerably more. He continued: Before dealing precisely and directly with the question of the hon. Member for Lewisham, West (Mr. Maples), I must deal with the Government's plans for tackling the unemployment crisis."—[Official Report, 19 March 1986; Vol. 94, c. 309.] Did the right hon. Member for Sparkbrook do what he had promised and deal precisely and directly with the question? He did not. I hope that the hon. Member for Birmingham, Hodge Hill (Mr. Davis) will answer the question that his right hon. Friend did not answer.

My right hon. Friend the Member for Henley (Mr. Heseltine) said that he thought that this year's PSBR could be £500 million more than the £7 billion figure which has been wisely chosen by my right hon. Friend the Chancellor. My right hon. Friend the Member for Henley is entitled to put forward that view—the target of the PSBR is a matter of judgment. I do not believe that, if we had taken a more relaxed view about the PSBR, we would have shown consistency of purpose during the successive dramas of the Falklands war, the miners' strike and the dramatic reduction not only in the price of oil but in the revenue from oil.

I believe that the level of the PSBR has a crucial influence on interest rates. No one is a keener advocate of lower interest rates than my right hon. Friend the Member for Henley. He is the first person to say that we must encourage our industrial manufacturing base. I believe that the surest way in which we can encourage our manufacturing industry is by following that policy of sound money and honest finance which is the best prospect of reducing interest rates.

If I praise my right hon. Friend the Chancellor for his cautious and prudent Budget, I praise him also for his new imaginative scheme to encourage the wider ownership of shares. Nothing has caused greater happiness among Conservative Members than the way in which, since my right hon. Friend the Prime Minister arrived at Downing street, between 925,000 and 950,000 people—it will be more than 1 million people by the time of the next Budget—whom the Labour party wanted to keep as tenants in perpetuity in the public sector have become home owners. I see a former Minister for Housing and Construction—the right hon. Member for Brent, East (Mr. Freeson)—in his place.

Mr. Winnick

What about private tenants?

Mr. Gow

The hon. Gentleman should contain himself. He may get a chance to catch your eye later, Mr. Deputy Speaker. I ask the hon. Gentleman to remain silent.

This increase in home ownership has become accepted by some Labour Members. At the next election, there will not be the same commitment by the Labour party as there was at the last election to repeal our Acts of 1980 and 1984. They may seek to amend them but they will not repeal them. In the past seven years, we have moved the centre of British politics to the right. I predict that the Labour party is fearful lest our new plans for encouraging share ownership should prove to be as popular with the people as was our policy of offering them choice. My right hon. Friend the Chancellor, in extending the opportunities for share ownership, wishes to extend opportunities and choice ever more widely. This is really the people's Budget—[Laughter.] Do you remember, Mr. Deputy Speaker, that the Labour party laughed when we promised that we would give tenants the opportunity to become owners? Today the Labour party laughs when we are giving to others the opportunity to become owners of capital—an opportunity that they would never have had before.

We have heard from Labour Members and even from the spokesman—now vanished—for the Liberal party that if only the Government would spend more money we would be able to abate what, by common consent, is the tragedy of unemployment. The Labour party should remember its own record of public expenditure and the consequences of that irresponsible expenditure: high interest rates and high inflation. It was those interest rates, that high inflation and that excessive borrowing—often undertaken in the name of compassion—that laid the fearful grounds of avoidable unemployment. In the longer term it is essential that the Government should persevere in their policy of lower borrowing, lower interest rates and insisting that this country, like others, should get rid of overmanning. Only in that way will we have a better prospect of more jobs in the future.

I repeat my congratulations to my right hon. Friend the Chancellor and look forward to another two Budgets in this Parliament.

7.51 pm

Mr. Donald Stewart (Western Isles)

If the hon. Member for Eastbourne (Mr. Gow) describes last week's Budget as a people's Budget, he will find that it will not be only Opposition Members who laugh.

The hon. Gentleman referred to wider share ownership. I shall not argue about whether or not that would be a good aim. However, we have heard about the 2 million people who bought shares in British Telecom. I am fairly confident that in two or three years that number will have been drastically reduced and the shares will be in the hands of the big institutions.

In opening the debate, the Chancellor of the Duchy of Lancaster referred to difficulties inherited from the Labour Government. I am not here to defend the Labour Government or to argue about whether those charges were correct, but the present Government have now been in power for seven years and they cannot continue, year after year, to say that they are not responsible. A time must come when they must take responsibility for the state of the country.

Most people looked to the Budget for a two-pronged attack on unemployment and poverty. Last Tuesday, the Chancellor made no claim to attack either problem. Had he done so, the claim would have been impossible to sustain. When we remember what happened to the unemployment figures after the right hon. Gentleman announced a Budget for jobs, perhaps it is just as well that he made no similar claim on this occasion.

The Budget resembled a gift of little value well presented in a nice package. The Chancellor's casual and frivolous comment on the prospect of the other half of the oil revenue disappearing over the next 25 years seemed to me to be complacent and irresponsible. Had it not been for the oil revenues in recent years, the United Kingdom might well have been obliged to file its petition in bankruptcy.

The tax on petrol will have serious repercussions, particularly in Scotland where petrol is generally dearer than in the rest of the country and where rural areas and islands are dependent on road transport. If the right hon. Gentleman really believes that the oil companies should absorb the new tax, he should take the necessary action to oblige them to do so. Those hungry hyenas will not cooperate with him otherwise.

The hon. Member for Eastbourne was pleased with the personal equity plan, which allows for relief of taxes on investments of £50 per week. With the appalling unemployment figures and widespread poverty, most of our fellow citizens will regard that measure as a joke in poor taste. Many of them do not have that amount to live on. Even from the capitalist viewpoint, I gather that if one lifts the shares when the stock market is dropping, the tax relief will not be forthcoming.

I welcome the action taken on charities. At last the iniquitous VAT on distress alarms, welfare vehicles for the disabled and so on is to be removed. It should never have been imposed. I also welcome the relief on employee donations to charities and the relief to companies on one-off gifts, which should be of substantial help to many worthy and needy causes. I am sure that that aspect of the Budget will receive universal approval.

I also support the increased duty on cigarette tobacco. As a pipe smoker I should declare an interest, but I agree that tobacco in general is a legitimate object for raising revenue, with improved health as a bonus—although I suspect the Chancellor would be taken aback if everyone gave up tobacco at the same time.

The wealthy section of society has been handed substantial increments by the abolition of tax on lifetime gifts. I agree with the hon. Member for Truro (Mr. Penhaligon) that it is a disgrace that that tax should be abolished at such a time. When one thinks of the lack of funds for the universities, the cutting of student grants and so on, the abolition of that tax is iniquitous.

The reduction of a penny in income tax is gimmickry. Everyone wants more money, but the Prime Minister and the Chancellor evidently believe that people are all hungry materialists with no higher aim in life than a reduction in income tax. The Government boast about the reduction in income tax, but the same Government imposed 15 per cent. VAT on almost all goods and services. In my view, many people would forgo tax reductions if that helped the unemployed and the old-age pensioners who have suffered severely this winter. The money could be better used in providing schools, hospitals and houses. Our housing stock is a serious problem that some Government will have to face in four or five years.

It is nonsense to reduce income tax when the Health Service is in dire straits. The DHSS quotes statistics about more doctors and nurses but the public knows that the Health Service and the hospitals are at crisis point. That penny could have been used for education, for the universities, or for improving student grants. I and my hon. Friend the Member for Dundee, East (Mr. Wilson) will join the alliance in voting against the reduction in income tax. Even British business puts tax cuts far behind help for the unemployed in its list of priorities. The Government might have taken their friends' view into account.

The Budget was a political, not an economic, one. I hope and believe that the Government will pay the political price.

7.58 pm

Sir Julian Ridsdale (Harwich)

I congratulate my right hon. Friend the Chancellor of the Exchequer on a prudent and cautious Budget. Looking after the country's finances is no different from looking after the finances of a family. At times one has to be cruel to be kind. It is not easy to restrain Government expenditure, especially when unemployment is rising so severely, and when we are already spending about £2.5 billion on employment and training measures in 1986, increasing to nearly £3 billion in 1988. However, let us remember that every £100 million spent on employment measures comes from other businesses and other people in employment. Squeeze them too hard by higher taxes or higher interest rates and one destroys hundreds of thousands of jobs that would otherwise be lasting jobs.

That is why I have supported all along the restraints on Government spending, which I am glad to underline have now got us to the position where my right hon. Friend the Chancellor of the Exchequer is able to reduce interest rates and point to a growth rate this year of 3 per cent.—1 per cent. more than is estimated this year for Japan—with inflation moving, I hope, somewhere near that figure, too.

We hear a lot about industrial planning and helping industry, but from my visits to industry—especially recently to the exciting KTM factory in Brighton, part of the Vickers Group which is making machine centers—I find general agreement that the best way for the Government to help manufacturing industry is by lowering interest rates and working for stable exchange rates. As my hon. Friend the Member for Eastbourne (Mr. Gow) said, we are unable to reduce interest rates unless we have a stable public sector borrowing requirement. That is why I join him in being nervous about some of the luxuries that at this moment my right hon. Friend the Member for Henley (Mr. Heseltine) wishes to have.

In my view, at the moment we must take care of our international competitiveness which is being threatened by the United Kingdom paying higher increases in wages than West Germany, Japan or the United States, which are helped by far lower tax bases than we have.

The Social Democratic party and the Liberal party oppose the reduction of 1p in the basic rate of income tax, yet, to quote from the speech of the hon. Member for Stockton, South (Mr. Wrigglesworth) in the debate on 20 March: In recent years, unit labour costs in Britain have continued to increase consistently compared with the costs of our major competitors. That must stop."—[Official Report, 20 March 1986; Vol. 94, c. 462.] I agree with what he says, but surely the Budget helps in this respect. Everybody agrees that the single person earning £140 a week—that is the average wage in my constituency—is paying too much tax. I admit that I thought that that person would benefit from higher thresholds rather than from the basic rate reduction in income tax. On the contrary, as my right hon. Friend the Chief Secretary to the Treasury told us on 19 March, that person will gain a 95p a week reduction in the basic rate, compared with 69p a week for an equal cost increase in allowances.

I am glad that those people will have £1.70 more in their pay packets as a direct result of the Budget. For a married couple on average earnings, the figure is £2.59 a week. For the employee on average earnings, the reduction in the basic rate, plus the increase in thresholds, is the equivalent of an increase of £4 a week in gross pay. I am surprised that although the Liberal party and the Social Democratic party are complaining about Britain's international competitiveness they complain when the Government take 1p off the basic rate of income tax, which will help to alleviate this problem, and yet intend to oppose it in the Lobby.

This pay increase does not damage the competitiveness of British industry and does not put other people's job, or that employee's job, at risk. As the Chancellor said, this is a springboard Budget for making our industry more competitive, but with limited resources available this year because of the £5 billion spent on the miners' strike last year and the £6 billion fall in oil revenues—lost because of the change in the oil price. I hope that we can have more meaningful tax reductions from the springboard that the Chancellor has put in place, because that is the best way to stop our international uncompetitiveness. That is why I am so surprised that the Social Democratic party and the Liberal party do not see this.

Finally, I turn to the wild promises of the Labour party which have been costed at £24 billion, with promises of £3.5 billion extra for pensioners. It all sounds so like a repeat of the disastrous policies between 1974 and 1979 that led to runaway inflation and the erosion of the lifetime savings of so many pensioners. Nevertheless, I should be wrong if I did not point to the 18.9 per cent. increase in rates which we are having to face in Essex this year and to the heavy heating bills that pensioners are having to face because of the severe winter. Proper indexation of income thresholds for pensioners in the Budget will help, but I would urge the Government to do more ahead of the promised reform of local government finance to help pensioners because they have been so badly hit by these large rate increases.

Surely there is no better way of doing that than by giving next year a very generous Christmas bonus as a dividend to pensioners to share in our growing prosperity, to assess the present Labour promises and to remind pensioners that twice the Labour Government cut the Christmas bonus in those disastrous days between 1974 and 1979. Compared with those days, Britain is back on the rails and heading towards an age of prosperity. But let us make no mistake. We shall have that age of prosperity only if we keep a Conservative Government in power.

