HC Deb 03 May 1988 vol 132 cc744-825

Question proposed, That the clause stand part of the Bill.

4.33 pm
The Chief Secretary to the Treasury (Mr. John Major)

We start the Committee stage of this year's Finance Bill with what most hon. Members will accept are by far the most important measures in the Bill. Clause 22 reduces the basic rate of income tax in 1988–89 to 25 per cent. and clause 23 sets a single higher rate of 40 per cent. We shall debate both clauses together, but there will be separate votes on them both.

Taken together those clauses produce a radical simplification of our personal income tax structure. The difference over recent years is startling. In 1979 we inherited a system of 11 rates of tax on earned income and of a further two rates of tax on what the Opposition tend to call "unearned" income. This provided special punitive rates on the product of savings and investment even though investment then—as now—is critically important to our economic success.

In 1979 we reduced the number of tax rates to eight. In 1984 we abolished the investment income surcharge. This Finance Bill now carries this progressive simplification further and establishes a system with only two rates of personal tax. As a result, it enables the taxation of capital gains to be aligned with income tax. It now gives us one of the simplest structures of personal income tax anywhere in the world.

These measures are central to our policy of tax reduction and reform. They reflect our belief that people know better than Governments how to spend their own money in their own interest and on their own behalf and should be enabled to do so. We also believe that they are less likely to work productively if they are over-taxed and are not allowed to keep a greater share of the rewards of harder work and greater productivity. We believe. too, that a low tax environment will ensure that people make less use of the tax shelters which are endemic to any high tax regime, and, crucially, that they will be more willing to take risks if they know that successful risk-taking brings a worthwhile return. Those are all key factors in creating the culture for enterprise that is so essential to maintaining a growing economy.

Clause 22 redeems the promise that we made in our manifesto last year—to reduce the basic rate of income tax to 25p in the pound. It is by no means a new target, but an aim that we first set in 1979. By last year we had reduced the basic rate of income tax from the 33p in the pound that we inherited to 27p—within 2p of the objective set by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) in 1979. That was the record and the promise on which we fought the general election. The substantial question before the Committee today is whether the basic rate should now be reduced to a quarter, fulfilling that election pledge which was so warmly endorsed last June.

I recognise that for a variety of reasons the Opposition dislike tax cuts. The right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley),—who in those halcyon days was the Opposition spokesman on the economy—called last year's tax cuts "a failed publicity stunt." They were not a stunt, and they were not a failure. The tax cuts go on to benefit the economy, and the right hon. Gentleman has moved on.

The truth is that lower taxes benefit millions of ordinary taxpayers. The basic rate is the marginal rate for 94 per cent. of all income taxpayers and for 90 per cent. of unincorporated businesses. This year the marginal rate for basic rate taxpayers will be 8p in the pound lower than the rate that we inherited from Labour, and the lowest that it has been since before the war.

Mr. Chris Mullin (Sunderland, South)

Will the right hon. Gentleman confirm that the total amount of the gross national product consumed by taxation has risen by about 5 per cent., if my memory serves me correctly, from 34 per cent. to 39 per cent. since the Government came to office, and that what he is talking about is the reduction in the rate of income tax?

Mr. Major

I can certainly confirm that we are talking about income tax and that there has been an increase in the gross take from taxation. I am happy to confirm that to the hon. Gentleman. It underlines the fact that we are keen to continue to reduce taxation, but we do not yet believe that we have reduced it sufficiently. I shall return to that particular point in a few moments.

Twenty-three million taxpayers now have a marginal rate of 25p compared to a mere 4½ million taxpayers who benefited from a reduced rate band under the Labour Government.

Mr. Robert Sheldon (Ashton-under-Lyne)

The right hon. Gentleman seemed to take pride in reducing the number of tax rates. Other countries think it quite reasonable to have a progressive system. In fact, under the Conservative Government before 1964 there were three reduced bands, then there was the standard rate, and there were the 11 rates of surtax. They did not think that was wrong. They felt that it was right that people should come gently into tax and pay on a progressive basis. Why the sudden change?

Mr. Major

There are other countries of the same political persuasion as the right hon. Gentleman that share our view that there should be a simple tax rate and a low high-tax rate. That is a matter to which I shall be returning. That is fundamental to the case that I wish to put to the Committee in this debate.

Under the last Labour Government the reduced rate band covered only £750 of taxable income. Our 25p band—the same rate as the reduced band that applied before 1979—covers not £750 of taxable income, but £19,300 of taxable income. Nor should we forget that personal allowances are now 25 per cent. higher in real terms than in 1978–79, and the married man's allowance is at its highest level since the war. By contrast, personal allowances fell between 1974 and 1979. The overall burden of income tax is now £20 billion lower than it would have been if we had kept Labour's regime and simply adjusted allowances and thresholds for inflation.

The benefits of these tax reductions have been felt at each and every level of taxable income. The percentage of earnings taken in income tax and national insurance contributions is now lower at all levels than if we had kept the regime that we inherited and simply indexed it. For example, a nurse this year will pay around £12 less in tax than she would have done under the regime that we inherited; and she is now paid much more, too. Furthermore, not only does she pay less tax and is paid more, but there are more nurses than there were before, which reflects our public expenditure priorities.

We have already come a long way in our tax changes, but we do not think—I pick up the point made by the right hon. Member for Ashton-under-Lyne (Mr. Sheldon)—that we have yet reduced tax sufficiently. The rate of tax for the majority of taxpayers in this country is still too high. That is why, having fulfilled one pledge, we have set a new one: to reduce the basic rate of tax to 20p in the pound—not rashly, not irresponsibly, not even necessarily speedily, but as soon as we prudently and sensibly can. That would give us a starting rate of tax generally in line with that in other countries, although, of course, covering far more people. Opposition Back Benchers have from time to time taken us to task in recent debates for our "failure" to reduce the tax burden. I agree with them. We have not done enough and more must be done. We welcome their conversion, however belated, to the cause of lower taxes. They are only nine years and three general elections behind the majority of voters in this country. The voters in those three general elections were all, of course, behind us.

However, Opposition Back-Bench support is simply not enough. We would welcome the support also of right hon. and hon. Gentlemen on the Front Bench for our policy of reducing taxation. Last year, their spokesman, the right hon. Member for Sparkbrook, made their position perfectly clear well in advance of the Budget. Indeed, the right hon. and learned Member for Monklands, East (Mr. Smith), who will be speaking later, may recall the words of his predecessor to the International Equity Dealers Association last January, when he said: When the Chancellor cuts the standard rate, as he undoubtedly will, the Labour Party will vote against it in the House of Commons. What is more, we will reverse that decision when we are elected and return to approximately the present level of taxation. The right hon. and learned Gentleman's prediction about the election result was about as accurate as his later claim that the Conservative Government would not be able to sustain their tax cuts. We have not only sustained them, but extended them.

