Budget Resolutions and Economic Situation

HC Deb 21 March 1988 vol 130 cc41-158

[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).]

4.48 pm

The Secretary of State for Employment (Mr. Norman Fowler)

I shall seek to follow your advice, Mr. Speaker, on the length of speeches. This is the last day of the Budget debate and I wish to concentrate on the Government's economic policy and the part that the Budget of my right hon. Friend the Chancellor of the Exchequer will play in carrying forward that policy.

The Budget has many strengths. It reduces taxation to the benefit of both individuals and companies. It reforms taxation by removing the long-standing unfairness of the system regarding married women. It recognises that the primary function of taxation is to raise revenue, not to punish success.

I believe that those individual changes will be welcomed throughout the country and will add to the reputation of my right hon. Friend. But the Budget is far more than a series of individual measures. It is a further step in a strategy that is summed up in the very first sentence of the Budget Red Book: the objective of the Government's economic policy is to defeat inflation and to maintain a vigorous and enterprising economy with sustained growth of output and employment". Now that, doubtless, is a general statement of policy that would probably attract widespread support. It would probably have the support of some Labour Members—certainly, I suspect, the support of the hon. Member for Dagenham (Mr. Gould) who is replying to this debate and leads the revisionist faction of the Labour party. Indeed, over the past four days of the Budget debate, right hon. Gentlemen who have led for the Opposition have set out their interpretation of a "vigorous and enterprising economy" and their hopes for sustained growth of output and employment". But on one point there has been a deafening silence from the Opposition Front Bench—that is on policies to "defeat inflation". If one reads the speeches of the Leader of the Opposition, the shadow Chancellor and the shadow Secretary of State for Social Services one will search in vain for any serious mention of inflation. It is not just that they have no major passage on it —the word hardly crosses their lips. Yet the whole point of the Opposition's attack on the Budget has been their claim that there is a conflict between the Government's economic policy and the demands of social justice. I find it inexplicable that in a case that majors on social justice the need to control inflation does not even rate a passing comment. Surely the most significant feature of life in Britain today compared with 10 or 15 years ago—the most important social advance — is that we do not suffer from the evil of inflation.

The most important change in the lives of people in this country is that we now live with an inflation rate of just over 3 per cent. Even that is too high, but compare it with what went before and one sees the contrast. Between 1974 and 1979, inflation averaged over 15 per cent. For 13 months in 1975 and 1976 inflation never fell below 20 per cent. At its peak, Labour's inflation rate reached the banana republic heights of almost 27 per cent. We have heard a great deal from the Opposition about social justice, but the truth is that there is nothing more socially divisive than inflation. Nothing is more likely to make the rich richer and the poor poorer. Inflation strikes at the weak, and the victims of inflation were literally millions of people in this country who no longer had the power to look after their own interests. The victims of inflation were the elderly living on fixed incomes and it is to the shame of the previous Labour Government that they knocked the heart out of a whole generation of elderly people in this country.

I am not prepared to take lectures from the Opposition on social justice. There was no social justice in old people being brought to their knees by the financial incompetence of the previous Labour Government.

Mr. Nigel Griffiths (Edinburgh, South)

Will the Secretary of State give way?

Mr. Fowler

I shall give way in a moment.

There was no social justice in a Government who were prisoners of the worst prejudices of the most outdated trade unions in the western world. Above all, there was no social justice in the inflation that Labour inflicted on this country. What the Opposition have never understood is that the basis of any social policy worthy of that name must be a sound economic policy. Above all, it is that sound economic policy that the Government have achieved.

Mr. Nigel Griffiths

The Secretary of State has talked about social justice for pensioners. Where is that justice when, from April, as a result of Government policy, 700,000 pensioners will no longer be able to claim housing benefit?

Mr. Fowler

I will come to that and a whole series of other points regarding social security, inflation and concern for the elderly.

Low inflation, steady growth and a balanced budget have made possible improving productivity, rising levels of investment, falling unemployment and real and sustainable increases in spending on social programmes. It was precisely the failure of the previous Labour Government's economic policy that forced them into social policy "U" turn after social policy "U" turn.

The hon. Member for Edinburgh, South (Mr. Griffiths) has spoken of social security, but the cut made by Mrs. Barbara Castle in 1976, by fiddling the method of uprating, cost pensioners more than £1 billion — the biggest cut in the social security budget made by any Government since the war. That cut was made by the previous Labour Government.

Mr. Nigel Griffiths

Will the Minister give way?

Mr. Fowler

In a moment.

The Opposition now talk of health, but the cut of 30 per cent. in hospital building made by the previous Labour Government was the biggest cut in the Health Service made by any Government since the war.

The right hon. and learned Member for Monklands, East (Mr. Smith), the shadow Chancellor of the Exchequer, referred to his Government's specific record in 1978. Let us consider what was said in 1978 about the Health Service and Labour policies. The Sunday Times commemorated the success of Labour policies with a three-part series entitled "Crisis in the NHS". The chairman of the British Medical Association was calling for an injection of £1 billion into the Health Service and said that the National Health Service in Britain was sick, inadequate and impersonal. Some months previously the general secretary of the Confederation of Health Service Employees, the late Albert Spanswick, said the National Health Service was more in danger and more in fear for its very existence than ever before. That was the state of affairs in 1978 and that is what the shadow Chancellor specifically put before the House as an example of what happened under the previous Labour Government.

Mr. Max Madden (Bradford, West)

The Secretary of State appears to have reversed Ministers' custom of giving the history lesson at the end of speeches—we have had it at the beginning. Will he address himself to a statement that has been made by an independent research body that states that the social security changes to be introduced in April will put the lives of those most vulnerable in our society at unacceptable risk? That body refers specifically to many pensioners and the families of the unemployed. Will he explain why the Budget did not recognise the great hardship and financial problems that are faced by many pensioners, many low-paid families and unemployed families? We do not want a history lesson. We want to know what the Government will do for those people. They have failed miserably in the Budget to help those people.

Mr. Fowler

I am sure that the hon. Gentleman does not want a history lesson. However, when the hon. Gentleman and his hon. Friends seek to lecture the Government on their social conscience and in particular about their social record we have a right to point out precisely the social policy record of the previous Labour Government. In terms of social security and health they have a deplorable record. The hon. Gentleman is concerned about social security changes, but family credit is one of those changes and that will provide more money and £200 million of additional resources for low-income couples. The whole purpose of that change is to target and direct resources to low-income people.

Let me try to reach a point of agreement with Labour Members. At the beginning of the Budget debate the shadow Chancellor—he was here a moment ago, but perhaps he does not like being contradicted on what he has previously said—stated: 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"—[Official Report, 16 March 1988; Vol. 129, c. 1123.] Let us test that statement.

We are now about to enter the eighth successive year of economic growth at an average of 3 per cent. a year. Last year the British economy grew faster than that of any other major industrial country. If that is "episodic" growth, it is the kind of episode for which Labour Governments of the 1960s and 1970s would have given their eye-teeth.

Mr. Doug Henderson (Newcastle upon Tyne, North)

rose——

Mr. Kevin Barron (Rother Valley)

rose——

Mr. Fowler

I will not give way at this time.

Let us take another indicator—employment. At the time of the election Labour Members appeared on platform after platform around the country to say that if the Government won the election the improvement in employment would quickly disappear and unemployment would rise. What has happened? Since June last year, unemployment has come down by almost 400,000. More than that, it has come down every month for the past 19 months. It has now fallen by 680,000 and that is the biggest sustained fall in unemployment since the war. Within those figures, there are further encouraging features. It is encouraging that the biggest falls in the rate of unemployment have occurred in some of the areas where the problem has been worst—for example, in the west midlands, the north-west, the north, and in Wales. It is encouraging——

Mr. Bryan Gould (Dagenham)

Will the Secretary of State give way?

Mr. Fowler

I will give way in a moment.

It is encouraging that there have been record falls in school-leaver unemployment and that there has been a record fall in long-term unemployment after unemployment rose continuously from the early 1970s.

Mr. Gould

I know that the right hon. Gentleman will not make predictions about the future trend of unemployment because that is the position that he and his right hon. Friends have taken consistently. If he will not make a prediction, would he be prepared to make a calculation? If unemployment continues to fall at the current rate, how long will it take before it reaches the level which the Government inherited?

Mr. Fowler

As the hon. Gentleman said, this Government are following the practice adopted by the previous Labour Government by not making predictions of that kind. The hon. Member for Dagenham (Mr. Gould) must take some credit for the position that existed in 1979. He knows as well as I that the recession hit our economy then just as it hit every other western European country. The significant difference is that the reduction in unemployment and the growth in jobs in this country are now far greater than the reduction in unemployment and growth in jobs in not just one or two countries in Europe, but in all Europe.

The challenge now is to ensure that the improvement continues and spreads. The Budget helps in that. It improves incentives, increases disposable income and reduces the burden of taxation on business, particularly on small business.

We should always remember that one of the outstanding features of the past nine years has been the development of small businesses. In the years to 1979, the number of self-employed people fell by 100,000. Since 1979, the number of self-employed people has increased by 1 million. The outlook for jobs is better than it has been for more than a decade. If we can continue to strengthen the economy and create employment through growth, we shall have the opportunity to keep unemployment on its present downward trend.

Mr. Barron

Will the right hon. Gentleman give way?

Mr. Fowler

I will not give way at the moment.

We know that there are 700,000 unfilled job vacancies in the economy. Our duty is to ensure that unemployed people are given the chance to acquire the skills that they need to fill those jobs. That is the purpose of the new employment training programme.

I want to emphasise that further improvement in the employment position is not automatic. Barriers stand in the way of job creation and the continuing fall in the level of unemployment. One of those barriers is excessive pay settlements. They threaten our progress in generating the many thousands of new jobs that we need and will continue to need. They have that effect because they discourage employers from taking on more staff, they reduce opportunities for increasing profitable output, and they hold back investment in the future. At the same time, excessive pay settlements reduce our competitiveness in world markets and that, again, can only restrict the growth of output and jobs.

There is another barrier to jobs — strikes and bad industrial relations. The simple truth is that strikes destroy jobs. The industrial anarchy of the late 1970s reduced industrial output in this country and exported British job after British job overseas. It did more damage to our reputation overseas than any other single factor.

There has been a remarkable improvement since 1979. The number of working days lost on account of industrial disputes has fallen dramatically. There have been fewer strikes in each of the past three years than in any year since 1940. That record has made a very substantial contribution to Britain's economic recovery.

In the past few days we have seen an absolutely clear demonstration of the connection between jobs and industrial relations in the dispute at Dundee over which union should represent the workers at the proposed Ford plant. More than 1,000 jobs are at stake. The responsibility will be heavy if the plant does not go ahead and the new jobs are destroyed. The only hope now is that union objections to the agreement that has already been reached will be withdrawn. I hope that the hon. Member for Dagenham will confirm that that is also the Opposition's view.

The dispute at Dundee has illustrated with the utmost clarity the importance of inward investment to this country. In the past five years non-oil inward investment has grown from £1.1 billion a year to £4.1 billion a year. Such investment brings jobs and it has brought jobs to some of the areas most in need of employment as the people of Sunderland, south Wales, Plymouth and, indeed, Scotland know well enough.

It is no coincidence that those jobs have increased steadily over the past nine years. Companies from the United States, Japan and Europe have seen that investing in Britain makes sense because of what Britain has to offer, because of our good work force and because those companies have confidence in this Government and above all in the Government's economic policies.

Mr. Barron

Will the Secretary of State give way?

Mr. Fowler

I will not give way at the moment.

Does anyone seriously believe that companies overseas are delaying their inward investment plans in the hope that in, say, the early 1990s there could be a Labour Government? Does anyone seriously believe that companies overseas really want a return to the Labour policies of the 1970s?

Mr. Barron

Give way.

Mr. Fowler

I will not.

That is a self-evidently ludicrous proposition. Yet it is the acid test. Companies will not invest here unless they believe that we have a strong economy and sound economic policies. The most significant change over the past nine years has been in the view that the world takes of Britain. Today Britain is seen as productive, competitive and profitable.

Mr. Henderson

Will the Secretary of State give way?

Mr. Fowler

No.

Today Britain is seen as enterprising and efficient. Above all, Britain is seen riot as a nation in decline, but as a strong and powerful economy. This Budget will reinforce the policies that have made our economy strong. It is a Budget for economic growth and it deserves the support not only of the House, but of the nation.

5.7 pm

Mr. Bryan Gould (Dagenham)

We are debating a Budget today that has been received rapturously by the rich. The rich and the powerful have showered all the plaudits on the Budget that one would expect from those who are the great beneficiaries of the Chancellor's largesse. However, behind the deafening applause from that small, privileged group we can hear the cries of despair and pain from those who have been left by the Government, and by the measures that the Government are yet to introduce in the social security changes and changes in housing benefit, with no benefits and very little hope.

There are also cries of protest from those who are perhaps not directly affected by the unfairness at the heart of the Budget, but who nevertheless recognise that unfairness and want to express their feelings. Those people have puny voices. They do not control the media. They do not hold the great offices in the land. They will not take home thousands of pounds in extra pay and be prepared to use it to express their thanks. Such people have a weak voice, but it is echoed and repeated by the Opposition. We accept the responsibility of speaking for them and for pointing out the fundamental immorality of what the Budget represents. Although those voices may be heard only pitifully weakly, they will, in the end, come to stir the conscience of the nation. They will even disturb the sleep of the Chancellor of the Exchequer.

However, I want to address the Budget on a different point. I shall set aside, as the Chancellor manifestly has done, all considerations of morality, social justice and fairness. I shall take on the Chancellor's argument on its own ground. Let us assume that such considerations do not matter—it is difficult to make such an assumption about any self-respecting Chancellor—and that the sole test is whether the things that the right hon. Gentleman has done in his Budget will be in the national interest and for the good of the country's economy. As I understand the Chancellor's argument, there need be no limit to inequality — it should be celebrated and gloried in. Inequality and incentives that give more to those who already have the most will benefit the national economy most, as I understand his argument. Ultimately, it has a further sophistication : even those left out and wholly ignored will derive some minuscule benefit—the crumbs from the rich man's table argument.

This is a convenient theory, which just happens most to serve the interests of those who advance it. That is immediately a reason for great suspicion in deciding whether to take the theory at face or any other value. It is immediately suspect because it is so selective. It applies, so it seems, only to the economic interests of the richest 5 per cent. of society. If the argument is that by giving people more they will work harder and create greater wealth, why does it apply only to the richest 5 per cent. and not to the rest of us? Why is it right to reduce the marginal rates of tax for the richest but to pile the burdens on the rest of us?

Mr. Neil Hamilton (Tatton)

rose——

Mr. Gould

Why do the rich, who are already taking the lion's share of the rewards, need their mouths stuffed yet more full of money before they can produce the wealth on which it is said the rest of us depend?

Mr. Hamilton

rose——

Mr. Gould

I have hardly begun and I have things of greater substance to say, but I shall give way in a moment.

Why is it right to release the rich, already swimming in their money, and at the same time to entrap the poor in the poverty trap and offer them no way of escape? Why is that so beneficial to the economy, when most of us are denied the incentives that the Chancellor proclaims are the heart and origin of economic success?

How does the Chancellor know that the great rewards he is offering the richest 5 per cent. will go to the productive people in our economy? Does he not understand that many of the richest 5 per cent. have little to do with productive capacity or activity? Most hold assets and derive income from them, push bits of paper around, go in for speculative deals in the City, invest speculatively in property and sail close to the wind when they become involved in insider dealings and similar enterprises. So how can we and the Chancellor be sure that, even if his theory is right, he is directing incentives at the right people? What assurances does he have that the money will not be snapped up gratefully by those who are already rich but idle, and who will be confirmed in their idleness and ask why they should work any harder or do more when they can sit back and wait for a munificent Tory Chancellor to come forward with more goodies? How will this stimulate greater economic activity or wealth?

Mr. David Shaw (Dover)

Does the hon. Gentleman accept that everyone in his former country — New Zealand — is rich because that country now has a maximum top rate of 34 per cent?

Mr. Gould

The hon. Gentleman has his facts wrong. Fortunately, as a British citizen and long-standing hon. Member, I no longer have the slightest interest in or responsibility for the policies of Governments in my native country.

It is hardly flattering that the Chancellor should so demean even the rich in his expectations that he believes that Sir Ralph Halpern and all those others will be so ready to respond, like Pavlov's dogs, to the sign of yet more money bags being floated in front of them and will work harder as a result. That is not true, and the Chancellor is wrong if he believes it.

If this theory is correct, what evidence to support it comes from our experience and that of similar countries? We have relatively recent experience of what cutting the top rate of tax means; the Chancellor's predecessor cut it in 1979. What an economic miracle we had then. We had the worst recession that any advanced industrial country has ever experienced, together with the worst fall in output and investment and the worst rise in unemployment. That was the earlier consequence of the strategy upon which such faith is now pinned. So there is little in our experience to sustain the Chancellor in his view.

What of the experience of other countries? There is one country about which Opposition Members have made rather generous and flattering comments in recent years, but whose economic performance has been severely criticised by Conservative Members. I refer to the United States and the wicked policies it has been pursuing. Yet the United States happens to be near the bottom of the international league of top rates of tax. Of the other countries that deserve even more praise for their economic performance, Japan, for example, is near the top of the league for marginal rates on top income earners. And of all the countries of western Europe perhaps the one that has been the most successful economically in recent years has been Sweden. What is Sweden's rate of tax for the top income earner? It is 77 per cent. I express no view on whether that is the right figure, but I ask the Chancellor or the Financial Secretary to the Treasury to explain how the Swedes have done so much better than we have on almost every count over the past few years while appearing to contradict the fundamental tenets of the right hon. Gentleman's Budget. I see that we have no answer.

If the Chancellor has no evidence to offer it is not because none is available. The evidence is there because the Chancellor asked for it. He asked his Treasury officials to commission a great study from Professor C.V. Brown of Stirling university, asking him to investigate incentives so that—one assumes—the whole ludicrous notion could be substantiated. The report has now been available for a long time. Of course, we rarely hear it mentioned or have our attention directed to it. When the Chancellor brings himself to mention it, he denigrates it with all the power at his command.

Mr. Gordon Brown (Dunfermline, East)

The report cost us £500,000.

Mr. Gould

As my hon. Friend says, the report involved a great deal of public expenditure to produce the answer, which was that there was no evidence for the Chancellor's basic theory that cutting taxes increases incentives and induces people to work even harder.

There is an American study. Maybe the Chancellor or the Secretary of State will say, "What about the study done by Professor Lindsey in the United States?" He made a valiant effort to disentangle the various factors which may be at work here, but he concluded that if there was any detectable consequences—he was doubtful about it—of reducing the marginal tax rates of the top earners, any such reduction would have to be offset by removing tax shelters which they had previously enjoyed. What a pity it is, if the Chancellor aheres to that view—there is no evidence of it — that he did not follow it through. Instead of removing tax shelters, he has created new and much more offensive ones.

Mr. Ian Taylor (Esher)

Will the hon. Gentleman confirm that tax revenue from the top 5 per cent. has risen since 1979 despite the fact that tax rates have gone down substantially?

Mr. Gould

The hon. Gentleman demonstrates the fact that the Government have not waited to manipulate the tax system to benefit their friends at the top of the income scale—they have already widely increased inequalities and substantially increased the salaries of people at the top. To pray that in aid as justification for yet further tax cuts is ludicrous and offensive.

If the Chancellor is left with nothing by way of evidence or experience to justify his theory—we are told it underlies his Budget strategy—what is he left with? I suggest that what he is left with is political prejudice, and an unattractive one at that. It is the prejudice which says simply, "It is right for the best off to have yet more. Greed is in itself a good thing." We remember Ivan Boesky travelling the world delivering highly paid lectures to adoring audiences, telling them, "Feel good about greed." We know what happened to Ivan Boesky. We know what the Chancellor has said in his Budget. He has said to the British people, or at least to that minority who benefited so enormously, "Feel good about greed." What we have sitting on the Government Front Bench is the Boesky of the Budget. Just as Boesky came to a grim end, and just as justice caught up with him, so will it catch up with the Chancellor.

The view that inequality is somehow the key to economic success is denied by anybody with eyes to see. If we look around the country, we see alienation, bitterness, division and apathy. Nobody in his right mind could conceivably argue that widening social divisions and increasing inequalities could be anything other than utterly harmful to our social cohesion and our economic prospects. Inequality is inefficient. Any strategy which is designed to increase inequalities is doomed to failure. That is the conclusion that anybody with wit and eyes to see must reach.

The Chancellor is completely wrong if he believes that, by widening inequalities, he will usher in an economic miracle for Britain. We shall see, but I believe that we shall all have a rude awakening on this central question.

I shall now change the focus slightly, away from the Chancellor's dealings as between one taxpayer and another. The richest 5 per cent. are the only people who have enjoyed tax cuts until this Budget—everyone else has paid more in tax. The Chancellor's dealings with the top 5 per cent. are a monument to immorality and unfairness. I shall consider whether the Chancellor's use of the money is in the national interest and in the interests of the economy as a whole. What should he have done with the money at his disposal?

We know exactly what the answer is. The demand was made and endorsed time and again—by the public, by doctors, nurses and others who serve in the Health Service and by patients. They all agreed that if the Chancellor had money available, the Health Service was where it should go as a first priority. They did not say that they never wanted tax cuts in any circumstances, just that the first priority should not be tax cuts but the NHS. The demand was made repeatedly by those who are best placed to know.

Mr. Phillip Oppenheim (Amber Valley)

Will the hon. Gentleman give way?

Mr. Gould

No. I do not intend to linger on this point. The money could be put to a range of purposes. Britain today has been characterised by Professor J. K. Galbraith as private affluence combined with public squalor. Anyone who travels abroad and compares what they see in other more prosperous countries with what is increasingly apparent on our streets must see the public squalor over which the Government have presided. That is another priority to which the Chancellor could have directed resources. Instead, he chose to make his tax cuts.

The Opposition contend that that was a sin of both omission and commission. By cutting taxes for people who are already consuming at a frenetic rate, the Chancellor has ensured that a further powerful stimulus is given to a consumer-led boom which is already running the country into deep trouble. The Chancellor has no idea how to control the explosion in private credit. His only response is to make the consumer boom forest fire yet worse. We cannot afford it—even the Chancellor predicts a balance of payments deficit for the coming year of £4 billion.

In itself, that deficit is not too serious. It is reasonably easily financed if that is where it stays, but the real cause for worry is the trend — the rapid, terrifying and dizzying descent into a balance of payments deficit, even with the enormous benefits of North sea oil. That is what should be worrying the Chancellor. While one ought not to attach too much importance to one month's figures, we can hardly say that January's figures were the most auspicious beginning to this calendar year's trading results.