8.7 pm

Mr. Eric S. Heffer (Liverpool, Walton)

On a number of occasions this evening hon. Members have referred to previous Labour Governments. I want to make one clear statement and then say no more about it. Whenever Labour Governments have made mistakes, they made them because they were following the type of policies that had been set down by members of the Conservative party. In other words, they accepted Conservative ideas rather than Socialist ideas. That is why Labour Governments have made some fairly serious mistakes from time to time. When I have been in the House I have said so. I trust that a future Labour Government will not make the kind of mistakes that Labour Governments made in the past.

It has also been said many times during the course of this debate that the problem is that workers earn too high wages. In an exchange with the Chancellor of the Duchy of Lancaster I said that this is the old, old story. I first heard it when I was six or seven years of age. I did not understand then what it was all about. However, I have always been told that our economic problems are due to the fact that the awful working people earn too much and that if only their wages were cut everything would be all right. The problem is that when their wages are cut, as happens in areas of high unemployment—for example, on Merseyside and elsewhere—it does not lead to an increase in employment. All it does is to depress the condition of the people and make the situation worse.

The best thing that I read about the Budget appeared in yesterday's edition of The Observer. I am not reading The Sunday Times at the moment, so I read The Observer with even greater interest. What did The Observer say yesterday? It said: There is a very British feeling in the land at the moment that enough has been done for the rich. Now should have been the time to ease the pain a little at the lower end … There is, too, a feeling that the money being made in the City is unseemly, that it is industry and jobs that matter and should be assisted. There was no need for the Chancellor to play silly games over a penny off income tax, less-than-expected increases on petrol, and nothing on beer or whisky. The article ends with this statement: As Lord King commented, it is she who is in charge. And that means—goodnight, nurse. You are a fool to believe that public service or fair play matter. This is the day of the speculator and the inheritor, the greed of the oil companies and the slickness of the City operators. This is Mrs. Thatcher's Britain, 1986. That is what the Budget is about. It is a rich man's Budget. It helps the rich but does not help the poor.

Also in The Observer—I am sorry to keep quoting The Observer but I think that it is of interest—there is the following: The Chancellor signally failed to provide any specific help for the country's poorest families. They did not even earn a mention in his speech, and welfare groups are bitter. I should think that they are bitter because the people who gain—and it gives all the figures in the newspaper—are once again the higher income groups in this country. The ordinary working people and those who are not working have once again suffered under this Budget because it is in line with the ideological position of the Government. The Government are a very ideological Government. They believe that the capitalist system is the best of all systems. They ignore the fact that it is crumbling around their ears and that there is increased unemployment, poverty and misery amongst people. All they see is increased profits for some people and they believe that that proves what a successful society we have. We are in this position precisely because we have a capitalist economy with a capitalist Government carrying out capitalist policies.

I have no hesitation in saying that the only real answer is Socialist policies. I get a little upset when I hear some people from my party apologising for our past policies and for our Socialist concepts. I do not apologise for them and I never will. I well remember what the 1945 general election manifesto said. It was a grand manifesto. We should think of what happened at that time and the crisis that the people of this country had to face. The soldiers, airmen and sailors were coming back from the war. There was a danger that we would have a problem similar to that which occurred after the first world war with an immediate increase in mass unemployment. That was not the case. We did not have mass unemployment. The Government dealt with the problem and they did not drop their policies such as public ownership. They took into public ownership a whole series of industries, introduced a National Health Service and created the welfare state. They laid the basis for the society we have had since 1945.

I say to my comrades on the Front Bench—[HON. MEMBERS: "Comrades?"] Yes, comrades. I say to them, do not be mesmerised like rabbits in front of the Thatcher stoat. The way to handle the Thatcher stoat is to deal with it positively and get rid of it. The answer is to carry out the sort of policies that were carried out in 1945, which are still basically the policies of my party. That is the way to deal with the crisis. The Budget is a disgrace and a disaster. It is a Budget for the rich and at the next election we shall have a change in Government. That Government will reverse the whole policy, trend and system we have been suffering under for the past few years.

8.13 pm

Mr. Tony Baldry (Banbury)

There is no doubt that falling oil prices have presented British industry with an outstanding opportunity to increase its exports, win a larger share of world markets and orders for jobs. As the Chancellor made clear in his Budget speech, industry will only be able to seize that opportunity if it meets two conditions. First, it must keep firmer control of its labour costs. Secondly, it must spend more of its much healthier level of profits on investing for the future in research and development and in training."—[Official Report, 18 March 1986; Vol. 94, c. 169.] I want to consider those points because I believe that they are critical to whether we succeed as a competitive trading nation.

For a long time Conservative Members have spoken about the responsibilities of trade unions. I believe that it is imperative that we now alert the nation to the responsibilities of employers, particularly the importance of industry and employers controlling wage costs, and investing in research and development and training. I believe that those three items are conditions precedent to our sustaining success into the 21st century.

In January the Organisation for Economic Co-operation and Development published a survey which focused on our labour market since 1979. It found that in Britain the failure of wages to adjust to lower inflation and increasing unemployment was at the core of our unemployment difficulties. Further, the OECD considered that the failure of Britain to moderate wages ruled out the option of any general reflation of the economy to reduce unemployment because it concluded that, without greater wage moderation, any stimulus to demand would simply be dissipated in higher inflation.

The OECD further found that in other developed countries higher unemployment had led to a downward pressure on wages, in stark contrast to Britain, where earnings have continued to rise steeply irrespective of unemployment levels. In those circumstances, the OECD concluded, pessimistically, that there is little that macroeconomic policy can do to reduce unemployment.

None of that should come as any surprise. Only last summer the House of Lords Select Committee on Overseas Trade published its findings. It asked its statistical staff to produce figures for unit labour costs for manufacturing in Britain and elsewhere. It found that since 1962 labour costs per unit of output in America had hardly doubled, in West Germany they had slightly less than doubled, in France they rose four times, but in Britain they had risen six times.

The simple fact is that in those countries we consider to be the most well off—for example, West Germany and the United States—the rise in wage costs has been the smallest. Indeed, in 1984 real average earnings in the United States were lower than in 1962, in contrast to Britain where we simply continue to pay ourselves as a nation more than we earn. Average earnings were up by 8.3 per cent. last year compared to inflation of only 5.5 per cent. There has to be a new sense of responsibility in pay claims if Britain is to improve her competitive position and if we are to have any chance of significantly increasing the flow of new jobs.

Let us all be clear about at least two things. First, extra spending of the type and degree consistently advocated by the Opposition—borrowed money pumped into the economy—would not go towards output and jobs. It would simply disappear in higher pay and prices. Secondly, pay is one of the main reasons, if not the main reason, why we have such a disastrous unemployment total. Even unemployment based on the lack of industrial capacity reflects excessive pay awards of the past. Of course, people like getting wage increases well above inflation but that has a cost for the whole community. It has a cost in lost jobs.

In successive years the Government have reduced the burden on business, for example, by abolishing the national insurance surcharge, only to see industry placing a greater burden on its own back by allowing unit labour costs to soar because of excessive pay awards. Excessive pay awards mean that our goods cost more to make. Therefore, the goods cost more to buy, fewer are bought and fewer are then made. That results in higher unemployment.

Pay awards constantly that are ahead of inflation in the private sector also lead to pressures for greater public spending and greater taxation. Teachers, for example, are not complaining that their salaries have not kept pace with inflation; they know that they have. The teachers' complaint is that their pay has fallen behind the private sector and, understandably, they want to catch up. That inevitably means pressure for more public spending and thus more revenue from taxation, fuelled by the private sector failing to face up to the reality of the wage settlements in this country. I have a nightmare that some managers prefer having an overpaid workforce, as long as its numbers are kept to the minimum. They do not want to create new jobs if they can manage it. But we need more new jobs, and that means wage moderation now, and leadership from management and employers.

To that end, I am sure that the whole House will welcome the new proposals for profit sharing, the idea that part of the pay packet should be related to profit and performance. The suggestion that a significant slice could be taken off the tax burden of those who enter profit-sharing schemes is good news, and, further, can lead only to greater employee involvement, which is also good news. However, the stark reality is that employers and managers have to get a grip on spiralling wage costs if we are to get more people into jobs.

If we are to compete in the 21st century, industry has to invest more in research and development. Let us consider a few stark facts concerning just one key area — information technology. IBM's European data processing revenue of almost $10 billion equals the combined turnover of its 10 closest competitors, which illustrates the dominant position of the United States an advanced technologies. It is not surprising that Europe is estimated to import 80 per cent. of the personal computers that it requires, mainly from the United States. As for silicon chips, Europe's market share for the supply of advanced metal oxide semiconductors, which will dominate chip-making for the next few years, is just 6 per cent.

If we are to keep in the forefront of the new technologies that will dominate the 21st century, British companies must invest more of their profits in research and development, because if we do not invest in the future, we shall simply find ourselves struggling ever harder to preserve the industries of the past. Certainly, the British Government and the European Community are acting to stimulate industry to increase research and development. There is the Esprit programme, which concentrates on improving information technology, the BRITE programme, the RACE programme for broad band communication, and the Eureka programme to promote awareness of the practical opportunities that research might bring. If one wants to see the success of investing in research and development and of greater industrial collaboration in Europe, one has simply to look at Airbus and our aviation industry. Airbus, now successfully competing with Boeing, is winning orders and creating jobs. But British companies have to invest more in research and development, and they have to spend more on training.

A recent report called "Challenge to Complacency", commissioned by the Manpower Services Commission as a follow-up to the National Economic Development Office report entitled "Competence and Competition", condemned employers for their indifference to training. The report found that the vast majority of companies studied were not very interested in training and had an attitude which bordered on complacency. Indeed, few chief executives interviewed appeared to have much knowledge of the training activities undertaken by their firms. Compared with the United States, Germany and Japan, Britain's record of the training of adults is lousy, with training being seen not as an investment but, all too often, as an overhead to be reduced when times are difficult.

If we are to succeed, we have to become a nation of lifetime learners. The tools and the technology that are used can be same the world over. What makes the difference is what one does with that technology, and that means the skills and knowledge of those who are using the technology. That means industry having to invest more in training and in people. During the next five years the impact of new technology will involve something between half and three quarters of the nation's entire work force needing to update their skills just to keep pace with new technology.

My right hon. Friend the Chancellor's Budget is imaginative and creative. It promotes wider share ownership; it stimulates greater growth; and it builds on the continuing improvements in our economy. But if Britain is to maximise opportunities presented by the Budget and falling oil prices, employers will have to realise that they have responsibilities to ensure common sense on wages, to invest in research and development, and to invest more in training.

8.24 pm

Mr. Reg Freeson (Brent, East)

I should like to make an observation on the remarks of the hon. Member for Banbury (Mr. Baldry). If one wants the economic and social ethos to which he referred, national standards will have to be set. If one wants national standards to be set, it is the Government who should be in the lead on that. One will not get a willingness to undertake increased research and training, which the hon. Gentleman rightly emphasised, if at the same time the Government are cutting in those very areas in our educational establishments. That is perfectly true, and the hon. Gentleman should look at his figures.

Those who take pride in the financial strategy of the Budget, such as the Chancellor, and those who have applauded it, with a few exceptions, on Conservative Benches, are, in effect, applauding and taking pride in continued decay and mass homelessness in our inner cities, the physical decay and decline of our schools, as well as the services that are provided in many of them, and the continued decline of the less often mentioned areas of rural deprivation, which are often cheek by jowl with affluent "exurbs", as the Americans call them. Any pride in such a financial strategy means pride and applause for the things that I have mentioned and many others, too. One cannot have continued restrictions on public expenditure and investment and at the same time put one's hand on one's heart and complain about the crumbling of the inner cities, homelessness, decay in the state of our homes, particularly houses that elderly people live in, and decay in the schools, in our public services, our environment, and so on. The Government are reaching the stage where they are presiding over environmental slums in vast areas of our cities.