Mr. David Winnick (Walsall, North)


Mr. Major

I will give way in a moment.

Although the right hon. and learned Gentleman may not have been clairvoyant, at least he did tell us what his policy was, even if it was not always completely convincing. I do not wish to sound unreasonable, but it always seemed to me to be rather unlikely that Labour could finance its £35 billion spending programme at approximately the present level of taxation". The right hon. and learned Member for Monklands, East, regrettably, was not invited to speak to the International Equity Dealers Association this January—no doubt by an oversight—so we have to turn to other sources for his pre-Budget judgment. Here the seminal document is Woman's Own of 12 March 1988. Bemoaning the fate of a shadow Chancellor, it said: John Smith has a Budget too. The trouble is no one will hear it. I offer the right hon. and learned Gentleman an invitation. In a few minutes he will have the Floor. I am sure that I speak for this side of the Committee when I say that we would love to hear what the right hon. and learned Gentleman might have put in his Budget.

The Chairman

Order. Not in Committee.

Mr. Major

Perhaps, Mr. Walker, the hon. Member for Dunfermline, East (Mr. Brown) or the right hon. and learned Gentleman some time later will share with us some of the thoughts on taxation that are relevant to this clause and that the right hon. and learned Gentleman shared with the readers of Woman's Own, when he said that he doesn't subscribe to reductions in income tax", although he would support a change in the thresholds, so that more people on low incomes don't pay tax, and a lower bottom rate of tax, perhaps"— note "perhaps"; not "certainly", but "perhaps"— but no other changes and certainly not for the big earners. That, at least, is clear.

4.45 pm
Mr. Winnick

It is noted, at least on this side of the Committee, that the right hon. Gentleman is making very little reference to indirect taxation. All his emphasis is on income tax. As someone who makes no apology for the fact that he believes that there are occasions and times when a decrease in the standard rate of taxation is not justified—I made my views clear last week—I ask the right hon. Gentleman to recognise that accompanying the decrease to 25 per cent. is the starvation of essential services in the National Health Service with ward closures, even hospital closures, and long, long waiting lists. In my own borough, for example, a new extension to the general hospital cannot be opened——

The Chairman

Order. I remind the hon. Gentleman that we are debating income tax.

Mr. Winnick

All I am saying, Mr. Walker, is that if there is a choice between what the right hon. Gentleman is now proposing and, for example, the general hospital extension that cannot be put into use once it is completed because of the lack of cash, at least the Opposition know their priority.

Mr. Major

I understand the point that the hon. Gentleman puts extremely clearly. I remind him that we increased public expenditure on priority programmes by £4.5 billion—rather more than the tax cuts—in the public expenditure round that was concluded last autumn. As he will know from the additions made then and subsequently to the health budget in particular, very large sums indeed have been directed to priority programmes, for we share his concerns.

Mr. John Smith (Monklands, East)

As the right hon. Gentleman finds articles in Woman's Own of interest in the debate, does he agree with the observations of Lord Whitelaw that will appear in next week's edition of Woman's Own—I am reliably informed that The Sunday Times and other journals have got it right, and certainly there has been no denial from the noble Lord—that the bad side of the Thatcher Government is that there are a lot of people very interested in making a lot of money, and not very interested in anything else that goes on. A little compassion is needed. Does the right hon. Gentleman agree that a bit more compassion is needed from this Government?

Mr. Major

It is rather difficult to comment on an article that has not yet appeared and a report that may or may not be accurate. In view of the right hon. and learned Gentleman's invitation, I shall most assuredly read next week's Woman's Own. I am sure that we shall have plenty of opportunities in Standing Committee to return to this point, and I look forward to that opportunity. I have no idea whatsoever what my noble Friend may have said in an interview in Woman's Own, which has not yet been published and about which I have not spoken to him.

Mr. Smith

I am sure that the right hon. Gentleman would not imagine for one moment that I would misquote. That was a direct quotation from Lord Whitelaw. He said: a little compassion is needed. Is that a fair comment on this Government, or is it not?

Mr. Major

I accept what the right hon. and learned Gentleman says, but my noble Friend has specifically made it clear that his criticism generally in that article was directed at yuppies, not at the Government—[Interruption.] I have read The Times report. I have not yet read Woman's Own. Nor, I think, has the right hon. and learned Gentleman, unless he is clairvoyant, because it has not yet been published.

There is one way in which Opposition Members have been consistent, and I am happy to award them a point for that. Clause 23, which abolishes all higher rates above 40 per cent., has been the subject of repeated and often relatively passionate attacks by Opposition Members. [Interruption.] Only relatively; moderation still exists even in some quarters of the Labour party. We are clear that Opposition Members dislike that proposal. We are also fairly clear about why they dislike that measure. They dislike tax cuts because they know that they have been bringing about increasing prosperity. Prosperity and Labour party philosophy do not mix, and the country is well aware of that. We have repeatedly told the House of Commons of the benefits that we believe the reduction in the to rates of tax will bring and that our economic performance has improved.

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

Has the Minister read the document entitled "Taxation and Family Labour Supply in Great Britain" by Mr. C. V. Brown? Does he accept any part of it? Does he recognise that it says that so-called tax incentives do not work in the way that he suggests? Is he writing off the report? What is his view? Is the report relevant?

Mr. Major

I have not read in detail the report to which the hon. Gentleman has referred. But it is crystal clear, to those who wish to see, that since 1979 we have pursued a policy of reducing tax rates. Since 1979, there has been a substantial growth in prosperity and in the economy of this country. There is a causal link between the two events. I am not necessarily required to read each and every article that may or may not have been written on a certain subject.

Mr. Campbell-Savours

Does the Minister understand that his Government—his Department—commissioned the report? It drew on a sample of 8,000 addressees, yielding 7,751 households. The information that it provided was crucial when the Chancellor was considering this year's Budget, but the Minister now tells us that he has not read it and has not considered it. Yet the Chancellor has gone forward and allocated £2 billion to the better-off in society in the form of cuts in higher tax rates.

Mr. Major

I shall tell the hon. Gentleman way I did not read the report. He is suffering under the misapprehension that it may have been commissioned by the present Government. He is wholly wrong. It was actually commissioned by the right hon. Member for Leeds, East (Mr. Healey) some time ago. In no sense was it commissioned by the present Government. It may be for that reason that it has not been brought to my attention.

Mr. Tim Smith (Beaconsfield)

Regardless of what any academic report may state, does not common sense suggest that if tax rates are high, people will work less hard than if tax rates are low? From what we have heard this afternoon, is it not clear that Opposition Members do not have an income tax policy? We have heard from some Opposition Members that the tax burden is too high and should be reduced, and from others we have heard that they want to see a higher rate of income tax.

