Finance Bill

HC Deb 22 April 1987 vol 114 cc683-765

Order for Second Reading read.

(Relevant document: Sixth Report of the Treasury and Civil Service Select Committee, House of Commons Paper No. 293 of Session 1986–87.]

4.18 pm

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

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

The Budget and the Finance Bill before us today are favourable measures for the country. They are based on the increasing underlying strength of our economy and on strong public finances; six years of steady, balanced growth up at the top of the European league; six years of improving manufacturing productivity, growing more rapidly than most of our competitors. Once we had put right the economy that we had inherited — with investment going up by an average of 4 per cent. a year, again a good performance in the European league—the firm control over public spending. combined with buoyant tax revenue, has meant a prudent outcome for the public sector borrowing requirement for the year just completed and prudent levels set for the PSBR in the year we are now in.

There is no need for me to repeat the many illustrations of our increasing economic success because they were well documented in the Chancellor's Budget speech and the Budget debate in March. However, the evidence has been underlined by further indicators even since that debate a month ago.

The February trade figures show that British exporters are grasping the favourable opportunities to which the Chancellor referred in his Budget speech and which the Confederation of British Industry constantly underlines. Non-oil exports are up by 11 per cent. compared with a year ago. Between January and February, unemployment fell by 44,000—the largest monthly fall on record—and between February and March by a further 30,000. We have seen the largest fall in unemployment for a six-month period since 1973.

The CBI March inquiry showed industry's order books and output expectations at their highest levels since the information has been sought in that way. Industrial production stands at its highest level ever. With steady, unmistakeable consistency, the economic indicators across the range show that, following nine Budgets under the Government, the British economy is getting stronger and stronger.

One key test of the growing confidence in British industry, not much commented on so far in our debates, is the amount of new equity being raised for investment — investment that will produce new jobs and higher profits. In 1986, United Kingdom companies raised £7½ billion in new equity on the stock exchange—eight times the amount that they raised in 1979. That does not include the finance raised through the unlisted securities market which did not exist in 1979, nor the finance raised through venture capital funds, which in 1985 invested more than 40 times more finance than in 1979.

The growing vitality of the United Kingdom venture capital industry is a particularly encouraging development and reflects the emphasis that we have placed on encouraging entrepreneurs and promoting enterprise among small businesses, which are now positively encouraged to invest, to take risks and to grow. Venture capital investment in the United Kingdom is now higher as a proportion of gross domestic product than in the United States. A recent report by the British Venture Capital Association highlights the rate of growth of the industry in recent years. It has taken the United States venture capital industry more than 25 years to reach its present size. In the United Kingdom, a large part of the industry's growth has taken place during the past five years.

The venture capital industry looks to the long term. Its growth under the Government is one further signal of investors' confidence — and of international investors' confidence, too —in in the prospects for British industry. That is also illustrated by the high level of overseas investment in the United Kingdom in recent years, reflecting the increased profitability of British industry, which in 1985 was at its highest level since 1964. In the past two years, overseas investment in the United Kingdom has amounted to almost £24 billion, but the growth in our overseas assets has outstripped even that inward investment, increasing our net asset position to an estimated £110 billion by the end of 1986. At 28 per cent. of GDP, that is the highest recorded level since the war. It compares with a level of £12 billion at the end of 1979. Nor, I stress, is that at the expense of direct investment here at home, as is shown by the high levels of capital raising, to which I referred, and of new investment in the United Kingdom itself. Moreover, as a result of that healthy position, earnings from interest, profits and dividends were over £4 billion in 1986. They will continue to make an important contribution to the balance of payments in the future and help underpin our increasingly strong position.

Those are the hard facts. But it is not just the statistics that demonstrate how our economic polices are hearing fruit and reversing the decline of earlier years. Nor is it the statistics alone, powerful though they are, which so totally destroy the Opposition's feeble attempts to belittle our now strong economic position. The official pronouncements of industrial and commercial bodies themselves—the CBI, the Association of British Chambers of Commerce and many others—all bear testimony to the renewed confidence of British industry, based on their achievements and their support of our policies. They know the real world, unlike the Opposition.

That mood is confirmed by companies all over the country, which are not just reporting better results and better prospects, but repeatedly stating that as a result of the policies that we have pursued and the management measures that they have taken over the past few years they are now more efficient and in much better shape. They know it. They see the effects on the ground. That is why there is a real mood of confidence around and why the response to the Budget has been so positive. That is why the attempts of the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) to work up an atmosphere of doom and gloom are getting such a nil response. It is the Opposition who are out of touch.

The strength of the recovery is spread widely across the economy. For example, the office machinery and data processing sector increased its output between 1981 arid 1986 by 201 per cent. The output of the electronic consumer goods sector rose by 167 per cent. over the same period. In the construction industry, new orders for 1986 were up 7 per cent. on 1985. Private sector output rose particularly strongly in 1986, with commercial work increasing by 14 per cent. and private housing output rising by 10 per cent. on 1985 levels. In 1986, housing repair and maintenance reached a record level of £4.9 billion.

Major building material suppliers report booming conditions, not least because of the big increase in owner-occupation, which we have been encouraging. More people owning their own home has meant a big expansion of property renovation, maintenance and improvements. That does not come through in public expenditure figures. The Opposition fail to recognise that a Budget that cuts taxes is also a Budget that creates jobs. Let me give one example. This Budget has given more money back to the people who earn it without having to resort to irresponsible public borrowing. That will give a further boost to the building industry and provide more jobs because part of the additional spending power available will undoubtedly be used by families for further home maintenance and improvements.

The warmly favourable response to my right hon. Friend's Budget proposals has come not just from industry, not just from those with a direct interest in the Budget measures, but more widely still. They have strengthened the confidence of the financial markets with the result that base rates have fallen by½ per cent. since Budget day, following an earlier½ per cent. reduction the previous week. The majority of banks and building societies have announced a reduction of 1 per cent. in mortgage rates. That will be of direct help to the 8 million home owners with a mortgage loan. The exchange rate is strong and the foreign exchange reserves are rising.

All those reactions since the Budget reinforce the view that our plans for a £2.6 billion reduction in taxes, a £3 billion reduction in public sector borrowing and a £4.7 billion increase in public expenditure are proving to be a winning combination. It is a hat-trick of success, which would not have been possible without the prudent and consistent economic policies which we have followed and which would be far beyond reach if the Opposition parties were ever able to pursue their alternative Budget strategies. It is that continued strength and vigour of the British economy that gives the lie to the increasingly desperate attacks by Opposition Members.

I now refer to the details of the Finance Bill. The House will have noted that the Bill is not insubstantial. It provides plenty to occupy the full time of a normal Standing Committee. The House will forgive me if I refer only to the main proposals today. My right hon. Friend the Member for Worthing (Mr. Higgins), whom I notice in the Chamber, will wish to comment on his own report by the Select Committee on the Treasury and Civil Service. I know that he will forgive me if I do not. I have only just seen it. I think that it does not refer much to the Finance Bill as such.

There is much in the Bill that is of importance and assistance to business. Clauses 107 to 122 introduce the new tax relief for profit-related pay. The significance of that new measure has ben widely recognised. It will reinforce the steps that the Government have already taken to make the labour market work more flexibly and increase the common interest and involvement of employers and employees in the success of their businesses. It has the vital extra dimension of providing automatic flexibility in labour costs.

Last year's consultation document on the subject received a generally favourable response. The House will have noted that the Chancellor has decided to double the tax relief that was originally suggested. That will add greatly to the attractions of the new scheme and means that it now provides substantial incentives. The relief proposed could be equivalent to a further 4p reduction in the basic rate of tax for a married man on average earnings whose employer takes maximum advantage of the scheme.

As my right hon. Friend has said, the scheme is not a panacea, but it will encourage British management further to play its part in bringing about changes in the operation of the labour market that could radically improve the prospect for jobs. I hope that British management will take up the challenge. Indeed, I am glad to report that the level of interest shown in the scheme is very encouraging and steadily rising. About 3,200 firms have already registered their interest with the Inland Revenue.

Clause 36 contains what I believe to be a worthwhile new measure on training. The importance of training and retraining to the success of the economy is well understood. At present, expenditure by employers on training for people who are changing jobs is liable to tax as a benefit in kind in the hands of the employee, but increasingly, in a modern economy, job mobility is inevitable and retraining for new skills highly desirable. It is increasingly likely that companies will wish to offer retraining in these circumstances as part of their wider social responsibilities to employees. Clause 36 will make this expenditure on training for a new job or business opportunity free of tax.

A number of clauses are concerned with the collection of corporation tax. The purpose of these measures is to build on the major reform of the corporation tax regime that we introduced in 1984, and to make the collection of the tax simpler, fairer and more effective. Clauses 123 to 133 introduce a new streamlined method of assessment and collection known as pay and file. There has been consultation with the business community about that system and it has been generally welcomed. Because computerisation is required, the new arrangements cannot take effect before the early 1990s. The reason for legislation now is to give taxpayers and their advisers a firm basis on which to plan.

Now that we have brought the main corporation tax rate down from 52 to 35 per cent. we believe that the case for a differential rate on gains is no longer justified. Clause 61 therefore provides for companies' capital gains to be charged at the appropriate corporation tax rate, thus removing the complicated adjustment that is needed under present arrangements. I wish to stress that for small companies that will mean a cut of three percentage points in the rate that is charged on capital gains.

At the same time, we propose that companies should be able to benefit from advance corporation tax set off against their liability to tax on capital gains. That will be of considerable benefit to many companies.

I know that concern has been expressed about the impact of these changes on life assurance companies. The Government considered that issue carefully and, in the end, concluded that it would not be appropriate to make capital gains earned for holders of life assurance policies an exception. The extension is likely to have a small effect on bonuses of with profits policies, not least because most companies offset management expenses against their capital gains, which are therefore largely sheltered from corporation tax. That is a matter to which we can, and no doubt shall, devote proper attention in Standing Committee.

A further streamlining measure is contained in clause 37 which will rationalise payment dates for corporation tax, bringing all companies on to a nine-month payment basis and removing the scope for a potentially costly abuse.

A major part of the business package in the Finance Bill is, yet again, the measures that are devoted to helping small businesses. Two of those are especially important. First, there are the cut in the basic rate of income tax for unincorporated businesses, including the self-employed, to 27p in the pound, and a similar reduction in the rate of corporation tax for small companies to 27 per cent., which is contained in clause 22. That brings the cumulative reduction in the small companies' corporation rate of tax down by a whole 15p in the pound below the level which we inherited in 1979. As I mentioned earlier, that also means a reduction for such companies of 3p in the pound in the present year in the capital gains tax rate. Secondly, clause 11 provides for cash accounting for VAT which will enable businesses whose annual turnover is less than £ ¼ million to account for VAT on the basis of cash paid and received. More than half of all traders who are registered for VAT fall into that category, and this will be a significant, beneficial change for them. Cash accounting will overcome the twin VAT problems that are associated with late payment of hills and bad debts. The same clause enables the introduction of annual accounting for these businesses, which will provide a means of assisting cash flow and reducing the form-filling burden. Of course, the turnover ceilings for those businesses are much higher than my right hon. Friend proposed in the original consultation document.

While we are on small business matters, there is also increased retirement relief from capital gains tax in clause 67, which is a further measure to add to the many that we have introduced to make it easier to pass on flourishing family businesses to the next generation.

Also on the subject of VAT, I should record the fact that, as promised in my right hon. Friend's Budget speech, there are no increases in the Finance Bill in indirect taxation, indexed or otherwise, except for very minor items.

This is, perhaps, an appropriate moment to refer to another group of measures in the Bill. Within our continuing programme of tax reduction and reform, it is the Government's policy to eliminate unintended or unjustified tax breaks that cause rates of tax generally to be higher than they would otherwise need to be. We see no justification for asking the majority of taxpayers to subsidise the few who benefit in this way. Clause 12 is the main clause in a package that tightens up the rules on the deduction of VAT input tax as they apply to businesses, and, in particular, groups of associated businesses whose activities are, in part, exempt from VAT. That is designed to prevent distortion of trade and to combat tax avoidance, as the old rules were excessively generous and were being exploited on a growing scale.

The new rules contain generous relief provisions for small businesses. About 2,000 have ceased to be treated as partly exempt. Special arrangements for calculating deductible input tax have been made with individual traders and trade associations to deal with problems that are peculiar to particular industries, such as brewers' tied houses. With these special arrangements included, these measures have generally been accepted as fair and necessary.

Clauses 48 and 49 will prevent companies in multinational groups which enjoy dual residence from securing tax relief twice on one and the same interest payment. Clause 50 ensures that the controlled foreign companies legislation is not side-stepped by moving the residence of the foreign company to the United Kingdom before payment of a dividend.

Clauses 52 and 53 will end the present excessively generous treatment of tax credit relief for foreign withholding tax paid on interest on bank loans. In future, banks will be able to offset this tax credit only against tax on the profit on the relevant loan, and not more widely.

Clause 58, which affects members of Lloyd's syndicates, is designed to bring the tax treatment of their reinsurance to close into line with that of comparable provisions made by insurance companies and other traders. I am well aware that concern has been expressed about the impact of this clause, but the basic point at issue is a simple one: Should the Inland Revenue be able to review Lloyd's reinsurance to close and apply the normal tax criteria for determining what should be deductible for tax purposes? Or must Lloyds figures be accepted without inquiry?

The effect of the present law is that the normal tax criteria do not apply. So reinsurance to close is automatically deductible in full, without review. That puts Lloyd's members in the unique position of being able to determine their own tax liability as far as reinsurance to close is concerned. The purpose of the legislation is merely to ensure that reinsurance to close figures can be examined against the sort of tax criteria that already apply to comparable provisions made by insurance companies arid other traders.

Having established the principle, it is very important that the rules should apply equitably in practice. That is why the Chancellor announced in his Budget speech that there would be immediate consultation with Lloyd's. The consultation process is already well under was on a constructive basis. I am sure that this is the best way of achieving a solution which removes the present anomaly but takes account of Lloyd's understandable concerns. Again, that is a matter that we shall no doubt examine in Standing Committee.

Taken together, these measures amount to a significant contribution to a fairer and more effective tax system, and I hope they will receive support from all sides of the House.

Finally, I turn to three sets of primarily personal tax measures. Clauses 69 to 106 will bring about important and far-reaching changes in the pattern of pension provision. They form part of a strategy to widen the coverage of non-state pension provision and give individuals far more flexibility and choice in the way in which they provide for their retirement. They will reduce employees' reliance on the state for their provision in old age and will extend the tax advantages for retirement provision much more widely.

The tax regime for the new personal pension schemes that will be available next January is based on the present retirement annuities provisions, but it incorporates new features that have been widely welcomed. Through clause 92, it will be possible in future for employees to contract out of state earnings-related pension schemes through a personal pension. Clause 71 enables a much wider range of pension providers to carry on new pension business. Hitherto, insurance companies and certain friendly societies have enjoyed a virtual monopoly of personal pensions business. In future, banks, building societies and unit trusts will be able to enter this market, thus improving the choice that is open to individuals.

Another development that I believe has been welcomed by all is contained in clause 79. It will enable transfer values to be paid into or from a personal pension scheme. This will permit much greater transferability than is now possible between different types of pension arrangements.

Clause 34 and schedule 5 make it possible from next October for members of occupational schemes to make additional voluntary contributions to a pension plan that is completely separate from their employers' scheme up to the tax approval limits in contributions and benefits. Again, this increases the range of choice and independence,

In summary, the pension proposals build on and extend changes made in recent social security legislation and provide a better pension deal for millions of employees.

Mr. Tim Smith (Beaconsfield)

I am sure that my right hon. Friend is aware that some of the pension proposals will benefit from clarification. There are some doubts, especially about pension schemes which were set up before Budget day but which had not been approved by the Superannuation Funds Office on that day. I hope that my right hon. Friend will be able to provide some clarification because there is considerable confusion within the pension industry about the position of these schemes.

Mr. McGregor

I believe that the Inland Revenue has recently issued an announcement on this matter that is designed to help the pension industry. This is clearly an issue that we shall be able to debate in full when we consider the Bill in Committee. My right hon. Friend the Financial Secretary to the Treasury may say a word or two about this when he replies.

The next group of mainly personal measures is contained in clauses 147 to 152, which relate to inheritance tax. I say "mainly personal measures" because they will benefit also many family businesses. The key provision is contained in clause 147, which increases the threshold from £71,000 to £90,000 and simplifies the rate structure from seven rates to four. This has been concentrated rightly on smaller estates, and as a result the number of estates liable to inheritance tax will be cut by roughly a third.

I conclude with by far the most important measure in the Bill, which is the reduction of a further 2p in the basic rate of income tax to 27 per cent. in clause 20. It is by far the most important measure because it affects every taxpayer and because it involves by far the biggest amount of income given back to taxpayers, as I prefer to call it, or revenue forgone, as some technicians do. This measure continues our steady progress towards the goal of a basic rate of not more than 25p in the pound. It underlines the difference between our tax policies and those of the Opposition parties.

Starting from the 33p rate which we inherited in 1979, we are now well over halfway towards our goal. We shall soon reach a basic rate which is equivalent——

Mr. Bryan Gould (Dagenham)

To 25p as a bottom rate.

Mr. MacGregor

I heard what the hon. Gentleman said. We are halfway towards our goal, and we shall soon have reached a basic rate which is equivalent to the reduced rate band which was introduced by the Labour party when it was in government.

The cumulative effect of the income tax reductions since we took office is substantial. Once again we have designed our income tax proposals to concentrate the benefit on the overwhelming majority of ordinary taxpayers. As we did last year, we have structured the changes so that those with the highest incomes do not benefit disproportionately. I know that the whole House has given a warm welcome to the measures of extra relief for those aged 80 years and over, and for blind people.

The cut in the basic rate improves incentives for nearly everyone whose marginal rate is the basic rate. That is nearly 21 million taxpayers of working age, or 94 per cent. of the total. It is good also for industry, because it offers higher take-home pay without adding a penny to industry's costs. For a married man on average earnings, the rate and allowance changes combined mean nearly £4 a week extra in his pay packet, which is equivalent to a 2.7 per cent. pay increase. As the Government have made clear repeatedly, a key factor in the future performance of the economy and thus the prospect for jobs will be the ability of British industry to keep control of its costs. The Government's success in reducing inflation has substantially reduced the justification for pay increases that are not earned by better performance. This year's income tax reductions provide further help to employers in their efforts to control labour costs.

I note that the right hon. Member for Sparkbrook said on radio the other day that the reduction in the standard rate of income tax is unsustainable". Let me assure the House and the country that it is and will be perfectly sustainable under our sound economic management. It would be only if the Opposition parties ever had the chance to implement their policies that the tax cuts would immediately go out of the window.

I must admit——

Mr. Stuart Bell (Middlesbrough)

Over and above the serious balance of payments deficit that we are running up in manufacturing industry, what about the United States' crisis which is approaching, the trade war which is looming, the £117 billion trade deficit of the United States and the £200 billion deficit in its budget? Are not those factors over and above those that the Government are creating, and are they not likely to have some impact on our economy?

Mr. MacGregor

The hon. Gentleman cannot have been listening to what I was saying earlier, when I made it clear how strong our economy now is. By pursuing our prudent economic policies we are much better able to withstand any international shocks that might occur. I can assure the hon. Gentleman that an economic crisis would occur in Britain as a result of domestic policies only if the Labour party were able to implement its policies.

I must admit that the position of the Social Democratic party and the Liberal party on income tax cuts is characteristically confused. I believe that they intend to vote against clause 20 but are riot necessarily committed to reversing the cut, though they will not pledge themselves never to increase taxation. As usual with them, the voter does not know where he or she would stand. Fortunately, they will never be in a position to cause it to matter.

With the Labour party there are no doubts. It would reverse the tax cut that we have introduced and increase borrowing substantially. That would be the equivalent of a take-home pay cut for the newly qualified staff nurse of £1.56, or £5.32 for a primary school head teacher under the new scales. That would come immediately, but it would be only the beginning. There can be no doubt that with the spending pressures from the Front Bench colleagues beside the right hon. Member for Sparkbrook, let alone those of the Left-wingers behind him, he would not be able to contain himself to his initial package.

Mr. Stuart Randall (Kingston upon Hull, West)

Where are all the Left-wingers?

Mr. MacGregor

I shall have something to say about that, too. There may be only two in the Chamber now, but there are many more standing for Parliament.

If we had the misfortune to have a future Labour Government and the right hon. Member for Sparkbrook as Chancellor, it would be the same as the early days of the previous Labour Government, only worse. With only a modest number of their spending pledges taken on board, the right hon. Gentleman's Government would impose much higher taxes on everyone than the previous Labour Government. With the full £34 billion of the Labour party's other pledges, which keep popping out of the basket despite all of the right hon. Gentleman's efforts to conceal them, the basic rate of income tax would be doubled, at least. That is a burden that I hope profoundly will never fall upon the British people.

The Labour party let it be known in the press that this Second Reading would be the great launch of its attack on the Government, so where are Labour Members? Their almost total absence suggests that they have little confidence or interest in their attack, and I am not surprised as it is such a flimsy one.

The Bill demonstrates the difference between the parties on tax policies and it contains a range of new proposals to encourage enterprise, efficiency and flexibility that will improve further the prospects for output and jobs. It will consolidate and extend the programme of reform that we have followed successfully since 1979, a programme which has contributed in no small measure to the present vigour of the economy, which is now entering its seventh year of steady growth. I commend the Bill to the House.

4.50 pm

Mr. Bryan Gould (Dagenham)

The Finance Bill presents the House and the country with a puzzle. It is a puzzle that is no easier for us to resolve as a consequence of listening to the Chief Secretary's speech.

As the right hon. Gentleman pointed out, the Bill has a certain bulk, containing 22 schedules and 164 clauses; however, it has little by way of substance. It is almost as if it had been drafted by Ministers in relation to an economy that existed only in their imaginations. In that imaginary economy, very little needs to be done. It is on a wonderfully serene course, requiring only the odd deft touch on the tiller—a small adjustment to VAT here, a few consequential changes to the personal pension schemes there and a little encouragement to profit-related earnings somewhere else.

The only point of substance — the Chief Secretary conceded that it was the major point of substance— is the modest tax offering that the Bill places before the electorate. Even that is treated in a slightly odd way, as though it had nothing to do with the economy or its needs. It is treated simply as an uncovenanted benefit, a little bonus distributed as if it were a dividend in relation to an economy whose needs are assumed to have been fully met, the only problem being to decide how to spend the money.

The peculiarity — the puzzle — is that the Bill, the Chief Secretary's speech and virtually every pronouncement by Ministers bear no relationship whatever to the reality that we face, or to the real needs of our economy. Far from heading serenely on automatic pilot out towards the open seas, our economy, as any objective perusal of the statistics will show, foundered on the rocks when the Conservative party took office in 1979. There is absolutely no sign yet of it floating free. But Ministers seem scarcely to know, still less to care, about what is really happening to the economy. All that concerns them is what is happening politically: the imminence of a general election dominates their thinking. That is why, as the Bill and Ministers' speeches have shown, the only concern that bothers them is that nothing should be allowed to disturb the illusion of serenity that they have tried so hard to foster.

Yet the people know differently. The reason that they know differently is that the harsh experience of their daily lives directly contradicts the glossy picture painted by Government propagandists. People in our society. when they read the statements and the speeches, watch the television broadcasts and listen to the propaganda, must ask themselves, "Are we going mad? This is not the economy in which we live, or the society that we have to endure. Our daily experience is quite different." I say to them, "It is you who are right, and the Government's propaganda that is wrong."

The daily experience of virtually every family in the country is very different from that propaganda. There can be scarcely a family in the country that does not know, or even include, someone who is unemployed—perhaps a school leaver unemployed since leaving school 18 months or two years ago. There can be scarcely a family that does not include someone who has been waiting on a hospital waiting list, perhaps for a hip operation, for the past 18 months. There can be scarcely a family that does not know of someone living in dilapidated housing or bed-and-breakfast accommodation; scarcely a family that does riot include a grandparent, a pensioner struggling to make ends meet and to keep warm in the winter; scarcely a family that does not know of school children having to share textbooks, and working in run-down, worn-out schools.

That is the reality of living in Britain today — a reality that is not reflected in Government propaganda, but which people know well from their own lives. Their view of that harsh reality is infinitely more accurate and deeply felt than anything that can be said from the Government Dispatch Box.

It is also the reality of an economy crying out for resources to be spent where they are desperately needed. I invite Conservative Members not to take my word for it, but to look to the myriad authorities—many of them well disposed towards the Government and the Conservative party — that have made similar claims, repeatedly, over a long period.

The economy is crying out for resources to be spent on, for instance, training. My authority for saying that—apart from the circumstances in which we so obviously find ourselves—is a news release published as recently as yesterday by the CBI. A CBI survey showed that, at a time when at least 3 million people—probably nearer 4 million — are out of work, one in five British manufacturers maintain that skill shortages will prevent them from increasing their output or investment. That point was made not by the Labour party, but by the CBI. Its new director general makes the point starkly: Japan has been training proportionately eight times as many graduate engineers as the UK in recent years. That is the indisputable reality. We see the consequences in our puny attempts to resist the power of the Japanese economy when we get into trading difficulties with Japan.

In the same CBI press release, Mr. Bryan Nicholson, the chairman of the Manpower Services Commission, said: This survey once again shows up the skills gap that exists in this country. It is vital that our workforce is trained in the appropriate skills and to the appropriate level so that every firm can work to its maximum capacity. That point was made by someone who is, in many ways, the Government's own man.

Our economy is crying out for resources to be spent on training and housing, as every independent survey will confirm, and also on research and development. Virtually the whole of the British scientific community has made it clear that we are running down our spending at our peril, and mortgaging our future. As long ago as 1984, in its publication "The Fabric of the Nation", the CBI made it clear that the economy was crying out for spending on our industrial infrastructure. In the National Health Service, beds and wards are being closed, and nurses are forced to go abroad to obtain decently-paid jobs. Tremendous difficulty and chaos are being created in our schools: teachers' morale has been sapped by low pay and the removal of their negotiating rights.