I shall concentrate on one or two of the things that I believe could have been dealt with in the Budget rather than comment too much, except indirectly, on what is in the Budget. Potentially, the main generator of economic revival would be what we loosely call the construction industry. In fact, it is a group of industries and services. Many reports have been emanating from that industry and others — the Confederation of British Industry, the Building Employers Confederation, the Federation of Civil Engineering Contractors, National Council of Building Material Producers, the Royal Institute of British Architects, the Duke of Edinburgh's study into housing conditions, the House-Builders Federation and the Housing Corporation. All the reports and studies have been pigeon-holed by the Chancellor and the Treasury. Not a thing has been done in the Budget to tackle any of the problems that have been identified in detail—not in general rhetoric—in those reports. Not a single thing is to be found in the Budget that tackles any of the over-urgent problems depicted and detailed in those reports. This is not the first time. We have had several years of that.

Therefore, our housing, schools, colleges, hospitals, roads, sewers, inner cities and deprived rural areas will continue to decline, decay and crumble. When that grows into rioting and other foul conditions in our cities, all the fine speeches and expressions of concern will mean nothing if nothing effective is done about that. Millions of people who are unemployed could be tackling some of those problems. They remain unemployed while huge fortunes are being made in the wasteful buying and selling of existing assets, when we could and should be conserving and creating assets. The strategy should be to create assets. We should invest in that, not in buying and selling.

Those are the issues which could have been dealt with, in part, by the Budget, and which I want to develop. Investment in infrastructure and capital works in public services could be increased without the risk of higher inflation. I agree with the right hon. Member for Henley (Mr. Heseltine) that it could be done. Indeed, there could have been increased public sector borrowing without affecting inflation. That is shown analytically and conclusively in the full submissions by the sections of the industry to which I have referred, and by other bodies.

The Chancellor's response last week was that the appropriate policy was to keep borrowing low. I understood him to mean that he was talking about the private as well as the public sector. He did not refer specifically to the public sector borrowing requirement. Although it has not been stated, I have suspected for a long time that Government policy was directed to confining and restraining borrowing across the economy, irrespective of the public or private characteristics of the borrowing, but that they always concentrated on public sector borrowing. There is nothing new about that. It has been going on for years.

Ways could be found to increase investment in rented housing, the inner cities and infrastructure. It means more public sector borrowing. After all, we are borrowing for massively high unemployment. That is where the biggest burden lies. The burden is roughly equivalent to the revenues in the last five or six years from the North sea, which amount to thousands of millions of pounds annually. It would be far better to have a strategy directed to using that resource for the creation of assets rather than unemployment. I echo what the right hon. Member for Henley said on that score.

I shall put briefly to the Chancellor some proposals which could and should be adopted by the Government now without conflicting with what I believe to be their wrongful prejudice against increased public expenditure in such areas. Time forbids me from developing the proposals in detail. With his colleagues in other Departments, in particular the Department of the Environment, will the Chancellor take action to put a stop to the underspending on derelict land and development grants? Underspending occurs mainly because of the bureaucratic procedures employed by the Department of the Environment in processing the grants. Hundreds of millions of pounds are involved in the underspend. Each thousand pounds spent on one of those grants produces £6,000 or £7,000 of private investment.

Housing associations have experienced massive cuts in expenditure in recent years, as have local authorities. The housing associations have made detailed, not general, proposals to the Government to marry the grant expenditure, however limited, with private investment. They have worked out schemes in negotiation with building societies to couple the two organisations. There is one obstacle to that partnership approach—the Treasury. The Chancellor and the Treasury are forbidding housing associations to line up private capital with housing association grants which could double the effects of grant expenditure on rented housing. Instead of 15,000 homes a year, 30,000 could be started. I urge the Chancellor to take action.

8.34 pm

Mr. Richard Ryder (Mid-Norfolk)

The right hon. Member for Brent, East (Mr. Freeson) bemoans the Government's low public expenditure. It comes as some surprise since he was happy enough to remain in a Labour Government between 1976, when the Government were forced to go to the International Monetary Fund, and 1979, when they were defeated at the polls. Public expenditure in real terms on the Health Service fell by 30 per cent. in that time, as it did on major road construction.

During the Budget debate Opposition Members such as the right hon. Member for Brent, South urge the Government to spend a great deal more money and to expand the public sector borrowing requirement. They have tried to depict the Government's prudent fiscal policy as a dogmatic experiment which no other sensible nation dares to follow.

In such circumstances it is reasonable to look abroad to discover whether Britain is, as the Opposition contend, the odd man out, or whether the truth is that other countries are pursuing identical fiscal policies to those of the Conservative Government in Britain. Needless to say, Governments of the centre Right in Japan and Germany are pursuing precisely the same policies as Her Majesty's Government.

What about democratic Governments led by the Left, particularly in Europe? What policies are they pursuing? Under President Mitterrand in France the Socialist Government introduced their budget in September last year. It was the toughest budget introduced by any French Government since the war. It involved huge public expenditure cuts across the board, but included—I must tell the right hon. and learned Member for Monklands, East (Mr. Smith)—an increase in law and order expenditure. Defence expenditure was also increased by 2 per cent. President Mitterrand cut public expenditure on trade and industry. Public expenditure on the car industry was sliced through Renault. Expenditure on the steel-making industry through Usinov was sliced by a Socialist Government. Expenditure on social security was cut too. A person under the age of 25 in France, who has been unemployed for longer than six months, can be deprived of unemployment benefit. Psychiatric treatment in the French health service has been farmed out to the private sector. All that has happened under a Socialist Government.

What about Socialist Spain? The Socialist Government in Spain last year introduced the toughest ever budget since General Franco's time. That Government have sliced 20 per cent. from capital spending on infrastructure and nationalised industries. The Socialist Government in Spain have cut pensions. A new pensions reform law came into operation last August, and lower pensions will now be paid.

The same applies to Italy where the Socialist Prime Minister, Mr. Craxi, presented an austerity budget to the Italian Parliament last September. Health spending was to be curbed by raising prescription and other charges by at least 19 per cent., and by as much as 25 per cent. Italy imposed hefty cuts in welfare benefits and families with only one child are no longer to receive benefit. Concessionary rates for travel on railways and for electricity are to be cut. University fees, about which we hear so much, are to be raised significantly by that Socialist Government.

I have been talking about budgetary policies by Socialist Governments who have to grapple daily with the realities of office, rather than dallying in the sort of rhetoric of opposition that we have heard from the Labour party and the alliance in the last few days.

I have a little piece of good news for the right hon. and learned Member for Monklands, East. I have a small consolation for him. There is a Socialist Government in the democratic world which has pursued almost the same policies as he recommends we follow here. That Socialist Government is the Government of Australia.

The Australian Government have increased public expenditure and there have been six major consequences. During the past year the Australians have had to devalue their currency by 20 per cent. Interest rates in Australia under a Labour Government have hit 20 per cent. and small businessmen have been driven into bankruptcy. The inflation rate in Australia is double the OECD average and there is rising international debt in Australia. The Australian balance of payment problems are a cause for enormous concern. Lastly, industrial disputes are increasing rapidly in Australia.

All these problems are being encountered by a Labour Government in Australia who are putting forward, and have implemented, precisely the same policies that the British Labour party is suggesting should be followed in Britain, and which a Labour Government would introduce.

If Britain wants to embrace extravagant policies of the Left, it has only to look at what has happened in Australia. That which has happened in Australia would happen here if a Labour Government were elected. We should have double-digit inflation, and interest and mortgage rates of 20 per cent. We would have industrial strife on the scale of the 1960s and 1970s. We would have rising international debt, balance of payments problems and currency devaluation. It is because I do not wish these kind of Labour policies to be pursued in Britain or to witness their consequences if the Labour party is given the chance to form a Government that I shall be supporting my right hon. Friend the Chancellor of the Exchequer when the House divides. I congratulate him wholeheartedly on introducing an excellent Budget.

8.42 pm

Dr. Jeremy Bray (Motherwell, South)

There was a joker missing from the Budget statement of the Chancellor of the Exchequer, and that was exchange rate policy. The Government started out in 1979 with the view that markets could be trusted to manage exchange rates better than Governments could. They considered that Governments had no real power in the face of market forces and today's capital flows. The Chancellor of the Exchequer seems now to have abandoned these extreme views. He has recognised that the exchange rate is an important indicator and he took part in the Group of Five meeting in September 1985 when the main industrial countries agreed to take concerted action to move interest rates and exchange rates. Indeed they have moved in the directions needed to correct imbalances in cost competitiveness and trade that have done more damage to Britain than any other country.

The movement that has taken place seems to have exhausted the extent of the agreement. The United States might like the dollar to be lower, but Japan seems to think that the yen has risen enough. So where do we go from here? What is our national interest with the pound? What understanding should we seek from other industrial countries?

The Chancellor of the Exchequer is slowly learning the lessons that are set out in the second special report in 1983 of the Select Committee on the Treasury and Civil Service that was produced at the end of the previous Parliament. The right hon. Gentleman is following very much the course that we recommended to him. Mechanistically he repeats the formula that is now a regular feature of financial statements. It is as follows: There is no mechanical formula for taking the exchange rate into account in assessing monetary conditions". Last year the phrase was: There is no mechanistic formula". But this year he goes on to give the exchange rate an independent role. He states:

a balance must be struck between the exchange rate and domestic monetary growth consistent with the Government's aims for money GDP and inflation. The "balance" of objectives which the Chancellor of the Exchequer talks about he may not like to describe as a mechanism, but there is a computer programme operating in the Treasury which comes remarkably close to doing what the right hon. Gentleman describes. The Government have a number of policy instruments, including fiscal policy, which they adjust annually in the Budget. Interest rates and intervention in the money and foreign exchange markets are instruments which they can adjust more frequently and even continuously. The effects on unemployment, growth, the balance of payments and inflation are not measurable continuously, and even shorter-term monthly measures are often not a reliable indicator of trends. The effects on the exchange rate and capital flows are, however, observable continuously, and are very important.

There is, therefore, a slowly moving background of final objectives and fiscal policy, and a rapidly moving foreground of market expectations, intervention, interest rate adjustments, and their effects on the exchange rate and capital flows. The shorter-term foreground and the longer-term background are part of the same scene. They interact and they have to be mutually consistent.

To set the background, it is necessary to attach priorities to the final objectives of growth, employment and stable prices. It is not a question whether unemployment matters. Of course it matters, even to the Chancellor. But the Chancellor is prepared, perhaps, to give less priority to the speed of reducing unemployment than the Opposition would. Any Chancellor will set the instruments at his disposal to achieve the best achievable balance of objectives given his priorities. That is broadly the content of the Budget speech and the Financial Statement and Budget Report, which includes forecasts of the expected outturn. It enables the House to judge the Government's priorities, and it also sets the expectations of the markets.

But one thing is for sure: events will not fulfil those expectations, especially for the most variable short-term indicators, such as the exchange rate and financial markets, which in the absence of any definite expectations can go all over the place.

The Chancellor of the Exchequer does not even spell our precisely his expectations for the exchange rate, which is said to be assumed to remain at broadly its present level. That may or may not be right. But what is done internally within the Treasury? The computer programme that I mentioned is operated by the Treasury. It indicates fiscal policy instrument levels that are appropriate to the balance of priorities or final objectives. But it also picks short-term rules which indicate the adjustment of, for example, interest rate changes which will be needed in response to movements of the exchange rate from its expected path. None of this leads automatically to policy adjustments. It is not in that sense a mechanism. But it does give guidance which, on the best evidence available, achieves a balance between objectives, and a coherence of shorter-term actions on interest rates and longer-term actions on fiscal policies.

This apparatus does use our old friend the Treasury model. It can handle various types of expectation formation and uncertainty, and select a policy which produces a reasonable result on models based on conflicting economic theories. Very much the same sort of action now emerges from the Treasury, London Business School and National Institute models, now that they are being more rigorously tested and compared. We have, therefore, a basis for a more pragmatic fiscal and monetary policy which properly reflects the Government's priorities at the national level.

