§ [Relevant documents: European Community Document No. 9561/87, Annual Economic Report 1987–88 and the unnumbered document, Annual Economic Report 1987–88 (final version as adopted by the Council).]
§ Mr. Speaker
I repeat that a large number of right hon. and hon. Members seek to participate in the debate. Because there is no limit on speeches, it would be helpful if Privy Councillors, who may be called earlier than other hon. Members, set a good example.
§ Mr. John Smith (Monklands, East)
The Budget which was presented to the House yesterday is an outrage. It is immoral, wrong, foolish, divisive and corrupting. As its full import began to sink in towards the end of the Chancellor's statement yesterday, I looked across at Conservative Members. A significant number did not wave their Order Papers or cheer the Chancellor on. Quite a number looked askance or troubled, and a few even looked concerned because they knew that what was happening was not right.
Let us never forget that, in a country where there are still millions of people, young and old, thrown on the scrap heap of unemployment, where our Health Service is on the edge of collapse and where we have a growing underclass living in ever deepening drabness and despair, it is not right to slash the rates of tax for the highest paid and redistribute the tax collected to the tune of £2 billion and give it all—every penny piece—to those whose earnings and wealth have already been ostentatiously increased in recent years. No Budget in this century has more savagely redistributed the proceeds of taxation towards the super-rich. There is a simple rule about this Budget: the more you earn, the more you gain; the more you have, the more will be given unto you.
A married man who earns £200,000 a year—not a fanciful figure in modern Britain—gains £33,314, over £640 each week. That is enough. I remind Conservative Members, to keep open the hospital ward in Wales which the Queen Mother opened and which is now closing because of the shortage of funds.
1117 When the Budget is stripped of its frills and when its contents are disentangled from its frequently misleading packaging, it is clear that the percentage of GDP raised in tax hardly changes from last year to the coming year. Last year it was 38 per cent.; this year it will be 37.9 per cent. —a fall of merely 0.1 per cent. It is worth recalling that 10 years ago in 1978–79 the proportion was only 33.9 per cent.
Of course income tax rates have been cut in the Budgets of the Tory years, but our people know only too well that income tax is but one of the taxes that they pay. They pay VAT, which was doubled in this Government's first Budget, excise duties and national insurance contributions — a special extra tax now on those who earn under £16,000 a year—which went up from 6.5 per cent. to 9 per cent. in the Government's earlier Budgets.
The Budget is essentially about the redistribution of the same proportion of tax, but that redistribution goes from the rest of us to the highest paid. Ten million of our fellow citizens whose pensions, benefits or incomes are so low that they do not even reach the lowest rung of the income tax ladder, gain no benefit from the Chancellor's cut in the basic rate announced yesterday.
Another 2.5 million people who will be covered by the new social security system, to come into force a few weeks from now, have a cut in the tax rate read straight across to a cut in income support or in housing benefit. For a person on family credit in receipt of housing benefit and receiving £100 a week, the 2p cut in the tax rate will mean a gain of 2p a week or £1.04 throughout the year. I observe in passing that their poverty does not mean that they do not pay the huge increases in indirect taxes which are the hallmark of the Government's tax policies. So many of those who are facing the greatest difficulties get no help from the Budget.
If we look to the higher ranges, the beneficiaries soon become apparent. The married man on five times average earnings, a salary of £64,000, will save £129 each week from this Budget alone—more than will be provided in income support for five people under 25 when the new social security system is implemented. For that same man on five times average earnings, the reduction in his income tax since 1979 amounts to £182 weekly—more than the total income tax rate for two married couples, each with three children. The top 10 per cent. of households in Britain get 50 per cent. of the concessions provided by the Chancellor. The bottom 50 per cent. get only 10 per cent. of the gains.
§ Mr. Marlow
I am grateful to the right hon. and learned Gentleman for giving way. The tragedy is that he has forgotten that taxation is not about punishing people. It is about raising revenue. Those people whom the right hon. and learned Gentleman is banging on about being in the higher tax brackets have been able to employ advisers and have sought tax shelters. By getting those tax shelters, 1118 many have paid little tax. The probability is that, after my right hon. Friend's Budget yesterday, those people at whom he is aiming will pay more tax than ever before.
§ Mr. Smith
It is interesting to hear the comforting illusions of Conservative Members. The hon. Gentleman knows perfectly well, because he can look it up in the Red Book, that there is a cost to reducing the top rate of tax from 60 per cent. to 40 per cent. It is spelt out clearly for a full year —more than £2 billion. That is the cost of paying the rich in the way that the Chancellor has done. It is a bitter irony that the total to be committed in tax forgone in a full year— the very £2 billion to which I have just drawn the attention of the hon. Member for Northampton, North—to pay for the massive cuts in higher rates is what the Labour party has been campaigning for as the additional money to be spent on our National Health Service.
When the Chancellor had so much money to spend, why did he choose to ignore the pressing needs of the National Health Service, which is in acute crisis, as the professionals repeatedly tell us? Is it because he does not believe that the money needs to be spent on the National Health Service? Is it that he felt that he did not have the money available because of financial stringency or other pressing priorities? Is it because he felt that the NHS was not a priority favoured by the electorate?
It cannot be for any one of those reasons. We know that the money is desperately needed by the National Health Service. We know from the evidence of the Budget itself that the money was available. We know from opinion poll after opinion poll that spending on the National Health Service was the public's top priority. I know of only one opinion poll in which people said that they were in favour of tax cuts as opposed to funding for the NHS; it was an opinion poll of Conservative Members.
Let us examine briefly the evidence of the needs of the National Health Service. Evidence is available from a wide variety of sources, but it all points to the same conclusion about the Health Service. Every piece of evidence that I am about to cite comes from one of two sources — the British Medical Association or the Royal College of Nursing. [HON. MEMBERS: "A vested interest."] I should hope they have a vested interest. They have a vested interest in the National Health Service; we all have a vested interest in the National Health Service. It is a vested interest which I am proud to declare and even more proud to fight for, which is what we shall do during these debates.
This very month, the BMA's central committee for hospital medical services produced a report that gave a chilling description of what its chairman, Mr. Alexander Ross, describes asa nationwide crisis in the acute hospital sector".The report contained the results of a survey conducted by the BMA district representatives on regional committees throughout the country. Let me list some of their conclusions. They found that in England and Wales as a whole, 5,300 hospital beds had been closed in the year to December 1987. Anxious to be scrupulously fair, they excluded 30 per cent. due to the implementation of so-called strategic plans and 11 per cent. due to rationalisation measures. That leaves 59 per cent., or 3,100 beds closed permanently due to short-term financial restrictions. In addition, 2,800 beds have been temporarily closed for varying lengths of time over the same period.
1119 It is bad enough to lose so many beds in one year, but the picture looks even worse when we examine the statistics relating to the cancellation of clinical sessions. On a grossed-up basis on an examination over a three-week period, it was discovered that 900 operating theatre sessions had been; put another way, 300 operations each week are not being carried out because of financial restrictions.
The BMA quotes the remarks of its consultant members who took part in its survey. Those remarks are perhaps more revealing than the bare statistics that I have cited. A consultant in Wales said:Everyone is gloomy and sad because the old ideal of providing the best service has been lost and the new one of cutting all possible corners and taking all possible risks in the name of the great god efficiency and savings just doesn't seem to make our hearts beat faster. Everyone is taking to the practice of doing the bare minimum.From one end of the country to the other, the devastating evidence emerges that our National Health Service is in acute crisis.
§ Dame Elaine Kellett-Bowman (Lancaster)
Is the right hon. and learned Gentleman aware of the tremendous difference between bed usage in one part of the country and another, and, indeed, in different parts of the same area? For example, in Lancaster, which is top of the league in the north-west, bed usage is 115.19 per cent. whereas in Salford it is only 97.46 per cent. Is it not important to improve bed usage and the use that we make of the money that we are given?
§ Mr. Smith
All that I am doing is to report to the House the evidence of the consultants who work in the National Health Service. With the greatest respect to the hon. Lady, I think that they might know a little bit more about the National Health Service than even she does. Their evidence was that more than 3,000 beds were closed in England and Wales over the past year. I am happy to accept that evidence. Do the Government deny it? We can either believe the Government, who caused the problem, or the Health Service professionals, who are fighting for a future for their own service. I know which the nation will believe.
There is one great source of comfort about the crisis in the National Health Service. It is not a crisis which arises from a lack of skills or commitment among those who work so hard for us in the Health Service. If that were the problem, the crisis would be grave and the prognosis could only be despairing. Mercifully, the problem is of a different kind: it is principally financial and can therefore be solved financially.
What makes the Budget all the more mistaken, wrong-headed and morally faulted is that the money is available. The money was there, but the Chancellor chose to spend it on what he thought were more important priorities than our National Health Service. In the months leading up to the Budget, we have argued that new funds are desperately required. The Chancellor could have spent the £2,000 million that we advocated by simply removing the tax concessions for the rich. The plain fact of the matter is that the Chancellor chose not to do that. So all those who work in our Health Service and depend on it have got their answer.
It is not good enough for the Chancellor to claim that money is not provided for the Health Service in a Budget. 1120 He can announce an extra spending programme any time he likes. He could have done it two months or two weeks ago. He could do it today or two weeks hence. He should announce it now because the crisis is now.
I remind the Chancellor that my right hon. Friend the Member for Leeds, East (Mr. Healey), in his Budget of 1978, not only announced an extra allocation of funding for the NHS, but, as the Royal College of Nursing pointed out in its excellent submission on the Budget, he specified what it was to be spent on: reductions in waiting lists, a number of new staff posts, enough cash to enable newly built hospitals to be opened and the provision of 400 new kidney machines.
§ Mr. Smith
I know that this does not go down well with Conservative Members. They do not like to be told the truth about the crisis in the National Health Service. I know that they like the truth about the last Labour Government even less. In that Budget, my right hon. Friend the Member for Leeds, East allocated 400 extra kidney machines to the Health Service.
The fight to save the National Health Service will go on. It must go on. The fight to obtain for it the resources that it needs will be maintained until it eventually succeeds. We know that there is another danger facing the National Health Service, apart from the financial crisis. Many Conservative Members see the financial crisis in the NHS—
§ Mr. John Smith
I shall not give way.
They see in the financial crisis of the NHS a new opportunity to attack its basic principle and what they correctly divine as its Socialist basis. For many years, they have been forced to accept a Health Service funded on the principle that it is paid for when people are well so that it is available without financial inquiry when it is needed. Since the second world war, the NHS has lifted a burden of worry from the backs of the ordinary people of this country and provided our nation with a unique and especially effective method of providing life-long medical care and attention for everyone in our community, irrespective of income, wealth or status. That is why the Health Service is deeply rooted in the interests and affections of our people.
For a long time, on the grounds of political prudence, Conservatives said little, whatever they thought privately. The Prime Minister herself told us in words that seem very hollow now that the NHS was safe with her. Now, like sharks sniffing blood in the water, the enemies of the NHS are circling round ready to strike at what they regard as a Socialist extravaganza.
They claim that the Health Service costs too much and that it is inefficiently administered. Let me give just two replies. All the evidence suggests that the NHS is far superior in terms of administration costs to any private health care system in this country or abroad. Conservative Members who admire the private medical system in the United States should bear in mind that we spend 5 per cent. on administration in the Health Service and the Americans spend 22 per cent. on administration in their private, bureaucratic system.
On two central questions, this Budget—
§ Mr. John Butterfill (Bournemouth, West)
Does the right hon. and learned Gentleman agree that there are 1121 profound regional variations? Will he accept that Sir Brian Thwaites, the chairman of Wessex health authority—my region —said that there is no crisis in Wessex? In the Boscombe general hospital, the unit cost per patient is £546. That compares with an average in London of over £1,000 and a cost in Hackney of £1,300. Surely there is a big difference in administrative costs somewhere.
§ Mr. Smith
It just so happens that on the first page of the submission from the BMA there is a quotation from a consultant in Wessex. I shall tell the hon. Gentleman what that consultant said:At present the acute services have an open ended and expanding remit. They are expected to cope with everything and anything demanded of them. The boundary of their area of responsibility must be drawn if no more money is forthcoming, but this in itself begs more questions than there are answers.That is the evidence from Wessex, the part of the country to which the hon. Member for Bournemouth, West (Mr. Butterfill) referred.
The Chancellor's first priority should have been to secure our Health Service. That done, he should then have turned his sights towards the creation of a stronger, more competitive, more balanced economy. The Government seem to believe that because a short-term boom raised the level of economic growth in 1987, Britain has somehow turned an economic corner. Time will soon tell us how lasting or, alternatively, how evanescent is a rate of growth boosted by an easy credit society and the lowest levels of personal savings for more than four decades.
We know already that the deteriorating balance of payments is the most serious constraint on economic management, apart from the Prime Minister, in the years immediately ahead of us. Despite the massive contribution of North sea oil during the years of this Government—over £60 billion in extra revenue to the Goverment—and the even more important cover in terms of freedom from balance of trade and balance of payments constraints, here we are, moving towards the edge of the decade, only eight years or so after reaching oil self-sufficiency, heading into balance of payments problems again. The historians will ask what we did with North sea oil, because it looks as if we will face the 1990s without the beneficial changes in society and our economy that a proper investment of those riches would have secured.
The Secretary of State for Energy answered that question honestly the other day by remarking that North sea oil revenues were spent on unemployment. He was, of course, correct. The tragedy is that the money was not spent on employment—not just on creating jobs now to reduce our still appalling totals of unemployment, but on jobs for the future based on new skills and new technologies.
Now that North sea oil is declining in volume and may, for all we know, decline in value, the problem is less easy to solve. However, it remains urgently on the national agenda and one of our top priorities should be to see how to build a strong, competitive industrial economy that can sustain growth, not in episodic spurts or election-oriented booms, but powerfully, continually and steadily. In the context of our present position it can be put quite succinctly: how do we convert short-term boom into long-term recovery?
One would have thought that to a sensible Government, the opportunity provided by a Treasury awash with revenues was obvious. This is the time to invest 1122 those resources in new technology, new science-based industries, education and training and research and development. This should be the opportunity to create in these islands the best educated and trained work force in western Europe by a sustained and energetic commitment, starting with the Government and spreading throughout the whole of our society, to utilise that unique resource —the skills of our young people — so that they can found our economic security in the 1990s.
This should be the opportunity to end the neglect of research and development in the public and private sectors and in the universities and industry. If that is not soon corrected, Britain will limp into the next decade well behind the leaders in the technologies of the future. All those are opportunities which could have been seized. But, sad to say, the Government prefer tax cuts for the rich investment in those crucial areas.
Is not our economy hopelessly unbalanced in two crucial respects: the balance between the public and private sectors and between the economic regions, the north and the south? Throughout the 1980s, under the perverse set of priorities which constitute Thatcherism, investment in public services and facilities has been deliberately and continuously run down. We have the worst public investment record of all the OECD countries. That is why we have outdated and inadequate hospitals and schools, crumbling inner cities, industrial wastelands, decrepit commuter trains, leaking water courses, collapsing sewers, and roadways in a perpetual state of deterioration.
It is difficult to digest the information in a parliamentary answer which said that 80 per cent. of all the buildings used by the NHS were built before 1918 and only 7 per cent. have been built since 1965. No reckoning seems to be made of the costs in economic efficiency of muddling through with an inadequate and antiquated infrastructure. For too long now the myth has been perpetuated that public spending is intrinsically damaging to the economy. The truth is the opposite. Public assets are essential to produce a modern and competitive economy as well as a decent society. Transport, basic utilities and modern and proper housing are all crucial to the effective functioning of a civilised society. Ought we not now to be putting thousands of unemployed people to work to repair, improve and modernise the rapidly declining housing stock in which so many of our fellow citizens are forced to live?
When we look at the yawning and widening gap between the north and south, which the present Government do not even acknowledge to exist — so blind are they to the realities of life in many parts of modern Britain—we see social injustice and economic waste combined in spectacular fashion. On a recent visit to the north-east of England—to Bishop Auckland and the Wear valley — I was astonished to discover that companies seeking to bring work to county Durham—where unemployment rates go up to 20 per cent.—were having to be turned away because there was no money left to build new factories for incoming industry.
I quote from the Financial Times of 7 March which said:North East England, which has one of the worst unemployment problems in Europe, has run out of factory space for inward investors or existing businesses that want to expand.The report goes on: 1123A West German company is fighting an English business for the last sizeable factory available in County Durham. Each project would create 100 jobs. Last week another would-be incomer from elsewhere in the UK was told there was no room in Hartlepool, a town where male unemployment is the region's highest at 26.8 per cent. The company is going elsewhere.The writer reports:with the current winding up of the two new towns in the region, Washington and Aycliffe — Peterlee and tight control of local authority spending, responsibility for building advance factories has fallen almost entirely on English Estates North, the Government's commercial property developer. It too is constrained by tight spending limits of £20 million in the current year, all spent, and £13.5 million in 1988–89.It must be a crazy country in which the Government will not even finance a proper building programme for companies that are competing to occupy factories in areas of high unemployment.
§ Mr. Nicholas Budgen (Wolverhampton, South-West)
Is it not the case that English Estates has been erecting factories at such a low rate of return that the private sector cannot now compete with it? Is it not the case also that English Estates has run out of subsidies from the taxpayer and that, as a result of distorting the market, it has become impossible for anyone to get a factory there?
§ Mr. Smith
Whatever the hon. Gentleman's analysis of the cause of the problem, the solution is perfectly clear —give some more money to English Estates so that it can build more factories for companies to occupy. Would it not make much more sense to spend the money on building factories than on paying unemployment benefit for people who could work in the factories? Sometimes I wonder when the light will ever dawn on some Conservative Members. However, we will try with patience and determination to bring those economic facts of life constantly to their attention. After the wanton and senseless destruction of regional economic policy, I should not be surprised. Anything can happen in the north of England.
Why have the Government not used the resources in this Budget to start a revival of economic activity in the regions? Why cannot there be development agencies for the English regions as there are for Scotland and Wales, to act as a catalyst for economic regeneration and to harness the talents and assets of those communities—not only for the sake of their own advancement but to contribute to the economic wealth of our nation?
It is increasingly necessary to break down the north-south gap that is dividing this nation. When we see the right hon. Member for Henley (Mr. Heseltine) moving in on a subject, we should adjust our political seismometers carefully. There is something stirring in the Tory undergrowth, and it probably has something to do with the coming leadership struggle in the Conservative party. It is also probably something to do with a recantation of some policy for which the right hon. Gentleman was previously responsible. None the less, he speaks for many when he opposes the urbanisation of large parts of the south of England by the unrestrained operation of market forces in which the Conservative party places such touching faith.
Foreign commentators simply do not understand—this was emphasised to me only the other week by a CSU Minister in Bonn—why any Government would allow 1124 such a division of a country to take place and not have a programme of encouraging industry and employment where such a programme is passionately desired, but rather seek to force such a programme on areas where it is bitterly resisted.
§ Mr. John Smith
I am not giving way to the hon. Gentleman.
We could start a programme tomorrow to combat the north-south divide, but it would need the Government to lead it. Regrettably, they would not do so. Let us not hear from them ever again that such a programme cannot be undertaken because the money is unavailable. The money was available but they chose not to spend it.
The Chancellor has turned his back on investing in the country's long-term future in favour of rewarding in the short term his party political supporters of today. It is not that he can be unconcerned about the state of the economy. If there were only a few worries, as he pretends, why has there been the continued, comic farce over who runs the Government's exchange rate policy? Is it the Prime Minister or is it the Chancellor? Some day the Chancellor might tell us. We do not know whether we can rely on what he said in his Budget Statement about exchange rate policy because it has not yet been either contradicted or corroborated by the Prime Minister, who so often chooses to intervene in such matters.
First we were told that there was no dispute and that they were both working in harmony towards the same objectives. Then there was, apparently, what was quoted as a "healthy argument". We heard that the Chancellor's friends were active in the Lobby, stressing one day his anger or irritation, and the next day his resolve or bitterness—even that he was contemplating his personal future in some detail. The truth is that an idiotic Punch and Judy show took place over who runs the shop. From what I read of interest rate policy this morning, it seems that Judy has slaughtered Punch. She may go on beating him, beating him and beating him again—because in the Punch and Judy show that is the present Government, Judy always wins.
It seems that interest rates will not come down, but that means that our economy will be run on the basis of high exchange and high interest rates. How on earth will British industry compete in what will be a very difficult international market place in the years ahead? God forbid that we should return to the follies of 1980–81, when an absurdly overvalued exchange rate helped to eliminate 20 per cent. of British industry within a year or two.
Perhaps it is indelicate of me to refer to those difficult years. In a terse parliamentary answer that the Chancellor gave when he was a junior Minister at the Treasury, when he was asked how the exchange rate was determined he replied with one word — "Markets". He has since changed his mind. It all seems to be different now, unless, of course, one takes the view that one cannot buck the markets. Perhaps it is the Prime Minister who has stayed constant to the true faith and the Chancellor who has slipped behind. I am sure the Chancellor finds those notions unappealing today.
§ Sir Peter Tapsell (East Lindsey)
Is that not rather an artificial argument? Do not markets in fact pay some attention to interest rates?
§ Mr. Smith
I was trying to work out in as kindly and gentle way as I could who is running the Government's exchange rate policy. That is a little harder to divine than the effect that interest rates have on the market. But as it is an important area of policy, and as it is unclear who in the Government is responsible, the subject is worth inquiry and that gives the Chief Secretary the opportunity to tell the House a little more about that aspect.
The Chancellor spoke yesterday about the management of the economy, but he has failed dismally to take the action that could give it the long-term, supply-side strength. But then, we were told that the Budget was about tax reform. The Chancellor billed himself, rather immodestly, as the tax reformer of the century. How can anyone claim to be a tax reformer when he cuts the top rate of tax from 60 to 40 per cent. but leaves an upper earnings limit for national insurance contributions of £16,000 per year?
We shall have in this country a combined tax and insurance system that will start at 30 per cent., move up to 34 per cent., drop again to 25 per cent. when one reaches £16,000, and then increase again to 40 per cent. Is that supposed to be some kind of logical and cleverly designed, sensibly constructed policy for income tax rates and national insurance contributions?
We know perfectly well why the Chancellor did not reform also national insurance contributions. It was because he did not want to remove the privilege enjoyed by people earning more than £16,000 a year, who do not have to pay anything in excess of the existing national insurance contributions even though the rest of the community earning below that figure has to pay its full whack.
Let us see how the Chancellor scores in terms of being a Budget reformer. There were five major areas of tax abuse that we invited him to tackle because we knew that the vast majority of people in this country pay their tax under the PAYE scheme, where there is not much room for manoeuvre. But there is another group of people—those who pay if they like. They are the people hiding in the tax shelters. The Chancellor says that he has removed some of those shelters. It was about time that he did something about them, in the light of the evidence that we have recently received. But no sooner has one tax loophole been filled than a few others will be found to have been left open.
I refer, for example, to the business expansion scheme. Not much has been done there to close loopholes. There has been no reduction in the amount that individuals can invest. We know that in the case of Park Hotels, for example, the cost was financed almost entirely through the business expansion scheme. We know that all the income from those who lived there came from DHSS benefits, and that the huge increase in the value of the property will be totally free of capital gains tax. Is that the sort of enterprise that should be encouraged and rewarded in Britain?
We know that not only is such activity being allowed to continue but that there are new BES rules for rented accommodation which will provide a huge tax shelter for profiteering landlords. That is happening at the same time new restrictions are being introduced that will shove up the rents for the very people who will inhabit the properties financed by taxpayers through the business expansion scheme.
Why did we hear nothing about bed and breakfasting whereby rich individuals and institutions can wipe out 1126 losses for capital gains tax by the device of selling shares in the evening and buying them back the following morning? Why are such artificialities allowed to erode the basis of our taxation system? Why are we not in this Budget plugging these important loopholes? If the Chancellor had done that, he could have earned some credit for being a reforming Chancellor.
But the Chancellor tells us that independent taxation is his marvellous innovation. His plan for independent taxation is basically a con. We shall see not the abolition of the married man's allowance, but, basically, its renaming as the married couple's allowance. We shall not see, except in form alone, the independent taxation of men and women. The clue to it all was given in the cost of £500 million. Why does it cost that sum? Because we stop disaggregating the investment incomes of husbands and wives. It is so that those can be added together that it costs so much.
Capital gains tax is another area of concern again; we find that windfall benefits are given to those who make large increases in capital gains. The Financial Times was wise to counsel further consideration of the independent taxation scheme so that we might get a proper system that genuinely respects the privacy and individuality of women—a desirable principle which we should seek to attain.
As we look through the Budget, we find that what is constructed behind a facade of tax reform is a major redistribution of income and wealth through the tax system. The Government took £2,000 million that could have been spent on the Health Service and gave it to the rich. That is why at its core there is a fault in this Budget, a moral fault. It is a massive political miscalculation. The Chancellor has revealed in all its vulgarity and unfairness the Thatcher vision of society, in which unfairness, inequality and injustice march side by side. The decent majority will react to what they have seen in the Budget. It is a Budget too far. It is the beginning of the end of Thatcherism.