That reality is not merely anecdotal; it does not rest on the considered views of so many outside and independent bodies. It is borne out by statistics — not, I hasten to add, those that the Chief Secretary gave us, but the simple, central, important statistics. It is a sad and familiar litany, and I apologise for having to weary the House with it again. Manufacturing output is still 4 or 5 per cent. below its 1979 level. The Chief Secretary made great play of the tremendous volume of equity that is being raised, but precious little is going into manufacturing industry. Manufacturing investment is still 20 per cent. lower than when the Government took office. The right hon. Gentleman boasted of the trading figures for the past two months; let us see what his feelings are as the year progresses. Is he telling us that his forecast of a deficit of £8 billion in trade and manufactures is now out of the window, like so many other Government forecasts'? Has it been abandoned, or is it still an accurate forecast on which we are entitled to base ourselves?

The Chief Secretary sometimes deploys productivity and rate of growth figures. I asked the Chancellor recently when the 1980s began, because we are constantly being told that throughout the 1980s our performance has been very much better than that of any other country. The Chancellor gave the expected reply that the 1980s began in 1980, so I then took the interesting step of tabling a question to the Chancellor in which I asked him for comparative rates of growth in general terms and in manufacturing industry since 1980. Far from the Government's grandiose claims about Britain heading the growth league, we find that by comparison with other G7 countries we rank fourth in overall growth and fifth in manufacturing output growth. Even on the figures that the Chancellor and the Chief Secretary choose to use, there is deception at the heart of those figures.

If that is the real state of the economy, why is the Finance Bill so lamentably inadequate and irrelevant to the needs of the economy? The answer is a combination of incompetence, cynicism and self-delusion by the Government. It is partly a matter of incompetence because, frankly, the Government do not know where they are going. The ship of the economy has foundered on the rocks and the Chancellor has no idea of the direction in which he is now trying to take it.

Let me substantiate that claim, because I see that the Chancellor and the Chief Secretary are inclined to laugh it off. Unless my ears deceived me, money supply—the lodestar of the Government's economic policy—was not mentioned by the Chief Secretary. It has disappeared from view. It is no longer relevant or significant in any respect. In today's Financial Times, Mr. Tim Congdon of Messets, one of the remaining high priests of monetarism to whom the Chancellor used to lend a very ready ear, warns, presumably on the basis of the old monetarist religion, that interest rates will have to rise.

The Chancellor may say that that is all rubbish and monetarist mumbo-jumbo. I agree with him, but I wonder whether he is prepared to be quite so direct in rejecting the doctrines to which he attached so much importance only two years ago. If he is not prepared to accept Mr. Tim Congdon's view of interest rates and if he is still prepared to say that the Budget strategy is designed to bring interest rates substantially down, I wonder whether he still says that the prospect is that interest rates will come down.

For example, has the Chancellor looked at international trade and at the international economy? Has he looked at what is happening to currencies and interest rates around the world? Is he prepared to say that interest rates are on the way down? If he is, I suggest that he would be disbelieved by almost everybody who takes an interest in these matters. I try this regularly but I never get a taker. If the Chancellor would care to rise to his feet and tell us that interest rates are on the way down, I am sure that that would be regarded by the City as extremely interesting news.

Mr. Tim Smith

Will the hon. Gentleman give way?

Mr. Gould

Of course the Chancellor will not do that. Perhaps the hon. Member for Beaconsfield (Mr. Smith) will offer that assurance, but he will do so, I suggest, with less authority.

Mr. Smith

The hon. Gentleman says that the provisions of the Finance Bill are irrelevant to the problems that he believes the British economy faces, but most of his solutions seem to involve increased public expenditure. The Finance Bill has nothing to do with that. Apart from providing the revenue, is he prepared to say that the £34 billion to which my right hon. Friend the Chief Secretary referred would be financed by increased taxation or by increased borrowing?

Mr. Gould

I ought to have learnt by now that it is not wise to give way to ridiculous interventions. This is a debate on the Government's Finance Bill. I well understand the anxiety to divert attention to other matters, but when we have the opportunity to deploy again our extremely practicable and well worked out programme for reducing unemployment by 1 million in two years and for making a major attack on family poverty and poverty among the elderly, I shall be delighted to give the statistics for which the hon. Gentleman asks. But for the time being, much as Conservative Members may regret it, we are debating the Government's Finance Bill.

I was making the point that the Finance Bill has abandoned all mention of monetarism. The new lodestar is the public sector borrowing requirement. That is to be the guiding principle according to which our economy is to be steered. Perhaps not surprisingly, however, the Government have had extreme difficulty in discovering what is happening to the public sector borrowing requirement. As to their forecast about the PSBR for 1986–87, in the 1986 Red Book we were told solemnly that the PSBR would be £7.1 billion. A year later, in the 1987 Red Book, we were told that it would be £4.1 billion. In the event, it was £3.3 billion, less than half the original forecast. I do not blame the Government for getting it wrong, but it demonstrates how useless a measure the PSBR has become.

In case the Government wish to congratulate themselves on having reduced the PSBR, let me make it clear that the Government can claim very little credit, because they do not understand how it happened. The major reason for the difference between the Government's original forecast and the actual outturn is accounted for in the Red Book by a mysterious item called "Miscellaneous Financial Transactions", which account for between £2 billion and £3 billion. "Miscellaneous Financial Transactions" is a very nice, round phrase, but I do not believe that Ministers have the slightest idea what it means. Therefore, they are as puzzled as everybody else about precisely what happens to the PSBR and how much reliance can be placed on it.

However, the Red Book makes one point that the Chief Secretary and the Chancellor have studiously ignored in their public pronouncements: that it is not the PSBR that is causing the problems; it is the explosion in private sector borrowing, as the Red Book makes clear, that is creating the major upward pressure on interest rates. On that subject, however—I assume for ideological reasons and prejudice—we hear not a word. I say "ideological" reasons, but I ought to add cynicism, too, because the one thing that the Government cannot do is to try to rein in the consumer boom on which they have pinned their election hopes. The one thing to which they will not admit and which they cannot be seen to admit is that the consumer boom is inherently unstable and unsustainable. That is the reality that is revealed not by ministerial speeches but by the Red Book.

Self-delusion comes into play as well. The Government have worked so hard and for so long to delude the electorate that now they have succeeded in deluding themselves. Government propaganda has been telling us month after month that soon we shall reach those halcyon days when only 3 million people will he unemployed. The flags are waving, the bands are playing, the cheering has begun. "At 3 million we shall proclaim", say the Government, "an enormous triumph." But is that a triumph?

In any other country and in any other period of our history 3 million unemployed, with all the appalling waste and misery that lie behind that figure, would be regarded as a badge of shame. Only the Government, only the Conservative party, dare to lay that before the British people and claim it as a triumph, yet that is the essence of the Government's belief that the economy is on course: that they will reach 3 million — even if one gives credence to that figure — and thereby defuse the unemployment issue.

However, the figure of 3 million unemployed is a facade, a charade, a farce. Although that figure may be massaged downwards, what I call the unemployment gap is rising. By "the unemployment gap" I mean all those people who want to work but who, for one reason or another or by one means or another, do not show up in the official statistics. These are the people who have been fiddled off the register by statistical changes, or who have been shuffled out into make-work schemes, or who have been frightened off the register and therefore cannot claim benefit. These people have been told that they need not register or that they may not register, or they have been encouraged not to register. That figure is increasing and the unemployment gap is widening. That is the reality behind the Government's illusory unemployment total.

There is, of course, another important statistic to be considered in this debate. Whatever happens to the figure this year — whether it is just above or just below 3 million or, more realistically, approaching 4 million—on the Government's figures we have during their period of office lost no fewer than 21 million working years through unemployment. That means that virtually the whole labour contribution over a whole year of the whole British work force has been lost during the eight years of this Government's period of office. It is a shameful waste of human resources and national output.

It is no wonder that vie say with justice that unemployment, while being a cruel burden for those who suffer it, also makes the whole country poorer. It is because we deliberately turn our backs on the unemployed and the lost national wealth that they represent that we are a failing economy — something that the Government choose to try to ignore.

It is significant that the Chief Secretary made only one glancing reference to unemployment. He could scarcely bring himself to address the subject. Once again, I pray in aid the CBI—this is not my forecast—which in the last day has published a survey showing that 750,000 jobs in our industry have yet to be lost. That is the reality of present policies. Unemployment is not coming down. The figures may be coming down, but the numbers of jobless are increasing, and their desperation is increasing too.

The Finance Bill contains no sign that any of this is of concern to Ministers. The Government's only concern is to try to bribe the electorate with its own money. Yet even on the one central issue of tax cuts, a deception lies at the heart of the Government's position. We are told that this is all part of a wonderful strategy to make good the Government's claim to be a tax-cutting Government. However, even if we take into account the 2p cut in income tax in the Budget and generously set aside the doubling of VAT which began the Government's period of office, we see that the burden of tax for most ordinary people—the proportion, the sum that they pay by way of direct tax——

Mr. Tim Smith

What about the proportion?

Mr. Gould

Yes, the proportion is the same. The hon. Gentleman must be patient. I have all the figures, and I shall give that figure in a moment.

For an ordinary family on half average earnings, taxes on income have risen by £5 a week in real terms since 1978. For a family of the same composition on average earnings, taxes on income have risen by £1.60 per week. Even for households on 1.5 times average earnings, taxes on income have increased by 35p a week. Even on the most favourable analysis—taking into account only taxes on income and bearing in mind the Government's tax cuts — all those families are paying more in tax than they were when the Government took office.

If we consider the overall tax position and take VAT into account, we find that matters are far, far worse. In that case, a family on average earnings is paying £6.36 more per week in tax. Even a family on 1.5 times average earnings is paying £6.82 extra per week. So much for the Government's claim to be a tax-cutting Government: like so many of the Government's claims and assertions, it simply does not stand up to analysis.

Mr. John Watts (Slough)

Will the hon. Gentleman give way?

Mr. Gould

I gave way to the hon. Member for Beaconsfield (Mr. Smith) earlier and my experience does not incline me to give way to his hon. Friend.

Let me answer the question posed by the hon. Member for Beaconsfield. Taking the country as a whole, the burden of tax has risen as a proportion of gross national product from 37.4 per cent. in 1978 to 40.4 per cent. in the last year for which figures are available. That is what has happened to our economy.

None of this takes into account the tax changes that we know are in the pipeline but do not appear in the Finance Bill. We know about those changes because we have constantly challenged Treasury Ministers both in correspondence and in the House to deny that they have in mind and in place proposals to increase the scope and the rate of VAT if they win the election. We have been reminded on many occasions that that is the Government's long-term strategy. Indeed, the Paymaster General, who is not here today, conceded to me in a television interview a month or two ago that that is the Government's objective. The Chancellor's former Cabinet colleague Lord Cockfield, an EEC Commissioner, is busy completing the internal market with all that that implies for the harmonisation of VAT and therefore the extension of VAT across the whole range of family spending. We must also consider the Chancellor's interest in joining the European monetary system with all that that implies for the co-ordination and harmonisation of monetary and fiscal policies.

Mr. David Sumberg (Bury, South)

Will the hon. Gentleman give way?

Mr. Gould

I shall not give way again.

There are two further pieces of evidence, the first of which is the now notorious statement by the Foreign Secretary, the Chancellor's predecessor, before the 1979 election. He made the famous statement—the notorious statement, as I prefer to put it— We have no intention of doubling VAT. We know that in the right hon. and learned Gentleman's first Budget he increased VAT from 8 per cent. to 15 per cent.

Secondly, my right hon. Friend the Shadow Chancellor and I have constantly challenged Ministers to deny reports that work has been done in the Treasury on the extension of VAT. Recently I received a reply from a Treasury Minister in which all sorts of weasel words and wriggling around were deployed to avoid answering the central question, "Is work being done, or has work been done on proposals to extend VAT?" We get no answer to that question.

On that basis my right hon. Friend and I —indeed, the whole Labour party — will be campaigning, and warning the electorate that the election of a Conservative Government will mean the extension of VAT to food, fuel, new housing, all clothing and even funerals. — [HON. MEMBERS: "Answer."] If the Chancellor wishes to dispute that, let him say now. If he does not, we shall make sure that the British people understand what is in store for them. We shall draw the parallel between what the Government are failing to say now and what the right hon. and learned Gentleman who is now Foreign Secretary said as Chancellor in 1979 and the action that he took immediately after winning the general election.

This Finance Bill is irrelevant to the needs of the economy. It is a sham that owes everything to the imminent election and nothing at all to what the economy desperately needs. Labour Members are clear as to what the alternative should be. We know what should have been done with the resources. We should be rebuilding our infrastructure, the skills of our people, our shattered industrial base and our economic future. None of those aims makes even a token appearance in the Finance Bill. The Bill is irresponsible. It offers no hope to the unemployed or to those who suffer from impoverishment and lost national output, and nothing constructive for the future. It is because the Bill does nothing to build our future that we shall vote against it tonight.

5.18 pm

Mr. Terence Higgins (Worthing)

The Budget day proposals of my right hon. Friend the Chancellor were widely welcomed as responsible and prudent. As I pointed out in the Budget debates, it is difficult to envisage how deflationary his proposals would have had to be for them not to be regarded by the Opposition as electioneering. They embody a sensible approach which is consistent with the maintenance of the improvement in our economic indicators which has occurred over a considerable period.

I had the greatest difficulty in reconciling what the hon. Member for Dagenham (Mr. Gould) said with the general experience of the vast majority of people in not only the south but other parts of the country. But, as he rightly said, there is a continuing unemployment problem. It is extraordinary that many of those who have commented on the Budget—not only the Opposition but people outside — have said, "The Budget does nothing for the unemployed." It is clear that the proposals for cutting taxation, not least for reducing the rate of income tax, help employment. That means greater spending power. Therefore, when people buy goods, it is likely that employment will increase.

More important, the Budget and the Finance Bill must he seen in the context of other public expenditure and borrowing proposals. Two or three years ago, some said, "Why do we not spend more on infrastructure, for example, rather than tax cuts?" In the last autumn statement and public expenditure White Paper, the Government significantly increased expenditure in a number of crucial respects, and that will help to alleviate unemployment. The combination of the reductions in taxation, the increases in public expenditure and the reductions in borrowing—this will enable interest rates to come down, which will increase the level of investment, as my right hon. Friend the Chief Secretary said—will help to reduce unemployment.

We must analyse the reasons for unemployment. I apologise for repeating what I have said previously, but the reality is that in the past there was gross overmanning. The reduction in employment, the increase in unemployment, and the subsequent increase in productivity all reflected the elimination of that overmanning. Some jobs were not really there. We are faced with a tremendously difficult problem. The country now has to generate jobs to employ those people who were previously in industry, which was overmanned. There cannot be rapid progress. But the measures in the Finance Bill, combined with the public expenditure programme and reduction in borrowing, mean that we are now on a steady course and that there should be a reduction in unemployment.

The Government have introduced a number of other measures to alleviate the problem in the meantime, and the underlying trend is significantly better than it has been. Demographic factors are now moving in a more favourable direction. Previously, there was an increase in employment and an increase in unemployment at the same time because the labour force was increasing. For all those reasons, real progress is being made on the unemployment front. The Finance Bill will contribute to further improvements.

There is common concern on both sides of the House about the unemployed, as for the rest of the economy. Undoubtedly, standards for those in employment have been improving for a considerable time. I had the greatest difficulty in recognising the gloomy picture painted by the hon. Member for Dagenham.

Mr. Gould

Will the right hon. Gentleman give way?

Mr. Higgins

Of course I shall give way.

Mr. Gould

I am grateful to the right hon. Gentleman. I gave way once. The right hon. Gentleman seems to have difficulty in understanding the point which I was making. Even those in work are very much dependent on the level of services available to them. The examples which I gave related to the services that they had received from the National Health Service, the state school system or the housing provision. I think that the right hon. Gentleman will concede that, in all those respects, the points which I made had substantial merit and accuracy. Many families, even those in work, have suffered because of the rundown in those services.

Mr. Higgins

With the greatest respect, I totally disagree with what the hon. Gentleman has said about expenditure on the Health Service. We know about the substantial rise in real expenditure on the Health Service, which was further augmented by the proposals in the autumn statement. As for education, one can look at the size of classes, expenditure per pupil and so on. In overall terms, I do not recognise the hon. Gentleman's description. On the contrary, the position has been improving significantly over a considerable period.

The Treasury and Civil Service Select Committee was under tremendous pressure because the recess occurred largely before Easter rather than after and the Committee had only a few days between concluding taking evidence and compiling the report. Traditionaly, the Committee does not normally deal with measures in the Finance Bill, leaving them to the detailed analysis undertaken in Standing Committee. My right hon. Friend the Chief Secretary said that some clauses would be considered in Standing Committee. With the possible exception of the right hon. Member for Ashton-under-Lyne (Mr. Sheldon)—I am not sure about my right hon. Friend the Chancellor—I have probably served on more Finance Bill Standing Committees than any other hon. Member. It is unlikely, I hope, that I shall find myself on the Standing Committee this year.

I wish to return to one point that I raised during the Budget debates. The proposals in clause 62 — on the taxation of the capital gains of insurance companies as income—give cause for concern. The House has always set its face against retrospection. I must declare an interest because I have some with-profits insurance policies—as, I dare say, do many other hon. Members. This measure will affect the position of those who have such policies and who may have reasonable expectations of the eventual value or the surrender value of their policy. They may even have asked their assurance company to assess that value.

I was not convinced by the statement by my right hon. Friend the Chief Secretary that there is no great problem because companies, to a considerable extent, write off their expenses against their capital gains. That may or may not be the case, but an increase in the rate of tax imposed on those companies must mean that the resources which they eventually have available for distribution, especially in terminal bonuses, will be reduced. I hope that, before the Bill is considered in Standing Committee, my right hon. Friend will consider whether this is appropriate.

I understand my right hon. Friend's point about consistency between clauses 61 and 62. Clause 61 is concerned with companies' capital gains, which are vastly different from the gains made by insurance companies, which are subsequently distributed to policyholders who have invested their savings with that company. 'The two are not the same. That is why, in the past, the legislation has differentiated between the capital gains of insurance companies and other companies' capital gains. I hope that that aspect will be considered, not least because I gather that there are substantial differences of opinion about the revenue involved. I think that the Government estimate that it is about £30 million and that some outside groups have suggested that it may be as high as £100 million.

On value added tax, I welcome the proposals in the Finance Bill to change to a cash accounting system and the relief that that will give to companies facing bad debts. It is extraordinary that the Opposition have had to resort to a scare campaign about the imposition of VAT on items such as food, fuel and housing. I am naturaly prejudiced on this issue, because I had the doubtful pleasure of steering, or perhaps fighting, the original VAT legislation through the House. There were good reasons why reliefs were given. In a recent report entitled "The Defence of VAT Zero-Rating," the Select Committee pointed out the importance of defending in the courts the existing derogations for a narrow range of items. I am glad to say that the Government are clearly doing that. In an earlier report, the Select Committee pointed out that the existing zero rating is not relevant to harmonisation of the internal market. The Committee put forward overwhelming arguments in its report.

It is sad that Lord Cockfield, who, in some ways, was instrumental in instituting some aspects of the present value added tax, should now seem to have changed from gamekeeper to poacher. I hope that the Government will do everything possible to resist that trend. If we are to harmonise at all, it is much more sensible to harmonise on our existing form of tax with a single positive rate, for example, and zero rating on essential items rather than the much more complicated and unjustified taxes that exist in many Common Market countries. It is completely wrong for the Opposition to start a scare campaign.

I shall say a few words about two points that are raised in the Treasury Select Committee report. In particular, I refer to monetary policy and what the Government and the Bank of England have described as the overhanging glacier of liquidity. It is a cause for concern. The reality is that, in many respects, the Government's present monetary policy is much closer to what I suppose Professor Milton Friedman would have described as a real monetary policy than to what was the case when the Government first came to power. The Chancellor has been successful in reducing the level of public sector borrowing.

The Committee felt some concern about the efficiency of using short-term interest rates to deal with credit expansion and, in particular, consumer credit. I hope that the Government will pay attention to that matter and consider whether it is appropriate to spell out, in rather more detail than the Committee was able to get in evidence, the overall policy with regard to control of credit and monetary policy generally, given that the measure of sterling M3 has been abandoned and the extent to which sterling M0 is a lead indicator is, to say the least, open to great doubt.

The other point upon which the Committee concentrated is the Louvre accord on international monetary affairs. I hope that the situation can be clarified. The Committee sought, with difficulty, to establish whether the Government are seeking to maintain any range of exchange rates. As we pointed out in the report, the lack of explicit exchange rate bands means that we are giving up some advantages that we would enjoy if we were to join the European exchange rate mechanism. If indeed the accord that is said to have been reached does not include any specific trigger levels for particular currencies or in certain circumstancces, it is difficult, particularly in the context of the present controversy with Japan, to determine how such a system can effectively operate. I shall not burden the House with the arguments that we put forward. The Government have yet to make entirely clear the proposals that they reached with the various participants in the accord. Greater clarification will assist the operation of international finance markets.

The economic forecasts attached to the report, which include those conducted by independent forecasters and those based on their common assumptions, show a satisfactory picture of economic growth, which, as my right hon. Friend pointed out, has been sustained for a considerable time, and of the retail price index and even the balance of payments. As the Committee report points out, we believe that the balance of payments side of things may be pessimistic rather than optimistic.

Overall, the Finance Bill is relevant to the problems of the unemployed, the future prosperity of the country and, above all, sets a course that can be maintained for further improvement in our economic affairs.

5.34 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

The right hon. Member for Worthing (Mr. Higgins) mentioned a value added tax scare campaign. Of course, we all know that value added tax is the subject of the European Commission's decision to push the matter forward as fast as it can. Of course, even if it were successful in doing that, it would not be the end of the matter. There would still be a distortion of competition—or so it would claim—in excise duties and even in personal and corporation tax. It is bound to fail in such matters if it tries to take the matter to anything like a logical conclusion. The harmonisation of taxes may come. If it does, it will be shortly before we harmonise the languages of the Community.

I disagree a little with my hon. Friend the Member for Dagenham (Mr. Gould). The Chancellor of the Exchequer has not failed in his Budget. He has succeeded. It was not his task to lay the foundations for the nation's prosperity. His task was to deliver to the Prime Minister what she required—a good pre-election Budget for a Conservative Government hoping to be re-elected. Most important of all, the Chancellor of the Exchequer has provided flexibility in the choice of the date of the next election. It could go on even for the next 12 months, so flexible are the arrangements provided by the Finance Bill and the Budget. The Chancellor has done that by quietening the foreign exchange markets. He has arranged matters so that interest rates, if not coming down, should be on a downward trend. He succeeded in maintaining some spending in the economy — excessive spending — with several tax reliefs that will keep his party satisfied if not deliriously happy. It has been a clever but not over-clever Budget. The Prime Minister could not ask for more.

If we raise our eyes a little we shall see that it offers little long-term hope for manufacturing industry, and nothing for the regions of our country. We seem to have forgotten the regions in our Finance Bill and Budget. Years ago, they were the prime aspects of Budgets. How can we deal with the problems faced by the parts of our country that are not being successfully run at present? That matter has been forgotten. It finds no place in discussions—more's the pity—and so the suffering goes on. There is nothing in the Finance Bill for the deprived and nothing to end the divisions between the rich and the poor and the north and the south. In the pre-election excitement, that will be lost. It will be remembered when the voting figures are counted and we must turn again to economic realities.

Two matters are omitted from the Finance Bill. They used to find a regular place in the Finance Bills introduced by the previous Labour Government. Each came about as a result of the activities of one hon. Member, who was then an Opposition Whip. He introduced the novelty of a Whip who spoke more frequently and for longer than most of his colleagues. Hon. Members will know that I speak of the present Chancellor of the Exchequer. The debates on the Finance Bills of the Labour Government were substantially dominated by the Rooker-Wise amendments. The alliance between my hon. Friend the Member for Birmingham, Perry Barr (Mr. Rooker) and Audrey Wise, together with the then Opposition Whip the present Chancellor of the Exchequer, led to indexation of personal allowances.

That amendment found its way into legislation and became part of all subsequent Finance Bills. That was quite right. It was taxation by stealth. The Chancellor of the Exchequer used to call it "Truth in taxation". I must concede that that term is a bit too grand for my taste, but in inflationary periods there is a special need to increase thresholds. A number of people come out of taxation at the time of all Budgets, there is a great hullaballoo, and they are in it again the next year. It used to be called fiscal lag. We do not seem to use that term too much these days. That happens even when income tax thresholds are raised in line with inflation.

What is worse is that, when thresholds are not increased in line with inflation, the so-called generous Chancellor is not generous at all and increases taxation. The then Whip started his campaign to tell the truth about these matters. He made much of the failure to revalorise personal allowances, which was his major campaign during the time of the Labour Government. But the failure to revalorise personal allowances is the mirror image of the failure to revalorise excise duties. In the Finance Bill he has failed to revalorise excise duties.

We have a Chancellor brought to his judgment. His past derides his present—his present actions are mocked by his past. An earlier Chancellor of the Exchequer failed to index personal allowances in order to increase his revenue. This Chancellor condemns that action, yet he fails to increase the excise duties. He does that for one reason—to manipulate the retail prices index—and it is that manipulation that I oppose. We have to ask ourselves which is the more heinous offence—to fail to index to increase revenue or to fail to index in order to manoeuvre the retail prices index? That is the price we pay for too close attention to the RPI.

At one time the Government believed that inflation was not caused by the cost of living. They believed it was caused by the money supply. They were so convinced of that quackery that they increased VAT from 8 per cent. to 15 per cent. in the belief that it would not affect inflation. Of course, it did and inflation leapt to over 20 per cent. The policy continued unchanged and the country has paid a high price for the education of the Government.

A high inflation rate was followed by what the Leader of the House has called the three years of unparalleled austerity. That was bad enough, but it differed in its effects throughout the country. It impinged lightly on the south-east and wreaked devastation not just in the towns with old industries but in places such as Ashton-under-Lyne, Droylsden and Mossley in my constituency, where small firms have thrived for generations and where people had earned their living making things, using their skills to manufacture articles for the home market and abroad. The trouble with the three years of needless, as well as unparalleled austerity, is that it closed so many firms which ought not to have closed and it closed them in my towns.

It is no use blaming councils. In Tameside we have a most responsible local authority. Last week I and my Tameside colleagues my hon. Friends the Members for Stalybridge and Hyde (Mr. Pendry) and for Denton arid Reddish (Mr. Bennett) met industrialists in the town. Those industrialists are rather different from the sort one gets in the Confederation of British Industry. They are concerned mainly with small industries, making things arid earning their living providing prosperity for the towns in which they live. They appreciate the good sense of the Tameside council.