Mr. Major

I agree entirely with my hon. Friend. It is clear that, as it is common sense, it does not necessarily appeal to Opposition Members.

Mr. John Butterfill (Bournemouth, West)

Does my right hon. Friend agree that one of the problems in the business world today is that the unincorporated sector is at a disadvantage compared with the corporate sector? The risk: reward ratio for those who pay direct schedule D taxation is far too daunting. Something needs to be done, and this measure will help with the problem.

Mr. Major

I agree with my hon. Friend. I was proposing to refer to that matter later.

A low tax system encourages risk taking and does not deter it. That refers to the point that my hon. Friend the Member for Bournemouth, West (Mr. Butterfill) had in mind. It also makes the United Kingdom an attractive place for those with internationally tradeable skills and talents to work in and to invest in. In a competitive world, we compete for money and people in a global market. Both are footloose. They go to the least hostile environment. The United Kingdom simply could not survive as an island of high taxation in a sea of low tax economies, without doing irreparable harm to our international competitiveness and our ability to retain talent and attract investment.

Mr. Rhodri Morgan (Cardiff, West)


Mr. Major

If the hon. Gentleman wishes to intervene, I shall give way. There is no need for him to behave in that fashion.

Mr. Morgan

The right hon. Gentleman has stated that, in his opinion, economic growth advanced rapidly under the Conservative Government when direct taxes fell. Perhaps he would like to consider the fact that, in the nine years since the Thatcher Government—the present Government—came to power, the international oil price has risen by 80 per cent. During the five years of the previous Labour Government, the international oil price rose by 80 per cent. a year! Will he consider whether that has had an even greater impact on any change in prosperity?

Mr. Major

The hon. Gentleman might care to bear in mind that oil revenues are now less than 2 per cent. of revenue and have fallen quite dramatically in the past few years. In the Japanese tax system, there are certainly higher rates of tax, but only at extraordinarily high rates of income. We have chosen a different system for the reasons that we have set out before the House of Commons and that I am now setting out before the Committee.

In a competitive world, skills and investment go to the least hostile environment. Opposition Members who focus on the month-by-month changes in our balance of payments might do better to contemplate the longer term damage to our economy if we drive out that investment and repel that talent. The importance of that talent is the extent to which it brings investment and employment to those regions of the country that still require it. Of course, I recognise that Opposition Members neither accept nor understand such arguments, and they never have.

Mr. Tony Worthington (Clydebank and Milngavie)


Mr. Major

I have given way quite sufficiently in the past few minutes. I shall give way a little later to the hon. Gentleman if he is still enthusiastic.

In 1979, the right hon. Member for Leeds, East confessed that he was mystified by the Chancellor's belief that somehow or other his cuts in income tax will transform economic performance in the boardroom and on the shop floor."—[Official Report, 13 June 1969; Vol. 968, c. 469.] He is still mystified, despite the evidence before him of our changed circumstances. Opposition Members believe that people will put in the same effort, take the same risks and make the same investment decisions if an extra £1 earned brings in 17p, 40p or 60p. That flies in the face not just of basic economics but of basic common sense—not just of common sense, but of what has happened in the past few years.

Mr. Doug Henderson (Newcastle upon Tyne, North)

From the study that was quoted earlier by my hon. Friend the Member for Workington (Mr. Campbell-Savours), is the right hon. Gentleman aware that only 19 per cent. of the people who were interviewed said that they could work more paid hours if the opportunity were available? Is he aware also that 81 per cent. said that they were so dependent on existing processes of industry that, even if they were given more incentive, they could not work more? Does that not confirm that the Japanese have the right answer?

Mr. Major

The hon. Gentleman is referring to a report that, for the reasons that I have given, I have not read. It was not commissioned by this Government. The information that has just been passed to me suggests that it dealt only with short-term effects. It does not in any way address the points that we are seeking to make, for we are looking at a tax regime not just for the short term but for the long term. That is the way that we plan in this country.

For example, in 1979 the venture capital industry in this country was almost non-existent. Last year, it invested over £1 billion. In 1980, the first year of the unlisted securities market, £12½ million was invested in new issues. Last year, it was £191 million, and £40 million was invested in the new third market. Since 1983, when it was first started, over 3,000 companies have used the business expansion scheme to raise £750 million. Opposition Members still see no link between willingness to invest and the prospect of greater returns, yet the link is clearly there for all to see. Nor is it confined to people putting their own money into other people's businesses. Since 1979, self-employment has grown by 1 million—more than 50 per cent. That is six times the increase recorded in the previous 30 years. New businesses have been created at the net rate of around 500 a week. Yet again that is evidence that the Opposition prefer to ignore.

We have repeatedly pointed to the evidence that reduced marginal rates benefit not only the economy but the Exchequer. Lower tax rates reduce incentive for higher rate taxpayers to shelter their incomes from punitive taxation, through elaborate tax avoidance devices. Higher rate taxpayers now contribute more revenue than ever before. In 1978–79 higher rate taxpayers contributed only 20 per cent. of total income tax revenue and in 1988–89 they will contribute 30 per cent. To put it another way, under the Labour Government, 80 per cent. of income tax revenue came from basic rate taxpayers; this year they will contribute 70 per cent. That is not because we have soaked the rich, but because we have given them the incentive to create wealth and the tax revenues have benefited.

As Opposition Members appear to have forgotten, I remind them that our view is not some British idiosyncrasy; it is shared by the Governments of the United States, Canada, Australia and New Zealand. The Labour Treasurer of Australia and the Labour Finance Minister of New Zealand share our view on the futility of punitive taxation and of the damage that it does to economic performance.

5 pm

Because of our policies, we now have the highest growth rate in the EEC and we shall make sure that that growth rate continues. Not one Opposition spokesman——

Mr. Morgan


Mr. Major

I gave way to the hon. Gentleman once, which was not wise, and I shall not do so again.

Not one Opposition spokesman has succeeded in refuting these assertions or has even tried. Nor have they denied the evidence, for they cannot. Instead, they pretend that it does not exist. They have fallen back on those old familiar cliches that do nothing to advance the argument or persuade the House of Commons or the country that they are right and we are wrong.

Mr. Worthington


Mr. Major

The hon. Member for Clydebank and Milngavie (M r. Worthington) must be the only hon. Gentleman to whom I have not given way, so I will do so.

Mr. Worthington

I realise that my hon. Friends are extremely unreasonable in expecting the Minister to have read a document that is relevant to his brief. However, will he confirm that, since receiving his increase in income through the tax cuts, he has smartened himself up considerably and is working harder?

Mr. Major

That is a matter for others to judge. I am far too modes: to say that I worked pretty hard before and shall continue to work pretty hard.

Mr. Gordon Brown (Dunfermline, East)

Before leaving these points, will the Minister tell us what share of the total income tax cuts has gone to the top 1 per cent?