But what about the international level? Can we trace the international repercussions and reactions? A fortnight ago, at a conference of the Brookings Institution in Washington, the first comparisons took place between the internationally linked model systems maintained by the Federal Reserve Board, the OECD, the Japan Economic Planning Agency, and nine other systems. The Treasury, the Bank of England and the IMF were all well represented so the Chancellor has his own reports of what took place. There were, of course, substantial differences, particularly among the outliers. But what impressed me was that in the models that mattered there was broad agreement on the sign and on the timing of effects of fiscal and monetary changes in the United States on the rest of the OECD, and conversely. It looked as if the apparatus was there to provide the analytical framework needed for international negotiation and co-operation in our mutual interests.

In the Treasury programme that I described, the level and weight of the exchange rate target has to be set externally. So, notionally, these are adjustable in international negotiation. If the exercise that the Treasury does is done on one of these international model systems, each country can be left to specify its own priorities, and the system will produce a set of exchange rate rules which would maximise the sum of benefits to all countries, or, perhaps more appropriately, maximise the minimum benefit to any one country. That does not, of course, dictate the outcome of negotiations but it gives it a sound analytical basis and, therefore, a better chance of success.

If the evidence of the conference is anything to go by, Britain now enjoys a comparative advantage in such work. It would be in the British interest if the Chancellor were to say rather more about his exchange rate policy and spell out the evidence on which it is based. Most importantly, it can encompass the hazards that remain on the oil price. I would not expect that to lead to our joining the EMS, but I would expect it to stimulate work by other Governments and the international organisations leading to developments in the EMS, in the context of wider international cooperation, in which we could join with the hope and expectation that we could avoid exchange rate wars and the gross misalignments of currencies which have done so much damage in recent years.

8.49 pm

Mr. William Powell (Corby)

The hon. Member for Liverpool, Walton (Mr. Heffer), who unfortunately is not in the Chamber, is much admired in the House for his consistency and sincerity. However, when he chose to argue that Labour Governments have only gone wrong in the past because they abandoned Socialism and that if only they had pursued red-blooded Socialism they would not have gone wrong, I could not help but reflect that the Labour Government were not pursuing Conservative policy when they were driven to the IMF. Frankly, over the course of the past four days of this debate the Opposition have presented us with a picture revealing a remarkable reluctance to come to terms with those aspects of previous Labour rule which led them invariably to shipwreck and which are being pursued and continued today, as my hon. Friend the Member for Mid-Norfolk (Mr. Ryder) said, by a Labour Government on the other side of the world.

It is very easy to mouth platitudes, to be in favour of everything progressive and to say that if only one was given the opportunity of putting such things into action then everything would be right. People who say that fail to come to terms with the fact that such a policy, when tried in the past, invariably led to failure.

The simple truth is that previous Labour Governments went wrong not because they failed to pursue red-blooded Socialism, but because Socialism is the locomotive of inflation—the locomotive which destroys jobs and leads to the social breakdown which has caused so much comment during this debate.

It is impossible, after more than 80 speeches during the course of the debate, for one of the last Conservative Back Bench speakers to contribute anything novel to the debate. It would not be worth while my trying to do that. Instead, I should like to congratulate my right hon. Friend the Chancellor of the Exchequer on a number of points. I congratulate him and the Governor of the Bank of England on the way that they have handled the currency instability which occurred in January and February of this year. At the same time last year, when we had a period of currency instability, not everyone was universally happy with the way in which it was handled. However, there cannot be the slightest doubt that the way it was handled this year has been dramatically successful. Heads have been kept, and, at the very time when everyone was forecasting that things would go off course, that did not happen. Considerable praise is due to my right hon. Friend the Chancellor and to the Governor of the Bank of England for handling things extremely well this year.

I also congratulate my right hon. Friend the Chancellor on continuing the policy adopted in previous years and on maintaining course. Many people think that each Budget should be a new beginning each year. Many wish to blot out previous years and think that it is possible to have a new beginning each year. Of course, this year's Budget is merely a development of a policy that has been carried on—thank goodness—for some years. I have no doubt that the measures taken last year will continue to have a beneficial effect upon economic activity during the course of next year and that the recent and new measures will take some time before they have their full impact on the economy. A Budget is not and cannot be a new beginning.

It is part of the progression of policy. My right hon. Friend deserves all praise for seeing it in that context and not in the way in which so many would have him view it.

I should also like to take this opportunity, perhaps belatedly, to congratulate my right hon. Friend on the elimination—I have forgotten just how long ago it was done—of the halfpenny from our currency. That had one very good effect during the course of the debate. The hon. Member for Truro (Mr. Penhaligon), representing the Liberal party, was not able to come to the House as he would have done in previous years and advocate not a penny reduction in the standard rate of income tax, but only half—a halfpenny reduction. The elimiation of the halfpenny from our currency has at least had the effect of forcing Liberals to stop trying to halve what everybody else is trying to do and saying that that was the correct judgment to make.

Many of the aspects of the Budget are to be welcomed. I welcome the schemes which will encourage saving. I have no doubt that other schemes will come forward in subsequent years.

I very much welcome the abolition of the lifetime gifts tax, and I commend to the House the remarks of my right hon. Friend the Member for Henley (Mr. Heseltine) who analysed that point clearly in his speech. It has been made very clear that the Liberal party is against the handing on of small businesses through families. They are in favour of small businesses, provided that they are not successful or grow to the point at which they come within tax limits. That humbug, which the hon. Member for Truro articulated, is clearly on the record. I know that in every constituency, including his own, people will realise the nonsense that he was speaking. We can understand the Labour party being completely against family businesses and all that that involves—its opposition to that is honest and straightforward—but the humbug and nonsense from the Liberal party has been clearly revealed for what it is.

A Budget offers the opportunity for developing existing policies. It should never be seen as a new beginning, as so many commentators inside and outside the House choose to see it. I hope that the Budget policy will continue to develop. However, I recognise that we are not as successful as we ought to be in certain matters.

As a country we are deficient in two major areas. First, as a general rule, English people—I choose that phrase carefully—hate selling. There are plenty of exceptions to that general rule. Many successful companies have prospered on that basis, but it is the general rule. We love people to buy from us but we hate the idea of going out and getting a sale. We shall not be successful as an economy until all companies, not just the best companies, recognise that they must go out into the market place and sell their products. That is not something that my right hon. Friend the Chancellor will be able to make clear in his Budgets, but it shows that budgetary policy is only one aspect of the development of the economy. Much has to be done outside.

My second point is that Britain's training provision is desperately inadequate. I hope that companies will recognise much of what has been said during the debate and will use their new-found profits to invest much more heavily in research, development and training. Thank heaven, they are much more profitable than they were when the Labour party was in power.

Alas, it is not possible for me to develop my arguments. Without going into the judgments of my right hon. Friend the Member for Henley on the fiscal adjustment, the PSBR, and so on, I strongly commend his basic line of approach. I commend the Budget to the House.

8.59 pm

Mr. Nicholas Budgen (Wolverhampton, South-West)

I want to make three short points. First, I hope that when my right hon. Friend the Member for Henley (Mr. Heseltine) commends, as I am sure he will in his many speeches in the country, the lower cost of borrowing, he will explain to the country how that is consistent with his rather heroic attitude towards public expenditure generally. Those of us who admire and watch what he says will look forward to a further explanation on that point.

Secondly, I regret that in this Budget my right hon. Friend the Chancellor of the Exchequer has effectively abandoned the principle of fiscal neutrality. He has suffered some important defeats in pursuit of that policy. He was defeated over cars and pensions and he has been defeated over mortgage interest relief. He won an important battle upon investment allowances and he has now, at least for the time being, given up the battle. Many Conservative Members applaud that retreat and speak with great approval of the various incentives that he has given to politically favoured interest groups. He has been skilful in his selection of those which he intends should benefit. But my right hon. Friend has persuaded me of the advantages of fiscal neutrality, and I hope that the time will come when the Tory party returns to that principle, although I accept that by returning to it we shall offend many of the interest groups that so often support us.

Thirdly, and finally, I wish to agree with my right hon. and learned Friend the Member for Richmond, Yorks (Mr. Brittan) in his criticisms of the observations in the Red Book about monetary policy. But I come to an entirely different conclusion from my right hon. and learned Friend. My right hon. and learned Friend wishes us to go into the EMS. I agree that there is a need for a discipline, but I would assert that disciplines in Britain are better if they are recognised to be internal disciplines—that we recognise that we are doing something not because we are ordered to do it by the IMF, or even the EMS, but because we recognise the social advantages of sound money.

I am somewhat amazed that many of those who wish us to go into the EMS are fierce supporters of our continued membership of the EEC. I am somewhat sceptical of that, but I conclude by saying that those who want us to go into the EMS may be doing the cause of Europe severe harm, because when the time comes to take deflationary action upon the economy if we go into the EMS, we can be certain that it will not be the Government of the day who are blamed, but the EMS and the other nations of Europe. I hope that my right hon. Friend the Prime Minister will continue her opposition to our going into the EMS.

9.3 pm

Mr. Terry Davis (Birmingham, Hodge Hill)

After the speech of the hon. Member for Wolverhampton, South-West (Mr. Budgen), the Chancellor may be surprised to know that I intend to begin my speech with a compliment to him. I always believe that credit should be given where it is due and for once I agree with the hon. Member for Croydon, South (Sir W. Clark), who described the Chancellor's Budget as clever and ingenious. I think that the words were originally used by other hon. Members—the right hon. Members for Glasgow, Hillhead (Mr. Jenkins) and for Worthing (Mr. Higgins)—but I agree that the Budget is clever, skilful and ingenious. As the Chancellor admitted at the beginning of his Budget statement, the fall in the price of oil and the resulting fall in the Government's income from the special taxes on oil revenues mean that the Chancellor is left with little room for manoeuvre within the framework of his principles and prejudices.

I admire the way in which the Chancellor presented the Budget under these circumstances, but I must make it clear that it is admiration of a sort that I give to the cleverness, skill and ingenuity of the professional cardsharp. The only difference was that the Budget deceived the ear rather than the eye, and already the commentators are beginning to realise the truth.

Let us consider, for example, what the Chancellor said about the fall in oil prices and the effect of that fall on the Government and on the economy. As I have already said, the Chancellor made, for him, a remarkable admission. He admitted that his room for manoeuvre was restricted by the fall in oil prices. However, later in his speech, as part of his constant attempt to disguise the dependence of the Government and the economy on North sea oil, he pointed out, quite fairly—I do not argue with the figures—that North sea oil accounts for only 5 per cent. of gross domestic product. The other sectors of the economy—manufacturing industry, agriculture, distribution, construction, public and private services—account for 95 per cent. of economic activity.

The mere statement of these figures constitutes a condemnation of the Government's strategy because the Chancellor is saying that his Budget, his ability to cut taxes or to increase public expenditure, his success and the Government's survival, depend not on the 95 per cent. of economic activity in Britain but the 5 per cent. of economic activity in and around the North sea. The truth is that the vital decisions at the heart of the Government's economic policy are taken not by the Chancellor and the Chief Secretary to the Treasury, but by Sheikh Yamani and his colleages in OPEC. They are taken without any reference to this country or the balance of our economic interests. It is surely ironic that, more than any other part of Western Europe, this country is at the mercy of the middle east. The correct description of any country whose Government's economic policies are determined by other Governments is to call it a colony. That is the role of Britain today. Our colonial past has become our colonial present with the roles reversed.

The price of oil is determined elsewhere and the Chancellor's Budget is entirely dependent on it. Dependent on it? The Government's policies are dominated by it. During the next few months, if the price of oil falls to $10 a barrel, the Chancellor tells us that the result for the Government will be disaster. If the price of oil rises to $20 we shall have a tax-cutting Budget on a massive scale next year—in the run-up to the general election. Of course, the tax cuts will be, and can only be, temporary, because the oil will eventually run out. What will happen then? The Chancellor gave his answer on Tuesday with characteristic sleight of hand:

If we can survive unscathed the loss of half of our North sea oil revenues in less than 25 weeks, the prospective loss of the other half over the remainder of the next 25 years should not cause us undue concern."—[Official Report, 18 March 1986; Vol. 94, c. 168.] The Chancellor forgets that there is a tremendous difference between loss of revenue due to the fall in the price of oil and the inevitable loss of revenue when the oil runs out. The Chancellor himself pointed out that, although lower prices for oil result in lower revenue for the Government, it also means lower costs to British industry. British industry benefits not only in terms of lower inflation but in terms of jobs. It also benefits, we hope, from the boost in world trade arising from universally lower prices for oil.