They know, to the surprise of many, that Tameside council has a public accounts committee of its own to ensure that it gets value for money. It sent a delegation to the Select Committee to learn how to provide itself with some of the skills necessary to satisfy itself of the probity and correctness of its spending decisions. Therefore, do not let us hear too much about local authorities and the damage they do. They are assisting the economic regeneration of many parts of the country.

Many years too late, the Chancellor of the Exchequer has come to realise that inflation is not caused by the money supply after all. He has discovered that it is. sadly, a little more complicated than that. He has discovered, in the final years of the 20th century, that it is caused by such old-fashioned notions as demand in the economy, the level of manufacturing capacity, pay settlements, the exchange rate, investment and boring things such as that. The danger is that the Chancellor, with his new-found interest in and concern for the retail prices index, may become too enamoured of the scope for trickery and deception that it presents.

Chile, long before the years of Pinochet and Allende, depended heavily on the RPI as a measure of inflation, which it naturally wished to reduce. Chile has the longest record of inflation of any country in the world. It had inflation going back to the 1880s. Years ago, wage settlements took place in January of each year. That may still happen; I do not know. Therefore, every December large quantities of cheap imported potatoes were brought into a country that was self-sufficient in potatoes and depended heavily upon them for the diet of the people. That depressed the cost of living index and wage settlements were moderated. That was the theory. It worked for a while but it did not last because the trade unions eventually constructed their own version of the retail price index. So the Chancellor of the Exchequer should beware of playing those tricks with the cost of living index. If I may say so, he has his reputation to consider.

The second omission from the Finance Bill deals with mortgage relief. It was here that in 1976 the Chancellor of the Exchequer, again in his erstwhile position of the talkative Whip, moved an amendment to include the level of mortgage relief as an annual item which, from then on, had to appear as a new clause in every Finance Bill. Consequently, that could be debated and was debated each year, usually at some length. Accommodating as Treasury Ministers then used to be, they accepted the amendment and so it stayed until the present Chancellor of the Exchequer moved into the Treasury and scrapped the whole business.

The House knows the nonsense of mortgage relief. It knows how it pushes up the cost of houses and encourages home owners to use their spare cash in trading up rather than investing in industry. It knows how so much of the money leaks into other areas of expenditure, much of it consumer expenditure, and how the rise in house prices increases collateral and expands the availability of credit. We also know the difference of opinion on this matter between the Chancellor and the Prime Minister.

The Chancellor has learned. He is now on the side of those who realise the dangers of mortgage relief for its impact on house prices as well as for its assault on the principle of fiscal neutrality, to which I believe he is still wedded. The trouble is that, although he has learned, he has done nothing to halt the rise and the cost of mortgage relief now amounts to around £5 billion a year. I notice that he did not refer to that once during his Budget statement. That is rather surprising considering the importance of it. However, I think that it is perhaps a sign of a feeling of guilt and an acceptance that he was not able to get the agreement of the Prime Minister.

There are two other omissions from the Finance Bill. One is from part III, which deals with stamp duty. I expected that at some stage during his period of office the Chancellor of the Exchequer would enjoy himself and abolish stamp duty or at least bring it down further than he has done. I also thought, dealing with part II of the Bill, that he would try to abolish capital gains tax.

The Chancellor has so emasculated capital gains tax that very little of it remains. That is a pity, because there was a coherence between corporation tax, capital transfer tax, and capital gains tax which has now been destroyed by the Government. A Labour Government will need to replace that trinity of taxes with something equally consistent. It is sad that the Labour Government will not have the expertise and dedication of the late Lord Kaldor to help them, but a unifying system such as that which he might have devised will be needed to deal with the taxation of wealth and inheritance.

I am not a close friend of the strange tax of stamp duty, but nor am I the enemy of it that I believe the Chancellor to be. It has been a substantial and economical raiser of revenue. Because of recent changes, it does not occupy the same position today and I had expected it to be on the Chancellor's execution list or at least to be something about which he would have taken action.

I have always been unhappy about the way in which we have taxed oil. We were late in coming to it and we have taken very little notice of the need to ensure that a depletions policy is part of the Government's essential policies in dealing with our energy supplies. That tax has been absorbed into the revenue aspect of Government. They have had vast sums of money which have enabled them to carry out the economic policies they pursue. However, it is not just the revenue but the balance of payments, because even when oil is quite cheap and drops substantially in price it is still saving us an enormous amount in balance of payments. In the period since the last war, in fact almost the whole of the century, certainly from the first world war, balance of payments difficulties have bedevilled the whole economy. Those difficulties have been the basis of stop-go and of some of the most agonising decisions that Chancellors have had to face. Suddenly, at a stroke, all those difficulties disappeared. Any success rests on the backs of those oil wells in the North sea. The major constraint that has now been removed has been an enormous advantage to all those who have taken the position of Chancellor of the Exchequer since 1979.

I note that the Treasury and Civil Service Select Committee report considered that the oil price assumption was modest and that the PSBR figure of £4 billion was an overestimate. I agree with that. In passing, I must state that I have great respect for the right hon. Member for Worthing. However, it is sad that there were eight Divisions during the Select Committee proceedings. I know that it is hard to achieve a united Committee as we approach the general election, but if the Committee is divided, it will not carry the same weight. I hope that all those concerned are more aware of that now and I hope that they are aware that they may have to steer clear of certain subjects during this rather difficult period.

The Chief Secretary to the Treasury spoke again and again about success, the strength of the economy and the wonderful position of this country. Had we had genuine proof of the success, I suspect that we would have had a different Finance Bill before us today. The Bill and the Budget are inadequate to meet the problems that lie ahead and they cast severe doubt on the success claimed by the Chief Secretary.

5.51 pm

Mr. Nigel Forman (Carshalton and Wallington)

I am sorry that the hon. Member for Dagenham (Mr. Gould) is not present to hear my comments. It was rather uncharacteristic of the hon. Gentleman to claim that the Finance Bill was, among other things, irrelevant to some of the real needs of the nation. One of the points that he instanced when making that charge was the important area—and hon. Members on both sides of the House would agree that this was important — of industrial training and retraining, where quite clearly the contribution in this country of the public and private sectors has for a long time been inadequate. The hon. Member for Dagenham should have paid attention to the small but useful clause—clause 36—to which my right hon. Friend the Chief Secretary to the Treasury referred. That clause relates to the relief of the costs of training for private sector employers who carry out more of the training which the country so badly needs. In that respect, if not in many others, the hon. Member for Dagenham's speech fell below the needs of the occasion.

Last year I spoke in the equivalent Second Reading debate on the Finance Bill and gave a particular welcome to two aspects of what later became the Finance Act 1986. I welcome the cut in the standard rate of income tax to 29p in the pound and the package of tax reliefs for charities and charitable giving.

This year, I want to give a particular welcome to the cut in the basic rate of income tax to 27p in the pound. At that level, we shall not be far from the Chancellor's objective of 25p in the pound. I hope very much that the basic rate of income tax can be cut further in future. However, as the figures set out in clause 20 of the Bill show, the tax changes in income tax — welcome though they are — leave us more urgently than ever in need of fundamental tax reform to lower still further the initial rate of income tax — the point at which someone enters income tax. Secondly, we must lower further the top rates of income tax, especially when we consider the international position. Our top rates rise to 60 per cent. in the pound and they are still significantly higher than those of many of our competitors. Thirdly, and most important, there is a need to smooth the gradient in income tax.

As right hon. and hon. Members who study these matters will have noticed from clause 20, it is striking that there are now two "cliffs"—as I believe that they are called in the jargon—in the income tax structure. In other words, someone moves from paying no income tax, beneath the income tax threshold, directly into tax at 27p in the pound — at least that will be the case if the measure becomes law later in the year. That person may then move again up a "cliff" of 13 per cent. to the next rate of 40 per cent. to level off thereafter at 45, 50, 55 and 60 per cent.

Mr. Ian Wrigglesworth (Stockton, South)

Plus national insurance.

Mr. Forman

If I had a graph or a blackboard I could illustrate my point more clearly. As the hon. Member for Stockton, South (Mr. Wrigglesworth) has just said in a sedentary intervention, most people outside the House regard income tax as only part of the picture. They often speak in terms of stoppages. When we consider matters in that light, we must also include the 9 per cent. employee national insurance contribution, which merely compounds the problem to which I am drawing attention. The smoothing of the gradient should be a priority for income tax reform, if not in this Finance Bill then certainly in the new Parliament.

Once the Finance Bill becomes an Act, we shall have an income tax structure which is badly out of kilter with built-in disincentive effects at the point of entry and at the higher rates. Taxpayers will be faced with the two cliffs and a number of higher rates which are still too high. I want a structure to replace the present structure in which we move to a tax gradient, for example, with a starting rate of income tax of 20 per cent. moving up perhaps in five or six equal stages to a top rate of 45 per cent. and linked perhaps to judicious reform of some tax allowances.

When considering income tax we need to consider both sides of the matter—the rates of tax and the coverage of tax which involves tax allowances. The entry point of tax —in addition to my comments about rates—should be at a relatively higher level of income and the various bands should be smoothed as much as possible so that at the end of the exercise the state becomes not the senior partner, but a junior partner in sharing the benefits of a person's earnings. In that context, it is important that the absolutely top rate of tax should be less than 50 per cent.

I have made some calculations as to what an income tax gradient of the kind that I have described might cost in terms of revenue forgone. In the tax year 1986–87, my best estimate is that it might have a full-year cost of £11,000 million. However, in any tax reform proposal of this kind, it would obviously be sensible and indeed inevitable that any Government should phase such a change over two or three years. If we consider the matter in that context, my proposal would mean an annual cost of about £3.7 billion each year over three years. In the context of some of the other tax changes that we have made recently, that would not be out of court. Those figures of cost would take no account of the dynamic boost to the revenue that would almost certainly flow from the lower rates of income tax on the evidence of this country with its higher rate reductions and from other countries. If we consider this matter overall, a tax reform package, even if confined to the realm of income tax along the lines that I have described, could be beneficial to economic activity and to personal incentives in this country.

In parenthesis, I want to state that the cause of such radical tax reform — to which I have long been committed—has not been assisted over the years in the United Kingdom by the administrative and institutional arrangements for advising upon and implementing tax policy. That is not an original point. It was well made recently by John Kay in his valedictory lecture to the Institute of Fiscal Studies. As Mr. Kay can explain this matter so much more expertly than I, the House might be interested to hear a brief quotation from that lecture in which Mr. Kay sets out the way in which the total involvement of the Inland Revenue at the expense of the Treasury is not necessarily in the national interest. M r. Kay put it like this: Revenue policy ideas have been based on narrowly conceived administrative criteria, which have not been sensitive either to the broader economic, social or political context within which policy operates, or to the realities of the business and commercial environment. Nor could one have expected anything else. The Inland Revenue is not an economic department—it employs, as a matter of fact, four economists. It undertakes little research or analysis, arid commissions none, although there is a very substantial statistics collection activity. It does not engage in strategic planning. And the experience that officials bring to bear on the issues before them is, almost exclusively, experience of tax administration. Whatever attributes the Inland Revenue may have, working out complicated long-term tax policy is not necessarily one of them.

As Ministers have to rely heavily on advice from civil servants on these complicated matters, I believe that the answer to this institutional problem is significantly to expand the tax policy division of the Treasury on the model of the United States Treasury's Office of Tax Analysis and to encourage such a body to involve itself in timely and open publication of well-constructed tax reform proposals which could then be widely discussed and perhaps improved before the Chancellor of the day decided what shape of tax reform he wished to introduce in a subsequent reforming Budget. If we approach tax reform on that basis rather than on the traditional rabbit-out-of-hat basis that we have come to associate with Chancellors of all parties, I believe that there will be a much better chance of building the kind of informed public support that is needed for such a package to be carried through.

Secondly, I warmly welcome the range of measures designed further to assist small businesses. My right hon. Friend the Chief Secretary has already referred to some of them. I especially welcome the proposed reduction to 27 per cent. in the rate of corporation tax for small companies compared with the 42 per cent. which prevailed in 1979. The introduction of optional cash accounting for VAT for businesses with a turnover of up to £250,000 is also a good idea as it means effectively that they will not have to account for VAT until their bills have been paid. I also welcome the introduction of optional accounting for VAT for businesses in that category as it means that they will have to complete only one VAT return per year with nine advance payments on account. All those measures are most welcome because of the need for dynamism and a vibrant small business sector. Moreover, they are merely the latest instalment in a range of measures introduced by the Government over the years to assist small businesses. I remind the House of the measures benefiting unincorporated businesses, the abolition of the national insurance surcharge and the introduction of the business enterprise scheme.

Thirdly, I warmly welcome the proposals in clauses 107 to 122 designed to encourage profit-related pay. I was encouraged to learn earlier today that more than 3,200 firms have already registered an interest in setting up such schemes in favour of their employees and I am sure that many more will follow in response to the generous tax relief provided in the Bill. The relief is generous because it offers the opportunity for up to half of any profit-related pay up to an annual limit of £3,000 per employee to be exempt from income tax. Not enough people outside are aware of the dramatic figures already given by my right hon. Friend the Chief Secretary when he said that such relief could be equivalent to a further 4p reduction in the basic rate of income tax for employees of firms which take full advantage of the scheme. It is an excellent way of helping British firms to overcome two persistent problems which have bedevilled us for far too long. First, it will help to overcome the all too familiar "them and us" syndrome because it will give workers an extra cash stake in the firms for which they work. Secondly, it will help to break down the rigidities which, unhappily, still exist in the labour market by encouraging greater pay flexibility. I hope that the take-up of the schemes will expand further over the years and thus help to extend employee involvement and improve corporate performance. If we can achieve both those things through the mechanism of successive Finance Bills, they will be of great utility to the real economy.

A complementary mechanism for encouraging wider participation by employees in the firms for which they work is the idea of employee share ownership schemes. As an honorary director of Job Ownership Limited, I am strongly committed to this and argued for it in Committee on last year's Finance Bill. I was therefore disappointed that there was no further measure of tax relief for such schemes in this year's Finance Bill, but I live in confident hope that a radical measure along these lines will be included in an early Finance Bill in the new Parliament, whenever that may be. Even at this stage, I strongly commend the idea of time-limited tax relief for employee share ownership schemes, not only for all employee share ownership schemes on the so-called democratic capitalist model which I strongly favour but for those permitting partial equity participation by employees of a qualifying firm. Examples from many quarters such as the National Freight Consortium, the John Lewis Partnership and the Baxi Partnership show that such schemes have been as effective in this country as in the United States by improving corporate performance, spreading share ownership and creating a more constructive and well-informed climate of opinion in which to conduct industrial relations.

We are all grateful that the climate of industrial relations has improved significantly and that the number of problems and stoppages has greatly declined. Nevertheless, any measure which has the effect of further improving industrial relations must be welcomed in its own right. Moreover, such a policy of employee share ownership would be entirely consistent with the Conservative policy of extending privatisation. It would involve more people as shareholders as well as employees. We are all multi-dimensional in that there are many different aspects to our lives. This would have a broadening effect and, I believe, breed a more positive attitude to new, productive investment which is wanted by both sides of the House. It would also facilitate the sale of family businesses to their employees, especially when there are family succession problems. Finally, I believe that it would foster a greater spirit of genuine partnership in British industry and commerce. All in all, I believe that the idea deserves the closest possible attention and I hope that it will benefit from the support of Members in all parts of the House.

This has been a very good Budget, leading to a sensible and welcome Finance Bill containing a number of timely and popular measures. I am confident that it presages further progress in the coming years, presumably in the new Parliament, especially in the areas of fundamental tax reform and the widening of ownership. On that basis, I am happy to give it my full support.

6.9 pm

Mr. Ian Wrigglesworth (Stockton, South)

Not for the first time I find myself in agreement with much of what the hon. Member for Carshalton and Wallington (Mr. Forman) has said. His advocacy of tax reform has interested the House on previous occasions. It is a great pity that some of the Labour Members who are barracking at present do not take more interest in radical tax reform than they have shown recently. The hon. Gentleman's commitment to co-ownership and to employee particiption deserves support from hon. Members of all parties. I am sure that if he tables amendments in Committee along the lines of the schemes that he has proposed, they will receive a wide measure of support across the Committee.

I hope that the hon. Gentleman will forgive me if I return to the beginning of the debate and to the optimistic speech of the Chief Secretary in his assessment of the current economic position. That contrasted remarkably with a letter that I received in the last few days from one of his ministerial colleagues in another Department, in which the Minister referred to "these difficult times". There was little in the Chief Secretary's speech that gave the impression that we were facing difficult times. However, that is what a Minister from the Department of Health and Social Security told me.

Why did the Minister point out that we are facing difficult times? I shall tell the House why. I raised with the Minister the problems faced by people who are aged over 80 and who have an age supplement of 25p a week. I suggested that that was a scandal and an insult to those people. When addressing pensioners over 80, the Government find, all of a sudden, that we are facing difficult times. However, when the Chief Secretary comes to the House to talk to those who are receiving 2p off income tax, at a cost of £2.2 billion to the Exchequer, all of a sudden we are facing a rosy climate. There is a remarkable contrast in those Ministers' pronouncements, depending upon the audience that they are facing.

Many of those who will benefit from the 2p cut in income tax would have great sympathy with Mr. George Brand in my constituency who wrote to me about the insulting level of age allowance for those over 80. I wish that Ministers would speak consistently when addressing the country and not seek to give the impression that everything is milk and honey as the election approaches, when clearly, for such people it is not.

I want to point to the three major defects in the Government's policies at present. First, the demand that the Government have stimulated in the economy is led much too much by consumer expenditure. That is leading to problems with the balance of payments and inflation. Secondly, the Government's policy is defective because unit labour costs in this country are still increasing at a rate which is beyond those faced by the competition from countries overseas. To a considerable extent, that is related to the fact that pay increases are still going ahead, having done so for the past two years, at between 7½ and 8 per cent. Inevitably, that is leading to a loss of competitiveness by comparison with Germany, Japan and other countries.

The third defect in the Government's strategy is the decline, ineffectiveness and lack of support for manufacturing industry, which my hon. Friends and I regard as the core of the economy, upon which the service industries and, at the end of the day, the wealth of the country depend. The Budget does very little—I am not saying that it does nothing — to address the fundamental problems of manufacturing industry.

The right hon. Member for Worthing (Mr. Higgins) said that we had had such high levels of unemployment in recent times because of the shake-out of jobs that did not exist in industry. I must tell him that he is completely wrong. Some jobs certainly needed to go because firms operated with inefficient and uncompetitive manning levels. However, I remind the right hon. Gentleman that what happened between 1979 and 1982 was nothing to do with a shake-out of over-manning. We lost 20 per cent. of our manufacturing capacity during that time. That meant not just that a few people were shaken out from individual firms, but that whole firms were going bankrupt and closing down. The reason for that was the Government's economic policy. The high exchange rate and the monetarism to which the Government was wedded in the past brought about the collapse of perfectly efficient and successful companies that could not survive against a background of exchange rates and the economic policies that the Government pursued at that time. That is when unemployment shot up to its present level. That did not happen as a result of shake-outs in industries in more recent times which have undoubtedly led to some of the increases in productivity that we now welcome.

However, the damage that was done to our manufacturing base will be with us for many years to come. One of the major defects in the Government's policy is that they do not address themselves and their resources to dealing with the problem. Last year, in his Budget speech, the Chancellor said that as a result of the oil price fall industry had an outstanding opportunity both to increase its exports and to reduce import penetration in the home market". —[Official Report, 18 March 1986; Vol. 94, c. 169.] Since then, the projection for the balance of payments for 1987 has deteriorated from a surplus of £3 billion to a deficit of about £2.5 billion. The projected manufacturing deficit for 1987 has widened to a horrific £8 billion. That hardly suggests that industry has taken advantage of the decline in oil prices, to which the Chancellor pointed last year.

We need only look around us, in areas such as my own, which has the highest level of unemployment of any county in Great Britain, outside the Western Isles, to see that that deterioration continues. In my constituency during the last few weeks we have seen the final closure of the engineering firm of Head Wrightson, which had a magnificent record, going back over 100 years, of high quality manufacture and constructional engineering work. That firm is being closed down when the orders for new power plants, for which we have been waiting for years under this Administration, are just coming forward. Typical of many such firms in our region, Head Wrightson made first-class, quality products for the nuclear generating industry, heat exchangers and all sorts of plant for the process plant industry. Just as those orders are coming down the track, that firm has finally collapsed. There is no hope of keeping it as a going concern, despite the magnificent efforts that the work force and the management have put in.

It is a tragedy to see yet another—in fact the last firm of any size in the engineering sector in my constituency—being closed down in that way. We have lost one after another during the past seven or eight years. I warn the Government that now that that capacity is going and that machine tools and people are leaving that plant, they will not be available in the future and orders will go overseas. When orders go overseas, we strengthen not only the manufacturing sectors of those overseas countries, but the service sectors because the idea that one can live without the other is clearly poppycock.

The Chancellor needs to remember that we have lost not only a substantial share of our manufacturing sales overseas, but a substantial share of our invisible market overseas. In fact, our share of world trade in invisibles has fallen from 12 per cent. in 1969 to 7.7 per cent. in 1984. Therefore, the idea that invisibles will pull us out of the mire into which we have sunk is poppycock. All the evidence from countries such as Japan and, indeed, the history of the United Kingdom show that a thriving services sector must be based on a thriving manufacturing sector. A country has overseas insurance, banking and shipping industries and all the other service sector industries because it trades successfully. Unless we do so in manufacturing exports, almost 100 per cent. of which are tradeable, we shall never maintain our share of the invisible market. That is absolutely fundamental.

The Chancellor of the Exchequer should still be worried about the trend of unit labour costs. Increased productivity through a continuing shake-out of labour in manufacturing has reduced unit labour costs, but our earnings growth has remained substantially higher than that of our principal competitors. It is 8 per cent. compared with 2.5 per cent. in the United States, 1.8 per cent. in Japan and 3.2 per cent. in West Germany. Our unit labour costs at an annual rate of 3.7 per cent. in the fourth quarter of 1986 remain higher than those in the United States, which are at minus 0. per cent., than those in Japan, which are at 2.7percent and than those in West Germany, which are at 1.8 per cent.

The existence of that gap, together with a firming up of sterling, suggests that our competitive position, far from being the industrial miracle trumpeted by Ministers, is still deteriorating. That is demonstrated clearly in the balance of payments forecasts for the forthcoming year and the horrific deficit forecast in manufacturing goods.

That is why we in the alliance have a different set of priorities from those which the Government have encompassed in the Finance Bill and the Budget. Our Budget priorities are designed to cut unemployment by about 1 million in three years. We believe that that can be achieved without higher inflation and without increasing the overall tax burden, and by taking several measures which are in marked contrast with those taken by the Government.

First, there should be a job guarantee for all those out of work for a year or more through a new building and improvement programme, a crash programme of education and training for skills, recruitment incentives, new jobs in caring in the community and earlier retirement. Secondly, we believe that a cut of 25 per cent. in the tax on jobs in the regions and unemployment black spots through reduced employers' national insurance contributions could make a major contribution in the regions to which the right hon. Member for Ashton-under-Lyme (Mr. Sheldon) referred. Thirdly, we believe that there should be a major expansion of capital expenditure on housing and construction.

Mr. Higgins

I have trouble in understanding how early retirement can give a job guarantee.

Mr. Wrigglesworth

Early retirement makes employment available for those coming on to the jobs market. If we increase the early retirement scheme which the Government are already running, it will enable more people to leave industry and make way for young people to be recruited. In that way the unemployment register will be reduced.

Mr. Higgins

How can that give a guarantee to people who will be retired earlier?

Mr. Wrigglesworth

Many of those in work would be delighted to retire early if they had the incentive to do so. I am sure that that is the case, not only in my constituency, but in many other areas.

Fourthly, we believe that there should be an attack on the poverty which has hit many people during the recession, through increases in the basic pension of £2.30 for single people and £3.65 for married couples, with a further £3.70 and £5.75 for pensioners with no other income. Child benefit should be increased by £1 and a new basic benefit should be introduced for families on low incomes.

That form of increased consumer expenditure has much less import content in it and much more demand on the domestic economy than the expenditure that the Government are stimulating by cutting taxes by 2p.

The Financial Secretary to the Treasury (Mr. Norman Lamont)

Will the hon. Gentleman enlarge on what he said about retirement pensions? Is he saying that there should be a two-tier retirement pension and that the second pension should in some way be means-tested and available only to people with no savings?

Mr. Wrigglesworth

We are saying that the pension should be increased for a single person by £2.30 and for a couple by £3.65, and that there should be a supplement for those with no other income of £3.70 for a single person and £5.75 for a married couple. That is consistent with our proposals for integrating the tax and benefit systems and for targeting the money on those who need it most. We would not throw money all over the place like a blunderbuss without targeting it on the hardest hit, as the Labour and Conservative parties wish to do.

We want the Government to apply for full membership of the European monetary system and to join the exchange rate mechanism which would help to maintain the pound's competitiveness and bring interest rates down by 2 per cent. on average.

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

rose——

Mr. Wrigglesworth

I must not give way as other hon. Members wish to speak.

We would introduce a tax allowance of up to £500 for people investing in shares to encourage wider share ownership. I shall return to that. The stamp duty on house purchase should be abolished. We must embark on an industrial strategy with incentives to industry to invest in new technologies, education and training to a much greater extent than the Government have been prepared to do if we are to underpin the long-term growth of our manufacturing sector.

The Government have done something of benefit by introducing in clauses 107 to 122 a scheme for profit-related pay. The alliance welcomes the concept of profit-related pay which is based on ideas of profit-sharing and industrial partnership which we have supported for a long time. We accept the basic framework, limiting PRP to the lower 20 per cent. of basic pay or £3,000. That means that only basic pay of up to £15,000—about the level of the employee's national insurance contribution threshold—qualifies for the scheme and is far more equitable than the proposals originally contained in the Green Paper. However, the scheme offers insufficient incentives for both employees and employers to commit a substantial proportion of their pay to the PRP scheme. Therefore, we shall seek to move amendments to scale up the reliefs available for those committing more than 10 per cent. of total pay to a PRP scheme and to offer a payroll incentive to employers to initiate schemes in the form of reduced employers' national insurance contributions. We would also limit the relief to the basic rate.

The effect of that would be to redistribute the incentive to employees much closer to average earnings and to encourage them to commit a higher proportion of their pay to the scheme. Instead of giving a tax break to employees paying tax at higher rates so that those on £40,000 a year paying 60 per cent. tax would receive £900 a year under the present PRP compared with £405 for the basic rate taxpayer, all employees would get up to £805 a year relief. Thus, for employees our changes would mean a tax rate of only 19 per cent. for PRP and for employers it would mean a cut of 2 per cent. in their national insurance contributions for 20 per cent. of the paybill of the employment unit. Clearly, we can pursue this further in Committee.