Mr. Major

As the hon. Gentleman knows, vast amounts of the cuts in income tax have gone to people on the basic rate or on the threshold. The hon. Gentleman knows that to be the case. If he requires the precise figure, my right hon. Friend the Financial Secretary will provide it in his reply to the debate. In terms of the total, the majority of the resources have gone towards reducing the basic rate from 27p to 25p and to raising the threshold at which people commence paying income tax. That is a benefit to every taxpayer in the country to a greater or lesser extent.

Mr. Brown

If the Chief Secretary cannot give me one of the more important figures arising from the Budget, will he confirm the figure that the Financial Secretary gave to me on Friday? I was told that the top 1 per cent. taking into account income tax reductions, personal allowances and top tax rate reductions, have had 31 per cent. of the income tax cuts and the top 5 per cent. have had 44 per cent? How does the Minister defend that?

Mr. Major

The hon. Gentleman did not hear what I said a few moments ago. I made the point clearly that higher rate taxpayers contributed only 20 per cent. of total income tax a few years ago. This year they will contribute 30 per cent. The hon. Gentleman might bear that in mind.

Mr. Brown


Mr. Major

No, I will not give way. I have given way twice to the hon. Gentleman who will have every opportunity later to catch Mr. Walker's eye.

Noone will deny the passion that Opposition Members feel on the subject of higher rate tax cuts. They are passionate in their wish to penalise success. They are passionate in their desire to reduce returns from investment. That is what, fires the Labour party. Opposition Members are passionate in their wish to make risk-taking an unrewarding enterprise, notwithstanding the effect that will have on those people who do not have jobs and who perhaps would get them. None of the passion of Opposition Members is any good for Britain, which is what people have observed in the past three general elections.

Ms. Hilary Armstrong (Durham, North-West)

Perhaps the Chief Secretary does not believe that people in this country want to contribute and be part of a country that cares for all people. Some of those tax earners may feel a responsibility to demonstrate their care and concern For the rest of the country. That is not to say that they should not contribute. Many of them would contribute and be happy to do so. In fact, they are benefiting from the better things in society. Does the right hon. Gentleman want them to contribute?

Mr. Major

I agree with much of what the hon. Lady has said. There is no doubt that the British nation is remarkably openhanded and will contribute to society. We have seen that time and again during the past few years. We have now established a payroll-giving scheme for those who wish to contribute on a structured basis. The hon. Lady is talking not about the openhandedness of those who wish to contribute, but about the compulsion of the Government imposing taxes, so that there is no choice but to contribute. That is a different proposition.

Without the facts Opposition Members have found it difficult to provide any substance for their claim that the Government are creating a poorer society. Therefore, they have accused us of creating a more unequal and unfair society. They are wrong. In the 1970s, the price paid for the sort of artificial equality that they sought was high. In their last period in government it meant a fall in living standards for single people at all multiples of average earnings and a virtual standstill in living standards for a married man with children on average earnings—[Interruption.] The hon. Member for Cardiff, West (Mr. Morgan) may not like it—that may he why the hon. Gentleman could not get elected on earlier occasions—but it is a fact.

Mr. Gordon Brown


Mr. Major

I have given way to the hon. Gentleman on several occasions and I shall not do so again.

There was also only a tiny increase in real take-home pay for the average nurse over a five-year period.

Mr. Nigel Griffiths (Edinburgh, South)


Mr. Major

I have been exceedingly generous in giving way so far and I now wish to make progress.

That was the price that ordinary working people had to pay under the Labour Government, with their insistence on equality—[Interruption.] I will tell Opposition Members what sort of equality they produced. It was an equality they produced. It was an equality of low opportunity, low and falling living standards and misery and high taxes. It was not equality of opportunity and low taxes.

Mr. Anthony Beaumont-Dark (Birmingham, Selly Oak)

There is nobody here who believes more than me that people have a right to expect a just return for their labour. However, there is also a need for a just return on risk and capital. Sometimes I have disagreed with things that have happened. But is it not more important that in the end, unless we are willing to give people a just reward upon that capital and upon that risk, there will not be growth? If one is going to take great risks—this country needs great risks to be taken with people's capital—and if there are not just rewards and we return to 90 per cent. taxation, why should anybody take any risk at all? That is the sense of reality that the Government have brought to this country. That is the sense of reality that we have to keep. Success should not make one a pariah.

Mr. Major

My hon. Friend the Member for Birmingham, Selly Oak (Mr. Beaumont-Dark) crystallises the point that I have been seeking to make to the Opposition for some time. My hon. Friend does it with great clarity. If Opposition Members do not accept it from me, they might accept it from my hon. Friend. I would be delighted if that were the case.

The Opposition will oppose us on clause 23, because they dislike a Budget that offers people a chance to better themselves, to make money for themselves and to create jobs for others. They prefer a tax system that clobbers those in high-tax brackets, at whatever price to the nation's success, and which does not give people the chance to improve their position. In this matter, yet again, the Labour party reveals itself to be the class party that we expect it to be so frequently. Not only that. but it is a one-class party with a vested interest in class divisions, in impeding social mobility and in destroying personal initiative. That is what the Labour party stands for. It does not seek opportunity for all; it seeks destruction of opportunity for a vast number of people. The Labour party's position on clause 23 is clear. We may not know what higher rate it favours, but at least we know what Lobby Labour Members will enter. However, on clause 22 we do not know even that. We believe that the basic rate of tax that people pay is an issue of such fundamental importance that everybody should know the Labour party's policy; they signally fail to do so at the moment.

The Labour party clearly does not know its own mind on this subject. An unusual silence has fallen over the Opposition Front Bench about the subject of the basic rate since the Budget. Even the coy, pre-Budget hints of the shadow Chancellor to Woman's Ownhave not been repeated. His natural eloquence has been stilled. We have heard nine speeches on the Budget from Labour Front-Bench spokesmen since Budget day, but not one has stated where the Labour party stands with regard to the basic rate. They have sat silent, fearing that anything they say will be taken down and used in evidence against them. Perhaps the shadow Chancellor, who is an extremely eminent advocate, has advised them to use their right of silence.

The Labour party has not only not told the Committee where it stands but, even more remarkably, it has not told the press. Over recent weeks, the hon. Member for Dunfermline, East has treated us to a stream of elegantly phrased press releases. No subject has been too important to ignore or too trivial to overlook. The hon. Gentleman has a press release for them all. We have not had one press release from him about a subject that affects 25 million taxpayers, despite the fact that last Tuesday The Guardiancomplimented him on his skill in first understanding the point and then maximising the political mileage from it. Nobody could exceed my admiration for the hon. Gentleman. He must understand the point, so we are forced to draw the conclusion that he has realised that there is no political mileage for the Labour party in saying anything about the basic rate reduction.