The true awfulness of our position can be appreciated only if we divert attention for a moment from the overall balance of payments to the manufactured trade deficit, because it is there where we chalked up a deficit of £6 billion last year. Even the Chancellor's prediction is of an £8.5 billion deficit this year. That is evidence of an economy that is increasingly unable to pay its way and increasingly dependent on North sea oil, which is running out. That is why we should be worried — it is not a matter of whether a static debt is financable. We should be worried about what that state of affairs tells us about our loss of competitiveness, output, productivity and performance, bearing in mind the fact that our economy depends on its ability to sell to international markets. The problem is a trend which is running us into a deficit which speaks of a failure of economic policy and of productive capacity.

Last Thursday, the Chancellor of the Duchy of Lancaster said that of course Britain is running into a rather worrying balance of payments deficit, but it ought not really to be a source of worry because we are growing so fast and it is natural that we should suck in a lot of imports. That is an astonishing assertion. Has he never considered the example of the really strong and successful economies which have consistently maintained high levels of growth, and where the corollary of growth has been a substantial balance of payments surplus?

Why are we told that if our country is to grow we must increase our already famous propensity to import? An explanation was offered, in part, by one of the Chancellor's hon. Friends on Thursday, who said that Britian was running into a balance of payments deficit because it had to import a great deal of machinery, capital equipment and all the other goods needed to build a strong economy. Why do we not produce those goods in this country? It is because the Government's economic policies have decimated our industrial base. That is the dilemma. It is not an excuse or an explanation; it is a definition of our problem. That is why imports and the balance of payments deficit are so worrying.

Despite all the Government's propaganda and the constant statements by Ministers that Britain is much more competitive now than it has ever been before, the truth is that, measured by virtually every index of competitiveness, Britain is less competitive now than it was in 1979. That is why we are in difficulties, and that is why our balance of payments deficit is so worrying.

Mr. Andrew Rowe (Mid-Kent)

If that is true, why is it that Ford's head of manufacturing in Europe came to us last week and explained graphically how rapidly Ford is beginning to close the gap between itself and its competitors? Indeed, he said that it was by no means a unique phenomenon.

Mr. Gould

The hon. Gentleman prefaced his question with the words, "If that is true". I assure him that it is true, and he can establish that quite clearly simply by reading the official statistics produced by the Government. I hope that he will do me the courtesy of doing exactly that, as I am sure that he will then confirm that on all the indices of export competitiveness Britain is less competitive today than it was in 1979.

The problems to which I am trying to direct the rather reluctant attention of the Chancellor and his colleagues have been made very much worse by another aspect of the Budget. It has little to do with the right hon. Gentleman's tax policy, but it excited a great deal of interest. I am, of course, referring to the much-publicised disagreement between the right hon. Gentleman and the Prime Minister about their policy on exchange and interest rates. Some commentators listened to the Chancellor's rather elliptical words—brave in their own way, but brief and unclear—and noted that wonderful 0.5 per cent. cut in base rates, and said, "What a magnificently strong Chancellor. We will award him a win on points, even over such a formidable Prime Minister." If the right hon. Gentleman is to be reckoned the winner in the battle—and it is a continuing battle—we shall demand of him a great deal more than a 0.5 per cent. cut in interest rates and the odd phrase tossed away in a Budget speech.

We want an explanation of and real action to deal with interest rates that are twice as high in real terms as those in Germany. Can the Chancellor or anyone else explain that? Can we be given one simple, intelligible reason? Can we have one comprehensible answer? Is there an answer? —[Interruption.] Surely this is an important matter. The Confederation of British Industry and everyone else agrees that high interest rates are a great burden on industry, yet not a single explanation for them has been given. Is that not rather peculiar?

Several Hon. Members

rose—

Mr. Gould

I am seeking an answer from the Government Front Bench. I have no doubt that Back-Bench Members wish to do their best, but until the Prime Minister's eye falls upon them they are not entitled to speak for the Government. I want an explanation from the Government of such a remarkable state of affairs.

The Prime Minister stands on the proposition that we must not buck the markets. I do not know whether that is the Chancellor's view—it may well have changed. The Prime Minister's statement is quite remarkable. Is she unaware that the market is very much influenced by interest rates at twice the level of most other countries? Is that not bucking the market? If the Prime Minister is serious about the effect on the market, why does she not get interest rates down? Is not that the obvious remedy?

Mr. Neil Hamilton

I find it a little difficult to reconcile what the hon. Gentleman is saying now with what he said earlier about the greatest problem being excessive growth of credit. He now asks that interest rates be reduced even further. How does he reconcile those propositions?

Mr. Gould

The hon. Gentleman, perhaps unwittingly, gives the game away. As a hangover from the last trappings of monetarism—[HON MEMBERS: "Answer the question."' I am about to do so. The Chancellor has tried so hard to divest himself of the last trappings of monetarism, yet he still has to use interest rates to choke the explosion of credit. High interest rates are ineffective — indeed, they are often counter-productive, as is immediately discerned by anyone who bothers to study the evidence from the unavailing attempts to use interest rates in that way during the past eight or nine years. Apparently, however, that does not faze this Chancellor. He continues to force high interest rates, oblivious to the fact that they have little impact on credit but are very damaging to British industry and the exchange rate.

The key to the issue is the level of interest rates. A Government who pursue high interest rates show that they are unwilling to forgo immediate consumption for the sake of future investment. Yet the role of interest rates is to make just that division and allocation of resources. High interest rates show a Government who want to encourage immediate consumption; low interest rates show a Government whose policy is to encourage future investment.

Interest rates have another function — to allocate income between those who hold assets and derive income from lending them, and those who want to use the national wealth productively to create new wealth. Interest rates inevitably and diametrically establish the priority of those who hold assets over those who want to increase our productive capacity. High interest rates are clearly a further and most damaging expression of that very disease about which the Chancellor has spoken from time to time, short-termism. A country that pursues a policy of high interest rates shows that it is not concerned about the need to invest in the long term or about those whose true vocation is to create national wealth; it wants to give priority to immediate consumption and to the holders of assets.

The effect of the exchange rate is exactly the same. By forcing up the exchange rate, every over-valued pound will buy more goods, usually foreign, than would otherwise be the case. Of course, it is attractive to Governments to offer a higher standard of living in the short term, but that cannot be sustained in the long term. We shall have to pay a severe price for that short-term gain.

Ricardo, an economist with whom I do not always agree, said many decades ago: If we sell our goods at a high money price and buy foreign ones at a low money price, it may well be doubted whether this advantage will not be purchased at many times its value, for to obtain it we must be content with the diminished production of home commodities. That is an exact summary of what the Government's policies will produce. We will buy in cheaper foreign goods and derive a short-term advantage, but with the consequence of shutting British factories and throwing British workers out of work. That is the hallmark of a policy that pays no attention to the future, but is instead solely concerned with the immediate gratification of those who want to consume to the highest limit that the Chancellor can make possible.

This Budget is not just immoral or offensive, or one that fails the NHS or that fails to invest; it is an anti-productive Budget that takes its place in the context of an anti-productive strategy. It reinforces the divisions that prevent all our people from making their proper contribution to the creation of our national wealth. It encourages ostentatious and short-term consumption at the expense of investment. It encourages the very short-termism that the Chancellor has criticised. It shows a lack of care for the future which is the very antithesis of what a prudent Chancellor would be expected to show.

It is a Budget for the rich, but also for the irresponsible —and not the least irresponsible is the Chancellor who introduced it last week. The Prime Minister proclaimed that the Budget would be the epitaph for socialism—we shall see. It is certainly a celebration of greed and selfishness. If that is the ground on which the Prime Minister and the Chancellor wish to fight, we are ready to trust that matter to the common sense, better instincts and good conscience of the British people.

5.40 pm

Mr. Edward Heath (Old Bexley and Sidcup)

After the Budget the Chancellor has every right to look satisfied with his reputation as a great reformer of the structure of our taxation system. He has every right to look satisfied, and he never hides it. I commend him for the changes that he has made in the structure, because they continue the process of himself and his predecessor, and for that matter his predecessor in 1974, whom he helped to prepare his plans. His Budget has done an immense amount to improve the structure of our tax system.

I suppose that one aspect that will last longest and will always reclaim his fame is the change for married couples. It is not an aspect of which I have any personal experience, but I am told that it will give great satisfaction, and my right hon. Friend has been absolutely right to make that change. My right hon. Friend is quite right to have made various changes to block up the loopholes and escape exits in the tax system, and I fully endorse them.

I fully agree with writing off the system of capital gains until 1982. However, I do not know whether I am quite so sure about combining capital gains with income tax. I must reveal my doubts on that. It seems that in capitalist economies we are always differentiating between capital and income, and we are now combining the two. I cannot see that that simplifies the administration very much. The problems of checking on capital gains will still remain. I have grave doubts whether it is right in principle to combine income and capital gains in that way. Perhaps in replying to the debate my right hon. Friend the Chancellor will be able to convince me of that.

Those are all excellent measures in the reform of the structure of taxation. The controversy arises not so much about the structure — there was little criticism of the structure from the hon. Member for Dagenham (Mr. Gould)—as from the level of the taxes that have been achieved inside the structure.

I advise my right hon. Friend the Secretary of State for Employment, who opened the debate, that he would do more to help me and our supporters in the country if he were to concentrate on the raison d'etre for the specific rates of change, rather than spend his time abusing the Opposition of long ago. I must confess that I find it very difficult now to concentrate on what Mrs. Barbara Castle did or did not say, let alone what she did or did not do decades ago.

I have always objected to what Lloyd George did in the coalition directly after 1919, but I have never held it against the present leader of the Liberal party. I have always believed that one of the most foolish decisions ever taken was by Mr. Churchill to go back on the gold standard at a rate of $4.85, which he could not sustain, in 1925, but I have never blamed my own party particularly for that foolish action. It would help all of us if we had rather more weighty arguments on the exact nature of the change of taxation inside the Chancellor's structure.

I must make one thing plain—I am not opposed to reductions in taxation. I refer to an article in The Economist this week, which displays that bigoted ignorance that is now so characteristic of The Economist and the reason why it has become purely a table magazine for would-be intellectual hostesses in the United States. It states: Mr. Edward Heath, who, as Prime Minister, presided over top tax rates of over 90 per cent., sourly dismissed the changes as 'way over the top'. That displays the most remarkable ignorance by those who write for what was once a great and distinguished paper. In fact, the first Budget in the Government of 1970–74 immediately cut tax rates—

Mr. Neil Hamilton

That was a long time ago.

Mr. Heath

It is nothing like as long ago as Mrs. Barbara Castle — [Interruption.] If my hon. Friend wishes to support the ignorance of The Economist, he should kindly do so—it would not in the least surprise me.

What I want to point out is that we reduced taxation in that Budget. If my hon. Friend wants to come up to date, what is even more relevant is that in 1973—the end of our period of office— the proportion of GDP taken by tax was 32.4 per cent. If my hon. Friend wishes to supply the figure for today, he will know that it is 37.5 per cent. This shows that at that time a substantially smaller proportion of the gross domestic product was being taken for taxation than is taken today. I hope that my hon. Friend will now acknowledge that, but not by intervening.

Therefore, the Chancellor will recognise that there is still considerable progress to be made, even though he himself may not be prepared to make it.

When we come to the relationship between the rates, one asks whether it is right to have gone to 25 per cent. and, so drastically, to 40 per cent. That is rightly a debatable question.

Mr. Nigel Griffiths

Will the right hon. Gentleman remind his hon. Friend the Member for Tatton (Mr. Hamilton) that under the last Labour Government the effective tax rate was 34 per cent.?—[HON. MEMBERS: "That is history."]

Mr. Heath

It may all be history, but at least it bears relevance to what is being said today and to my right hon. Friend's speech, although if it is part of history I am surprised that he did not use it in his speech.

When we come to the debate on the rates, we must recognise that today there are still 2.5 million people unemployed. How can they look at the Budget for any benefit? According to the European Economic Community, 7 million people in this country live below the level that is described by the Community as the "decency threshold" for people living in Europe as a whole. If we have more than 7 million people below the threshold of decency, and 2.5 million people unemployed, that raises the question whether measures could have been taken in the Budget to help those people. I believe that measures could have been taken in a variety of ways, by way of allowances, and that that need not have prevented the Chancellor from lowering the rate to, say, 45 per cent. However, I shall not vote against the Government because of that, because it is a matter of personal judgment.

My right hon. Friend the Member for Shropshire, North (Mr. Biffen), who is not in his place at the moment, explained that he would vote against the Government because he did not believe that the rate should have been reduced from 27p to 25p I find that argument difficult to understand. My right hon. Friend said quite frankly that he had never understood economics, which is a fact that some of us recognised many years ago. If he had said that the dangers of cutting the higher tax rate from 60p to 40p were too great so he had decided to vote against the Government, it would not be up to me to complain.

I want to consider the general problems facing my right hon. Friend the Chancellor of the Exchequer, because he is facing a dilemma which many of his predecessors faced and it is necessary realistically to recognise the dilemma if we are to deal with it properly. The fact is that we now have great consumer demand and as a result we have increased both production and productivity. The Chancellor himself asked how long it could continue. We must ask that, because, although we have 2.5 million unemployed, we lack skilled labour, and the labour available is not in the right place for employment. Unfortunately, those two problems have characterised this country for many years and we have still not come near to solving them.

If there is a responsibility on the Government, it is to take urgent action to train far more people in the skills that are necessary for them to fill the vacancies available. [HoN. MEMBERS: "Rubbish."] I hear some helpful hon. Friends saying, "Rubbish", but the core of the problem is that we lack skilled people and the unemployed are where the demand does not exist. Why? Because the housing is not available where demand exists. This problem has faced us before. The dilemma now is that all too many steps are being taken to ruin the environment by providing more housing, rather than to deal with the problem by placing industry where labour and trained people can be.

Naturally, my right hon. Friends are right to emphasise the trade union problem that we have seen in Dundee. I hope that that can be speedily settled, and I understand that there are possibilities of that.

Mr. Nicholas Budgen (Wolverhampton, South-West)

I am grateful to my right hon. Friend for his observations about industry and housing, but is he in favour of some form of direction so that industry is forced to go to areas where there is labour?

Mr. Heath

I do not know why my hon. Friend, who has known me for many years, should ask such a stupid question. Never in my life have I been in favour of direction. I was the Minister in the 1959 Government who abolished conscription.

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

What about the Housing Finance Act 1972?

Mr. Heath

The last thing that I want to see is any form of direction of labour. But—[Interruption.]

Madam Deputy Speaker (Miss Betty Boothroyd)

Order.

Mr. Heath

I want to raise the basic question of what will face us in future as a result of the Chancellor's policies. There will undoubtedly be increased consumer demand.

The Chancellor of the Exchequer (Mr. Nigel Lawson)

indicated dissent.

Mr. Heath

The Chancellor shakes his head. I do not see how he can say that that will not be the case, even with a reduction of 2p in income tax. Even if all those who will get a reduction in income tax from 60p to 40p invest every penny of it, I do not see how that will prevent an increase in consumption.

We have an undeniable tendency to import more and more when there is more money available. Even now we are faced with the problem that if we did not import our industry could not meet the demand because we do not have the skilled labour, or the labour in the right place, to meet the increased production necessary for the increased consumer demand. That problem will face the Chancellor, if not this coming year, then his successor next year or the year thereafter.

How do we deal with that? My right hon. Friend the Secretary of State emphasised the need to deal with inflation and said that 3 per cent. is far too high. The way to deal with inflation is to allow sterling to rise. That view may be being expressed privately in the Government—these things leak out. The more that sterling rises, the more difficult it is for our exports to be maintained. Let us never forget what happened in 1980–81, when sterling rose to $2.20 or more. That destroyed much of the industry which today could otherwise meet the consumer demand that will result from this Budget.

Let us never forget what happens when sterling reaches that level. It is a way of keeping down inflation, because when we import and allow sterling to rise the price of the goods remains about the same, but it now damages our export industry. At present, sterling is 51.85 on average, and that is too high for our exporters. Moreover, according to reports from firms, it is reducing their profitability because of what they receive in the transfer of dollars to sterling. Some of our great firms are reporting reductions in profits purely because of the movements on the exchanges of the dollar-sterling rate.

The Chancellor faces a dilemma. He can let sterling continue to rise, in which case it may help him to control inflation but will put more British businesses out of operation and damage our exports, or he can keep sterling stable, in which case it will remain too high, or he can reduce sterling by reducing our interest rates, in which case there is the risk of increasing inflation, which will affect selling. The Chancellor wants to maintain stability, and I strongly support him in that. He must get sterling down further and join the European monetary system. We know that the Bank of England and the Treasury want that, and I believe that my right hon. Friend the Chancellor wants it. That is the test. He should take sterling into the EMS. That would help our stability, by preventing sterling from rising too high and, if the balance of payments continues to deteriorate, from beginning to fall against his wishes. These are genuine dilemmas in handling the economy. It is not right to allow sterling to keep on rising. It should come down in order to help our exporters.

We are now in an international system in which it is impossible to prevent an inflow of money into the country. That makes nonsense of monetary figures, targets and limitations, if any remain. This, again, can be handled only by interest rates. If the Chancellor does not want the money to come into the country, he must reduce interest rates to reduce the effects of monetary expansion on the system. At the same time, he runs the risk of inflationary rises in prices because of imports, whether of raw materials or of manufactured goods, entering at higher prices. That is another dilemma. This is all a question of the management of the economy.

What is left to the Chancellor to manage the economy is only the interest rate. He has discarded taxation as a means of dealing with the demand that is created among consumers. He has nothing left except the interest rate. That is why it is crucial, and why it is tied to our membership of the EMS.

Mr. Ian Gow (Eastbourne)

Does my right hon. Friend agree that another weapon in the hands of the Chancellor is to diminish public borrowing or to repay debt? Could he bring himself to pay tribute to my right hon. Friend the Chancellor for having been the first Chancellor for many years, not only to repay debt of about £4 billion this year, but to budget for a £3 million repayment of debt in the coming year?

Mr. Heath

I am strongly in favour of that, but the consequence can be damaging. Unless the money is reinvested, or paid abroad, it becomes consumer money. If the Chancellor repays debt in the ordinary sense, the money is going into some system. The question is whether it will be used for consumption or reinvested. If we assume that it is reinvested, he is right to repay debt.

I shall make two suggestions to the next reforming Chancellor. First, having reached the stage at which great earnings can be made in this country —my right hon. Friend said that we have one of the lowest rates of taxation in the industrial world — the Chancellor has a responsibility to deal with family trusts. This is the system—it does not exist in the United States, Japan or some other Western industrial countries — whereby great estates can be handed on from generation to generation, with no taxation, or minimal taxation. With a system in which, in contemporary ways, one can create great wealth, there is no justification for maintaining a system in which, having made that wealth, one can hand it on from generation to generation without any generation doing anything about it. That will not appeal to my right hon. and hon. Friends behind me, but it will become a basic tax structure issue. That is the first matter that a radical reforming Chancellor should tackle. Of course, it will bring in considerable revenue.

Secondly, the Chancellor should opt for the tax credit system. It will be beneficial to us. It means combining allowances and taxes and operating under one system. It was always calculated that computerisation would save 20,000 personnel. I still believe that that is desirable, and I hope that the next reforming Chancellor will devote his attention to it. It will need further simplification of the system. It will enable the Chancellor to focus on what is required to help poorer sections of the community and to deal with them through the tax credit system. He will then be fully justified in saying that he reduced the overall maximum tax level to something that is reasonable in modern times, that he changed a great deal of the tax structure, and that his successor is carrying on with the reform of the system of family trusts. If he prides himself on having stopped some tax loopholes — family trusts are by far the biggest of all tax loopholes — he will introduce a tax credit system.

I hope that the next Chancellor will do those things. In the meantime, I hope that the risks inherent in the Budget—encouraging though the structure is—will prove to have been taken rightly, that we shall not find inflation increasing, that we shall not find a great consumer boom, and that we shall find our industry and skilled labour force rapidly expanding. Unless that happens, there are grave risks of being forced into other activities.

6.2 pm

Mr. David Steel (Tweeddale, Ettrick and Lauderdale)

I have undertaken to keep my remarks extremely brief. Therefore, I am grateful to the former Prime Minister, the right hon. Member for Old Bexley and Sidcup (Mr. Heath), for not expecting me to defend the decision of Mr. David Lloyd George or anybody else of similar vintage. As I shall mainly be critical of the Budget judgment, I shall begin my remarks by making two statement of appreciation of Budget decisions.

First, I refer to the decision regarding taxation of married couples. The Liberal and Social Democratic parties fought not only the last election but the one before it on that issue. We welcome that long-overdue change.

Secondly, I refer to forestry. I speak not only on behalf of a party that is concerned about the environment, but, obviously, with extensive constituency interests. The change from dependence on tax avoidance measures to planting grants is extremely welcome. We look forward to the details of the planting grants being announced, and, in particular, the hint contained in the Chancellor's speech about the way in which planting grants will be used to encourage the development of broadleaf as well as conifer planting.

With those two exceptions, the Budget judgment is sadly deficient.

In her speech to the Conservative party at the weekend, the Prime Minister said: Most people don't manufacture their own morality. They take it from the culture in which they live. She went on to talk of the responsibility of leaders. Our young people live in a culture whose values are being warped by the kind of judgments in last week's Budget. The Prime Minister herself said: No one would have remembered the Good Samaritan if he'd only had good intentions. He had money as well. In an unscripted answer to a television interview question, the Prime Minister said: Society. There is no such thing as society, only the individuals who comprise it. I give the House a more up-to-date word on the same lines from a junior Minister in the Scottish Grand Committee debate this morning in Edinburgh. Talking about private sector education, he said: Parents exercise choice with their cheque books. I suspect that much of the thinking behind the Budget is that more and more people shall be able to exercise choice with their cheque books and that more and more people should be enabled to buy their way out of the inadequacies of the Health Service and the education system. Because of that basic judgment and the basic purpose behind it, we are strongly opposed to the Budget. Indeed, one wonders why, when community care provisions are sorely stretched, the Government should choose this year to abolish the dependant relative's allowance. I should have thought that we would want to give every encouragement to people to look after their relatives in their own homes whenever possible. We want choice for all, not just for those who can afford it. That is why the Government should have concentrated on maintaining public services at a level of which we could all be proud.

The Budget is severely redistributive in an upward direction. It is always better to give specific examples than to talk in generalities. Today, a married man on a low income of £100 a week with two children takes home £96 a week. But, after the tax changes in the Budget and the social security benefit changes that have already been announced, that man's take-home pay will be down to £87 a week. That reinforces the call of the right hon. Member for Old Bexley and Sidcup for a tax credit system, to which my party is committed. It will not only be more efficient and cheaper to administer, as he rightly said, but more just for individuals who are still caught in the poverty trap.