Those large incentives should be for longer than a year, which is insufficient to test the effectiveness of such schemes. They should be linked to agreements of at least two years' duration which would encourage the development of new forms of pay bargaining. At present the Government appear to assume little or no union and staff participation, no doubt fearing that PRP will be used to open company books. We in the alliance have no such inhibitions in advocating both disclosure of information to members of staff and trade unions and their full involvement in such schemes. We believe that is an absolutely essential part of the success of such schemes if workers are to be involved in the performance of their firms and in their firms' results.

In introducing the scheme the Government have proposed substantial and deeply damaging changes for existing schemes. I hope that they will look at that again. I am sure that representations have been made already to them about it. Their proposal to make employers and employees pay national insurance on all profit-sharing payments which are made through discretionary trusts will undoubtedly undermine existing schemes, reduce the size of the final profit pool and cut payments to employees.

It is right to tackle the abuse by which, following the abolition of the national insurance contribution ceiling for employers, firms with higher paid employees have been setting up trusts with the sole intention of avoiding national insurance contributions, and one supports the Government in seeking to stop that occurring, but surely there is a better way of closing that loophole than cutting off this concession for bona fide profit-sharing schemes such as those run by the John Lewis Partnership, ICI, Sainsburys, English China Clays and many other companies. I hope that the Government will think again about this and look at the proposals in the light of the comments that such firms have made.

The impact of the Government's proposals will be substantial. A firm such as ICI, as the CBI has pointed out, will lose about £4 to £5 million per annum as a result of this and its employees will lose some £60 to £80 per annum. English China Clays will lose about £500,000 per annum and its employees about £30 to £40 per annum. I hope that the Government will look at that and see whether amendments can be introduced to reduce the impact on existing schemes

. As to wider share ownership, I am very disappointed that the Government have not modified the personal equity plan proposals that they brought forward in the last Finance Bill. We shall seek to introduce a scheme along the lines of the Loi Monory system in France to give tax relief to taxpayers who wish to invest in shares.

I think that the personal equity plan will fizzle away to virtually nothing because at the moment it is only of great benefit to those who are already paying capital gains tax. The benefit to a person who has a small income and the small amount of capital gain from participating in a personal equity plan is almost totally eaten up by the 1.5 per cent. that most companies charge for adminstering the scheme. I hope that the Government will think again about that, and I also hope that they will respond to pressure from Back Benchers such as the right hon. Member for Worthing and introduce wider share ownership proposals than those that they have so far been prepared to contemplate.

I should like to raise one final point that I raised during the course of the Budget debate—the very mean attack on working men's clubs and non-profit making clubs of one sort or another. The Government are increasing the tax on gaming machines by 25 per cent. to give it to people who go to the races by removing the tax on on-course betting. That has been a substantial blow to many clubs in areas such as mine. The clubs are social institutions which have an enormous community involvement and which do a great deal for the children of members and their pensioner members. They include a wide range of different types of institutions, but many of them have been in substantial financial difficulty as a result of the recent recession. When there is 20 per cent. unemployment in an area the clubs are hard hit by the drop in income and many have closed down. This further imposition of tax will inevitably lead to further financial difficulties. I have received representations from the Queen's club, the Acklam Garden City club and various other clubs. and I have also received a petition From my constituents about this. I hope that the Government will think again about such a substantial increase in tax. If it had been an inrease which was in line with inflation over the past year the clubs would not have complained, but to use the revenue from that to abolish tax for on-course betting seems a particularly invidious thing to have done. Why people in clubs should be penalised to benefit those who have the freedom to bet on-course is unclear to me, as I am sure it is to many of the members of the clubs.

The Government's economic strategy for manufacturing industry is misplaced and defective in terms of the character of the demand that they are stimulating in the economy and by not paying sufficient attention to the increases in pay and the deterioration in unit labour costs. The long-term interests of industry and the economy are being eaten away by the short-term interests of the Government, who are putting all their attention behind a pre-election Budget boost. That is of no benefit to the long-term interests of industry. It is of no interest to those who have been hardest hit by the recession in recent years, and the Government will pay the price when the general election eventually comes.

6.35 pm

Mr. John Watts (Slough)

In the Budget my right hon. Friend the Chancellor of the Exchequer achieved the virtuous treble of being able to provide for higher spending in key areas, while at the same time achieving a substantial reduction in Government borrowing and further cuts in taxation.

The key to those achievements lies in the substantial and sustained growth of the economy, which is the expected outcome of the consistent and prudent financial and economic policy that the Government have pursued since they were elected in 1979.

The buoyancy of tax revenues is clear evidence of the improved profitability of businesses. One has only to look at corporation tax, which has yielded £1.8 billion more than the original forecast for last year.

I have no doubt that the substantial structural reforms of corporation tax which were contained in the 1984 Finance Act have made a major contribution to the transformation of the business environment. Those reforms removed the tax shelters of stock relief and 100 per cent. capital allowances; stock relief became largely redundant with the defeat of inflation. Those tax shelters of stock relief and capital allowances of 100 per cent. tended to induce businesses to make non-commercial decisions, so that if towards the end of a financial year a company had been so imprudent in the management of its affairs to envisage a corporation tax liability at the end of it, it would simply be advised to buy more stock or buy a few more machines to wipe out that liability. Those tax shelters were removed, and in so doing the Chancellor was able to reduce corporation tax in progressive stages from the 52 per cent. rate which we inherited to the 35 per cent. rate that we enjoy today. For small companies the reduction has been from 42 per cent. to 27 per cent., as proposed in the Finance Bill.

Another effect of this structural change was that much brainpower in companies was switched from concentrating on how to minimise tax bills to how better to manage the company profitably. That has benefited the whole economy. Companies have seen their profits rise dramatically as more attention has been paid to managing the business and to commercial considerations. At the same time, corporation tax revenue has grown substantially under the stimulus of lower rates of taxation.

It is quite clear that lower taxation provides a strong stimulus to economic activity. Sadly, that lesson is lost on the Opposition parties. The right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) remains extremely coy about his party's proposals on taxation. However, today some of his hon. Friends have let the cat out of the bag. We have seen the Labour party's secret agenda for taxation reform.

In the Treasury Select Committee, the hon. Members for Great Grimsby (Mr. Mitchell), for Newham, North-West (Mr. Banks) and for Hackney, South and Shoreditch (Mr. Sedgemore) produced as an amendment an alternative budget strategy, proposing that the burden of taxation on business should be increased to raise an extra £5 billion. This would be in addition to the £5 billion that the hon. Member for Kingston upon Hull, East (Mr. Prescott) would wish to raise from the 1 per cent. levy on the turnover of businesses. The alternative agenda would require putting corporation tax back to a rate of 52 per cent., but not just for mainstream corporation tax —advanced corporation tax would also be charged at 52 per cent.

I would be interested to see, when the Bill reaches Committee, whether that proposal is put forward as an amendment by the Labour party Front Bench spokesmen, or whether they would seek to disown it.

Dr. Oonagh McDonald (Thurrock)

Will the hon. Gentleman give way?

Mr. Watts

I will give way to the hon. Lady on the condition that on this occasion she answers my challenge and that which I made in the previous debate, on the public expenditure White Paper, when I asked her to go through the £34 billion list of Labour party spending plans and tell me and the House which are now being disowned by the Labour party. If she will disown the proposal of the hon. Member for Great Grimsby and the £34 billion, I am happy to give way to her.

Dr. McDonald

It would have been far better if the hon. Gentleman had given way to begin with. I rose simply to put the hon. Gentleman out of his misery by saying that there will be no Opposition Front Bench amendments along the lines that he is suggesting. My two hon. Friends exercised their right, as any Back Bench Member of a Select Committee may, to put forward their own ideas. As regards the £34 billion, I am not proposing to waste the time of the House in discussing the Chief Secretary's fantasy. We hear far too much about it as it is, and I do not intend to prolong the House's long-suffering patience in listening to what the Chief Secretary and his minions have to say about his fantasy.

Mr. Watts

I am grateful for that clarification. The £34 billion in the proposals from the hon. Member for Great Grimsby will remain the Labour party's hidden agenda, to be revealed and acknowledged as a legitimate child of the Labour party only if it should, by some mischance, win a general election.

The proposition that business rather than people should be taxed has some superficial attractions until one remembers that individuals depend on those businesses for their employment. They have created the 1 million extra jobs since 1983, and will create the 2 million further jobs that we need to bring unemployment down to the 1 million level, which in the current economy would probably represent full employment.

The assaults on the profits of private companies are also an attack on working people who save through life assurance, pensions or unit trusts, or direct equity investment to provide more financial security in their retirement. Such attacks on the profits of business are also an attack on millions of pensioners whose current standards of living depend on the profitability of the business in which their savings are invested, whether directly or indirectly, through financial institutions.

Under this nightmare hidden agenda, which was revealed today, pensioners and their pension schemes are to suffer a double blow because not only are the profits of business to be taxed at a horrendous rate, but the taxation benefits enjoyed by pension funds are also to be withdrawn, except from those who have fully invested in index-linked gilt-edged securities. Perhaps that would be one way to force an unwilling financial sector to lend money to a spendthrift Labour Government. No doubt pension funds would need to seek some index-linked investment if the implementation of a £34 billion spending spree by a Labour Government were to lead to a resurgence of hyper-inflation.

Home owners also do not escape from these nightmare proposals. Pension funds and relief on mortgage interest are described as very largely a means of tax avoidance". That may be the view in Grimsby, but it is certainly not the view of first-time buyers in my constituency who have to obtain mortgages substantially higher than the £30,000 limit on mortgage tax relief, but then my constituents live in the real world, which is clearly alien territory to the Labour party.

My constituents will not be tempted to vote Labour by the proposals to phase out mortgage interest relief, but thankfully they will be able, by the sensible use of their votes in the forthcoming general election, to ensure that none of these nightmare threats is ever enacted.

Dr. McDonald

What about the Finance Bill?

Mr. Watts

I can hear catcalls from the Opposition Benches. As you will recall, Mr. Deputy Speaker, the Order Paper specifies that the report of the Select Committee is also part of the business for the debate, and I am dealing with proposals that figure quite large in that report. I am coming to the proposals in the Finance Bill.

I welcome the further reduction in income tax to 27p in the pound, bringing the cut to 6p since the Government first came to office, in addition to the raising of thresholds by one fifth more than inflation. My constituents will be watching carefully to see whether the Labour party, the Liberal party, or the SDP vote against this further reduction in direct taxation. I found it rather odd to listen to the hon. Member for Dagenham (Mr. Gould) alleging that the burden of taxation had increased under this Government when the policy of his party would add still further to that burden.

Small businesses in my constituency are enthusiastic about the proposals on VAT, particularly those on the introduction of cash accounting for companies with turnovers of under £250,000 and the option to account for VAT on an annual basis. These will be welcome improvements in the environment for small businesses. I also welcome the extension to 30 days of the period in which businesses must register for VAT. During the passage of the Finance Act last year in Committee, I drew attention to some of the hardships faced by small businesses through not knowing whether they were just going over the registration limited turnover and the comparatively harsh treatment which they received if they transgressed. This extension will be a welcome improvement for small businesses that have other concerns than keeping an eye on turnover and comparing it with VAT regulations.

Taken together with the reduction to 27 per cent. in small companies' rate of corporation tax and the similar reduction in the standard rate of income tax, which applies to unincorporated small businesses, these measures provide a valuable package of further improvements in the financial environment for the small business sector.

Although of rather less significance than those measures, I also welcome the abolition of on-course betting duty. In Committee last year, in the impeccable company of the right hon. Member for Bristol, South (Mr. Cocks), I supported an amendment to that effect, although perhaps as a former Patronage Secretary he ought not to have seduced me into voting against my Government on the issue as I did.

I had a particular constituency interest in the abolition of on-course betting duty because of the greyhound racing stadium in Slough. Alas, the relief that this measure brings comes too late to save Slough stadium, which has closed to make way for a Co-op supermarket. I fear that my constituents have got the thin end of the deal. Nonetheless, I am pleased that my right hon. Friend was able to make this small but valuable concession to the racing industry.

I am a glutton for punishment and I have served on every Finance Bill——

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

So are we.

Mr. Watts

I am glad to hear it. I have served on every Finance Bill Committee since I entered the House. I think that I look forward to serving on the Committee again this year, but I was somewhat deterred when I heard the complexity of some of the amendments that the hon. Member for Stockton, South (Mr. Wrigglesworth) is intending to put forward.

I am looking forward to discussing this Bill because it is probably the last Finance Bill that we will discuss before the election. The debates that we will have in Committee will provide an opportunity to explore the contrasting philosophies of the parties with regard to taxation and economic affairs. We view taxation as a regrettable necessity—a burden that should be minimised. However, the Labour Party clearly considers the state to have the first call on all income and wealth and that the individual should be grateful if any part of that income should be left in his pocket.

The evidence of recent opinion polls and in particular of the NOP poll in The London Evening Standard today suggests that the British people favour the Tory philosophy.

Dr. Godman

May I offer a correction to what the hon. Gentleman has said? When the hon. Gentleman discusses opinion polls he is discussing the English opinion polls. The most recent poll in Scotland put Tory party support at 19 per cent.

Mr. Watts

I said that I was referring particularly to the NOP poll in The London Evening Standard today. From that poll I draw the conclusion that the British people favour the Tory philosophy rather than the philosophy of the Labour or Alliance parties.

In the face of that rather depressing news the hon. Member for Dagenham, who, in his other capacity, is the Labour party co-ordinator, put a brave face on things in his opening speech. At least he has the consolation that the NOP poll shows Labour creeping up from third place into second place even though it is 15 points behind the Conservative party.

The hon. Member for Dagenham set himself the impossible task in his speech of creating bad news out of good. No matter how hard he tries no one will believe in the impending economic crisis that the Labour party tries to paint for us on every occasion. That crisis does not exist. Neither will anyone believe his VAT scare when we know that the cost of the Labour party's spending programme would involve a VAT rate approaching 50 per cent. if such a programme were to be funded from VAT. The hon. Member for Dagenham alleges that the Government have been taken in by their own propaganda, but rather it is the Labour party that has been taken in by its propaganda. Certainly, the electorate is not taken in by the Labour party's propaganda.

The hon. Member for Dagenham said that the country is crying out for this, that and the other. I confidently predict that the only crying that we are likely to hear later this year will be the wail of lamentation from defeated Labour candidates up and down the country.

6.53 pm

Mr. Michael Cocks (Bristol, South)

It is a pleasure to follow the hon. Member for Slough (Mr. Watts). I am glad that he reminded me of his little transgression from the official party line last year in Committee. Indeed, he was a good deal easier to persuade than some of my colleagues during the time when I had some hand in keeping Labour in office.

When the hon. Member for Slough was speaking I had to look up his age in the book because his remarks were so antediluvian that I almost expected him to be of the generation of young Conservatives who used to banter from the back of political meetings in the early 1950s squeaking out, "Groundnuts." In fact I find that the hon. Gentleman was only a few years old at the time. When the hon. Member for Slough said that the Conservatives wish to pay as little tax as possible, I was reminded of the groundnuts scheme. That scheme was an attempt to solve a worldwide shortage in vegetable oil when the world was in desperate need of that oil.

I have always believed that life is not a race where all the prizes go to the strongest and most powerful, but that those who have advantage and ability have a responsibility to look after those not so fortunate.

My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) is becoming a little bit of a doppelganger in these debates. Last year, when I was making an extensive plea on behalf of the luncheon voucher system, he ripped holes into the fabric of my argument. This year, to my great disappointment and chagrin, he has put forward the idea that the Government did not tamper with the excise duty on tobacco because of some obscure business about the retail prices index and not wanting it to go up.

However, I was firmly under the impression that the Government's mind had been made up by the most convincing and persuasive arguments put forward by my colleagues and me in our deputation to the Chancellor. Certainly that is the impression that I have made every effort to convey to my constituents. I hope that no one here will pursue this most unfortunate line in public presentation.

Although I am a former Parliamentary Secretary to the Treasury, it is not common for me to engage in debates on monetary matters. Although, on prima facie evidence, the public may believe that someone who carried that grandiloquent title is well versed in such matters, hon. Members present will know different. All that is required is the most vestigial knowledge of arithmetic. During the time when I held that position, all the necessary arithmetic could be done on two hands; in fact, one hand was frequently enough because the majorities were so thin.

I wish to say a few words about the Finance Bill. First, I hope that the House will accept that any occasional infelicities that I may have in my dealings with Her Majesty's Government's inspectors of taxes are irrelevant to the objectivity of my remarks. I wish to discuss the question of tax reform — a subject that has become much more topical lately. No doubt it will feature in various election manifestos.

In March 1986, the Government produced a Green Paper on the reform of personal taxation. However, that document made little mention of tax administration. The House will be aware that, in July 1980, a committee was set up under Lord Keith on the enforcement powers of revenue departments. That committee reported in March 1983. Part of that committee's report stated: At an early stage we formed the view that the mechanisms which the Board of Inland Revenue were striving to operate were in many respects antediluvian and quite unsuited to modern conditions. The Chief Secretary to the Treasury discussed streamlining. Indeed, chapter 5, clauses 123 to 137 of the Finance Bill are concerned with tax management provisions. The briefing notes issued together with the Budget there referred to the "pay and file system" that will be introduced.

I ask the Government to consider seriously how that squares with two recent articles in The Times, on 9 and 10 March, by David Sapsted. The subject was the taxation system. They did not receive the attention that articles of that calibre would normally receive because at that time the nation was desperately concerned about and overshadowed by the Zeebrugge ferry disaster and the tragic loss of life. Had that not been foremost in people's thoughts, more notice might have been taken of the articles. I ask Treasury Ministers to study the articles. The first, on 9 March, is headed, "Taxpayers face unfair fight". It begins by saying that millions of people pay too much tax. It goes on to quote Mr. Brian Prime, chairman of the policy unit of the National Federation of Self-Employed and Small Businesses. Small businesses have been mentioned several times in the debate. According to Mr. Prime, the tactics used by inspectors to extract money would only be judged as extortion if used by any other group or company. There is further quotation in the article by Mr. Henry Toch, a City tax consultant and former Inland Revenue inspector, who says: Many accountants share my experience of coming across a hard-nosed attitude where inspectors are prepared to use the considerable legal armoury at their disposal to crush the fight out of anybody daring to challenge their judgments. I do not want to overstate the case, but concern is expressed in not only the first article but the second, which appeared the following day and is headed : Weight of law in taxman's favour. The first paragraph says: Taking on the tax inspector can involve time, cash and a lot of courage. Even if the individual wins eventually, the candle may not have been worth the light. The article goes on to make various points, saying: Unlike VAT cases, there are no costs awarded in Inland Revenue cases. The article says that anybody taking on the Inland Revenue in a dispute is faced with enormous legal back-up on the other side, paid for from public funds, whereas the taxpayer is much more limited in that respect.

The Keith committee concluded: What is needed is a proper disputes procedure under which the taxpayer can complain to an independent tribunal when he considers that powers have been misused. Accordingly we consider that this subject is central to the theme of providing the necessary balance between the taxpayer and the Revenue Department." That balance should be examined.

The problems of small traders need to be considered. If a small trader is investigated by the Inland Revenue, it can be extremely costly for him because he will probably have to pay an accountant to make sure that his affairs are completely sorted out. A great deal of investigation may be needed. It will drag on for months. Even if the trader is found to be innocent, he still has to meet the costs. Over and above financial costs, somebody who is investigated in that manner is subjected to a great deal of personal worry and anxiety. On top of trying to run a small business, that is a heavy burden. That burden should be eased. I hope that the Government will try to do something about that.

There is no parallel provision in the Taxes Management Act 1970 to protect the taxpayer from negligence. The problem is that any error in a tax return, irrespective of how it occurs, constitutes neglect. We shall leave aside the problems of people committing fraud or wilful default. Innocent oversights are classified as neglect. There is no corresponding provision on the part of the Revenue. When there is delay in dealing with papers in the Revenue office, the inspectorate can still profit from the delay in terms of interest and penalties. The unfair balance even extends as far as the interest on unpaid tax.

We should consider seriously what can he done about that problem and whether we should have a tax ombudsman. I know that the Parliamentary Commissioner can already deal with cases of maladministration, but that does not meet the problem. I hope that the Government will consider that seriously and possibly discuss it further in Committee. I hope that whoever forms the next Government will take it seriously. It will be one way of getting away from the idea that people have when dealing with the Inland Revenue that it is, "Them against us," a gargantuan machine with enormous resources which it is hard for small people to take on and tackle.

But there is one glimmer of hope. In my recent tax return I received a copy of the taxpayer's charter, dated July 1986. It tells me that I have important rights and entitlements as a taxpayer. Help and information is available. The charter states : the staff of the Inland Revenue and Customs and Excise will at all times carry out their duties courteously, considerately and promptly. I hope that that betokens a new wind blowing through the Inland Revenue.

I do not know what lies in store in terms of the next Administration, but I hope that we shall have a Labour Government. I have not taken part in the knockabout in the debate, because I am trying to make a serious point. Whoever occupy the Treasury Bench after the general election, I hope that they will take the matter seriously. If they do so, they will relieve hundreds of thousands of people running small businesses of a great deal of worry and many millions of ordinary citizens of the fear of becoming involved in tax disputes. If the slate can be wiped clean and if attention is paid to the administration of tax affairs, we shall achieve the balance, and the country's spirit will be invigorated.

7.7 pm

Mr. Neil Hamilton (Tatton)

It is a great pleasure to follow the right hon. Member for Bristol, South (Mr. Cocks), who enjoys great popularity, at least on Conservative Benches. He also has his adherents on Opposition Benches, although I believe that that popularity is not universal. Perhaps that is something to do with the right hon. Gentleman's previous incarnation.

I have a great deal of sympathy with what the right hon. Gentleman said about the problems of the taxpayer fighting the Revenue—not because I have ever had any trouble with the Revenue, but I know what it is like to fight a large organisation effectively with limited amounts of money. The Government should consider the right hon. Gentleman's point seriously. I hope that he will not regard it as too much of an impediment to the achievement of his goals if I add my support to what he said.

In his speech, my right hon. Friend the Chief Secretary set the scene for the Finance Bill. It is based on secure economic and financial foundations. Compared with a decade ago, things have been transformed. Whereas at that time we were at the bottom of the world growth and productivity league, we are now near the top. Economic growth this year is scheduled to exceed even that in Japan. Inflation is down to the lowest level for 20 years. Exports of manufactured goods, to which the hon. Member for Stockton, South (Mr. Wrigglesworth) devoted considerable attention, were up by 6 per cent. in the final quarter of last year compared with a year earlier. Manufacturing industry's output last year grew rapidly. In tandem with that, we now enjoy rapidly falling unemployment. Unemployment has fallen more rapidly in the last six months than in any similar period since 1973. So the attempts by Opposition Members to paint a picture of crisis will find little support in the country at large.

The speech by my right hon. Friend the Chief Secretary was, therefore, an inspiration to us all. It contrasted sharply with that of the hon. Member for Dagenham (Mr. Gould). Whereas my right hon. Friend demonstrated inspiration, the hon. Member for Dagenham showed desperation. That is one up on what we would have had if the right hon. Member for Birmingham, Spark brook (Mr. Hattersley) had opened the debate. In that case, we would have had expectoration and perspiration. At least Conservative Members have something to crow about.

The Opposition are basing their electoral appeal in the coming election on insubstantial economic and financial grounds. They seem to be setting two hares to run in the hope that they will hide from the general public the disaster that their economic policy would entail. First, they argue that my right hon. Friend's Budget this year constitutes in some way a bribe to the electorate. If the Chancellor were seriously interested in bribing the electorate, he would have devoted the whole of his financial leeway—part of which he devoted to reducing. the PSBR—to the reduction of taxation. We could have more than met the objective of the Government for the past eight years of reducing the basic rate of income tax to 25p, although I believe that that would not have been a prudent course of action. If my right hon. Friend had done that, Opposition Members could justifiably have attacked the Budget as being explicable in terms of an electoral bribe. In practice, he did not do that; he decided to reduce taxation by only half the amount that he had at his disposal.

The second hare that the Opposition tried to set running was the ridiculous scare about the potential increase in the scope of value added tax after the next election. What they have not yet been able to explain is why they think that we will need the money —because the finances of the Government are in good order. We are not in the business of increasing or extending taxation but of reducing it. There is no reason why we should try to increase the level of VAT or reduce the number of exemptions from it. Indeed, the Government have vigorously opposed the European Commission's attempts to do so in the European Court.

The predictions that the right hon. Member for Sparkbrook has been making throughout the country in recent weeks are without foundation. He is not the best judge of form in the predictions market. He has become more and more like some sort of inverted Mr. Micawber, always waiting for something to turn down, in order to rescue him from the effects of the Opposition's folly in saddling themselves with the millstone of policies which are far from appealing to the British people.

Dr. Godman

That is a mixture of metaphors.

Mr. Hamilton

If so, it should appeal to the Labour party, whose latest poster campaign has followed me down that road.

The right hon. Member for Sparkbrook does not have a good record in these matters. In 1983 he was predicting that, in a year's time, inflation would be in double figures again. In fact, in 1984 inflation was only 5.1 per cent., and it has fallen further since then. At the time of the last Budget the right hon. Gentleman predicted : there will be no significant fall in unemployment before the next election or beyond.—[Official Report, 19 March 1986; Vol 94, c. 310.] As I have already said, there have been significant falls in unemployment, and more are to come. As recently as last November the right hon. Gentleman was making further gloomy forecasts about oil that were not subsequently borne out. He wailed : North sea oil is running out, and every time the markets catch a glimpse of what, on present policies, the British economy will be when the oil has gone, they withdraw their confidence from the British economy. That is because the Chancellor has managed to make us peculiarly dependent on the 6 per cent. of gross domestic product that oil provides".—[Official Report, 6 November 1986; Vol 103, c.1111.] In the event, oil prices have plummeted and we have been able to brush that off as being of almost no consequence. We should not have been able to do that without the sound financial and economic base with which the Government have provided the country during the past eight years.

I gather that the right hon. Member for Sparkbrook is now predicting a Labour victory. As the bookmakers are now quoting odds of 8:1 on for the Conservatives, he is likely to be disappointed in that prediction as well.