§ The Chief Secretary to the Treasury (Mr. John Major)
Contrary to what the right hon. and learned Member for Monklands, East (Mr. Smith) said, this Budget is about tax reform. Yesterday, my right hon. Friend the Chancellor of the Exchequer introduced a package that cut six rates of income tax to two; that introduced independent taxation for wives; that reformed the taxation of capital gains; and that introduced a single rate of inheritance tax. It represents the most sweeping reform of personal taxes this century and leaves us with no single rate of personal taxation above 40p in the pound. [HON. MEMBERS: "We have heard all this."] Hon. Members are about to hear it again, because it is a good story and I shall keep telling it until they understand it.
The centrepiece of my right hon. Friend's proposals was a promise redeemed: the reduction of the basic rate of income tax to 25p. He has linked that with a comprehensive reform of higher rates. Taxes have been simplified and reduced. The right hon. and learned Gentleman is indignant because he would have preferred to spend more and raise the effective rate of tax. When asked a question by one of my hon. Friends, the right hon. and learned Gentleman responded like one of Pavlov's dogs—"You know the answer: spend more." That is the universal answer of the Labour party: whatever the problem, spend more and to hell with the taxpayer.
§ Mr. Robert N. Wareing (Liverpool, West Derby)
What does the Minister think the rich will do with the money? Will they not spend it?
§ Mr. Major
The hon. Gentleman may or may not have been part of the football hooligan behaviour yesterday, but if he was, I hope that he will not repeat it today.
The right hon. and learned Gentleman made a different speech from that of his predecessor, the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley), who last year claimed that we could afford neither higher spending nor lower taxes. The Opposition saw last year's increase in spending as a pre-election boom which could not be sustained, and they predicted that the Budget's tax reductions would be reversed after the general election. Now they have their answer. Spending is up again and taxes are down again, and the right hon. Member for Sparkbrook has wisely moved on.
The right hon. and learned Member for Monklands, East agrees that his right hon. Friend was wrong on all counts, for his message today is that the economy is so successful that we can afford both to raise spending and to reduce taxes. It is a pity that he has not examined our plans more closely because that is precisely what we have done. We have raised spending by £2.5 billion, allocating an extra £4.5 billion to programmes. The right hon. and learned Gentleman does not appear to have noticed that. We have reduced taxes by £4 billion. The right hon. and learned Gentleman disapproves of that. We are repaying debt of £3 billion into the bargain. The right hon. and learned Gentleman should be shamefaced about that, because it is his party's debts that we are repaying.
§ Mr. David Winnick (Walsall, North)
Has the Minister seen the article in The Daily Telegraph today entitled,Smiles on the faces of the rich"?Has he noticed how much some millionaires will gain—from £10,000 to £44,000 a year extra—as a result of the tax reduction? Does he not consider that it is an affront that the richest in the community should gain so much while the National Health Service and other essential services are so desperately in need of cash?
§ Mr. Kenneth Hind (Lancashire, West)
Will my right hon. Friend confirm that, despite all the criticism about the 40 per cent. rate, by increasing the thresholds my right hon. Friend the Chancellor of the Exchequer has taken 750,000 low-paid people out of tax?
§ Mr. Major
The hon. Gentleman says that my hon. Friend is only a barrister. What he would say to the right hon. and learned Member for Monklands, East, who is a distinguished and learned Queen's Counsel, I have not the faintest idea.
The fact is that my right hon. Friend the Chancellor, for the second successive year, has produced a fiscal hat trick of more spending, lower taxes and less debt. It is a hat trick that no Labour Chancellor could ever have produced.
§ Mr. Major
I shall give way in a moment.
I may not admire the Opposition's judgment, but, by golly, I certainly admire the right hon. and learned Gentleman's cheek. After nine years of denouncing the economic policies that have made this Budget possible he now has the brass neck to lecture the House on how he would have used the room for manoeuvre that the Chancellor has obtained. I must tell him that if we had followed the policies he advocated, we would never have had that room for manoeuvre in the first place.
§ Mr. Major
The right hon. and learned Gentleman says that the Treasury is awash with money. How does he think that happened? I shall tell him. It happened because of the success and growth of the economy. He referred to a short-term boom. That was his expression. Eight successive years of growth and he thinks that it is short-term boom.
Over the past few hours, the right hon. and learned Gentleman has made several claims about the effect of the social security reforms and he touched on that again today. I know that he feels deeply about this and I shall turn to it. Unfortunately, most of the claims made by the right hon. and learned Gentleman were wrong. In cash terms, 88 per cent. of claimants will either receive more benefit or remain unaffected as a result of the reforms on 1 April. That is 7.5 million people, compared with the 1 million people whose benefit will not be increased.
As the right hon. and learned Gentleman knows, there will be full cash protection for the poorest, so that, in April, no one on income support will receive less weekly cash benefit than they receive under supplementary benefit.
§ Mr. Darling
Will the Chief Secretary explain how a married man with two children, earning £115 a week gross, will lose 32p in benefit as a result of the tax changes? How can he say, therefore, that there will be no loss as a result of both the Chancellor's announcement yesterday and the announcement of the Secretary of State for Social Services earlier this year? Surely the poor are losing while the rich are gaining.
§ Mr. Major
If the hon. Lady listens, she may learn something and I may give way to her later as a reward for her listening.
For most of the vulnerable groups, there are substantial gains. The majority of sick and disabled people will gain from the reforms. Of those, about half will gain £5 a week or more, and 80 per cent. of families not in work will gain. Sixty per cent. of lone parents, many of them divorced, separated or in difficulties, will gain or be unaffected. Well over one quarter of all lone parents will gain by over £5 a week. Despite the right hon. and learned Gentleman's mischief over the social security reforms, that is the fact of the matter.
I wish to add a further fact that the right hon. and learned Member for Monklands, East might not find palatable. The social security reforms add £400 million to public expenditure on benefits in 1988–89 and the social 1129 security programme as a whole will increase by £2 billion next year, on top of the £2 billion added this year. Those are the largest cash increases in any individual programme, and they have been made against a background of falling unemployment.
All those social security benefits directed at the poor and the disabled have been increased in value since 1979. We have targeted extra help specifically where it is needed, so our reforms provide more help for the sick and disabled, poor families and lone parents. It is against that background, not the mischief perpetrated by the right hon. and learned Gentleman, that we must see the Budget.
§ Mr. Nigel Griffiths (Edinburgh, South)
Will the Chief Secretary admit that over 300,000 pensioners on housing benefit will lose their benefit entitlement altogether because they have £6,000 or more in savings and that there will be no transitional protection?
§ Mr. Major
The hon. Gentleman must understand that the cut-off point for other benefits, which he expressly failed to mention, was moved from £3,000 to £6,000 and that one in three households is at present receiving housing benefit. There is far more assistance under housing benefit now than there has ever been.
Opposition Members who are clearly not interested in hearing rational debate, have been inventive in finding reasons for opposing tax cuts. Some of them have claimed that cutting taxes will damage the balance of payments. The right hon. and learned Gentleman said that we should have used the money to boost what he calls investment. The hon. Member for Berwick-upon-Tweed (Mr. Beith) has formed a new Lib-Lab alliance on that point with the right hon. and learned Gentleman, but their concerns about investment are misplaced. As the forecast published yesterday shows, investment is expected to rise by 9 per cent. in 1988, not because we are pumping taxpayers' money into industries to which the market will not lend, but because our policies have created an environment in which businesses have the resources and confidence to invest and they are doing so.
I understand the right hon. and learned Gentleman's concerns about that, because memories of short-term balance of payments crises are seared into the collective conscience of all those, including the right hon. and learned Gentleman, who had the misfortune to serve in Labour Cabinets or in Lib-Lab alliances with the then Labour Government. The deficits run up by the Labour Government of up to 4 per cent. of GDP were four times as large as the prospective deficit that my right hon. Friend has forecast for 1988. The income from our huge stock of overseas assets should mean that there will be no problem in financing that deficit.
It is hardly surprising that we should have a current account deficit when growth in the United Kingdom economy is far stronger than that of most of our trading partners. During our period of office we have had a cumulative balance of payments surplus of almost £20 billion; all Labour ever had were deficits. The right hon. and learned Gentleman is seeking a return to the bad old days of short-term demand management, of so-called tinkering and fine tuning.
Mr. Deputy Speaker
Order. I understand that the hon. Member for Vauxhall (Mr. Holland) will be seeking to catch my eye later. Perhaps he will save his speech for then.
§ Mr. Major
I doubt whether the hon. Gentleman's speech will improve with the keeping.
Our approach is different. We set fiscal policy in a medium-term context. That medium-term approach has rescued our finances from the batterings of five years of Labour government. Frankly, it is a colossal cheek for the right hon. and learned Gentleman, as a member of the party that wrecked our economy, to criticise the Government who have rebuilt it.
The right hon. and learned Gentleman told us a great deal today about the National Health Service. He also told us how the right hon. Member for Leeds, East (Mr. Healey) increased spending on the NHS in one of his Budgets. That is quite right—I believe that it was the 1978 Budget. However, the right hon. and learned Gentleman did not tell us how that right hon. Member for Leeds, East cut the capital programme by one third in 1976 because the country was almost bankrupt.
The Labour party's view of the NHS is simplistic. Labour Members are utterly clear about what needs to be done and they would happily admit it. They say quite simply, "Give the National Health Service more money." [HON. MEMBERS: "Hear, hear."] Opposition Members say, "Hear, hear," but that fragile consensus in the Labour party begins to break down on the question of how much more. The hon. Member for Peckham (Ms. Harman) suggested £200 million. The Leader of the Opposition, the right hon. Member for Islwyn (Mr. Kinnock), upped that to £1.3 billion. The right hon. and learned Gentleman now pitches his demand between £1.7 billion and £2 billion. So it is accelerating.
§ Mr. Major
I shall tell the hon. Gentleman precisely what we have given—an extra £1 billion this year, an extra £1 billion next year and an extra £1 billion in the following year, the largest increases that the NHS has seen. On top of that, there is the product of the cost improvement programmes, the income generation schemes and the increased efficiency. We have produced that money.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
Does the Chief Secretary think it reasonable to compare that figure with the 8 per cent. rise in prescription charges? Does he agree that it must be deflated to conform to the rate of inflation in the Health Service, expressed in the Government's increase in prescription charges?
§ Mr. Major
The hon. Gentleman neglects to mention the fact that those resources feed into the National Health Service to help increase resources for patient care. The hon. Gentleman and I must both pay prescription charges, but the vulnerable do not pay prescription charges. That is why the hon. Gentleman and I pay an increase greater than the rate of inflation. I should have thought that he would have found that acceptable. We are providing that money to the National Health Service because we care about the NHS at least as much as the Labour party does. We care about its efficiency as well as the resources that are put into it.
§ Mr. Dafydd Wigley (Caernarfon)
The Chief Secretary said that there may be £1 billion next year and £1 billion the following year for health, if needed. If the review of the Health Service shows, as has been suggested by representatives of the royal colleges, that there is a need 1131 for some £2 billion, will he confirm that he has that money in his contingency reserve and that he can make it available without disrupting his Budget strategy?
§ Mr. Major
There are two aspects to the important point that the hon. Gentleman has just raised. What I said about an extra £1 billion was not that I will provide an extra £1 billion next year, but that I have already provided it, docketed it, annotated it and put it in the accounts for next year and for the year after. That money is already provided in the accounts. We shall review the question of mainstream funding for the National Health Service again in the next public expenditure round.
On the hon. Gentleman's other point, which clearly relates to the nurses' pay review body, we have made it absolutely clear that we expect to receive the report in April. We will consider the report speedily and make our decision on it speedily. The House and the health authorities will know our decision on it, and the extent to which we may be able to assist in its funding, before the end of April. We shall deal with that matter speedily, but I can go no further than that today.
I should like to make another point absolutely clear so that there is no doubt among Opposition Members. Despite the scaremongering in which Opposition Members indulge so frequently, I reaffirm to the House yet again that the principle of access to medical care irrespective of ability to pay is not at risk now, is not at risk in the review and will not be at risk at any stage in the future.
§ Mr. Major
I should like to make a further point about the National Health Service. The right hon. and learned Member for Monklands, East and his hon. Friends have talked at some length in recent months about the position of the nurses. I remind the right hon. and learned Gentleman that a typical nurse would be paying over £40 per month more in income tax if we had stuck with the income tax regime that the right hon. and learned Gentleman supported; nor would that nurse have had a review body on pay, because that too was a Conservative initiative.
I said a few moments ago that this Budget is about tax reform and tax reduction. I believe that the case for both is overwhelming on economic grounds, on fiscal grounds and on practical grounds.
§ Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)
Before my right hon. Friend leaves the subject of the Health Service, he said that patients' access to the National Health Service is not at risk. Can he explain why hospital wards and, indeed, some hospitals are being closed because they do not have sufficient money? Does that mean that if access is at risk the extra funds will be found?
§ Mr. Major
My hon. Friend is being uncharacteristically mischievous. The principle that I enunciated was that access to medical care, irrespective of ability to pay, is not at risk. I reaffirm that principle, and events will show it to be justified.
The reductions in tax rates in this Budget reduce the marginal rates faced by over 99 per cent. of taxpayers. Allowances have been raised by precisely twice the amount 1132 needed for indexation, which especially helps those on modest incomes. As a result of the changes made by my right hon. Friend, personal allowances are now over 25 per cent. higher in real terms than they were in 1978–79.
Taken together, the reduced tax rate and the increased allowances mean that the married man on average earnings will find himself better off by about £5 a week as a result of this Budget. That is equivalent on its own to a pay increase of £370 a year and means that a pay rise of less than 2 per cent this year would maintain living standards. Anything higher would materially raise them.
§ Mr. Ian Gow (Eastbourne)
As nurses and others outside are listening carefully to what my right hon. Friend is saying about cuts in direct taxation, will he give way to the Shadow Chancellor so that he can tell the House and the nurses by how much be would diminish the tax thresholds and what the standard rate of tax would be if he became Chancellor?
§ Mr Galbraith
I was interested in what the Chief Secretary said about access to care being free at the time of need. Can he give us a guarantee that in the review there will be absolutely no charges applied in the National Health Service for access to general practitioners or to anyone else? Can he also tell us how that equates with the Government's new policy of charging for dental checks and eye examinations? How does that equate with free access at the time of need?
§ Mr. Major
The hon. Gentleman will have to wait on all those matters, which will be the result of the review. One thing that I might usefully say to the hon. Gentleman, who I understand, is a surgeon —[HON. MEMBERS: "A brain surgeon."] Yes, I understand that he is a brain surgeon. I am pleased to hear that. I have something to say to the hon. Gentleman, with which he may agree. He will recall that some years ago, towards the end of the 1970s, many of his colleagues, who were distinguished surgeons, were leaving the country to go abroad to Canada, America, New Zealand and elsewhere, precisely because of the rate of taxation and their small net incomes. Changing the upper tax rates will stop that drain, which will materially help the National Health Service.
§ Mr. Galbraith
The right hon. Gentleman is quite wrong. What stopped my colleagues going to places such as Canada was that Canada refused to let them in. It has absolutely nothing to do with income tax rates.
§ Mr. Major
I am not sure that the hon. Gentleman does not add to my point rather than detract from it, as he sought to do.
The point about a low tax environment — [Interruption.] If the right hon. and learned Member for Monklands, East wished to intervene, he had his opportunity a moment ago.
Moreover, a low tax environment helps create new jobs—genuine jobs that are not for ever dependent on state expenditure or subsidy year after year, with the consequent 1133 high taxation, but not a word of that found its way into the right hon. and learned Gentleman's speech. The Labour party claims that it wishes to improve living standards. If that is true, how ironic that Opposition Members invariably seek to do so by supporting high wage claims that cost jobs, and opposing tax cuts that help create them.
The right hon. and learned Gentleman disliked the reduction in basic rate tax, but he was positively apoplectic at the reductions in upper rates, as were many of his hon. Friends, despite the fact that anyone who cares to examine the matter knows that low tax economies work better than high tax economies.
The right hon. and learned Gentleman also referred, in an entirely class-conscious way, to what he refers to as "the rich". Let us examine who the gainers predominantly may be from the tax changes that my right hon. Friend has made. Of those gaining from the abolition of the higher rates above 40 per cent., about two thirds have incomes that are not in the "super rich" category but are under £40,000—less than that of, for example, the Leader of the Opposition. They include scientists, surgeons, doctors, engineers—they are the meritocracy, not the outstandingly rich or the privileged. It is those people we wish to help, for whom we wish to provide incentives and whom we wish to keep in this country.
§ Mr. Tam Dalyell (Linlithgow)
The right hon. Gentleman has just mentioned scientists. How does he deal with the worry of the Royal Society that about 10 per cent. of its members are going abroad and that the drain of top scientists from this country is something that should worry us all?
§ Mr. Major
I have given way twice to the hon. Gentleman, and that was once too many.
On the subject of redistribution, the other point that is clear to all except the Opposition is that, since 1979, the real revenues paid by the top 5 per cent. of taxpayers have risen by a third and those paid by the other 95 per cent. have been reduced. That is what has happened up to and including my right hon. Friend's changes of yesterday. But the Opposition's stance is admirably clear. They believe in high taxation, not because it raises more revenue—it does not—or because it improves the quality of public services—it does not—or because it leads to economic success—it does not. They believe in high taxes for their own sake, whatever the damage to the economy.
§ Mr. John Smith
Will the Chief Secretary explain why the Government maintain the upper limit on national insurance contributions? Why is it right for a person earning £18,000 a year to pay less by way of tax and national insurance contributions than someone on 16,000?
§ Mr. Major
It is enlightening that the right hon. and learned Gentleman should ask that question, because the Labour party spent the first two weeks of the last general election campaign denying that it was going to lift the upper earnings limit on national insurance contributions. 1134 So it is interesting that the right hon. and learned Gentleman now places on record the fact that the Opposition will lift the upper earnings limit on national insurance and carry national insurance charges right through the scale. If that is their policy, everyone earning more than £15,800 a year will be losers, and I hope he will accept that that is now the Labour party's position.
The Government last cut the top rate of tax in 1979. Despite that, the top 5 per cent. of taxpayers now contribute 29 per cent. of income tax revenues, compared with the 24 per cent. they contributed when they were subject to the right hon. and learned Gentleman's penal rates.
That trend mirrors what happened after my right hon. Friend reformed corporate taxes two or three Budgets ago. Companies now contribute a higher proportion to our revenues than when they were subject to higher rates. They are also investing in and moving to this country, rather than disinvesting from and leaving it. That is the other advantage of lower tax rates. They are doing that partly because we have one of the lowest corporation tax rates in the industrialised world.
Reducing tax rates is not merely a bizarre fetish of this Government—
§ Ms. Hilary Armstrong (Durham, North-West)
The Chancellor told us yesterday that no one would pay more than 40 per cent. tax. Had he forgotten about the 500,000 people whose marginal tax rate, after yesterday, will he between 70 and 90 per cent. — the group included in what we call the poverty trap? Will the Chief Secretary tell us what he will do to take those people out of that marginal tax rate?
§ Mr. Major
My right hon. Friend specifically said that no one will face a personal tax rate in excess of 40 per cent. The underlying point that the hon. Lady made is one to which there is no solution, as successive Governments have found. The more benefits we provide, the worse the poverty trap becomes for many people. If there were a solution, I would have taken it when I was a Minister in the DHSS. I could not find one. If the hon. Lady will offer me one, I shall willingly take it to my right hon. Friend the Secretary of State for Social Services.
§ Mr. Robin Cook (Livingston)
May I offer the Minister an immediate solution: not to proceed with the changes on 11 April, which will double the number of families who are subject to a deduction rate in excess of 70 per cent.? How does he justify that doubling when the top 5 per cent. have a cut of a third in their tax rate?
§ Mr. Major
First, I suspect that the hon. Gentleman's numbers are wrong. Secondly, he will know that, before the social security reforms, it was quite possible to have a marginal tax rate of well over 100 per cent. We have lessened that poverty and employment trap substantially with the changes that we have made. If more people are now in the trap, that is entirely a result of increasing levels of benefits, as the hon. Gentleman knows.
As I said, reducing high tax rates, with which the Opposition disagree, is not merely a fetish of this Government. The Socialist Government in India and the Labour Governments in Australia and New Zealand are all cutting taxes substantially—
§ Mr. Major
They are doing so because it has been accepted by those in government, Socialist and non-Socialist alike, that high tax rates are inefficient for raising revenue, and damaging to the economy. Only the British Labour party, excluded from power for so long, does not recognise that. Until it does, it will stay where it deserves to be—in opposition and out of government.
Penal tax rates do not encourage effort, risk-taking or wealth creation. They only encourage tax avoidance, tax evasion and emigration.
§ Mr. Major
I have given way enough.
Lower marginal tax rates will reward effort and enterprise, and give an incentive to invest in productive areas of the economy.Does the right hon. and learned Member for Monklands, East agree with that? Was he listening to it, and would he understand it if he was? Probably, the answer is no, but those were the words of the New Zealand Labour Finance Minister, when he announced a reduction in the top rate of tax from 66 per cent. to 48 per cent. He was right, we are right, and the right hon. and learned Gentleman was wrong.
§ Mr. Major
I shall not give way.
We cannot insulate ourselves from the worldwide trends towards lower tax rates. We cannot hope to keep the best talents in this country—the best entrepreneurs, surgeons, electricians and scientists—if the price of their success is 60p in the pound here as against 28 cents in the dollar in the United States, 29 cents in Canada, 49 cents in Australia and 48 cents in New Zealand. That is why it was right to cut tax rates in the Budget. Opposition Members who disagree with that must explain to the sick and unemployed why they want to cling to a tax regime that offers low rewards to those who can most help them and encourages such people to seek rewards overseas.
The right hon. and learned Member for Monklands, East had a lot to say about our policies but was shifty about his—in so far as he has any. He knows what he is against, but I am not sure that he will tell anyone what he is for — if he knows. It is clear that the Opposition would reverse many, if not all, of these tax reductions. We now know that they would abolish the upper earnings limit on national insurance, thereby severely damaging anyone earning more than £15,000 a year. We know what they tried and failed to hide during the general election—that they would abolish the married man's tax allowance and reduce the income of 6 million households. They tried and failed to conceal that, and lost the election because of it.
If the right hon. and learned Gentleman wants to be credible, he needs to do more than merely carp at us. He needs a policy of his own, but he and his party lack one. If they have one, will he tell us—he failed to do so—whether the Opposition will reverse the reduction in the basic rate of tax in the Budget? Will they reverse the threshold increases? Do they still hold to moving tax up to 29p in the pound, which was their general election position? I am happy to give way to the right hon. and learned Gentleman on that. Answer comes there none. [HON. MEMBERS: "Answer!"] This is perhaps the first time in the whole debate that the right hon. and learned Gentleman has been silent. So perhaps at least we can be grateful for that.
1136 But there is one area where the right hon. and learned Gentleman and I might conceivably agree and that is that there is a converse to lower tax rates. If it is not right to have penal tax rates then neither can it be right to have many special reliefs which the better off can exploit to reduce, or even eliminate, their tax bills. The great majority of wage and salary earners, with modest investment incomes, including small private shareholdings, do not really have the option of exploiting tax shelters.
Most of those on higher incomes pay their taxes in full as well. But, for a small minority — a very small minority—the present tax system means that, while the nominal tax rates for which they are liable is high, the actual tax rates they pay can be very low. That can, of course, be wholly within the law, but it is also wholly unfair. Far too many people have been able to avoid far too much tax by utilising tax shelters. I agree with the right hon. and learned Gentleman: I believe in low taxes. But I also believe those taxes should be paid.
But tax avoidance on a large scale is an inevitable consequence of a tax regime which gives the highly paid and the better-off incentives to invest in tax planning. That point has been very well put by others:It would be stupid not to recognise the lesson of recent history; taxpayers just will not pay ridiculously high marginal tax rates. The system invites abuse if it attempts to impose such a burden.Not my words, but those of Paul Keating, Labour Treasurer in Australia in the 1985 Budget. He recognised the basic truth that tax shelters are the product of punitive tax rates. It is right that, in a Budget where we are bringing tax rates down, we should take measures that start to remove those shelters.
Nor should the amount of tax paid depend on how one is paid — whether in cash or through a benefit in kind. Therefore, in this Budget we are tackling the most criticised tax shelter—the present tax regime for forestry — and the most widespread perk — the company car. Both these measures will make a significant contribution—
§ Mr. Major
As my right hon. Friend the Member for Shropshire, North (Mr. Biffen), the former Leader of the House, once remarked, we grammar school boys must stick together.
Both these measures will make a significant contribution to making the impact of the tax system fairer. But a real assault on tax shelters is possible only in an environment which does not encourage them to flourish—and that is a low tax environment.
My right hon. Friend's significant reforms have not been confined to income tax alone. He has overhauled the tax treatment of capital gains, ended the injustice of taxing notional pre-1982 gains and reduced the distortion of taxing a higher rate taxpayer's gains at 30 per cent. but the same taxpayer's income at 40 per cent. He has announced a drastic restructuring of inheritance tax. The four rates of tax have been reduced to one single rate and the threshold has been increased. As a result, 20,000 more estates, most 1137 of them people with modest home ownership values, will pay no tax at all next year. My right hon. Friend the Financial Secretary to the Treasury and my hon. Friend the Economic Secretary will expand on these changes later in the debate.
All these reforms mean that there will be no personal tax rate higher than 40 per cent. in the system. This is a total transformation from the days of 98 per cent. marginal rates on investment income, 83 per cent. on earned income and 75 per cent. on capital transfers. Those days are gone—and gone for good.