What will happen when the oil runs out and we lose the rest of the revenue? That will not have beneficial side effects for British industry. There will not be any reduction in costs because industry will still be paying the international price for oil. There will be no benefits in terms of lower costs, lower inflation and extra jobs.

Every economist knows—I am sure that the Chancellor must know—that his comparison of the effect of lower oil prices and the exhaustion of North sea oil was ingenious but invalid. I envisage a standard question in examinations on economics asking "Comment on the following statement—" after which will follow that classic quotation from the Chancellor of the Exchequer, who will then be a former Chancellor of the Exchequer. Anybody how goes along with him will fail the exam as surely as the Chancellor is failing the country.

We also have the Chancellor's equally skilful, but equally misleading, approach to indirect taxes. Anybody who listened to the Chancellor's statement would have thought that he was putting all of the increases on cigarettes and petrol and leaving all other indirect taxes at the same level. He referred to the vehicle excise duty for cars, vans, and lorries but he forgot to tell us—he refrained from telling us—that only those rates, not all rates of vehicle excise duty, were unchanged.

We had to wait for a press release from the Department of Transport to learn that the Chancellor was increasing the vehicle excise duty on all forms of public transport. Even the Department of Transport took care to tell the editors of newspapers that it was the Chancellor's decision, not its decision, although he had left it to the Department of Transport to make the announcement.

There is no logic about the decision. Those of us who served on the Standing Committee which examined last year's Finance Bill remember that there was no logic or economic justification for the existing pattern of vehicle excise duties. The Government even brought the Parliamentary Under-Secretary of State for Transport to the Committee in an attempt to explain the Government's thinking to us. From what I heard afterwards, Labour members of the Committee were not alone in concluding that the Parliamentary Under-Secretary of State made a bad job of explaining the Government's thinking because the Government had not done any thinking about vehicle excise duty. It is clear from this year's Budget statement that the Chancellor has not given any thought to the level or pattern of vehicle excise duties during the past 12 months either. So much for his claim of wanting to be known as a reforming Chancellor.

The Chancellor's attitude to petrol tax is even more revealing. As he said, petrol prices have drifted down recently as a result of falling oil prices, but the price of petrol has not dropped as much as it should. By the Chancellor's own admission, the price of petrol should have been 12p a gallon lower than it was on Budget day. What was the Chancellor's response? Did he see his role as the protector of consumers? Did he put any pressure on oil companies to pass on the reduction to the motorist? Did he announce that, although the price of petrol was due to drop by another 12p, he would regretfully have to increase the price by 5.5p to protect the Government's revenue against inflation? The answer is no on all counts. Instead, the Chancellor proposed what was effectively a deal with the oil companies. He said that the oil companies could keep 4.5p of that 12p if only they would let him have the rest—the 7.5p—without putting up the price at the pump, as he put it. He hoped that nobody would notice and that at least the motorist would not mind. It was a typical piece of ingenuity. The price of petrol should have come down, and it should still come down after allowing for the Chancellor's 7.5p, but the Chancellor was offering to keep quiet about it if only the oil companies would deal him in. The Chancellor's attitude to the oil companies is like the attitude of a policemen running a protection racket—offering to keep quiet if he gets his cut.

We also have the ingenuity of the Chancellor's policies to encourage share ownership, especially the personal equity plan. As my hon. friend the Member for Sedgefield (Mr. Blair) explained to the House, if the Chancellor was really trying to encourage new investors, he would restrict the tax benefits of the new scheme to that group. The truth is that the personal equity plan is a device to enable existing investors to avoid the tax on existing investment by switching their funds from their existing portfolios to the personal equity plan. The Chancellor shakes his head. If I am wrong, I am sure that he will explain later, and we shall look carefully at the Finance Bill for that provision. If people are able to switch their funds in that way, they will benefit disproportionately more than the new investor, by obtaining relief on dividends at the highest rates of tax as well as relief from capital gains tax.

This is the Chancellor who claims to want to help the small saver and the small investor. He even referred to his scheme as being designed specifically to encourage the smaller savers. Yet this is the same Chancellor who introduced a new tax on the savings of the smallest savers, the Chancellor whose 1984 Budget imposed tax on the interest received by people whose income was, and is, so low that they would not otherwise pay any income tax. These are the people who typically put their savings in the trustee savings bank or similar institutions and find that when they receive interest on their savings the Chancellor has been there before them and taken his cut of 25 per cent. with all the skill of a pickpocket.

That is not all. There is the same inconsistency in the Chancellor's treatment of other savers—people with incomes above average, who are liable to income tax on their investment incomes. This is the Chancellor who, only two years ago, as the hon. Member for Wolverhampton, South-West has just reminded us, turned the phrase "fiscal neutrality" into a cliché. This is the Chancellor who said that there should not be any difference in treatment of the income that investors and savers receive from different sources. He said that the institutions should compete on equal tax terms. That was the intellectual justification for the composite rate of tax on the interest paid by the trustee savings bank and similar institutions.

What price fiscal neutrality now? Where is the fiscal neutrality in charging tax on all interest received by savers and relieving income tax on dividends received by the same people if they put money into a personal equity plan rather than a trustee savings bank? No doubt the Chancellor will tell us later.

The one genuine tax concession for the individual taxpayer is the 1p off income tax. The arguments for and against this concession have all been rehearsed during our debates, and we all agree that it illustrates the differences between us. The Conservative party gives, and has always given, the greatest priority to tax cuts, by which it means cuts in the taxes on wealth and income, whereas the Labour party gives greater priority to an increase in public expenditure in order to extend and improve social services in the widest sense, to alleviate poverty in all its forms and above all to create jobs and reduce unemployment.

A Labour Government with £1 billion to spare would have used it differently. For example, to reduce the amount of income tax paid by people on low income, we would have preferred to raise the threshold for the basic rate of tax. To reduce the amount taken from people with the lowest wages, we would have preferred to raise the threshold for national insurance contributions. To have given the greatest help to people in greatest poverty, we would have preferred to increase pensions and child benefit.

As my right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley) explained last week, such measures would cost much more than £1 billion. We calculate that it would cost £3 billion to increase pensions and child benefit and extend the long-term rate for supplementary benefit to the long-term unemployed. We would get that money, not at the expense of the man and woman paying the standard rate of income tax, but by increasing the taxes paid by the richest 5 per cent. of society.

Mr. Nicholas Soames (Crawley)

Will the hon. Gentleman be voting against the cut in income tax?

Mr. Davis

I saw the hon. Gentleman receive that message from the Chancellor of the Exchequer a few moments ago via the Chancellor's PPS. We all know where the question came from, but I shall answer the Chancellor's question. We shall not be voting against the reduction in the standard rate of income tax. It would be strange if the Labour party voted against a reduction of 1p on the way towards a standard rate of income tax that existed when we left office. It was 25p, and is now 30p, so why should we vote against a slip back towards 25p? Anyway, we have made it clear that a cut in the standard rate of income tax will be of some benefit to those on the lowest wages who pay income tax. We do not deny that. It will provide a small amount. We are not going to set off the basic rate taxpayer against pensioners, parents and the long-term unemployed. We will get that money from the Chancellor's friends, the richest 5 per cent. of our society, those who have gained £3 billion a year. This Government have given that money to the rich not just in this Budget, but in all of their Budgets. That money has been given away in cuts not in the standard rate of income tax, but in the higher rates of income tax. It has been given away in the abolition of the investment income surcharge and in cuts in capital gains tax. It has also been given away in cuts in capital transfer tax and now in the abolition of that tax. I have mentioned only the four biggest giveaways. That money has been given not to those on the lowest incomes who are in greatest need, but to those on the highest incomes with the least need.

Mr. Richard Page (Hertfordshire, South-West)

Is the top rate of our income tax in line with the income tax rates paid in the EEC?

Mr. Davis

The hon. Gentleman has not been listening. I specifically referred not just to the higher rates of income tax but to the capital taxes. Those taxes have been cut and now abolished by this Government. That is the answer to Tory spokesmen such as the Chancellor of the Duchy of Lancaster, who has just drawn himself to my attention. The right hon. Gentleman claimed that the Labour party's programme would be financed only by increasing the standard rate of income tax or by increasing VAT. But I shall not take any lessons from the chairman of a party that nearly doubled VAT within six weeks of coming to office.

I think that the right hon. Member for Chingford (Mr. Tebbit) today made his first speech since returning to the House. On a personal level, we are all glad that he has returned. There is no Conservative Member who feels more strongly than my hon. Friends and I feel about the reasons for his temporary absence.

Mr. Tebbit

May I assume that Opposition Members will be voting in favour of the prevention of terrorism legislation next time?

Mr. Davis

I must also tell the right hon. Member for Chingford that on a political level his absence has not led us to regard him more fondly.

But our real quarrel with Conservative spokesmen is that they constantly refuse to acknowledge that the most valuable, expensive and far-reaching tax concessions introduced by the Conservative Government have been reductions in the tax paid by people with large amounts of capital and people with substantial incomes derived from that capital. Those are the people who have benefited most from the Government's tax cuts, and it is they who will pay more to finance the Labour Government's anti-poverty programme. That programme will involve at present an increase of £3 a week in child benefit for every child; an increase of £5 a week in real terms in the pension for a single person; an increase of £8 a week in the pension for a married couple; and the extension of the long-term rate of supplementary benefit to the long-term unemployed.

The biggest failure of this Government is their failure to reduce unemployment and all the Chancellor's cleverness and skill and ingenuity cannot hide that failure from the British people. Of course we welcome an extra £100 million for job creation schemes, but such a sum is totally inadequate when compared to what is needed. That is why my right hon. Friend the Member for Sparkbrook announced a package of measures with the aim of providing a million new jobs within two years.

I come to the question put to me by the hon. Member for Eastbourne (Mr. Gow) who quoted directly from Hansard of 19 March 1986. He quoted the question put by the hon. Member for Lewisham, West (Mr. Maples) at column 309. It is a pity that the hon. Member for Eastbourne did not listen carefully to the answer given by my right hon. Friend the Member for Sparkbrook, or at least did not read on in Hansard. If he had read on to the next column he would have seen the answer to the question. I do not know whether the hon. Member for Eastbourne was absent from our proceedings when the question was answered, but he could have read it before he made his intervention.

That package announced by my right hon. Friend will add up to £6.8 billion, not the £24 billion proclaimed by the Chief Secretary.

This debate has been overshadowed by the Chief Secretary's claim to have costed the Labour programme at £24 billion, a claim echoed by the right hon. Member for Chingford. That total has been shown to be a fiction. It was calculated by civil servants acting as animated calculating machines and dutifully totting up the cost for a mixture of plans for immediate implementation, longterm commitments and Green Paper type proposals on which the Labour party is consulting.

It is quite clear from the records that the Chief Secretary had the nerve to send to us that it was a mixture collected, confused and even invented by the Chief Secretary. Worse still, even where the Chief Secretary is right in his claims and his costings, he fails to understand—and many would say that he does not want to understand—that any increase in public expenditure on housing, roads, education, the Health Service or on a community programme or on training for the unemployed, would also have the effect of reducing all those items of public expenditure that result from unemployment.

We have made the point before and I will make it again. The top priority of the next Labour Government will be a reduction in unemployment. That is why we will increase public expenditure. It will be done to reduce unemployment, but the creation of new jobs will not only do that: it will also reduce the cost of unemployment. It costs £6,000 a year for every person who is unemployed, and for every person helped to get back to work the Government will save £6,000. That money is now spent on unemployment, and it will become available for education and the arts and a better standard of living for all those people, from pensioners to students, who depend on the Government for their standard of living. That is not an increase in public expenditure: it is a redistribution of public expenditure and resources.

I do not expect the Chief Secretary to understand that because he does not understand the economy any more than the Chancellor understands industry. Look at them: a financial journalist and a merchant banker supported by an investment banker and another hon. Gentleman who simply calls himself "banker." None of them has ever been unemployed or has ever worked in industry. The only thing that has ever dirtied their hands is their own economic policy. They do not care about industry or unemployment or poverty. That is why they have produced a Budget that is irrelevant to the needs of the country, and that is why the Labour party opposes it.