Today is the Opposition's final chance to make clear where they stand on the basic rate—[Interruption.]Will the right hon. and learned Member for Monklands, East sit on his hands yet again with his tongue quiet? If he does, it will be a remarkable innovation. The Opposition can vote for the basic rate reduction—[Interruption.] If the right hon. and learned Gentleman would stop chattering I would be able to concentrate. If he will stop making abusive sedentary interventions I shall stop abusing him from a standing position.

If the Labour party votes for the basic rate reduction it will be an astonishing turn around, given its previous position and the policy on which it fought the election. It is, after all, the high tax party.

Labour Members could abstain and express no view about the basic rate of tax, as they did in 1986 when my right hon. Friend the Chancellor cut the basic rate from 30p to 29p. I should remind Labour Members of the reason that their then spokesman gave for abstaining. He said: We will not oppose this small step towards returning to the lower level of tax to which the low paid were subject at the time of the last Labour Government."—[Official Report, 6 May 1986; Vol. 97, c. 115.] Will the interests of the low-paid lead Opposition Members into the Aye Lobby? The low and averagely paid are being offered a basic rate that is the same as Labour's reduced rate.

Labour Members could oppose the reduction, as they did in 1979 when my right hon. and learned Friend the Member for Surrey, East reduced the basic rate from 33p to 30p. That is what they did not once but twice in 1987 when my right hon. Friend the Chancellor reduced the basic rate from 29p to 27p. At that time, the Opposition were convinced that at the next election the voters must be offered a clear alternative. The right hon. Member for Sparkbrook made that alternative very clear, when he said: Cuts in the standard rate of tax across the board are not necessary for our economy and I do not believe that they are the choice or wish of our people."—[Official Report, 18 March 1987; Vol. 112, c. 942–49.] Is that still the Labour party's policy?

The Committee does not need to be reminded of the choice that the country made when the Labour party offered its alternative. The commitment to reverse the cut in the basic rate of tax was not the winning slogan that the right hon. Member for Sparkbrook or the hon. Member for Dagenham (Mr. Gould) thought it would be.

5.15 pm

The right hon. and learned Member for Monklands, East is often credited with being cannier than his predecessor. I do not know whether that is correct, but he is certainly quieter. Today is the day of reckoning—[Interruption.]The right hon. and learned Gentleman is quiet on policy, but he is not quiet when he is listening from the Opposition Front Bench.

I hope that the right hon. and learned Gentleman or the hon. Member for Dunfermline, East will make it clear whether the Labour party accepts a basic rate of 25p or whether it wants a man on average earnings to pay an extra £3.32 a week in tax—the consequence of a 27p basic rate—an extra £6.64 a week in tax—the consequence of a 29p basic rate of tax—an extra £8.30 a week in tax—the consequence of a 30p basic rate of tax—or indeed an extra £13.28 a week in tax—the consequence of a 33p basic rate of tax. The average taxpayer might be moderately interested to know the Labour party's policy.

While at the Dispatch Box, the right hon. and learned Gentleman or the hon. Gentleman might like to take the opportunity to clarify one or two other questions about the Labour party's tax policy. Would it abolish the upper earnings limit for national insurance, thus creating 2 million basic rate losers, not among the super rich—whom the hon. Member for Wrexham (Dr. Marek) mentioned nine times in his speech the other evening—but among teachers, policemen and junior doctors, who receive no benefit from the higher rate cuts. If it did, would it increase national insurance benefits for those higher earners, thus adding further to public expenditure? Would it simply throw the contributory principle out of the window? Those are hardly second order points, but I dare say that Labour Members have never addressed them. Would the Labour party, not content with having done that, reverse higher rate cuts back to 60 per cent., 70 per cent. or 80 per cent., plus national insurance? Is it still committed, as it was in the election, to abolishing the married couple's allowance, thus putting an extra £7 a week on the tax bills of 12 million married couples? Those are legitimate points that any responsible Opposition would have made clear to the electorate.

In the good old days, the Labour party's tax policies were crystal clear. The right hon. Member for Sparkbrook said: Tax cuts are quite the wrong prescription for the British economy. Indeed they are neither economically nor socially the right choice for this country. Does the Labour party still believe that? Are tax cuts still the wrong prescription, or is all that it can offer the "relatively blank sheet" about which the Leader of the Opposition wrote in The Times on 3 October? Perhaps the hon. Member for Dunfermline, East would like to put ink on that blank sheet.

Clauses 22 and 23 set out clearly our tax strategy: simpler taxes, with two tax rates rather than the 13 that we inherited; fair taxes, because even after these changes a man earning £100,000 will pay 16 times as much in tax as the man on average earnings; and, above all, lower taxes with a single higher rate of 40p, a basic rate of 25p and a commitment to a basic rate of 20p as soon as that is prudent and sensible.

That prescription has given us economic success, with seven years of steady growth averaging 3 per cent. a year, and with growth of over 3 per cent. in all but one of the past five years. That growth has been combined with low inflation and increasing living standards. We wish to continue that increase in prosperity. With that in mind, I commend the clauses to the Committee.

The Chairman

Order. I understand that it will be for the convenience of the House to take clauses 22 and 23 together. The Questions on them will be put separately, so it will be in order for the Committee to seek a Division on each.

Mr. Gordon Brown

The one matter on which hon. Members can agree is that the Chief Secretary to the Treasury is genuinely proud of the Government's achievements. He says that the Budget is fair, but forgets to say that 5 million people have lost money as a result of the social security changes that took place simultaneously, and that 2.5 million people have not benefited as a result of the combination of both.

At the same time as the Government are piloting the Bill through the House, child benefit has been frozen, housing benefit has been denied to thousands of people, prescription charges have risen, new eye test and dental check charges have been introduced and nearly 4 million people are having to pay rates for the first time, no matter how poor they are.

The Chief Secretary to the Treasury says that this is a Budget for investment, but forgets to say that, with the exception of Belgium, as a share of national income Britain invests less than any of its major competitors. Even after the last nine Budgets, as a share of our national income, in the oil-rich 1980s, we are investing less than in the 1960s or 1970s. The right hon. Gentleman tells us that this is a Budget for the meritocracy, and then gives the game away by saying that the real beneficiaries of the Budget—the top rate taxpayers—do not include teachers and junior doctors. He forgets to tell us that the financial gains for those at the very top are, in some cases, 50 to 100 times those that have accrued to engineers, research scientists and others who he says the Budget is designed to keep in this country. In the light of all that, is it any wonder that the former Deputy Prime Minister, Lord Whitelaw, has said that a little more compassion is needed from the Government?

If the Chief Secretary will not agree with any of our figures, perhaps he will agree with a Budget analysis to be produced this week, not by the Labour party or the TUC, but by Morgan Grenfell and Co. Ltd. This analysis, described in a press release this afternoon and to be published tomorrow, is entitled: High income earners: how they will spend their £2.8 billion tax cuts". I hope that the Financial Secretary will get a copy of the document later this evening. Morgan Grenfell claims that the Chancellor gave misleading indicators of the real benefits to the very rich as a result of the Budget.