These measures alone would represent a catalogue of substantial reform. But there is one other area I must single out, and that is the reform of the tax treatment of married women. Frankly, the present system is utterly outdated and widely accepted as such. But while there has been a long-standing clamour for some reform, there have been differing views on what reform there should be—and the result has been the perpetuation for too long of an unacceptable status quo.
The proposals that my right hon. Friend announced yesterday will end, at long last, the present unfair and widely resented tax regime for married women, and remove absurd and unjustifiable penalties on marriage from our tax system. They will provide the privacy and independence that women have long sought. They have been widely — until today, almost universally — welcomed.
In all this there is one dissentient voice, that of the right hon. and learned Gentleman. Perhaps Labour's attitude is best summed up by the fact that, when he chose to unveil his Budget thoughts, there was not one word about the tax treatment of women in an article of 1,500 words—and this was not to the Financial Times, not to The Economist, nor even to the New Statesman—but to Woman's Own.
§ Ms. Mowlam
I thank the Minister for giving way. If he is so keen to help women, could he please explain why it is possible under the Budget to park one's car with tax relief but not to park one's children in creches with tax relief?
§ Mr. Major
I am not sure that most people would refer to "parking" their children in quite that fashion, but I hope that the hon. Lady, whatever other reservations she may have, will welcome the changes to independence and privacy in taxation for women in this Budget, which most people have welcomed.
Contrary to the impression the right hon. and learned Gentleman sought to give, these reforms and reductions in tax rates have not been bought at the expense of fiscal prudence, for the remarkable fact is that the strength of the economy is such that we are able to reduce taxes by £4 billion and plan to repay £3 billion of debt next year. And for future years our strategy will be based on a zero public sector borrowing requirement — a balanced budget, something that many of us have long sought and greatly welcome, now that my right hon. Friend has achieved it. That, for most of us, is a welcome development, and we hope to sustain it permanently.
In many ways, this is a landmark Budget, because we have been able to re-draw the tax system. We have radically simplified personal taxation; we have the lowest basic rate since the second world war and the lowest top rate since the first world war; and we have transformed the tax treatment of married women. It is a landmark because 1138 we have done all this on top of substantial increases in spending on priority public services and we have planned a Budget surplus for next year.
That has been made possible only by the dramatic improvement in the performance of the economy since 1979. That improvement is possible only as a result of the policies of my right hon. Friend the Chancellor of the Exchequer and his predecessor over the past eight years. Without those policies, this Budget and these tax reductions would not have been possible. This Budget will give a further impetus to those policies of improvement in the economy. My right hon. Friend has delivered a Budget that is a product of past success and the foundation of future success. It is an historic Budget, and I commend it to the House.
§ Mr. Deputy Speaker (Mr. Harold Walker)
Order. I must remind the House of Mr. Speaker's earlier appeal for brief speeches.
§ Mr. Bruce Millan (Glasgow, Govan)
The Chief Secretary has done his best to defend yesterday's Budget but he has not made much of a job of it and I am not really surprised, because this a Budget which is indefensible where justice, fairness and morality are concerned. I have listened to many Budgets in the House but have never before felt the sense of outrage that I felt yesterday in listening to the latter part of the Chancellor's speech and the announcement that he made then about the reductions in the higher rates of taxation, in particular.
I find it nauseating to see hon. Gentlemen on the Government Benches, all of whom will do well out or this Budget, and some of whom who will do extremely well out of it, waving their Order Papers in the air, when in the past few weeks the same hon. Gentlemen have voted for the social fund — an attack on the poorest members in our community — voted to freeze child benefit, voted to reduce housing benefit, voted for attacks on the unemployed and, of course, voted for the iniquities of the poll tax as well.
Anticipating what the Chancellor was likely to say yesterday, I had the perhaps naive feeling that he would cover his tax reductions for the better off with a figleaf of additional expenditure on the National Health Service. I had not appreciated the depths of cynicism to which the Government have now sunk. Not a penny is to go to the NHS. Yet it is agreed by all who have examined the matter that there is a real and major crisis in the Health Service. That is the finding of studies by the British Medical Association, the Royal College of Nursing and the all-party Select Committee on Social Services.
That Committee recommended, very modestly, that at least £1 billion should be put into the NHS over the next two years—in addition to the figures in the White Paper on public expenditure—to make up even a part of the £1.9 billion by which the NHS had been underfunded during the past few years. In all the polls held before the Budget, public opinion made the NHS its top priority.
The excuse cannot be given this year that no money is available. Plenty of money is available, but it has been devoted overwhelmingly to the better-off. It is a scandal that £2 billion of that in a full year is paying for the elimination of the higher rate of tax, above 40 per cent. 1139 The money, or even half of it, could have been spent on improving the NHS and other aspects of the social services, and on more general improvements.
The Chief Secretary pretended that there was a direct correlation between the highest rates of income taxation and economic performance. That is an odd view, as we see by comparing the economic performances of Japan and the United States in recent years. The top rate of taxation in Japan is 60 per cent., while in the United States it is only 33 per cent. There is no such correlation. Similarly, there is no proven correlation between reductions in the higher rates of taxation and increasing effort on the part of those who benefit.
It is odd that those at the top end of the income range should be provided with incentives through the reduction of their taxation burden, while the poorer sections of the community are provided with incentives by being screwed down even further. But that has been part of the Government's policy over the past few years. High tax rates may encourage excessive salaries. Some grotesque salaries have been paid to directors and, in some instances, to completely useless people in the City of London. It will be interesting to see whether, having received all these concessions, they will volunteer reductions in their salaries, but I do not believe that they will. We are simply giving large sums to the least deserving members of the community.
I have always entertained a certain scepticism about the independence of taxation for women, believing that to move to a completely independent system without doing an injustice to some members of the community—sometimes deserving—would be a very difficult task. The general argument for independent taxation of women was that it was a redistribution to make the whole system fairer. The typical Opposition proposal was that the abolition of the married man's allowance would make possible considerable increases in child benefit. The Chancellor, however, has done exactly the opposite. On the one hand, child benefit has been frozen. On the other, the proposals will overwhelmingly benefit the better-off.
The present wife's earned income allowance has been converted to a wife's income allowance, earned or unearned, and the disaggregation of investment income is also proposed. The proposals will make no difference to the vast majority of couples who have no income other than earned income, with husband and wife both earning. Certain earners will experience a marginal difference, but on the whole they will be those who are already on high incomes and paying the higher rates of taxation.
It is the disaggregation of unearned income that will have the impact. The husband's unearned income, such as investments, will be switched to the wife. For unearned as well as earned income, separate higher rate thresholds are being created. For those at the top end of a total income scale, the threshold for higher rates of tax has been effectively doubled. The benefits to the rich of such so-called reform of the taxation of married couples are potentially immense. The £500 million, or whatever will be the cost of the reform, will go overwhelmingly to the rich.
The position is even worse than that. It has not been sufficiently noted that one part of the reform will provide for the business expansion scheme to be dealt with independently for husband and wife, so that the £40,000 investment allowed under the present arrangements will be 1140 increased for the very rich taxpayers to £80,000 a year. That is a massive benefit. The Chief Secretary talked about plugging loopholes, but the business expansion scheme has already been diverted into all sorts of activities that most of us would consider at best neutral, and in many cases positively harmful, for the economy as a whole.
§ Mr. Millan
I shall not give way, because I have been asked to be brief.
That loophole will be doubled, with immense loss to the Revenue, when the scheme is introduced in 1990. The only change announced yesterday is that the business expansion scheme will be extended to let properties. The deregulation of rents is an invitation to Rachmanism. If hon. Members do not believe that Rachmanism still exists, they should visit my constituency, where only last week a landlord—a Mr. Solomons — was sentenced to four years' imprisonment for harassing and intimidating tenants and defrauding the DHSS. He did that by using loopholes that had been repeatedly drawn to the Government's attention, but which they steadfastly refused to block.
The Budget does nothing for the economy. We have a serious problem with manufacturing and an increasingly serious problem with the balance of payments. That problem will get worse for many reasons and in particular as a result of the impact of the elimination of all kinds of barriers in the Common Market in 1992. That change fills me with considerable dismay, especially when we consider that British industry is less well prepared than other Community member industries for that reform.
The Budget also does absolutely nothing for the unemployed. I consider it shameful that the Chancellor has boasted about his economic success when there is still a massive number of unemployed people in this country. In my constituency of Govan, on the official count—those figures are, of course, massaged beyond recognition—I still have a total of 18.1 per cent. unemployed. Male unemployment is a good deal higher. If that rate was calculated in the old way, unemployment in my constituency would be 21.8 per cent. and the male unemployment rate would be considerably higher.
The relative position of Scotland in the unemployment league has deteriorated recently for many reasons and Scotland now has the second worst unemployment rate in the United Kingdom after the north of England. The situation continues to deteriorate.
Within recent weeks, the Government have produced a reform of regional policy which will do immense damage to areas such as Scotland and areas of England that have depended upon such regional development grants in the past. Every study that has been made of the proposals in the Regional Development Grants (Termination) Bill has come to the same conclusion—that there is no way in which the new scheme will produce the same kind of benefits for the regions as the old one. All this is happening against a background of continuing serious problems in areas such as Scotland and a continuing deterioration in standards as a result of the employment gap between the north and the south. The south-east unemployment rate is only half of the unemployment rate in Scotland.
Yesterday was an opportunity to do something to remedy the disasters that are occurring in so many parts of our country. It was an opportunity to bring the nation together. Instead, the Budget will divide the nation even 1141 further. It is a Budget for the rich and against the interests of the poor and it will lead to an increasingly divided and bitter nation.
§ Sir Ian Gilmour (Chesham and Amersham)
My right hon. Friend the Chief Secretary of the Treasury made an able defence of the Budget.
Everyone on the Conservative Benches has every reason to be grateful to my right hon. Friend the Chancellor because I doubt that any party has ever gone into a general election with every economic indicator bearing such favourable interpretations. As a result, all our majorities happily benefited from the Chancellor's exploits. Furthermore, as my right hon. Friend pointed out yesterday, last year's Budget was not an electoral bonanza that had to be reversed—such prophecies have proved false — and he has been able to repeat the mixture this year.
My right hon. Friend deserves considerable congratulations for the growth rate of 4.5 per cent. and the consequent fall in unemployment. In contrast to the unemployment rate of 18.1 per cent. that is found in the constituency of the right hon. Member for Govan (Mr. Millan), the unemployment rate in my constituency is 2.1 per cent. By any standard that percentage represents full employment. Furthermore, the growth has been achieved without a sharp increase in inflation.
Many of the Chancellor's tax reforms will be beneficial. However, I am bound to say that I believe that it is more than a little insensitive to hand out quite so much money to the rich — also to the not-so-rich, as my right hon. Friend the Chief Secretary pointed out—especially at a time when next month, quite a lot of people will find their social benefits markedly reduced. I find the refusal to uprate child benefit even more unforgivable than I found it last autumn. I still find it regrettable that, despite my right hon. Friend's reassuring remarks this afternoon, the Chancellor did not provide more money for the Health Service, which plainly needs that money. The Government are taking some unwarrantable social risks.
Nevertheless, undoubtedly my right hon. Friend the Chancellor has been an extremely successful Chancellor. I do not wish to concentrate on his taxation proposals, but on something that he said yesterday afternoon:The plain fact is that the British economy has been transformed. Prudent financial policies have given business and industry the confidence to expand, while supply side reforms have progressively removed the barriers to enterprise."—[0fficial Report, 15 March 1988; Vol. 129, c. 995.]The claim of transformation is a high one, and if it is justified we can all stop worrying about the British economy and start worrying about something else — a number of other candidates spring to mind. My right hon. Friend's claim deserves examination. If one looks back just a few years it may have some substance, but I am sure my right hon. Friend will agree that it cannot be substantiated if we go back and consider the entire period since 1979. During that period, Britain's average growth rate—even including the boost from oil—has been 1.8 per cent. which is lower than in any other eight-year period prior to 1979.
There has, of course, been an extremely promising increase in productivity in manufacturing, but that is not of great use unless it leads to an improvement in our ability to compete at home and abroad and therefore to an 1142 increase in production. Unfortunately, that has not yet happened. Some good figures were published yesterday, but production in manufactured goods is still not much higher than it was in 1979, while imports of manufactured goods have nearly doubled.
The claim of transformation must relate to a shorter and more recent period. Certainly in the period 1985–87 the growth rate has been much better—it has been a highly respectable rate of nearly 4 per cent. If the Government's claim is true, that rate of growth or something like it will be sustained and this latest recovery will be different from all previous recoveries when the go ended with a stop.
The last time that we had a two-year growth period as large as the 1985–87 growth period was in 1971–73 during the Government led by my right hon. Friend the Member for Bexley and Old Sidcup (Mr. Heath) of which I had the honour to be a member. The conduct of economic policy during that period has rightly or wrongly come in for a great deal of criticism. Unemployment was reduced to a mere half a million—2.3 per cent.—but the hostile view, which has been widely expressed, is that real jobs were not created at that time and that the profligate use of monetary and fiscal policy first caused an inflationary crisis and then led to an extremely large increase in unemployment.
It may be instructive therefore to compare 1985–87 with 1971–73. Certainly, those who oppose, in retrospect, the policies adopted in 1971–73 will want to make absolutely sure that we have not just got another consumption boom on our hands that is doomed, in common with all the others, to end with adverse consequences for inflation and employment. The policy stance in 1985–87, in common with 1971–73, has been strongly expansionary. Money supply—I do not know whether one is allowed to use such a phrase any more—
§ Sir Ian Gilmour
It certainly is. Money supply has risen by nearly 50 per cent. in the past two years, compared with just over 61 per cent. in the earlier period. If we measure the real money supply, correcting the figures for inflation, it turns out that there is no significant difference between the two periods.
I have mentioned money supply not because it has any significant connection with inflation — that notion has been mercifully discredited — but because it is the counterpart of a huge rise in personal borrowing and a sharp fall in personal savings.
There seems to me no doubt that fiscal policy, if properly measured, has also been expansionary, and in itself I greatly welcome that. The movement of the public sector borrowing requirement provides no guide because — as we know—it includes asset sales and the handing out of capital gains which happens nearly every time, although not, the last one. The PSBR works in the opposite direction to what it is said to do in the public accounts; it adds to, not subtracts from, personal consumption.
Quite apart from the Government's privatisation programme, the fiscal stance, properly measured, has been expansionary. Even the so-called financial deficit is an ambiguous guide to the stance of fiscal policy, because that also seems to have been reduced by sales of existing assets. So far as I can see, the figure for the financial deficit is struck after deducting sales of houses by local councils and 1143 new towns, and apparently it was worth £4 billion in 1987–88. Those sales by a convention seem to be treated in the accounts as negative public expenditure, although they do not reduce demand at all.
The fact that fiscal policy has been expansionary is not belied by the fact that revenue is so buoyant. No more than in Rab Butler's notorious first Budget in 1955 is buoyancy to be taken as evidence of fiscal prudence. Revenue receipts have been buoyant because loan-financed expenditure has risen and personal savings have fallen. The buoyancy therefore denotes the effect of the economy on the Budget rather than the effect of the Budget on the economy.
The structure of demand was not exactly the same in 1985–87 as in the earlier period, but it was broadly similar. While investment and Government consumption rose less in 1985–87 than in 1971–73, the 5.5 per cent. growth in personal consumption was almost exactly the same, and accounted for a larger proportion of the total expansion — two thirds in 1985–87, compared with one half in 1971–73. The recent rise in personal consumption has been far larger than in any of the go periods. The expansionary stance of fiscal policy is confirmed by the Chancellor's expectation that consumption will rise another 4 per cent. this year, making gross consumption over the period 1985–88 the largest on record.
The conclusion, therefore, must be that the expansions of 1971–73 and 1985–87 are broadly similar. I do not know whether the conclusion is more palatable to my right hon. Friend the Chancellor or to my right hon. Friend the Member for Old Bexley and Sidcup. My right hon. Friend the Member for Old Bexley and Sidcup had the bad luck to be hit by a fourfold increase in oil prices but, thank goodness, that will not happen today.
The recent excessive growth in consumption has generated an inevitable deterioration in the balance of payments from a surplus of £3.2 billion in 1985 to a deficit of £1.7 billion in 1987, which, according to the Chancellor's figures, will this year rise to £4 billion.
A few years ago, the Government kept saying that they were laying the foundations for a greatly improved economy and for an economic policy that was quite different from the failures of the past. It seemed to me that the foundation-laying was going on for a very long time, and I remember urging them to get on with the building. They finally finished the foundations and erected the building. Unfortunately, they did not erect the building on the foundations that they had spent such a long time laying. They erected their building miles away from the foundations on the same old boggy marsh that they had denounced previous Administrations for floundering in since 1945. The edifice that they have erected is the same old rickety structure as the others — the classic, authentic, British consumption-led economic boom, with imports rising far faster than exports.
Whatever the potential merits may be of the Government's supply side measures — the trade union legislation has been beneficial in that regard—nothing has yet happened to the overall performance of the economy that cannot be accounted for by having had an unusually large and prolonged dose of old-fashioned stop-go. The restrictive monetary and fiscal measures of 1979 caused an unprecedentedly deep recession—that was the stop—and expansionary, fiscal and monetary policy—in 1144 a word, reflation—has caused the subsequent recovery. That was go. Thankfully, that has lasted longer than the other goes, because it started from a uniquely low level, because of North sea oil, because of the Government's trade union legislation and because of the weakness of the Opposition, which has enabled the Government to run the economy at a far higher level of unemployment than would have been possible in the past.
Demand is being driven up towards the limits of our capacity to produce, which has dangers for inflation and the balance of payments. That has happened many times before, but this time it is happening long before we are anywhere near having re-established full employment.
My right hon. Friend the Chancellor may be right in maintaining that he can get through the present year and beyond. Treasury forecasts have been so strikingly accurate over recent years that it is a brave man who questions them. I only hope that my right hon. Friend's optimism is justified.
But no strategy for growth will be sustained for long unless it ensures that exports rise sufficiently to pay for imports. At present, they are certainly not doing so. We are undergoing a consumption boom, which, however popular it may be with those who have benefited from it—fortunately, many people have benefited from it—it does nothing whatever to resolve Britain's strategic problem in the medium or short term.
I fear that the British economy has not been transformed. I therefore hope that my right hon. Friend the Chancellor will devote his formidable powers and energies to effecting the genuine transformation that is still so badly needed.
§ 6.4 pm
§ Mr. A. J. Beith (Berwick-upon-Tweed)
The right hon. and learned Member for Monklands, East (Mr. Smith) said that there was something stirring in the Tory undergrowth. How elegantly it stirred in the remarks of the right hon. Member for Chesham and Amersham (Sir. I. Gilmour), and with what passion and determination it is possible to mount a critque of the Budget when it is done in the face of the recent rewriting of history. The experience of history being written prompts literary endeavour to quite a striking degree. One wonders how much more will stir in the undergrowth as a result of the Budget. So far, few heads have appeared over the top of the grass.
What strikes one about this budget is its sheer, bare-faced injustice. The Chancellor has gone out of his way not only to make major changes in the taxation structure which will benefit one section of society, but to add to them all the other measures he can find. He has gone far beyond what anyone expected. Most of the press commentators and some Conservative Members were surprised—some have been pleased, but others have not — by the extent to which he was prepared to go in tilting the balance of the Budget.
The impression given is of a Budget that is imprudent, not fiscally but in relation to the overall economic position and the serious problems with which we are faced, such as the balance of payments and the pressures towards inflation, which are likely to become worse. The balance of payments problem is bound to become worse for the reasons that were given by the right hon. Member for Chesham and Amersham. More money is available 1145 through tax cuts, which to a large extent will be spent on imported goods, which will add to the balance of payments problem.
There is no sense of the urgency of the problems of the National Health Service and no commitment to the investment that the country needs. The beneficence of the past series of Budgets has been based on the sale of assets or assets gained from oil revenues. It is basic economic sense that, if one is selling assets and benefitting from those sales, the money should go not into current expenditure but reinvestment.
It is difficult to see how the management of the economy is being carried out. Given the Chancellor's experiences of the past week or so, one wonders whether he dares to come out to get the milk bottles and the Financial Times off the doorstep for fear that the door along the street will open, a head will appear and that he will be warned that half a per cent. on interest rates is essential to curb inflation or that no intervention in the market must be contemplated. There is genuine doubt about the management of exchange rates in particular and interest rates arising from the events of the past two weeks. The Chancellor's few approved remarks in the Budget speech did not resolve those doubts.
The injustice of the Budget is not merely the reduction in top rates of taxation or the effect of the standard rate reduction, but the fact that the Chancellor, having taken those measures, went on to decline to lift the national insurance ceiling, which was referred to earlier by the right hon. and learned Member for Monklands, East. It is arguable that in isolation it might be wrong to lift the national insurance ceiling and that it would create many losers, but in face of the other tax reductions it seems perverse not to lift the national insurance ceiling.
In the circumstances, it seemed equally perverse not to limit mortgage interest relief and other reliefs to the standard rate of tax. When that is seen against the background of what poorer people will experience in coming months, it seems much more unjust. Many people will have to face up to the social security changes, the loss of benefit, the loss of housing benefit, and the changes that will affect young people. Of course, further down the track, but not so far down the track in Scotland, is the impact of the poll tax, the most regressive tax ever devised by anybody since the middle ages. All that is part of the background against which the Budget appears so uniquely unjust.
No Chancellor can really claim the title of a reforming Chancellor if he does not seek to make the overall effect of the tax system fairer. That cannot be so in respect of the position of people at the bottom of the scale. Take a married couple with two children and £100 a week who, before the tax and social security changes, have a net income of £96.01 a week. After the tax and social security changes, they will find their income going down to £87.17 a week. There is something fundamentally wrong with a tax and benefit system that does that. The Chancellor has not considered the kind of reforms that will deal with that —indeed, he does not seem in any way exercised about that most serious problem.
When we consider the number of people out of work, it is even more unjust. They are estimated at between 2 million and 3 million. Let us give the Government the benefit of the doubt about the way in which they calculate the figures and assume that it is not over 3 million. It is still far too many people who are deprived of the 1146 opportunity effectively to contribute to the economy and to have the dignity and self-respect of being in employment. The Chancellor could have usefully cut employers' national insurance contributions. He could have done so generally or on a selective basis, directing help to regions in which the level of unemployment is highest. That would have encouraged employers in such areas to take on more labour.
The Budget does not back or support investment in the economy. A better use of much of the money that was available to the Chancellor would have been on the supply side of the economy—for example, improving training and education. Why should we not have a highly trained unemployed labour force that is in demand by employers, rather than an unemployed labour force with which the Government do not know what to do and for which they provide time-using schemes of one sort or another?
It is interesting to look at the way in which the Swedish system works. In Sweden, the money spent on unemployment is used completely the other way round. Three quarters of it is spent on training and employment services, and only one quarter of it is spent on benefits. We are worse than the reverse of the picture. We spend only one sixth on training and employment services and five sixths on benefit. We are notably unsuccessful at getting people into the position in which they are rapidly sought in the labour market.
There are other areas in which public investment would have been appropriate. For example, I refer to housing. Small builders will be hit by the removal of mortgage tax relief on home improvements. There was an argument that something had to be done about abuse of that provision. Everyone knows the ways in which it had been abused. It was unwise for that to happen when no other measures were taken to stimulate housing improvement, given the need to improve our housing stock.
The Government would have generated more investment if they had followed the experience of the present Foreign Secretary when he was Chancellor, and carried out a deferred corporation lax reduction and announced that, in a phased way, they would reduce corporation tax, thus encouraging and inviting investment when the economy so clearly needs it. Investment could have been generated by the sensible use of the massive resources available to the Chancellor.
Of course, the overriding public worry was about the National Health Service and the fact that the Government seem oblivious of the crisis going on in it. The Government are fond of quoting the resources that they have put into the National Health Service, but, when the figures are looked at a little more closely, the true picture becomes clear. The Government have given a cash increase of 5.6 per cent. to the National Health Service, taking 1987–88 and 1988–89 figures. On the Government's own figures, after that is re-measured to take account of inflation, it goes down to an increase of a little over 1 per cent. When we take account of the higher rate of inflation in the National Health Service itself, the figure becomes minus 0.8 per cent.
The Government stand convicted. The Chief Secretary did not seem to understand the point when I put it to him earlier. I was not putting to him the basic argument about the merits of prescription charges, I was quoting in evidence that the Government say that such is the rate of inflation in medicines that they feel obliged to put up prescription charges by more than the rate of inflation.
1147 They must acknowledge that the rate of inflation in things crucially affecting the National Health Service is higher than in the economy as a whole.
That means that their vaunted cash increase for the National Health Service is not an increase in real terms at all. Moreover, that does not take account of demographic changes—the larger number of people whom the Health Service must look after—or new technology and financial implications. The Government have been aware of that for long enough.
Most Governments, when they prepare Budgets, are in the unhappy position of having made expenditure projections in November and then having a Budget that does not give them an opportunity to increase the projections. On their own admission, the Government are in a position to make substantial changes to the disposal of resources. They have the chance to do something about that problem. There is a greater urgency for them to do so. Health authorities are closing wards because they do not believe that they will have enough money to meet the result of the review body's decision on nurses' pay.