9.28 pm

The Chancellor of the Exchequer (Mr. Nigel Lawson)

The one thing of which we are always sure when the hon. Member for Birmingham, Hodge Hill (Mr. Davis) winds up a debate is entertainment. What he says bears little relationship to the facts, but at least we get the entertainment. I am grateful to the hon. Gentleman for not failing us this evening. He began his speech by saying that Britain was at the mercy of the middle east. The one thing that this Budget and the events that surrounded its conception has shown is, first, that events in the oil market have occurred not as a result of political actions by Governments in the middle east, but as a result of market forces asserting themselves against the political wishes of those in the middle east. Secondly, the events surrounding the Budget's conception have shown that our economic performance is in no way dependent on North sea oil. North sea oil is an important but marginal issue.

I should like to turn the point on which the hon. Member for Hodge Hill ended—the £24 billion programme which, as my right hon. Friend the Chief Secretary has rightly pointed out, is the sum to which the Labour party's commitments add up. [Interruption.] There is no point in the hon. Member for Hodge Hill muttering from a sedentary position that that is not true. During these debates, Labour Members announced not only the £3.6 billion programme for the relief of poverty but, on top of that, a £6.8 billion programme for jobs. We have been told that everything else is merely Green Paper conjecture for consultation. Is that really the case? Is the £1.3 billion, which the Labour party has said it will spend on education in various forms, merely a Green Paper type figure for consultation, or is it serious?

Mr. Terry Davis

rose—

Mr. Lawson

I shall give way in a moment. Is the £0.8 billion—

Mr. Davis

Will the right hon. Gentleman let me answer?

Mr. Lawson

In a moment. Is the £0.8 billion, which the Labour party has said is the extra amount it will spend on the Health Service, merely a Green Paper type speculation? Is the Labour party now resiling from the £1.1 billion extra which the Leader of the Opposition said would be spent on overseas aid? Is the Labour party now resiling from the extra £1 billion which the right hon. and learned Member for Monklands, East (Mr. Smith) said was for additional spending on industry? Which of those programmes is a commitment and from which does the Labour party resile?

Mr. Davis

If the Chancellor had sat through more of our debates he would have heard the truth about our promises on the education programme. He knows that the figures were invented by the Chief Secretary. There is a four letter word to describe that, which is not parliamentary language.

Mr. Lawson

On the contrary, the figure that I have cited has been amended as a result of the letter from the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley). Will the hon. Member for Hodge Hill say whether the Labour party resiles from the figures on health, education, overseas aid and aid to industry?

Mr. Davis

The Chief Secretary invented pledges, costed them wrongly and refused to retract. Any other hon. Member would have apologised to the House. We now know that the figures really came from the Chancellor of the Exchequer. The Chief Secretary was merely his parrot.

Mr. Lawson

It is clear that the hon. Gentleman, speaking on behalf of the Opposition, has not resiled from those figures and that, therefore, the £24 billion still stands.

How will the Labour party pay for all those programmes? For a Chancellor of the Exchequer, when faced with questions of this kind—

Mr. Hoyle

On a point of order, Mr. Speaker. When will the Chancellor reply to the debate?

Mr. Speaker

The Chancellor has been speaking for about five minutes.

Mr. Lawson

I had no intention of going into these waters until these matters were raised by the hon. Member for Hodge Hill. I have to reply to his remarks.

How will the Labour party pay for all these programmes? When a Chancellor of the Exchequer has to be interrogated, he goes to the Select Committee on Treasury and Civil Service, and he is investigated by my right hon. Friend the Member for Worthing (Mr. Higgins) and other hon. Members. For a shadow spokesman on economic affairs, the equivalent of the Treasury and Civil Service Committee is Jimmy Young. Therefore, it is right that I should look to the transcript of the very important interview that the right hon. Member for Sparkbrook gave on the Jimmy Young programme on 20 March. This is very important, and the House ought to pay attention.

Mr. Young said: Can I just ask you, I mean would what you get from the rich cover all the things that you want to do? The right hon. Gentleman said: It would more than cover it. Not the job programme, not the job programme. It would cover the pensions, the child benefit and the help to the long term unemployed. The very rich have got back about £3.64 billion and our anti-poverty programme, increasing the pension and so on, would cost about £3.5 billion. Mr. Young said: Can I just ask you; when you say rich, Roy, you mean who's rich? I mean what income are you talking about? The right hon. Gentleman said: It's people earning more than £25,000 a year … I don't think we should begrudge people their very high earnings, we just ought to face the fact that if you don't tax them properly, there are penalties. Mr. Young asked: Can I just get that one out of the way: when you say tax them properly, what sort of level would they be paying tax then, people on £25,000 a year? The right hon. Gentleman replied: The general income tax level wouldn't change very much, because our complaint is not about income tax, which ought not to return to what it was 10 years ago—98 per cent. on the marginal pound. I don't want income tax ever to get back to that level for £30,000, £40,000, £50,000. Mr. Young then asked: You wouldn't want it to get past what sort of level? The right hon. Gentleman replied:

I wouldn't want to change income tax very much. What I would want to do is remove some of the other tax perks that they've been given; capital gains tax, capital transfer tax and particularly the tax on unearned income. Let us look at that. There would be no change in income tax at all, or at least not very much, but changes in capital gains tax and capital transfer tax. Let us see what that adds up to. [Interruption.] The right hon. Member for Sparkbrook was able to make his speech in relative quiet. I hope that the same courtesy will be extended to me.

The reductions in CGT and CTT under the present Government have added up to £620 million. On top of that, the abolition of the investment income surcharge— much of which went to people on the standard rate, not just to the wealthy—amounted to £740 million. So the total is £1.36 billion, or, even generously, only £1½ billion. I doubt very much, too, whether the right hon. Gentleman would be able to get that £1½ billion, because, as a result of the changes that we have made and the more benign climate for investment in this country, the yield on capital taxes since we have been in office has risen in real terms by more than 20 per cent. despite those reductions. Nevertheless, with that £1½ billion, the right hon. Gentleman would still be £2 billion short of his £3½ billion. Where would he find it? If he confined himself to those earning over £25,000, he would have to tax every single penny above £25,000 at 75 per cent. compared with the present starting point of 45 per cent. For the right hon. Gentleman to say that he would not change income tax very much is sheer humbug and hypocrisy, and he should know that that is not the case.

Furthermore, during the period that this Government have been in office, as a result of the benign climate that has been created, the share of total income tax paid by the top 5 per cent. has not fallen. It has risen from 24 per cent. of the total in 1978–79 to 27 per cent. of the total in the coming year. So much for the arithmetic of the right hon. Member for Sparkbrook.

The speech of the right hon. and learned Member for Monklands, East was one of the poorest speeches that he has made in this House for some considerable time. He claimed that manufacturing output stagnated in 1985. Manufacturing output rose in 1985 by 3 per cent., which was more than in any single year of the last Labour Government.

My right hon. and learned Friend the Member for Richmond, Yorks (Mr. Brittan) made a more substantial speech. I thank him for his support for the Budget. He and the right hon. Member for South Down (Mr. Powell) expressed opposing views about the desirability of joining the European monetary system. That is clearly an important issue, but I am afraid that I do not have time to go into the details of it tonight. However, I assure the House that we shall continue to keep it under close review.

The right hon. Member for South Down asked about the consequences that I expect to flow from the improvement in industry's success in the markets, both at home and overseas. One answer is more jobs, and I am sure that he will welcome that. However, I suspect that he was referring to the balance of payments. Another answer would be to offset the declining surplus in oil which is likely to occur on the overseas account.

My hon. Friend the Member for Croydon, South (Sir W. Clark) also supported the Budget. He queried to some extent the preference for the basic rate over thresholds. In this Parliament alone we have moved very substantially on tax thresholds. We have increased tax thresholds in real terms by more than 20 per cent. Most of that increase has been during the lifetime of this Parliament. Our thresholds are higher, as a proportion of average earnings, than those in Germany and the United States, whereas the starting point of our basic rate is higher than in almost any other country in the world. It is right that we should seek to bring it down, and I make no apology for saying that the long term aim of this Government is to get it down to 25 per cent.

My right hon. Friend the Member for Henley (Mr. Heseltine) spoke, in particular, about inner city deprivation. If there is one culprit responsible for the acute problem of inner city deprivation, it is the public sector and the way in which local authorities have continually harassed businesses. It was necessary to create the urban development corporations, to which my right hon. Friend referred, in order to take power out of the hands of the local authorities in those areas.

On the whole, this Budget has been well received by the financial markets, as a result of which we have seen already a reduction of 1 per cent. in interest rates and a reduction in the mortgage rate. It has also been well received by industry, and not least by charities. I should like to say a word about charities. Some of the most important elements in the Budget were the measures that were introduced to encourage giving to charities and the charities themselves. I refer to the basic concession for corporate giving, the brand new concession for payroll giving by employees, the removal of the ceiling of £10,000 on covenants and the selection of value added tax reliefs. Certain abuses were also stopped. The Institute of Charity Fund-Raising Managers had this to say—[Interruption.] I am sorry that Opposition Members have no interest whatever in charitable giving. It is characteristic of them.

Mr. Bell

The reason why the Opposition have taken no interest in the subject until now is that the Chancellor has not alluded to the Budget. He has only now come to the Budget. We shall listen to him with interest.

Mr. Lawson

It is clear that the hon. Gentleman has not been listening. I am talking about an important section of the Budget at this moment—the concessions to charities. The Institute of Charity Fund-Raising Managers has said: This is the most exciting and imaginative Budget for charities there has ever been. The Charities Aid Foundation said it was more radical and far-reaching than we could have hoped for. The noble Lord Goodman, on behalf of charities concerned with the arts, said there was the prospect of many good things to come, and come soon. The Charities VAT Reform Group said the Budget had the "most substantial concessions ever." Mr. Brian Rix of MENCAP said he was "amazed and delighted" by the concessions.

The Budget reflects and seeks to promote the sort of society we wish to see. This is an exemplification of capitalism in the true sense—the voluntary aid secured from higher profits and higher incomes. It is popular capitalism, too. That has been the theme of the Government and of the Budget.

The Government believe in a society in which people own a stake in their own country and in its means of wealth creation. We are engaged in closing the divide between them and us. That is the true route to one nation. It began many years ago with the property owning democracy in terms of home ownership. That has been greatly extended under this Government as a result of the enfranchisement of council tenants. It has been further extended through employee share ownership.

When we came into office in 1979 there were merely 30 all-employee share schemes in operation under the Finance Act 1978. Through improvements of that Act and through the Finance Act 1980, enacted by my predecessor, we have today not 30 schemes, but well over 1,000 schemes, involving 1¼ million employees in all-employee share schemes. There are now 1,375 share option schemes in operation, and that scheme only started in 1984.

There are also workers' co-operatives—[Interruption.] I think that Labour Members are interested in worker co-operatives. When we took office the number of worker co-operatives in this country was 300. Today there are more than 1,200. [Interruption.] The Opposition may cheer, but when they were in office they merely talked about worker co-operatives. They never did anything about them.

The way in which we have pursued privatisation by giving preferential applications to small shareholders has more than doubled the number of individual shareholders in this country. Notably, of course, there is the British Telecom privatisation, which still has 1.6 million individual shareholders, many of them men and women who have never held a share before in their lives. That has opened up new horizons for more and more of our people.

Those horizons will be extended further by the personal equity plans announced in the Budget, which will come into force on 1 January after a period of consultation. Over time I believe that the new personal equity plans, which provide the possibility of investing small sums in equities year in, year out, totally free of all tax—tax on the dividends and on capital gains—will profoundly change the nature of our society. The people's capitalism is on the march, and there will be no stopping it. It will further foster the spirit of enterprise upon which economic success depends. [Interruption.] Opposition Members find it difficult to accept the fact that the British economy is doing very well.