The document says that the rich obtained a "disproportionate share" of even the basic rate tax cuts and the personal allowance changes and concludes: The 1988 Budget discriminated heavily in favour of the better off … The Budget tax cuts were virtually unprecedented in terms of size and concentration in the hands of a very small section of the population. That appears in a document by supporters of the Conservative party.

Let me tell the House the other conclusions reached in that document. While the Chief Secretary is exhorting ordinary employees to accept about 2 per cent. as basic wage increases because of what they have been given in tax cuts, Morgan Grenfell predicts a 15 per cent. rise in basic income for those on the top tax rates. I have not heard the Chief Secretary criticise those at the very top for taking such large income rises.

The Chief Secretary says that top rate tax cuts encourage savings and investment, and thereby produce jobs, although there is not much evidence that the rate of investment in our productive industries has increased to any great degree in real terms since 1979. In answer to that, Morgan Grenfell says that 83 per cent. of top rate tax cuts will be spent rather than saved, and a smaller proportion of that will of course be invested in productive industry in Britain.

Thirdly, Morgan Grenfell tells us—this is the truth about the new Britain to which Viscount Whitelaw referred in his interview with Woman's Own—the real boom areas in the economy as a result of the Budget will be luxury cars, boats, domestic servants, expensive wines and foreign holidays. This boom will do much for industry abroad and increase our imports. The boom is happening at the same time as pensioners are having to make a choice between heating and eating as a result of the housing benefit cuts. It is happening at a time when mothers are having to send their children to school ill-clad and hungry as a result of the freeze in child benefit and cuts in other benefits. I believe that the electorate will remember that the biggest tax handout in history to the very rich has been accompanied by the imposition of social security legislation that encourages the transfer of the relief of the poverty trap from social security offices to charitable organisations.

Mr. Gerald Howarth (Cannock and Burntwood)

hope that the hon. Gentleman is not criticising those who wish to spend some of their post-tax earnings on boats. In my constituency about 150 people are employed in manufacturing power boats, not only for people in this country, but for overseas exports, which earn revenue for the Treasury and keep my constituents in jobs. The hon. Gentleman's remark was utterly disgraceful.

Mr. Brown

I hope that the next time we debate the future of the shipbuilding industry the hon. Gentleman will join us in the Lobby to defend jobs, not only in his constituency, but up and down the country, that are being lost as a result of the Government's insane shipbuilding policy.

Let me return to the question that I put to the Chief Secretary. Morgan Grenfell may be too conservative in its account of the distributionary effects of the Budget. As I said earlier, the top 1 per cent.—this was confirmed by the Financial Secretary last Tuesday afternoon—will get 31.3 per cent. of the Budget gain. The top 1 per cent. represent about 200,000 households. They are people who are already earning more than £50,000 a year. They are people who, over the past eight or nine years, have had perhaps up to £10,000 a year in tax cuts as a result of changes in the top rate of taxation. They will gain an extra £10,000 or so as a result of these Budget changes.

How do the Chancellor, the Chief Secretary and the Financial Secretary justify the growing inequality—the growing gap between rich and poor—that will necessarily result from selective generosity to those who are already very rich? Last week we asked the Financial Secretary on what possible evidence he could justify such huge windfall gains by the very rich: on what evidence he based his claim that huge tax cuts to those at the very top will produce incentives and thus create opportunities for other people. The Financial Secretary said that he had such evidence and that our claim that no published evidence could justify his contention was entirely wrong.

When my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) asked the Financial Secretary on what he based his claim that there was academic evidence, the right hon. Gentleman dismissed the views of Professor Brown, a British academic who was good enough to be commissioned by the Treasury to write a report and good enough to be allowed to continue that report even though it was commissioned by a previous Government. The Financial Secretary said, instead, that Professor Lindsey had justified the top rate and other tax cuts. [Interruption.]Does the Financial Secretary doubt that that was what he said?

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

indicated dissent.

Mr. Brown

The right hon. Gentleman does not doubt it. I confess that I had not heard a great deal about Professor Lindsey, apart from a passing reference in The Sunday Times, and I know that most of my hon. Friends had not had a chance to study his works. Therefore, over the weekend, I took the opportunity to read all the works which the Treasury, at the invitation of the House of Commons Library, had suggested that someone interested in the career of Professor Lindsey should read. I must tell the House that it was not a long and arduous task. There is no book in America, and no hook published in Britain, and there is not even an Adam Smith Institute pamphlet, to which one can look. Professor Lindsey does not even have the honour of having been asked to write a speech for Keith Joseph in the old days when all these ideas were first being advanced. The Treasury told the Library that someone interested in Professor Lindsey should read one article in the Journal of Public Economics written by the professor, or associate professor or, as we would call him, the lecturer.

Let me tell the House what Professor Lindsey does not claim. I suppose that the Financial Secretary will be disappointed, because he does not claim that the tax cuts are compensated for by the extra efforts of the rich. He does not necessarily believe that the rich will respond to the top rate tax cuts by working a great deal harder. Rather, he says that the rich will respond to the top rate tax cuts and other tax cuts simply by declaring a larger share of their income for tax purposes. After all, he says, the reason why the rich will he paying a higher share of taxes is that they are reporting a higher share of income. But Professor Lindsey does not expect the top rate taxes to be entirely compensated for by people declaring more of their income. He expects that the Treasury may get back a sixth to a quarter of what it has lost.

Far from there being evidence from Professor Lindsey that these top rate tax cuts make people work harder, or that the top rate tax cuts will be compensated for entirely by people declaring more income, he argues none of these things. None of the arguments that have been put forward by the Financial Secretary arc sustained by the arguments of Professor Lindsey. None of the arguments put forward this afternoon by the Chief Secretary are sustained by this academic, for I shall read the conclusion of Professor Lindsey's article. He says: These findings do not support the contention that tax cuts by themselves produce any great surge in economic performance. Is it not the height of fiscal irresponsibility for the Government to tell us that we should vote tonight for £2 billion in top rate tax cuts to go to the very rich on the basis of an unproven and unprovable theory, an untested and presumably untestable contention, from a relatively unknown academic writing in a relatively unknown journal about tax policy in another country, and to tell us that we should prefer to vote for these tax cuts in preference to the secure and unmistakable, the precise and quantifiable benefits of investing the same amount of money in the National Health Service? With advisers like him in America, I can well understand why President Reagan has said that he listens to astrologers in preference to economists.

Mr. Winnick

Does my hon. Friend agree that the use by Treasury Ministers of some academic either here or abroad is not relevant, and that the Government are determined to reward the rich, as all Tory Governments have done, perhaps even more than this one? They need no excuse, as they are dedicated to the rich; hence these tax cuts, which have benefited very few people.