Of course, the Chancellor's Budget is only half the story. Much of the downside of finances for the less well-off was announced before the Budget. I refer to eye test charges, dental care charges, and the prescription charge increases that were separately announced. Of course, many of the changes that affect individuals form no part of the Budget. So it was that, in my constituency surgery this weekend, a lady came to me and showed me her pension book. She showed me how the calculated increase in pension to which she and her husband were looking forward was already swallowed up by the circular letter that she held in her other hand. It was a rent increase demand from the Scottish Special Housing Association, which, again, is under financial pressure from the Government. That is an example of someone, even with the promise of a pension increase, whose standard of living will be reduced.

We can now perceive that, in the warped culture in which we live, the number of rich individuals will increase—I do not dispute that—but they will live in an impoverished society, in which the crime wave will continue at its present level, squalor will not be eliminated, and in which there will be an increase in drug addiction. Such things are consistent with those parts of the country in which chronic long-term unemployment still exists.

My party supports an enterprise culture. The great majority of British people not all—support an enterprise culture. But it is an insult to suggest that, because they support an enterprise culture, they do not also support a culture that is fair and just. The emphasis that is placed by the Budget and by much of the Government's philosophy on acquiring more money is one of the reasons why we have seen an enormous leap in the scale of personal borrowing in recent years. Last year alone, personal credit was up 18 per cent. As has been rightly said, that results in the sucking-in of more imports.

The Government are guilty of creating a society in which it is thought to be easier to make money than it is to earn it in manufacturing. In the Budget, the Government should have done four things to encourage British manufacturing. The first concerns exchange rate fluctuations—in fact, almost deliberately increasing the pound rate. It remains a mystery why the Prime Minister has some sort of personal veto over our entry into the exchange rate mechanism of the European monetary system. The Chancellor now at least appears to be a convert to this, but I do not understand how the Government can be committed in principle to the completion of the internal market by 1992, and yet not take the step, which is in our interest, of joining fully in the exchange rate mechanism. It is high time that that was done, in the interests of our manufacturing industry.

Second, and here I agree again with the right hon. Member for Old Bexley and Sidcup, we have among our 16 to 25-year-olds a greater proportion of the unskilled than is the case in any of our competitor countries. That has been acknowledged in some of the speeches made by the Secretary of State for Employment, and I am glad to see him nodding. Are we doing enough to bring training and education together, and to invest more in making sure that that age group has more access to all forms of higher education? It is a constant complaint of modern manufacturers that they are finding skill shortages, even now, when there is a large pool of unemployed.

Third, the Government have been grossly neglectful in failing to take any measures to deal with the regional imbalances and disproportions in unemployment. Why is it not possible to reduce the national insurance contribution on a regionally varying basis in areas of high unemployment, to encourage people to take on more workers in the areas that are suffering most? Why is it not possible to do the same with corporation tax, to place more total investment at a regional level? I have some doubts about the changes in the regional development grants which the Government have announced, but I can accept that there is some logic in them, provided that the total resources available for regional development are to be kept going. We suspect that they are not.

The House has been greatly entertained by the exchange of public correspondence between the Secretary of State for the Environment and his predecessor the right hon. Member for Henley (Mr. Heseltine) as to which of them is the more responsible for the destruction of the environment of the south-east of England. Underlying all the correspondence is an assumption that I do not accept, which is that the economy of the south-east has to be overheated anyway, and nothing can be done about it. Without going into the absurd propositions about the direction of industry, I can say that something can be done about it. If more investment were steered towards the north, Scotland and Wales, a great cheer would go up from many of the communities in south-east England, which find that they are suffering from the pressure of people and resources and new developments in this one corner of England.

Fourth and last, the Government should do much more to encourage profit-sharing and industrial partnerships than they have done in this Budget. It is significant that we had a great success in the Nissan plant in Sunderland, where there is a single union, single status and a cooperative system of production. That is the industrial relations for the future. It was lamentable that the hon. Member for Dagenham (Mr. Gould), speaking for the Labour party, had nothing to say about the 1,000 jobs lost in Scotland through the failure to introduce precisely the system which exists in Sunderland, where trade unionism is alive and well, and people are enjoying prosperity. That is the pattern of the future, and the Government should have done more to encourage it.

We shall vote against the resolution on income tax rates because, in the truest sense of the word, this is an antisocial Budget, produced by an anti-social Government, and they should not be surprised if it continues to have anti-social consequences.

6.13 pm

Mr. Terence L. Higgins (Worthing)

I shall begin by taking up two of the points that have been raised by Opposition Front Bench spokesmen. It was noticeable that, in their remarks about income tax, they tended to concentrate on the reduction in the top rate of tax from 60 to 40 per cent. and skilfully ignored the reduction in the standard rate, and the fact that the threshold has been raised twice as much as would have been required merely by indexation to account for the cost of living. I tried to recall in how many Budgets introduced by the previous Labour Government any such reduction in taxation at the bottom of the income tax scale took place. It is a fact that by those standards this Budget, even if one takes that tiny segment of the concessions that my right hon. Friend the Chancellor has given to standard rate income tax payers, is a success.

The other point that it is important to stress is that there is undoubtedly a flaw in our system of considering economic matters with a division between the raising of taxation and the expenditure of it. The public at large do not understand that the Budget presented by the Chancellor is concerned only with the raising of taxation and not with the spending of the money that has been raised. It is tremendously important, since the Opposition have put so much stress on the National Health Service, that this Budget should be seen in the context of the public expenditure White Paper, published a few weeks ago. As my right hon. Friend the Chief Secretary pointed out, that involves an increase of £1 billion this year, £1 billion next year and £1 billion the year after.

I do not recall any Labour Government making such an increase in funds for the NHS. Furthermore, I hope that when the nurses' pay claim is decided, which should be before the end of April, the Government will fund whatever settlement is agreed in full. That will involve a further charge on the contingency fund, which itself will be a substantial increase in the expenditure on the Health Service.

This division between expenditure and taxation presents many problems, although I note with interest that Mr. Sam Brittan took up this point today. It was made many years ago by the Armstrong committee, and the Procedure Committee (Finance), which I chaired, examined it closely. In future, we should consider bringing together more closely the two sides of the measures.

I greatly welcome other measures in the Budget, not least the removal of discrimination against marriage which I know, from experience in my constituency, many groups, not least those involved with the Church and so on, have been advocating for many years. At last, my right hon. Friend the Chancellor has managed to do something about it, albeit with some delay in some of the proposals.

There are so many aspects of the Budget that it is difficult to know on which to concentrate, but I shall concentrate on two. One which has been neglected because it is so traditional is the increase in indirect taxes, notably that on tobacco. This puts into context the Government's attitude to the proposals coming from the EEC with regard to the approximation of indirect tax rates. I am passionately in favour of the single market and I believe that 1992 and the move towards it will give this country many opportunities, which I hope we will be sensible enough to take.

That being so, it is important, if one is enthusiastic for that opportunity, as I am, to disagree with proposals that seem unnecessary or perhaps even damaging. I am struck by the evidence given recently by Lord Cockfield with regard to the proposals for harmonisation of indirect taxation within the EEC. It was significant that he seemed far more preoccupied with the removal of customs barriers and transit between one country and another—when clearly, because of the Channel, the United Kingdom is in a somewhat unusual position — than with getting a system of indirect taxation which was the best that could be devised. He admitted as much when he said that we wanted the easiest way to get agreement, when the right approach should be to argue that we should decide what is the most appropriate system of indirect taxation and then seek to achieve it.

The report of the Select Committee on the Treasury andCivil Service, which was published a few days ago, stressed that there is a danger that the moves towards the approximation of indirect taxation run across the use of a tax system that may be designed for social or health reasons. From that point of view, there may be a case for not going along the route of approximation with regard, in particular, to excise duties. Therefore, I noted with great interest that in his Budget my right hon. Friend the Chancellor put up the effective cost of a packet of cigarettes by some 3p, whereas the proposals by the EEC would involve reducing the cost of a packet of cigarettes by 12p. This can be taken as a clear sign of the way in which the minds of my right hon. Friend and the Government are moving. But other important aspects of the move towards 1992 present opportunities without such disadvantages.

The move towards approximation of indirect taxes in the EEC without regard to whether the structure of those taxes could reasonably be regarded as good would cause serious problems, because once the rates are approximated and finalised by agreement there is no mechanism in the EEC for adjusting their level. That is a great deficiency, because it will mean that the rates are set in concrete. It will also have considerable implications for the management of Britain's economy, not least because a much greater weight will be thrown on direct taxation, over which we shall still have some control. We shall need to be able to take necessary fiscal measures now and probably for many years to come because of continuing differences between member states. The EEC proposals for harmonising corporation tax would give us even less scope for more fiscal adjustments. It is important to retain flexibility in that respect if a uniform system of taxation is not to be imposed, which will cause problems for some countries.

The other aspect on which I wish to concentrate is the Government's policy on economic management. I noted with interest my right hon. Friend's proposals for a balanced Budget, but one must take into account the large margin of error in estimating the public sector borrowing requirement. It was a significant change from last year, when he suggested that the PSBR should be 1 per cent. of GDP. I hope that that point will be clarified. I urge my right hon. Friend not to be afraid to say that policy has been changed. He has a slight tendency to say, as though it was a virtue, that there has been no change in policy. From time to time, changes in policy may be appropriate, and I welcome some of the changes that have been made.

In the run-up to the Budget, the exchange rate policy seemed to create much anguish in the press. The matter was grossly exaggerated on the basis of two answers to supplementary questions on the Floor of the House. There is no difficulty reconciling the answers given by the Chancellor and by the Prime Minister, but we must consider some important issues of exchange rate policy. The item that caught the headlines was the Prime Minister's remark that we cannot buck the market, but we should realise that the answer that she gave before that was entirely consistent with the remarks of my right hon. Friend the Chancellor of the Exchequer.

Of course, there is a market price for sterling at any given time and one cannot buck the laws of supply and demand, if that is what is meant by the market. But, as any student of economics knows, the laws of supply and demand are very different in macroeconomic policy from those in microeconomic policy. The famous diagrams associated with them are very different. The supply, price of and demand for potatoes is not the same as the supply, price of and demand for sterling or the dollar.

Although we cannot buck the market, by using the laws of supply and demand we can significantly influence the market and the price at which the dollar or sterling may operate. But we can do that in various ways. It can be done be currency intervention— throwing money at the sterling exchange rate or the dollar exchange rate. That is likely to be expensive, and it is difficult to buck the market in that sense. But that does not mean that we cannot seek—indeed, there may be strong arguments for it—some stability in exchange rates by co-ordinating interest rate and fiscal policy. I welcome the fact that my right hon. Friend the Chancellor has been active in that respect.

My right hon. Friend seemed to change his mind on the first form of intervention—going out into the market and buying or selling a foreign currency. It is clear from the outcome of the Louvre agreement that relying on intervention without sufficient co-ordination on interest rates and fiscal policies is dangerous. In that sense, too, it is difficult to buck the market. None the less, the measures that the Chancellor has taken in that respect are important and I hope that he will press on. I am sure that the Prime Minister wishes him to do so, as it was clear from her answer at Question Time that she wants to achieve more international co-ordination and stability in such matters. But it will involve co-ordination of all the points that I have just mentioned.

The Budget should be memorable because of the measures contained within it, but I fear that it will also be memorable for the events of Budget day itself. I was appalled by what happened. The House is often rowdy and noisy. There are often points of order and occasions when hon. Members react passionately and the noise reflects it. That is vastly different from mindless chanting clearly intended to prevent freedom of speech. It was greatly to be deplored, not least because it succeeded in its objective: the sitting had to be suspended and my right hon. Friend was prevented from making his speech. I hope profoundly that, on reflection, those who participated in the incident will realise that democracy is a fragile thing and that it is not easy to defend freedom of speech in this place. But it is incumbent on us all to make sure that we do.

6.27 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

I agree with what the right hon. Member for Worthing (Mr. Higgins) said about bringing together debates on spending and the raising of revenue. We have had something similar, but we do not have the factual basis or the proper background to enable us to discuss expenditure and revenue at the same time.

Despite all that has been said about this reforming Chancellor, I expected more from him. As he has given so much of his effort to such matters, I thought that this time we would see something exceptional. I am not talking about our expectation of fairness, which we did not see in this Budget, or the complete disregard for anything other than a reduction of taxation on the rich and the almost humorous justification for such discrimination. I had in mind a Chancellor who had had years of preparation for a Budget in which he could have achieved what so many of us wanted and what he must have wanted a year or two ago—to introduce the real reforms in taxation that would have marked him out for special distinction in matters that he used to consider important. They include mortgage interest relief, which is nonsense and a shameful blot on our financial timetable, the enormous reliefs that are available on personal pensions, the nonsense of stamp duties, and inheritance tax. I thought that he would have wished to turn his attention to those matters at this stage of his Chancellorship.

Of course, it could be said that a Chancellor of the Exchequer who has created such social upheaval in the redistribution of wealth to the rich has done more than enough in tax changes. But tax change is not tax reform, and the one does not inhibit the other. Those who believed that the light-burning in No. 11 which traditionally takes place before the Budget was the light of the tax reformer have been greatly disillusioned. As the Financial Times put it, the Budget was intellectually unexciting. But a proper analysis of these tax changes — and how much more could have been done — really ought to await the Finance Bill and the debates on it.

The political aspects of the Budget have been dominated by two matters: money for the rich, and the argument between the Chancellor of the Exchequer and the Prime Minister about the exchange rate. That argument really is important. It lies at the very heart of our economic management, and it is the critical test of the right hon. Gentleman's Chancellorship. Getting it right will determine the balance of payments, the promotion of exports, the discouragement of imports and the relationship of our economy to the world at large. In a word, it will determine the outcome more than anything else that the Chancellor is able to do. It represents the maximum of his power or influence. It is more than an economic indicator. It represents in itself almost an entire economic strategy. It is the one economic signal that can claim the privilege of keeping the Chancellor awake at night. The exchange rate is the precursor of trade patterns. It determines the order books of our most important industries, affects the level of unemployment and anticipates the real level of industrial prosperity.

As a lesson, we need only remind ourselves of what happened in the exchange rate madness of 1980–81, when so much industry was damaged and destroyed. As an example of what a disastrous exchange rate policy can do, I have only to turn to my constituency, where, in those two years, we lost one third of our manufacturing industry. This was not low-tech industry; it was not cotton, for instance. It was medium-tech. It involved skilled engineers and skilled engineering firms, producing articles that the whole world makes. They are made in Japan, Germany and the United States. Those firms were destroyed by the high exchange and interest rates. They could not sell on the home market or the overseas market, and they went to the wall. They will never recover or restart.

That was not unimportant, not just in Ashton, but everywhere. We saw a community with higher than average pay and lower than average unemployment—in the country as a whole, not just the north-west—suddenly turned to an area of high unemployment, low pay and all the problems of dereliction that compound those disadvantages.

When there is an argument about exchange rate policy between the Chancellor of the Exchequer and the Prime Minister, we are not talking about a bit more money for this, or a little less for that; a bit more on this tax, or a bit less on that tax. We are talking about the central economic issue of our country. On that, the Prime Minister has one view and the Chancellor has another. When the Prime Minister says, "You cannot buck the market", she is offering too simple a view, as the right hon. Member for Worthing pointed out. It is true that Governments must listen to markets, but it is also true that markets must listen to Governments. They interact, and a wise Chancellor uses the relationship to the benefit of our economy as a whole. In that respect, I believe the Chancellor to be right and the Prime Minister to be wrong. I think that they both started off with the same view, but the Chancellor has learnt and the Prime Minister has not.

At one time the Chancellor was even more extreme than the Prime Minister. He wanted to enable the Bank of England, through legislative powers, to decide these matters independently of the House of Commons. He held that view in 1977, and, although he may wince at the recollection, we can at least congratulate him on changing. The Financial Times says that the Chancellor of the Exchequer has jettisoned his "ideological baggage", and we as a House commend him at least in that particular.

Let me demonstrate the complacency of the present Government. Last week, when the Chief Secretary to the Treasury talked about the economic miracle—perhaps he will regret mentioning that again; we have had too many such false dawns—he joined the long list of those who, since the war, have awaited its coming with more hope than good sense. I must say that I find the exultations rather cloying, as well as the self-satisfaction that I see oozing from every statement. It seems that it is exceeded only by the Government's amnesia about the cause of the present economic position. That, as we all know, is North sea oil.

It is not the revenue aspects that are of such importance. It is the balance of payments aspect. From 1945 until 1980, what stopped the economy from growing was balance of payments difficulties. Stop-go was an illustration of those difficulties. Every now and again they brought to a halt all our expansionist hopes, whichever Government were in power, and, at a stroke, the balance of payments ceased to be the dominant economic factor in 1980.

What has happened since then'? We have had the disaster of the high exchange rate. More recently, we have had the boom in the high streets—a retailing windfall. Credit has never been so freely available, and our savings ratio puts us near the bottom of the table of major industrial countries. We now have a consumption-led boom, but we have been through this sort of thing before. We had it in 1955 and again in 1960, and—as the right hon. Member for Chesham and Amersham (Sir I. Gilmour) pointed out in a speech of great distinction—there are close similarities between now and the period between 1971 and 1973. The right hon. Gentleman could have added to his detailed list of similarities the property boom that is so disfiguring the housing market today.

This consumption-led boom could, of course, have taken place at any time since 1980. It did not have to wait for a year or two ago. The early factor that brought a halt to such policies in the past was the balance of payments. It is North sea oil which, uniquely in the present import boom, has protected the balance of payments. In past surges of consumer expenditure there was at any rate some intellectual justification for it. Expand demand, the argument went, and our factories would produce more, unit costs would fall and exports would increase. The philosopher's stone for which we have been seeking would be to hand, and we would have export-led growth. But the present consumption-led boom has no hope of being transmuted into export-led growth.

With the internationalisation of trade in manufactured goods, as well as the exchange rate—which, on any likely reckoning, will not discourage such imports—all we shall achieve is more imports and an artificial feeling of well-being. If that happens, the so-called economic miracle, like all previous hopes, will have collapsed. The economic miracle—or, rather, our misuse of North sea oil—will have been shown to be nothing but profligacy, and as such will take its place at the forefront of a long list of missed opportunities.

That, I believe, is the likely outcome of this Budget. Far from its effects being limited, if the Prime Minister were to succeed with her high exchange rate policy, the problems later this year, or early next year, would be magnified.

This is supposed to be the Budget for initiative. It is the umpteenth Budget for that elusive virtue. It is strange that tax reductions for the rich are supposed to stimulate the creators of wealth. I thought that we had tested that theory almost to destruction in our post-war history. The wealth creators were expected to be stimulated by Selwyn Lloyd when he made his large reductions in surtax in 1962. The economic halt, as we know, came two years later. Anthony Barber tried again in 1971, with his unified tax, which was the largest tax concession to the wealthy that had been seen since the war. That, too, collapsed in ignominy two years later.

In view of the economic consequences of stimulating the rich, it might be concluded that disaster would invariably follow. What would certainly be perverse would be to assume that any economic benefits flow from such changes—let alone that the benefits will be remotely comparable to the social consequences of divisiveness, unfairness and a decline in our provision of essential services.

Of course, the benefits of this Budget for the rich do not go just to the creators of wealth; they go also to the inheritors of wealth. With the emasculation of the so-called inheritance tax, great advantages now go to those who are left large fortunes. I have no idea how this is supposed to stir the entrepreneurial instincts of those waiting for their relatives who are well off to pass on.

The difficulty for the Government lies in their inability to provide an intellectual basis for the relief of taxation of the well off. The assumption must be that, despite all the trumpets and fancy speeches, and all the posturing, they are just handing out the prizes. It is in their expenditure that the Government show themselves to be equally unfair. They talk about giving more money to the National Health Service. Many hon. Members know something about the relative price effect. It costs more to keep the National Health Service than increases at the level of inflation can provide.

Tameside general hospital, which is in my local authority area, had 5,800 admissions two years ago and 5,000 last year, but it will come down to 4,000 this year. That sounds bad, but it is even worse when one takes into account the fact that 3,000 of those admissions are emergencies. All that we had were 2,000 above the level for emergencies last year and 1,000 above the level this year. That is the scale of the deterioration of the Health Service of which I have personal experience.

The failure to increase child benefit is also distressing. Just over 10 years ago, in 1977, a compact was reached between Iain Macleod and the Treasury. The deal was that child benefit would not be treated as public expenditure subject to the disciplines of the public expenditure exercise. We were going from tax allowances to child benefit. Tax allowances were always raised. The agreement reached with Iain Macleod was that child benefit would not be included in the public expenditure exercise, but would continue to be dealt with in the way that tax allowances are dealt with. We have seen a quite shameful withdrawal from that agreement that could have continued at least to play an important part in limiting the problems of families on low incomes.

This is an unfair Budget. It is not a Budget that a future Tory party will be able to look at with pride. It will be an embarrassment to the Tories and will shame their successors. Sooner or later the British people will turn to more equitable ways of running the economy, and I hope that they will do that before too long.

6.42 pm

Sir Ian Lloyd (Havant)

I begin by congratulating my right hon. Friend the Chancellor on three counts. First, he has produced a splendid Budget, which will be the envy not only of his predecessors but, I suspect, of his successors. To have balanced the Budget, balanced our payments, repaid debt, reduced taxation dramatically, held inflation in check and created the general economic conditions favourable to growth and falling unemployment is a prodigious achievement.

Secondly, he has gone a long way to ensuring that the lessons for our economy, set out in such vivid illustration in Correlli Barnett's powerful book "The Audit of War", are learned and applied. Few would have predicted with any real confidence as recently as five years ago such a remarkable transformation. It has not been without pain or uncertainty and, as always, the faint-hearted would have given up when the going was tough. It is very much to my right hon. Friend's credit that he did not do so.

Thirdly, in a most decisive and convincing manner, my right hon. Friend has broken the mould of a high-tax, low-incentive, low-productivity economy from which successive Governments of all parties tried so hard to escape, sometimes with very much less success than they had hoped. He has done so because he is the Houdini, if I may put it that way, who has mastered the complex art of unlocking each of those massive locks that bound our economy in the iron bands of constraint, despair and interlocking prohibitions. He has broken out of this by seizing on the most promising and important segments of policy, and by defining the fundamentals and sticking to them. I salute him and recognise in him, as Napoleon once recognised in his generals, the truth that good generals are those whose skill is rewarded with luck. I suggest that the Chancellor's skill is quite exceptional this side of the second world war.