If the Government were now to say that they will fund the outcome of the review body's decision, or even fund what they agree to pay nurses—if they are too mean to pay what the review body says, as they have sometimes been in the past—and if they were at least to tell health authorities that they are prepared to meet that cost, the rate of ward closures could be slowed down. At the moment, health authorities feel obliged to close wards and cut services because they cannot safely anticipate that they will have enough money to meet the pay review. That only begins to deal with the problem, given the figures that I have quoted. We need something to be done now. The Government should make an immediate announcement about the Health Service.
We are faced with a Government who believe that public expenditure, as a proportion of gross domestic product, should decline year by year. That is the Government's continuing and unchanging objective. The only end product of that must be public squalor amidst private affluence. If we go along that route with no limit, we shall not sustain proper public services.
There are other Budget proposals about which it is necessary to comment. The Chancellor's decisions on excise duties are strange. On tobacco taxes—the health evidence is absolutely overwhelming — he has done nothing about his pre-election sweetener of not making inflation increases. Therefore, he is totally failing to respond to the concern of those who have to face up to the problems of smoking and health.
Similarly, the right hon. Gentleman has not taken any measures to deal with the failure to increase alcohol duties last year. He has made no increase at all in respect of spirits. For two years running, there has been no increase. He has made a fool of the Lord President of the Council, who is chairing a working party that is supposed to co-ordinate Government policies, so that there is some sensible policy on how to achieve more moderate drinking and deal with alcohol abuse. The Lord President issued a lame press statement welcoming what the Government have done about low-alcohol drinks. He dare not say more about the problem, because the Government have not touched the most dangerous area of all, spirits.
1148 On fuel excise duties, the Chancellor took a step in a sensible direction. The differentials that he has so far produced are nothing like enough to encourage motorists to switch to fuels that do less damage to the environment—for example, lead-free petrol and diesel in cars. We need the much wider differential that we see in many other countries.
On wider share ownership, an objective we share with the Chancellor, what he has done in the Budget is pathetic. Personal equity plans were a flop from the start, except for those who had already exhausted their capital gains tax allowances. It is a good scheme for them. Having exhausted their other allowances, they can go into that scheme and get more. It is of no value at all for the new investor.
What new investor has any real incentive to go into a scheme that he does not need to go into? There are already existing capital gains tax allowances that are quite sufficient for anything that he is likely to get for his first few ventures into the stock market. If the Chancellor wants to encourage wider share ownership, he cannot simply raise the limit of the scheme. He must find a way of directing tax relief to new investors and thereby generate tax relief at the time of investment.
§ The Financial Secretary to the Treasury (Mr. Norman Lamont)
Does the hon. Gentleman not think that getting one's income free of taxation is of some interest to the small investor?
§ Mr. Beith
The income first has to be generated by the capital gains, which will not be achieved on a scale necessary to exhaust the existing allowances by a new investor making his first venture. The evidence is that the large majority of the users and beneficiaries of the PEP scheme are those who already have substantial investments. The Chancellor's purpose was to widen share ownership, not to increase it for those who already hold shares, and I hope that he will look again at that issue.
There are particular questions about the business expansion schemes in relation to rented housing. Why on earth are the Government generating an incentive that is confined to assured tenancies? Why are the Government saying to landlords, "You can have substantial tax relief only if you give your tenants the least favourable possible kind of tenure in that property"? Why should it be denied to those who offer protected shorthold tenancies and to those who offer more favourable tenancies in the properties that they build under the benefits of the scheme? Landlords can obtain very substantial benefits through the business expansion scheme only if they give their tenants the minimum possible tenure. That is an absurd proposal.
We argued for the forestry changes, and we welcome them. We shall examine the planting grant scheme in more detail, to see whether the balance is right and whether the right kind of encouragement is given to planting where it is appropriate and where it is environmentally sensible.
We shall examine the covenant changes in rather more detail, especially in relation to students, to see whether the scale for revised parental contribution really offsets the problems that will result from that change in the law.
The move towards independent taxation for married women is welcome and long overdue, but it is not the mechanism that we would have chosen. It is striking that the high cost, as the right hon. Member for Glasgow, Govan (Mr. Millan) pointed out, arises from the 1149 disaggregation of allowances on unearned income, so the most immediate tangible benefit from the scheme will go in large measure to those who have substantial investment income and the disaggregation of those allowances.
Yesterday, the Budget speech was interrupted in scenes that I thought were deplorable and were illustrative of the problems which the Labour party has created for itself. It was not the first Budget speech to be interrupted. The Budget speech of 1909 was interrupted for the more benevolent reason of allowing the Chancellor to have a break after he had spoken for several hours.
Perhaps the House needed a break after listening to several hours of oratory, even from Lloyd George. His Budget was a people's Budget and it became known as that. It rings with the sort of phrases that it would be impossible to use about yesterday's Budget. Lloyd George said:This … is a War Budget. It is for raising money to wage implacable warfare against poverty and squalidness. I cannot help hoping and believing that before this generation has passed away we shall have advanced a great step towards that good time when poverty and wretchedness and human degradation which always follow in its camp will be as remote to the people of this country as the wolves which once infested its forests."—[Official Report, 29 April 1909; Vol. 4, c. 548.]
§ Mr. Beith
No. I am coming to the end of my remarks.
The Chancellor had unprecedented resources at his disposal, far more than he expected when the public expenditure figures were originally decided. He could have fulfilled some of his tax-cutting objectives and still have done more to help the National Health Service, and to boost investment, but he chose instead to prove his boldness—
§ Mr. Beith
Unlike some other hon. Members, I set out earlier in my remarks the precise measures that we would have taken had we presented a Budget. [Interruption.]
The Chancellor chose instead to prove his boldness—and nobody can question his boldness—by showing how much further he dared to go than anyone had expected in slanting the Budget towards the better-off.
The Chief Secretary said that it was a landmark Budget. Who needs landmarks, except landowners and those who have property, to set the bounds of ownership? Landmarks also set boundaries as to who will not get the property and will not get the benefits.
The Budget is setting back the cause of a genuine enterprise society in which there is a sense of community. I believe that many people in Britain want an enterprising society and do not believe that the state should run everything or that industry and enterprise should be cramped by a bureaucratic system. Many people want society to be enterprising and successful, but believe that it can be done with social justice. The Chancellor has set 1150 his face against that and has put on his party the indelible stamp of a party which does not care about social justice, and that will be left to others.
§ Mr. Beith
It also has to harness and maintain things which are of value, and to spread employment opportunities around the country to regions which do not now share prosperity. It is to do many more things on which the hon. Gentleman invites me to spend more time.
It is quite clear that the Conservative party has set its face against combining the objective of enterprise with that of social justice, and it will be left to Social and Liberal Democrats to take up that challenge.
§ Mr. David Madel (Bedfordshire, South-West)
I agree with some of what the hon. Member for Berwick-upon-Tweed (Mr. Beith) said about training, but he would not expect me to agree with what he said about the Conservative party's views on social justice. He could have shown greater recognition of what my right hon. Friend the Chief Secretary said in his welcome remarks restating our full commitment to the National Health Service.
I shall say something about training later, but I shall start by saying that the Budget was needed to maintain expansion and growth, which is the main reason for the welcome fall in unemployment in the past 12 months. We need to ensure that unemployment continues to fall and that the training provided by the Government is always relevant to the new jobs that are rapidly being created.
I particularly welcome what my right hon. Friend the Chancellor said about exchange rate stability. He referred to the dangers to this country and the whole world economy if there werefurther wild gyrations in the dollar exchange rate".He also recommitted himself and the Government to working forgreater exchange rate stability … in the process of international co-operation".—[Official Report, 15 March 1988; Vol. 129, c. 997.]Last night, in his television broadcast, my right hon. Friend gave some very interesting figures and graphs showing how this country has performed. He was right to reaffirm that at present we are top of the European growth league. He also did not shrink from other graphs which showed us at the bottom of those leagues in the 1960s and 1970s. Let us hope that we shall stay top of the growth league for the rest of the 1980s. We also need to continue being top of the growth league in the 1990s to even the score to 2–2. We have been 2–1 down at present. Indeed, we are now so closely tied to Europe with a growing trade, particularly in semi-manufactured goods which are then completely manufactured here and sometimes manufactured in Europe.
As my right hon. Friend the Chancellor said, it is absolutely vital that exchange rate stability is maintained. In addition, multinationals have plants dotted around Europe, all of which are interdependent. There is a need for more overseas and multinational investment in Britain, 1151 especially in research and development. That is another reason why I was so pleased by what my right hon. Friend said about exchange rate stability. It is important that industry advances and brings about more import substitution through an expansion of its manufacturing base here.
I wish to comment on specific points made by my right hon. Friend in what was, basically, a statement about taxation rather than about Government expenditure, on which there is as usual a statement in the autumn. My right hon. Friend said that he was disappointed that there had not been a greater swing towards lead-free petrol.
The newspapers are today carrying a number of advertisements by the oil companies that tell the public what to do. The public would do better to pay attention to the car manufacturers rather than the oil companies, because the immediate use of lead-free petrol could be damaging to certain car engines.
My right hon. Friend appeared to be anxious to do more in that direction, and certainly there are opportunities to encourage more people to use lead-free petrol. For example, new cars exclusively designed for lead-free petrol could attract a lower rate of vehicle excise duty. I understand that the 10 per cent. car tax must be abolished by 1992 in line with the freer European market. There is a case now for a lower car tax on small and medium cars that use lead-free petrol.
However, an even more important initiative is contained in a paper published by my right hon. and noble Friend Lord Young on the role of the Department of Trade and Industry and the changed system of research and development grants. Under the new scheme, support for innovation will be given only if a company has a project that offers exceptional national benefits. It it qualifies, it will be considered for a research and development grant.
I hope that what will flow from this Budget and from the White Paper on support for research and development is that, once again, this country will become a more popular centre for the design, research and development of car and lorry engines. That will provide not only the engines for the next decade, which are bound to change because of the move to lead-free petrol and the introduction of new technology, but greater job opportunities as well.
Although oil is easy to be had at present, we should never take a casual attitude towards fuel consumption. Oil is a finite product and we should encourage people to drive more fuel-efficient cars and to use lead-free petrol. My right hon. Friend has certain weapons in his hands, but I especially hope that the DTI initiative will be developed in the vehicle industry. It is particularly appropriate for research and development if the product will be of exceptional national benefit.
My right hon. Friend included the treatment of company cars in his statement. We should remember the history of their growth. Many of them were provided as a consequence of the statutory incomes policy in the 1970s—they were a means by which companies could merrily get around the 3 or 4 per cent. pay limit. It is important not to get matters out of perspective. The popular view of a company car is that the managing director and senior managers drive from their homes to work, park their cars in the company car park and then drive them home at 1152 night. That is certainly one aspect of company car use, but another is the use by sales and marketing personnel, for whom the car is a tool of the trade.
Current tax law provides that if a car is driven for more than 18,000 miles a year on company business, the tax liability is halved. My right hon. Friend has introduced a new package for company cars, and he should cut the threshold from 18,000 to 12,000 miles a year so that sales and marketing managers—who do not carry out the same tasks as representatives, but whose cars are a tool of the trade—are not penalised or discriminated against. I hope that he will consider making that change during the Finance Bill Committee, as it would complete his new package.
I welcome my right hon. Friend's remarks about increasing share ownership. He said that he would change the provisions of section 79 of the Finance Act 1972, which wouldmake it easier for companies to provide shares to their employees outside the approved schemes … This will be of particular benefit to subsidiary companies and their employees."—[Official Report, 15 March 1988; Vol. 129, c. 1006.]That should lead to a further growth in self-employment because a number of those who have such shares may wish to cut their ties with the company and set up in self-employment.
We recently had an important debate on the role of the self-employed, and the key to increasing self-employment is the definition by the Inland Revenue and the Department of Health and Social Security of "self-employed". When replying to the debate my hon. Friend the Minister for Employment said:Since April last year, each tax and social security office has had one official responsible for decisions on employment status, which can save people much time in explaining their circumstances … It is perhaps still more important that a ruling by one Department will be accepted by the other, which ensures consistency and saves time. We are continuing to monitor the position to ensure that the measures alleviate the problem sufficiently." —[Official Report, 15 February 1988; Vol. 127, c. 741.]A consequence of this Budget should be a growth in self-employment, but I wonder about the attitude of the Inland Revenue and the DHSS. In many areas they are suspicious of the self-employed, but if they hinder them they are acting contrary to Government economic policy. I should like an appeals system for those who cannot obtain a redefinition of their status to self-employed. There should at least be more co-operation between the Inland Revenue and the DHSS on this important matter. I am convinced that with early retirement and with rationalisation in certain companies, not only individuals but groups will wish to carry out contracts for just one company, but be classed as self-employed. We should not stand in their way, because one reason for the fall in unemployment has been the rapid and welcome increase in self-employment.
In my right hon. Friend's explanation of the reduction in the public sector borrowing requirement, he said that one reason for the undershoot was that less had been spent on benefits for the unemployed as a consequence of the fall in unemployment. I hope that, in 12 months' time, we hear that more has been spent on training for the unemployed. We need an even more ambitious scheme of training, especially for the older unemployed. As the number of young people coming on to the labour market begins to drop, there will be an increasing problem of the older 1153 unemployed who desperately need new skills and opportunities to return to the labour market. That should be the shift in emphasis during the next 12 months, and our economy is more than strong enough to achieve that.
The Budget is generous to high-paid managers, and I welcome that. The tax cuts are an incentive to those wishing to move up the managerial scale. That puts an even greater onus on managers to get employee-management relations right. The Government have more than done their bit in changing trade union legislation to get the balance right between management and unions.
Management has had a considerable tax advantage in the Budget, and that is welcome and correct. Yesterday, my right hon. Friend the Chancellor referred to the need to keep costs down and keep pay settlements reasonable. Management must get greater employee commitment to the welfare of their company and get a much greater feeling among, employees that they, too, are part of the company and are working for greater prosperity. There is now an uneasy calm in industrial relations. It is up to management to transform that into a sustained and durable peace.
§ Mr. Giles Radice (Durham, North)
I shall not follow the remarks of the hon. Member for Bedfordshire, South-West (Mr. Madel), who is one of the most civilised Conservative Members. I shall consider the Chancellor's Budget from three aspects—first, what it tells us about the Government's economic policies; secondly, what it tells us about the long-term prospects for the British economy; and, thirdly, what it tells us about the Government's social and political strategy.
On economic policy, we should note first that monetary policy—at least, monetary policy on the 1980 medium-term financial statement — has been effectively abandoned. Aficionados of monetary aggregates—I am sure that there are many in the House—will be aware that the Government have successively announced different definitions—M3 in 1980, M1 in 1982, a re-defined M3 in 1985 and M0, also in 1985. All have proved entirely inadequate.
§ Mr. Radice
I shall come to that. In this year's MTFS a target is still set for MO, which is an extremely narrow measure. In fact, it is cash. Most people would consider that far too narrow a gauge of what is happening in the economy. Significantly, there is no target for broad money, which I think is what my hon. Friend the Member for Motherwell, South (Dr. Bray) calls M4. The MTFS does not say that the connection between the growth in monetary aggregates and inflation has proved extremely hard to discern. In fact, it has proved so hard to discern that in April 1986 the Chancellor told the Lombard Association that no economic relationship was perfect. One can say that again.
Back in 1980, the Chancellor stressed the key role of markets in setting the level of interest rates, yet in his Budget speech he emphasised their importance as a key element in the Government's counter-inflation strategy. As he told the Treasury and Civil Service Select Committee last autumn: "When I think they ought to go up, they go up and when I think they should come down, they come down." That was the Chancellor in his grandest manner on interest rates.
1154 One point about interest rates on which the Chancellor is reticent is their relationship to and connection with the public sector borrowing requirement. I wonder whether hon. Members remember that the Chancellor used to say that reducing the PSBR would lead to a fall in interest rates, yet now, with a negative PSBR—I think that it is now called the PSDR, or public sector deficit requirement, in the Chancellor's jargon—interest rates here remain higher in real terms than in most other industrial countries. There does not seem to be a strong connection there.
That brings me to the matter of greatest confusion—the Government's policy on exchange rates. The Prime Minister told the House that exchange rate levels are determined by market forces. The Chancellor, however, castigates the markets for their "wild gyrations". He extols the merits of a stable currency and preaches the virtue of managed floating. Yesterday he reaffirmed the importance of greater exchange rate stability. As it happens, I think that he is dead right, but the question is whether a stable and competitive exchange rate is compatible with an interest rate which attracts funds from abroad because it is higher than in most other countries. Clearly, the Chancellor must address himself to that question.
The other question is political. Is the Chancellor's view compatible with the Prime Minister's? Does the Prime Minister still believe that sterling should be allowed to be pushed even higher, whatever its impact on our exporters? At the heart of this confusion is the dilemma facing the Government: should it be the prime task of interest and exchange rates to act as counter-inflationary measures or, bearing in mind the disastrous experience of 1980–81, must regard be paid also to the impact of high exchange rates and an overvalued currency on British industry? Understandably, as we have seen from the CBI's comments, British industry is eagerly awaiting the answer to that question.
As the right hon. Member for Chesham and Amersham (Sir I Gilmore) said in an elegant and eloquent speech, the Chancellor frequently tells us—he did so yesterday—that the long-term prospects for the British economy have been transformed. It is certainly true that since 1982, after the major recession of 1980–81—about which, as the right hon. Member for Chesham and Amersham pointed out, we do not hear much these days—our growth rate improved. There has also been a significant improvement in productivity.
Even so, there have been a number of disquieting signs that recovery, especially on the scale induced by the Chancellor's pre-election boom, may be difficult to sustain. For one thing, skill shortages are already appearing in the south of England. As the Oxford review of economic policy has shown, British training and education effort still lags significantly behind that of most of our competitors.
Another problem is that the gap in research and development and high technology still seems to be widening rather than narrowing. That must be of concern. Last, but not least, there is the growing and disturbing balance of payments deficit—£1.5 billion this year and £4 billion next year. Of course, the Chancellor shrugs off the £4 billion deficit which is forecast for next year as "temporary" and as something about which we should not concern ourselves too much. If the right hon. Gentleman had been in opposition and there had been a Labour Chancellor, he would not have been saying that.
1155 There is no evidence from what the Chancellor has said, or from the Red Book, the Autumn Statement or any of the forecasts that the British balance of payments of deficit is likely to be "temporary". There is no evidence from what the Chancellor has said that he has any plans to do anything about the deficit, but, as he has often reminded us and the Americans, the American example is a horrid warning of what happens when a balance of payments deficit is allowed to continue unchecked year after year. The Chancellor has made much of his fiscal caution in planning for a negative PSBR—we can argue about the merits—but the value of his project is less impressive when one listens to his remarks.
The tax cuts proposed by the Chancellor, which amount to more than £6 billion in a full financial year, according to table 1.1 of the Red Book, are inevitably biased towards consumption. The truth is that this weighting towards consumption, when combined with already buoyant high street spending as the latest figures show clearly, and with extensive private borrowing—we know about the fall in the savings ratio—is bound to aggravate Britain's balance of payments difficulties. It will aggravate them quite simply because it will push up imports faster than we can push ahead exports. Therefore, on current policies, we shall be faced with a growing balance of payments deficit. Notwithstanding the Chancellor's trendy talk about the merits of supply-side measures, his Budget will almost certainly weaken rather than strengthen the British economy.
My right hon. and learned Friend the Member for Monklands, East (Mr. Smith) spoke earlier about the political and social aspects of the Budget. The Chancellor is primarily an economic Minister, but his Budget is bound to reflect the Government's social and political priorities. This Budget has certainly done that. The Chancellor had £11 billion more in revenue than was forecast last year. He had £11 billion to distribute. That gave him a magnificent opportunity—perhaps the greatest opportunity since the war—to heal wounds and to bring the nation together. He had the opportunity to unite north and south, the inner cities and the suburbs, the better-off and the less well-off.
However, as my right hon. and learned Friend has shown, the Chancellor has completely missed that opportunity. Instead, he has rewarded the super-rich by reducing the top rate of tax from 60p to 40p. Furthermore, he has done it without restricting the main special allowances or taking into account the impact of increases in allowances on marginal tax rates.
The Chancellor cites the examples of Australia, New Zealand and the United States. He might have pointed out that reductions in the top rates in the United States and Australasia were at least made less objectionable by attacks on the major tax breaks, which this Government have not made, by reforms in the allowance and credit systems and by help to those on lower incomes. This Government did precisely the opposite in the weeks before the Budget.
What is so morally objectionable about the Chancellor's tax changes is that at a time when social benefits are being cut and those on average earnings are getting £5 a week extra, those earning £60,000 a year will receive at least £128 a week extra.
§ Mr. Radice
I shall not give way, because I am about to finish.
At the same time, there is nothing in the Budget for the 2.5 million unemployed or for those who use the health and education services. Clearly, the Chancellor thinks that politically he can get away with ignoring the needs of the poor, of the National Health Service and of the development areas. He also thinks—this is clearly the Government's political strategy—that he can buy the acquiescence of more affluent employees by tax cuts. The Government hope that their tax cuts will encourage those voters to forget about the needs of the less well-off and about the extent to which the Government have rewarded the super-rich.
I believe that in this Budget the Chancellor has gone too far, even by Thatcherite standards. As the details of the Budget are fully digested in the coming weeks, its political cynicism will become increasingly clear. Economically risky and morally repugnant, the Budget does not deserve the support of the House, let alone the British people.
§ Mr. David Howell (Guildford)
There is no doubt that my right hon. Friend the Chief Secretary was entirely right in his remarks. This Budget obviously represents a major turning point in the post-war pattern of taxation in Britain. For the first time since the war, we shall be a country of low taxes and high enterprise. For the past 40 years we have been universally regarded—sometimes caricatured—as a nation inevitably associated with high taxes, low enterprise and shoddy performance. That has changed, and this Budget represents a landmark, a milestone or whatever my right hon. Friend the Chief Secretary likes to call it: we are making a clean break with that past and the national humiliations and shame that went with it.
I declare an interest, because for all my years in this House I have hoped for and campaigned for a really simple—a beautifully simple—tax system, which is now emerging with the two rates of 40p and 25p. Better still, from my point of view and for those who share my views, we have irrefutable evidence that the supply side system is now working—not that it will work in the future but that it is already working.
As the right hon. and learned Member for Monklands, East (Mr. Smith) said, we have already witnessed the results of previous tax-cutting policies. As the right hon. and learned Gentleman said, the Exchequer is "awash" with revenue and it is precisely the areas of activity in which tax cuts have been largest — those affected by corporation tax and the higher rates of income tax—that have generated the largest increases in revenue for the public finances.
If I have a disagreement with my right hon. Friends the Chancellor and the Chief Secretary it is a disagreement about one of the figures in their Red Book. According to the estimates showing the supposed yields from taxes next year and the year after, the abolition of tax rates higher than the 40p rate will cost £965 million in 1988–89 from the index base and more than £2 billion the following year. I would take a bet that this time next year we shall find that those figures are mythology and that higher revenues have been generated from lower tax rates. It will be an interesting laboratory case.
1157 It can he argued that high-rate tax cuts so far have been one of a number of contributing factors; I have heard that argued on both sides of the House. Now, however, with the move towards lower top rates and a dramatically simpler system, we have a clear laboratory case in front of us. My bet is that the net effect will be a dramatic increase, rather than a reduction, in revenue. In other words, this so-called handout for the rich will probably cost nothing and it is quite possible that it will generate substantial extra revenues for the Exchequer.
I listened to the Labour party, as represented by the right hon. and learned Member for Monklands, East, paint itself further and further into its dismal and dangerous corner as a high-tax party and push itself further and further into the political wilderness—where it could stay for 40 years if it continues to take this high-tax line.
I fell to wondering somewhat whimsically what I would advise the Labour party to do to get itself into a more promising position if I was its consultant. The first thing that I would advise Opposition Members to do is to beat a rapid retreat from their attack on my right hon. Friend's tax reforms. There is no doubt that if they were pursuing a policy of lower taxation all round—particularly in low income groups but also in high income groups—they would simultaneously argue for higher revenues. The Labour party wants higher revenues for the various purposes with which I shall deal in a moment.
§ Ms. Armstrong
One of the main complaints made by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) concerned the redistributive nature of the tax changes. Our main complaint is that the Government are redistributing from the poorest and the most vulnerable in our society to the richest.
§ Mr. Howell
The hon. Lady has anticipated my remarks. I was going on to say, in my self-appointed consultancy role, that if the Labour party would get away from arguing about tax rates—not to put too fine a point on it, Opposition Members have made pretty good asses of themselves in that respect — they could concentrate on the more genuine intellectual question of how the enormous proceeds that have already flowed from previous tax-cutting policies and the success of the supply side theory should now be used. In that, there is an opportunity for intelligent debate.
However, the Labour party has done its very best to lower the intellectual level of the debate by concentrating on the absurd theory that high taxes are a good thing and that low taxes are a bad thing. The opposite is true, from their point of view as well as ours.
§ Mr. Holland
Would the hon. Gentleman advise the Labour party to follow the example of the United States? The Laffer effect did not work there, except that increased revenues were put into increased stock market investment, boosting stock market prices and contributing to the crash on 19 October. That happened because there was no mechanism for translating savings into investment through an industrial policy in the United States, and there is none here either because of this Government.