One of the reasons why the Opposition are not likely to be successful in the next election—whenever it comes —is their ludicrous spending package. They cannot talk themselves out of that package now and the hon. Member for Thurrock (Dr. McDonald) refused to address herself to it when asked to do so by my hon. Friend the Member for Slough (Mr. Watts).

Labour Members have saddled themselves with a package of spending that amounts to £34 billion in the course of this Parliament. They have wholly failed to explain the package away because they will not say which parts of it they have jettisoned. That will make the Labour party even less credible in the election than it was in the last. They have said, however, that the income tax cuts in the Finance Bill will be reversed. That, I suppose, is one up on what was said by the hon. Member for Stockton, South, speaking for the alliance. At least we know where the Labour party stands, but it is more difficult with the alliance. If we examine the bare bones of the budget proposals that alliance Members would have executed if they had had their fingers on the levers of power, what we see is merely the Labour party mark II. Whereas the Labour party claims that it would increase spending by £10 billion, the alliance claims that it would increase it by only £4.9 billion. Whereas the Labour party claims that it would increase the borrowing requirement by £6 billion, the alliance says that it would do so by only £2.1 billion. The Labour party claims that it would reduce unemployment by one million in two years; the alliance—more modestly—says that it would reduce it by one million in three years. The Labour party would introduce a statutory minimum wage; the alliance would replace that by some kind of basic benefit. The trend of policy is along the same lines; only the destination is farther off for the Labour party than for the alliance.

Alliance Members have said that they are against the reductions in income tax but, if they were in a position to exercise any influence after the next election, they would not say categorically whether they would restore the reductions that have been made. That is in line with their general policy, which can best be characterised as following the line of the Vicar of Bray. Any hard decisions that have to be taken can be conveniently avoided because they know that they will never have the responsibility of putting them into action. The alliance policy is like one of those films that appear from time to time, in which a golden age reverie is done in soft focus photography with all the hard edges and bright colours removed. The kind of Finance Bill that alliance Members say they would produce does not face up to any of the difficulties that any Government, of whatever persuasion, would have to face. They simply come up with plenty of goodies for which they do not have to pay.

I have examined in some detail the policies that the alliance would implement if it were in government, and which would have to be incorporated in a Finance Bill. I devoted some time to reading the document entitled, "The Time has Come", which was co-authored by the right hon. Member for Plymouth, Devonport (Dr. Owen) and the right hon. Member for Tweeddale, Ettrick and Lauderdale (Mr. Steel). On the front of the document there is a rather charming photograph of the two right hon. Gentlemen trying to look friendly towards each other. The smile of the right hon. Member for Devonport looks rather like the one that one would expect to see on a piranha fish eyeing a minnow.

Many things are stated in the document which deserve wider currency. The title will be familiar to hon. Members of a literary bent. "The Time Has Come" will be recognised immediately as coming from the Walrus and the Carpenter in "Alice in Wonderland". The passage reads: 'The time has come,' the Walrus said, 'To talk of many things: Of shoes—and ships—and sealing wax— Of cabbages—and kings And why the sea is boiling hot And whether pigs have wings.' Pigs will be flying before alliance representatives are in a position to implement the policies that are adumbrated in "The Time has Come".

The one characteristic that the document has above all others is a sort of studied vagueness. At page 41 there is a reference to spending on infrastructure. The passage reads: How much more we can afford will depend on the economic circumstances at the time. At page 40 it is said that more borrowing would be desirable provided the deficit is kept within prudent limits … and is reduced at times of high growth and falling unemployment. We are experiencing high growth and falling unemployment; is the alliance saying, therefore, that borrowing is undesirable? There seems to be a contradiction.

At page 41 we are told that the alliance would seek to spend more than the Government's forecast spending, but again it does not say how much it would spend. I am sorry to make such a terrible pun, especially in the absence of the hon. Member for Stockton, South, but there seems to be more wriggle than worth.

If we compare the policy of the Labour party with that of the alliance, it is a pale pink rose, if I might use another metaphor, rather than the full blood-red claret of the Labour party.

Talking of claret brings me to the right hon. Member for Glasgow, Hillhead (Mr. Jenkins), who, alas, is not with us this evening. On 18 March, the right hon. Gentleman said that income tax cuts would not be the alliance's priority this year. He added : There is no question but that the impact upon unemployment of income tax cuts is very weak per million pounds spent, or whatever unit of management is chosen." —[Official Report, 18 March 1987; Vol. 112, c. 965.] In the light of that statement I stand aghast at the moderation of alliance Members in proposing such modest proposals to reduce unemployment. If the answer to unemployment is simply greater spending that can be financed by greater taxation, why do they not propose it?

Every year the alliance comes forward with a new set of figures, but it never explains how they have come about. This year it says that it wants to spend another £4.9 billion to reduce unemployment by 1 million in three years, but in previous years it has proposed different policies. Last year, for example, it was proposing to spend £3.5 billion to reduce unemployment by 750,000 over three years. Before that it was £5 billion to reduce unemployment by 1.5 million over four years. Why do we get these different figures every year? If £5 billion will cut unemployment by I million in three years, why not spend £10 billion to cut unemployment by 2 million in three years or £15 billion to reduce it to zero over the same period, or whatever combination of figures one likes to take?

The alliance is plucking figures out of the air for its own convenience to give spurious credibility to its policies. It admits that its policies will not work unless it can prevent a seepage from increased output into increased inflation, which has been the experience of all those who have assumed high spending policies in the past. Its bulwark is an incomes policy.

The right hon. Member for Hillhead, who claims to have some knowledge of classics and certainly some knowledge of history, will be able to appreciate that incomes policies have never succeeded. Even the Emperor Diocletian had an incomes policy in the days of the Roman Empire. In those days the penalty for breaking the policy was capital punishment, but we know that the right hon. Gentleman would not be in favour of that. Not one alliance Member voted in favour of capital punishment when there was the opportunity to do so. However, even without such a draconian punishment available, it should be apparent that an incomes policy would not work.

When I listened to the right hon. Member for Hillhead when he spoke in the Budget debate, I had more of a sense of déjà vu than a sense of history. He was proposing exactly that which was proposed in the 1960s and 1970s when he was a Cabinet Minister in Labour Governments, arid the ultimate effect of their spendthrift policies was to lay the basis for the inflation that so enfeebled Britain when it had to cope with the world depression in 1980 and 1981.

Those who do not learn from the mistakes that have been made in history are condemned to repeat them and that is the position in which the alliance is placing itself. I am amazed that it has forgotten the winter of discontent in 1979, which was a direct consequence of political interference in economic decision-taking and the concomitant of an incomes policy. When industrial muscle has a political effect that can influence the amount of money that goes into an individual's pocket, it is inevitable that the worst industrial practices will be encouraged. The industrial relations record which we left behind us, happily, with the election of a Conservative Government would return to plague us once again if the alliance's policies were implemented.

If that were to happen, we would be back to the days of norms and guidelines. Perhaps the hon. Member for Gordon (Mr. Bruce) will dilate upon the counter-inflation tax that constitutes the alliance's incomes policy proposal. To begin with, I should like to know how the norm that everyone will be obliged to follow will be calculated. As national income is an abstraction that is derived from hundreds of thousands of individual and specific income figures and constitutes, therefore, the totality of individual incomes, the norm in the real world is the exception rather than the rule. If the norm is set too high, it will be effective for the purpose that the alliance claims to be advancing, which is the control of inflation. If it is set too low, the effect, on its own reasoning, would be deflationary, which would be in conflict with one of its major policy objectives, which is to reduce unemployment.

Does the alliance deny that different incomes ought to behave in different ways and that in some years profits should increase generally and that in others they should decrease? Within the general totals new relativities would constantly be formed, and what goes for the nation as a whole goes even more for individual groups within the totality. As new relativities are formed as a result of changed preferences and changed conditions in the real world, it is obvious that prices and wages should move., sometimes in different directions, and that the norm is something that can never be known in advance. A norm can be revealed only in retrospect. Wages in particular will alter at different times, in different places and in different sorts of employment, and an attempt to impose a straitjacket on the economic system would be to seek to achieve the reverse of that which the alliance desires and which we all desire, which is greater economic growth, greater prosperity, higher employment and lower unemployment.

We are faced with a practical difficulty in the implementation of the alliance's counter-inflation tax. The alliance claims that there would be some flexibility to allow greater productivity, but those who receive higher wage increases because of higher productivity will force those whose productivity cannot be increased or has not been increased to have wage increases that are below the norm, if they have wage increases at all. It may be necessary to have wage reductions to preserve the norm figure that is adopted. I cannot see that such a policy is remotely possible of achievement.

What about catching-up exercises that are so much part of public sector pay? The present dispute in the schools is partly a reflection of the difficulty. This year we have offered the teachers a pay increase of 16.7 per cent. and an increase of 25 per cent. over two years. If the hon. Member for Gordon were to take 5.3 per cent. or 4 per cent. as his norm this year, to correspond with the inflation figure, I do not think that he would receive a great deal of support from the teachers, who are claiming an increase many times that sort of figure. A problem will always be found among some group within the population.

They will be catching up, in relative terms, with other groups who have received their increases on previous occasions. What of those whose incomes are not determined collectively? They now constitute the majority of the working population. How will they be covered by the counter-inflation tax? How will fringe benefits be brought into the equation? I know that we have reduced the importance of fringe benefits—rightly, in my view—over the past eight years. We have tried to concentrate on reducing tax rates, and thus removing some of the privileges that have arisen ad hoc over the years. But how would the hon. Gentleman ensure that those productivity gains, feeding through into non-pecuniary remuneration, were brought into the counter-inflation tax?

The hon. Gentleman must answer those questions. If his incomes policy is only partial, it will be swiftly rejected as unjust by those who must pay the price to give others increases above the norm. Indeed, judging by the limited explanation of the incomes policy in "The Time Has Come", it seems that the exception is the norm. Those excluded from the counter-inflation tax are firms with fewer than 100 employees—that is, 49 per cent. of the population; those taking part in profit-sharing schemes—5 per cent. of the population; the self-employed—10 per cent. of the population; new firms; those who have changed their jobs or their job descriptions; and those in the public sector — another 25 per cent. of the population. I know that those figures involve a certain amount of double counting, but on any reckoning a substantial proportion of the total working population would not be covered by the counter-inflation tax—the central necessity of alliance economic policy, without which the rest of its policy cannot work.

The alliance describes past incomes policies as unfair, bureaucratic, inflexible, over-centralised and denying participation. Yet exactly the same series of characteristics can be applied to its own incomes policy. The minority covered by the tax would have to suffer reductions to stay within the national norm, and that is bound to be regarded as unfair.

What about jobs in which productivity cannot be measured — for example, the job of a Member of Parliament? How do they fit into the system? If the people doing such jobs, cannot ever hope to receive pay increases above the pre-ordained norm, they also are bound to reject that as unjust and unfair. It is bound to be bureaucratic and, if not inflexible, ineffective, as my hon. Friend the Member for Wantage (Mr. Jackson) pointed out on 24 March, as reported in column 245 of the Official Report

. The alliance says that there will be comparability exercises—Clegg commissions all round—in the public sector. What a disaster it was for us when we accepted the commission's recommendations in 1979, which torpedoed the previous Labour Government as well. Comparability exercises will produce exactly the same problems that we face now in the public sector, although for different reasons. The relativities of wages to each other are always being moved, and the Government must then decide what they will accept.

Although the alliance claims to support the teachers against the so-called imposed contract of employment recently announced by my right hon. Friend the Secretary of State for Education and Science, it would be obliged to go down that road for every group in the public sector. It would be obliged to impose a settlement that fitted in with its own Government policy, or else risk the collapse of its counter-inflation policy, and hence of economic policy as a whole. We should find that the market economy—which the right hon. Member for Devonport seems to have discovered since he left the Labour party, but which does not seem to appeal so much to the leader of the Liberal party—would be weakened and put into a straitjacket, with results that would be fatal to economic growth and prosperity.

The alliance seems to recognise that. The pay review boards referred to in "The Time Has Come" will apparently take into account public and private sector comparisons, market factors and conditions in local labour markets. If conditions in local labour markets are taken into account, that will have no connection with productivity; it strikes at the very heart of the concept. If that is to apply in the public sector, why should it not also apply in the private sector, which constitutes a much greater proportion of the total working population?

I am afraid that I shall disappoint the hon. Member for Gordon in saying that I believe that alliance economic policy is fundamentally misconceived. Although the alliance does not make as many crass errors as the Labour party, that does not excuse it from the responsibility of proposing policies which are not designed merely for its own electoral advancement and temporary advantage, but which are based on the realism that we as a Government have had to secure and recognise during the past eight years, and which is now achieving very considerable results.

We are the only major party that believes in reducing taxes. I hope that we shall not stop at the aim of reducing the basic rate of income tax to 25p in the pound. I believe that in the course of the next Parliament it will be possible to secure a maximum basic rate of 20p. That road has been followed by many of our great industrial competitors: the maximum rate in the United States is now 28 per cent. That is the way to future prosperity. I refer, of course, to federal income tax; state taxes are in addition.

Our party, as a potential party of Government, is the only one that shows any understanding of the realities of economic policy. We shall continue down that path not only until the next election — which may not be long delayed—but throughout the next Parliament. We shall continue to achieve the results that are already becoming apparent, and make the irreversible shift in economic policy that the right hon. Member for Chesterfield (Mr. Benn) is always on about—but in a different direction.

7.36 pm

Mr. George Park (Coventry, North-East)

I shall not follow the line of the hon. Member for Tatton (Mr. Hamilton). I should like to deal largely with the position in my constituency. Judging by the contributions of Conservative Members, my constituency seems to differ considerably from theirs.

What we needed was a Finance Bill for jobs. What we have is one that does nothing for the real economy. The Chancellor had the chance to use the money available to him to invest in our economic future. An economy that is heading for a deep crisis needs investment in manufacturing industry, in houses and schools and in research and development. Anyone who makes such a statement is usually condemned—for instance, by the Chief Secretary in his initial speech—as a prophet of doom and gloom. However, I am not making prophecies. I want to deal with the position as it is.

The Chief Secretary laid great stress on the strength of the economy, but since 1979 the west midlands have lost some 283,000 manufacturing jobs. In Coventry alone, we have lost 32,000 jobs in that time. At the end of last month, the official unemployment figure for Coventry, North-East was 18.6 per cent. But before the various adjustments in calculation, that figure would have been over 21 per cent., and in parts of my constituency the figures are double that. This month, a thousand employees have been made redundant at Massey-Ferguson, and some 200 have been made redundant at Rolls-Royce. Both companies draw some of their employees from my constituency. A further 200 white-collar jobs have been lost at Austin Rover at Canley, supposedly to reduce costs. That nullifies the 300 extra jobs—for which we are grateful—at the Jaguar plant, and any gains made in small companies in the same area.

The Minister of State knows, because I have been to see him about this, that, but for Treasury policy, one additional customs officer at Coventry airport would result in the creation of a further 300 jobs. I wonder why that has not happened before now.

There has certainly been a fall in Coventry's official unemployment figures. In the last quarter, there was a fall of 370, but that is largely accounted for by the 5,300 people on Government schemes, of whom some 4,000 would be counted as unemployed but for the temporary schemes which, according to the employers in the area, do not solve the skill shortages.

Only 14 per cent. of school leavers go directly into work, and of this tiny percentage white school leavers are three times more likely than those from the black communities to go directly into work. In January, over half the jobless in Coventry had been out of work for over a year, and a quarter had been out of work for more than three years. Before the redundancies to which I have just referred, 29 people were chasing each job vacancy at the Coventry jobcentre. I do not know what the figure is now.

What kind of incentives does the Budget provide for these people, when manufacturing output is still 6 per cent. lower than it was in 1979 and when manufacturing investment is 24 per cent. lower, while the cost of unemployment in my constituency alone amounts to £55 million a year? Would it not be better to pay these people to work, to earn wages and to pay taxes rather than to pay them benefit for doing nothing? The idea now is that if people do not take part in the job training scheme they will not be entitled to benefit. We see here the influence of workfare, the American idea, which is utterly contrary to most of our ideas.

Together with a job, decent accommodation is a basic necessity for most people, but we find that of the 2,500 prewar council dwellings in Coventry that urgently need modernisation, only 240 a year will be completed at the present rate of spend, determined by Government, so those at the end of the queue will have to wait a decade before their houses are brought up to date.

The House will know that following the bombing of Coventry, our pressing need was to get a roof over people's heads, but the passage of time has shown that these dwellings are subject to damp and cold and that the only feasible way of countering that problem is to install central heating. However, the present programme will take a minimum of six or seven years to complete. That is a long time to be cold. Why does the Treasury not allow councils to use the money available to make quicker inroads into this problem and to replace lifts in tower blocks that are over 30 years old?

Coventry is involving the private sector in its efforts to provide decent homes, but that does not go to the heart of the problem for too many of its citizens. Massive investment is needed in carefully costed schemes, using materials that are readily available in the United Kingdom, thus providing jobs for unemployed building workers and proper homes for people. Tax cuts, which go largely to those who are least in need, have little impact on those about whom I have been speaking, since the poorest taxpayers will still be paying more income tax than they did under Labour.

On a wage of £115 a week, single people will be paying £1.84 more each week in income tax and national insurance contributions than they did in 1978–79, and a married couple with two children, on a similar wage, will be paying £..37 a week more. Even single pensioners will be paying £1.25 a week more in tax than they did under Labour, and married couples will be paying £2.34 a week more. That even applies, in some measure, to the over-80s. However, those enjoying five times the average wage will be paying, as single taxpayers, £72.45 less a week and a married couple will be paying £63.25 less a week.

In Coventry, we have some of the longest hospital waiting lists in the country, but consideration is being given to the closure of a hospital to meet the harsh budgets that have been set by the Government, with all the implications for prospective patients and job losses. That is the real world for too many of my constituents, and it has not been addressed by the Budget.

Of course, what the Chancellor has done is to play a cynical numbers game the majority are in work the majority are in decent homes the majority are not waiting to go into hospital the majority are not likely to be too concerned over even a sizeable minority who need work, a decent home, or treatment in hospital. That is the Chancellor's and the Government's arrogant assumption in the run-up to the election. I believe that the majority will prove him wrong. He, too, will then be out of a job arid a home, but I trust that he will not need hospital treatment.

7.47 Pm

Sir Brandon Rhys Williams (Kensington)

In the course of the debate on this year's Budget we have heard a number of virulent attacks on my right hon. Friend the Chancellor's policy by the Opposition parties. It cannot be stressed often enough that the best guarantee of continued employment and the best hope of new opportunities to work and to create wealth is to belong to a healthy economy. Opposition Members who recommend policies that would weaken the economy or that would add to the complexity of the tax structure or to the obscurity of the business outlook are doing no service to the unemployed, and they are probably doing no real service to their own parties, either.

I think that this Budget is very widely appreciated and that it has been welcomed by the public. I congratulate my right hon. Friend the Chancellor of the Exchequer on it.

The Budget strategy is quite clear and highly commendable: it is to work towards a further decline in interest rates and a stable rate of exchange rather than towards an early boost to spending on current account which, if anything, is at present on the high side.

As my right hon. Friend the Chief Secretary to the Treasury pointed out, a central proposal of the Budget is that income tax should be cut by 2p in the pound. In view of the predictions that there would be a much larger cut and the evidence that there could have been a much larger tax cut than 2p in the pound, it should be emphasised that the Chancellor chose to make a reduction of only 2p in the pound. The electorate now has a choice either that this tax cut should remain or that it should be removed by a Labour Government. That matter will obviously be an election issue.

Although the rate of tax is important, the House ought to be considering the impact of our particular tax structure on the workings of the economy as a whole. The tax structure should assist the most efficient working of free enterprise. The House ought therefore to consider this year's Finance Bill as one of a continuing series by which we are adapting the British economy to the realities of post-Socialist Europe.

Let us first consider the balance of overall public sector and private sector spending, on capital account and on current account. First, on capital account, is borrowing taking too much? Are the Government being greedy on capital account? The obvious answer is no, they are not. There has been a very substantial reduction in the Government's borrowing requirement. Indeed, I think that we should welcome the prudent measures of expansion in Government capital spending which have been announced in recent months.

But as far as the Government's requirement from the economy on current account is concerned, I consider that taxation is still taking too much out of the economy, not just in the way local government—in very many cases— is squandering ratepayers' money and, to some extent, central taxpayers' money, too. There is substantial room for savings in central Government as well. I do not have confidence that the British Civil Service is spending our money efficiently.

I would like to point in particular to defence procurement. I am sure that if we organised our defence procurement policies with the rest of the European allies in particular, we would be able to get much better value for money. I do not think that the Finance Bill is the time to dilate further on that, but I have a feeling that a great deal of taxpayers' money is producing inadequate results where defence procurement is concerned.

There is something nearer home for the Treasury that I would also like to stress. I believe that public administration in the redistribution of income is crassly inefficient and wasteful and I think that the movement towards the introduction of computers is altogether misconceived. I shall come back to the redistribution of income shortly. I recognise that there are tens and tens of thousands of people in the Inland Revenue who are doing a dedicated and difficult job. I do not criticise them for trying to do the best that they can with an obsolete system of taxation. I know, too, that there are tens and tens of thousands of people in the Department of Health and Social Security and in other parts of the public sector dealing with the redistribution of income and I do not blame them for finding their work extremely difficult. I think that the House must blame itself, because we do not force those Departments to do more in the way of innovation and fresh thinking on the redistribution of income, which costs us so much in itself.

What, then, should the objectives be for the series of Government Budgets that I would like to see? We should encourage the accumulation of assets in personal ownership to the absolute maximum, to enable not just the tens of thousands of people as in the past, but millions of people in the future, to make their own choices. The ownership of one's own personal assets is a tremendous liberator, enabling people to make their own choices in so many fields; it enables them to be free British citizens. I would like to see the millions owning their own houses and their own shares, having their own pensions and insurance arrangements, and even owning their own businesses—if they choose to do so—or planning their own careers in their own best interests. Without personal financial resources, those things are really not possible.

We should work to enlarge the area of business activity because it is no longer good enough to think in terms of the British economy alone. I welcome the Government's support for the Commission's campaign for the completion of the internal market by 1992. This is a matter of enormous importance for British business, and we should not only hasten to implement the recommendations coming from Lord Cockfield where the British economy is concerned but we should be bringing all the pressure and influence we can to bear on our continental partners as well.

I would like to see the tax approximation with the Common Market countries proceeding apace. I do not think that there is very much evidence at the moment that the Treasury is taking this seriously just now. I am not just speaking of VAT, but also of corporation tax and all the other tax considerations affecting investment decisions. If we do not make a success of our membership of the Common Market, we shall not make a success of anything else.

I think that we should also seek to lengthen the timespan of discretion for business as far as we can. We have heard a lot about short-termism in recent months : it is a particular disease afflicting the British economy. I would like to see transparency in Government strategy and in the workings of the public sector over a long span of time, so that business people can make predictions which are likely to prove right in the light of their calculations as to how Government policy is going to affect them. We need predictability of tax policy over long periods of time — not just months, but years. That is not really compatible with a conception of an annual Budget handled as we do it, without long-term considerations being constantly under discussion.

I would like the Government to break up the presentation of the Budget into the capital account, the current account and the redistribution of income. It cannot be stressed often enough that the redistribution of income is not an aspect of Government spending. The money that goes to the pensioners is spent by the pensioners. The money that goes to the unemployed or to mothers is spent by the unemployed and the mothers. It is not Government spending. The Government act as the agent for the redistribution of income; but the whole aspect of redistribution should be taken out of the Budget and looked at as another function of Government.

We should study ways of reducing, or even eliminating, the brakes, which are all too serious at the present time, on saving and the incentives to work, and remove the particular burdens or prohibitions that retard the economy—which may produce revenue, but which also produce undesirable effects.

These are all objectives which can be made more easily attainable by prudent tax policy over a series of Budgets.

I would have liked a start to be made in the present Bill. Perhaps, if the election does not intervene, we may have an opportunity of going into some of my recommendations in Committee, but let me outline them quickly now.

I would like to see, as a settled policy of Government, the extreme simplification of taxation for its own sake. I think that the complexity of taxation not only adds to the cost of administration but it makes people timid about their investment decisions and personal plans.

On capital account, I think that it is a pity that in this Budget we have not taken the opportunity to end stamp duty on financial transactions. That would have been the end of another tax which the Chancellor might have brought about this year. It cannot be stressed sufficiently —I speak as the Member for a constituency in which many people earn their livings in the City—that we are in competition with the Pacific and with the dollar area. London should be given the advantages which will enable it to take a pre-eminent place in our own time zone. Stamp duty on financial transactions is an unnecessary burden which we are putting in our own way if we wish the City to make a triumphant success.

I would like also to end capital gains tax on the inflationary element in the gain. That has been stressed before, and I was disappointed that the Chancellor did not take the opportunity, when he was not so short of funds this year, of ending the taxation on the inflationary element which is undoubtedly still there. Better still, we should end capital gains tax altogether except for ultra-short-term gains which are really a form of income.

We should take the unpredictable element out of inheritance tax which, I regret, was reintroduced last year. The best way, in my opinion, is to tax the recipient rather than the originator of the gift. I hope that my right hon. and hon. Friends will reconsider their policy in respect of that alternative approach, possibly this year or in a later Budget, because I believe that the relief of taxation on private capital is likely to be more fruitful in encouraging the entrepreneurial spirit in Britain than a reduction in the basic rate of tax. I am not trying to say that I do not welcome the reduction in the basic rate of tax — of course, every sensible person must do so—but there are taxes on the capital account which need even more urgent consideration.

The tax treatment of income still needs major reforms and there are simplifications on current account which I would also welcome. We should put all personal tax on a single unisex basis. In a Green Paper, which did not receive a very warm welcome, the Government floated the idea of making it possible for husbands and wives to transfer their allowances. That was too complex. It would be better to have a single unisex tax, so that it would not be necessary for a woman to declare whether she was widowed or cohabiting, or her personal circumstances at all. Indeed, it should not be necessary to state one's sex on a tax return at all.

Another change could have been made this year. I understand from a parliamentary answer that it would have cost only about £500 million, which is a small sum considering the advantages: we could have made wives' investment income separately assessable. It is unfair to discourage women from making their own financial plans by taxing their investment income together with the income of their husbands. I should also like to see an end to the higher rate tax on investment income. I cannot see who would seriously lose by that.