My main purpose is to concentrate on one argument, that the Budget has reduced taxation rather than increased expenditure on the National Health Service. My right hon. Friend the Chancellor has come under considerable attack on this score, not least in today's debate and not only from the Opposition. He is right and his logic is equalled only by his courage. It is most uncongenial to be accused of lacking sympathy or compassion for the sick. As I understand it, the argument is that the National Health Service can demonstrate a shortage of staff, equipment and space. It is that hospital queues are lengthening, that there is a perceived shortage of most skills—especially of the most scarce medical skills—and that decisions are being made not on health but on financial grounds. Therefore, the argument runs that there should be no reduction in tax on anyone until a significant proportion of these needs have been met and the future of the Health Service secured. On the face of it, that is a plausible and in some ways a powerful argument.

I find particularly disturbing the suggestion that has been made over and over again in the past few weeks that this problem is unique to our Health Service and to the United Kingdom. The suggestion is that it reflects a unique lack of generosity on the part of the Government, and that there is a unique indifference to the plight of our hospitals and our medical profession. Those things are attributed by our critics uniquely to the Government. All that is unsustainable because the mass of description and anecdotal evidence, of which we have had a great deal, has failed both in detail and in terms of the general picture that has been conveyed to make a case.

What is the evidence that the problem is not unique? There are three principal organisations which in my experience have concentrated immense effort in recent years on the problem of world health in the developed and the undeveloped world. The first is the World Health Organisation. It has published a series of reports pointing out in the most dramatic terms that by the end of the century all the developed countries of the western world, whatever their present position, are likely to run into massive problems about financing their health services. No one has mentioned that.

Secondly, that superb body, the Organisation for Economic Co-operation and Development, has published a series of reports, specifically on health but more generally on social problems. In a moment I shall come to some of the conclusions in one of those reports.

Thirdly, the Office of Technology Assessment, which advises the United States Congress, has produced a series of reports on health that are of immense significance and value. The OTA has looked at a series of major health problems in the United States in relation to the Medicare system of payment and has concluded that there are no easy solutions and that such solutions have not been applied there or anywhere else. The problem of health is immensely complex and has not yet been solved.

All these reports have a series of common conclusions. I have touched on the first one, the immense complexity of the problem. The second is that there is general evidence throughout the western world of failure and concern, and that this applies in countries such as the United States, Sweden and Switzerland which apply the highest percentage of GDP, just as much as it does to countries at the other end of the scale. Thirdly, there is general evidence from the OECD and in the developed world of massive health cost overruns. It is not a problem unique to the United Kingdom or to our National Health Service, nor is it one that the present Government or any other British Government have uniquely failed to solve. It is a general problem and I suggest that we have much to learn by looking at the experience of others and seeing what lessons we can derive from them.

There is no correlation — this is a significant conclusion — between the system of payment and the general success of a health service. The system is obviously one of immense variety, varying from our own, which is virtually a totally publicly funded service, to the United States, which has the highest percentage of GDP spent on health, but, in fact, spends only 4.4 per cent. in the public sector and 6.3 per cent. in the private sector. In France, where the figures are 6.5 in the public sector and 2.6 in the private sector, the OECD analysis again discloses many unsolved problems, particularly in the distribution of health skills throughout metropolitan France.

Mr. Campbell-Savours

Does the hon. Gentleman accept that there may well be a great body of opinion that simply wants to spend more as a percentage of GDP and that those people are not concerned with his arguments? They simply want the state to spend more, to raise standards and to increase the availability of services. Can the hon. Gentleman absorb that proposition?

Sir Ian Lloyd

There is always a vast body of public opinion which, over almost every segment of the public expenditure spectrum, wishes the state to spend more. I have never yet received large numbers of letters from constituents, especially those employed in the public sector, asking the state to spend less.

That brings me to my next point. There is no exclusive right of a national health service or the health sector in any country to absorb, as of right, increased resources which the growth of the economy is making available. It certainly has every right to put in a claim and to have the claim considered in conjuction with others. However, the argument being deployed here is that under the Health Service there is an absolute right, as soon as a surplus is created elsewhere which matches or exceeds its deficit, for that deficit to be met. That argument cannot be sustained. Health Service expenditure must compete against expenditure on defence, education and the environment, a total of £130 billion in public expenditure.

Health care may often be better achieved through other forms of expenditure. Some calculations have been made by the Office of Technology Assessment, which show that expenditure on safety, as a result of the high medical costs of accidents, could well improve the general efficiency of health services much more directly and effectively than direct expenditure in hospitals on the consequences of accidents. The same applies to expenditure on reducing pollution. Some precise calculations have been made in respect of the effects of reduced pollution on bronchitis and the consequent reduction in bronchitis costs. Those calculations were made in the United States, where the reduction in expenditure was calculated to be about $10 billion. That is a cost-effective way of going about things. I need hardly mention the effect of decreasing expenditure on alcohol and tobacco. The consequences of the consumption of alcohol and tobacco account for about 40 per cent. of all health expenditure in this country. There is no automatic entitlement of the NHS to funds. The NHS must compete. It may be justified in its approach in some cases, but not in others.

I should like to refer to a number of points made by the hon. Member for Dagenham (Mr. Gould). He said that economic judgments were much better if they were not so confused with morality. He appeared to be saying that economic judgments were generally much better made if they were judged in some sort of moral-immoral spectrum. That is a fallacious way of considering such matters. We are considering two essential problems—social acceptability and economic growth. They are certainly interconnected. It is a fine and often difficult judgment as to which policy will optimise the U-curve between the two in a most complex and difficult manner.

However, in my judgment, it is not a question of morality. It can never be a question of morality or immorality. If it were a question of immorality, one must ask oneself, if it is immoral to lower tax rates, at what point does the immorality become acceptable? We can consider that equally from the other side of the political spectrum. At what point does it become immoral to raise tax rates to the draconian levels that have existed in this country and others? We know that those draconian rates have had what could be described as immoral consequences, but I prefer to describe them as poor economic judgments with poor economic consequences. Let us forget about bringing morality and immorality into the issue. There is no ethical criterion, but economic judgments about consequences should be made a proper ground for political disagreement between the parties and a proper ground for debate.

The hon. Member for Dagenham then suggested, in an attempt to elaborate his argument, that the rich are idle. He said that the rich would benefit from the Budget, particularly the idle.

Mr. Campbell-Savours

He did not say that.

Sir Ian Lloyd

I wrote it down at the time. He said that many of those who would benefit from a reduction in tax rates were not merely the rich, but the idle rich.

Mr. Campbell-Savours

That is different.

Sir Ian Lloyd

It may be different, but if the hon. Gentleman considers some of the so-called rich — for example, Ford, Nuffield, Carnegie, Morris, Hammer, Leverhulme, Hanson, Rothschild, Morita, Wolfson and Sainsbury—he will see that not one of them could ever be said to be idle. They may have made great wealth, but they made it by the sweat of their brow and the efficiency of their judgments. Let us forget about the question of benefiting the idle.

The hon. Member for Dagenham then said that inequality is inefficient. That argument may be valid in a limited way in certain circumstances, but, if one is generalising the argument, why has the Soviet Union staged a massive retreat at great political cost from the egalitarian state that it sought to create and implement? The hon. Gentleman should take such judgments into account before he makes statements of that degree of generality.

The hon. Member for Dagenham then referred to Professor Kenneth Galbraith whom I remember being quoted in support of a former Prime Minister, now Lord Rievaulx, and his Government. If one considers that in a limited sense, Professor Galbraith had a point, but, when one widens the analysis and area of judgment, one finds such examples as that which I found two or three years ago. I went to the Rhondda valley with the Select Committee on Energy to look at coal mines. One of the things that impressed me was the relative poverty of the private housing. The area was poverty-stricken and in many ways depressing. Suddenly, we came over the hill and there was a splendid, vast glass structure. I asked, "What's that? Is it some new factory?" I was told that it was the Rhondda council building. There is, therefore, another kind of contrast, that between public affluence and private squalor, but there is not necessarily any argument for or against the Budget from that quarter.

Mr. Rhodri Morgan (Cardiff, West)

The hon. Gentleman must have the wrong valley. I can assure him that the Rhondda valley council headquarters are in a building equal in antiquity to that of the majority of houses in the valley—in other words, about 120 years old.

Sir Ian Lloyd

I apologise to the hon. Gentleman if I have the wrong valley. There was certainly a dramatically large and expensive building some 20 miles further up the valley that I visited. I withdraw any aspersions that I may have accidentally cast on the Rhondda.

I wish to deal finally with the question of high interest rates. I was astonished to hear the hon. Member for Dagenham argue that high interest rates encourage consumption. When my overdraft rate goes up, I endeavour to reduce my consumption. When the building society rate on mortgages goes up, the net effect on a fixed income is to reduce the available income and, therefore, to reduce consumption. The hon. Gentleman went on to say that that discourages the type of investment that we most want to see. Again, as most major industrial investments involve elaborate discounted cash flow analyses, in which the rate of interest is a crucial factor, one of the significant effects of high interest rates is to encourage more discriminating investment.

Mr. Dafydd Wigley (Caernarfon)

Oh!

Sir Ian Lloyd

If money is cheap and free, anyone can borrow and get hold of it. If money is expensive and scarce, obviously it is much more difficult to borrow and those who do borrow must consider much more carefully their approach and how they will spend that money.

I repeat that I heartily approve of what my right hon. Friend has done and I hope that he will be here next year to do it again.

6.59 pm

Mr. Tom Pendry (Stalybridge and Hyde)

I am extremely pleased to follow my right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), the previous speaker from the Opposition Benches, because he referred to the damage that the high interest rates policy of earlier years had done to his constituency and to mine. We have not yet recovered from that damage. I wish to concentrate my remarks upon that policy. It is a relatively narrow policy, but it is an important aspect of Government thinking and it is one to which the Chancellor should have addressed himself in the Budget.

I can state categorically that last Tuesday was not "Super Tuesday" for my constituents. At the weekend, the Prime Minister used just that expression a few miles along the road from my constituency and how she had the nerve to do so I will never know. It is just as well for her that security was drawn tight at Buxton. Clearly the hand picked audience were beneficiaries of the Chancellor's lopsided, rich man's Budget. She certainly would not have got away with saying such things further along the road in Tameside. The Budget has done nothing for the vast majority of people and it has certainly done little for the people of Tameside.

The much-vaunted inner city policies of the Government have hindered the development of trade and industry in my constituency and that failure is repeated in many similar areas. My local council, as my right hon. Friend the Member for Ashton-under-Lyne would testify, is a well-run council. It is doing a great deal in line with what the Prime Minister has urged councils to do in her introduction to that glossy piece of fiction "Action for Cities" which was launched only two weeks ago. The Prime Minister wrote—perhaps it was Bernard Ingham or perhaps they worked together—in that document: The Government is resolved, in partnership with the people, to generate that hope and help to create a new, lively environment in which to live, work and prosper … the Government has created a climate which supports enterprise and has set about removing obstacles in the way of inner city recovery. That is nonsense to Tameside, whose situation does not square with the Prime Minister's words. By any yardstick Tameside is recognised as a deprived area. Indeed, its problems are recognised by all the political parties in the borough. I should like to draw special attention— I am sure my right hon. Friend would join me—to the leader of the Conservatives on the council, Councillor Bell. The Conservatives on the council, with one exception—an unsuccessful business man and failed parliamentary candidate—are at one with the majority party and with the business community in pressing the Government for help for the varied problems of the borough.

The three Members of Parliament with constituencies within the boundaries of Tameside have worked hard to bring Ministers to the area and have sent deputations to Ministers in Whitehall to present the problems of Tameside.

The hon. Member for Rossendale and Darwen (Mr. Trippier) was the latest Minister to visit the area. The leaders of the majority and minority parties made it clear to him that there was a true partnership scheme—not one of the glossies—in operation. It was a true coming together of the private and public sectors of the borough with the aim of generating the local economy. Those involved in the scheme believe that Tameside has many of the problems of the inner city — decay, dereliction, eyesores, empty factories, crime and run-down housing. The Minister must have been convinced by the determination that exists to tackle and resolve the problems. I am sure that he was especially convinced by the senior representatives of nationally-known companies who told him that they were as united and determined as anyone else to make the partnership work. However, when the Minister returned to Whitehall, he and, therefore, the Government turned their backs.

Tameside does not fall within the boundaries for urban aid that were drawn up a decade ago, so the borough is deprived of the assistance that it needs and it is ignored. Why did the Budget not address the problems faced by Tameside? Why are Tameside and similar areas considered irrelevant to Government philosophy?

Local business men, many of whom the Parliamentary Under-Secretary of State for the Environment met, are baffled about why their ideas for expansion have been stopped by Whitehall's red tape. Projects that are attractive to private investors and that would benefit urban regeneration are coming up against a Government brick wall. The Government are letting the spirit of enterprise flounder. Instead, they are producing glossy brochures and an abundance of new logos.

One glaring example of Whitehall red tape was witnessed by the Under-Secretary. A pharmaceutical factory in my right hon. Friend's constituency straddles the boundary between Tameside and Oldham. It was pointed out to the Minister that, if that company moved its postal address from one building to another —situated on the Oldham shde— it would be eligible for inner city status. The company was baffled by that. It asked the Minister about it, but nothing was done. I defy any hon. Member to go round Oldham and Tameside and say that there are any differences in the problems that they face. They are both worthy of Government support. Indeed, Tameside has a worse unemployment record than Oldham. My purpose is not to diminish the claims of Oldham or any other area for Government help but to highlight my council's case.

On the Department of the Environment's own figures for social stress, Tameside scores higher than at least five of the north-west boroughs that enjoy urban area status. In the past four years unemployment in Tameside has increased at a faster rate than in nine boroughs that receive support. Financial resources are also tighter in Tameside because of its low rateable valuation in comparison with neighbouring boroughs and that is a clear reflection of the poor status of the area.

One point that is often overlooked is that Tameside not only has the economic problems of the scale of the city of Manchester, but has them in population terms as well. Tameside contains several overspill estates and, in the main, people have been rehoused there from Manchester's inner city. The estates of Hattersley, Carrbrook and Haughton Green in the constituency of my hon. Friend the Member for Denton and Reddish (Mr. Bennett) contain a population of about 13,700. Many of those people still work in the city of Manchester and if they lived a mile along the road they would qualify for help.

I want the Government to recognise that my local authority is playing its part on partnership and regeneration. It has done so without Government help. However, that authority needs help if it is to fulfil its wishes and if it is to achieve what the Government claim they want such authorities to achieve.

The authority has provided houses for sale and vigorously tried to improve older housing stock; land has been sold to private developers at subsidised cost; efforts have been made to improve the infrastructure, especially the shopping precincts, and it has introduced many other schemes.

On top of its economic problems, the deprived constituency of Tameside faces further cuts in health care. In the two Black reports Tameside was described as being in the top 10 most deprived areas of the country in terms of health provision. Tameside general hospital — my right hon. Friend the Member for Ashton-under-Lyne has said somthing of this already—is to cut 90 acute beds and 16 children's orthopaedic beds. A hospital has effectively closed without the Secretary of State's permission to date. Twenty-five general surgical beds are to be kept open for three months only.

I accept that I have made a constituency speech, but I do not apologise for that. Tameside is typical of many areas and the Budget has not addressed the problems in those areas. I state candidly to the Minister that he must respond to the points made by me and my right hon. Friend the Member for Ashton-under-Lyne about our area. Our constituents look to the Government to help them with their difficulties. If this Government will not help, our constituents will look forward to the day when we have a Government who recognise the problems and are prepared to do something about them.

7.10 pm

Mr. Cranley Onslow (Woking)

I want to be brief and I hope that the House will forgive me if I pick up the points made by my right hon. Friend the Member for Worthing (Mr. Higgins) at the end of his speech.

I begin by referring to the events on Tuesday when our debate began. I agree with my right hon. Friend that the organised tribal chanting was a disgraceful exhibition. The lack of action from the shadow Leader of the House or the Opposition Chief Whip to restrain those who were responsible for that disgraceful breach of order says much about the ability of those people. Perhaps the House would benefit if they would make way for others. If they will not make way, would they at least please stop obstructing the establishment of the Select Committee on Procedure which could consider these matters which must be examined?

There is an aspect of the disorder in which the hon. Member for Banff and Buchan (Mr. Salmond) succeeded in getting himself suspended which preceded the chanting which should not pass without remark. As you were in the Chair at the time, Mr. Deputy Speaker, you might be interested in the names in the Division list on the motion to suspend the hon. Member for Banff and Buchan. Most of the names will not have caused you surprise, Mr. Deputy Speaker. However, the presence of the hon. Member for Cunninghame, South (Mr. Lambie) on the list might have surprised you.

I gave notice to the hon. Member for Cunninghame, South that I intended to raise this point and I am sorry that he is not in the Chamber. I believe that the hon. Member is a member of the Chairmen's Panel. Members of that panel have a duty to support the Chair. It is entirely reprehensible that the hon. Member for Cunninghame, South chose not to support the Chair and he should be brought to account for that. I have no wish to go further into that matter as I have made my point.

I agree with the compliments paid quite rightly to my right hon. Friend the Chancellor of the Exchequer for his Budget. I want to focus closely on a point that has been referred to off and on from the beginning of the debate, which is the extent to which my right hon. Friend the Chancellor has prudently made provision for what may be expected to happen in the next few years.

Too much of the debate has been harking back. We could hark back a long way if we wanted to. As I listened to the right hon. and learned Member for Monklands, East (Mr. Smith) and his Front Bench colleagues, I was reminded irresistibly of a colourful card that I was given by a constituent during the 1970 general election campaign. That card dated from the 1920s and was headed "The Socialist Creed". The card read along the lines, "Brothers" — it may have been "Comrades" — "let us combine among us and when I have spent my share we will do that again." The right hon. and learned Member for Monklands, East presented himself in the typical guise of one of Socialism's big spenders. All his answers to the problems confronting our society were, "Spend, spend, spend."

I do not believe that we can hope to compete in the world if we adopt that philosophy or if we ignore the effects of the years that the locusts have eaten or if we decide to squander in one great round of national self-indulgence the achievements that have been built up since 1979. If we do that—and that appears to be what the Socialists want us to do — we will be in the worst position to face the future.

My next point concerns another matter raised by my right hon. Friend the Member for Worthing. I want to consider what happens between now and 1992 and the advent of the single European market. Apart from the Budget, the most important economic event last week was the launch on Friday by my right hon. and noble Friend the Secretary of State for Trade and Industry of the campaign to familiarise more people in British business with what will happen in 1992. In the covering letter, which I hope has reached all hon. Members, my right hon. and noble Friend states: Over the next five years we shall see the dismantling of the remaining barriers to a single unified market of over 320 million people in Europe. All Member States are committed to achieving this by the end of 1992. I want to ensure that companies throughout the UK are given every chance to make a success of the new opportunities of the Single Market and to meet the challenges it brings — before our competitors beat us to it. No one interested in the affairs of the European Community can deny that the next four or five years are absolutely crucial to the future of this country and its people. That is why it is so important and such a matter for commendation that my right hon. Friend the Chancellor's Budget puts this country's economy in the best possible shape to enter those years and make the most of the advantages before us.

There may be many obstacles and difficulties to overcome. However, we start with some advantages. We have the advantage of a sound economy which is enterprising and efficient in which the world has confidence. Thanks to the fiscal changes introduced by my right hon. Friend the Chancellor, the best business men and managers in those businesses will continue to be motivated in our economy and have the incentives to produce the goods for us all.

I do not believe that we can have anything less than the highest dedication if we are to beat our competitors. The French and the Germans in particular—our two greatest rivals—suffer from disadvantages that we do not have. We have political certainty, but the French do not and the Germans seem to be in some danger of losing their certainty. The years between now and 1992 must be used for the sake of everyone in this country—for those in work and those out of work and for the sake of those working and those in retirement.

They must be used to maximise our advantages and to acquire business if we cannot export into those markets —to buy businesses in France and Germany—and to use the period between now and 1992 to move forward to be ready to meet and beat our competitors. The best memory of this Budget for historians in future will be that it was the Budget that prepared to take this country into Europe and to make us the leader in Europe.

7.18 pm

Mr. Denis Howell (Birmingham, Small Heath)

I am grateful for the opportunity to speak for a while in this Budget debate. I want to deal with two aspects in which I feel I have a duty to put forward the fight for my constituents in Birmingham, Small Heath. The first aspect relates to the abject poverty that we face in my constituency, about which this Budget says nothing, and the other relates to the serious and continuing decline of manufacturing industry in the west midlands.

Before I deal with those two points, I want to comment on the Health Service and the questions of morality that have been raised today. It is fascinating that the Secretary of State for Employment, who is not in the Chamber at the moment, spent all his extremely short and very unsatisfactory speech deploring the fact that anyone should raise questions of social justice in relation to the Budget.

I do not think Conservative Members can object to considering the Budget from the point of view of morality. I do not like scenes such as those we saw the other day, but if ever we needed an increase of moral indignation it is now, because of the poverty about which the Budget had nothing to say—the Budget that handed out largesse to the richest people in the country. That was bound to create a sense of moral indignation, and it is the job of the Labour party—and other opposition parties—to foster such a sense if we are to have any hope of tackling these problems.

I want to talk about the Health Service. In Birmingham, many of the worst features of the lack of resources for the Health Service have been manifested in the children's hospital and other hospitals at which, at one stage, doctors were being instructed by administrators not to admit or operate on children with hole-in-the-heart conditions, not for medical reasons but for administrative and financial convenience. If ever there was immorality, that was it.

The right hon. Member for Worthing (Mr. Higgins) told us that he hoped the nurses' pay award would be funded in full, and I share that hope. I know that it will be. The Chief Secretary has already told us that the award is expected in mid-April, when an immediate judgment will be made on it and a decision will be announced by the end of April. The local elections take place in the first week of May. In view of the overwhelming case for the nurses, it is disgraceful that no interim award was made to them in the winter months. The funding of the Health Service should have had a place in the Budget. I know all about the extra £1 billion, but allocations now being suggested for district hospitals for the next financial year do not approach meeting the demand on those hospitals. It is important that Opposition Members should say that in the House.

If I may return to the issue of morality in the Budget, there is a biblical parable that applies to it—that of the Good Samaritan. The Chancellor and the Government have passed by on the other side in the face of the atrocious conditions in which some people, particularly in my constituency, live. The Chancellor gave an interview to Brian Redhead the other day. Mr. Redhead asked him what was in the Budget for the poorest of the land. Unfortunately, these days television and radio interviewers ask a question and then fail to follow it up because they have clipboards in front of them and they have to get on to the next question. They do not listen to the answer to one question before asking another. However, the Chancellor answered that everyone would gain from tax relief. If everyone got tax relief that would be true, but the poorest of the poor get none. There was nothing in the Budget for them, so the Chancellor's answer in that respect was wholly dishonest.