§ Mr. Howell
I would advise the Labour party not to follow the budgetary policy of the United States, although it is presently inclined to do so, and pile up a budget deficit of horrifying proportions—although, thank goodness, 1158 that is now coming down. I would argue that the Labour party would have a good debating ground and a perfectly genuine one—I do not agree with it—if it got away from its obsession with high taxes. It places the Labour party in an impossible position. My right hon. Friend the Chief Secretary had the right hon. and learned Member for Monklands, East nailed to the floor on the question whether he would restore taxes on the lower incomes of student nurses and so on.
It so happens that my right hon. Friend the Chancellor has made a triple judgment about how he intends to make use of the enormous growth of revenue that has accrued as a result of past tax cuts. He is going for three things. First, he is going for further tax cuts. That is correct because it will refuel the engine of revenue generation and produce even more revenue in the future. Secondly, he is financing huge increases in spending. We tend to get those increases out of focus now because they were announced in the autumn. However, the increases are vast and many people, in all parties, may question the priorities there. Nevertheless, my right hon. Friend is using part of the revenue for huge increases in spending.
Thirdly, my right hon. Friend is going for something quite remarkable, which, in the language of the past 10 years, would be amazing. He is not going for a deficit at all, but a £3 billion surplus in the public budget, with national debt being retarded by £3 billion. He has chosen that as a decision of policy and as a way of using some of the revenues. By past standards that is staggering and, of course, it is highly restrictive.
I heard and enjoyed the speech of my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour), who told us about the expansionary stance that he believed he detected in current economic policy. I can tell him that there is nothing expansionary about running a £3 billion public sector surplus combined with rather high interest rates. In fact, some people would argue that interest rates are too high as well. Therefore, the brakes are on. The question is whether those brakes are slowing down the economy.
§ Mr. Howell
I have given way so often that I shall exceed my time and be penalised by the Chair. Much as I admire my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen), I shall deal with him in the Tea Room afterwards.
The question is simply why, in addition to his excellent and epochal tax reforms and his sanctions on large increases in social spending, my right hon. Friend has chosen to go for the £3 billion surplus. He is obviously worried about overheating, but I hope that he does not believe that a budget surplus of £3 billion will automatically be a great brake on the considerable growth of consumer borrowing and credit.
The truth is that the whole business of deficits or surpluses in the budget is an extremely inexact science. Figures are paraded with spurious precision. As my right hon. Friend the Member for Chesham and Amersham pointed out, the Treasury missed the target last year by about £12 billion, and one could argue that the figure was even greater. Therefore, this is an imprecise area. We are subject to vast global influences over which we have not the slightest control. Therefore, on those grounds there is 1159 not much reason to go for a £3 billion or £2 billion surplus or even a perfectly round zero, which would also have been a restrictive stance.
The real worry of my right hon. Friend the Chancellor is to be found in the charts in the Red Book. The chart on page 9 shows the enormous growth in private borrowing with a corresponding decline in public borrowing and the table on page 23 shows the worrying, indeed some would argue catastrophic, decline in private savings. There is a miserable private savings ratio.
We and the Americans, the two Anglo-Saxon nations, have had a miserable performance in this respect. The American performance looks as if it is now turning round. The aim of policy now must be to do that here so that we become a nation of higher personal savers. I also want to see much more interest by individuals in the use and investment of savings, rather than leaving it to institutions. However, as I have said, the aim must be to turn around that miserable personal savings ratio figure and to improve it by the appropriate tax reforms, which might even have been possible this year.
If my right hon. Friend the Chancellor was worried that a lower budget surplus would have meant more money in the hands of people in the street who would have swarmed out and bought videos and imported goods, that is understandable. However, it may be that it would have been possible—it would certainly be possible next year — to have the sort of tax reliefs that transfer Government saved money not into individual spent money but into money saved by taxpayers. A graph on page 24 in the Red Book shows that the financial assets held by individuals are growing at a mighty rate. There is an underlying desire in Britain, in spite of all the difficulties people face, to increase personal borrowing and to hold moneys that they may get back in their wage packet instead of it being taken by the Government.
Therefore, I should like to see—I should like to have seen it this year—a bigger boost to individual saving and investment than anything we have had so far. Personal equity plans have not been all that marvellous. Why not take the bold step and go for tax-free investment available to all on the first £2,000 along the lines of the loi monory in France? That would take the cause of wider ownership in this country on to its next stage.
That is what I would have liked to see on top of what has already been done. In a sense, that is a greedy demand because I admire greatly what has been done. However, there would have been room for a further step without the danger of sucking in imports, increasing consumer borrowing or bringing about any of the other problems that exercise the Bank of England and other authorities now. Those are problems and they probably need to be dealt with by completely different means. It is whimsical to imagine that they could be dealt with by raising base rates by half a point. That will not help at all. That would simply push the pound up and cause us other difficulties.
I should like to deal with another not totally unrelated issue. It is a much more specific matter raised by the Budget and by the present policies of income taxation and its administration. We know, because surveys now tell us, that the labour market today is not what it was. A third of it is involved in what is called flexible employment—that is, self-employment, part-time employment and other types of employment, not necessarily in the black economy 1160 but in jobs that are not the traditional employee status jobs. That is a wholly welcome development and it is one that Government policy, Government rhetoric and Government intentions constantly back. They want to see more self-employment, more independent employment and a much more flexible labour force. The Government's intentions are aimed at that. Indeed, some of the tax reforms in the Budget are designed to reinforce that.
I have to tell my right hon. and hon. Friends that the news of their intentions has not reached the Inland Revenue. The Inland Revenue administration is still being conducted on the principle that all sorts of sub-contracting and flexible employment should, if possible, be opposed and rolled back into employee status. That is its dedicated crusade and it goes wholly against what I understand to be the policies of my right hon. and hon. Friends on the Front Bench.
They need to look again at the definitions of self-employment being used by the Inland Revenue and at some of the more absurd cases where the concept of full-time employment is being applied by the Revenue to things which common sense tells us could not possibly justify that sort of categorisation. Of course, there are the usual bureaucratic answers, such as that individual taxpayers can challenge, appeal and so on. Nevertheless, out there a war is going on, with the Inland Revenue pursuing a war policy against a flexible economy. As I have said, that is not in line with Ministers' policies.
I have to say to my right hon. and hon. Friends that I think that they are being taken for a ride over this issue. If tax reforms for a more flexible labour force, more self-employment and more enterprise is the policy, it needs to be backed up more vigorously in the administration of that policy as well as in the laws we pass in this House.
That is one grumble, and I do not want it to detract from my admiration for the boldness of the Budget. What it shows after all these years is that the supply side works and that if one cuts income tax one achieves higher revenues, which allows further tax cuts and more enterprise.
At the same time, it allows one also to finance good public services. If Opposition Members are trying to make the point that, in addition to what is being done, finance should be diverted to certain public services, that is a respectable point and one that can be debated on its merits. That would be better than moaning about tax rates, on which the Labour party is simply shooting itself in both feet.
My right hon. Friend has the revenue and will have more revenue still next year, despite the tax cuts. Let him therefore show that the aims of supply-side economics can be fulfilled and that we can have a low tax society, a low or zero balanced budget—as the Chancellor has said is his aim—and well-financed, high quality public services. We as good Tories should show how that can be done.
§ Mr. Nigel Griffiths (Edinburgh, South)
This Budget is a body blow for the low-paid, pensioners, the poor and the unemployed. Even as the Chancellor of the Exchequer rose to deliver his speech yesterday, he knew that 7 million British taxpayers are paid below the income decency threshold of the Council of Europe, and when he sat down, he knew that his Budget made absolutely no difference to them. Nor did the Chancellor help in any way the 3 million 1161 men and women in this country whose wages have dropped so much under this Government that they pay little or no tax on their low incomes.
Ten Tory budgets have seen the burden of taxation increase from 34 per cent. of national income to 38 per cent. The extension of value added tax yesterday to a new range of consumables, combined with an increase in various duties, ensures that the burden of taxation continues to run at a level 4 per cent. above that under the previous Labour Government.
One of the many mistakes made by the Chief Secretary to the Treasury this afternoon was to raise the issue of housing benefit. The real hammer blows of this Budget fall on those in low income groups who receive rent and rate rebates in the form of housing benefit. In the five years since it replaced the rent rebate system, the Chancellor has clawed back £1 billion from pensioners and the poor and has removed housing benefit entitlement from more than 2,400,000 people— not by ensuring their incomes rise to a decent level but by pulling from under them the financial rug to which many of them contributed during their working lives and from which they were entitled to receive benefit in their retirement.
The Chancellor would have done well yesterday if he had provided for reinstating the £640 million deducted as part of the latest social security cuts. Some 700,000 pensioners have been hammered by that change.
After the 1982 Budget, a low-paid worker claiming both rent and rate rebates lost 60p in the pound in earnings. As a result of this year's Budget, he will lose more than 90p in the pound. That provides no incentive for the low-paid to work harder.
The Chancellor is providing incentives for a very different set of people. In doing so he has laid bare the real economic motives of the Government. The picture of the Chancellor stripped to the waist on the front page of one newspaper today carried the misleading caption "The Tax Exterminator", when he is really the Rambo of the rich. As a result of the tax threshold being dropped to 40 per cent., the wealthiest 600,000 taxpayers have gained £2 billion at a stroke. And while the wage earner receiving £120 a week will benefit by 10p, those earning £60,000 a year will gain £136 a week. That cannot be fair. Is it fair that the poorest 500,000 families caught in the poverty trap now face an effective rate of tax of 60p in the pound? No, it is not.
One newspaper today cited the case of a family with three children and a mortgage. The husband said that the Budget had been a great help to their stretched finances. He is paid £70,000 a year and has a home worth £250,000. He has an XJ6 as a company car and sends his two children to private school. Yesterday the Chancellor put an extra £500 a month in that man's pocket to help his stretched finances, which include a £164,000 mortgage.
Even the Daily Mail comments that the Budget leaves pensioners out in the cold, and when the Chancellor reads that newspaper's interview with a senior nurse he should hang his head in shame. She is not one of the City slickers whom the Chancellor prizes so highly, or one of the 500,000 people who are paid the most although they do not necessarily earn it. Her job is less important to the Chancellor—she only saves lives. She earns every penny of the £7,800 salary she receives, yet she will gain in direct taxation by less than £150 a year under this Budget.
1162 That nurse has a message for the Chancellor and the Government that they can read in the newspaper today. She would sacrifice all that modest gain if more could be spent on the National Health, Service.
Some people enjoy more than a modest increase. The Daily Express lists them today. The merchant banker Christopher Heath will receive £500,000 from the Chancellor on his £2.5 million pay packet. Ralph Halpern will net an additional £250,000. Maurice Saatchi has helped the Chancellor and now the Chancellor is helping him. He will gain an extra £93,000 a year. The Chancellor has even helped himself to a more modest £4,000.
§ Mr. David Shaw (Dover)
The hon. Member has mentioned some very successful business men and the incomes they receive. Has he examined the accounts of the businesses they run to see the massive increase in corporation tax on the wealth they have created for this country, and at the number of jobs created by those businesses?
§ Mr. Griffiths
The hon. Member entirely misses my point, but it is one that is not lost on the country. This Government have looked to those people who have done very well over the past seven years and this year have rewarded them more then ever. The problem is that most people in this country have suffered in order that the others may grow rich. That is the point the hon. Member misses, and he would do well to heed it.
The problems created by the Chancellor are summed up in a statement made in the Daily Express today, which echoes the sentiments of the Chief Secretary to the Treasury. It states:Our managers are so badly paid that they need every penny they can get from the Chancellor.That gives the game away. The real beneficiaries of this Budget are not the workers but the directors, not the nurses but the nouveau riche, not the ward sisters but the spivs. We reject the rationale of this Budget, and so does the country.
§ Mr. Edward Leigh (Horncastle)
Apart from the fairly dreary recital by the hon. Member for Edinburgh, South (Mr. Griffiths) of the tabloid press, he has nothing to say about what a Labour Government would do with tax affairs. This morning, his leader was asked repeatedly to state what his party would do for nurses' tax, and he refused to answer.
This is an honest Budget. For 40 years, successive Governments have cheated the people. They have covered their tracks by subsidising the voters of today and stealing from the children of tomorrow. The replacement of a doctrine of national public borrowing by a national reduction of indebtedness will be seen as an historic return to decency. Incidentally, it is a courageous commitment, given the squalls in international waters. It is an example to the world against deceit in the management of public finance. It marks a vital staging post in the conquest of inflation. It is public recognition that, as inflation is theft, state morality is quite as important as private morality. It recognises that one cannnot help the poor by robbing their children's children.
How that stands in contrast to the Labour way in their own crumbling fiefdoms, as they mortgage their town halls to fund their lack of financial prudence. How ironic it is that the party which accuses the Government of being the 1163 most interventionist this century is reduced to the spluttering impotence of terrace chanting when faced with the massive withdrawal of government that is represented by cuts in taxation in this Budget.
This is a people's Budget. If the hon. Member for Berwick-upon-Tweed (Mr. Beith) were still here or any member of the Social and Liberal Democratic party were present, I would tell them that this is a final rejection of the absurd doctrine that in some undefined and wholly unsubstantiated way the poor can be raised by punitively putting down the rich. Such a myth flies in the face of experience, which shows that cutting taxes for the better-off is repaid through higher productivity, more enterprise and less evasion.
Only those, like some Opposition Members, afflicted with chronic political myopia or feelings of futile jealousy deny what every progressive left of centre party in the world—
§ Mr. Leigh
No, I shall make a short speech. All those parties, including the New Zealand Labour party, accept that simplicity in tax bands literally reaps dividends.
This is a Budget for decency. It has cut through years of sophistry, prevarication and double dealing in the treatment of married women and it ends the dependence of married women on their husband's tax affairs. This is a Budget for investment. It will unlock assets frozen in small farms and dormant businesses by the punitive and inexcusable refusal hitherto to recognise that CGT has been an inflation tax because it did not recognise inflation before 1981.
This is a homes Budget which will begin a return to sanity by ending years of persecution of the privately rented sector that has hit the potentially mobile, the young and single so hard for so long. Above all, this is a Budget for a new consensus—a last goodbye to the low-growth, high-tax, low-productivity economy of the 1970s that at no time and in no place anywhere in the world has met people's expectations in terms of health and education provision. How well that is illustrated by the fact that in a year when we have cut taxes so dramatically, we have given an extra £1 billion to the NHS.
If yesterday had been Labour Budget day, it most certainly would not have been national health day; it would have been national tax increase day for everyone and hospital building cut day, because that is the legacy of the Labour Government. That would be our fate if we were ever under Labour tutelage again.
This will be remembered as a Budget for new ideas which finally and irrevocably committed the Government and the Conservative party to the progressive dismantling of shackles on the enterprise culture. This is the party of new ideas and a party which has the courage to go into new areas. Above all, we can build on this Budget and continue the work of aligning and simplifying the tax and benefit structures so that the poverty and unemployment traps which continue to be the most deadening restraint on self-reliance and self-respect are finally whittled away.
I agree that it cannot be right that 500,000 people effectively pay a marginal tax rate in excess of 50 per cent. While I do not underestimate the difficulties in dealing with the poverty and unemployment traps, to which my right hon. Friend the Chief Secretary referred, we are 1164 rapidly approaching the day when it will be possible to replace tax allowances and progressive tax bands with a universal, non-means-tested, cash payment paid for by a universal single tax band, created by fusing national insurance contributions and basic rate tax.
That in turn could pay for all social security and health care—broadly £4 of every £10 of Government spending. In effect, it would become a national insurance premium which could be made mobile, if asked for, into private education and health care. Such a reform would dramatically reduce the poverty trap. At the same time, mortgage interest tax relief could be converted into a national investment benefit, usable not just for home purchase but for the purchase of shares.
This is a Budget debate and I shall resist the temptation to go further into these radical and interesting ideas. I shall wait hopefully for a reply from the Prime Minister to an 18-page letter of ideas which I sent her. I am sure that it is sitting by her bedside all the time.
This Budget consciously paves the way, not just for a low tax economy, but for a tax regime that positively encourages ordinary people to invest in private health and education provision and in shares, in the same way that we have traditionally encouraged them to invest in pensions and homes. In these terms words like historic and radical are not enough —"progressive" and "exciting" equally sum up a Budget on which I warmly commend the Chancellor.
§ Ms. Marjorie Mowlam (Redcar)
The hon. Member for Gainsborough and Horncastle (Mr. Leigh) said that the Budget ends the dependence of married women on their husbands. Yesterday we heard similar statements from the Chancellor of the Exchequer and today similar statements came from the Chief Secretary to the Treasury about how this is a breakthrough for women. The Daily Mail carries the headline, "Lawson the Ladies' Man". We hear that this is a Budget for women.
If this was a breakthrough for women and this was the first step along the road to equal pay for work of equal value, I would support the Chancellor on this section of the Budget. But the section that relates to women shows clearly that this will benefit only a small group of women. If a woman is a high earner or married to a rich husband, she will benefit. For the majority of women this Budget is a con, a sham and a fraud. Women will not be fooled by being told that it benefits them.
I shall support those statements by picking out three parts of the Budget to substantiate them. First, we are told that independent taxation is a change from the married man's allowance to the married couple's allowance. Clearly there is a marginal advantage for women which I welcome, in that we shall not have to go through the humiliating experience when we complain about our tax of having a letter from the tax office sent to our husbands. That is an improvement and a change in the rights of women and their privacy, and I acknowledge it. But that is the only advantage. The majority of the section does not change the position of women in real terms.
There are three reasons for that. First, the married couple's allowance will be paid to husbands only. If the Chancellor is serious about benefiting women, why is it not paid to wives? That would be a clear statement of his commitment to women. Secondly, the married couple's taxes will still not be independent. A husband will be able 1165 to transfer any unused portion of his married couple's allowance to his wife. To do so will still involve the paperwork and exchange of particulars of income that occurs now. So although we shall have a marginal change in the rights of women, it will be small.
Thirdly, few people will benefit from the transferability that is included in this section. It will benefit those with earned income only: a couple where the man is paid less than the woman and less than £4,095. The main couples to benefit from a transfer will be those where the husband does not work and has some investment income—in other words, mainly those over retirement age—and where the wife works with sufficient income to take advantage of it. That applies to few people. Therefore, that section looks as though it benefits women but in practice it does not. For most married couples, the section on independent taxation will mean no change.
The second section which supports my argument relates to mortgage interest tax relief being set at £30,000 for one property. I accept that in any change there are gainers and losers, but ironically in this section the losers will again primarily be women. In London and the south where housing prices are so expensive and women are primarily in low-paid jobs, the only way to get into the housing market is to buy a property together. This section will militate against women and others on low pay trying to benefit in that way.
The third section of the Budget that I wish to use to support my argument is that relating to changes in maintenance provision. That section simplifies the present regulations. Like many pressure groups concerned with such matters—for example, the National Council for One Parent Families—I welcome that simplification, but there is a rather insidious aspect of that part of the Budget which will affect the chances of many women and single parents of obtaining maintenance. At present, tax relief can be obtained if an unmarried man wants to pay maintenance to his partner, but, under this part of the Budget, that will no longer be possible, so women who are single parents and the children of unmarried couples, who already suffer a fair amount of discrimination, will suffer again. That section of the Budget is particularly discriminatory to one section of the community. Similarly, the setting of tax relief at £1,490 might affect the payment of maintenance which remains at £1,490 or below, so there will be no incentive to go above that level.
I use those three arguments to suggest that the Budget is not primarily positive for the majority of women. If the Chancellor were serious about increasing supply side deficiency and women's chances of returning to the job market, he could have done a number of things.
First, the Chancellor could have provided some tax incentive for workplace nurseries. I questioned the Chief Secretary about this earlier, but, as in the case of most of the other questions that he has been asked this afternoon, he managed to avoid answering the question completely. If there is to be relief for car parking and perks are to be taxed, there should be some incentive because, more than anything else, the provision of workplace creches would provide women with a chance to return to the job market. That would make a substantial difference to women.
Secondly, the Chancellor had a chance to change child benefit. We have seen it cut by 30p in real terms. A couple of days ago, we went through the charade of discussing the Lords amendments to the Social Security Bill 1988, when the Government accepted that they might reconsider 1166 increasing child benefit in line with inflation. However, in concrete terms, the amendments meant nothing. That benefit was paid directly to women. If the Chancellor were serious, he could have increased it and thereby made a difference for women.
Thirdly, the benefit system provides 80 per cent. rebates for people on some form of benefit, but the poll tax will hit low-income families and part-time workers, again primarily women. They will suffer badly under the tight tapering of the benefit system and the introduction of the poll tax. Again, that is something that will change the reality of women's lives.
Fourthly, the Chancellor could have done something for pensioners, a large proportion of whom are women. Pensioners have suffered a great deal under the rate and rebate cuts in housing benefit. They will suffer as a result of the increase in the price of TV licences and electricity. If the Chancellor were serious about improving the position of women, he could have done something about all those things.
Finally, as a result of the change from family income supplement to family credit, free school milk and welfare milk will be stopped. Let me give two examples to support my argument. Under the Budget, a single woman on £100 a week will lose £4.98 per week overall. Her tax cut will be £1.44, but that is far less than the amount that she will lose in housing benefit as a result of the changes in April; that sum will be £6.42. Similarly, a single mother with two children under 11 will lose £11.69 per week overall. Her £1.23 tax cut will not make up for the loss in child benefit of 60p, free welfare food of £4.74 and housing benefit of £18.42. Therefore, even with the increase in family credit of over £10, she will still be a loser.
I believe that I have given sufficient examples of how the Chancellor, if he were serious about being the ladies' man, as the Daily Mail tells us, could have done something more concrete for women. For the majority of women, this is not a positive Budget. It is not a charter for women. It is not the end of women being treated as their husbands' property. It is cosmetic. It is window-dressing and the women of this country will not be fooled by it.
§ Mr. David Davis (Boothferry)
I listened yesterday to the Leader of the Opposition saying that government was about choices. I have listened today to the alternatives being put forward. I have rarely heard such a band of false options and non-existent choices as those being proposed today. Tax cuts are not an alternative to funding the Health Service, except in the dire circumstances of the 1970s when we were mortgaging tomorrow to pay for today.
The enterprise culture pays for the NHS and the welfare state. As my right hon. Friend the Chief Secretary has explained, the Chancellor has created a culture and society in which we have the incentive to be creative, the ability to be competitive and, therefore, the wherewithal to be compassionate. On that basis, I commend the Budget as a brilliant blend of the cautious and the radical—the cautious macroeconomic policy with a radical tax-reforming policy. I commend this Budget, and all previous Budgets of Conservative Chancellors that have made this Budget possible by the careful husbandry of the national resources, which, through a combination of a £3 billion surplus and tax reforms, has allowed us to build upon our success.
1167 The keystone of that success is the ability of the British economy to compete in the international market place with its international rivals for a constant, or even a growing, share of world markets. Without that keystone, our growth rate would not be possible, our tax receipts would be unavailable and our social objectives would be unachievable.
The competitive ability of an economy depends on two factors. The first is qualitative—the so-called supply-side effect and the enterprise economy. Yesterday the Chancellor talked about a financial virtuous cycle. That sector of the economy has been helped by tax cuts, small business aids, capital taxation aids and, in previous Budgets, corporation tax reform. Those supply-side effects are difficult to measure. My right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) said that they were not measurable. The best way of measuring supply-side effects is to consider the times when economists and econometricians get their forecasts wrong. We should consider those times when the Treasury underestimates the returns that we make.
We should consider, for example, the economy since 1985. During that time, we have had a high level of domestic demand growth. Normally, in those circumstances, we see increases in import penetration in the economy, but since 1985 we have seen static import penetration and export shares of world markets being higher than was predicted by price and other measures. So the supply side of the economy is working well. The Budget will accelerate that aspect.
On the other side, three quantitive factors have been supported by a responsible and stable economic policy. Those are productivity growth, low inflation and a stable exchange rate. I should like to consider how the Budget has affected each of those. My right hon. Friend the Member for Chesham and Amersham implicitly criticised the growth in consumer demand in the economy when he referred to the drop in the savings ratio. In large part, that drop is a function of a responsible policy. Since 1981, two thirds of that drop has come about because of a reduction in corporate pension payments. That is because the expected inflation has reduced dramatically, which has cut the requirement for those pension payments, and the returns on investments have grown dramatically. That too has cut the requirements of pension payments. Therefore, one aspect of that demand growth is a direct response to our stable policies.
I return to the question of productivity growth, which is a key part of the competitive ability of the economy. Indeed, in many ways it is the key to its competitive ability because it is a component part of an industrial virtuous cycle. Productivity growth gives us more competitive ability. With more competitive ability comes more growth, and more growth makes it easier to achieve productivity growth. The Red Book shows that our productivity grew by 7 per cent. last year. In that same period, West German productivity grew by 2.5 per cent. Therefore, we have a significant advantage, which must be protected.
That growth is another sign of supply-side success because our intrinsic productivity growth rate has increased from below 3 per cent. to above 4.5 per cent. Many academic economists around the country are living on a diet of humble pie as a result of having to reassess 1168 what they thought our economy was capable of. Our productivity growth is one of the principal reasons for that.
Another important aspect of our competitive ability is our inflation rate. Nobody can gainsay the Chancellor's success historically. I do not want to get into monetary technicalities on this matter, but I should like to consider our inflation as it affects our ability to compete. To do so, I shall divide inflation into two parts. I turn first to external inflation—inflation which is imported and has an effect upon our commodity and raw material prices. It is clearly demand-led or monetary-led, and is growing significantly at the moment. Commodity prices are increasing sharply, probably as a result of the buoyancy of world trade. I do not consider that aspect to be terribly important. Although it is important as a corrosive issue in the United Kingdom economy, it is not important as a competitive issue because it affects our competitors as much as ourselves.