We have a very important anniversary this year. It is the 10th anniversary of the flight from Manila in 1976. Unlike President Marcos, the right hon. Member for Leeds, East (Mr. Healey) had to flee from Manila before he had even reached it. He got only as far as London airport when he had to turn back. That was at a time when inflation was running at 26 per cent. The exchange rate had fallen by one quarter over the previous three years. This country's net overseas assets are now some £90 billion. At that time, they had fallen to £3 billion. The public sector borrowing requirement, which the right hon. Gentleman regarded in such a cavalier manner, was almost 10 per cent. of gross domestic product. In today's money, that is £33 billion. That is precisely what he would like to see again. The result was collapse, ignominy and going cap in hand to the International Monetary Fund, and the then Labour Government had to have an about turn of their policies.

Let us contrast the situation today. Inflation is at 5 per cent., which is the average since the last election, and we are heading for 3.5 per cent. by the end of this year. We have a growth rate of 3 per cent. We have had 3 per cent. a year steadily since the last general election — [Interruption.] Yes, since the general election in 1983 it has been steadily 3 per cent. The right hon. and learned Member for Monklands, East does not even know when the last general election was. I am not surprised. He had to obliterate it from his mind because his party was practically obliterated, too. Our growth rate is 3 per cent., and the prospect is the best for a generation. Indeed, in international competitiveness since 1979—

Mr. Andrew Faulds (Warley, East)

Will the right hon. Gentleman give way?

Mr. Lawson

I do not have the time.

Mr. Faulds

rose—

Mr. Lawson

All right. I shall give way in a moment.

The right hon. and learned Member for Monklands, East invited me to make a comparison with 1979. I shall do so. Since 1979, we have grown to the same extent as France and Germany, whereas under the Labour Government we grew very much less. Indeed, in no other six-year period since the war has our relative performance compared with our European competitors been as good as it has been since 1979.

Mr. Faulds

Will the right hon. Gentleman be charitable enough to his private office to admit that he wrote this rubbish?

Mr. Lawson

I am sorry that I gave way to the hon. Gentleman.

Our cumulative surplus on the balance of payments has been more than £20 billion over that period.

The right hon. and learned Member for Monklands, East spent a great deal of time talking about manufacturing industry. It is right that I should reply. To do him credit, I think that he has been talking about it for a little while. The Leader of the Opposition speaks with the excessive enthusiasm of someone who has only just discovered its very existence.

The plain fact is that the environment for manufacturing today is better than it has been for a very long time. We have lower oil prices. The reduction in the fuel bill so far is worth over £1 billion to manufacturing industry. Mind you, Mr. Speaker, Labour Members want to take that away. Despite their professed concern for manufacturing industry, they are recommending that we should enter into talks with the Organisation of Petroleum Exporting Countries to ensure that the oil price is higher than it is now. That is what was said by the hon. Member for Thurrock (Dr. McDonald) on behalf of the Opposition. I hope that Labour Members will tell manufacturing industry how much higher they would like oil prices to be—[Interruption.] We have a lower exchange rate against both Germany and Japan, our principal competitors, and, of course, lower inflation. That does not normally happen when the exchange rate is coming down. Inflation is also coming down sharply. This is an unparalleled opportunity for British industry in general and for manufacturing industry in particular, at a time when we are holding our share of world markets. Between 1981 and 1985 inclusive we have seen the best five-year period in recent history for maintaining our share of world markets.

Dr. M. S. Miller (East Kilbride)

Will the right hon. Gentleman give way?

Mr. Lawson

I shall not give way. I have given way a great deal.

Although there has been some decline since 1979 in the share of world trade in manufacturing, our share of world trade has declined very much less than that of France and Germany since 1979. Manufacturing profitability is the highest since 1973. It is from that manufacturing profitability that the resources come for more spending on training and research and development. Of course, I welcome the emphasis that was laid on that, echoing what I said in my Budget speech. Under the Labour Government, the profits were not there and industry was unable to make that expenditure. Now that the opportunity is there, I hope that industry will take it. As to unemployment—

Dr. M. S. Miller

Will the Chancellor answer a question which is puzzling the nation? If things are so good, why are things so bad?

Mr. Lawson

I assume that the hon. Member is referring to unemployment, which, of course, is bad. We have never sought to disguise the fact that unemployment is bad. It is odd that the Opposition seek to deny what is good in terms of productivity, output, inflation, profitability, overall investment and exports. All these are good. Over a number of years we have introduced special measures to help the unemployed. We announced more this year. In addition—

Mr. John Smith

Will the right hon. Gentleman give way?

Mr. Lawson

No.

In addition to that, a number of measures are specially designed to encourage small and new businesses which are particularly important for the future of employment. I refer to the improved loan guarantee scheme, the improvement in the business expansion scheme and the improvement on capital transfer tax. The most crippling burden on small and family businesses was capital transfer tax.

None of those measures will reduce unemployment in the way that hon. Members on both sides of the House would like, unless there is a slower growth in unit labour costs. Many of my hon. Friends rightly referred to that. There is no getting away from the fact that we shall not achieve the lower unemployment that we all seek unless unit labour costs rise at a slower rate than among our competitors. That is why, to encourage flexibility in the labour market, I made the profit sharing proposal in the Budget so that a proportion of remuneration related to company profits might receive a tax concession. I am encouraged by the early signs of a positive response. But that is in the long term. In the short term business must take control of its own labour costs. The only solution to unemployment is a more effective, efficient and dynamic economy.

The most favourable climate for industry is the most favourable climate for jobs. There is no way round achieving a better climate for jobs other than by achieving a better climate for industry.

Since the last general election we have seen inflation averaging 5 per cent. and growth averaging 3 per cent.—the best combination for a generation. We have seen manufacturing output average 4 per cent. growth a year, manufacturing productivity average 4¾ per cent. a year, employment rise at a rate of over 750,000 a year, non-oil exports grow at 4½ per cent. a year and real take-home pay at 2½ per cent. a year.

Not only has our position been better than under many previous Governments for a very long time, but, even if one takes the period from 1979, our relative position has improved considerably. We have not yet made as much progress with inflation as we should like, but we are making progress and I forecast that it will be 3½ per cent. by the end of this year. Since we have been in office, inflation has been 1 per cent. higher than the OECD average. But when the Labour party was in power inflation was 6 per cent. higher than the OECD average. That is another measure of the improvement in comparative terms as well as in absolute terms.

The Budget which I introduced on Tuesday is a Budget for the whole of the people. It is a Budget that will continue to build on the success of our previous Budgets. It is a Budget that will encourage the spread of wider share ownership and popular capitalism and I commend it to the House.

Question put:—

The House divided: Ayes 353, Noes 212.

Division No. 111]	[10 pm
AYES
Adley, Robert	Clark, Sir W. (Croydon S)
Aitken, Jonathan	Clarke, Rt Hon K. (Rushcliffe)
Alexander, Richard	Cockeram, Eric
Alison, Rt Hon Michael	Colvin, Michael
Amess, David	Conway, Derek
Ancram, Michael	Coombs, Simon
Arnold, Tom	Cope, John
Ashby, David	Cormack, Patrick
Aspinwall, Jack	Corrie, John
Atkins, Rt Hon Sir H.	Couchman, James
Atkins, Robert (South Ribble)	Cranborne, Viscount
Atkinson, David (B'm'th E)	Critchley, Julian
Baker, Rt Hon K. (Mole Vall'y)	Crouch, David
Baker, Nicholas (Dorset N)	Currie, Mrs Edwina
Baldry, Tony	Dickens, Geoffrey
Banks, Robert (Harrogate)	Dorrell, Stephen
Batiste, Spencer	Dover, Den
Beaumont-Dark, Anthony	du Cann, Rt Hon Sir Edward
Bellingham, Henry	Dunn, Robert
Bendall, Vivian	Durant, Tony
Bennett, Rt Hon Sir Frederic	Dykes, Hugh
Benyon, William	Edwards, Rt Hon N. (P'broke)
Best, Keith	Eggar, Tim
Bevan, David Gilroy	Emery, Sir Peter
Biffen, Rt Hon John	Evennett, David
Biggs-Davison, Sir John	Fallon, Michael
Blackburn, John	Farr, Sir John
Blaker, Rt Hon Sir Peter	Favell, Anthony
Body, Sir Richard	Fenner, Mrs Peggy
Bonsor, Sir Nicholas	Finsberg, Sir Geoffrey
Bottomley, Peter	Fletcher, Alexander
Bottomley, Mrs Virginia	Fookes, Miss Janet
Bowden, A. (Brighton K'to'n)	Forman, Nigel
Bowden, Gerald (Dulwich)	Forsyth, Michael (Stirling)
Boyson, Dr Rhodes	Forth, Eric
Braine, Rt Hon Sir Bernard	Fowler, Rt Hon Norman
Brandon-Bravo, Martin	Fox, Marcus
Bright, Graham	Franks, Cecil
Brinton, Tim	Fraser, Peter (Angus East)
Brittan, Rt Hon Leon	Freeman, Roger
Brooke, Hon Peter	Fry, Peter
Brown, M. (Brigg & Cl'thpes)	Gale, Roger
Browne, John	Galley, Roy
Bruinvels, Peter	Gardiner, George (Reigate)
Bryan, Sir Paul	Gardner, Sir Edward (Fylde)
Buchanan-Smith, Rt Hon A.	Gilmour, Rt Hon Sir Ian
Buck, Sir Antony	Glyn, Dr Alan
Budgen, Nick	Goodhart, Sir Philip
Burt, Alistair	Goodlad, Alastair
Butcher, John	Gorst, John
Butler, Rt Hon Sir Adam	Gow, Ian
Butterfill, John	Gower, Sir Raymond
Carlisle, John (Luton N)	Grant, Sir Anthony
Carlisle, Kenneth (Lincoln)	Greenway, Harry
Carlisle, Rt Hon M. (W'ton S)	Gregory, Conal
Carttiss, Michael	Griffiths, Sir Eldon
Cash, William	Griffiths, Peter (Portsm'th N)
Chalker, Mrs Lynda	Grist, Ian
Channon, Rt Hon Paul	Ground, Patrick
Chapman, Sydney	Grylls, Michael
Chope, Christopher	Hamilton, Hon A. (Epsom)
Clark, Hon A. (Plym'th S'n)	Hampson, Dr Keith
Clark, Dr Michael (Rochford)	Hanley, Jeremy