The Secretary of State for Employment, who opened the debate, represents Sutton Coldfield in Birmingham, but I represent Birmingham, Small Heath — the city centre—which has the highest rate of infant mortality in Europe. That is why it is my duty to make this speech today and to ask the Government what on earth they are doing when, in Nechells, in my constituency, we have an infant mortality rate of 23 per thousand of the population. That is a scandal that those of us who have been in politics for a long time thought we had eradicated years ago. It is a shocking state of affairs. The reason for it is that my constituency has the highest percentage of single-parent families in the area and the average age of mothers in Nechells who lose their children in the first year is lower than anywhere else. Who can come to the help of these unfortunate children and mothers, when there are no tax reductions for them, no proper increase in child benefit, their rents are to be forced up and their one-off social security payments are to be denied them under the new social security legislation? To whom can they turn for help? They must look to their local authority, but next year that local authority—one of the most responsible in the country — faces a £300,000 cut in its partnership programme, which offers the only relief in our part of the city.

To add to all this, the unemployment rate in my constituency is more than 30 per cent., and more than 60 per cent. or 70 per cent. among young people. Those are disgraceful figures. The effect of all this social deprivation was seen on the streets of my constituency a year or so ago in Handsworth and Lozells. One cannot divorce this abject poverty and social deprivation from the good order that we need. Some of us spend much of our time working for racial harmony in our constituencies, but whatever we do, the effects of the policies that bring about this despair in the lives of thousands of ordinary people are being exacerbated by the Budget.

Sometimes it is necessary to explain to the House the living conditions of people in our industrial communities. I am not against reducing taxation whenever we can, and my party needs to be careful not to be always the party that is against lowering taxation But anyone with a moral foundation to his being must ensure that, before he benefits the better off, or Members of Parliament or even the industrial classes, he remembers his overwhelming Christian priority to provide for people living in absolute destitution and despair. Birmingham is doing its best, with all-party agreement in large measure. Just this week the city council is calling for a symposium of architects, decision-makers, landowners and others to help to advise us on how to begin the regeneration that the city needs, and how to use our land properly.

I want now to deal with trade and industry in the west midlands. I agree with the right hon. Members for Worthing and for Old Bexley and Sidcup (Mr. Heath) about the importance of Europe. I declare a prejudice, or an interest — I am chairman of the Labour committee for Europe. I am pleased to tell the House that we in Birmingham, faced with the decline of our manufacturing industry, understand that we have to accept what will happen in 1992. The trade union movement is now coming overwhelmingly to understand the importance of our full involvement in the European Community. My union—the Association of Professional, Executive, Clerical and Computer Staff—recently passed a resolution proposing that we immediately join the European monetary system. I am glad to say that I proposed the resolution and that it was carried overwhelmingly. I offer that information to the House as one sign of the fact that the trade union movement understands where its future interests lie. I hope that colleagues will note that.

We have lost 30 per cent. of our jobs in the west midlands during the lifetime of the Conservative Government. We have lost 1 million jobs because of the decline in manufacturing industry. The losses continue. The total number of jobs has gone up a bit because we have gained some in service industries, banking and insurance, but the number of jobs in manufacturing is still going down.

I am an old-fashioned Socialist. I believe that all wealth is created by the application of labour to the raw material or the land, but I can see that when banking and insurance attract investment from overseas, they have contributed to the growth of wealth. Nevertheless, Britain's interests must lie with the manufacturing sector and the decline of manufacturing should worry us all.

Productivity in the west midlands is now what it was in 1979. It is quite appalling that we have just got back to where we were when the Conservatives took over. Germany and Japan, however, have moved 25 per cent. ahead of us. I agree that exchange rates are critical, but I do not want to say anything about them except that I am on the side of the Chancellor rather than the Prime Minister.

The worst feature of the Budget is its complete failure—my friends in the Birmingham chamber of commerce, the Engineering Employers Federation, the West Midlands Trades Union Congress and the West Midlands Economic Development Council agree with me — to provide for research and development, training and retraining. The lack of skills in industry is growing upon us because for years Birmingham's industry has not taken on apprentices or trained skilled people. That failure will catch up with us and if we have anything like the improvement in the manufacturing base in Birmingham which the Government see in other sectors of the economy, we shall not be able to deal with it because employers do not have sufficient incentives to provide training, retraining or research and development. Capital allowances have gone and there is nothing for apprenticeships.

There is one other matter which I wish to raise. I am not sure whether my language will be parliamentary, but I am sure that you will be the first to draw my attention to the fact if it is not, Mr. Deputy Speaker. We are dominated by the bottom line. I am getting fed up with it. Whenever we discuss anything, we are always told that we must look to the bottom line as though it should determine all our values and needs. I am forming a new society, which I am calling Bugger The Bottom Line. I hope that you are tolerant enough to allow me to say that, Mr. Deputy Speaker.

Mr. Deputy Speaker (Mr. Harold Walker)

Order. I think that Mr. Speaker would want me to say that he does not regard that as parliamentary language—indeed, that it is vulgar and coarse.

Mr. Howell

I am sorry, but I fully understand your reproach, Mr. Deputy Speaker, which I expected. It underlines the point that I wanted to make.

I am advised by industrial friends that when industry in Birmingham wants to expand, it is dominated by insurance companies and pension funds who want to invest but that, to a great extent, the institutions demand such high returns on their investment that the process is self-defeating, so no manufacturing jobs are created.

The worst feature of the appalling unemployment in Birmingham is its effect on individuals who will never have a job. People get a feeling of pride and self-respect when they pick up a wage packet which they have earned, rather than take a handout. Never having that opportunity has an appalling effect on generations of young people.

I spent a lot of time in industry before coming here, and it seems to me that the absence of the discipline of the work place in the lives of so many people is a serious matter for any community. We all know that it is fellow workers who knock the corners and edges off to produce a round person. They impose a discipline which is often not imposed anywhere else. I would create work for its own sake because everyone ought to have a right to a job, but in any civilised society every person should demand that everybody works so that they make a contribution to the community. We thus enhance individual personality.

My greatest criticism of the Budget is that it does not enhance the personality of the individual when there is such severe unemployment in Birmingham and the rest of the industrial west midlands. As a football referee, I can only say that the score on this Budget is: The Greedy 5, The Needy 0.

7.37 pm

Mr. John Redwood (Wokingham)

I congratulate my right hon. Friend the Chancellor of the Exchequer on his magnificent display of fiscal pyrotechnics. As always, Opposition Members have tried to dampen them down and ruin the display.

It was intriguing to hear the hon. Member for Dagenham (Mr. Gould) trying to suggest that the tremendous success which my right hon. Friend has pulled off is due entirely to the presence of North sea oil. If we read the Red Book forecast carefully, we see that it is quite clear that oil has been a problem for us this year, and will be next, and not a great opportunity. There has been a dramatic decline in Government revenues from oil to only £3 billion next year and, in the forecast for the balance of payments, an adjustment has been put in which shows that exports will do much better without oil next year than they will with it. That is a perfectly sensible forecast.

The simple fact is that the £3 billion from oil just equals the amount of debt that the Government are repaying, and that the bulk of the revenue to pay for all the public spending quite clearly comes from the success of the economy, rising incomes and rising purchases in shops.

Mr. Robert Sheldon

I did not want to intervene, but it must be said quite clearly that 15 years ago we bought oil, whereas now we sell it. That is the effect on our balance of payments.

Mr. Redwood

The right hon. Gentleman is quite right, but what matters is the change over the years. It will he less helpful next year than in previous years, and it has declined this year. To put the matter in perspective, the contribution to the balance of payments from oil revenues is forecast as £2.5 billion, while the contribution from the service sector—which which has been a great success in our economic strategy in recent years—is forecast as £8.5 billion.

The next strange doctrine of the hon. Member for Dagenham was his assertion that interest rates would prevent investment and encourage consumption. Has he not seen the figures for recent years, which show a surge in both commercial and industrial investment at a time of relatively high interest rates? Does he not understand that, for industrialists and those in commerce, what matters is the gap between real interest rates and the return on capital? Again, one of the great successes of our economic strategy has been the surge in the return on capital, which has made investment more worth while and has brought forward new investment projects. For the past 19 months it has also created new jobs, which is exactly what the strategy was designed to deliver. I should have thought that Opposition Members would welcome that.

If we try to divine what the Opposition want, we can only conclude that, first, they want the rich to pay more tax—although they do not tell us how much; secondly, that they want tax to take a larger proportion of our national income—but again they will not tell us how much. [Interruption.] I must have misunderstood: they want higher taxes for the rich, but the same amount of overall taxation. Thirdly, they want a substantial increase in public spending across the board, on a variety of programmes, but within that they especially want an increase in the proportion spent on health.

Is it not strange, therefore, that those are the three priorities that the Government have adopted since they took office in 1979? The tax paid by the top 5 per cent. has risen by 5 percentage points in the total tax take. Opposition Members say that that is because they have had large pay rises, but everyone else has also had a pay rise. There has been a large increase in the number of people locating in this country and in the risks that they are prepared to take. That proves my right hon. Friend the Chancellor's point that to lower tax rates at the margin for the better off will generate more wealth and more jobs, and that those then percolate through to help everyone in the community. That is a welcome change.

The proportion of income taken in tax since 1979 has, I regret, actually risen. It is a sign that, at the beginning, the Government put public services and fiscal prudence above making a dramatic cut in the tax rates. I welcome the fact that the Government are now in a strong enough position to cut the overall tax burden, not just the high tax rates on income. As the economy grows, I am sure that that process will increase and strengthen, to the consternation of Opposition Members, but to increasing the strength of the economy.

Mr. Nigel. Griffiths

When will the burden of taxation imposed by this Conservative Government be reduced to its levels under the previous Labour Administration?

Mr. Redwood

I hope that, as a proportion of gross national product, that will happen before the end of this Parliament. If not, it will certainly happen before the end of the subsequent Conservative Administration, during which the Government will continue their policy of tax reduction to below a 20 per cent. standard rate. A rate of 20 per cent. is a feasible objective for this Parliament.

The Opposition's desire for an increase in spending on health has also been met. As a proportion of total public spending, health spending will rise from 11.9 per cent. in 1979 to a projected 14.1 per cent. in the early 1990s, and the increase already stands at more than 13 per cent. Spending on health has increased as a proportion of a total which, in itself, is rising, thanks to the increase in real expenditure made possible by the large amount of tax revenue generated by our economic success. I hope that Opposition Members welcome those moves.

On the issue of fiscal balance, I greatly welcome my right hon. Friend the Chancellor's decision to run the economy with a £3 billion surplus in the ensuing year. Opposition Members find problems with that, too. I remember debating with some of them, outside the House, what would be an appropriate level of deficit or surplus for the coming year. I have always said that it would be right to run it at about a nil balance — no borrowing —because that would help the economy to grow strongly. Opposition Members and media figures told me that there would be a recession, which had to be taken into account. Indeed, if there were to be a major international recession this year, a borrowing level of about 1 per cent. of GDP would be appropriate. However, I stressed that that would be extremely unlikely and that, instead, we would witness another year of good growth. I very much welcome the fact that Britain will have another year of satisfactory growth, which will be even better than expected, so that we can make a welcome repayment of debt from the public sector and so reduce the crippling interest burden that this Government inherited from the Labour Administration.

I welcome the joint decision of my right hon. Friends the Chancellor and the Prime Minister to allow interest rates to fall. In the circumstances of the past couple of weeks, they rightly decided that the sterling exchange rate had to move upwards. It makes little sense to spend cheap pounds buying dear deutschmarks simply to nurse a loss on the foreign exchanges. It is quite clear that our currency is very much more attractive than many other currencies because of the robust health of the British economy and the level of real interest rates in the United Kingdom compared with Germany and elsewhere. However, it was also right to allow interest rates to be nudged downwards, and they may have to come down further if the flow of hot money into this country continues and puts further pressure on exchange rates. I do not believe that that will result in a major inflation problem, because the money figures have been greatly distorted in recent months by that very intervention itself. Not all of it has been properly funded because it occurred on such a large scale.

If we move towards a policy of little or no intervention in exchange markets, and if we produce a prudent balance between the levels of exchange rates and interest rates, there can be both a low or nil inflation policy and a further attractive reduction in interest rates for house buyers, industry and other investors. That can be accommodated quite easily, because there remains in our economy a substantial surplus capacity—for example, derelict land, the unemployed and other factors of production—all of which can be applied as we spread prosperity ever more widely across the country. We can now bid those factors into use without running many, or even any, inflationary risks.

I very much approve of the moves to deal with some of the tax dodges that have been a feature of recent years, partly due to the high tax structure. It is better to have a simple, two-band system, because that will reduce the number of dodges that the rich can take to protect their wealth and their incomes if they want to keep them in this country. The changes on forestry, covenants and company cars go in the right direction, and are entirely at one with the strategy of lower tax rates, but more tax income because of the enterprise effect.

My right hon. Friend the Chancellor is perhaps being unduly cautious in estimating £2 billion as the cost of cuts in the higher tax rates. As people of enterprise, the risk takers, come into this country, the benefits will be so great that the cost of the tax cuts will not amount to anything like £2 billion. I am sure that before the end of this Parliament the rich will be paying yet more as a proportion of the total. I do not understand why Opposition Members are looking so concerned; surely that is exactly what they want. Perhaps it is merely jealousy on their part. They cannot bear to think that more well-off people will come to this country, bringing with them their investments and their incomes to spend on creating jobs in Opposition Members' constituencies. I, for one, would greatly welcome that.

I have only one minor criticism of the Budget, which is that I am a little concerned about mortgage relief for first-time buyers in high-cost housing areas. I understand the need to produce equality of treatment, at least between married and unmarried people, but I am also well aware that in many parts of the south-east house prices are such that it is extremely difficult for people to get started on the home ownership ladder with only a £30,000 mortgage. I hope that there will be second thoughts about that.

It is a splendid Budget. It is a Budget for more jobs, more prosperity, lower tax rates and better public services. I look forward to the conclusions of the health review and the health pay award, because I think that there will be more surprises in store for Opposition Members. I am sure that by the end of the next financial year my right hon. and hon. Friends will have produced a system for health management and improved services of which we can also be proud.

7.50 pm

Mr. Brian Sedgemore (Hackney, South and Shoreditch)

I was reading in a satirical magazine over the weekend that the Government have set up groups of WOMBATS — working ministerial breakfast action teams—to justify the Budget in the face of the stinging criticism that it has received.

Being a reasonable person, I begin by complimenting the Chancellor. I believe that it required courage to introduce this Budget and that he needed nerves of steel and extraordinary moral and spiritual resources to do so much for so few in return for so little. The Chancellor has come through his ordeal, pleased and smiling, and worshipped and revered by the gawping, grasping, privileged, avaricious, salivating super-rich. Moaning minnies, puritans, the poor and those whose bootstraps have let them down did not like the Budget, but they must realise that the Chancellor's world has passed them by and that their pathetic cries, "Stop the globe, I want to get of", will no longer be heard.

For the few, the Budget was much more than a spring tonic. For those of us who like to live vicariously, it was one for fantasies and dreams. For all of us, it has presaged a world in which we can get rid of that wretched quality of empathy—the idea that it is possible for a human being to put himself in the position of another. After this Budget, other people simply do not count.

In the real world of the City — next door to the forgotten wastes of Hackney—they like the Budget, and why not? I ask my hon. Friends to stop cavilling about it. All right, there may be a balance of payments crisis and the forecast deficit of £4 billion may turn out to be £8 billion, but let us look on the bright side.

Yes, when the Prime Minister stood at the Dispatch Box and said that Britain was becoming a filthy, squalid and rundown country with a crumbling infrastructure because of lack of investment, that might have been true, but we should have a sense of proportion. In a super-binge society the comforts of the day are bound to be far more important than the problems of tomorrow. I dare say that my right hon. Friend the Member for Birmingham, Small Heath (Mr. Howell) was right when he said that a few babies may die because of want of treatment in the National Health Service as a result of the Budget.

However, I am bound to ask my hon. Friends to attempt to comprehend the sheer exquisite delight that the Budget has given to a few very important people. For them, I agree that the Budget has been messianic. It will change people's lives. I give my hon. Friends three examples——

Mr. Neil Hamilton

Sir Ralph.

Mr. Sedgemore

Well. I shall come to Sir Ralph in a moment.

At 6 o'clock on 14 March, just after the Chancellor had sat down, having delivered his Budget speech, a helicopter took off from docklands. A few minutes later it landed on an airstrip at Northolt. Two men in flak jackets were transferring £5 million in used notes into a light aircraft, which was destined for one of the great financial centres of the world — Liechtenstein. Just as the light aircraft was about to take off, air traffic control received a cryptic message over the teleprinter from the City godfather who had organised the mission. It stated, Abort mission. Just heard the Budget. £5 million now to go into property via the Business Expansion Scheme. Rachmanism legalised at last. God bless Nigel. Stuff Liechtenstein. Meanwhile, over at Cazenove, the stockbrokers to the Queen, they were taking a little bit of time off from their worries about the fraud squad investigation into Guinness as it closed in on them. Of course, as we would expect, their celebration in favour of the Budget was quite dignified. They were drinking bubbly from cut crystal glasses, poured from bottles matured in the finest wine cellars in all Europe. The toast was, of course, "vivat, vivat cancellarius" — may the Chancellor live for ever and ever.

More extraordinary than that, yesterday I went to a celebration party for the Budget at the Dorchester in Mayfair. It was organised by a merchant bank for the hundred richest people in England. Everyone who was anyone was there. I felt privileged to be a fly on the wall. Of course, I shall tell hon. Members who was there, what they thought of the Budget, and how they will spend the lorryloads of money that the Chancellor has given them.

I shall talk first about the atmosphere, which told one more about the way in which this Budget has been appreciated than anything else. It was straight out of "The Great Gatsby" except that I knew that it was a celebration party for Budget-88 by the beautiful LaCroix dresses that the more fashionable women were wearing. It really was a spectacular scene: Men and girls came and went like moths among the whisperings, and the champagne and the stars … At 7 o'clock, the orchestra arrived. This was no thin five-piece affair, but a whole pitful of oboes, trombones, saxophones, violas, cornets, piccolos, and low and high drums. The bar was in full swing. Floating rounds of cocktails were picked out by the glittering diamonds in the chandeliers. Laughter — at first light, then raucous —spilled with prodigality.

At first, the attention was concentrated on somebody called Sir Ralph. I did not catch his surname, but I understand that he is a man like Mr. Speaker — a bespoke tailor who runs a chain of shops. He was telling the assembled multitude that he earned £1,300,000 per year, and that he stood to gain £750 per day by the Budget. My hon. Friend the Member for Bolsover (Mr. Skinner) keeps telling me that it is £750 per night, but I am blessed if I know what he is talking about. Sir Ralph was telling the assembled multitude that he was going to buy a lavender-coloured Rolls-Royce with the first month's tranche from the Chancellor—£20,000—and that he was going to use his lavender-coloured Rolls-Royce as an omnibus to ferry around those starlets, without which I understand that Burton cannot carry out a business deal these days.

Then the cameras and the attention homed in on a big man. He was gross and ugly. No, I am not talking about the hon. Member for Crawley (Mr. Soames)—they kept referring to him—[Interruption.]—yes, my hon. Friends have got it—as Cap'n Bob. He said that he would make so much money out of the Budget that he would be able to buy out all 49 bookshops owned by Blackwell's which were selling unflattering biographies about him, and that he would still have money over to put in a bid for each and every one of the 22 first division clubs in the Football League, which he would rename the "Maxwell championship". Yes, it is a good Budget, isn't it?

Then there was that super-league butcher, who owns £1 billion—a man called Vestey. He has spent a lifetime writing in books that he has never paid any tax. So naturally he was highly miffed because, not paying any tax, he did not get any benefits from the Budget. He was telling his friends that as an act of revenge he was going to put together a consortium to buy out the Treasury when the Chancellor says that he will privatise it.

The first supper of the evening for the magnificent Budget was a sumptuous affair—with oysters, black and red caviar, smoked salmon, escargots and lobster. At one table was a Stanley from Dixons, who earned £659,000 per year. He was commiserating with Maurice from Saatchis, a much poorer man, who takes home only £500,000 per year. Everyone felt sorry for Maurice.

At the next table were one or two people who had had a hit too much to drink—the rich are apt to do that. One of them was saying to the other, "What kind of idiot of a Chancellor thinks my pretty little wife can fill in her own tax return? Who is this Lawson fellow anyway? Some kind of damned Socialist, I suppose?" The other replied, "It's not the wife, but the mistresses I worry about. Surely it's time they were made deductible. That's the only tax break I want to give me an incentive."

Then came the final supper at midnight—the most fabulous that I have ever witnessed. It had hardly begun when "He" appeared. As he appeared there was a wave of sentiment, as if a war had been won and a new civilisation was about to dawn. This was not Blake's Agony and Ecstasy, but ecstasy and more and more and more. As the guests waved, cheered, clapped, jumped on the tables and wept for joy, he stood there like an icon — the Chancellor of the Exchequer of the United Kingdom, the right hon. Member for Blaby (Mr. Lawson). He did not make a speech. Upright, magnificent and imperious, a surreptitious leer on his face, his eyes alighted on one of the servants who had just dropped a tray of oysters. Suddenly the guests understood and took their cue from the Chancellor. In no time they were all leaping up and down and in a sweaty frenzy looked at the servant and screamed, "Shame, shame, shame". Then they gave a Churchillian V-sign and shouted "Up yours, up yours."

Some of the guests then passed out, others were sick into their bibs and a few made it home, their thingumajigs unable to rise to the occasion. Who was left but the Chancellor of the Exchequer standing alone. He knew that his Budget had not been in vain and that as an outsider he had arrived. Yet, in his moment of triumph, even he felt uneasy and sick. I knew how he felt because I wanted to vomit when I first heard this Budget. The Chancellor said to himself, "Could anything in this whole world be worth this?" Suddenly he realised a Budget too far had been followed by a party too far and that the decline and fall of Thatcherism had begun.

8.1 pm

Mr. Leon Brittan (Richmond, Yorks)

I do not know whether the contrived salivation of the hon. Member for Hackney, South and Shoreditch (Mr. Sedgemore) and the imaginary antics of the rich at this fictitious party shed much light on the Budget, its effect and implications, but I cannot help thinking that they do not. However, so long as the hon. Gentleman has enjoyed himself burning the midnight oil to that effect, I dare say some purpose is served.