The other part, which I consider more important, and which has implications for our economic strategy, is internal inflation. It is internal inflation in the sense that it affects the components of the value added to our manufactured goods and the services that we export—what one might think of as measured by the GDP deflator. It is influenced dramatically by earnings.
The Chancellor commented on earnings as climbing at about 8.25 per cent. That is not surprising because the British economy—the British private sector—has seen both large increases in its profitability, and a high level of profitability. I believe that 22 per cent. is the quoted return on capital today. Therefore, it is not surprising that we have a high earnings growth. Managers will not refuse their work force their earnings claims.
However, it is interesting to note that that 8.25 per cent. is largely made up of overtime, on top of a 5.5 per cent. wage settlement. That must be looked at in conjunction with the productivity growth to which I referred earlier. The effect of the two together is a small cost increase in manufactured goods, of between 0 per cent. and 2 per cent.
Our competitive ability is a function of our internal inflation and our productivity growth together. Productivity growth is itself dependent on growth. Therefore, one difficulty that we must consider in our exchange rate policy is that we do not administer such a shock to our economy that we lose growth and therefore lose productivity growth, because that sort of control could have the opposite effect to the one that we want.
Therefore, I was pleased to hear the Chancellor say that he has a clear view of exchange rates as part of his strategy. We should not see exchange rates as an exercise in silly precision. Most industrial companies hedge their forward position and their foreign sales. They are not concerned with a 7 pfennig move on a one-day basis. They are concerned principally with major changes that they cannot hedge, such as major changes that are more than one or two years forward. When a company such as ICI builds a factory, it has to make its plans on a multi-year basis. It cannot make those plans if it cannot forecast, with some degree of reliability, what the exchange rates will be. However, neither would I advocate a Canute-like, or rather a Canute-adviser's-like, defiance of economic tides.
As we have heard, market operations are useful for smoothing, which can have a useful effect on our interest rate policy because the smoothing of short-term volatilities reduces the risk to capital investors in the currency. 1169 Therefore, they will invest at a lower interest rate in a smoother currency than they would in a volatile currency. Therefore, short-term smoothing is an appropriate use for that measure. It is also appropriate for countries and central banks to intervene as medium-term speculators.
Outside the central banks, there does not exist a set of medium-term speculators in currency markets. It is all short-term speculation and, as such, the markets can become distorted. I give the example of the central banks' intervention in 1984 and 1985 in the dollar, when they held it down, which was quite profitable for them in the long run.
Nevertheless, one must understand and accept that a currency policy is ultimately an interest rate policy. It is important that we have flexibility to keep our interest rates in a range that allows our trade-weighted index to stay somewhere in the 70s. That may be a 3 deutschmark level, or near to it. Again, that is not terribly important to 1 or 2 per cent., but it is important in order of magnitude terms.
The significant issue is that that surplus or PSBR level means that the medium-term interest rates will tend slightly downwards. That is appropriate and helpful because at the moment Germany's interest rates will look up because the German economy is growing faster than expected. That, too, is rather fortuitous because it means that towards the end of this year we shall see a slightly better trade relationship than is facing us now.
That is important, because the acid test of this Budget is not 1988; it is 1989, when growth rates will have diverged more than they do now; when the currency protection of hedging is lost by most British business; and when most world trade will look to turn down, even on the Treasury model. That will he the acid test of whether this Budget is successful as an economic strategy. In my view, the Chancellor and his team have made a brilliant judgment and created real foundations for British economic growth.
§ Ms. Hilary Armstrong (Durham, North-West)
This Budget was the first that I have heard in the Chamber. For many new Members, the Budget is a major event and, of course, it is the major parliamentary event that most of our constituents are aware of. They were listening, they were concerned and were looking for the messages that the Chancellor was giving. The Budget is the one thing that everyone in the country knows will happen and it is the one time of the year when the Government can give clear signals, not just about fiscal policy, but about the sort of society that they see themselves creating and the sort of society at which they are aiming. Through the Budget the Government give clear messages about the behaviour that they expect of individual people. In those terms, yesterday was very interesting.
What messages were the Government giving about their sort of society? What sort of society are the Government interested in? Yesterday the Chancellor made it clear that he was making choices. He told us in no uncertain terms and more than once that it was not a question of "no money" but as he termed it, of a buoyant and successful economy. He was making choices about the way in which that economy was moved forward and would be used. We were told that the choices were based not on scarcity but on surpluses, as my right hon. Friend the 1170 Leader of the Opposition said. The Chancellor has reminded us on numerous occasions that the money does not belong to the Government—it is the people's.
How, then, did the Government choose to act on behalf of the people? We have heard today that this was supposed to be the people's Budget, in which case I detect a cynical view of what the people are like and of who would benefit from the Budget. It was restricted to a narrow band of our people.
More than anything else, I was enormously saddened by the narrow and restrictive view that the Government have of the British people. The Chief Secretary reiterated time and again today that the only thing that can motivate them is personal gain. When I have met nurses, they have not gone on at me about their pay and asked why the Government were not giving them more; they have expressed concern about patient care. They are not asking for more for themselves, but more to do a proper job to ensure that the patient care that they have been trained to deliver can be given. But the Government have told them again and again that motivation comes only from personal gain—greed, to use a cynical word.
I do not believe that the British people are like this. Of course they are interested in looking after their families and themselves, but they also care about their neighbours, their communities and the nature of the society in which they live. They want a Government who reflect that care. Despite all that the Government have said to the Opposition about higher taxation, we were not talking about that but about the choices before the Government. Overwhelmingly, the nation told the Government that it wanted one of those choices to be to put some of the surplus into a better National Health Service. It is a matter of quality of care as well as of pay.
What message have the Government given to folk in my constituency? The Government have often used it as an example of the success of their policies. Consett has suffered the depths of the worst ravages of the Government's policies: unemployment there reached 30 per cent. Since the closure of the steelworks, jobs have been created there largely by the determination of the local councils, the regional arm of local government and the local people to ensure that the town would have a future. But no one in Consett says that the corner has been turned, and we still have high rates of unemployment. Jobs have been created and unemployment has fallen mainly because of the changes in the way in which the Government calculate the figures, but never mind. We welcome any new jobs, but yesterday the Government said that they were not interested in the nature of the regeneration.
I had wanted to discuss Consett in greater detail—once I start on the subject, I get carried away—but let us instead consider women and children in my constituency. Women have begun to work in Consett and the rest of my constituency because of the change in the nature of employment, so they are interested in the tax system. My hon. Friend the Member for Redcar (Ms. Mowlam) has already dealt with this in some detail, so I shall be brief.
There was nothing in the Budget for children, but we know that the number of children living in poverty has more than doubled under the Government. There was nothing in the Budget to assure us that future generations will be catered for.
As for women, I wish to quote from the Financial Times leader about women, which says of the Chancellor: 1171Having accepted the principle of separate taxation, he has kept a 'married couple's allowance' equal to the difference between the married man's allowance and the single allowance, which, amazingly, goes first to the husband, not to the principal earner. This is a very peculiar half-way house. Thankfully, the Chancellor has two years within which to have second and better thoughts.We would urge the Chancellor to have those second and better thoughts, to be radical and to address the issue rather than trying to con us, as he did yesterday.
Because of the changing nature of work, many of my constituents are now what the statistics would call low-paid. A gentleman who was interviewed on television on Sunday, in a programme in which a Minister took part, said that his take-home pay is now what it was eight years ago when he worked in the steelworks. That shows what low pay is like in my constituency. The Government may well say that the low-paid should be grateful that they have a job—they are. But the Government have a double standard, consisting of one economic theory for the rich and a wholly different one for the low-paid and the poor.
We have been told that the rich need greater tax hand-outs as incentives. But the people who are the key to economic development in Derwentside and Wear valley are those who fall into the category of the 500,000 who will have marginal tax rates of 60 per cent. to 90 per cent. That is not good enough. Many of them are in the poverty trap.
The Government have given the people in my constituency a clear message: they are at best irrelevant to the Government and are being treated as an irritant. What have the Government done to encourage them to play the full part that they want to play in the economic regeneration of their towns and regions? How are these people to be encouraged to become entrepreneurial, and what incentives are they being given to contribute to economic regeneration? There is one economic theory for the rich and another for the rest.
Whatever the disagreements between the Prime Minister and the Chancellor—on those we can only speculate—we know that there is one major agreement: that those who have shall be rewarded. It is inevitable, whether the Government like it or not, that it will be at the cost of the rest. The Chancellor's choices mean that he is satisfied with the divisions in our society, that he wishes to institutionalise those divisions, to strengthen them. The anger and disbelief felt by people in the north is widespread. The Government have intervened once again to emphasise that the north is an area that they have abandoned.
There is moral outrage that a national Government can be so ready to abandon any notion of nationhood. There is a great feeling of social injustice. But there is more than that—there is a recognition that the Government have given up trying to procure a healthy economy throughout the country, that they have failed to take the steps necessary to bring about a thriving economy countrywide. Yesterday's Budget will continue to fuel the economy in the south but will do very little, if anything, to assist those of us who live in the north.
The north wants the opportunity to play its full part. Earlier in the debate, during the speech of my right hon. and learned Friend the Member for Monklands, East (Mr. Smith), there was an exchange about factory space in the northern region. What Government Members fail to 1172 recognise is that, because the economy is still so fragile, we must continue to have proper public recognition of the help that is needed.
The market is not yet ready to take over in areas like mine. We still have the lowest representation and the lowest growth of small firms of any region in the country. We still have the lowest number of self-employed anywhere in the country. It is precisely the folk that I have been talking about who will have to become the self-employed and who will have to set up the small businesses. It will not be the £100,000-or-more-a-year men. It is precisely the lower paid to whom we look in our region to carry out this process of rebuilding.
In these circumstances, the Government's crude reliance on the opinion that giving the rich additional rewards will lead somehow, magically, to more investment in the north—whether it can be described as naive or not—fails to address the reality.
We know that what we need in the north is investment in manufacturing. We know that such investment is currently still 14 per cent. below what it was in 1979. We also know that prospects for manufacturing industry this year are not good. If we continue even at the same rate—and the rate of change in unemployment is forecast to slow down rather than increase—it will take between 10 and 11 years for unemployment to return even to the 1979 level.
That is a price that it is not fair, not just, not moral for the Government to ask of people in the north. It is also an economic price that the country does not want and cannot afford to pay.
§ 8.3 pm
§ Mr. Nicholas Budgen (Wolverhampton, South-West)
I expect that you often reflect, Mr. Speaker, as we rise, hoping to catch your eye, that it is good for us to wait and listen to other hon. Members as they make their contributions; and, although we complain, it certainly is. I reflect that sometimes, when the House is apparently at its most noisy and contentious, there is none the less an extraordinary element of consensus.
I say that in spite of the comments of the hon. Member for Durham, North-West (Ms. Armstrong), because although she expressed with great vigour her plea that her constituency and her part of England should be dealt with, as she would see it, with more compassion and with a higher level of public expenditure, the Government have, in fact, done much of what has been demanded of them by the Opposition in the past eight years.
We have seen a massive change in the Government's overall control of the economy. After all, one of the main reasons why the Government were elected was to control inflation and then eliminate it, not to enjoy or even tolerate a rate of inflation of about 5 per cent. but to reduce it to 0 per cent. Another important reason for the election of the Government was to reduce public expenditure. But at least since the end of 1986 there has been a considerable increase in public expenditure.
In so far as the Government put forward specific proposals for the elimination of inflation, they said that they would do so by the control of the money supply; and they even went so far as to identify a particular indicator as being the best example of what the money supply was—sterling M3. Sterling M3 is now growing by over 22 per cent. per annum. So there is, in spite of what the hon. Lady has said, a remarkable consensus between what the 1173 Opposition demands and what the Government are doing. It is only those who had the misfortune to agree in detail with the argument put forward before 1979 who find themselves excluded from this cosy consensus. Nevertheless, in spite of being so excluded, I should like to say a few words about why I think this is an important Budget.
All Chancellors say that all Budgets are important. In the 14 years that I have been in this House I have never heard a Chancellor describe his Budget as a modest little thing, unlikely to be noticed much by the historians. While this year's Budget may not be vastly historic, I suspect that it will be a Budget of some importance because of its tax changes. I would like to say why I, as an excluded monetarist, believe that the reduction of taxation by £4 billion in the next financial year is wise and may even be prudent.
Although the Chancellor talks about himself as a tax cutter, he is not, of course, a tax cutter overall but only an income tax cutter. He is an increaser of taxes in a number of other important areas. When we talk about the dangers of overheating in the economy, clear signs of which exist, we must ask ourselves whether a relaxation of £4 billion in respect of income tax is dangerous as inserting yet further demand into the economy. I say no, for this reason, that it is £4 billion out of a total of about £160 billion; and £160 billion itself is only 42 per cent. of the gross domestic product. So we are not talking about a very large percentage increase in demand in the economy.
Of course, it is important to all those who are affected by the tax reductions. As the hon. Member for Durham, North-West demonstrated, those who feel that they do not benefit from the reductions in income tax, and have a sense either of anger on behalf of their constituents or of envy on behalf of themselves, feel very annoyed. But, in terms of overall control of the economy, a reduction in tax of £4 billion is not all that significant.
One of the most educational aspects of sitting here for some time is to observe the extraordinary way in which the Labour party expresses its envy. There is, of course, no party divide in that respect; we in the Tory party can express envy just as well when required to do so.
§ Mrs. Maria Fyfe (Glasgow, Maryhill)
May I say that no party can display greed as the hon. Gentleman's party can?
§ Mr. Budgen
The Tory party can indeed display morality, but it is sometimes reasonable to say that the modern Tory party does not display the wish for consensus and social cohesion as much as it might. I am simply trying to explain why I think that these tax cuts are permanent and will not be reversed, even when the present Conservative Government ultimately lose power. I believe that there has been a profound shift in taxation policy which reflects social changes. That shift is very well illustrated on page 58 of the Red Book, which shows that income tax as a proportion of general Government receipts dropped between 1979 and 1988 from 29 per cent. to 23 per cent.
One of the great successes of the present Chancellor's regime—here I feel that he is entitled to describe his 1174 activities as almost historic—is his change in the structure of corporation tax. He has succeeded in turning a voluntary tax into a low-rated tax paid by everyone, and abolishing the various tax havens in the corporation tax structure. As a result, corporation tax as a proportion of general Government receipts has risen from 6 per cent. in 1978–79 to 9 per cent. in 1988–89. The Chancellor has been very successful in that regard, and in increasing the yield from VAT and excise duties.
There has been a fundamental change in the way in which the state raises its revenue—a change that is reflected in the extraordinary silence of Opposition Members, who are not saying that they will reverse these tax reliefs. They know that it would he unwise to say that, because, whatever they may say about the greed that undoubtedly exists in all of us, that greed also exists in their supporters, who will be delighted at the tax cuts. They will also notice that the cuts do not go only to the rich; They go on the standard rate, on the allowances and to all the lower-paid people whom the hon. Member for Durham, North-West represents with such force.
Although the tax reliefs will not be reversed, they will be a very important change in the climate of opinion, which will last long after the present Chancellor is as well remembered in the House as Mr. Chancellor Heathcoat-Amory is now.
Let me conclude by referring to a real dispute which I do not think the Budget has settled. Often, when there is the most noise, there is the most agreement, but although the dispute between my right hon. Friends the Chancellor and the Prime Minister has been private and quiet, it has been long-standing. It depends on very different attitudes towards the management of the economy, both here and in other countries. The 1979 theory of free markets depended on the proposition that it was impossible to rig exchange rates, although it might be desirable to do so, and that is also the lesson of the Louvre agreement. Let us take two examples of the way in which it has not worked.
Before the crash, the Americans were promising, under the Louvre agreement, that they would take all the necessary steps to hold up the value of the dollar against that of other currencies. Once the crash came, and it became obvious that the cost of holding up the dollar was higher than they were prepared to sustain, political support for the actions necessary to the Louvre agreement went, and all the other countries that had been buying dollars like mad to support the agreement were left with dollars that were quickly worth 10 per cent. less than they had been. Poor old Britain, and poor old Bank of England; they had bought $20 billion, and they were left with a 10 per cent. loss—apart from the question of how they funded the intervention. That did not work because the political will to support the external agreement was not there.
The Friday before last, the Governor of the Bank of England and my right hon. Friend the Prime Minister disagreed with the Chancellor, and also with the Louvre agreement, which contemplated—as does the European monetary system—the fixing of the pound against the deutschmark. When the Chancellor said, "Let us intervene, or, for the sake of argument, let us drop interest rates," the Prime Minister said no. There were, she said, signs of severe overheating in the economy, and dropping interest rates would give inflation a further push. 1175 Intervening would be very expensive, and might add to the money supply. There was not the political support for rigging an exchange rate mechanism.
There is also a dispute of substance between my right hon. Friends the Prime Minister and the Chancellor about whether the best indicator of future inflation is to be found in the exchange rate or in the consideration of the money supply, however that is indicated. Until that dispute has been publicly resolved, and proper disciplines exist and are known to be followed in the economy, there will never be such stability. I accept that there never can be total or certain stability, but an element of stability in public policy is required.
I am opposed to the Louvre agreement, opposed to the EMS and opposed to the attempts to rig our economy according to an exchange rate mechanism. In one way Mr. Sam Brittan had it right when, on Thursday of last week, he wrote:The DM3 free link was not the only possible nominal framework. By nominal I mean one which will allow for reasonable growth but not accommodate inflation. Monetary targets have been tried. A nominal gross domestic product objective was tried half-heartedly. But in the last year or two the sterling—D/Mark link was the only game left in town and now there is no game left at all.There must be some clear discipline if the economy is not just to drift along being fine tuned and fiddled according to whatever are the electoral requirements of the moment. There may be respectable arguments as between fixing the economy to the exchange rate or fixing it to some measure of the money supply, but there can be no respectable argument for a vacuum at the centre of policy.
§ Mr. Alistair Darling (Edinburgh, Central)
I am grateful for the opportunity to contribute to this debate and I shall be brief.
I wish to echo the criticisms of the Budget that were admirably made this afternoon by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith), the shadow Chancellor. When I heard the Chancellor say that the Budget was to be a reforming one I, in common with my colleagues, listened in anticipation to learn what would be forthcoming. If one looks at this Budget, one is extremely disappointed.
Let us consider, for example, the treatment of the rich and the poor. The abolition of the higher rate tax will cost the country £2.1 billion this year. I believe that that money could have been better spent on the Health Service or on research and development, which is sadly lacking in this country.
I listened to the Chancellor talk about some of the taxes and perks that he intended to scrap. He said that he was going to scrap tax relief on covenants, but then went on to mention how they are used by individual families to finance student support. I wonder how many students are financed in that way. I believe that the Chancellor was talking about a tiny minority. Perhaps his friends or friends of Conservative Members finance their children's grants in that way, but most students rely on the grant that they receive and, over the years, that has been steadily undermined. I hope that, in the future, the Chancellor will give much more thought to incentives and opportunities for student finance than he appeared to do yesterday.
1176 If the Chancellor was considering perks, why did he not scrap the share option scheme? That is ripe for scrapping as it benefits a very few people who do not need such benefit or incentive. Indeed, is it not the case that, very often, the people on the lowest level of income desperately need the incentive of more cash? It has already been said that it is they who find it most difficult to better their positions because of the penalising, marginal rates of tax. I believe that those at the lower end of the economy should be given the incentives rather than those at the top.
I also wish to register my protest about the business expansion scheme. The Government are to encourage and give licence to people to make money out of those at the lowest end of the income scale. I believe that that is quite shocking. From experience in Edinburgh, I know that there have been scandals about bed-and-breakfast accommodation and I am shocked that people will be able to use such establishments as a tax shelter at the same time as exploiting the most vulnerable and, economically, the most weakest people within our society.
Let us consider the effects of the Budget. Someone earning £60,000 year will be £128 a week better off. At the other end of the scale a married man, with two children, earning £115 will be 32p a week worse off. That demonstrates the disparity within the Budget. Surely, the unfairness of flat rate taxes occurs to the Government. With regard to income tax, there is a great deal to recommend a tapering system that reduces the difficulties that we face with high marginal rates, but is, at the same time, fair. We oppose the poll tax because it is grossly unfair and pays no regard to the ability to pay. I believe that the Chancellor's drive to reduce taxes will demonstrate similar unfairness. I am especially concerned about that.
I am also greatly concerned about his threat—I mean a threat—to reduce the basic rate of income tax to 20 per cent. in the not-too-distant future. That bodes ill for the public services within this country because it suggests that public spending will be cut even further.
What will the effect of the Budget be on our balance of payments? It appears that our current account deficit is now £4 billion. In November it was forecast at £3.5 billion and it appears to have increased in the past few months. If it was not for oil this country would face a major balance of payments crisis. A spending spree, without corresponding investment in the country, will mean that more foreign goods will be sucked in. It would have been nice if the Chancellor had paid some heed to the ravages of those missing years of Conservative ideology, 1979–81. Those years are never quoted when considering the country's growth or anything else; they are rather like Stalin's missing years.
The Chancellor must address the major problem of the balance of payments, because if he does not, the result will be that the only people cheering at the end of the day will be our European and other foreign competitors.
In common with most of my colleagues I am extremely concerned about the Americanisation of this country. In America a cruel deception is perpetuated year after year: everyone, no matter what their station, can somehow make it and they should remember they live in the land of the free and in the land of opportunity. We know that that is simply not true. In this country, the vast majority will remain at the bottom of the heap and those that have will be able to better themselves because they have the financial ability and other advantages to do so. Those at the bottom 1177 will be denied that opportunity. In this country those who have money are able to exercise choice and improve their standing in many ways. We need to ensure that all the people have the power to choose rather than some of the people.
We cannot run an economy whereby those living in one part of the country have the necessary opportunities and incentives whereas the vast majority—those who live in Scotland, the north, Wales. Northern Ireland and so on—are constantly disadvantaged. The reason for yesterday's anger—an anger that will continue—is that the Budget is for those that have. It is for the rich man, a champagne Budget. No wonder there was much cheering in the stock exchange last night and the cracking open of champagne bottles. On the other side, the dispossessed have every reason to fear for the future and fear for the welfare of their families. That is why the Budget is bad. It is about short-term gains for the few. For that reason we shall oppose it throughout this long summer.
§ Mr. Graham Bright (Luton, South)
I hope that the hon. Member for Edinburgh, Central (Mr. Darling) will not think it discourteous if I do not refer to his speech, but, in the interests of time, I shall push on with my speech.
The Budget was unique because it recorded the longest period of sustained economic growth that Britain has enjoyed since the war. That growth is consistently higher than that enjoyed by many of our rivals and it has been accompanied by low inflation, rising output, rising productivity and falling unemployment. Those are achievements about which the Government and the nation can feel justifiably proud.
It is vital that those achievements are sustained. The policies of restraint in public expenditure and borrowing, of lowering taxation and of rewarding enterprise have been the key to our economic recovery. Firm monetary discipline and a prudent fiscal stance go hand in hand.
My right hon. Friend the Chancellor of the Exchequer is right to stick to those policies. They have created an enterprise economy in which the incentives to work and to prosper operate. The net addition of 500 new businesses created each week since 1979 and the welcome growth of 800,000 people in self-employment are proof of that. It is right to use the carrot of lower rates of income tax and higher thresholds to encourage that process.
I strongly support the decision to cut the standard rate of income tax by 2p. It will provide a further incentive to private individuals, particularly small business men, to work harder. The 7.5 per cent. increase in personal allowances will be of direct benefit to those on lower incomes. The process of lowering direct taxation in this way must be continued in future years.
I make it equally clear that I support the simplification of the higher rates of income tax and their reduction to 40p in the pound. The tax burden on the top 5 per cent. of earners had been growing recently. Those earners are also the creators of many jobs. Action to cut that burden and to reduce the attraction of tax-avoidance schemes is appropriate. Higher tax revenues will be produced in due course.
Given those reductions in income tax, it is certainly right to reduce the rate of corporation tax for small companies to 25 per cent. My right hon. Friend the Chancellor of the Exchequer is, I know, aware of the concern which is shared by many hon. Members who are 1178 interested in the prosperity of small businesses—that the impact of corporation tax should be more progressive. That reduction is a step in the right direction and it will leave many small incorporated businesses subject to the lowest level of taxation since 1945.
I hope that my right hon. Friend the Chancellor will entertain the idea that I have been advancing for many years of enterprise bonds to allow small companies an instant rebate on corporation tax if they intend to expand, invest or carry out research and development, which is essential if a small company is to continue to grow.
The difficulties that rapidly expanding small companies face in finding new equity are well known. The Government have rightly taken measures to help small companies and to encourage growth in the number of venture capital institutions. I understand that more than £700 million a year is being channelled through those institutions.
There is evidence that the business expansion scheme has been benefiting companies of rather larger than those that it was originally intended to help. For that reason, I particularly welcome the proposal to limit the amount that any one company can raise under the BES in one year to £500,000. It will give newly established firms and those of smaller size a better opportunity to find equity investment than they have had in recent years. This is a matter about which I and my hon. Friends on the Back Bench smaller business committee have expressed our concern. I thank my right hon. Friend the Chancellor for responding so positively to that problem.