We should also end the higher rate tax on earned income which we call the national insurance contribution. My right hon. Friend the Chancellor is bringing down the rate of tax on investment income to 27 per cent., but the effective rate of tax on earned income up to £15,000 a year is 36 per cent., because there is a 9 per cent. contribution by the employee on top of the income tax, which we call the national insurance contribution. That extra 9 per cent. is collected through the pay-as-you-earn system and has precisely the same impact as income tax. We talk about reducing income tax, but we retain a system in which earned income is penalised because it is taxed at 36 per cent., whereas investment income is taxed at only 27 per cent. That seems to be getting matters entirely wrong.

I should like to go further. I consider we should bring taxation of income to a single standard rate for all types of income. I invite my right hon. and hon. Friends to contemplate the enormous simplification in the administration of taxation which that reform would make possible and all the ramifications of tax which have grown up over the years since the higher rate tax was introduced. They could all be swept away if we went straight to a single flat rate of tax on all income, whether investment or earned. Substantial prizes would be gained by that reform. I hope that my campaign for it will bear fruit before too long. I first made this recommendation in 1971, w hen I served on the Finance Bill Standing Committee, and repeat it now in all seriousness. That should be done after the election when I hope that we again will have a Conservative Government in charge of our affairs. I do not mind if people object to my making this recommendation. I have thought it through and I do not see how anyone could claim that he lost by the fact that people with high incomes were taxed only at the standard rate.

Comments have been made today about directors who take salaries of £500,000 or more out of their companies. It used to be said that, if one wanted to become a millionaire, one should not work on a salary because a man on a salary would never be rich. Undoubtedly, that used to be true, and many of our larger corporations which were run by people on salaries tended to be lacking in entrepreneurial spirit. If it is possible in private business for people to earn substantial incomes which enable them to put capital aside, that is not a bad thing. On the contrary, it is an aspect of the brightening up of our economy which is slowly happening—albeit too slowly in view of the way in which capitalism can and does work in other places.

I am not saying that we want precisely to imitate Hong Kong, but it provides an example. Not only the rich but the poor as well are getting richer in Hong Kong. We are depriving ourselves of the benefits of capitalism by the way in which we operate vindictive taxes which have no real purpose.

If the rates of income tax on all types of income were standardised, it would be likely to imply a rise in the rate of tax on investment income. We should therefore concede a substantial tax-free band of investment income for each taxpayer to compensate fully for the rise in the rate, to stimulate savings and wider share ownership, and to produce a Loi Monory scheme of the most simple kind. I have it in mind that the first £50 a week of investment income should be free of tax. That would give people an incentive to accumulate shares and to provide for themselves by various forms of saving. We should encourage the spread of personal wealth and, in particular, help pensioners and old people living on investment income to keep their incomes above the level at which they have to apply for supplementary benefit.

Between 8 million and 9 million people are, in one way or another, dependent on supplementary benefit and other related benefits, and taking account of the housing benefits which are means-tested, 14 million people are dependent on means-tested benefit of one sort or another. That cannot be healthy for the economy, because those people know by instinct that it is not worth taking work or having their own savings, because that would simply rule them out of eligibility for benefit.

All the changes which I recommend would cheapen administration drastically and, within a short time, increase the yield of tax, because the economy would respond to the stimulus. The yield of taxation at the lower rates would be greater than would be taken out by continuing the higher rates of tax, which are charged at the moment.

I apologise if what I say about the redistribution of income echoes what I have said before in the House. I recall the campaigns of Wilberforce and Plimsoll and one of Disraeli's last speeches in which he said : I have begun several things many times and I have often succeeded at last. In post-Socialist Europe, there will still be an obligation on the members of the economy to give each other mutual support, but how can that be done efficiently? I am attracted by the concept of the redistribution of income as a zero sum whereby the average citizen pays into the public sector insurance system the same amount as he takes out. Over the cycle of life, he should draw support at the beginning and at the end and make his corresponding contribution during his working years.

But the redistribution of income must not be structured or administered in such a way as to provide a drag on the economy, as it now certainly does. That makes it an immediate target for reform because it operates in diametric opposition to the Government's policies of encouraging people to improve their circumstances by work and to provide for their future by saving. If 500,000 or 1 million people were dependent on means-tested benefit, one might say that the system was not working materially to reduce the efficiency of the economy. But when the number goes beyond 10 million, we must recognise that our system for the redistribution of income is counter-productive and wrong. It is extremely expensive to operate. It is unpopular, divisive, easily exploited and, as we all know from our constituency cases, often inadequate in relieving serious poverty.

I should like to repeat the suggestion which I have often made for what I call the BIG idea—the basic income guarantee, which used to be known as the tax-credit scheme. We should hasten to integrate the income tax and the national insurance systems in a tax credit scheme on a revenue-neutral basis. Objections have been made to the tax-credit scheme as it was conceived in the early 1970s, on the ground that it would be too expensive to implement. But a tax credit scheme does not have to be implemented in such a way as to add to the burdens on the economy. The advantages of a tax credit scheme can be obtained on a revenue-neutral basis.

For those in work, the basic income guarantee would replace the income tax allowances bringing pay-as-you earn to an end and making it possible for most people to calculate their income tax in their heads. For those in need of income support, the basic income guarantee would provide, as I envisage it, about half the amount they are currently entitled to draw in means-tested benefits. That would give claimants the option of continuing to draw the same total amount of benefit as they are entitled to draw now, treating the basic income guarantee as the bottom tranche of entitlement in the same way as child benefit —but if they made that choice it would land them, of course, with all the disadvantages and the humiliation and the disincentive effects of the present system—or they would have the choice of opting for freedom and self-reliance by taking the basic income and, at the same time, looking for work, either part-time or full-time, at low pay or high pay, without committing any crime if they did so and without dropping into hardship. They would have the basic income and their earnings, such as they could get, or the use of their savings, which would secure their independence. It would be a matter of their own choice.

A large number of people, judging from my own inquiries, would prefer to make that choice. They would have freedom from case work and investigation and freedom to keep their savings and personal assets without exposure to any tests of means other than the income tax at a flat rate. That reform would add nothing to the burden on taxpayers. There would in fact, in my view, be likely to be a big reduction in the total outlay on the provision of benefits because many people would prefer to take the half rate—the basic income guarantee—rather than continue to claim supplementary benefits, as they do now. There would be a radical simplification of administration. The black economy would largely be legitimised and brought within the tax net, and the confrontation between the principles on which our free enterprise economy is founded and the systems which we operate for the relief of need would be substantially reduced. Those who are really capable of rejoining the orthodox economy would select themselves to do so, and those who cannot would be no worse off under these proposals than they are now.

I do not want to dwell on too many other suggestions, but I would like to make one or two more particular points. We are now beginning to feel the benefit of much more realistic exchange rates vis-a-vis the Common Market, but we are not likely to adapt our economy quickly enough to gain the benefit of the more realistic rates of exchange unless the Government take certain steps. To encourage investment in manufacture, we should reintroduce initial allowances, and see whether it did not produce another spurt in capital investment in the private sector.

The way must also be found for the private sector to raise capital on indexed bonds in the same way as the Government. If the Government wish to do so, they are able to raise funds with very low outgoings in the early years. I realise that indexation to the retail prices index would be imprudent for many businesses, but there are other forms of indexation which would not be imprudent for business and which could well be devised. But that is not happening in the private sector, although I know from inquiries that I have made that many firms would welcome this facility if it were an option that was on offer by the capital market.

When I inquire why the capital market does not offer substantial funds in the form of indexed bonds, again and again I am told that it is because of difficulties over the tax background. I have tried in successive Finance Bills to make suggestions of my own as to the way in which the tax background could be clarified and eased for the issue of indexed bonds in the private sector, without ever getting a response. I ask my right hon. and hon. Friends once again to look into the situation and see what is preventing the private sector from getting the benefits that the Government are able to enjoy by issuing indexed bonds. That is still not happening at present.

To discourage short-termism in the investment policy of tax-exempt pension funds, there is a case for removing from them the exemption from the taxation ofultra-shortterm capital gains, which is an anomalous privilege which encourages them to invest simply from month to month or quarter to quarter in the hopes of making quick capital gains rather than to link over the long term to substantial businesses in the hopes of greater benefit over a period of years.

Coming now to pension funds, I think that my right hon. and hon. Friends will have to admit that the announcements that were made in the Budget have not been too successful and that it would he better if they were to reconsider what they have said. We should find a way of obliging funds to pay out full transfer values. I suggested a way in which this could be done during the Report stage of the Finance Bill last year, and I hope that this will be adopted this year, because the inability—or the unwillingness — of private sector schemes to offer genuine full transferability of all accrued values is a disgrace to the occupational pensions movement.

At the same time, one should take off the two thirds maximum limit on benefits. I cannot see that it is helpful. What the Inland Revenue is trying to do in this respect is counter-productive. Why not simply limit the amount of contributions that people can make to tax-exempt funds and put the figure quite high—perhaps even 25 per cent. of earnings as the employer's and employee's combined contributions per annum? I hope that my right hon. Friends will consider that suggestion.

We should attack the issue of the tax-free lump sum by the simple remedy of saying that, for future years, we will phase out the tax exemption; lump sums, in so far as they accrue in future years, should pay the standard rate of tax. That would be a much simpler way of achieving what the Government are trying to do, which is to end the distortion which has crept into the way in which pension funds are operated to obtain the benefit of the total exemption from tax that beneficiaries can claim if they draw their part pension in the form of a lump sum.

Finally, on the tax treatment of Lloyds and the question of tax of reinsurance, I welcome the statement that the Chief Secretary made in opening the debate. If we have a full Committee stage on the Bill, I hope that he will bear in mind the serious concern that has been aroused by the Government's proposals. I am sure that serious concern is well-founded; but the Chief Secretary made some reassuring statements about his attitude which I am sure will be welcome in the City. For the present year, let us say that this is a good Bill which is full of useful things. It is not possible to mention them all, but I wish it a smooth passage through its remaining stages.

8.17 pm

Mr. Stuart Bell (Middlesbrough)

I am grateful for :he opportunity to follow the hon. Member for Kensington (Sir B. Rhys Williams). His speech was cogent and detailed. Not only did the House follow his speech with great interest but it will read extremely well tomorrow in Hansard. He began his speech with a series of statements about personal possessions such as stocks and shares. But it occurred to me that people living in a home that belonged to them, having their walls papered with share certificates but with no job to go to, no good health to enjoy and no proper education for their children might consider that they were the victims of an imbalanced economy. The people of our country would prefer to have work for themselves and their children, good health. a proper Health Service that would cover them, and a proper education. They are essential elements upon which we shall fight the next election.

The hon. Member for Kensington welcomed the Finance Bill and said that it was full of good things to discuss in Committee, I am sure that the Chief Secretary for the Treasury was right when he offered us a good length of time in Committee, going into several sittings well into June and July, so that the Government will have the Bill on the statute book by July and can hold the general election probably in October. We shall wait and see whether that forecast is right.

I enjoyed the speech made by the hon. Member for Tatton (Mr. Hamilton) from the Government Back. Benches. He mentioned that the maximum rate of income tax in the United States is 28 per cent. Of course, that is the United States federal tax rate and does not include state or sales taxes. I wonder whether even the Chancellor of the Exchequer would wish a situation to exist in which we had a low rate of income tax and a Budget deficit of about $200 billion, rising to $250 billion in 1989. Even the Chancellor of the Exchequer, give him credit, has not said that he wishes taxes to become low at the expense of the public sector borrowing requirement.

We are always hearing from the Chief Secretary about the base year of 1981, as if there was no Conservative Government in the years 1979–81, in fact as if there was no Government at all. One of the jewels in the crown, as the Government would say, of their seven-year record is their low inflation rate. In fact, the British people pay for that low inflation rate with high interest rates. Those high interest rates keep the exchange rates strong, as the hon. Member for Kensington said. Those high interest rates are the reason why it is strong. They are the highest in Western Europe. The fact that they are high means that every householder in the country pays a higher mortgage rate than he ought to. Those who get domestic credit also have to pay interest rates ranging from 24 per cent. to 30 per cent. Therefore, someone pays for our low inflation rate and that happens to be the householders of our country and those on domestic credit who, as time goes by, find themselves unable to pay the excessive and exorbitant rates asked of them. If one looks at the £24,000 million that has been borrowed on plastic money and has to be repaid at those rates, one can see gathering in the distance a serious problem for our economy.

As all Opposition Members know, the Government's attack on inflation has been essentially three-pronged. Until 1979 every Government in the western world sought to balance inflation with unemployment. One did not want to see unemployment shooting away or the benefit of keeping inflation low. This was the only Government in the western world who decided as a matter of policy—they were elected, so they were entitled to do it—to keep inflation low at the expense of unemployment. We have seen the consequences of that since 1979. We know that since 1979 unemployment has risen by 2 million. That is the official figure. Unemployment actually rose from 1.1 million in 1979 to 3.1 million in January 1987.

We have had 19 alterations in the way in which the unemployment figure has been calculated. I almost called them the 19 varieties. In order to get to his 57 varieties even Mr. Heinz had to go through a process of increasing his numbers. The Government have reached 19 varieties in calculating unemployment in our country. In doing so they have reduced the figure by 400,000. Lord Young is seeking to talk down the unemployment figure and suggesting that it may not be lower than three million by the time of the election. The fact is that unemployment is not altering in our country. The way in which it is being calculated may bring it down but in the public perception it is there, it exists like an iceberg in the ocean and it is not going to go away. Every opinion poll shows that high unemployment is a cause of distress among our people and it is the matter that concerns them the most. They know perfectly well that unemployment exists and that the Government do not have a proper policy to bring it down. Even to reduce income tax by 2p in the pound will not bring down the unemployment figure. Whatever else it may do in the economy—it may release money into the economy—it will not bring down the unemployment rate.

Since 1979 we have seen a Government who believe in reducing the manufacturing base of our country and enhancing the service base. However, as we know, as the Americans are finding out and as the Japanese knew a long time ago, the basis of the wealth of a nation is its manufacturing base. The United States is now discovering that it is falling behind Japan as an industrial nation. The strength of a nation lies not in its service industry, which turns money round, but in its wealth creation in the manufacturing sector. The hon. Member for Stockton, South (Mr. Wrigglesworth) to whom I listened with great interest referred to Head Wrightson in his constituency, which was closing down. On Teesside 72 foundries have closed down over the past few years. British Steel has seen its work force on Teesside reduced from 25,000 to 7,500. That was not feather-bedding; it was a deliberate act of policy brought about by the Government. ICI reduced its work force by 8,000 and Smiths Dock, the last shipbuilding yard on our Teesside coast, has closed down. That is a direct consequence of a Government saying that manufacturing does not count and that what does count is the service industries.

The money markets, which have the respect of the Chancellor and the Government, will eventually judge us by our performance on the industrial front. They will decide what the value of the pound will be as a consequence of what our industrial strength really is. It cannot be the best idea to run down our manufacturing assets and to create a balance of payments deficit of £2,500 million on our manufactured goods and hope, as the Chief Secretary said earlier, that that can be made up by earnings from interest, profits and dividends.

The Chief Secretary mentioned investment abroad from 1979 of something like £112,000 million, yielding £4,000 million by way of interest, profits and dividends in 1986. As a consequence of that, we see the money and assets of our country being drained away towards a foreign country such as the United States and converted into assets such as the Watergate building, which was bought by the Coal Board pension fund, thereby converting our assets into paper money in America, benefiting the American economy to the loss of our own. If we had invested——

Mr. John Butterfill (Bournemouth, West)

Would the hon. Gentleman accept that external investment is also the mark of a highly developed economy and that Japan, for example, which the hon. Gentleman admires and talks about so much, invests overseas in even greater proportion than we do?

Mr. Bell

I should like to say three things to the hon. Gentleman. First, I share with him a secret desire and I hope a secret delight. I hope that Bournemouth and Middlesbrough will go up from the third division to the second division at the end of the season. Secondly, may I disillusion the hon. Gentleman somewhat by saying that I am not a great admirer of Japan. I shall come to that. Thirdly, Japan is investing abroad because of its massive credits on its exports. Its exportation of manufactured goods is creating such a huge credit that it has to put the money abroad in order to invest it. There is no prospect of being able to invest that sort of money in its own country. Therefore, we have the peculiar situation of a British Government who refuse to believe that the public sector borrowing requirement can play any part in our own economy. We have seen the figure reduced. A total of 0.75 per cent. of GDP is now being borrowed. The Government borrowing figure for last year is now so low that it is almost insignificant. In fact, I cannot understand why they complain about a Labour policy of investing £6,500 million in the economy when their own public sector borrowing requirement target is £7,000 million for the past financial year. What the Government have done —it has to be put on record and set in context—is that they have sought to raise the same amount of money by the sale of the assets that the nation owns.

When the Government came to office in 1979 the idea of selling off public assets was a doctrinal and ideological matter in which they believed. Again, they won the election so they were entitled to do that. However, what they did not foresee was what a bonanza it would make for the Treasury. They are now able to raise through the City of London something like £8,000 million a year by the sale of public assets. They are selling those assets at less than their fair market value in order to encourage the British public to buy them. That is the sad position that we are in. Would it not be better to use those assets, to borrow against them for the benefit of the whole nation rather than to sell them for the benefit of a few?

I am glad that my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) is in his place again. He mentioned oil tax revenues and their impact on the balance of payments and the fact that oil is no longer being exported in such massive quantities. We see the structure of the Government's financial policy very clearly. We see the sale of public assets raising £8,000 million a year, and we see a high value for the pound, as the hon. Member for Kensington said, maintained by high interest rates because there is no basic underlying support for the value of the pound, as we see the massive reservoir of unemployed.

All of us, as I mentioned to the Chief Secretary to the Treasury earlier, should take into account the position in the United States of America. The Opposition believe that there will be difficulties for the British economy over the next few months as the balance of payments deficit rises on our manufacturing trade and the consequences of that filter through to the markets. We must also take into account the fact that in the United States the trade deficit for one month was $115,000 million. The federal deficit is $200,000 million and it will rise to $250,000 million in 1989. A protectionist wave in Congress has already touched upon the importations from Japan with a 100 per cent. duty, and that will result in rising interest rates. The Chief Secretary would not rise to the challenge of my hon. Friend the Member for Dagenham (Mr. Gould) who called upon the Chief Secretary to claim that world interest rates were falling. In fact, the Federal Reserve in Ameria is allowing interest rates to rise to defend the value of the dollar.

The position in the United States is perplexing and possibly confusing. It will give rise to some impact on our world trade and our economy. The Chief Secretary to the Treasury acknowledged that in his reply to my earlier intervention. However, he said that the Government had safeguarded the position by keeping our public sector borrowing requirement down and our interest rates high. That is how we are trying to weather the storm. The consequence is that unemployment will not fall in our country. The benefits of the economy that the Government are trying to provide clearly show that there is no benefit, especially to my constituents in Middlesbrough, to those looking for work or trying to better the education for their children.

For those who claim that there is no correlation between high unemployment and a high crime rate, I would stress that Cleveland has the highest unemployment rate in the country on a county basis—about 21 per cent. Cleveland also has the third highest crime rate in the country. There is a clear link between rising unemployment and rising crime.

When the history of these times is written, these will be seen as the years that the locusts ate. They will be the years during which the Thatcherite Government entirely misjudged our economy and the British people. We have heard a lot about opinion polls. The only opinion poll that will count for this Government will be that taken on 7 May when 12 million voters go to the polls. I believe that the result of that poll will ensure that this Finance Bill will have a proper testing on the Floor of the House and in Committee. The Prime Minister will not dare to go to the country in June because the British people will show her what will happen if she does.

8.32 pm

Mr. John Browne (Winchester)

I believe that the Finance Bill reflects a Budget that was a real hat trick. First, public spending was down by £4.75 billion; second, taxation was down by about £2.25 billion, and, finally, the public sector borrowing requirement was down by some £3 billion to a level of £4 billion, and that represents about I per cent. of GDP. I realise that the level of 1 per cent. GDP reflects the proceeds of the privatisation programme. None the less, that is good for Government revenues not only from capital account, but from the revenue account because many of the industrial sectors that have been sold off to the genuine public as opposed to the state were losing money. Now they are profitable and the Government have saved on the revenue account and they have made on the capital account. That is good for the. Government and for interest rates in the longer term.

I welcome particularly the profit-related pay measures. I also welcome the cut in the standard rate of tax to 27 per cent. That is a real incentive to a large number — roughly 21 million people. I hope that it portends a move to lower rates yet beginning to mirror the United States. I support a single band of tax for simplicity and I hope that we will achieve that eventually. I think that it is wrong for people to compare our changes with the more sudden movements in the United States and the drop in American tax rates. There are more tax yields in the United States and the Americans can afford to drop their rates fast and still maintain revenues. We are less able to do that here. However, I hope that our tax change portends a real trend.

I believe that my right hon. Friend the Chancellor of the Exchequer and his Treasury team have listened to the urgings of the oil industry constructively and that the measures taken on oil taxation are good and prudent and will be good for oil production in the United Kingdom. I support the move by the Treasury team from using sterling M3 as a measure to sterling M0. I accept that there has been a growing demand for financial assets and an increasing volatility which makes sterling M3 an unsuitable indicator. However. I also feel—and I have felt for some time—that the money supply is extremely difficult to control if foreign exchange controls are removed and there is a free banking system. I support both of those, but I have always believed that focusing on sterling M3 was wrong and I am pleased that the focus is now on the narrower definition of sterling M0.

At the same time, I really believe that there is genuine concern in the City and elsewhere about the overhang of private sector liquidity and borrowing. This is taking place despite the relatively high level of real interest rates. That is a source of real concern and was correctly taken into account by the Treasury team in their arriving at what I would term a prudent Budget. We must consider that point in future.

I understand the caution that the Chancellor has exercised with regard to interest rate reductions. In view of the overhang of liquidity, the problems with world trade and the risk that oil prices could drop again, therefore eroding our revenues, it is right to be cautious. The price that we pay within these high levels of real interest rates gives some benefit with regard to anti-inflation measures by keeping sterling relatively strong in the general anti-inflationary battle.

I therefore welcome the Chancellor's caution in the face of the risk of a fall in oil prices and in the face of world trade problems. I also welcome it because of the probability that we must estimate whether the Government's revenues will stay as buoyant as they have been in the past year. I absolutely support that cautious, prudent approach in the Budget.

There is a chronic imbalance in world trade. Japan and Germany have massive surpluses while the United States has a massive deficit of about $150 billion. Of course, the United States will have to correct that deficit and there is no easy or pleasant way of doing that. The United States must either export more or import less. That has a tremendous potential impact for world trade. I believe that caution and prudence were absolutely correct.

I want briefly to consider the international debt crisis because a solution to that crisis is of vital importance to the continued health of world trade. I understand that the Government have already converted the debts of sub-Saharan countries into grants which is effectively an aid programme. My right hon. Friend the Chancellor at the recent G7 meeting extended that transfer of loans to Third world countries into grants or at least introduced an initiative in that respect. That is a great initiative in the aid programme and shows that this country and the Government are setting a leadership example on the world stage in a comprehensive and practical way by trying to offer a workable solution to the international debt crisis and the maintenance of the health of world trade. Britain now leads the world in that aid programme and more should be done to put that across to the public.

I thank my right hon. Friend the Chancellor for the measures that he has taken to assist small businesses. As chairman of the Conservative Back Bench small businesses committee, may I say that I and my officers have always been well received by the Treasury team and we were especially glad to see the measures taken in this Budget. The further reduction in corporation tax and the VAT cash option for companies with turnover of less than £250,000 are marvellous measures for small businesses and the VAT cash option especially will do a great deal to help bad debts and late payments. It is and always has been correct for the Government to restore growth in the small business sector even by actively discriminating in favour of small businesses. Just as in nature one always discriminates in favour of the young, whether they be plants or animals, it is right to do the same in economic terms.

The proof of the pudding is in the eating. In the past three years small businesses employing fewer than 20 people have created a net 1 million real new jobs while larger companies have shed 750,000 jobs. Small businesses are thus making a substantial net contribution to reducing unemployment and, interestingly enough, this is happening faster in the north than in the south. I applaud the many measures that the Government have taken to enhance not only investment in but the conduct of new and smaller businesses. There is still more to be done to reduce the administrative burdens on smaller businesses, but anyone in the small business world and, indeed, anyone looking at the economy will agree that it is far easier to establish and run a new business now than it was in 1979. That is very good for Britain in the long term, and especially for real jobs.

In 1979 the leader of the Liberal party said that the acid test for the new Government would be how they managed the economy. When one considers the economic situation in 1979, it is clear that the test was indeed an acid one. In 1979 we had state controls, disincentives and low morale. Now there is freedom and enterprise. One recalls the endless stop-gos of yesteryear. Now we have a period of steady growth. In place of declining productivity we have increasing productivity. Up to 1979 there were massive state monopolies and state cartels. Those cartels have now been opened to genuine public ownership rather than state ownership and to free competition. Incentives are therefore such that even in old, dying or apparently sick industries such as coal production there have been dramatic increases in productivity and in general morale.

Industry which until 1979 was oriented towards the producer is now oriented to the consumer. Therefore, we are winning increasing shares of world markets. Sales are increasing whereas before 1979 they were falling. The winter of 1978–79 was a time of endless industrial unrest. In the past year we have had the lowest level of worker days lost for 50 years. In 1979 tax rates were rising and Government borrowing was rising. Today tax rates are falling. The top rate of income tax has fallen from 92 per cent. to 60 per cent. and the standard rate from 33 per cent. to 27 per cent. Corporation tax has fallen from 52 per cent. to 35 per cent. and for small businesses from 42 per cent. to 27 per cent. At the same time, Government revenues have been rising and Government borrowing has fallen to 1 per cent. of GDP over three years. That is an outstanding record. In 1979 overseas assets were valued at about 7 per cent. of GDP. The figure is now 28 per cent., diversifying the security of our earnings throughout the world trade.

In 1979 employment was declining. Now it is rising at the fastest rate in Europe and unemployment is falling faster in the north than in the south. This is not due to gimmicks such as pumping money into jobs that do not really exist. These are real jobs, with the result that inflation, which was high in 1979, is now low and likely to average about 4.2 per cent. this year. The really interesting aspect, however, is that that low level of inflation has been achieved together with a high growth rate—the highest growth rate in G5. In the old days, high growth meant high inflation and reducing inflation brought the growth rate down, but the Government have succeeded in decoupling the two aspects so that we now have high growth and low inflation. That is a very great achievement.