Hannam, John	Marshall, Michael (Arundel)
Hargreaves, Kenneth	Mates, Michael
Harris, David	Maude, Hon Francis
Harvey, Robert	Mawhinney, Dr Brian
Hawkins, C. (High Peak)	Maxwell-Hyslop, Robin
Hawksley, Warren	Mayhew, Sir Patrick
Hayhoe, Rt Hon Barney	Meyer, Sir Anthony
Hayward, Robert	Miller, Hal (B'grove)
Heath, Rt Hon Edward	Mills, Iain (Meriden)
Heathcoat-Amory, David	Miscampbell, Norman
Heddle, John	Mitchell, David (Hants NW)
Henderson, Barry	Moate, Roger
Heseltine, Rt Hon Michael	Monro, Sir Hector
Hickmet, Richard	Montgomery, Sir Fergus
Higgins, Rt Hon Terence L.	Moore, Rt Hon John
Hill, James	Morris, M. (N'hampton S)
Hind, Kenneth	Morrison, Hon C. (Devizes)
Hirst, Michael	Morrison, Hon P. (Chester)
Hogg, Hon Douglas (Gr'th'm)	Moynihan, Hon C.
Holland, Sir Philip (Gedling)	Mudd, David
Holt, Richard	Neale, Gerrard
Hordern, Sir Peter	Nelson, Anthony
Howard, Michael	Neubert, Michael
Howarth, Alan (Stratf'd-on-A)	Newton, Tony
Howarth, Gerald (Cannock)	Nicholls, Patrick
Howell, Rt Hon D. (G'ldford)	Normanton, Tom
Howell, Ralph (Norfolk, N)	Norris, Steven
Hubbard-Miles, Peter	Onslow, Cranley
Hunt, David (Wirral W)	Oppenheim, Phillip
Hunt, John (Ravensbourne)	Oppenheim, Rt Hon Mrs S.
Hunter, Andrew	Osborn, Sir John
Hurd, Rt Hon Douglas	Ottaway, Richard
Jackson, Robert	Page, Richard (Herts SW)
Jenkin, Rt Hon Patrick	Parkinson, Rt Hon Cecil
Jessel, Toby	Parris, Matthew
Johnson Smith, Sir Geoffrey	Patten, Christopher (Bath)
Jones, Gwilym (Cardiff N)	Patten, J. (Oxf W & Abgdn)
Jones, Robert (Herts W)	Pattie, Geoffrey
Joseph, Rt Hon Sir Keith	Pawsey, James
Kellett-Bowman, Mrs Elaine	Peacock, Mrs Elizabeth
Kershaw, Sir Anthony	Percival, Rt Hon Sir Ian
Key, Robert	Porter, Barry
King, Roger (B'ham N'field)	Portillo, Michael
Knight, Greg (Derby N)	Powell, William (Corby)
Knowles, Michael	Powley, John
Knox, David	Prentice, Rt Hon Reg
Lamont, Norman	Price, Sir David
Lang, Ian	Prior, Rt Hon James
Latham, Michael	Pym, Rt Hon Francis
Lawler, Geoffrey	Raffan, Keith
Lawrence, Ivan	Raison, Rt Hon Timothy
Lawson, Rt Hon Nigel	Rathbone, Tim
Lee, John (Pendle)	Rees, Rt Hon Peter (Dover)
Lennox-Boyd, Hon Mark	Renton, Tim
Lester, Jim	Rhodes James, Robert
Lewis, Sir Kenneth (Stamf'd)	Rhys Williams, Sir Brandon
Lightbown, David	Ridley, Rt Hon Nicholas
Lilley, Peter	Ridsdale, Sir Julian
Lloyd, Ian (Havant)	Rifkind, Rt Hon Malcolm
Lloyd, Peter (Fareham)	Rippon, Rt Hon Geoffrey
Lord, Michael	Roberts, Wyn (Conwy)
Luce, Rt Hon Richard	Robinson, Mark (N'port W)
Lyell, Nicholas	Roe, Mrs Marion
McCrindle, Robert	Rossi, Sir Hugh
McCurley, Mrs Anna	Rost, Peter
Macfarlane, Neil	Rowe, Andrew
MacGregor, Rt Hon John	Rumbold, Mrs Angela
MacKay, Andrew (Berkshire)	Ryder, Richard
MacKay, John (Argyll & Bute)	Sackville, Hon Thomas
Maclean, David John	Sainsbury, Hon Timothy
McNair-Wilson, M. (N'bury)	St. John-Stevas, Rt Hon N.
McNair-Wilson, P. (New F'st)	Sayeed, Jonathan
McQuarrie, Albert	Shaw, Giles (Pudsey)
Madel, David	Shaw, Sir Michael (Scarb')
Major, John	Shelton, William (Streatham)
Malins, Humfrey	Shepherd, Colin (Hereford)
Malone, Gerald	Shepherd, Richard (Aldridge)
Maples, John	Shersby, Michael
Marland, Paul	Silvester, Fred
Marlow, Antony	Sims, Roger

Skeet, Sir Trevor	van Straubenzee, Sir W.
Smith, Sir Dudley (Warwick)	Vaughan, Sir Gerard
Smith, Tim (Beaconsfield)	Viggers, Peter
Soames, Hon Nicholas	Waddington, David
Speller, Tony	Wakeham, Rt Hon John
Spencer, Derek	Waldegrave, Hon William
Spicer, Jim (Dorset W)	Walden, George
Spicer, Michael (S Worcs)	Walker, Bill (T'side N)
Squire, Robin	Walker, Rt Hon P. (W'cester)
Stanbrook, Ivor	Wall, Sir Patrick
Stanley, Rt Hon John	Waller, Gary
Steen, Anthony	Walters, Dennis
Stern, Michael	Wardle, C. (Bexhill)
Stevens, Lewis (Nuneaton)	Warren, Kenneth
Stewart, Allan (Eastwood)	Watson, John
Stewart, Andrew (Sherwood)	Watts, John
Stewart, Ian (Hertf'dshire N)	Wells, Bowen (Hertford)
Stokes, John	Wells, Sir John (Maidstone)
Stradling Thomas, Sir John	Wheeler, John
Sumberg, David	Whitfield, John
Tapsell, Sir Peter	Whitney, Raymond
Taylor, John (Solihull)	Wiggin, Jerry
Tebbit, Rt Hon Norman	Wilkinson, John
Temple-Morris, Peter	Winterton, Mrs Ann
Thatcher, Rt Hon Mrs M.	Winterton, Nicholas
Thomas, Rt Hon Peter	Wolfson, Mark
Thompson, Donald (Calder V)	Wood, Timothy
Thompson, Patrick (N'ich N)	Woodcock, Michael
Thornton, Malcolm	Yeo, Tim
Thurnham, Peter	Young, Sir George (Acton)
Townend, John (Bridlington)	Younger, Rt Hon George
Townsend, Cyril D. (B'heath)
Tracey, Richard	Tellers for the Ayes:
Trippier, David	Mr. Carol Mather and
Trotter, Neville	Mr. Robert Boscawen.
Twinn, Dr Ian

NOES
Abse, Leo	Cohen, Harry
Adams, Allen (Paisley N)	Conlan, Bernard
Alton, David	Cook, Frank (Stockton North)
Anderson, Donald	Cook, Robin F. (Livingston)
Archer, Rt Hon Peter	Corbett, Robin
Ashdown, Paddy	Corbyn, Jeremy
Ashley, Rt Hon Jack	Craigen, J. M.
Ashton, Joe	Crowther, Stan
Atkinson, N. (Tottenham)	Cunliffe, Lawrence
Bagier, Gordon A. T.	Cunningham, Dr John
Banks, Tony (Newham NW)	Davies, Rt Hon Denzil (L'lli)
Barnett, Guy	Davies, Ronald (Caerphilly)
Barron, Kevin	Davis, Terry (B'ham, H'ge H'l)
Beckett, Mrs Margaret	Deakins, Eric
Beith, A. J.	Dewar, Donald
Bell, Stuart	Dixon, Donald
Benn, Rt Hon Tony	Dormand, Jack
Bennett, A. (Dent'n & Red'sh)	Douglas, Dick
Bermingham, Gerald	Dubs, Alfred
Bidwell, Sydney	Duffy, A. E. P.
Blair, Anthony	Dunwoody, Hon Mrs G.
Boothroyd, Miss Betty	Eadie, Alex
Boyes, Roland	Eastham, Ken
Bray, Dr Jeremy	Edwards, Bob (W'h'mpt'n SE)
Brown, Gordon (D'f'mline E)	Evans, John (St. Helens N)
Brown, N. (N'c'tle-u-Tyne E)	Ewing, Harry
Brown, Ron (E'burgh, Leith)	Fatchett, Derek
Bruce, Malcolm	Faulds, Andrew
Buchan, Norman	Field, Frank (Birkenhead)
Caborn, Richard	Fields, T. (L'pool Broad Gn)
Callaghan, Rt Hon J.	Fisher, Mark
Callaghan, Jim (Heyw'd & M)	Flannery, Martin
Campbell-Savours, Dale	Foot, Rt Hon Michael
Canavan, Dennis	Foster, Derek
Carlile, Alexander (Montg'y)	Foulkes, George
Carter-Jones, Lewis	Fraser, J. (Norwood)
Clark, Dr David (S Shields)	Freeson, Rt Hon Reginald
Clarke, Thomas	Freud, Clement
Clay, Robert	Garrett, W. E.
Clelland, David Gordon	Godman, Dr Norman
Clwyd, Mrs Ann	Golding, John
Cocks, Rt Hon M. (Bristol S)	Gould, Bryan

Gourlay, Harry	O'Brien, William
Hamilton, James (M'well N)	O'Neill, Martin
Hamilton, W. W. (Fife Central)	Orme, Rt Hon Stanley
Hancock, Michael	Owen, Rt Hon Dr David
Hardy, Peter	Park, George
Harman, Ms Harriet	Parry, Robert
Harrison, Rt Hon Walter	Patchett, Terry
Hart, Rt Hon Dame Judith	Pavitt, Laurie
Hattersley, Rt Hon Roy	Pendry, Tom
Haynes, Frank	Penhaligon, David
Healey, Rt Hon Denis	Pike, Peter
Heffer, Eric S.	Powell, Raymond (Ogmore)
Hogg, N. (C'nauld & Kilsyth)	Prescott, John
Holland, Stuart (Vauxhall)	Radice, Giles
Home Robertson, John	Redmond, Martin
Howells, Geraint	Rees, Rt Hon M. (Leeds S)
Hoyle, Douglas	Richardson, Ms Jo
Hughes, Dr Mark (Durham)	Roberts, Allan (Bootle)
Hughes, Robert (Aberdeen N)	Robertson, George
Hughes, Roy (Newport East)	Robinson, G. (Coventry NW)
Hughes, Sean (Knowsley S)	Rogers, Allan
Hughes, Simon (Southwark)	Rooker, J. W.
Janner, Hon Greville	Ross, Ernest (Dundee W)
Jenkins, Rt Hon Roy (Hillh'd)	Rowlands, Ted
John, Brynmor	Ryman, John
Johnston, Sir Russell	Sedgemore, Brian
Jones, Barry (Alyn & Deeside)	Sheerman, Barry
Kaufman, Rt Hon Gerald	Sheldon, Rt Hon R.
Kennedy, Charles	Shore, Rt Hon Peter
Kilroy-Silk, Robert	Short, Ms Clare (Ladywood)
Kinnock, Rt Hon Neil	Short, Mrs R.(W'hampt'n NE)
Kirkwood, Archy	Silkin, Rt Hon J.
Lambie, David	Skinner, Dennis
Lamond, James	Smith, C.(Isl'ton S & F'bury)
Leadbitter, Ted	Smith, Rt Hon J. (M'ds E)
Leighton, Ronald	Snape, Peter
Litherland, Robert	Soley, Clive
Livsey, Richard	Spearing, Nigel
Lloyd, Tony (Stretford)	Steel, Rt Hon David
Lofthouse, Geoffrey	Stewart, Rt Hon D. (W Isles)
McCartney, Hugh	Stott, Roger
McDonald, Dr Oonagh	Strang, Gavin
McGuire, Michael	Straw, Jack
McKelvey, William	Thomas, Dafydd (Merioneth)
MacKenzie, Rt Hon Gregor	Thomas, Dr R. (Carmarthen)
Maclennan, Robert	Thompson, J. (Wansbeck)
McNamara, Kevin	Thorne, Stan (Preston)
McTaggart, Robert	Tinn, James
Madden, Max	Torney, Tom
Marek, Dr John	Wainwright, R.
Marshall, David (Shettleston)	Wallace, James
Martin, Michael	Wardell, Gareth (Gower)
Mason, Rt Hon Roy	Wareing, Robert
Maxton, John	Weetch, Ken
Maynard, Miss Joan	Welsh, Michael
Meacher, Michael	White, James
Meadowcroft, Michael	Wigley, Dafydd
Michie, William	Williams, Rt Hon A.
Mikardo, Ian	Wilson, Gordon
Millan, Rt Hon Bruce	Winnick, David
Miller, Dr M. S. (E Kilbride)	Wrigglesworth, Ian
Mitchell, Austin (G't Grimsby)	Young, David (Bolton SE)
Morris,Rt Hon A. (W'shawe)
Morris, Rt Hon J. (Aberavon)	Tellers for the Noes:
Nellist, David	Mr. Allen MacKay and
Oakes, Rt Hon Gordon	Mr. John McWilliam.

Question accordingly agreed to.

Resolved, 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
712
4. (d) for any relief other than relief applying to goods of whatever description or services of whatever description.

Mr. Speaker

I am now required under Standing Order No. 114 to put successively, without further debate, the Questions on each of the Ways and Means motions Nos. 2 to 41 and the motion of procedure, on all of which the Finance Bill is to be brought in. Instead of reading out all of the motions in full, I propose to follow the procedure used in recent years; that is to say, I shall first state the title of the motion and then put the Question that the motion be agreed to.