One of the great advantages of small firms is their flexibility and mobility. Where there are opportunities and premises, there are always small businesses willing to take them up. Unfortunately, our housing market before 1979 had severe inbuilt constraints and our work force was relatively immobile. The position has improved, but more needs to be done, especially in the inner urban areas. The extension of the BES to residential property let on the new assured tenancy basis will encourage new private investment and provide more flexibility for workers seeking new employment.
No tax is ever popular with small businesses, and VAT is slightly less popular than most. It imposes a considerable bureaucratic burden, although that is counterbalanced by the salutary need to keep up-to-date and accurate accounts, so there are benefits from it. Nevertheless, the increase in the threshold will be welcomed.
There will be an even warmer welcome from small business men for the reform in capital taxation. Capital gains tax has posed a serious disincentive to owners of small firms who are contemplating retirement, and the differential in the rates of income tax has provided clever lawyers with scope for devising ingenious methods of avoidance. I have nothing against lawyers, but their activities in that regard provide a classic illustration of the problems created by an over-complex tax system.
The extension of the ceiling on retirement relief for capital gains tax from £100,000 to £125,000, and the concession that half of any gain between that level and £500,000 will be free of tax, will go a long way towards solving this problem. Families whose assets, on passing to the next generation, have been subject to inheritance tax will now, thanks to the Budget, have to pay no more than 20 per cent. in total.
That is important because small businesses are not just one-off, one-generation enterprises. They are often family 1179 concerns offering employment and prosperity to successive generations. They are an essential part of the social and economic fabric of Britain, but they have been gravely damaged in the past by excessively high taxation. That era is over, thank goodness. I am sure that the extension of the ceiling will help to keep small businesses in the forefront for a long time.
It is only in a prosperous enterprise economy that resources for private and public consumption can be generated. That is a matter about which we have heard a lot from the Opposition. However, if wealth is not being generated it cannot be spent. That requires a low tax regime, with in-built incentives and without complex allowances, reliefs and shelters. We have moved, step by step, towards such a system since 1979, despite being told that it could not be done and that it would have disastrous consequences. That has been shown, by experience, to be false.
Regrettably, Opposition Members do not understand or do not wish to understand that fact, and they have no intention of accepting it. When I listen to them I sometimes think that they would be happier if their recurrent prophecies of doom were being realised, if the economy was contracting, if output was falling and unemployment was rising, if inflation was back at 27 per cent. and if the burden of taxation was increasing rapidly. Their prescription has been tried. It failed disastrously and no amount of crude blustering will disguise that fact.
The Government have succeeded in revitalising the economy. The Budget builds on that success and my right hon. Friend the Chancellor is fully entitled to ask for the support of the House and the country for its contents. I am confident that he will get that support.
§ Mr. Allen McKay (Barnsley, West and Penistone)
Is it the case that Opposition Members do not realise that the economy must prosper, that people must make money and be paid, and that money must be provided to pay for the National Health Service and for prosperity? Of course we believe that. We do believe that, over the years, the Conservative Government have put their hands into one pocket, taken from the poor and given to the rich. That has happened in Budget after Budget. It is not a case of funding the economy. This Budget is funding the rich. It is not a case of envy but of asking the Government why they used the available money in a different way.
Everybody knew that money was available and that this could be a once-and-for-all opportunity. Everybody knows that most of our resources have come from oil and VAT. That must stop at some time. Instead of using the money that is now available to rejuvenate aspects of the economy that need to be rejuvenated—that is the sad thing about it—the Government have decided to give money to aspects that should not have received it.
The Opposition's wrath was not directed to what the Chancellor said at the beginning of his speech. Some hon. Members sometimes nodded or shook their heads in agreement. When he announced the 40p tax level, there was the realisation that £3 billion went to the wrong place. About £2 billion would have done the National Health Service the world of good.
That is what we were talking about. That is what people were angry about. The Government have said, "We shall 1180 not give £2 billion to the National Health Service because something could come up later." There is no doubt that the Chancellor had about £4 billion up his sleeve. He could say, "I hope that nurses' pay will be completely funded by central resources." That is the least that can be done in the present circumstances.
Some of my colleagues and I met representatives of the Royal College of Nursing. It is true that they did not talk about wage increases or what was in it for them. They asked what was in it for the people they were taking care of. For years I have been proud of our general hospital. It is fairly new. When people have talked about the problems of their hospitals, I have wondered why they have not attacked my hospital. When I met representatives of the Royal College of Nursing I realised that my hospital has growing staff problems and that there are patient care problems.
The Government's policies are driving wages down, encouraging private enterprise, harming hospital infrastructures and interfering with patient care. That is what the Opposition's wrath was about—not because money had gone to other things but because the Chancellor had money to use to put matters right. That was the problem. We have different points of view. Sometimes, hon. Members' points of view coincide.
Unlike what is happening in any other area, unemployment in my area is reducing extremely slowly. Male unemployment is still about 18 to 19 per cent. My area is not coming out of the recession in the way in which other areas are. I have questioned why that is so. I knew why it was so, but I wanted to prove it. I live in a coal and steel-producing area. Industries have been wiped out because of Government policies. Recovery is sluggish because nothing is going in to replace them. Yorkshire and Humberside are the worst areas for prosperity—for example, car and house ownership and other facets. South Yorkshire has produced coal and steel for some time. There is only one worse area in terms of prosperity, and that is Northern Ireland. I was shocked to discover what is happening.
Why is some of the money not available for my area? Why are we not getting unemployment down? [Interruption.] The Minister is smiling, but the facts are there. Time and again, I have said what is happening. The Government did not believe me. I asked the Government to declare it a special development area and provide some impetus. It is available. We have one of the finest work forces in the country. We have a network of roadways that join at the correct points. We have land available for building. We have people who are willing to get off their bottoms and get it done. We need that little bit extra to get it moving, and that little bit extra could have come from the Budget.
There is no doubt that we are falling behind. I have a census to prove it. Time is short, so I shall raise the topic on another occasion.
The Opposition emphasise what should have been done with the available money. The Government should have taken one important step, which would not have cost a lot. At least it would have shown that they have some compassion. I refer to television licences for old people. More than ever before, the Government had the opportunity to wipe out an anomaly. Old people, knowing that money was available, looked closely at what happened. They will not forgive the Government.
1181 I refer now to the problems in my area and ways of overcoming them. First, we must provide special development status. Second, we must put money into infrastructure — schools, hospitals, roads, and, in particular, housing. I was in local government for about 26 years before I came to this place. At one time, a couple could get married and have a house within three weeks. But, within the short space of five years, the first homeless family has had to go into bed-and-breakfast accommodation. That is a clear sign of what has happened over the past five years. From the prospect of having a house in three weeks, they have moved to the prospect of bed-and-breakfast accommodation in five years. That is a measure of where the Government's policies have taken people in my area.
We must examine what is happening and see how to put it right. With the Budget, the Government could have done a lot to put things right, but they failed to do so. In moving money to the rich, who could well afford to do without it, the Government have failed millions of people.
I clearly remember one Prime Minister saying that our peoplehave never had it so good.That was true at the time, but it is not true now. We now have another Chancellor of the Exchequer virtually saying, "I am doing this because you have never had it so good." Retribution must come about. By the Budget, the people of this country will judge the Government for what they are. They will judge the Tory party's ideology and the thought behind what the Government have done.
§ Miss Emma Nicholson (Torridge and Devon, West)
An Opposition Member referred to the Budget as a rich man's champagne Budget. It is in fact an ordinary woman's cup-of-tea Budget, and I shall show why.
Again, Opposition Members have accused the Government of framing a Budget that says, "What is in it for us?" We are meant to be greedy Tories. By asking, What is in it for them?" Opposition Members are guilty of unacceptable paternalism. The Government have created a Budget that has something in it for all of us, and that is the way it should be.
I am pleased that the hon. Members for Redcar (Ms. Mowlam) and for Durham, North-West (Ms. Armstrong) referred—albeit scathingly—to the subject that I wish to discuss. I was glad that they did so late in the debate, because, as the Chief Secretary to the Treasury pointed out in his lengthy speech of about 1,500 words, the shadow Chancellor did not even bother to mention married women. I am appalled by that.
The Chancellor has put forward a tremendous reform. Although there may be pieces of fine tuning that perhaps the shadow Chancellor, had he bothered to glance at the subject, might have wished to offer us, he did not take it seriously enough to talk about it. That is abominable. It is a betrayal of Labour ideals. Surely, in their manifesto, Opposition Members pledged to produce independent taxation for women. However, when it appears, they ignore it.
Of course, I did not expect any proper reaction from splinter groups on the Opposition Benches. Indeed, I did not get it. The hon. Member for Berwick-upon-Tweed (Mr. Beith) did not bother to talk about it, either. It is an important topic. It affects almost all women in the United Kingdom. For some reason, marriage is immensely 1182 popular today. Twenty years ago, 70 per cent. of the population married: now 90 per cent. of the population get married. I assume that 50 per cent. of those getting married are women. I suggest therefore that this reform affects almost every woman in the United Kingdom and that the new reforms will ease the constraints of marriage.
How galling and humiliating it must be for a woman whose marriage is less than comfortable—and some people are unlucky in their private lives—to have to discuss her private financial affairs, her small savings—not the grand gains that a few women make on the stock exchange, but small, personal, intimate savings which she has set aside from the housekeeping—with someone whom she does not respect as much as she should. [Interruption.] I suggest that the Chancellor is removing the financial chador which cloaked western marriage laws in darkness for so long. He has thrown it off and women will be grateful.
The tax laws which affect married women go back 203 years to the time of Trafalgar. While I appreciate that it may have been correct for Nelson to turn a blind eye to the extra-curricular activities of my namesake, Emma Hamilton, I sincerely believe that the abolition of the wife's earned income allowance is a magnificent move. This has surely been a crushing ceiling on the employment of women. It may have been acceptable in the bad old days when work was seen as the prerogative of male heads of households, but it is surely not acceptable now when 63 per cent. of all married women work and only 5 per cent. of all families have male heads of households who are the only earners. I therefore believe that this is a very important measure.
I am delighted about the abolition of the married man's tax allowance. I shall return to the point raised by the hon. Member for Redcar. She called the reform a sham and a fraud. She said that it will benefit only a very small proportion of the population and that it will help women only if they happen to be married to a very rich man or if they are very high earners. I believe that she is wrong because, as. I have already mentioned, independence, personal dignity and the ability to spend will be achieved by the new measures.
Privacy was not mentioned by any other hon. Member, male or female, who spoke for the Opposition, although the hon. Member for Redcar agreed that privacy matters desperately to women within marriage as well as outside it.
The equality of personal allowances will benefit everyone. We are being offered, and we shall accept, the first ever tax allowance for married women. It can be placed against all forms of income. It does not matter whether it has been earned or saved. That is a real and signal advance.
The married woman's pension will affect the poorer female population. Women pensioners will be able to have allowances and any elderly married women will qualify for age allowance for the very first time. Generally, we are an aging population and pensioners are among the poorest in the land. I am delighted to say -that this measure will affect women at the poorer end of the scale as well as those who are better off.
§ Ms. Mowlam
I agree that the measure will give a certain degree of independence and will get round any lack of privacy that we suffer. Does the hon. Lady agree that the Chancellor could have increased the allowance of 1183 individuals when they get married and kept the married couple's allowance? Does she agree that the Minister has not gone far enough?
§ Miss. Nicholson
I am happy to say that I hold the view—as I believe the Government do—that the state should, as far as possible be non-judgmental in its financial dealings with its citizens. That means we have to withdraw the discriminatory charges against marriage. I appreciate the hon. Lady's earlier point about the problems of mortgages for women who share accommodation and who need to buy houses together. Nevertheless, it is right and proper that discriminatory charges against marriage should be removed and that the mortgage ceiling should be attached to the building and not to the people who are living in that building and contribute towards it.
Returning to the equality of personal allowances, that will give women a enormous incentive to save. The fact is that not many married women sit at home doing nothing. Only 11 per cent. of married women not in work do not take care of dependants who are either children under school age or elderly or sick people. Only a fraction of married woman are not working, in terms of not being out in the market place and not having a carer's duty at home. That is a very important point.
Couples' allowances reflect the lack of equal pay for work of equal value and the fact that women are still the smaller earners in society. I hope and believe that that will change.
Many married women prefer to stay at home while their children have not reached the statutory school age. Nonetheless, I should have preferred the couple's allowance to go to the higher earner. I accept that for the moment in almost every instance the higher earner will be the husband, although I hope that as the pattern of society, work and reward alters in terms of wages and salaries, the Chancellor will examine that again. I can only assume that is an easement of the abolition of the married man's tax allowance.
Finally, I believe that £500 million is a very small price to pay to clear away the injustice of 203 years. This is a reform which will be welcomed by all women. I suggest that it is economical, inventive and fair-minded and that those three qualities are the hallmarks of this great reforming Budget.
I commend the Chancellor's magnificent work in doubling the limit on donations which will come through the system of payroll giving. Payroll giving was invented in 1947 by the Children and Youth Alyah, the British arm of the Zionist movement. There has been a very slow increase ever since. Until the Chancellor turned his attention to it, it never took off. It is a magnificient way to make a pesonal contribution to the welfare of others. Voluntary giving is the bedrock of our society and can be equally matched through state provisions by the Conservative Government.
§ Mr. Deputy Speaker (Sir Paul Dean)
Order. It is hoped that the wind-up speeches will begin at 9.10 pm. I appeal for brief contributions so that some of the hon. Members who have been sitting here for a long time will not be disappointed.
§ Mr. Pat Wall (Bradford, North)
For many years of my working life, I spent Budget Tuesdays being summoned to an office, under a distributive trade three-line whip, and forced to sit and listen to a transistor radio—which was banned on Derby day—and await with bated breath any changes in purchase tax, latterly VAT. Quite often, they resulted in many additional hours of weekend working drawing up new price lists. I assure the House that I found it far nicer to sit on these Benches yesterday, even listening to the present Chancellor, than to carry out those tasks.
For the 850,000 people on the hospital waiting lists, for the 3 million who earn too little even to pay income tax, for the 7 million who take home less than £135 a week—the European decency threshold—for those, whose number has increased by 50 per cent. to more than 500,000, who are caught in the poverty trap, for the two-child family who pay as much in direct taxation on average earnings today as they did 10 years ago, for the two-child family on half average earnings who pay twice as much in direct taxation as they did 10 years ago, this Budget is a disaster, especially if we compare them with those who earn 10 times the average income and who, as a result of the Budget, will pay 45 per cent. less in direct taxation.
The cut in tax rates for the top earners, which will cost £2 billion, will provide one third of the total tax cut, to the benefit of just 3 per cent. of taxpayers. Overall, the burden of taxation has increased because of indirect taxation, which hits working people hardest, and which has increased from 34 per cent. to 38 per cent. under this Government.
Mr. Chris Pond, the director of the Low Pay Unit, said today:The analysis shows clearly the double standards in operation with tax cuts for the rich and benefit cuts for the poor. The Government will save £1₷1 billion in the social security changes introduced this April, but it has given away twice this amount in tax cuts. The Chancellor boasts proudly that he has managed to balance the Budget. But he has failed to balance the scales of justice between rich and poor.The rich will do very well out of this Budget. Under this Government, the number of millionaires has increased from 4,000 to 21,000. The top 60,000 taxpayers have already received about £5,000 each in tax rebates. For two fifths of our population, yesterday was not "super Tuesday"—it was never on a Monday, never on a Tuesday, and never on any other day.
A few weeks ago my hon. Friend the Member for Newham, North-East (Mr. Leighton) likened the Chancellor to the Emperor Nero. I understand that the right hon. Gentleman plays the piano rather than the fiddle. Despite the media hype, the flamboyancy and the rather sickly looking Dispatch Box cake, the Chancellor is the emperor without any clothes. What is worse, he has convinced himself that he is cloaked with levels of production, investment, employment, productivity and profit that serious analysts and even the more sober Opposition Members know are but an illusion.
As has been said, from 1964 to 1973 the rate of production was 3 per cent., falling to 1₷4 per cent. from 1979 to 1986. It is far lower than Europe, the USA or Japan. In comparable periods, the British economy has lagged behind that of its rivals. When growth in manufacturing output is taken into account, the figures are far worse. Between 1973 and 1985, our manufacturing 1185 fell absolutely by an average of 0.5 per cent. a year, while that for every major competitor rose. The faster rate of growth in manufacturing in 1987 of 4.5 to 5 per cent. must be set against that long-term record. Manufacturing production now only equals its peak eight years ago, and manufacturing investment is still 9 per cent. below its 1979 level. So much for the Chancellor's boom.
The boom, such as it is, has been boosted by £60 billion of oil revenue and, more recently, by revenue from the financial and service industries. Until last year, manufacturing was stunted, and any growth was made possible only by a sharp decline in the value of sterling, making exports cheaper and imports dearer. During the past six years, sterling has risen sharply against the dollar and has now passed through the Chancellor's personal European snake of a 3 deutschmarks parity. He appears to be getting little help from the Prime Minister.
The Confederation of British Industry, in "CBI News", takes a view rather different from that of the Chancellor. It said:The decline of the dollar … has resulted in a sharp drop in optimism. The balance of optimism to pessimism is minus 7 per cent. compared with plus 14 per cent. in October. Although export orders and deliveries increased over the past four months, they are expected to slow over the next four.I wish to make many points, but I am aware that other hon. Members wish to speak. I want to make one point about productivity and manufacturing. An article in the Financial Times said:It is often forgotten quite how far Britain fell behind. Manufacturing outpt in September, for example, despite the recovery of recent years, was still 2½ per cent. lower than in the boom of 1973 under Mr. Edward Heath. Over this period, production has risen by 49 per cent. in Japan, 46 per cent. in the US, 18 per cent. in Italy and 16 per cent. in West Germany.The comparison is in some ways even bleaker if 1979, the year Mrs. Margaret Thatcher entered Downing Street, is taken as the starting point. A marginal 1½ per cent. rise in manufacturing output in the UK contrasts with gains of, for example, around 32 per cent. in Japan and 23 per cent. in the US. If Britain is to regain its standing, even of the late 1960s, it will have to out-perform its rivals for at least a decade, perhaps much longer.It continued:it is not unreasonable to argue that British productivity is still only between a third and a half of that in other leading industrial countries.The Government had an opportunity to finance health and insurance infrastructure and to refinance industry and building, which is a non-inflationary approach, but they chose to give money to the rich. There is a growing world crisis. British factories are under-funded and under-equipped. The workers are under-trained and under-skilled. There is under-investment in industry. Whether the Government like it or not, the Budget does not herald an atmosphere of growing prosperity and growing riches for the top section of society. It denotes a future of disaster for the people of Britain unless we change this Government and their proposals.
§ 9.6 pm
§ Mrs. Maria Fyfe (Glasgow, Maryhill)
The hon. Member for Wolverhampton, South-West (Mr. Budgen) said that where there was a lot of noise there had to be agreement. It is a little like imagining a large crowd at a Celtic and Rangers match shouting at each other, "We want a draw."
We have been told also that the Opposition argument is about the politics of envy. I should like to point out 1186 something to the few Conservative Members in the Chamber. The people whom we represent created the wealth in the first place. Their money created the £2 billion and, as they said in every opinion poll that one cares to name, they wanted it to go towards the Health Service. The House rises during the long summer recess and the country seems to manage quite well without us. If the work force who created the wealth stopped their work for two and a half months, the economy would collapse. That proves my point.
The Chancellor's Budget has been presented as a great deal for women. That is far from true. Fifty per cent of all the tax cuts in the Budget have gone to the top 10 per cent. of taxpayers. The bottom 50 per cent. of taxpayers pocket 10 per cent. of the tax cut money. Who are largely among the bottom 50 per cent. of taxpayers? It is women, mostly in low-paid jobs. Indeed, there are many in the lowest quartile. Taxes remain at 38 per cent. of GDP. The burden has shifted to indirect taxes, national insurance contributions and other taxes which fall predominantly on low-income groups—again, mainly women.
There are 13 million people in families below the tax threshold on untaxed benefits who will get no tax cuts. For up to 2 million people living on low incomes, benefit cuts cancel out any tax cuts that they have had. A wife and mother in such a household, struggling to keep her family fed and clothed, will view the Budget with bitterness, if she has any time to take in its details. For a person with a weekly income of 100 the net gain is 5p a week. There will be dancing in the streets of Maryhill at that! For a person with a weekly income of £2,000 the net gain is £281 a week.
We have been told that this is all justified by the need to control tax avoidance and evasion℄in other words, do not put taxes too high in case people dodge them. It is amazing how the financially well-off get financial incentives not to indulge in what can be criminal behaviour but the lowest of the low-paid and the unemployed are chased by social security snoopers to ensure that they do not break the law.
We are supposed to have seen a big reform with tax forms. Because, at long last, women will fill in their own tax forms the Chancellor thinks that we cannot see through his little game. He has abolished the married man's tax allowance, but, hey presto, just like a magician, he flicks out of his sleeve a married couple's allowance. Is that to go to the man and the woman half each? No, it is to be paid to the man, not the woman. Where is the big reform in favour of women in that? Will all couples—or at least the male half of them—benefit? Do not ask silly questions.
As the hon. Member for Torridge and Devon, West (Miss Nicholson) said, this dodge gives an extra £500 million of tax cuts through independent taxation of investment income—hardly the kind of money that most families aspire to see. A couple with £10,000 investment income will save an extra £41 a week in tax. That is more than some of my constituents have to live on all week. The Government continue to ignore that fact.
On the same day as the dawning of the new era of independent tax form-filling, the Chancellor is to introduce for women in England and Wales the joint and several liability for their husbands' poll tax—a year later than in Scotland. If women think that the Chancellor is doing anything for them, they will learn differently before very long.
1187 There is much else to be said about the Budget that I do not have time to say. However, let me mention the general impact of the Budget. The Chancellor has put more money into the hands of those men and women who will do nothing with it other than live lives of even more offensive display while others live in squalor. The consumer boom depends on imports bought with credit cards and other forms of high interest loans. The Prime Minister read some economics 40 years ago, it seems, and she thinks that high interest rates curtail borrowing. That seems logical, but it has not happened, has it? All the borrowing is boosting imports from other economies and not boosting our investment in our economy.
Even if the forecast were correct, that investment would still be below the level achieved in 1979. The hopes for jobs are therefore bleak. We continually hear about the recovery of the economy. Hon. Members mentioned high unemployment rates in their areas, and they are dreadful indeed, but I have yet to hear of a constituency with unemployment as had as that in my constituency, with 22 per cent. average unemployment and 29 per cent. for men. Where is the wonderful boom in the creation of jobs? We are still waiting for it. The Government give tax incentives for the rich, but if one is poor one must learn to live on less. That is the message of the Government.
This Budget has shown more clearly to many more people that the Government are hellbent on a massive transfer of wealth from the low-paid and unemployed to those who are already substantially well off. It will not be forgotten or forgiven.
§ Mr. Stuart Holland (Vauxhall)
We have heard many interesting contributions during the debate and it is a great pity that the House is not more fully attended, given the major issues to which we have addressed ourselves. In that context, I think especially of the contributions made by hon. Ladies—for example, my hon. Friend the Member for Redcar (Ms. Mowlam), who talked about the married man's allowance and the implication of the change for women, my hon. Friend the Member for Durham, North-West (Ms. Armstrong), who referred to the Health Service, and my hon. Friend the Member for Glasgow, Maryhill (Mrs. Fyfe) who has just spoken. I regret that she did not have time to make her further points. Among other things, the hon. Member for Torridge and Devon, West (Miss Nicholson) kindly drew to our attention the fact that she is the namesake of Nelson's mistress, a point that I note with interest.
There is a character in Voltaire's "Candide" called Pangloss. He is the man who echoed Leibniz in saying that "All is for the best in the best of all possible worlds". He said that over the ruins of the city of Lisbon, which had just been devastated by earthquake. The Government's economic policy has not yet been devastated by earthquake but there are considerable tremors in the ground.
When we strip the Budget of the rhetoric and self-congratulation with which the Chancellor opened his speech, we find that there is a great difference between his fantasy view of the economy and the facts as they are actually are. Let us consider the Chancellor's first fantasy:the six years to 1987 have been the longest period of steady growth … for half a century.1188 Set aside the challenge to half a century. Again, I quote:During the 1980s, our growth rate has been the highest of all the major European economies.What are the facts? Since 1979, the growth rate of the United Kingdom has been the lowest of the Group of Seven top economies. Furthermore, we rank second lowest in terms of income per head among the G7 countries on 1986 figures and we are currently being overtaken by Italy, making us the lowest of all. In the OECD we are 15th in terms of GDP per head, which is a fall in the OECD league tables since the time of the outgoing Labour Government in 1979.
The Chancellor's second fantasy concerns unemployment. He says that in 1987unemployment fell faster than in any other year since the war".That is terrific, but what are the facts? Under this Government unemployment has increased faster than in any other OECD country. It has reached record levels. Registered unemployment is now 2.69 million but the de facto unemployment, in terms of the unamended figures, is at least 3.2 million. The Government kept changing the basis on which the measurements were made or adopted policies that affected those registered as unemployed.
One can change according to choice the number of ways in which the Government have done that. Some estimate that there have been only half a dozen ways but others estimate that there have been up to 19 ways and some estimate up to 23. I shall mention three of the most important.