Mr. Brown

I am grateful to my hon. Friend for pointing that out, but I know he will understand why I want to take the Government through their own evidence. If they want to justify to the public the reasons why they are introducing the top rate tax cut, we should expect them to produce evidence by which they might be able to stand. The truth is that they have produced one name, in Professor Lindsey, whose work does not stand the test of time and who does not himself expect his work to he used in this way. They cannot justify the tax cut on the basis of the evidence flat they put forward.

If the Germans work harder and pay less tax, and if the Japanese pay even less tax and work even harder, what is so peculiar about Britain if nothing but yet more tax cuts will increase the productivity of the 5 per cent. who are at the very top? Were they not working before 1979? Were they not working hard enough between 1979 and 1988 and therefore need these tax cuts? If that is the case, what possible justification can there be for the House to vote tax cuts to them this evening in the belief that more tax cuts will increase their efficiency? Is not the truth of all this that the Government do not believe that these top rate tax cuts will make people more productive, efficient and responsive to change? Al] they know is that these tax cuts will make people richer, and that is why they are doing it.

Mr. Campbell-Savours

Will my right hon. Friend not accept that this document. and indeed the Lindsey material, if it can be called that, should become centre stage during the Committee proceedings? It is for Ministers to read this document. Indeed, I am sure that we can table an amendment on which to peg a debate on these matters. The Minister cannot just sit quietly by the Dispatch Box, not responding. The evidence needs a reply and Ministers should make public statements. The whole of the Budget statement was based on the proposition that this material i3 rubbish and that they are correct.

Mr. Brown

I take it that my hon. Friend is suggesting that the Chief Secretary spends less time reading Woman's Ownand more time reading some of the academic works that have been produced.

Mr. Major

if I were to do that I would miss some extremely interesting interviews in Woman's Own.

Mr. Brown

I was preparing for a major intervention from the Minister that would cut right across our argument. All he is confirming, however, is that he likes reading Woman's Own.Perhaps in the light of what he said he might do better to spend his time reading Woman's Own than trying to get through some of the major articles which the Financial Secretary, in his rush to the top, is obviously busily reading.

5.30 pm

No one on this side of the House, looking at what is happening up and down the country, believes that tax cuts should take priority over the proper funding of the National Health Service and our public services. Last month we welcomed, as did everybody, the pay awards for nurses and doctors. Like the Select Committee on Social Services, which has a Conservative majority and which published its report only a few weeks ago, we recognise that the award to the doctors and nurses was the beginning, rather than the end, of attempts to solve the funding problems of the National Health Service.

Let me repeat what the Committee recommended. It did not suggest that the battle for funding would be resolved by the payment of the award only to nurses and doctors. It said that the Government ought to guarantee to fund fully the pay awards under the Whitley committee for the other 500,000 people working in the NHS, which should be an additional amount of money provided by the Government. The Committee said also that there must be 2 per cent. growth in real terms over the coming year to account for technological and demographic changes. It said that the refund of £95 million from the pay awards that were under-funded last year ought to be met by the Government, and it reported that the DHSS had acknowledged that that was an under-funding.

The Committee went on to say that a programme of £1 billion for repair and renovation, as well as current expenditure to make up the shortfall that the Committee itself had identified as £1.8 billion, should be begun immediately under new funding arrangements by the Government. Nothing has changed with the agreement to the pay awards for nurses and doctors. The priority of the British population is that the Health Service should be properly funded in the way that the Select Committee described before we vote tax cuts this evening.

Mr. Ian Taylor (Esher)

Can the hon. Gentleman explain why the Government have been able to put more money into the National Health Service, including fully funding the nurses' pay award last week, when we have been cutting taxes, while under his last Labour Government they were increasing taxes, yet nurses' pay fell in real terms? Given that many of the nurses whose pay will increase because of the announcement will benefit from the tax cuts proposed under these clauses, does the hon. Gentleman propose to increase those taxes for the self-same nurses if he is in power?

Mr. Brown

The Government have increased taxes, as the hon. Gentleman should be aware, for the average person, who pays a higher share of his income in tax, as well as having increased the total revenue from tax. The hon. Gentleman must be one of the few people in the House who believe that the Health Service is adequately funded. I do not expect that even the Prime Minister, who has had to set up a review on the Health Service, believes that the Health Service is adequately funded.

When we compare our funding to the position in other countries, it is evident that, whereas we spend less than 6 per cent. of GDP on our Health Service, other countries spend far more. The Italians spend 7 per cent., the Germans 8 per cent., the French 8 per cent. and the Americans 10 per cent. of their GDP. That is exactly why the Select Committee on Social Services is determined that the Health Service has proper funding.

Mr. Andrew Rowe (Mid-Kent)

I am listening to the hon. Gentleman with interest. As he reads so widely, he should be aware that the Kings Fund and other organisations are aware of considerable anxieties, particularly in Germany, that the German health service has a level of funding leading to demands that nobody in the health service welcomes simply because they are regarded as unnecessary. This difficulty must be taken into consideration.

Mr. Brown

I am sure the hon. Gentleman is aware that many French hospitals are not fully filled at the moment. There are different demands in different places. In Britain we are not meeting the existing demand. There are more than 700,000 people on waiting lists, many waiting for urgently needed operations. At the same time, as admitted by the DHSS, a programme of at least £1.7 billion is needed to fund the renovation and repair that is required to bring our hospitals up to a satisfactory state. That is exactly why we believe that the first priority of any Government should be to bring the Health Service to its proper state of funding.

A constituent came to see me in my surgery at the weekend. He told me that his mother had just died and that his father had to care for his grandfather, who was more than 90 years of age, severely disabled and unable to move out of his home. The father was waiting to go into hospital for a coronary operation and he could not cope with the grandfather. In Fife, however, there has been an inadequate expansion of care for the elderly. As a result, my constituent has had to use his money to put his grandfather into a private nursing home at a cost of £240 a week—much of which he has had to pay himself. My constituent told me that as a result of the tax cut that he has received from the Budget, and as a result of the under-funding of the Health Service, he has had to pay out more in a week than he will receive in tax cuts in a year.

People up and down the country are asking what is the gain of tax cuts to them when they are on waiting lists, when they have to travel further to visit people in hospital because the cottage hospitals have been closed, and when they cannot get non-urgent operations done because of growing waiting lists. Their greatest fear is that as a result of the tax cuts and the review with which the Prime Minister is involved, they will have to pay a far greater share of their income towards health care.