In 1979 we had the British disease. Now we have the British economic miracle. In 1979 the leader of the Liberal party said that the acid test would be the Government's conduct of the economy. This Budget and this Finance Bill are prudent and a testimony to the fact that the acid test has been met outstandingly well over a measured period of years. I therefore willingly extend to my right hon. Friend the Chancellor and to the Treasury team my heartiest congratulations on what I believe is just one more measure in a great success story.

8.47 pm

Mr. Malcolm Bruce (Gordon)

Listening to the hon. Member for Winchester (Mr. Browne) and, indeed, many of the Tory speeches, we have heard a very selective presentation of the state of the British economy. I was gratified to note that the hon. Member for Winchester quoted twice in his speech the same comment of my right hon. Friend the leader of the Liberal party. Perhaps that is a measure of the marginal nature of the hon. Gentleman's constituency. In reality, between 1979 and 1981 the Government failed the acid test. In the past few weeks they have constantly reminded us of the winter of discontent, but they have chosen not to remind us of the two years of monetarist mayhem which followed their election and resulted in whole chunks of our manufacturing industry being torn out by the roots, and brought about a degree of devastation on British manufacturing industry from which we are only now recovering. The Government say that the recovery statistics are impressive, but they need to be impressive if the economy is to recover from the damage inflicted on it in the first two years of Conservative rule following 1979.

We must consider exactly what priorities the Government are now offering the country. I should like to dwell for a moment on the clear choice that faced them in this Budget and the path that they chose to take and which we oppose. The Conservatives claim that tax cuts are very effective in creating jobs, but there is no evidence whatever to support that contention. In fact, the opposite is the case. The job creation effect of a 2p cut in income tax is small compared with the effects that that money could produce in jobs if it was targeted differently.

The Government's priority of reducing taxes would also be defensible if the public knew that there was no work that needed to be done. However, the public know that a great deal needs to be done. There is a need, for example, to provide for the care of our increasing elderly population, to provide them with care in the community such as home helps and home nursing. There is a need to integrate the physically and mentally handicapped into the community. That is something to which the Government claim that they are committed, but for which adequate resources are not available. The whole provision of health care rightly causes concern when in my own part of Scotland — the north-east—it is acknowledged that we are up to £50 million under-funded on the health budget. Even if the figure is disputed, the Government themselves admit that there is substantial under-funding and that the SHARE formula in Scotland will take several years more than was forecast to reach any sort of equity.

Therefore, it is not as if there is not a clear indication of what is required. There is a need for investment in education at all levels, and for investment in our infrastructure, in, for example, the electrification of the east coast railway line, plans for which currently stop at Edinburgh. There are no plans to extend it to Aberdeen. That gives us great cause for concern because when the line is electrified to Edinburgh that could lead to a reduced railway service to Aberdeen, rather than to improvement. All those things need to be done. The House knows of them and all hon. Members can draw their own list of priorities.

I suggest to the Government that even Tory voters, or I should say former Tory voters, those who voted Tory last time, must question whether the tax cuts that they are being offered in the Budget will make them personally better off. They will calculate that the benefit of getting those tax cuts will not even pay the premium for the private health care that they will increasingly have to take out because the National Health Service cannot provide the care that they had previously come to expect. It will not go anywhere near the cost of private education if they feel that they are unable to maintain their children in the state system. It is worth reminding the Government that probably three quarters of Conservative voters send their children to state schools and they know the problems facing them in terms of inadequate funding. They will have to consider whether they want their children to go on to further and higher education and the increased cost of that, in circumstances where support for colleges, universities and grants is effectively being cut in real terms.

I suggest somewhat lightheartedly that when those voters reflect on that, they might come to the conclusion that their tax cuts could be better invested by putting them into the campaign fund for the alliance to ensure that this Government are removed in favour of a Government who will give priority to the services that those voters know they need, but which the Government are clearly set against providing. I suggest that they should consider that the Finance Bill does nothing to reduce regional and national disparities. It does not address the problems that many of us know, or the specifics of individual projects which are failing or to the closures that still continue to bedevil the Scottish economy in particular but also many other parts of the country. I refer to the specific instance of a Unilever factory in my constituency, Lawsons of Dyce. It is being closed by Unilever, which is also to close two other factories in England. The company will receive about £4 million of Government grant to build a new factory in Corby with a net destruction of about 1,000 jobs, of which nearly 600 will be in my constituency.

That is the sort of anomaly that the Government could have faced up to. Such is the problem with the Caterpillar company, where the workers have continued their occupation of the factory. The circumstances are that the company has received substantial benefits from the British taxpayer, but now seeks to pull out in a breach of faith. It hopes to take those assets, some of which have been acquired with the help of British taxpayers, out of the country and to avoid tariff duties by having them treated as secondhand equipment. Such anomalies should have been tackled.

I shall briefly mention the North sea tax changes. which have been referred to by one or two of hon. Members. I welcome the breach of the ring fence principle and the fact that there is a tax allowance for money going into research. However, the Government have deluded themselves if they believe that the measure of concession that has been agreed of 10 per cent. to be allowed against new developments is anything like enough to make any significant difference to investment in the North sea. Indeed, the Chancellor said that the allowance was specifically calculated so that it would not make viable after the changes any field that had not been viable before.

One wonders about the point of introducing tax changes that are specifically designed to have no effect. However, that is exactly what the Government have done, and they will be able to claim no credit for any recovery that takes place in the North sea as a result of those tax changes. We need more significant tax changes if we are to achieve a significant increase in activity. That is important not only to the north-east of Scotland but to the Scottish economy as a whole and that of the north of England, which is suffering from the lack of North sea orders.

I shall refer to just two other areas because time is short. The Finance Bill has proposed. changes in VAT regulations as they affect small businesses. They have generally been welcomed and I wish to welcome them also. However, the Government should also recognise that they have not lifted the burden on small business as they claimed they would, but, in a number of ways, they have increased the administrative burden on them, for example, through statutory sickness benefit and by a whole variety of administrative burdens which must be faced. The cost to small businesses of implementing the administration of payroll tax changes can lead to the need for new software for a microcomputer, or, in some cases, to the need for a new microcomputer to cope with those changes. There is no Government assistance for such a consequence. The Government should address themselves to the implications of those changes as they affect small businesses.

In reading the Select Committee's report, another interesting thing is the lack of precision that exists in the Treasury on exactly where the revenue is going. We were told that the Treasury was quite unable to forecast the revenues for the next few months. Indeed, just before Christmas the Chancellor said that he ruled out the possibility of tax cuts. However, three months later he had enough money to provide a 2p in the pound cut that could not have been anticipated.

One wonders where the economy is going when the Treasury admits to the Select Committee how ill-equipped it is to forecast the future. When asked to explain why there was such an excess of profits, the Treasury assumed that it was because it had not forecast the increased profitability in the finance sector. That brings us full circle because it implies that the Government's buoyancy from revenues is directly attributable to the increase in borrowing in the private sector. We have now reached the position where public sector borrowing is down to 1 per cent. of GNP, but private sector borrowing has increased to more than 10 per cent. of GNP. The charges that are being paid on the interest of that private borrowing is improving the profitability of the financial sector. No wonder the Governor of the Bank of England sees that as a looming, glacial, overhanging liquidity which could come crashing down when the thaw comes.

Clearly, the Government hope that the Finance Bill will dress the window in advance of the forthcoming general election. The speeches of Conservative Members have been clear rehearsals of what they hope will go down well in their constituencies at the start of the election campaign. They may sound fine here and they may look good when they are read in the local paper, but at the general election hon. Members must stand before an audience of their constituents who are aware of the Government's shortcomings and the other side of the argument, who realise the cost of the Government's policies in terms of unemployment, the neglect of our infrastructure and the problems in health and education, and who will realise that the Tory Government's priorities are not right for the British people, that there is an alternative and that the time has come to change to it.

8.59 pm

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

I wish to put several proposals to the Minister on the credit union movement and I should be grateful if he would respond to them.

The Budget and Finance Bill do little or nothing for my constituents, about 33,000 of whom depend on social welfare payments — that is over 40 per cent. of those whom I represent. while I do not wish to make any predictions about the general election, I hope to continue to represent those people. The Scottish Office offers the sop of the Inverclyde initiative, which is a so-called privately led enterprise project. I do not think that Scottish Office Ministers take it seriously, because if they did, they would have to acknowledge that it cannot even touch the problems facing my constituents. The overwhelming majority of people in Scotland mistrust the Government and their Scottish representatives. Whatever happens south of the border, that will be made evident on election day.

The Bill does not mention assistance for the credit union movement. Clauses 31 and 32 deal with friendly societies, but there is not a word about the credit union movement, which is a matter of deep regret. In my constituency the Greenock East credit union has more than 700 shareholders who can obtain loans ranging from £75 to £300. It is a splendid, heart-warming example of a self-help bank in an area ravaged by unemployment and poverty. Of the 60-odd credit unions found in Great Britain, fully 21 are situated in Scotland and they have assets of about £1.25 million. This wholly admirable movement needs Government help to deal with the problems that bedevil it. I stress that I am not making a plea for financial assistance.

I received a letter from Dr. Ray Donnelly, director of communications of the Association of British Credit Unions, in which he states : our main problem is that the shares and loans limits have not been increased since 1979. Thus established Credit Unions are now in a position of having to refuse savings from their members because they have reached the £2,000 share limit. Will the Minister give serious consideration to increasing that savings limit from £2,000 to, for example, £5,000?

Dr. Donnelly continues: This is a preposterous situation for a government which is sworn to uphold the principle of deregulation. Deregulation only seems to apply to their friends and not the working class movements. One such credit union is the Strathclyde Passenger Transport credit union which is largely made up of bus drivers, ancillary workers and Glasgow underground workers. That union is telling some of its shareholders that they cannot invest another penny because they have reached the upper limit of £2,000. That is an absurdity and I appeal to the Minister to look closely at this ridiculous state of affairs.

The Credit Unions Act 1979 is, in many important respects, badly out of date; it needs changing, so that credit unions can grow. The 1979 Act was the first legal recognition of credit unions in Britain. Its aim was to regulate the performance of credit unions, and at the same time protect the interests of their members. At the time of the passing of the Act many members of the credit unions thought that it was a good Act. Even with 1987 hindsight, it was a good piece of legislation. There was no Division on Second Reading and there was a good deal of all-party support for the Act. However, there are problems.

The 1979 Act imposed strict limits on what a credit union could do. Those limitations included a maximum membership of 5,000 people; a limited shareholding of £2,000; and a maximum loan of £2,000. The maximum dividend rate of 8 per cent. remained until 1985. There is a maximum charge on loans of I per cent. per month, which equals 12.68 annual percentage rate. The longest repayment period was two years for an unsecured loan and five years for a secured loan.

The effect of these regulations was to place credit unions in a tight, tough framework of controls. Little was left for the individual credit union to decide. Restrictions were drawn up which reflected the composition and nature of the credit union movement at that time. I remind the House that in 1979 the average credit union had a membership of 154 people, with an average shareholding of £95. Today, credit unions average about 300 members with average shareholdings of approximately £200 -roughly double the figure of 1979.

A more important fact is concealed in those figures. Of the 72 credit unions which are affiliated to the Association of British Credit Unions, 16 control almost 80 per cent. of the assets of the movement. I appeal to the Minister to change these regulations. It is the larger and expanding groups of credit unions that feel the greatest hardship under the current unreformed legislation.

At present, six police federations are starting credit unions, including the West Midlands police federation, the Greater Manchester police federation and the Strathclyde police federation. They intend to operate with savings levels of some £40 per month, but I think that we can predict that many officers will save more. This is a vastly different type of movement from that which existed when the 1979 Act was introduced.

The following changes are needed. The individual shareholding should be increased to £5,000. It was £2,000 in 1979, so it is eminently reasonable, particularly for the bigger credit unions, that that shareholding should be increased to £5,000. At present, membership is limited to 5,000 people. No credit union in the United Kingdom exceeds 2,500 members, but certain groups are growing, and the development of local authority credit unions and police federation credit unions shows that the time may be ripe to consider raising this figure. At the time of the 1979 Act, the largest credit union in Great Britain had approximately 250 members. Now, the largest has some 2,500 members.

The level of loans should be raised as well. It is essential to do this. A not unreasonable amount in 1987 could be £5,000. The period of repayment could be extended. The maximum period over which loans are repayable should be extended to 60 months on all loans. Many members of credit unions own their own homes and would like to use their credit unions to finance home improvements and car purchase. To this end, a five-year repayment term should be made available, without the need for a second mortgage.

Nothing in these proposals would compel credit unions to accept changes that they deem inadvisable or inappropriate. They are proposed to facilitate the development of larger credit unions. These are necessary changes which will encourage the growth of the credit union movement. I am sure that there can be no disagreement in the House about this movement. Apart from anything else, a prosperous and lively credit union can do much in an impoverished area such as East Greenock or Port Glasgow. It can keep at bay that most dreadful of parasites, the moneylender. We are seeing such people in East Greenock and other working-class communities.

The Minister, with his usual lack of grace, is ignoring what I am saying. I am appealing on behalf of these cooperative banks, and the proposals that I have made are entirely reasonable. The 1979 Act was fine legislation. Today, in 1987, it is badly out of date.

9.12 pm

Dr. Oonagh McDonald (Thurrock)

When the Chief Secretary opened this debate, he painted a glowing picture of the economy. One would have thought from it that there was nothing to complain about in the way in which the Government have managed the economy in the past eight years. However, it was significant that throughout his speech he did not mention unemployment once. That was an amazing omission from the opening speech from the Government Front Bench in the debate on the Finance Bill, in which the Minister describes the Government's management of the economy. It was also revealing, because it showed clearly that the Government have simply written off the unemployed. They have decided that they do not matter, that they are invisible and that their votes will not count in the forthcoming general election. That is the way in which the Government quite plainly view the unemployed, and that view is reinforced by the fact that nothing in the Finance Bill assists the unemployed.

Labour Members face the hopelessness and the despair of the unemployed in our advice surgeries and we deeply sympathise with it. Their plight makes us determined to win the next election because we know that only our party has the answer and it is only the Labour party in government that would seek to bring the unemployed figures down rather than juggling with them.

It is not only among the unemployed that we see such despair. We know that among those who are in employment there is a fear that, although they are in work now, they are unsure how long those jobs will last. The other day I visited ship repairers in my constituency and that fear was plain. The ship repairers not only face that fear, but know full well of the Government's total unwillingness to do anything to assist ship repairers in my constituency at Tilbury docks. There are certain measures that could be taken that would lead to developments and the booming of that particular industry in Tilbury, but nothing has been done. Even the manufacturers who are doing well in Thurrock find that there is no prospect of increasing employment in their factories. Therefore, there is no hope for young people seeking jobs or for those young people who may be seeking apprenticeships. The fear of unemployment is still rife in this country, but the Chief Secretary had nothing to say about it.

The Chief Secretary turned on us and said that the Labour party had painted a black picture of the economy. It seems to me that he has not read his Red Book that was published along with the Budget. There are two revealing tables in that Red Book that make the Government's prospects for the economy clear.

One table considers visible trade and makes it clear that the Government expect little increase in the volume of exports in this year. Once again, not only will import volume increase this year on last year, but imports will outstrip exports. The increase in import volume is expected to be 7 per cent. but the forecast for the increase in the volume of exports is only 4 per cent. That is the truth that the Government face in their Red Book and that is clearly spelt out. We should also consider the forecasts for the current account. We discover that the Government expect that, in 1987, there will be a £8 billion deficit in manufactured goods and an overall deficit of £2.5 billion.

Those are significant features in the economy and are ones that the Government hope the public will not notice. They represent worrying signs for the future of the British economy. However, in his opening remarks the Chief Secretary had nothing to say about them. Certainly there is nothing about those features either in the Budget speech or the Finance Bill — nothing that will enable us to reduce the forecast deficit or increase exports and reduce the volume of imports. The Chief Secretary said nothing about that and showed no concern about the serious and growing deficit in manufactured goods—£8 billion expected this year, £5.5 billion last year and £3 billion in 1985. That represents a rapidly growing deficit in manufactured goods and one that the country cannot continue to sustain. However, no concern has been shown about that and it has all been swept aside.

Instead, the Chief Secretary talked about the Chancellor's hat-trick of allegedly achieving tax cuts, increased spending and reduced borrowing. However, once again when one examines closely this hat-trick it is clear that, despite the Chief Secretary's expertise, such a hat-trick cannot be achieved. It is impossible to make that combination and, indeed, the Chancellor in his Budget did not make that combination.

When the Chief Secretary and the Chancellor talk about spending being increased, all that they mean is that spending has increased this year over their plans to cut public spending last year. Indeed, public spending as a proportion of GDP has changed little between this year and last year. Again the Government's Red Book shows that. As regards tax cuts, we all know full well that, as a proportion of GDP, taxes have not fallen. Indeed, the figures clearly show that general Government receipts were up by £3 billion on the expectations set out in last year's Red Book.

Of course, in the forthcoming year, general Government receipts will increase again. Therefore, in effect, taxes have not been cut. Borrowing is at roughly the same proportion of GDP. The spending plans are just trying to pull a rabbit out of the hat. There is no serious increase in public spending and there is certainly not the increase in public spending that would make a real difference to the economy or increase employment opportunities.

The Government have made it clear that taxes for most people have increased over the years since 1987–79. All the figures show that clearly. A couple with two children on average earnings, and equally a single person on average earnings, find that the percentage of their income taken by direct taxes— income tax and national insurance—has increased from 20–9 per cent. in 1978–79 to 21.9 per cent. in 1986–87. If all taxes are taken into account, including VAT duties and rates, that proportion has increased from 35 per cent. to 38.5 per cent. of the income of a family on average earnings.

There has been a 2p cut in the basic rate. The fall in the basic rate since 1978–79 has been offset by a fall in the relative value of child benefit, the increases in the proportion of spending liable to VAT, the doubling of VAT and the rising burden of rates as the rate support grant has been cut. I represent part of the county of Essex, where the rates have increased by 10 per cent. That is due entirely to the cut in rate support grant. We have no loony Labour Left council. It is in fact a hung council of Tories and Liberals. Nevertheless, each year for the past eight years the county council has written to all the Essex Members of Parliament and asked them to plead with the Government not to cut the rate support grant. It made a special plea this year, which was ignored by the Government, not to cut a further £6 million off the rate support grant. To get the burden of taxation back to the level of 1978–79, the Government would have had to reduce the basic rate in this Budget to about 23.5p in the pound or to cut the rate of VAT to 5 per cent. Neither of those options was taken up by the Chancellor.

What I find amazing, although I suppose I should be used to it by now, is the Government's behaviour. Time after time, Ministers talk about tax cuts. They say that the tax burden has been reduced, and so on, yet when I tabled questions, which the Financial Secretary kindly answers in great detail, I find that every answer that he gives entirely contradicts that. His answers contradict what he will say at the Dispatch Box shortly, what the Chief Secretary tells us and what the Chancellor tells us. I refer in particular to the answers given at column 311 on 27 March 1987, where the Financial Secretary goes into great detail. Page after page of statistics show the percentage taken from various levels of income for single people, married couples with no children, married couples who are both working, married couples with two children, and so on. We find that in each case the percentage of tax and national insurance taken from gross earnings has increased since 1978–79, until we get near the end of the table. Then the percentages begin to fall. If, for example, we take a person who is earning well over £1,000 a week, we find a substantial fall for a married couple with two children from 49 per cent. to 43 per cent.—and so it goes on.

Every single figure that the Government are prepared to put on record in their written answers contradicts the claims made by those same Government Ministers —aped by their Back Benchers — in one speech after another. At a net cost to the Exchequer of £1.6 billion, only 24 per cent. of the population have gained and 59 per cent. of taxpayers have lost, even before the effect of increases in indirect taxes has been felt.

It is painfully clear from every figure that one examines that the rich have benefited at the expense of those on average or below average earnings. Two pence off the standard rate will make no difference. What could make a difference to many families up and down the land would be to meet the real needs of those families by a substantial increase in child benefit at one end of the scale, and by increases in the pension for married and single pensioners. That is why we have committed ourselves to those sorts of increases—because we know full well that the resources that the Chancellor has squandered by taking 2p off the standard rate should be used for child benefit and increases in pensions to meet the needs of those who most seriously require help from the Government. That is why we made that decision and why we would not waste that 2p off the standard rate in the way in which the Chancellor did.

In his opening speech, the Chief Secretary proudly mentioned that there had been virtually no increase in indirect taxes. The real damage on that score was done by the Chancellor's predecessor. Poorer families have paid for it in the past and still pay for it now. The average household now pays one fifth of its total income in indirect taxes. The poorest 10 per cent. of households, on £3,500 a year, pay one quarter of their income in indirect taxes. The richest 10 per cent. pay only about one-sixth of their income in indirect taxes. That shows clearly the regressive nature of indirect taxes.

Nevertheless, in the past, the Government almost doubled VAT and, despite no increases in this Budget, the poorest families are paying most heavily. If the Government are re-elected, they will use the forthcoming EC court decisions as an excuse to slap 15 per cent. VAT on books, gas, electricity, water and new build. There is every reason to believe that the Chancellor would not hesitate to do that. Not only have the Government doubled VAT in the past, but the Chancellor has shown no hesitation whatever in extending the VAT base. He quite happily extended it, for example, to take-away food, a move that the Opposition opposed, knowing full well that poor families often rely on cheap and nutritious takeaway meals. Adding 15 per cent. to such meals merely added to the burden of indirect taxes on such people.

The EC decisions that will be made at the end of this year will give the Government, if they are re-elected, the opportunity to say, "Sorry, we cannot help it. The EC says we must do this". So on the tax will go, the Chancellor will rake in yet more VAT and will then, if the Tory Government are re-elected, use those receipts in later Budgets, perhaps, to cut the basic rate of taxation. That is because the Government's commitment and policy is less direct taxation and more indirect taxation. Why is this? The reason is that the better-off a family is the less hit it will be by indirect taxation. It is a regressive form of taxation and we know that it is entirely in line with the Government's stated policy and their preference for indirect taxation. Their willingness has been shown over repeated Budgets to tax the poor to reduce the burden of taxation on the rich. That is entirely in line with Government thinking and it will be convenient to use the EC's decision to justify their actions. We hear about the internal market and the pressure that has been applied by Lord Cockfield as the EC Commissioner. We know also that if the Government are re-elected they plan to impose VAT on food. This is part of the Government's commitment to the EC, and it is all part of their commitment to indirect taxation. That is entirely what we expect the Government to do.

The Chief Secretary talked about profit-related pay and said that it was not a panacea for all the ills that are faced by industry. I listened with interest because in the absence of any other policy to assist industry we must regard profit-related pay as the only policy that the Government have for industrial development.

The Chancellor of the Exchequer has doubled the tax relief available for profit-related pay from the amount suggested in the Green Paper of July 1986, but there are conditions on profit-related pay schemes. At least 80 per cent. of employees must take part in a scheme for it to qualify and the prospect must be that if profits remain unchanged the total profit-related pay will be at least 5 per cent. of the payroll of those taking part. I do not want to go into the details of the conditions because they will be matters for debate when we consider the Bill in Committee.

I want instead to draw attention to the cost of profit-related pay. It could cost at least £500 million, and it is more likely to cost £1 billion. That is a lot of money to spend on the scheme when it is fully under way, depending on the number of applicants willing to take part in the scheme. There have been many estimates of a cost of £1 billion, and, as I have said, that is a great deal to spend on one scheme that is designed to assist industry. We need to be sure that the scheme will achieve the objectives that have been set for it.

The scheme derives from the ideas of an American economist called Martin Weitzmann, who thought that it was the single solution for all industry's problems. He considered that it would solve the problems of unemployment and inflation at a stroke. Those are high claims to be made for one scheme and I doubt whether the Government would suggest that all of that could be fulfilled merely by introducing the scheme. Nevertheless, the Government no doubt believe that it will so involve employees in the company for which they work that it will motivate them to work harder, and that that in itself will assist industry. They probably believe also that it will encourage employees to accept lower wages and thereby increase employment opportunities. It is argued that the lower wages costs become the more likely employers are to take on more labour. Those would be the justifications for the scheme which the Government would have in mind. However, there are difficulties. People whose wages are already low will be encouraged to run the risk of having them lowered again if the company for which they work fails to make a profit and makes a loss instead.

There are also important questions to be asked about the relationship between the scheme and the benefits system—family income supplement, for example. Family income supplement is paid on a six-monthly basis. while profit-related pay will be worked out on a three-monthly basis. How will the low paid, who may have to face a cut in pay and may therefore need family income supplement and become eligible for it, be dealt with by the benefit system? That is an important question. I do not expect the Minister to answer it when he winds up, but it should be considered carefully during the Committee stage.

Secondly, how will we determine the size of the profits? What part will the employees have to play in determining what counts as a profit and what counts against it? No answers have been given to questions such as that.

The Opposition's main objection to the scheme, however, is that it is not radical enough. It should be accompanied by the granting to employees of a real say in the running of their companies. If employees are intended to take a share of the profits and to lose if their company fails to be profitable, they should be properly involved in the running of that company, and should have a real say and responsibility.

The scheme also gives employees no stake in the capital growth of the business. Other schemes, such as the employee share ownership schemes to which the hon. Member for Carshalton and Wallington (Mr. Forman) referred, and which we include among our aims to achieve social ownership, would give employees a real stake in the capital growth of their businesses : they would give them something to work for. We might then see a change in the commitment of employees to their companies, and in the growth of the profitability of those companies. However, the Government's offering is not a radical scheme at all. The trade unions are right to be suspicious of the Government's motives, and to feel that the scheme probably has much more to do with holding down wages than with sharing wealth.

The suspicions of the Labour party and the trade unions are well justified. One Finance Bill after another introduced by the Government: has done nothing whatever to encourage the sharing of wealth. All that successive Finance Bills have done is to encourage the further concentration of wealth by altering the rules of inheritance tax and abolishing capital transfer tax, and to increase the incomes of the wealthy. Meanwhile, the number of families living in poverty has grown to seven million.

Those families are entirely disregarded in the Bill; but it is for them that we are concerned, and it is those whom we are determined to assist when we are in government.

9.38 pm

The Financial Secretary to the Treasury (Mr. Norman Lamont)

For a debate that was widely billed in the press as the beginning of the Opposition's fight back, this has been a curiously quiet and ill-attended occasion — on both sides, admittedly. It is the fight back that never happened. The hon. Member for Dagenham (Mr. Gould) is always listened to with respect, and he always makes an interesting speech, but I think that all who have heard his speech today will agree that it was somewhat disappointing. We heard hardly a word from him about the Finance Bill. We listened to a general speech about the economy, but the hon. Gentleman expressed no views about important issues in the Finance Bill, such as personal pensions—a very considerable innovation that will affect retirement provision for years to come.