In February 1981, the register affect of special employment and training measures meant that, in effect, half a million people were taken off the dole at the stroke of a pen. In October 1982, there was a change in definition and compilation of monthly unemployment figures from a clerical count of people who registered for work at jobcentres to a computer count covering only benefit claimants. This took another one fifth of a million people off the dole at the press of a button. From October 1986 to January 1987, the introduction of the tighter availability for work test took nearly 100,000 people off the registered figures within a year and over 120,000 after that.
The reality is that unemployment will get worse. All we have to do is ask some of the self-styled experts. From February-March, before the Budget, the independent average, which is an average of 11 forecasts, including Liverpool, the Confederation of British Industry, Cambridge, OECD, the National Institute, the London Business School, Henley, Oxford, Economic Forecasting and others, estimated that unemployment would increase over the period concerned. If one takes the GDP growth rate as the fundamental reason, it will fall from about 4.1 per cent. in 1987 to 2.7 in 1988 and to 1.9 in 1989.
There may be some stimulating effect on the economy as a result of tax cuts. However, it is not nearly as effective to stimulate or sustain economic growth by cutting tax as it is by more direct forms of expenditure. In fact, it is only about one fifth as effective to do so and that is another reason why we can see that the growth—the so-called miracle on which the Chancellor congratulates himself—was a pre-election boom that will not last.
The Chancellor's third fantasy is:The plain fact is that the British economy has been transformed … This outstanding performance was founded on a further big improvement in productivity.Productivity has gone up, essentially because it is higher in bigger business with greater capital intensity and more 1189 embodied innovation and is lower in smaller firms. One reason for the increase in productivity is that so many small firms have been bankrupted, especially during the 1979–81 period. That may well be replicated by allowing the pound to rise now because the Chancellor is not in control of exchange rate policy and has the Prime Minister breathing down his neck.
Any fool can increase productivity by cutting jobs. No one in the Government has increased productivity by raising long term investment and innovation on a scale comparable with our competitors. That is what counts: it is not simply the rate at which productivity increases from the depths to which it had sunk by 1981. It is especially not done under this Government by the oft-cited mechanism of promoting new small and medium-sized firms. That has been well shown by Mr. David Storrey of Newcastle university, who specialises in such matters. Within the lifetime of this Government, for every 100 firms that started, 80 are now dead; four out of five are now dead. That is the mortality rate among such firms. Four of each 100 now account for half the employment. In other words, there is an advantage to bigger business.
The fourth fantasy of the Chancellor is that the current account deficit is now manageable and thatthe outlook both for exports and for jobs will depend critically on employers keeping their costs firmly under control." — [Official Report, 15 March 1988; Vol. 129, c. 995–996.]The wage element clearly influences the outcome but it does not do so "critically". This Government have consciously pursued a policy of increasing aggregate unemployment, or sustaining high levels of unemployment to reduce wages. They have sought also to compete internationally by confronting trades unions and organised labour, relying on low wages to give us a competitive advantage in world markets.
Tell that to the country having the most competitive economy in the modern world, which is Japan. In contrast to the Chancellor, the Japanese rely on investment and innovation to raise competitiveness, and state-supported investment to sustain competitiveness. They also guarantee lifetime employment to core company workers.
The results in the examples are these. The labour content of the value of a product in Japan in heavy engineering, medium engineering and electronics — and including companies such as Matsushita and its household brand names, and the Japanese auto firms Toyota and Nissan—is now down to 5 per cent.
The Japanese are not running a low-wage economy in order to compete. They are running a high-wage and innovating economy in order to compete. Again, that is reflected in training, as was stressed by my right hon. and learned Friend the Member for Monklands, East (Mr. Smith). Again from Japan comes the illustration that an average skilled on-line worker in Toyota or Nissan spends seven years training during a working lifetime. At Ford, until very recently, only one and a half years was spent training during a working lifetime. The Japanese are reskilling and extending the skills of their workers and relating them to innovation rather than going for a wretched low-wage economy, which has been the record of the Government in recent years.
That policy in itself affects tax rates. Taking 2p off tax when the wage is low is only one way of increasing disposable income. The real way of increasing long-term 1190 disposable income is through investment in sound products in entirely new sectors of industry and by raising wages.
Further, we have a change in the exchange rate. The Chancellor has moved his position on that, and I am sorry he is not with us tonight. We are led to believe that he was Keynesian in his youth — I believe he was at Christ Church, so he cannot have been far away from Sir Roy Harrod—an advocate and supporter of a fixed exchange rate. He then moved to supporting a floating exchange rate, and then to managed floats. Now we are back to target zones. All very good — certainly give him a blue star for effort. But exchange rate policy is not simply a matter of whether or not rates float but what firms actually do at prevailing rates.
The illusion of this Government was shared, for example, by Lord Joseph when he was Secretary of State for Trade and Industry. When in this House, he said that the Government would roll the burden of taxation off the back of business — and the Chancellor has now clone that — and we would see an unleashing of millions of British entrepreneurs, British exporters and foreign markets.
It is always very problematic in this House that after getting to one's feet a certain number of times—as you know very well Mr. Deputy Speaker, sometimes one gets to one's feet quicker than others — It becomes almost automatic. It is rather like the member of another place who dreamt one night that he was speaking and woke up and found that he was speaking. I found myself asking the Secretary of State for Trade and Industry whether he was really unaware that there were not millions of British firms in manufacturing or visible trade. There are only about 10,000 regularly exporting firms. Two hundred and twenty control two thirds of our trade, 75 control half and 30 firms account for 40 per cent. of our visible export trade.
What those firms do matters. The Japanese know that. The Germans, for all their reluctance to use four-letter words such as "plan", either because they are too close to the East German border or to an unlamented past, nevertheless intervene at the level of leading firms through the Deutsche Bank. Recently there was a Dm7 billion package of investment through the Kredietanstalt für Wiederaufbau. They know how to intervene, but this Government do not. That reflects the Prime Minister's prejudice against any intervention.
I suspect that the Chancellor may well prefer to have an industrial strategy. He has come some way towards target rates on the demand side and he may well want to have a real supply side economics rather than the laughing matter of the Laffer curve and its alleged incentive and volume effects. But he cannot reach an industrial strategy, because his mistress will not let him.
The result is that the Government have been offering Austin Rover and British Leyland on the market to the highest bidder. Under the Labour Government, we had a British motor industry. We invested resources through the National Enterprise Board. As a result, we had a considerable increase in productivity. What happens under this Government? They offered to sell the industry or let it have a joint venture with Honda, so that a Rover is now a Honda with a Rover badge. That is the failure of the Government's strategy, and it relates both to incomes and employment.
The fifth fantasy is that the fight against inflation should be "paramount". That was what the Prime 1191 Minister said only a few days ago in this House. Obviously, countering inflation should be a key objective of any Government, but the fight against inflation should not be a paramount aim, even of a Conservative Government. The Government's Budget strategy should have been to make it possible to get higher productivity through investment and innovation, thereby increasing our international competitiveness against this disastrous chronic deterioration in our balance of trade.
No hon. Member in his right mind would thank a doctor for reducing a patient's temperature if the result was rigor mortis. Why then should we thank the Government for reducing inflation when it has killed at least 2 million jobs and we have forgone billions of pounds of income and output? Even if that income had been taxed at the rate which obtained a day before the Budget, it would have been higher from sustained economic growth than it has been under the Government.
The Chancellor likes to give the signal in the City that he is no longer going for monetary targets. The code words are that he is no longer a monetarist. Certainly he is the only person who is paying attention to M0. [Interruption.] The Economic Secretary to the Treasury questions that. Perhaps he or the Chief Secretary would like to get to their feet and tell us whether the Chancellor is still a monetarist. If so, what is meant by monetarism? Where is the relation between inflation and the money supply? M3 targets have been abandoned down to M0. What is M0? It is cash in the till and certain types of deposit. Nobody takes that seriously as an index, other than the Chancellor.
A further fantasy is that there are inherent benefits in a balanced Budget because public spending in principle drains the private sector. We have news for the Chancellor: public spending does not drain the private sector or crowd it out; it sustains the private sector. In housing, for example, in England and Wales as a whole, over 90 per cent. of the council houses built are built not by public but by private contractors. So it is hardly miraculous that the cuts in the housing investment programme, which approach nearly two thirds of the total for 1979–1986, collapsed the sales of private contractors nine times more than those of the direct labour organisations of councils.
That is the so-called success of the Government. The cuts have deprived people of housing and have doubled the rate of bankruptcies in the private housing sector. That is not a record that the Government will wish to defend.
Keeping a balanced budget when the remainder of the OECD is slowing down, the United States economy is slowing down and the world economy as a whole is slowing down is like putting an aircraft on to auto-pilot. It deprives the Government of the ability to influence the level of demand and of the possibility of taking a lead at European Comunity level with, for example, the Governments of France and West Germany, to follow the example of Japan and give a stimulus to spending, income and trade in the world economy.
§ The Economic Secretary to the Treasury (Mr. Peter Lilley)
§ Mr. Holland
I see the Economic Secretary shaking his head. Perhaps he wishes to rise and say, "No, that is not the case." [Interruption.] I know who the Economic Secretary is, but I am now looking at the Chief Secretary 1192 who is also nodding his head. Perhaps Ministers would like to tell us whether they think it necessary that the European economies should take the strain from the world economy, the leadership of which can no longer be provided by economic growth in the United States. Have the Government any priority for that? Why did they not reply to the call made by the Secretary of the United States Treasury, Mr. James Baker, before the Venice summit, to other leading OECD Governments to set targets for economic recovery?
If spending and demand targets, which are more important than exchange rate targets, had been set, we might not have seen Black Monday. If they had been set and there had seen a recovery of Europe's trade and sustaining of the dollar by the volume effect on exports, we might have had the "adjustment" on 19 October of the Chancellor's euphemism rather than collapse. In those respects, the Government are heading, at best, into a recession of the world economy and, at worst, into a possible slippage into slump. Through their commitment to a balanced Budget, they are denying themselves the means of coping with that or contributing to a recovery programme with our leading partners.
In contrast with the Chancellor's claims, the real economic scenario is that this country has had the lowest growth rate of any G7 country since 1979. The GDP per head has fallen in OECD tables. Unemployment is still over 3 million and more than double the figure when Labour left office in 1979. Manufacturing investment is still lower than it was in 1979 and the trade crisis is chronic. After more than eight years of Tory rule, this country is uncompetitive, unproductive and unready to cope with a worsening global crisis.
In addition, as my right hon. Friend the Leader of the Opposition said yesterday and as my right hon. and learned Friend the Member for Monklands, East and so many other other hon. Members have emphasised today, this is the most uncharitable and uncaring Budget of all. If the Conservative party thinks that it has anything to do with the economic and social philosophy of the gurus at the Adam Smith Institute and the Institute of Economic Affairs, it has a surprise coming.
Adam Smith was not the man who elevated to the highest principle the self-interest of the entrepreneur. The reference to the invisible hand is a throwaway phrase in "The Wealth of Nations", relating to Smith's preference for domestic trade rather than international trade. Smith thought that by far his most important contribution was his book "The Theory of Moral Sentiments" in which he criticisedThis disposition to admire, and almost to worship, the rich and the powerful, and to despise, or … to neglect persons of poor and mean condition … is, at the same time, the great and most universal cause of the corruption of our moral sentiments".Smith went on to say:It is not the soft power of humanity … that is capable of counteracting the strongest impulse of self-love. It is a stronger power, a more forcible motive … It is reason, principle, conscience".Smith stressed the sense of propriety — which is so missing from this Budget — and what is proper versus the rights of privilege and property. He wrote ofthe propriety of resigning the greatest interests of our own for the yet greater interests of others; and the deformity of doing the smallest injury to another in order to obtain the greatest benefit to ourselves".1193 In practice, in the terms of Adam Smith himself, the Government stand condemned for the Budget because it embodies what he deplored, thedeformity … inequity … and corruption of our moral sentiments".which stem from putting profit and privilege for the stronger in our society before the interests of society as a whole.
§ The Financial Secretary to the Treasury (Mr. Norman Lamont)
I am grateful to my hon. Friend the Member for Torridge and Devon, West (Miss Nicholson) not only for welcoming the Government's extremely important proposals on independent taxation, but for pointing out what I regard as the astonishing fact that the Opposition's Front-Bench spokesmen have spent so little time addressing what the Government have put forward as a solution to something that has always been regarded as an important and long-standing problem. My hon. Friend said that it went back to the battle of Trafalgar and the taxation system that was regarded as appropriate at the time of the Napoleonic wars. Certainly the reception that we have had suggests that, contrary to what Opposition Members have said, that is regarded as an important problem.
The present tax laws generally treat a married woman as if she had no separate identity from that of her married husband. Her income is taxed as if it were his income. Her capital gains are treated as though they belong to him. Even her tax allowance is technically his allowance for use against her earnings. Other taxpayers have a personal tax allowance as of right. Only a married woman has to go out to work to qualify for any allowance at all. Therefore, it is no wonder that people have been pressing for reform for so long.
That is why my right hon. Friend put forward in his Budget a radical proposal for independent taxation, which will come in from April 1990. It will give married women the independence and privacy in tax matters that they have been denied for so long. That is the earliest possible date at which such a system can be implemented and suggests the priority that we are giving to that important reform.
Under the new system, a married woman will be treated as a taxpayer in her own right with a full personal allowance to set against her income, and her own basic rate band. She will have responsibility for her own tax matters and will be able to enjoy complete privacy if she wishes. The change will mean that a married woman will no longer have her income from savings taxed at her husband's highest rate, regardless of the size of her income. A married woman whose only income comes from modest savings need pay no tax at all.
§ Ms. Armstrong
The problem with what the Financial Secretary is saying is that it does not match up with what his right hon. Friend said yesterday. If the Government are serious about enabling women to have independent taxation, will they pay the married couple's allowance to the woman or at least to the highest earner?
§ Mr. Lamont
As my right hon. Friend the Chancellor explained, the married couple's allowance will go in the first instance to the married man. However, it will be transferable to the wife if the married man does not have the income necessary to absorb the full allowance. The new system will be a step forward because it will mean that 1194 married women who work and who, at the moment, may have an allowance, but none the less have their income aggregated with that of their husband, will no longer have their income so aggregated.
The hon. Lady— and other Opposition Members — have suggested that the married couple's allowance is wrong, but if we did not have it, the threshold for married men would be lowered and considerable numbers of people would lose from the change. That is why we have designed the married couple's allowance in this way. This will allow incomes to be disaggregated, which was a point that the hon. Member for Redcar (Ms. Mowlam) addressed. However, she was wrong to suggest that this was an insignificant reform, primarily of interest and importance only to rich couples or rich women. Those who will benefit will not only be the well-off—three quarters of the benefit will go to basic rate taxpayers and non-taxpayers.
Another major beneficiary group will be the elderly. Large numbers of elderly wives earn their pensions on the basis of their husbands' contributions. They, too, will be major gainers — those who have category B pensions — and half the cost in the first year will go to elderly couples. That clearly shows that this tax reform does not only benefit the better off.
It is an important principle that there should be independence and privacy in taxation matters. That has been requested for a long time, and at long last my right hon. Friend has devised a system that will achieve all these objectives.
§ Mr. Millan
The right hon. Gentleman has said that pensioners' wives will be major gainers from the reform, and they will enjoy some gain. But the taxpayers who will gain overwhelmingly will be those with large investment incomes, or large incomes that include investments as well as earned income.
§ Mr. Lamont
I can only assume from that intervention that the right hon. Gentleman is against independent taxation and thinks that people should not have it merely because they have investment or savings income. The hon. Member for Berwick-upon-Tweed (Mr. Beith) made the same mistake. It is not necessary to be rich to have some savings income. At present, women with modest savings income have it aggregated with their husbands' income and must pay tax at their husbands' rate of tax, even if they are non-taxpayers.
The hon. Member for Redcar also mentioned covenants and maintenance. My right hon. Friend has announced some far-reaching changes in those, which will remove an unnecessary shelter in an era of much lower tax rates. The use of covenants for student support is an example that underscores and emphasises the need for reform. The present arrangements for covenants are also unfair to married couples. A covenant between husband and wife can have no effect for tax purposes because their incomes are aggregated, but unmarried couples can reduce their tax liability by making a covenant to transfer incomes between themselves.
My right hon. Friend the Chancellor also identified the present rules for maintenance as being an area in need of change, as it would be hard to imagine a system more complicated than we have now. His announcement will mean that the system will be much simpler for those who receive and those who pay maintenance.
1195 The hon. Member for Redcar referred to the unmarried mother's affiliation order, and said that she thought it was wrong that there would be no tax relief on it. That is true, but all maintenance from now on will be wholly tax-free. That is part of the simplification. She also feared that, because of the limit on relief of £1,490 — the difference between the single and married allowance—there would be no incentive for anyone to pay more maintenance than that. That, of course, will largely be a matter for the courts, but I point out to the hon. Lady that, in fixing this figure of £1,490, we were not unaware that the vast majority of maintenance payments were actually under that figure.
The hon. Member for Berwick-upon-Tweed devoted part of his speech to wider share ownership, which has certainly been one of the Government's major successes. In his Budget speech, my right hon. Friend referred to the survey that we had carried out, by the Treasury and the stock exchange, in January and February of this year, which shows that 9 million people, or 20 per cent. of the adult population, now own shares, compared with 19.5 per cent. a year ago and 7 per cent. in 1979. What the survey shows is that, if anything, there has been an increase in share ownership and a willingness by investors, even in difficult market conditions, to hang on to shares.
The hon. Member for Berwick-upon-Tweed may be interested to know that the survey also showed that personal equity plans have encouraged a lot of people who had not previously bought shares to do so. A number of hon. Members, including the right hon. Member for Glasgow, Govan (Mr. Millan), talked about the Government's changes to the business expansion scheme. Some Opposition Members seem to have missed the important announcement by my right hon. Friend that there will be a ceiling on companies raising BES finance in future. There will be a ceiling of £500,000 on the total amount that any company can raise through the business expansion scheme in any one year.
We have taken this step precisely for the reasons adduced by some Opposition Members; we felt that the business expansion scheme was sometimes being used for raising money for asset-backed investments of a kind that could attract finance in other ways, and that it was wrong to give such a big tax relief in those situations.
The right hon. Member for Govan also raised the question of double BES relief under independent taxation. It is an interesting point but again, for the reason that I gave earlier, he is exaggerating the effect there, because the vast majority of wives with disaggregated incomes in future will either pay no tax or be basic rate taxpayers, and the opportunity for that will be extremely small.
§ Mr. Lamont
I follow the logic of the right hon. Gentleman but equally he must follow ours. If there is independent taxation there should be separate reliefs, just as there are for capital gains tax and just as there are in the area of the business expansion scheme as well.
We have heard a lot of accusations by Opposition Members that this Budget does not help the very poorest in society. We have heard a lot about non-taxpayers. Opposition Members seem to think that people not paying tax have nothing to do with this Government's policy of tax reductions. It is a fact that the Government, not just in this Budget but in others, have been raising the tax 1196 threshold and taking people out of tax, and that some of those who do not pay tax are people who have benefited directly from the Government's policies.
The hon. Member for Dunfermline, East (Mr. Brown) has put forward an extraordinary figure. He has actually talked about the 12 million adult non-taxpayers who will not benefit from this Budget. One would not think, from the way in which he talked about it or in which some of his hon. Friends have canvassed the same figure today, that of that number only 400,000 are people of working age in full-time employment. All the others are either part-time workers, married women with part-time jobs and young people living at home, perhaps some of them coming from relatively well-off homes.
Keeping people out of tax is not something of which we should be ashamed, or which causes pain or anxiety. Keeping people out of tax by constantly increasing tax thresholds is extremely necessary, and is something for which the Government have an extremely good record.
The hon. Member for Redcar implied that the Budget had done nothing for the elderly. Again, many of the elderly are non-taxpayers precisely because the Government, through successive Budgets, have taken them out of taxation. We have the highest tax threshold for married pensioners since the second world war.
As I said a moment ago, pensioners will also be major beneficiaries of the move to independent taxation, especially older pensioners. Each married pensioner will receive an age allowance in his or her own right. They will also be entitled to a married couple's age allowance, based on the age of the older partner in the marriage.
§ Ms. Mowlam
I thank the Minister for giving way. I was trying not to interrupt, so that he would have a chance to finish, but I must correct his inaccuracies.
If the Minister had followed the logic of my argument, he would have understood that I was identifying the parts of the Budget that do not cater for women. If the Government are serious about their commitment to women, they should be dealing with that. Pensioners know, from the context of electricity privatisation and television licences, that what is given with one hand is taken away with the other. The Minister should put his remarks in the right context.
§ Mr. Lamont
I am sorry that I gave way to the hon. Lady. I think that my proposition that independent taxation — as put forward by my right hon. Friend the Chancellor—is indeed independent, and achieves privacy for taxpayers, stands and has been well demonstrated.
When the Leader of the Opposition replied to my right hon. Friend's Budget speech, he said that the Budget did nothing for the average person. It comes as something of a relief to many people to hear the Labour party putting its shoulder behind average people: it so seldom seems to pay any attention to them.
The average person benefits from the Budget. The married man on average earnings benefits by nearly £5 a week, and some 6 million people with between three quarters of average earnings and one and a quarter times average earnings have benefited by between £4 and £6 a week.
No one who listened to the right hon. and learned Member for Monklands, East (Mr. Smith) would have dreamt that over 70 per cent. of the cost of these tax changes had gone on the basic tax rate, and on increasing 1197 allowances. Some 23 million people are basic rate payers, and 99 per cent. of them are beneficiaries of the Budget. They will gain, as they have gained from previous Budgets from the present Government, by significant amounts.
It should be remarked — as my right hon. Friend has pointed out — that the basic rate of tax is at its lowest level since the second world war, and the personal allowance for a married couple is at its highest since then. That is how ordinary people have benefited from the Budget, and they can be confident that they will benefit from future Budgets produced by my right hon. Friend and the present Government. We have set our sights on reducing the basic rate of tax to 20p in the pound, as my right hon. Friend has said.
My right hon. Friend the Chief Secretary has pointed out that the majority of European countries have a top rate of taxation that is lower than our previous rate of 60 per cent. In some countries, such as Switzerland, the rate is significantly lower. Many other countries are moving to cut their top rates — Australia, New Zealand, Canada and the United States.
§ Mr. Lamont
Yes, Germany has a rate that is lower than 60 per cent., and so does France. I would be happy to go through every country and demonstrate, as my right hon. Friend has, that the majority of European countries have top rates below 60 per cent.
The Government have reduced the top rates previously. Indeed, the last time we reduced them it was by a larger amount — 23 points as compared with the reduction of 20 points announced yesterday. As a result of that reduction, the revenue from top rate payers soared in real terms and indeed, my right hon. Friend noted that the proportion of tax represented by the top 5 per cent. of taxpayers increased from 24 per cent. to 29 per cent. We expect that broadly to continue to be the case even after the changes that have been made in the Budget. My right hon. Friend emphasised that policy.
If the result of cutting the top rate of taxation in the past has been to increase revenue, why is the Labour party so opposed to such cuts? When we previously reduced the top rate to 60 per cent. Opposition Members said that that was outrageous and pledged themselves to reverse that decision. However, the increased revenue provided more money for the National Health Service and for our public services.
§ Mr Lamont
I will not give way now.
I had long given up hope for the Labour party, but perhaps I am doing it an injustice because I noticed a 1198 report in The Times of 26 January—admittedly it is a Murdoch newspaper and some Labour Members may not have read the announcement—which was headed:Labour to end the policy of high taxes for rich.That article said that the Labour party believed that the starting point for income tax could be extremely low, but that the maximum top rate under a Labour Government might only be 50 per cent.
Apparently, despite yesterday's indignation and disruptions, that is what the Labour party has been thinking about in private. It appears that a cut of 20 points is outrageous and unacceptable, but a cut of 10 points is something quite different. We have the greatest difficulty in understanding what great difference of principle is involved in that argument.
Labour Member after Labour Member has referred to the amount that my right hon. Friend the Chancellor has had to give away — that is the phrase that they have used. Every word of their speeches showed that they had no understanding of how my right hon. Friend has achieved his current strong position. They talk about the amount that he could give away as though the increased revenues were somehow an accident or manna from heaven—
§ Mr. Lamont
That is an interesting comment. Occasionally, the hon. Gentleman may dip into the Red Book, but perhaps the last time he did so was seven or eight years ago. Today, North sea oil accounts for something like 1.9 per cent. of revenue.
I noticed yesterday that when my right hon. Friend was talking about the strength of revenue, Labour Member after Labour Member said, "North sea oil," and that simply shows that they do not understand that it is by prudence that my right hon. Friend has achieved the current position.
In the past, my right hon. Friend has shown that prudent financial policies are the ones that will leave this country in a strong position. However, we cannot expect Labour Members to understand that. There was a look of utter bewilderment when my right hon. Friend talked about reducing the PSBR or reducing debt.
The Opposition do not look beyond today into tomorrow and they do not look for savings in debt interest. The Autumn Statement of my right hon. Friend the Chancellor amply showed that reducing debt interest can create more room for improvements in priority sectors. Prudence has enabled us to place more and more resources into state services.
Debate adjourned. —[Mr. Neubert.]
Debate to be resumed tomorrow.