I warmly welcome the Budget proposals. They have been made possible only by the success of the Government's economic policy generally over the past nine years. Its proposals amount to a fiscal watershed and will undoubtedly contribute to ensuring further economic progress over the coming period. What is particularly important, especially in view of the anxieties and reservations expressed by my right hon. Friend the Member for Shropshire, North (Mr. Biffen), is that the apparent largesse of the Chancellor has not been achieved by borrowing more money. The fiscal stance has been rightly tight. To have a negative PSBR of £3 billion this year, and to repeat a substantive negative PSBR for next year, is, by any standards, the clearest sign of the Government's commitment to the battle against inflation, which the market would ignore at its peril. Those who do not take the message are likely to get their fingers badly burnt.

I was sorry to learn from the press, if it be true, that the Chancellor considers that the process of reforming personal taxation is now at an end. I am afraid that I cannot agree with him. The principles underlying the Budget have a long way to go before they are fully implemented. The central principle is the abandonment of penal taxation at the upper level in return for the abandonment of myriad perks and tax concessions. The history of the past few years on both sides of the Atlantic shows that if one does that the Treasury will not be any the poorer and the economy will be much richer. The Budget goes a long way to give effect to these principles, but there is still a long way further to go.

Whatever one's view of the economic effect of mortgage interest tax relief, it is embedded in the personal financial arrangements of millions of people and it would be impossible to remove it. What would be possible would be to limit mortgage relief to the basic rate of income tax. That would be entirely in accordance with the general philosophy that I have just described. Those who pay the new higher rate of 40 per cent. do not now need any further incentives to encourage any house purchase of the sort reflected in the continuation of mortgage interest relief at the higher rate. The same applies to tax relief at the higher rate on pension contributions.

There is also clearly unfinished business on national insurance contributions. I can understand why my right hon. Friend did not simply remove the upper earnings limit this year. That would have placed an extra burden on 2 million middle-income taxpayers, but it remains an extraordinary quirk of our tax system that if income tax and national insurance contributions are taken together the percentage paid at a certain point falls when the upper earnings limit is reached, and rises again when the higher rate of income tax becomes payable. The Government will have to return to that, particularly if they contemplate, as I hope they will, moving to a system of financing the NHS from national insurance contributions. If they do that, it will almost certainly be desirable to extend the base of national insurance contributions.

That leads me on to the one statement in the Budget speech about which I have considerable reservations, and that is the express aspiration to reduce the basic rate further to 20 per cent. It is only an aspiration, and not a commitment, but I hope that its fulfilment will be deferred indefinitely. At 25 per cent. no one could possibly say that the basic rate is unacceptably high. Indeed, it has been a triumph of the Government and taken nine years to get to that figure. If any further money is available for the reduction of taxes, the top priority should surely now be to help people at the lowest end of the income scale, preferably by taking them out of the tax net altogether, and at last by reducing the tax burden on them.

The Budget has gone some way towards doing that. Allowances have been increased by twice the rate of inflation, and that has had the effect of taking 750,000 people out of tax altogether, but substantially further progress in that direction is immensely desirable for two reasons. First, taxation is obviously a real burden on the lower end to a greater extent than on the upper end. Secondly, by removing the tax burden, it increases the attractions of working rather then staying on the dole. Indeed, for some people it makes it worth working when previously it was not. Therefore, it makes it possible to take more people on at pay rates which employers can afford. That would be the biggest single contribution that the Government could make towards reducing unemployment. That is why the Government should not set a fresh target for reducing the basic rate further, but should set a target of the number of people to be taken out of paying income tax altogether who at present pay it.

I know that the target has a tendency to move as people earn more and come into the tax bracket again. None the less, a clear target concentrates the mind wonderfully. If it had not been espoused in 1979, that 25 per cent. target would not have been reached today. Therefore, the time has come to set an imaginative but realistic target for taking people at the lower end out of tax altogether and thereby making the biggest contribution that the Government could make towards solving the problem of unemployment. Let it be our aim that, by end of this Parliament, 3 million fewer people will pay tax. That target is attainable. Of course, to achieve it means forgoing a great deal of revenue. It is expensive to increase allowances and thresholds, as the Red Book so clearly shows, but we should clearly establish that priority, and the sooner we do so the better.

If we are to make international comparisons to justify the cut in higher rates, we must be prepared to look at comparisons at the other end, too. As Irwin Stelzer clearly pointed out in yesterday's edition of the Sunday Times, a married couple paying tax at 25 per cent. when their income is just over £4,000 represents the highest rate applied at that level of income by almost any country today. In addition to using any money available in future to cut taxes to take people out of paying tax altogether, serious consideration should be given to having a reduced rate band of, say, 15 per cent., as in the United States, for those earning just about the level of the allowance.

Incentives are just as important for poor people as they are for rich people, and the introduction of a reduced rate band would have a powerful incentive effect. The cost of introducing such a rate would be much reduced if, as happened in the United States, it applies only to the first tranche of income, in the case of low earners, and tapers out as one goes up the income scale. Whether we take people out of tax or reduce the rate at the lower end, or both, the objective is the same. It is to make the maximum contribution that the Government can to reduce unemployment. Unemployment is the greatest remaining economic and social ill in many parts of the country, and it should be our top priority to take fiscal and other action further to reduce it. That proposition cannot seriously be denied. In the Budget, some progress has been made towards achieving it.

Apart from general ideological objections to reducing top rates, the main criticism that my right hon. Friend the Chancellor has faced—I have been referring to future aspirations and not to the Budget—is that the Budget should have been used to put more money into the National Health Service. On that point, I agree totally with my right hon. Friend the Member for Worthing (Mr. Higgins). Those who make that criticism must look at public expenditure and taxation decisions as a whole. Such decisions are taken at different times, but they come into effect for the same year, that is, 1988–89. It is perfectly natural for public expenditure decisions to be taken earlier. Those who must plan their expenditure through the year need to know what the figure is to be well in advance, while taxation can be reduced or increased much more quickly. Therefore, it is entirely fair to point out that, in the same year as taxes are coming down, spending on the National Health Service is going up by £1,100 million.

What is more, that is not the end of the story. We know perfectly well that it is highly likely that the review body will shortly recommend a substantial increase in nurses' pay. No Government can unequivocably tic themselves down in advance to saying how that will be handled, when they do not know precisely what will be involved. I am totally convinced that the Government will fully implement whatever is recommended. If the cost of doing so exceeds what they are currently allowing in the National Health Service provision for the Department of Health and Social Security, that extra sum will be met out of the substantial public expenditure reserve. The Government will be absolutely right to handle the issue in that way, and I am sure that they will do so. If that happens, the net effect for 1988–89 will be a major total increase in National Health Service provision — the £1,100 million and whatever extra is needed to meet the review body's recommendations That will be totally justified, but, until the current review of the pattern of health care is concluded — I hope that it comes to some radical conclusions—it would be quite wrong to go any further with the injection of extra sums of public money.

The Chancellor's speech and the Red Book are lapidary and opaque. Instead, the Chancellor tells us to look at actions rather than words. Last week we saw a cut in interest rates. It is not quite satisfactory to leave it at that. There are decided advantages in exchange rate stability and in not having too high a rate for the pound against the deutschmark. But stability does not mean that the rate never changes. It certainly does within the EMS exchange rate mechanism. Indeed, many people think that a realignment is likely soon.

There may be occasions on which upward pressures on a currency are too great to he resisted by any feasible amount of intervention, and on which inflationary pressures are too great for it to be desirable to reduce interest rates. In some circumstances, an upward movement in the exchange rate may be fully justified. It makes perfect sense to have a policy of stable exchange rates with, at least, an implied right to revise them if circumstances materially alter. Anything further than that would be an unrealistic straitjacket, which never existed in the past, and would not be required by membership of the exchange rate mechanism of the EMS. If that is the policy, it would be highly desirable for it to be clearly stated.

Monetary aggregates are not robust enough to provide a credible monetary policy. Our only lodestar is the exchange rate, and interest rates are the major instrument. Whether we are inside or outside the EMS, there is no reason why the current broad target for the pound should not be publicly stated. If, for anti-inflationary reasons, it must be set a shade higher than some in industry would like, so be it. With an explicit exchange rate target range we will give industry and markets the inestimable advantage of that degree of certainty and credibility in monetary policy which, over the years, has proved to be beneficial in fiscal policy. I hope that that, too, can soon be achieved.

8.17 pm

Mr. Peter Shore (Bethnal Green and Stepney)

The speech of the right hon. and learned Member for Richmond, Yorks (Mr. Brittan) was like the parson's egg; it was good in parts. Among the parts that I welcomed were his statements to the effect that the emphasis should fall on lower-rate taxpayers or people on low incomes and, particularly, his comment about the value of introducing a reduced band. I disagree with his general judgment that the essential principle of the Budget is the abandonment of penal taxation. It is far more just to describe it as the abandonment of progressive taxation. The Prime Minister and the Chancellor believe that they have achieved that.

The right hon. Member for Old Bexley and Sidcup (Mr. Heath) made an important point. He pointed out to the Chancellor and the Secretary of State for Employment that, in spite of the rather startling reduction in this year's Budget, taxation accounts for a much higher percentage of gross domestic product in 1988 that it did in 1970. It is about 37.5 per cent. now, compared with 32 per cent. in 1970. How do we explain the difference? Why do the Government need to levy so much more taxation in 1988 than they did in 1970? The answer lies in the sphere of responsibility of the Secretary of State for Employment. The real difference—the reason for the great increase in the burden of taxation between 1970, when we had unemployment of some 600,000 and 1988, when we have unemployment of some 2.6 million—is the cost to the country of the enormous sums both in direct payments in benefits through the social security system and, even more, indirectly in the forgone income in the form of income tax contributed, national insurance raised, and the rest.

That brings me to the first point that I want to make to the Secretary of State for Employment. He rightly pointed out that during the past year there has been a welcome fall in the rate of unemployment, but he will know that the fall has taken place only during the past year. That is to say, it happened during a year in which gross domestic product has grown by about 4.5 per cent. In earlier years—the right hon. Gentleman emphasised this point—when GDP grew at the rate of 2.75 or 3 per cent., there was no fall in the overall rate of unemployment.

What worries me, and must worry other hon. Members when we look at the growth rate predicted for this year, is that after the first few months we shall not see a continued fall in the rate of unemployment. It will bottom out and we shall be left with about 2.3 million or 2.4 million unemployed. That is on the assumption that the rate of growth does not exceed 3 per cent. Our increase in productive potential is precisely 3 per cent., so if we do not do better in terms of growth achievement we shall not get the fall in the level of unemployment that all serious and sensible people want.

Two themes have dominated the Budget debate, and they are the two criteria against which the Budget should be judged. They are how it affects the distribution of wealth and its relevance to the problems of the real economy. There is no room for doubt about the central objective of this Budget. It is to make Britain a more unequal society. It is a Budget not for one nation but for three—the rich, who are to be enriched beyond their wildest expectations, the poor, who have been excluded, and those in the middle-class, middle-income group, who are to be modestly rewarded.

This is a historic Budget. On no occasion since the 1930s has a Chancellor of the Exchequer openly and consciously sought to make Britain a more unequal society. Over the past 50 years, Britain has seen a gradual movement towards greater equality of post-tax income and in that movement fiscal policy has played a major part. During the past eight years, that process has been slowed down and virtually halted. Now it is to be sharply reversed. On what basis did the Chancellor decide on this radical shift of policy? It was on the old, unproven assertion — as my hon. Friend the Member for Dagenham (Mr. Gould) made plain in his excellent speech — that the creation of wealth is directly linked to the extent of inequality. The Chancellor believes that the greater the inequality of rewards, the faster will be the growth of national wealth. He believes that man is economic man in the old classical economic sense and can be galvanised into extra effort only by the prospect of greater rewards.

Most of the evidence that we have does not sustain that contention. Japan, the most successful post-war economy, has a top rate of tax of over 70 per cent. and Germany and France, which have done much better than we have, have respective top tax rates of 56 and 58 per cent. Consider Britain's growth rate. In the 20 years or so before Lloyd George's Budget of 1910, progressive taxation barely existed, but Britain's industry and economy declined year by year. By far the fastest rate of growth that we have enjoyed over any substantial period of years occurred in the 30-year period from 1945 to 1974, when progressive taxation was at its highest rate. The case for inequality is, on the evidence, quite unconvincing.

No doubt, that accounts for the subsidiary argument which, I am sure, has surprised other hon. Members as much as it has surprised me. It is the Prime Minister's claim that Britain's top talent no longer flows abroad. I should like to see the evidence for that. Only last year, we were warned that the brain drain among Britain's top scientists and academics was steadily increasing, and that this was primarily due not to the poor level of reward in the United Kingdom but to the lack of opportunity to pursue research and development in Britain's underfunded universities.

Then we have the astounding claim that the lower the rate of taxation on the rich, the greater the yield of that tax will be. According to this myth—we have heard it repeated in the House today — the top 5 per cent. of taxpayers paid 24 per cent. of total income tax in 1978–79. Following the reduction of the top rate to 60 per cent. that category paid some 29 per cent. of total income tax in the year 1987–88. That assertion simply ignores the fact that in the past eight years there has been an explosion in pretax top incomes. The rich are paying more tax not because they have abandoned tax relief and avoidance devices, but because the incomes on which they are taxed are so much bigger. The growth in top salaries will no doubt continue, but the Budget's arithmetic allows for a loss of tax revenue in 1989–90 of £2,000 million as a result of the Chancellor's abolition of the higher tax rate.

The Chancellor and the Government do not seem to understand the importance of income redistribution. The latest available figures — I am afraid that they are for 1985 and I have taken them from the latest issue of Social Trends—show that the bottom 20 per cent. of households in Britain had only 0.3 per cent. of total pre-tax income, compared with the no less than 49.2 per cent. of total national income that went to the top 20 per cent. As a result of tax redistribution, the share of the bottom 20 per cent. grew from 0.3 to 6.5 per cent., while the share of the top 20 per cent. fell from 49.2 per cent. to 40.2 per cent. Without tax redistribution of income, at least 20 per cent. of Britain's households will be living far below the poverty line. In his Budget, the Chancellor is saying that redistribution from the most prosperous to the least prosperous has to be brought to an end. If the poorest are to maintain, let alone increase, their standard of living, it is not the rich but the middle-income earners who must bear the brunt of the tax burden.

Against the background of the 1988 Budget, we can see more clearly why the poll tax—the community charge—excites such enthusiasm from Government spokesmen. Basically, it is their ideal tax, because it has no redistributive function whatsoever.

The Budget is not designed to meet needs, whether they are personal or community needs. Nor is it designed to assist the real economy. An end to the fall in unemployment and the slow-down in the rate of economic growth will be very evident before the end of this financial year. Moreover, it is difficult to see what additional stimulus the Chancellor will then be able to give to the British economy. As the Chancellor admits, imports will grow much faster than exports this year and a balance of payments deficit of some £4,000 million is anticipated. This is all part of the continuing and destructive trend in our balance of visible trade which will steadily diminish prospects for growth in the economy.

Looking back over the past four years, it is depressingly clear that the only engine of growth in the British economy has been the upsurge in consumer expenditure. Between 1984 and 1987, it has increased in constant prices by £23 billion. For the same period, the savings ratio has fallen dramatically from more than 10 per cent. to 5 per cent. and consumer credit has grown from £11.5 billion to £21.9 billion. Consumer expenditure will continue to grow this year, as will indebtedness and our import bill.

The argument between the Chancellor and the Prime Minister which enlivened our pre-Budget discussions is about the priority to be given to growth and counter-inflation. The Chancellor knows that our balance of trade needs an exchange rate that will enable Britain's exporters to compete successfully against their continental competitors. The Prime Minister, who puts the conquest of inflation before all other considerations, is ready to accept the diminished growth and higher unemployment that would result from a further appreciation of the exchange rate. But both are wrong. We need a continuation of national growth, but both deny the role of public expenditure in achieving it. The Chancellor can increase growth only by making the balance of payments worse. The Prime Minister can conquer inflation only by increasing unemployment and decreasing growth. Both are too doctrinaire even to consider the imposition of restraints on credit creation and consumer expenditure.

The Chancellor has claimed that this is a balanced Budget — the first since 1970. That is true. But a balanced Budget is beneficial only when we have a balanced economy, and that goal will recede even further as a result of the Budget. We have a growing imbalance between public and private expenditure, a growing imbalance between north and south and growing inequality between rich and poor.

The greatest mistake that the Chancellor and the Government have made is to misread majority opinion. There remains a strong sense of social justice. British people are committed ideologically neither to egalitarian policies nor to inequality, but they have a strong sense of fair play, and that sense has been outraged by the Budget, as was reflected in the two national polls that were published yesterday.

In her Buxton speech, the Prime Minister said that the Budget would be the epitaph of Socialism. She is wrong. It will be the epitaph of this Chancellor and this Government.

8.32 pm

Sir Peter Hordern (Horsham)

The right hon. Member for Bethnal Green and Stepney (Mr. Shore) and other Labour Members have called this a socially divisive Budget, but they have misinterpreted the thrust of the Budget. If the effect of lower taxation is to increase the gross national product and the volume of public expenditure, their objections cannot be valid.

We should reflect upon the fact that when the Labour Government were in power and there was high personal taxation, public expenditure was cut—not least on the National Health Service. The right hon. and learned Member for Monklands, East (Mr. Smith) will remember that capital expenditure on hospital building was cut by about 30 per cent. But I go along with the right hon. Member for Bethnal Green and Stepney in this respect: the test will be whether growth will be stimulated by the tax cuts and whether, as a result, an increase in public expenditure will allow further expenditure on the NHS.

The House will be familiar with the public expenditure programme and the fact that in each of the next three years more than £1 billion will be spent on the Health Service. But I draw hon. Members' attention to something else in the public expenditure White Paper that is not immediatelly obvious: the size of the contingency allowance. This year, it will be £3.5 billion, next year it will be £7 billion and the year after it will be £10.5 billion. Of course, all the Departments will be competing for that contingency allowance, but there will be considerable scope for increased public spending on programmes which commend themselves to hon. Members on both sides of the House.

I congratulate my right hon. Friend the Chancellor of the Exchequer, first, on his plan to have balanced Budgets in the future. For a long time, the idea has prevailed that demand management matters most, that the Chancellor of the day should set his course for the coming year according to the way in which the economy should grow, and that the public sector borrowing requirement should be made the handmaiden of Budget judgment. I have always thought that that was wrong. I have always thought that it would be right to have a balanced Budget and for there to be no public sector borrowing requirement. It is most significant that my right hon. Friend has achieved that and intends to continue it in the coming years.

Not only will there be certainty in such matters—or as much certainty as can be achieved—but the fact that there will be almost no borrowing will create a definition and a sharpness in the operations of the gilt-edged market which would otherwise not have existed. In the long term, provided that there are no shenanigans in supporting the exchange rate at the wrong price — that is a big condition—the certainty that will result will mean that the private sector can enjoy lower interest rates.

A great deal of fuss has been made about the reductions in personal tax rates, but we should consider the increased revenue that has been raised during the past two or three years, especially from corporation tax. The Red Book shows that the revenue from corporation tax has increased by £4,200 million. I remind the House that that follows a reduction in corporation tax from 52 per cent. to 35 per cent., although we must not forget the removal of allowances. That is the right course. In exchange for a reduction in personal taxation, those loopholes should be closed, and my right hon. Friend the Chancellor should make more efforts in that direction in subsequent Budgets.

My right hon. and learned Friend the Member for Richmond, Yorks (Mr. Brittan) said that the standard rate of 25 per cent. was all right and that the Government should concentrate on increasing personal allowances. The Chancellor has increased personal allowances—indeed, he has doubled them. I have some sympathy with my right hon. and learned Friend's suggestion that there should be an intermediate rate between the two, but if it is valid to reduce the top rate of tax to 40 per cent. as a tax incentive, it is just as valid to do it for lower wage earners. I am glad to hear that my right hon. and learned Friend wants to work towards a target of 20 per cent. Even that is too high, certainly when compared with the American rate. The days of tax-cutting have not yet ended, and I look forward to more progress at the lower end of the scale, where incentives are just as relevant as they are at the top.

The Budget is not just about creating wealth. It is about curbing inflation, and in that connection we must consider the exchange rate controversy and the importance of interest rates and exchange rates in the economy. The evidence about the economy is confusing—at least to me. It looks as though lending to the private sector is at record levels, although recently there has been a small decline. Bank lending to the private sector was as much in the first three quarters of last year as it was in the whole of the previous year. I have also noticed that the savings ratio has come down to below 6 per cent. Historically, that figure is very low indeed. It suggests not only that consumer spending is buoyant, but that earnings are expected to increase to allow for that consumer expenditure to continue. I do not think that the reduction in tax rates will do anything to discourage such personal consumption in the future. Interest and exchange rates are very important points for us to consider.

As my right hon. and learned Friend the Member for Richmond, Yorks said, the exchange rate provides the Government's objective, and the interest rate is the only weapon available to the Chancellor. It is important to distinguish if possible between the thoughts of my right hon. Friend the Prime Minister and those of my right hon. Friend the Chancellor. Both of them cannot be right, although it would be very convenient for someone such as me to be able to argue that they were.

Obviously, there are occasions when the pressure on the exchange rate is too much for it, and it is unwise to try to keep it fixed, especially at a level at which it cannot be sustained. It is impossible to conduct a proper monetary policy otherwise. The difficulty about the present dispute is that it has prevented my right hon. Friend the Chancellor from providing the advantages that seem to result from keeping sterling in line with the deutschmark. Of course, it is necessary to choose the right level at which to pitch sterling to the deutschmark, but I feel that this is about the right level. I am sorry that such a controversy has taken place, because there is much to be said for keeping sterling aligned with the deutschmark, as for all practical purposes we have abandoned monetary policies by the old monetary targets—much to my regret, I may add.

It is by no means easy to adopt a monetary policy nowadays by monetary targets, because of the inflow of foreign funds and the easy extension of credit. West Germany is an example that I should have thought we could follow. Subject to that, I see nothing wrong in subcontracting our monetary policy to West Germany—which, in effect, is what we do if we align sterling to the deutschmark.

People think that that may be rather a soft option, and that we can go on printing money and allow the consumption boom to continue. I do not agree. If we align our currency closely with the deutschmark, as my right hon. Friend the Chancellor would like to do, we must recognise that, in West Germany, earnings are rising by 3 per cent., there is virtually no price inflation, and the public sector borrowing requirement scarcely exists—as, indeed, is the case in this country. It would be wise to spell out that message, and I am sorry that my right hon. Friend may have been inhibited from doing so.

If there is one thing that is annoying at the moment, it is that business and industry do not know where they are; they do not know the Government's policy. If they knew for certain that the Chancellor's and the Government's policy was to keep sterling aligned with the deutschmark, they could plan their production and their future much more easily.