Furthermore, only during the dying minutes of the speech by the hon. Member for Thurrock (Dr. McDonald) did we hear a word about what must by any standards be an important innovation—profit-related pay. The hon. Member for Dagenham did not mention it. He was not interested in addressing the details of the Bill. All that we had from the Opposition were scares a-plenty. The scare of 1983, which proved to be wrong, was repeated—that the Government are planning VAT increases to fund direct tax cuts.

I repeat that these allegations are fanciful. My right hon. Friends the Prime Minister and the Chancellor of the Exchequer have denied them repeatedly, firmly and publicly. My right hon. Friend the Prime Minister has written a letter to Mr. Lomas, the Labour Member of the European Parliament. Such scare stories show how desperate the Opposition are to distract attention from their own policies. The Labour party is desperate to put up a smoke screen to hide the fact that the Conservative party is the party of lower taxation and that the Labour party is the party of higher taxation. [Interruption.] It is very good to hear the Opposition laughing when we say that the Conservative party is the party of lower taxation.

Dr. McDonald

Will the right hon. Gentleman give way?

Mr. Lamont

I shall give way in a minute.

For years the Labour party voted down what it attacked as Tory tax cuts. Now, at the last minute before the election, it is turning round and saying that they were not tax cuts, after all; they were tax increases.

Dr. McDonald

rose——

Mr. Lamont

I shall deal with the hon. Lady in a minute.

My hon. Friend the Member for Beaconsfield (Mr. Smith) referred to pension schemes in relation to additional voluntary contributions, to the lump sum and to schemes that had been submitted but had not been approved on Budget day. Where a pension scheme had applied for but had not received approval from the superannuation funds office before Budget day, it will be treated in the same way as a scheme that had been fully approved, provided of course that approval is subsequently given. That treatment will apply to those who were members of a scheme before Budget day. People who have been added to it since will be dealt with under the new rules. Nobody, therefore, who was in such a scheme before 17 March will be disadvantaged.

My right hon. Friend the Member for Worthing (Mr. Higgins) referred to the amalgamation of capital gains and corporation tax as it applies to the corporate sector—in particular, to how it applies to the life assurance business. My right hon. Friend the Chief Secretary explained that we had considered this point very carefully and had decided not to exempt the life assurance industry. However, talks will continue and this matter will be Considered in Committee.

My right hon. Friend referred in particular to two points. First, he asked whether the legislation would be retrospective. I suppose that all changes in the rate of capital gains tax could be described as having a retrospective effect, but the event that will crystallise the liability is prospective, not retrospective.

My right hon. Friend also referred to the effect on policies. There will be an increase in taxation, but we believe that broadly it will have a relatively small effect. Policy holders' funds in life assurance companies probably total about £50 billion, 30 per cent. of which is in gilts, while £35 billion is in property and equities. If that proportion stood at 25 per cent. over indexed book costs in all life companies, there would be au addition of 0.4 per cent. to their taxable funds. That is a point to which we can return, but I hope that what I have said will be of some interest to my right hon. Friend.

The Finance Bill contains provisions that relate to the business expansion scheme. I said in the Budget debate that we were examining the statement of practice issued by the Inland Revenue of what a ship-chartering company has to do to satisfy the business expansion scheme requirement that it has to trade wholly or mainly in the United Kingdom. As I explained, there was some doubt about what had to be done to satisfy that requirement. I am pleased to announce that, following consultations with the General Council of British Shipping, the Inland Revenue is to issue a revised statement of practice tomorrow. I know that the GCBS believes that that will be helpful and that, by providing greater certainty as to whether the conditions can be met, it will help ship chartering companies to raise finance under the business expansion scheme.

Much of the debate has been taken up with the Finance Bill. The hon. Member for Dagenham was not interested in its contents. He complained that the Bill did not mention monetary policy, and I found myself racking my memory to recall one that did. It was difficult to recognise the hon. Gentleman's description of the British economy. He is beginning to be affected by his right hon. Friend the Member for Birmingham, Sparkbrook (Mr. Hattersley), who is a distinguished romantic essayist. That is his literary forte, and I have a copy of his essays at home. The right hon. Gentleman is somewhat less skilled and informed in the horror comic approach to the economy.

The hon. Member for Dagenham talked about unemployment. No one denies that unemployment is a problem, but we deny the impression painted by the hon. Gentleman of an economy that is stagnant, in which investment is not rising and where the prospects for exports are not very good. By asserting that again and again the Labour party does not only the country but itself a disservice. Some of us are not disinterested in the state of the Labour party. Perhaps I might offer a little friendly advice. The Labour party would do much better if it said to the public, "Yes. There are many aspects of the economy that have improved. That is all the more reason why we should make different choices and build upon what has been achieved."

The hon. Member for Great Grimsby (Mr. Mitchell) tried to warn the Opposition. Under the headline "Labour should stop crying wolf" the hon. Gentleman wrote in The Guardian on 17 March : the actual prospect is rosier; an opportunity for growth, rather than the prelude for the disaster for which we have so assiduously prepared…So far from slipping into a balance of payments disaster, Britain is probably riding a J-curve. Exports are rising, imports, currently, are not. Manufacturing is becoming more buoyant.

Mr. Gould

Will the right hon. Gentleman give way?

Mr. Lamont

I shall give way in a moment. If the hon. Gentleman will not believe me, perhaps he would like to take the advice of The Economist, which pointed out on 4 April: Job ads in the Manchester Evening News are 15 per cent. up on a year ago. Construction firms, even in cities with as many jobless as Sheffield, are beginning to find difficulty in recruiting skilled workers. The Association of British Chambers of Commerce, surveying 3,400 firms, says business confidence in four parts of northern England— Yorkshire and Humberside, the north-east, Greater Manchester and Merseyside —is above the national average". The Economist concluded that the recovery was definite, strong, and beginning to spread to those parts of the economy that it had hitherto not reached.

Mr. Gould

Does the Minister adhere to the Treasury's forecast of an £8 billion deficit in trade and manufactures this year?

Mr. Lamont

rose——

Mr. Randall

Answer yes or no.

Mr. Lamont

Of course we adhere to that forecast. The hon. Gentleman knows that our current account position has been extremely strong. Some deterioration in the balance of payments is only to be expected after the price of oil has been halved. However, the deterioration is small and marginal compared with the balance of payments disaster that we experienced under the Labour Government. If the hon. Member for Dagenham will not believe me or his own supporter, the hon. Member for Great Grimsby, let him heed the words of Mr. Christopher Smallwood, the economics editor of The Sunday Times. The hon. Member for Dagenham may be put off because Mr. Smallwood has been known occasionally to write speeches for the right hon. Member for Glasgow, Hillhead (Mr. Jenkins). I understand that Mr. Smallwood has been a policy adviser to the SDP. On the economy, he said : the picture is one of … rising demand for industry's products, particularly from overseas, of adequate capacity in the short term and an upturn in investment for further expansion in the longer term. In short it is a picture of a continuing 'productivity miracle'. Sooner or later, Britain will realise that it once again possesses a successful industrial economy. Exactly like the hon. Member for Great Grimsby, Mr. Smallwood did not hesitate to give advice to the Labour party. He said : if Kinnock and Hattersley are not to sound like generals fighting the last war, they have to present the problems of unemployment and social stress, not as the product of industrial failure, which they are not, but as the spin off from industrial success, which a caring society should wish to do something about. That is more difficult to get across, but Labour does not help its cause by pretending economic disaster is around the corner when the evidence of a sustained industrial recovery is all around. That was the evidence of M r. Smallwood. Although he may have been a former adviser to the SDP, it is a pity that his advice has not reached the hon. Member for Stockton, South (Mr. Wrigglesworth).

Even if the Opposition do not believe me, their hon. Friend the Member for Great Grimsby or the economics editor of The Sunday Times, why do they not believe the CBI? CBI survey after CBI survey has shown that the outlook for industry and for manufacturing industry is better than it has been for many years. The CBI will not take anything other than an impartial and dispassionate view, and it said that the prospects for the British economy are better than they have been for many years.

Many hon. Members will have been astonished, as I was, by the Labour party's decision to choose the burden of tax as something with which to attack the Government in this debate. Bereft of all other arguments, Labour Members cling to that, although some people might think that it was something of an own goal for a party that is committed to high spending and high taxes. But apparently things are better seen in perspective standing on one's head. The Labour party intends to vote against the income tax reductions in the Finance Bill and is committed to reversing those measures, yet at the same time it is arguing that taxes are too high, and it reverts to its latest favourite theme, the burden of tax.

It is difficult for anyone, except perhaps a member of the Salvation Army, to believe in overnight conversions. It is a new ploy for the Opposition and is about as convincing as their conversion to the cause of law and order. It is a pity that they did not think of it a bit earlier — during all those years when they have been voting against Tory tax cuts. Now the Opposition tell us that they were not tax cuts but tax increases. If cutting the rate of tax from 33p to 27p, if increasing personal allowances by 22 per cent. more than the rate of inflation to the highest real level since the second world war, and if taking 1½ million people out of taxes is not cutting taxes, I do not know what is.

Dr. McDonald

Will the right hon. Gentleman tell us which statement he believes? Does he believe the one that he just made, that the burden of taxation—direct tax and national insurance contributions — has fallen, or does he believe the written answers which he gives, which are recorded in Hansard and which he signs as Financial Secretary to the Treasury? Which of the two does the right hon. Gentleman believe? They contradict each other.

Mr. Lamont

I am extremely grateful for the opportunity clearly to make the point to the hon. Member for Thurrock that, of course, a person on average earnings is paying more pounds in tax—he is even paying a higher percentage in tax—because earnings have risen so fast. Those on three quarters of average earnings, average earnings or one and a half times average earnings have seen an increase in their real take home pay of over 20 per cent. It is absurd for Opposition Members to say that that amounts to an increase in taxation.

We might as well, if Opposition Members would like to do so, compare what a person on average earnings of £92.80 paid in 1979 in tax and national insurance contributions with what he would pay today. In 1979, he paid 27.8 per cent. in tax and national insurance contributions. Today he would pay 12.8 per cent. That is not a fair comparison for the Labour party to make. Obviously, £92 is not worth today what it was worth in 1979. The only fair way in which to compare the burden of income tax today with what it was in 1979 is to adjust the different levels of income—the different thresholds—in line with inflation and apply them to different multiples of earnings. If we adjust the regime that we inherited from the Labour party in 1979 for inflation and apply it to half average earnings, average earnings, twice average earnings and five times average earnings, at every level the burden of taxation today is lower than it was in 1979.

The hon. Member for Dagenham does not answer the point. He does not understand the point. The comparison that I have made is absurdly favourable to the Labour party. We are assuming that Labour Members would have adjusted their regime in line with inflation. That is precisely what they failed to do when they were in power. They did not adjust allowances in line with inflation. In real terms they went down, and the burden of taxation increased year by year. If a Labour Government were to come to power, the burden of taxation would increase massively for every family on average earnings, on above average earnings and below average earnings.

What matters to ordinary people is what happens to their real take-home pay after taking account of inflation. That calculation takes account of the VAT increases of which Opposition Members have made so much in debate. The record is clear. At every level of earnings real take-home pay has increased substantially under this Government. Under the last Government, living standards hardly rose for many people. For single people at all multiples of average earnings they actually fell under the Labour Government. For a man on average earnings with two children, real take-home pay has gone up by over 21 per cent. since 1978–79. For the same man, real take-home pay went up by less than 1 per cent. when the Labour party was in office—hardly any increase at all.

The overall impact of the Bill is to reduce taxes by £2.5 billion in 1987–88. As a result of the implementation of the Bill, we estimate that the percentage of earnings taken in income tax, national insurance contributions and indirect taxes will fall for virtually everyone except the very highest paid. The Budget is designed to reduce the burden of tax for the mass of our people. As a result of the income tax changes alone, a married man on average earnings will be £3. a week better off. A primary school teacher who is married to a nurse will be better off as a couple by £7.59 a week. People whose mortgage rates come down next month will gain a further benefit. A married man with no children and on average earnings with an average mortgage will be £5.37 a week better off as a result of the Budget changes and the fall in mortgage interest rates.

I agree with the Labour party if it is saying that the burden of taxation is too high and that we ought to get it down. I wish it had said that earlier. I wish that had been its attitude during the years in which we have been trying to control expenditure and cut taxes. We want to get taxes down. We believe that the tax burden is too high and we intend to continue to reduce it when it is prudent so to do. Tax reduction is the central element of the Government's policy. We believe that cutting taxes is the single most effective method available to us to encourage enterprise and improve the prospect for output and jobs.

A world-wide consensus exists on the need for tax reform, tax reductions and, in particular, the need to reduce income tax. We are committed to taking these reforms further forward in order to get the basic rate down to 25p. The Government remain committed to the reduction of the burden of taxation. We are the only party with such a commitment and we are the only party that has a track record of substantial tax reductions.

Question put, That the Bill be now read a Second time:—

The House divided: Ayes 267, Noes 171.

Division No. 146]	[10 pm
AYES
Adley, Robert	Dicks, Terry
Aitken, Jonathan	Dorrell, Stephen
Amess, David	Douglas-Hamilton, Lord J.
Ancram, Michael	Dover, Den
Arnold, Tom	Durant, Tony
Ashby, David	Dykes, Hugh
Aspinwall, Jack	Edwards, Rt Hon N. (P'broke)
Atkins, Rt Hon Sir H.	Eggar, Tim
Atkins, Robert (South Ribble)	Emery, Sir Peter
Atkinson, David (B'm'th E)	Evennett, David
Baker, Rt Hon K. (Mole Vall'y)	Eyre, Sir Reginald
Baker, Nicholas (Dorset N)	Fairbairn, Nicholas
Banks, Robert (Harrogate)	Fallon, Michael
Batiste, Spencer	Farr, Sir John
Beaumont-Dark, Anthony	Favell, Anthony
Bellingham, Henry	Fenner, Dame Peggy
Benyon, William	Finsberg, Sir Geoffrey
Bevan, David Gilroy	Fletcher, Sir Alexander
Biffen, Rt Hon John	Fookes, Miss Janet
Biggs-Davison, Sir John	Forman, Nigel
Blackburn, John	Forsyth, Michael (Stirling)
Blaker, Rt Hon Sir Peter	Forth, Eric
Body, Sir Richard	Fowler, Rt Hon Norman
Bonsor, Sir Nicholas	Fox, Sir Marcus
Boscawen, Hon Robert	Franks, Cecil
Bottomley, Mrs Virginia	Fraser, Peter (Angus East)
Bowden, A. (Brighton K'to'n)	Freeman, Roger
Bowden, Gerald (Dulwich)	Fry, Peter
Braine, Rt Hon Sir Bernard	Gale, Roger
Brandon-Bravo, Martin	Galley, Roy
Bright, Graham	Gardner, Sir Edward (Fylde)
Brinton, Tim	Garel-Jones, Tristan
Brittan, Rt Hon Leon	Gilmour, Rt Hon Sir Ian
Brooke, Hon Peter	Glyn, Dr Alan
Brown, M. (Brigg & Cl'thpes)	Goodhart, Sir Philip
Bruinvels, Peter	Goodlad, Alastair
Bryan, Sir Paul	Gow, Ian
Buck, Sir Antony	Gower, Sir Raymond
Budgen, Nick	Grant, Sir Anthony
Bulmer, Esmond	Greenway, Harry
Burt, Alistair	Griffiths, Peter (Portsm'th N)
Butler, Rt Hon Sir Adam	Grist, Ian
Butterfill, John	Ground, Patrick
Carlisle, John (Luton N)	Grylls, Michael
Carlisle, Kenneth (Lincoln)	Hamilton, Hon A. (Epsom)
Carlisle, Rt Hon M. (W'ton S)	Hamilton, Neil (Tatton)
Carttiss, Michael	Hanley, Jeremy
Cash, William	Hannam, John
Chalker, Mrs Lynda	Hargreaves, Kenneth
Churchill, W. S.	Harris, David
Clark, Dr Michael (Rochford)	Harvey, Robert
Clark, Sir W. (Croydon S)	Haselhurst, Alan
Cockeram, Eric	Havers, Rt Hon Sir Michael
Conway, Derek	Hawkins, C. (High Peak)
Cope, John	Hawkins, Sir Paul (N'folk SW)
Cormack, Patrick	Hawksley, Warren
Corrie, John	Hayes, J.
Couchman, James	Hayhoe, Rt Hon Sir Barney
Critchley, Julian	Hayward, Robert
Currie, Mrs Edwina	Heathcoat-Amory, David
Dickens, Geoffrey	Heddle, John

Henderson, Barry	Robinson, Mark (N'port W)
Heseltine, Rt Hon Michael	Roe, Mrs Marion
Higgins, Rt Hon Terence L.	Rost, Peter
Hill, James	Rowe, Andrew
Hind, Kenneth	Rumbold, Mrs Angela
Hirst, Michael	Ryder, Richard
Hogg, Hon Douglas (Gr'th'm)	Sackville, Hon Thomas
Holland, Sir Philip (Gedling)	Sainsbury, Hon Timothy
Hordern, Sir Peter	St. John-Stevas, Rt Hon N.
Howard, Michael	Scott, Nicholas
Howarth, Alan (Stratf'd-on-A)	Shaw, Sir Michael (Scarb')
Howarth, Gerald (Cannock)	Shelton, William (Streatham)
Howell, Ralph (Norfotlk, N)	Shepherd, Colin (Hereford)
Hunt, David (Wirral W)	Shepherd, Richard (Aldridge)
Hurd, Rt Hon Douglas	Shersby, Michael
Irving, Charles	Silvester, Fred
Jackson, Robert	Sims, Roger
Jenkin, Rt Hon Patrick	Skeet, Sir Trevor
Jessel, Toby	Smith, Tim (Beaconsfield)
Johnson Smith, Sir Geoffrey	Soames, Hon Nicholas
Jones, Gwilym (Cardiff N)	Spencer, Derek
Jones, Robert (Herts W)	Spicer, Michael (S Worcs)
Kellett-Bowman, Mrs Elaine	Stanbrook, Ivor
Kershaw, Sir Anthony	Steen, Anthony
Key, Robert	Stern, Michael
King, Rt Hon Tom	Stevens, Lewis (Nuneaton)
Knight, Dame Jill (Edgbaston)	Stewart, Allan (Eastwood)
Knox, David	Stewart, Andrew (Sherwood)
Lamont, Rt Hon Norman	Stewart, Ian (Hertf'dshire N)
Lang, Ian	Stokes, John
Latham, Michael	Stradling Thomas, Sir John
Lawson, Rt Hon Nigel	Taylor, John (Solihull)
Lee, John (Pendle)	Taylor, Teddy (S'end E)
Lennox-Boyd, Hon Mark	Tebbit, Rt Hon Norman
Lester, Jim	Thomas, Rt Hon Peter
Lilley, Peter	Thompson, Donald (Calder V)
Lloyd, Peter (Fareham)	Thompson, Patrick (N'ich N)
MacGregor, Rt Hon John	Thorne, Neil (llford S)
MacKay, Andrew (Berkshire)	Thornton, Malcolm
MacKay, John (Argyll & Bute)	Thurnham, Peter
Maclean, David John	Townsend, Cyril D. (B'heath)
McNair-Wilson, M. (N'bury)	Tracey, Richard
Major, John	Trippier, David
Malone, Gerald	Twinn, Dr Ian
Marlow, Antony	van Straubenzee, Sir W.
Mather, Sir Carol	Vaughan, Sir Gerard
Maude, Hon Francis	Viggers, Peter
Mawhinney, Dr Brian	Wakeham, Rt Hon John
Maxwell-Hyslop, Robin	Walden, George
Mayhew, Sir Patrick	Walker, Bill (T'side N)
Miller, Hal (B'grove)	Wall, Sir Patrick
Mills, Iain (Meriden)	Waller, Gary
Mills, Sir Peter (West Devon)	Walters, Dennis
Monro, Sir Hector	Ward, John
Montgomery, Sir Fergus	Wardle, C. (Bexhill)
Morrison, Hon C. (Devizes)	Warren, Kenneth
Moynihan, Hon C.	Watts, John
Neale, Gerrard	Wells, Bowen (Hertford)
Newton, Tony	Wheeler, John
Onslow, Cranley	Whitfield, John
Osborn, Sir John	Whitney, Raymond
Page, Sir John (Harrow W)	Wiggin, Jerry
Parkinson, Rt Hon Cecil	Wilkinson, John
Patten, J. (Oxf W & Abgdn)	Winterton, Mrs Ann
Percival, Rt Hon Sir Ian	Winterton, Nicholas
Portillo, Michael	Wolfson, Mark
Powley, John	Wood, Timothy
Prior, Rt Hon James	Woodcock, Michael
Proctor, K. Harvey	Yeo, Tim
Pym, Rt Hon Francis	Young, Sir George (Acton)
Rhys Williams, Sir Brandon
Ridley, Rt Hon Nicholas	Tellers for the Ayes:
Ridsdale, Sir Julian	Mr. Michael Neubert and Mr. David Lightbown.
Rifkind, Rt Hon Malcolm
Rippon, Rt Hon Geoffrey

NOES
Adams, Allen (Paisley N)	Ashdown, Paddy
Alton, David	Ashley, Rt Hon Jack
Archer, Rt Hon Peter	Atkinson, N. (Tottenham)

Bagier, Gordon A. T.	Hughes, Robert (Aberdeen N)
Banks, Tony (Newham NW)	Hughes, Roy (Newport East)
Barnes, Mrs Rosemary	Hughes, Sean (Knowsley S)
Barron, Kevin	Hughes, Simon (Southwark)
Beckett, Mrs Margaret	Janner, Hon Greville
Beith, A. J.	Johnston, Sir Russell
Bell, Stuart	Kinnock, Rt Hon Neil
Benn, Rt Hon Tony	Kirkwood, Archy
Bennett, A. (Dent'n & Red'sh)	Lambie, David
Bermingham, Gerald	Lamond, James
Bidwell, Sydney	Leadbitter, Ted
Boyes, Roland	Leighton, Ronald
Bray, Dr Jeremy	Lewis, Ron (Carlisle)
Brown, Gordon (D'f'mline E)	Lewis, Terence (Worsley)
Brown, Hugh D. (Provan)	Livsey, Richard
Brown, N. (N'c'tle-u-Tyne E)	Lloyd, Tony (Stretford)
Brown, R. (N'c'tle-u-Tyne N)	Lofthouse, Geoffrey
Brown, Ron (E'burgh, Leith)	Loyden, Edward
Bruce, Malcolm	McDonald, Dr Oonagh
Caborn, Richard	McKay, Allen (Penistone)
Callaghan, Rt Hon J.	Maclennan, Robert
Callaghan, Jim (Heyw'd & M)	McNamara, Kevin
Campbell, Ian	McTaggart, Robert
Campbell-Savours, Dale	Madden, Max
Canavan, Dennis	Marek, Dr John
Carter-Jones, Lewis	Martin, Michael
Cartwright, John	Mason, Rt Hon Roy
Clark, Dr David (S Shields)	Maxton, John
Clarke, Thomas	Maynard, Miss Joan
Clay, Robert	Meacher, Michael
Clelland, David Gordon	Meadowcroft, Michael
Clwyd, Mrs Ann	Michie, William
Cocks, Rt Hon M. (Bristol S)	Mikardo, Ian
Cohen, Harry	Millan, Rt Hon Bruce
Coleman, Donald	Morris, Rt Hon A. (W'shawe)
Conlan, Bernard	Morris, Rt Hon J. (Aberavon)
Corbett, Robin	Nellist, David
Cox, Thomas (Tooting)	Oakes, Rt Hon Gordon
Craigen, J. M.	O'Neill, Martin
Crowther, Stan	Park, George
Cunningham, Dr John	Parry, Robert
Davies, Rt Hon Denzil (L'lli)	Patchett, Terry
Davis, Terry (B'ham, H'ge H'l)	Pendry, Tom
Dixon, Donald	Pike, Peter
Dormand, Jack	Prescott, John
Dubs, Alfred	Radice, Giles
Duffy, A. E. P.	Randall, Stuart
Dunwoody, Hon Mrs G.	Raynsford, Nick
Eastham, Ken	Redmond, Martin
Fatchett, Derek	Richardson, Ms Jo
Field, Frank (Birkenhead)	Roberts, Ernest (Hackney N)
Fields, T. (L'pool Broad Gn)	Robertson, George
Fisher, Mark	Robinson, G (Coventry NW)
Foot, Rt Hon Michael	Rogers, Allan
Foster, Derek	Rooker, J. W.
Foulkes, George	Ross, Ernest (Dundee W)
Fraser, J. (Norwood)	Sheldon, Rt Hon R.
Freeson, Rt Hon Reginald	Shields, Mrs Elizabeth
Freud, Clement	Shore, Rt Hon Peter
Garrett, W. E.	Short, Ms Clare (Ladywood)
George, Bruce	Skinner, Dennis
Gilbert, Rt Hon Dr John	Smith, C (Isl'ton S & F'bury)
Godman, Dr Norman	Smith, Rt Hon J. (M'ds E)
Golding, Mrs Llin	Soley, Clive
Gould, Bryan	Spearing, Nigel
Hamilton, James (M'well N)	Steel, Rt Hon David
Hamilton, W. W. (Fife Central)	Stott, Roger
Hancock, Michael	Straw, Jack
Hardy, Peter	Thomas, Dafydd (Merioneth)
Harrison, Rt Hon Walter	Thomas, Dr R. (Carmarthen)
Hattersley, Rt Hon Roy	Thompson, J. (Wansbeck)
Haynes, Frank	Thorne, Stan (Preston)
Healey, Rt Hon Denis	Tinn, James
Heffer, Eric S.	Wainwright, R.
Hogg, N. (C'nauld & Kilsyth)	Wallace, James
Holland, Stuart (Vauxhall)	Wardell, Gareth (Gower)
Home Robertson, John	Wareing, Robert
Howarth, George (Knowsley, N)	Welsh, Michael
Howells, Geraint	White, James
Hoyle, Douglas	Wigley, Dafydd

Wilson, Gordon
Winnick, David	Tellers for the Noes:
Woodall, Alec	Mr. John McWilliam and Mr. Ron Davies.
Wrigglesworth, Ian
Young, David (Bolton SE)

Question accordingly agreed to.

Bill read a Second time.