I was very put out last Thursday when I learned that my right hon. Friend the Member for Shropshire, North (Mr. Biffen) had said that he would vote against the Budget. Reading his speech, I discovered that the reason was that he felt that too much consumption was going on, and that therefore inflation might be stoked up. My right hon. Friend, my right hon. Friend the Secretary of State for the Environment, Lord Bruce-Gardyne and I were the principal opponents of the economic policy of my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath). I do not like being outflanked.

I must look very closely at these matters. I am uncertain of the answer. I shall merely observe to my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour), who drew our attention to certain similarities between the present circumstances and what happened in the 1970s, that the difference is that there was then a very large public sector borrowing requirement. In 1974, it had risen to £6.4 billion out of a gross domestic product of £73 billion, about 8 per cent. compared with the present rate of nil. Furthermore, there was a cheap money policy. The minimum lending rate was 5 per cent. in 1971, 6 per cent. in 1972 and 7.5 per cent. in 1973. No one will find that our minimum lending rate has ever gone below 8.5 per cent. since the present Government came to power, and it has even been as high as 14.5 per cent.

On this occasion, I shall not go into the Lobby with my right hon. Friend the Member for Shropshire, North, but I shall certainly watch the indicators as closely as he does.

My right hon. Friend the Member for Woking (Mr. Onslow) talked about the importance of working towards 1992 and the single European market. That is another reason to stress the importance of aligning sterling with the deutschmark. Let us compare our country's economic performance with that of West Germany. Enormous possibilities are open to us, if we can seize them. I mean by that the opportunities demonstrated in an article that appeared in the Dresdener Bank Review, which mentioned that in mid-1987 — taking 100 as the index — hourly labour costs are 100 in West Germany, and 54 in the United Kingdom. In the United Kingdom, the value added per working hour was only 54, the lowest in any of the countries in the European Community.

West Germany is now going through a rather stagnant period, while we are experiencing rapid economic growth. If we can possibly improve our productivity, labour relations and value added, there is significant scope for further advance. That is why I think it important that we should align our exchange rate to the deutschmark, and I am sorry that my right hon. Friend may feel inhibited from pointing out the prospects that are available.

Whether those prospects may be seized is another matter. If we have many more cases like that of Dundee, foreign investment may well be discouraged. But if we can have more instances of what encouraged Nissan to invest in this country—single union agreements—and if we can do away with the restrictive practices that have bedevilled business and industry for so many years, there may be a prospect of bright times ahead.

8.47 pm

Mr. Dafydd Wigley (Caernarfon)

Earlier in the debate the leader of the Liberal party, the right hon. Member for Tweeddale, Ettrick and Lauderdale (Mr. Steel), spoke of the Budget reflecting a warped society. That is very much my feeling as well. It was interesting to read in The Times this morning of a leading industrialist referring to the cut in the top rate of income tax from 60 to 40 per cent. as obscene. That is a comment that comes to mind now.

That is not to say that the Budget does not contain a number of detailed changes that most hon. Members welcome. We certainly welcome the change in the marriage allowance—as far as it goes—the leaded petrol change, the change in company car perks, the forestry changes, and, indeed, the increase in tax thresholds over and above what is necessary to deal with inflation. Those changes, however, although important in themselves, are relatively trivial in comparison with the strategic error which I believe has been made in the Budget and the social insensitivity that it reflects.

The Secretary of State for Employment tonight made what must have been one of his shortest speeches at the Dispatch Box, even allowing for interventions. I well understand that, given that the references to employment in the Budget were so sparse. Indeed, I could point to only two such references in the whole of the Chancellor's speech. It is from that viewpoint that I want to make my contribution to the debate, because, more than any other, that is the viewpoint from Wales.

We suffer continuing high unemployment. The official figure is now 140,000 compared to about 90,000 when the Government took office in 1979. That is in spite of changed definitions and the effect of part-time work and all the other things. Pwllheli, which has one of the two employment exchange areas in my constituency, has an unemployment rate of 24 per cent. That is what we have to live with, and we looked to the Budget for a solution to the problem, but we sought in vain.

The Chancellor said that the reduction in unemployment as a result of the Budget would be at a reduced rate compared with what had been happening to unemployment figures in the past year. That hardly gives us confidence, faced as we are with such a level of unemployment. In spite of the pleasant perspective from which the Budget is viewed in Tory constituencies in south-east England, it is looked at quite differently in areas such as Gwynedd and in the old industrial valleys of south Wales.

That brings me to the heart of the Budget strategy. The Chancellor mentioned unemployment only twice, and clearly the Budget has nothing to do with jobs. It seems to be geared to the top 5 per cent. of earners. It is revealing to look at what the Chancellor said about the public sector borrowing requirement when introducing his 1987 Budget: We have now reached what I judge to be its appropriate destination—a PSBR of 1 per cent. of GDP. My aim will be to keep it there over the years ahead. This will maintain a degree of fiscal prudence that, until this year, had been achieved on only two occasions since 1950. Accordingly, I have decided to provide for a PSBR in 1987–88 of £4 billion."—[Official Report, 17 March 1987; Vol. 112, c. 818.] If that strategy to have a £4 billion PSBR was right 12 months ago, by what token is it now not appropriate? If it was a valid, stable and sustainable position 12 months ago, why has it now been abandoned? Why have the Government carried out a considerable U-turn on this matter? The Chancellor is deliberately going down a path which he describes as one of prudence and caution, and is going for a Budget surplus of £3 billion compared with a £4 billion PSBR last year. That is a difference in strategy of £7 billion.

The Budget surplus gave the Government a choice between attacking unemployment and lining the pockets of rich people. If the Chancellor had stuck to last year's strategy of a deficit Budget of about £4 billion, instead of aiming at a surplus of £3 billion, he could have triggered a public investment capital programme of about £7 billion. That would have been worth at least about £350 million to Wales in the form of hospitals, schools, roads and housing investment. It would have created at least 10,000 to 15,000 new jobs in each of the counties of Wales and brought an end to our jobless nightmare. Instead, he has given the money away in tax relief to his richer cronies at the expense of deprived people, not only in Wales, but in other places where the standard of living is low and unemployment is high.

That sort of investment programme could have been achieved within the parameters of the 1987 Budget review and economic assessment. If it is too risky in 1988 to go down that sort of road, he could have forgone some of the tax relief given to those on top incomes. If the money had been used for capital investment, that would have avoided sucking in imports in the way that that is likely to happen because of the tax cuts. It could have been the basis of a direct investment regional policy, but a regional policy appears to have been abandoned by the Government.

If the cost of capital had been brought down by interest rate cuts of a more substantial and significant nature than we have seen, that would have triggered industrial investment and induced ventures which at the moment are regarded as marginal to go ahead. If lower interest rates were to lead to a lower rate for the pound, that would be of benefit to exporters and would lead to increased demands from manufacturers. What I have suggested would create a coherent whole and could have been an alternative strategy for the Chancellor. All logic points to interest rates that are lower than those that currently exist.

From the point of view of my area, a third element in the Budget is open to criticism. It is the priority given to indirect taxation policy. The increase in petrol prices will be a further blow to rural areas in Wales, Scotland and England. The increase in petrol duty contrasts with the policy of retaining the current level of duty on spirits. The balance struck by the Chancellor is not acceptable.

Another major problem in Wales, which also exists in some other older industrial areas, is substandard housing. The Budget does nothing to help there. Indeed, it takes away the possibility of some tax relief for modernisation. It still allows tax relief to those on the top rate, because at the top rate of income tax a mortgage of £30,000 can qualify for relief. This year of all years, and bearing in mind the giveaway to those on top rates, there is surely a case for restricting mortgage tax relief to those on standard rate, because the resources thereby made available could be used for other purposes, such as spending on those who have greater housing needs.

I have spoken about my constituency problems and about unemployment in Wales, but we also have a major Health Service crisis. In Gwynedd, five cottage hospitals are lined up for closure because the Government have not made available to the health authority adequate resources to keep them open. Towns such as Portmadoc, in my constituency, will not have a hospital at all as a result of the Government's policies. The money being given away by the reduction of the top rate of income tax from 60 to 40 per cent.—about £2,000 million when indexed—is almost exactly what the NHS needs but is not getting. It is immoral of the Government to give away such amounts of money to top earners when people who need vital services cannot get them.

Those who benefit from the reduction in their income tax should remember that the cut has been delivered at the expense of their neighbour's hospital bed. The price of their handout may be that a friend fails to get kidney dialysis. It may mean that when the son or daughter of one of these high earners has an accident no ambulance will be available. There is no such thing as a free handout, and the handouts in the Chancellor's Budget will be paid for by a reduced Health Service and, sadly, human lives. That epitaph on the period of office of the Chancellor is at one with the Thatcherite priority of private greed over public need.

We have to wait to see what will happen to the Health Service, whether additional resources will be made available next month and the month after. It is tonally unfair for the Health Service, which has to run a coherent budget, to have to wait until the new financial year opens before it knows where it stands. Budget day was loudly advertised as NHS day, and rightly so. The issue of the Health Service was rightly the centre of focus. The National Health Service does not need one day of attention, but ought to be given priority all year.

If this battle is to go on, as it should, in what way can the Government have the message brought home to them that their policy is not acceptable? The running down and closure of hospitals was not part of their election manifesto, nor was the reduction of the top rate of income tax to 40 per cent. The Government have no mandate for such priorities, and it is up to the Opposition parties to make life so intolerable for the Government that they cannot and will not go ahead with such policies. That is a challenge to all Opposition parties. On this issue our message to the Leader of the Opposition is, "For goodness sake, do not go gentle".

This is a Budget for the south-east of England, or at least for some parts of the south-east, because there are pockets there which suffer from deprivation. The Budget does little for those facing unemployment or for those whose homes are not in good repair, but for those who have no unemployment problems, who have good quality housing and can afford private health care, and whose income levels are twice those in Wales, it is a good Budget. Few people in rural Wales or the industrial valleys of Wales receive £0.25 million a year and will be £800 a week better off at a time when we cannot afford to increase and index child benefit.

This Budget takes a massive double backward step towards a second Victorian era. A rich elite is growing fatter, while poor people are getting poorer. The richer regions will prosper, while the depressed regions will decay and disintegrate. This is the most class-based Budget of a generation and must surely trigger a political reaction among all decent-minded people.

8.59 pm

Mr. Keith Raffan (Delyn)

In the few remaining minutes, I cannot follow the hon. Member for Caernarfon (Mr. Wigley) by putting the Budget in a Welsh context. No doubt we shall have an opportunity to do that shortly in the Welsh Grand Committee.

The measure of the Chancellor's success, of his ingenuity and of the radical nature of his tax reform is the near unanimity of Members on the Government side in applauding his Budget. Any reservations must be of a minor nature. The key to a strong economy must be to increase incentive and to encourage enterprise. A low-tax economy is a high-incentive economy.

I welcome my right hon. Friend's decision to introduce independent taxation of husband and wife, to give married women a fair tax deal. Raising the tax thresholds by double the rate of inflation and reducing the basic rate will help the lower paid and will be of particular value to the self-employed. The abolition of all the higher tax rates above 40 per cent. will also improve incentives, just as a reduction from 83 per cent. to 60 per cent. did. Lower tax rates can yield greater tax revenues, not less.

Ten years ago, Labour's top rate of tax on investment income was a punitive 98 per cent. Its top rate on earned income was 83 per cent. Since the top rate for both was reduced to 60 per cent., the yield from higher tax rates has more than doubled in real terms. It is equally true that surtax and higher tax revenues fell steadily throughout the 40 years when the top rates exceeded 90 per cent. Tax cuts can raise revenues. When rates are higher, as everybody knows, people avoid taxes or choose to be rewarded by perks rather than by cash. At worst, they move abroad.

As Hamish McRae said in The Guardian, No one likes paying tax but there comes a level at which it really is not worth the bother of avoiding it. That is the level which we have now reached. When rates come down, people start paying the tax. Even The Guardian accepts that a persuasive case can be made for tax revenues having increased as a result of tax rates having been cut. It is those increased tax revenues which have allowed us to go ahead with the biggest ever increase in National Health Service spending in 1988–89—£1.1 billion in the United Kingdom as a whole and £78 million in Wales.

In a debate on the NHS, the hon. Member for Livingston (Mr. Cook) said: This year the Chancellor of the Exchequer has the money to ensure that we get a National Health Service that can deliver to its patients."—[Official Report, 19 July 1987; Vol. 125, c. 833.] When could he have said that about a Labour Chancellor? Labour Members were never in a position to say to their last Chancellor of the Exchequer, "We want you to spend more on the Health Service," because he was too busy paying off the Labour Government's loan from the International Monetary Fund.

Yes, the Government face pressures on the NHS, but they are the pressures of an expanding service which is building new hospitals and undertaking operations unheard of 20 years ago. Those pressures are very different from those that we inherited from Labour — pressures arising from slashing the capital programme by 30 per cent. and from allowing nurses' pay to fall in real terms by 21 per cent.

Under Labour, spending on the NHS fell from 5 per cent. to 4.7 per cent. of GDP. If it had remained at that percentage, we would now be spending £2.9 billion less on the NHS in England and Wales.

Luckily, the Government changed, and spending on the NHS increased from 4.7 to 5.4 per cent. of GDP. Labour want more to be spent on the NHS, more than the increases already provided and more than those promised for the future, yet what Labour Members ask of us they singularly failed to deliver when in office.

The hon. Member for Great Grimsby (Mr. Mitchell), in characteristic form — perhaps because he was a reporter and is one of the few Opposition Members who still has a leaning towards the truth—got it right in the latest edition of The Political Quarterly, which concentrated on the future of the Left—a rather thin issue. He wrote: The first and most indispensable requirement of the better society is growth. It is also Labour's, our greatest failure. Labour's greatest failure is the Government's greatest success, a success which has brought us unprecedented economic strength, a strength which has enabled us to increase spending substantially in priority areas, such as health and education.

9.3 pm

Mr. Gordon Brown (Dunfermline, East)

As my right hon. and hon. Friends have said during this debate, indeed as many Conservative Members have said, the final effect of the Budget will be to transfer £2,000 million to the 5 per cent. at the top who are already extremely rich. It will award £200 million more in inheritance tax reliefs to the 35,000 people who pay that tax. It will provide an additional £40 million for the small number who benefit from the business expansion scheme. It will offer £290 million more to those institutions and individuals who benefit from relief from capital gains tax liabilities. Yet 95 per cent. of the population will make no cash gain from the changes.

It is common ground that the tax cuts are taking place against the background of social security changes and the introduction, next month, of the social fund. Today, 5 million people claim supplementary benefit and from April they will be on income support—8 million people depend on those benefits. There are 16 million low-income families in this country, including 4 million children. In April, child benefit for 7 million mothers and 12 million children will be frozen, 1 million men and women will lose housing benefit and 4 million of our poorest households will have to pay rates at 20 per cent. for the first time, no matter how poor they are. The result will be that, in my constituency and in the constituencies of most hon. Members, low-paid workers and their families on earnings of less than £80 per week will lose between £1 and £2, even with the introduction of family credit and given the tax cuts in the Budget. Unemployed families with two children with an income of less than £80 per week will lose between £2 and £3 because of the withdrawal of single payments as a result of the introduction of the social fund. Those pensioners on income support who will receive £44.05 will automatically see whatever cash gain they make from the uprating of social security wiped out instantly as a result of the price rises in electricity, gas and other household necessities.

I estimate that 9 million people will be worse off as a combined result of the tax and social security changes over which the Chancellor and his Ministers have presided. The only conclusion that we can draw is that the tax cuts that have gone to the few at the very top are to be paid for by the withdrawal of benefits and the misery that that will cause to the poorest of our country.

Our argument is that the Budget will do nothing for justice, fairness and the social cohesion of this country. We also believe that the Budget will make absolutely no contribution to the efficiency and competitiveness of our economy. Conservative Members may argue that tax cuts, the ideology of incentives and social inequality are essential for the running of the modern economy and prerequisites for economic efficiency. However, if we are to be capable of achieving long-term, sustained economic and industrial success, the policies that would do most for social justice are investment in training and education, investment to effect the use of the resources of our regions and inner cities, investment in personal security and investment in the Health Service. Such policies are the most likely to help bring about a long-term, sustainable, secure growth in living standards and an improvement in the quality of life.

The first question that Conservative Members should have asked themselves about the Budget was, why is it, with all the tax cuts that have been achieved at the top since 1979, with all the supply-side incentives that have been available, with all the much-vaunted new opportunities from investment that have come from the £13,000 million of tax cuts at the top and even with the projected increases in the private sector capital investment in the Red Book this year, that Britain will still be investing less as a share of national income in the oil-rich 1980s than it did in the 1960s and 1970s?

Why will we still be investing less of a share of our national income on ourselves than any other industralised country with the exception of Belgium? Even after the Budget's tax cuts and after taking into account the Chancellor's predictions for rising private sector investment, why is Britain—the country that the Chancellor claims has the fastest growth rate in Europe—also the country in which investment as a share of national income is lower than in Spain, Portugal, Greece and Turkey?

With regard to our productive industries and especially our manufacturing industry, why, even after all the tax cuts since 1979 is the level of investment in our manufacturing industry 10 per cent. below what it was when the Government came to power? Why has no other country in Europe had such a low level of manufacturing investment or seen such a fall in investment since 1979?

The least that might have been expected from the tax cuts at the top end in 1979, was that they would have increased the level of manufacturing investment in our economy. In 1988, with manufacturing investment still 10 per cent. below what it was in 1979, the best that can be said for a new round of supply side tax cuts at the very top is that they might just return our investment levels in manufacturing to the 1979 level.

Is it not the case that those countries with higher tax rates than ours, such as Japan, have been investing more and that those countries with lower tax rates than ours —at least until last week—such as America, have been investing the same as us?

As tax cuts at the top end have not produced the level of investment that we need in our economy, why did the Chancellor not use the Budget to bridge the investment gap to make up the investment shortfall? There should be investment in training and education, where we are now falling behind not just Germany and Japan, but Korea and Taiwan. There should be investment in research and development on which we spend half as much as Germany and Japan. There should be investment in our regions and cities, where manufacturing investment levels in real terms in the north, Yorkshire, the north-west, Scotland and Wales are still 20 per cent. and in some cases 35 per cent. below the 1979 level. It makes absolutely no sense to have high and persistent unemployment, forced emigration, depopulation from the north, Scotland and Wales when at the same time, as Conservative Members have noticed, there is over-heating, congestion, skill shortages, pressure on the green belt and escalating house prices in so many parts of the south-east.

Is it not therefore perverse for the Chancellor to announce that he has balanced his Budget while at the same time he states in the Red Book that public sector capital investment actually fell last year—and this in a year in which he claimed that he had 5 per cent. growth?

The only investment that the Chancellor has apparently stimulated as a result of his Budget measures last Tuesday is investment in the business expansion scheme for property development. With subsidies for purchase, subsidies as a result of rent de-control and release from capital gains tax when properties are sold, the housing problems of the many are becoming the tax havens for the few. Small wonder that one firm of accountants said last week: Rachman, one suspects, would not have been slow to take advantage of the scheme had it been around in the sixties. The problem is that under the proposals Rachman will riot only be alive and well, but he and his colleagues will be subsidised to the tune of £40 million by the state.

What about the Chancellor's aims for a balanced Budget? In 1980 the test of success was to be M3; in 1982 it was the aggregate levels of monetary targets; in 1984 it was the total level of public expenditure; in 1986 the Budget was to have been judged by PSBR as a proportion of GDP. The Chancellor might have liked to have come to the House last Tuesday to claim that the proper criterion by which the Budget should be judged was the exchange rate stability that he had achieved, but he was prevented from doing that by the Prime Minister. Instead he told us that we must judge the Budget and its success because he has balanced his books. I looked at what the Chancellor said last Tuesday: At one time, it was regarded as the hallmark of good government to maintain a balanced budget; to ensure that, in time of peace, Government spending was fully financed by revenues from taxation, with no need for Government borrowing."—[Official Report, 15 March 1988; Vol. 129, c. 997.] So, on the Chancellor's own definition, current taxation revenues should exceed current spending. His problem is that, even on his own definition—that is that current taxation revenues without privatisation receipts should exceed current expenditure — he did not balance the Budget last year or this year, and, he will not balance it in years to come. It would have been better if he had come to the House with modesty, and, rather than triumphantly proclaiming that he had balanced the Budget, referred us to an article some years ago, when he——

The Chancellor of the Exchequer (Mr. Nigel Lawson)

When was it written?

Mr. Brown

I shall come to that. In the article, he attacked what he called that school of economic commentators, who see mystical significance in an overall budget balance since this is a muddled amalgam of Gladstone and Keynes without the logical consistency of either". The Chancellor rightly asked me when he wrote the article. I am happy to concede that he wrote it in 1962. I would not have mentioned it but for the fact that he has repeated the same views in the years since then. Did he say to the Treasury and Civil Service Select Committee in 1984 that his objective was a balanced Budget or that it was the crucial test of the health of the economy?

There is no particular magic about a balanced budget. It may trip off the tongue rather well"— indeed, it did, four or five times last Tuesday— but I do not think it necessary to have a balanced budget in order to achieve the objective of stable prices. Our objection to the Chancellor's statement is that, although he may claim to have balanced the Budget, just about everything else in the economy and society was left unbalanced. There is an imbalance between investment and consumption, between the regions and the centre, between the rich and the poor and between private affluence and public squalor.

At the heart of the unbalanced Budget was the balance of payments problem, to which the right hon. Member for Old Bexley and Sidcup (Mr. Heath) referred. The balance of payments is bad and worsening, and it will be accentuated by the tax cuts, which will fuel imports. The problem will be made even more serious by the Prime Minister's determination to run high interest and exchange rates. The current account deficit is £1.5 billion this year and will be £4 billion next year. The manufacturing deficit is £6.5 billion this year and next year will be the worst in our 200-year history as an industrial nation — £8.5 billion. The Chancellor may think—

Mr. Redwood

Will the hon. Gentleman explain why we should believe his forecasts now when, in October 1986, he was reported in The Guardian as saying that Government policies had no chance of bringing down unemployment? If everything is so awful, why is unemployment falling more quickly here than anywhere else in western Europe, and why do we have the fastest growth rate?

Mr. Brown

If the hon. Gentleman would read my articles and repeat them accurately, I might be prepared to answer. The Chancellor said that a balance of payments deficit—a manufacturing deficit — of £6.5 billion was perfectly manageable, and that a manufacturing deficit of £8.5 billion, which is what it would be, would be neither here nor there.

Does the Prime Minister agree with him about this? I know that the Prime Minister and the Chancellor do not see eye to eye on everything, except for the fact that this might be the Chancellor's last Budget, but do they see eye to eye on the manufacturing trade deficit? I must ask the Chancellor, who thinks that the manufacturing trade deficit is neither here nor there, to consider the words of the Prime Minister. When she was aspiring to become Prime Minister, the right hon. Lady said: It is often said we must export or die. I would add: we must manufacture or die even more quickly. That was not a Tory wet, a Labour Back Bencher or a member of a Select Committee in another place, but the then Leader of the Opposition. Does she and the Chancellor now say, with 30 per cent. of our manufacturing jobs lost, 50 per cent. of our cars, 50 per cent. of our washing machines, 50 per cent. of our fridges, 60 per cent. of many items of our furniture, 90 per cent. of our videos and 100 per cent. of our radios imported, with trade deficits in new industries far bigger than trade deficits ever were in the old ones, that we must manufacture or die even more quickly? Never, until this Government came to power, did we import more manufactured goods than we exported and never did we send more money abroad than we invested in manufacturing in many of our regions. Never before have we had whole areas of the country where people are without regular work because they are unemployed, in part-time work or in training schemes and who outnumber those employed in manufacturing industry, whether new or old.

Mr. Steel

Will the hon. Member support the Amalgamated Engineering Union to get 1,000 jobs for Scotland?

Mr. Brown

The right hon. Gentleman knows perfectly well our determination to get those jobs for Scotland. [Interruption.] If Conservative Members would stop trying to make party political points out of this issue and started to fight for the contract for Britain, we would be far better off.

The Budget is not just a missed opportunity for investment in our future, exports and jobs. It gave to the very few what could have provided a lifeline for the National Health Service. The British Medical Association report, which was published only a few days ago, said that 31 per cent. of consultants have had to cancel operations because of financial restrictions, that 3,000 hospital beds have been lost this year, and that the problems next year will be worse than the problems this year. What was the Government's response? Ruthlessly to exclude from expenditure in the Budget the one item on which the vast majority of the people agreed, and then to tell us that the Budget was about taxation and nothing to do with expenditure.

If that was the case, why did the Chancellor of the Exchequer in 1982 announce an extra £100 million for housing as a direct response to public pressure? Why did the Chancellor of the Exchequer in 1983 have to announce an extra £100 million to £200 million for industrial innovation? Why in 1985 did this Chancellor have to tell the House that an extra £75 million would have to be spent on the community programme, saying that it was not an unprecedented gesture that would never be repeated but that the prospects for expenditure revenue and borrowing are reviewed annually in the Budget?

If that could be done when there was less money to be spent, why could it not he done when the right hon. Gentleman had £4 billion to spend? The truth is not that the Government cannot spend on the Health Service but that they will not spend on the Health Service. Each health authority and each patient who is waiting for an operation should know that the money given to one top earner as a tax bonus—£500.000—would have paid for almost 1,000 operations.

The money given to the top 100 taxpayers could have paid for the cardiologists needed in our hospitals to treat heart diseases. The money given to the top 20,000 taxpayers, most of them millionaires, could have entirely eliminated the waiting lists for tonsils and hernia operations, and most of the list for hip joint operations. That is the scale of the redistribution in the Budget. The £2 billion given to the top 5 per cent. could have returned the National Health Service to the stability and security for which doctors and nurses have been calling. Why did the Chancellor opt for the unproven, unprovable, untested and untestable calls for tax cuts for the few, when that money could have been invested in the NHS to provide a lifeline for the benefit of all? This Budget cannot unite the nation because the one area for which the majority of people have been demanding help has been denied any money. It cannot unite the nation because, through his decision to opt for tax cuts, the right hon. Gentleman has chosen unfairness where he could have chosen to be fair.

The new state social fund will come into operation next month. I ask the Chancellor whether there is anything in need, in merit, in contribution to the community or in his insensate ideology that could ever justify someone on £50,000 a year receiving an additional £75 a week, someone on £70,000 receiving £150, and someone on £100,000 receiving £268, while the Government implement a policy of withdrawal of help from pensioners for their heating, from the disabled for laundry, clothing and baths, and from families for basic housing and household necessities?

A number of rulings by adjudication officers have already been made in advance of the social fund, and they will dominate its operation. While tax handouts go to the rich, what will happen to the destitute family looking for beds and bedding who were refused help, not because there was not sufficient money in any social fund but, as the Government adjudication officer told them, because the lack of bedding could be overcome by the family sleeping in their clothes? That happened in 1988, in advance of the social fund.

Mr. Neil Hamilton

Who said so?

Mr. Brown

The adjudication officer.

What about the family with school-age children, who——

Mr. Hamilton

Will the hon. Gentleman give a reference for his remarks?

Mr. Brown

The reference is the decisions of adjudication officers, which were reported in Hansard in a debate on 24 January.

While the rich become richer, a family with school-age children were told that, for people in good health, there was no medical necessity for cooked food. The adjudication officer turned down their request for a cooker on the ground that there was no necessity for cooked food. Parents who had applied for help to buy shoes for their young child were told that the child could get by with three pairs of socks. That is happening in 1988, in a civilised, decent society. Families must go without cookers because the Government say that they can get by without cooked food, and children must go to school without shoes because the Government say that socks are sufficient.

The £2 billion that the Government have given to the very rich could have provided a safety net for the maintenance of single payments. The £200 million lost in tax relief on inheritance tax could have provided for a rise in child benefit or prevented the cut in heating payments to the elderly. The £2 billion that will go the very rich could have rescued the NHS.

One considerable statistic should be left in the minds of Conservative Members. The top 100,000 people in this country—a small fraction of people—get far more in the tax cuts than has been given by the Chancellor to the majority of families, to 15 million people throughout the country. When we understand that fact, we understand clearly that this Budget was born out of greed, founded on indifference to the poor, built on selectivity towards the rich, skewed unashamedly towards the top 5 per cent. and dressed up in hypocrisy about tax cuts and the incentive effect that they will have. It is now revealed in its true colours—not as an epitaph for socialism in this country but, as long as this Government are in power, as an epitaph for social justice and an obituary for the fairness and decency that should lie at the centre of our social arrangements.

The motto of this Government is not, as they say. "God helps those who help themselves"; it is "God helps those whom He has already helped" and they do not worry about the rest of the people in this country.

The Government claim that they are the party of the family. Is there anything more harmful to family life than this Budget's failure to provide for decent hospitals, a decent Health Service, decent homes, decent schools a decent level of child benefit, and a decent opportunity for people to work?

No Budget this century has given so much to so few people. No Budget this century has seen such a huge redistribution of wealth from poor to rich. No Budget this century has so offended the decent instincts of the majority of people who are far more altruistic and far less selfish than the faction that now rules over us. This Budget——

Mr. Nicholas Bennett (Pembroke)

rose——

Mr. Brown

This Budget—[interruption.]

Mr. Bennett

On a point of order, Mr. Speaker.

Mr. Speaker

Order. Is it a point of order, or is it just because the hon. Gentleman did not get in?

Mr. Bennett

The point of order, Mr. Speaker, is that the hon. Member for Dunfermline, East (Mr. Brown) quoted a statement from 24 January. We have checked, and that was a Sunday.

Mr. Speaker

Order. That does not seem to me to be a point of order.

Mr. Brown

We now know who the rowdy elements in this House are — a rowdy element in defence not of fairness, but of injustice, unfairness and inequality throughout the country.

No Budget has so offended the decent instincts of the majority of British people. The Budget cannot unite the people of this country because it deliberately set out to divide the people of this country.

This is the Government who, even when they have the cash, even when they know the need, and even when they made promises about what they would do for the Health Service, cannot bring themselves to afford the poor, the sick, the disabled and the unemployed in our society. The truth is that this country can no longer afford the price that it is paying for this Government.

9.33 pm

The Chancellor of the Exchequer (Mr. Nigel Lawson)

I shall just say this about what the hon. Member for Dunfermline, East (Mr. Brown) has been saying. It is an impertinence for him to say that the Government are doing nothing for the poor, the sick, the disabled and the needy, when public expenditure on social security is already running at far higher levels under this Government than it ever did under that of the Labour party, and the increase—[Interruption.]

Mr. Speaker

Order.

Mr. Lawson

The increase in social security spending that is planned for this coming year, despite falling unemployment, is £2,000 million.

The hon. Gentleman also talked about the rowdy element in the House. During the debate there has been a considerable amount of disquiet, expressed notably by my right hon. Friends the Members for Worthing (Mr. Higgins) and for Woking (Mr. Onslow), about the appalling and unprecedented scenes which we witnessed in the Chamber during the Budget debate. During one of those interruptions I recalled the motto uttered on one memorable and turbulent occasion in the House of Commons by our former colleague, Admiral Morgan-Giles, for many years the Member of Parliament for Winchester. He drew himself to his full height and said: Pro bono publico: no bloody panico.

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

Will the Chancellor give way?

Mr. Lawson

I have only just started. That is the principle on which I have based economic policy throughout my time as Chancellor of the Exchequer and it has served this country fairly well.

The House of Commons will deliver its verdict on the Budget in the Division Lobbies tonight. But the Budget has already attracted unprecedented comment from around the world, where it has been seen as reinforcing the high standing which Britain, under the leadership of my right hon. Friend the Prime Minister, now has in the Western world. It is a far cry indeed from the tones of sorrow and pity which we received from the rest of the world during the period of the Labour Government's desperate attempts to shore up a declining economy.

In Japan, for example, one of the main papers gives prominence to what it calls "the Thatcher miracle", and another to, a Budget too bold for the Japanese Government", while the Japanese equivalent to the Financial Times refers to the changing image of Britain as now being a country of individual enterprise.

Mr. Morgan

rose—

Mr. Lawson

In the United States, The Wall Street Journal in an editorial observed that Britain has returned to the lead in the global swing towards free economies and pro-growth policies based on individual initiative. In France, Liberation called the Budget the most fundamental and most daring Budget since Margaret Thatcher came to power", set against the background of the exceptional dynamism of the British economy. In Germany, Handelsblatt declared that the once sick man of Europe has become the most dynamic economic nation in Europe. So much for the view expressed by the hon. Member for Dagenham (Mr. Gould) about the economy and the Budget alike.

Mr. Morgan

Will the Chancellor tell the House whether the Japanese newspaper went on to explain whether it was proposing that the Japanese Government follow his lead of reducing top tax rates from 60 per cent. to 40 per cent., when Japan has a top tax rate of 78 per cent. and a higher growth rate than the United Kingdom?

Mr. Lawson

Not only do the Japanese plan to reduce the top tax rate, but all the Japanese newspapers stated that in forming their tax reform proposals the Japanese Government would do well to study carefully what has been done in this Budget in Britain.

Mr. Harry Ewing (Falkirk, East)

I am grateful to the Chancellor, because I realise that he is generous to give way. Did any of those newspaper comments refer to the fact that the wealth that the Chancellor is boasting about has been gained at the expense of an expectant mother from Reading who was hawked round 25 hospitals before she was finally admitted and that one of the children to whom she gave birth died? Did any of the newspapers mention that fact?

Mr. Lawson

I clearly should not have given way to the hon. Gentleman. He knows perfectly well that the increase that I announced in November for spending on the Health Service was the biggest increase that has ever been announced in any year.

But important though this Budget is, it is even more important that it is not seen in isolation. For this Budget represents a continuation of the policies which we have pursued consistently for nearly nine years, and which we will continue to pursue—a continuation of the steps that we have taken in nine previous Budgets, and of the major reforms that we have introduced in other fields, too, all of them designed to encourage and reward enterprise and so to liberate the energies of the British people.

The tax changes in this Budget consolidate Britain's move from a high-tax country to a low-tax country, at all levels. Since 1979, the top rate of income tax has been cut from 83 per cent. to 40 per cent. The basic rate has been cut from 33 per cent. to 25 per cent. The corporation tax rate has been cut from 52 per cent. to 35 per cent. The small companies' rate has been cut from 42 per cent. to 25 per cent., arid the 15 per cent. additional tax on savings income has been abolished altogether.

Ms. Hilary Armstrong (Durham, North-West)

Will there be any change in the share of GDP that is taken in taxation?

Mr. Lawson

Yes, I hope that over a period of years we shall indeed get it down.

But these dramatic changes in taxation need to be seen not as a reward, but as a challenge — a challenge to British businessmen. The reductions in tax rates, coupled with the reform of trade union law, provide an unparalleled opportunity for British firms to compete with the best in the world, and to succeed.

Mr. Nicholas Fairbairn (Perth and Kinross)

rose——

Mr. Lawson

The nation now looks to them not merely to do better than they have ever done before, but to outpace those overseas, for there is still a great deal to be done to make good the ground lost in the 1960s and the 1970s.

Mr. Fairbairn

rose— —

Mr. Speaker

Order. If the Chancellor does not give way, the hon. and learned Member must not persist.

Mr. Lawson

And the British people look to them, too, to play their full part in the social field—in the inner cities and in other areas where they can often be far more effective than bureaucratic agencies. I am confident that British business will live up to this challenge. I am confident that, just as it responded so well to the challenge of adversity during a world recession, so it will respond to the challenge of opportunity. For it is already clear that the policies that we have been pursuing have brought about a profound cultural change in this country. That, indeed, is what it is all about. For that cultural change is the only route to the economic success that we all wish to see, and which is no longer promise but reality.

No longer do people accept that economic policy should be about regulating everyone's lives and imposing penal tax rates, in the illusion that that will benefit those on lower incomes. Instead, it is now widely recognised except on the Opposition Benches that one cannot make the poor rich by making the rich poor and that there are enormous benefits in getting the state off people's backs, in transferring decision-making from the state to the people. And it is now abundantly clear that giving greater freedom and greater incentives has removed the shackles that have held back Britain for so many years and has liberated a great surge in enterprise.

Mr. Eric S. Heller (Liverpool, Walton)

The right hon. Gentleman says that the tax cuts will lead to his friends in the City and industrialists investing more and thereby helping to make the economy better and to bring unemployment down. Supposing it does not lead to the investment and they use that money for more holidays abroad and so on. What will the Chancellor do then?

Mr. Lawson

The policy that we have been pursuing has already brought economic success. This country is now experiencing an economic miracle, comparable in significance to that previously enjoyed by West Germany and still enjoyed by Japan. As for Japan, which the hon. Member for Dagenham mentioned, the Socialist party has been in uninterrupted opposition there for the past 33 years—arguably the most important single ingredient of economic success.

Mr. Fairbairn

Does my right hon. Friend appreciate that the miracle of which he speaks and the prosperity and freedom that we have has been destroyed in Scotland by the bigotry of the Labour party and the unions that they support which has denied to Dundee, to Perthshire and the rest of Scotland the Ford development of the future?

Mr. Lawson

I agree entirely with what my hon. and learned Friend says about the criminal shortsightedness of the Transport and General Workers Union in Dundee. We are still waiting for the Leader of the Opposition to make his position clear, but he is not prepared to say anything.

Mr. Campbell-Savours

rose—

Mr. Lawson

No, I shall give way only to the Leader of the Opposition.

In his speech last Wednesday, the right hon. and learned Member for Monklands, East (Mr. Smith) was reduced to referring disparagingly to a "short-term boom". The Leader of the Opposition, in an article in The Sun, called it a "boomlet". Seven years of steady growth at an average of 3 per cent. a year and it is callecl a "boomlet". The Labour Government did not achieve :3 per cent. growth in a single year—not once.

Mr. Neil Kinnock (Islwyn)

Would the Chancellor of the Exchequer be good enough to explain, first, why is that in the years of Conservative rule the amount of domestic debt has gone up from £80 billion to £280 billion and whether he thinks that that might have had something to do with what he describes as a recovery? Secondly, when does he expect to get the tax burden down by the £16 billion necessary to get it back to the level that the Conservative Government inherited in 1979? Thirdly, on the basis of present policies, when does he expect to turn the £8 billion balance of trade deficit into the £5 billion surplus that they inherited in 1979?

Mr. Lawson

I gave way to the right hon. Gentleman so that he could make his position about the scandal of Dundee absolutely plain. He totally failed to answer that point.

As for inflation, which the Labour party never mentions, while we are determined to get inflation down further, what we are now talking about is getting it down from something between 3 and 4 per cent. That can be contrasted with a Labour Government under whom the lowest rate of inflation ever achieved was more than 8 per cent., with an average of more than 15. When Labour Members claim that this Budget is unfair, I say this to them. They can argue till the cows come home about whether it is fair to take 60, 50, or 40 per cent. of a man's salary away from him in taxation. But what is beyond dispute is the crowning unfairness of 15 per cent. inflation to every person in the land.

The benefits of sound and consistent policies are now being felt throughout the economy—in every region, in every country and in every industry. Unemployment has fallen by half a million over the last year, faster than in any other major country, and our unemployment rate is now lower than that in any other major European country, min h the exception of Germany.

This success has been achieved by rejecting the idea that the state is the engine of growth, and that the only way to stimulate the economy is by running ever-larger fiscal deficits. We saw what that led to in the 1970s. It led to inflation spiralling out of control and to the currency crashing, until there was no choice but to slam the engines into reverse, with deep cuts in public expenditure and savage tax increases. What we have done is to adopt a policy of steadily reducing Government borrowing, and we have now reached the logical conclusion of a balanced Budget.

Our legacy to future generations will not be an increasing burden of debt interest, but one which falls as a proportion of national income. This is already allowing us to spend more on priority services—including health — while keeping to our overall objective of reducing public expenditure as a share of national income.

What has brought us to this position is the virtuous circle of lower borrowing and lower tax rates. Lower borrowing gets the state out of the way while lower tax rates give every incentive for the private sector to expand. That in turn generates the higher revenues which have again allowed us to achieve the hat-trick of lower tax rates, higher public spending and lower borrowing — indeed, the elimination of borrowing altogether.

It is nonsense for the Labour party to make fanciful suggestions about what it would have done with the revenues if it had been in government. For the plain fact is that had it been in government the revenues would never have been there in the first place. They were not in the 1960s, they were not in the 1970s, and they would not be now, either.

A crucial part of achieving this virtuous circle is the pursuit of tax reforms that reward and encourage enterprise, something which is completely alien to Labour's philosophy. We do not have to theorise about the benefits of tax reform. They are vividly illustrated by the reforms to corporation tax which I introduced in 1984. The principles of lowering tax rates and of reducing or abolishing unwarranted tax breaks have been applied consistently since 1979. They have served the economy well.

On capital gains tax, the system that we inherited bit harshly on inflationary gains made in the 1970s. My predecessor was able to make a start on rectifying this in his Budget in 1982. I extended the indexation provisions in 1985, and in this year's Budget I was able to announce the logical conclusion that gains made before 1982 should be exempt from tax altogether. This will benefit the economy by unlocking assets bought before 1982, which people have been sitting on simply to avoid a penal tax charge on purely paper gains. But at the same time the alignment of the rates of tax on income and capital gains, which was made possible by the simplification of the income tax rates, reduces both the distortion of investment decisions and the scope for higher rate tax payers in particular to convert income into gains to minimise their tax liability.

In this Budget, it was right to concentrate on personal taxation — and on income tax in particular. We had made some substantial progress in previous Budgets, but it was clear that this was an area ripe for reform.

I believe that the whole House, and indeed the whole country, has welcomed the reform that I announced in the tax treatment of married women. The existing system, with the wife's income treated for tax purposes as belonging to her husband, had lasted for 180 years. It had become wholly indefensible. I decided that the time had come to act. My proposals will for the first time ensure complete privacy and independence for married women in their tax affairs. Of those married women who will gain financially from the introduction of independent taxation — the majority of whom, incidentally, will be elderly—nearly three quarters have incomes of less than £5,000 a year.

Mr. Dick Douglas (Dunfermline, West)

How does the Chancellor reconcile his division of man and wife here with the provision in the poll tax legislation for husband and wife to be jointly and severally responsible for the payment of that tax?

Mr. Lawson

It is still independent taxation in that context, too.

At the same time, it was clearly right to eliminate the so-called tax penalties on marriage and that I have also done.

It is, I must say, the height of effrontery for Opposition spokesmen to complain that those below the tax threshold cannot benefit from a Budget that reduces income tax. Are they arguing that we should have reduced thresholds in real terms, instead of raising them? That is what they did when they were in office, when the single person's tax threshold was reduced by 20 per cent. in real terms.

We have now done something which has never been done before : we have cut income tax in seven successive Budgets — which, under this Government, means seven successive years. Compare Budget day now with the sense of apprehension and dread with which, under the last Government, the British people waited to find out what fate would befall them in March, and again in July and again in November.

This year, we were able to achieve our declared goal of reducing the basic rate to 25 per cent. — from a third under the last Labour Government to a quarter now—and I have pledged that we will reduce it further to 20 per cent. as soon as it is prudent and sensible to do so.

The cut in the basic rate, together with the double indexation of personal allowances, accounted for three quarters of the cost of the income tax package in the Budget in the coming year. So much for the claim that 95 per cent. of the population would not benefit from the Budget. That is poppycock.

It was clearly right—I know that the Opposition are concerned about this—to reduce the higher rates, too. All the experience, in this country and overseas, has demonstrated the futility of levying high tax rates in some misguided search for social justice. It is clear that all that does is encourage distortions and discourage enterprise.

With high tax rates, far too much wasted effort is put into finding ever more complicated ways of avoiding tax and, indeed, into emigration. No one benefits except tax accountants and tax lawyers. It is far better both to cut higher rates of tax and to sweep away as many as possible of the shelters and tax breaks which were an inescapable part of a high tax regime. And that it what I have done in this Budget. The changes in the tax regime for forestry, for covenants, for company cars, for golden handshakes, and indeed for capital gains, all sweep away tax breaks which have no place when tax rates are lower.

Our experience since 1979 clearly demonstrates the results. In 1978–79, the top 5 per cent. of taxpayers contributed 24 per cent. of income tax revenues. This year, the top 5 per cent. will contribute 29 per cent. of income tax revenues.

All around the world, top tax rates are coming down. Even the Labour Governments in Australia and New Zealand have embarked on that road, particularly New Zealand—let me tell the hon. Member for Dagenham— where they have already brought the top rate down from 60 per cent. to 48 per cent., and now plan to bring it down to 33 per cent. this October. Only the Labour party here claims that high tax rates are a good thing. Labour completely fail to understand the basic points. They said in their election manifesto that they would reverse the tax cuts for the top 5 per cent. to help pay for their programme. They do not realise that the top 5 per cent. are paying more, not less. In real terms they are paying £3 billion more. That is how the programmes are being paid for.

All that motivates the Opposition is envy and spite. They still cannot say where they would set the top rate. Reducing income tax gives people more freedom and more effective choice.

The Lord President of the Council and Leader of the House of Commons (Mr. John Wakeham)

rose in his place and claimed to move, That the Question be now put.

Question, That the Question be now put, put and agreed to.

Question put accordingly and agreed to

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