In case Conservative Members believe that the argument that we advanced before the Budget has disappeared, let me remind them that health authorities and health boards are still having to make difficult decisions—even after taking into account the health salary changes that were announced by the Prime Minister a few weeks ago. Lambeth health authority, for example, is having to make difficult decisions about whether to continue with the closure of a 137-bed hospital, to close out-patients' services for one week in every four and, because of a continuing shortfall in its budget, to consider further the possibility of closing the children's psychiatric hospital. Such are the difficult decisions that health authorities must make. I make no apology for saying that, when the choice is between tax cuts and a properly funded NHS, we shall vote for its proper funding and I believe that the country will be on our side.

The Government faced a number of choices about priorities in the Budget. The Chancellor had to make a choice about how to use £800 million. He had to decide whether that money should go in tax cuts to those with incomes of more than 100,000 a year or be used to avoid restrictions on housing and child benefits. The Chancellor showed us where his true priorities lie. He chose to give a great deal more to those who already have large sums of money. The cost of that decision was that housing and child benefits were cut. The Chancellor had a choice of properly funding the NHS and our deteriorating social services, or cutting taxes. He was aware of public opinion—not just doctors' and nurses' opinion—about that, but in preference he chose the path of tax cuts.

No Budget in this century—I suspect at any time—has given more money to the rich in our community. No Budget has seen such a large redistribution of income from the poor to the rich as this Finance Bill, and especially clause 23.

The people of this country are far more altruistic and far less selfish than the Government who rule over them. They are looking for a Government who will stand up for the whole nation, not just part of it. They are looking for a Government who will legislate in the interests of the whole community, not just some of it. They are looking for a Government who will give priority in all their policies to the interests of all sections of society, not just the richest few.

5.45 pm

When the people make their choice on Thursday—it will be the first vote on the Budget—I believe that they will have no doubt about rejecting the policies that have been put forward by the Chancellor and the Prime Minister. The Government's response to the growing gap between the rich and the poor in our society has been to widen that gap deliberately and then to deny that any Government can do anything about it. It is for that reason that we shall vote against the clauses this evening. It is for that reason that we shall have the whole country behind us.

Mr. Ian Gow (Eastbourne)

Nine years ago today the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) was the Financial Secretary to the Treasury. Nine years ago tomorrow he was not. I believe that it was ungracious of my right hon. Friend the Chief Secretary not to pay tribute to the right hon. Gentleman who served as a Treasury Minister for almost all of the period of office of the previous Labour Government. When the right hon. Gentleman left office the highest rate of tax on income was 98 per cent. and the basic rate of tax was 33 per cent.

After the last general election a rather disgraceful scene took place when the Labour party said that it was to abandon all its beliefs because it needed to decide wherein would lie the greatest prospect of securing the endorsement and popularity of the British people. It is a profound error for a political party to say that it will simply go to the country with that programme that it believes will he the most popular. During the course of this Parliament the Labour party will find that to build the policies of a great party simply upon those it perceives will be the most popular with the electorate rather than upon principles or convictions is a subterfuge and unworthy of a great party.

I have had an opportunity to refresh my memory of the manifesto upon which the Labour party fought the last election. The concluding paragraph was headed: Britain will win with Labour". It reads: Labour's plans, carefully costed, prudently programmed, can provide that start". Of course there is the closest link between the proposals in clauses 22 and 23—as the hon Member for Dunfermline, East (Mr. Brown) has made clear—and the programme of public expenditure. What has happened in the past nine years and what has happened as a result of the Budget —the ninth successive Budget to be presented by a Conservative Chancellor—is that there has been an increase in public expenditure. We are now to have—quite rightly—a programme to reduce taxation.

Labour Members are right to point out—as my right hon. Friend the Chief Secretary acknowledged—that taxation takes a higher proportion of GDP today than it did in 1979. The paradox with which the Labour party is faced and the dilemma that it has been unable to solve is whether it is now in favour of the policies for reducing taxation or is opposed to them. It is legitimate for any Socialist party—it has been the characteristic of Socialist parties throughout the ages—to say that it is in favour of higher taxation. The Opposition have the difficulty—no answer was given by the shadow Chief Secretary to the question put by my right hon. Friend—of deciding——

Mr. Morgan

Will the hon. Gentleman stop waggling his finger at us?

Mr. Gow

It is my finger and I shall waggle it at the Opposition if I want to.

The Opposition will have to decide what to say to the British people at the next election about whether they will diminish or increase the standard rate of income tax. They have not answered that question and will find it difficult to do so. If they have now abandoned all principles and convictions and have decided to go to the country with the programme that they believe will be the most popular, they had better understand that a policy of lower taxation on income is becoming increasingly popular with the British people.

Ms. Armstrong

Is the hon. Gentleman's party in favour of reducing taxation or merely of redistributing it from direct to indirect taxes?

Mr. Gow

My right hon. Friend the Chancellor made it clear in his Budget speech that he had set for our Government target of a basic rate of 20p as soon as it was prudent to reduce income tax to that level. With that commitment, I find myself in wholehearted and enthusiastic agreement. My right hon. Friend made no commitment to reducing the higher rate of tax to below 40 per cent. I hope that we shall be able to move to a basic rate of tax of 20p in the pound. I have clearly said that I am in favour of lower taxation——

Ms. Armstrong

I asked the hon. Gentleman whether he was in favour of reducing taxation overall or merely of redistributing it from direct to indirect tax.

Mr. Gow

The hon. Lady will find that, as the years proceed, the proportion of GDP taken by tax under this Government will diminish.

Mr. John Smith

But it has gone up.

Mr. Gow

I have acknowledged that the share of GDP taken by taxation was higher than it was in 1979 and I praised the Government because we are now reducing that proportion and will go on reducing it throughout the remainder of this Parliament.

The Opposition face a dilemma and will face it in the Division Lobby tonight. They do not know whether to vote in favour of the reduction in the basic rate, whether to abstain, or whether to support it. That has been made clear. The lesson that will be drawn by the British people when they read their newspapers tomorrow morning will be that the Opposition's vote has shown once again that they are not in favour of reducing the basic rate of tax.

It was entirely prudent of the Chancellor to have reduced the basic rate in the Budget, because, accompanying that reduction in income tax, has gone, for the first time since the Budget introduced by the noble Lord Jenkins of Hillhead, a budgeting for a repayment of debt.

Dr. John Reid (Motherwell, North)

As every opinion poll has shown that the vast majority of the British population would rather have more money spent on social services—particularly the Health Service—than on a cut in the basic rate of income tax, from where does the hon. Gentleman draw the evidence to substantiate his claim that the British people prefer a cut in the basic rate of tax? Was it a straw poll among his friends at the yacht club?

Mr. Gow

I call in aid May 1979, June 1983 and June 1987, when the alternatives were precisely laid before the British people. Indeed, if the hon. Gentleman recalls it, his party committed itself in June last year to reversing the reduction from 27p in the pound to 25p. That was in the manifesto, and that policy of increasing the basic rate of income tax was decisively rejected by the British people on 11 June last year. That was an actual poll, not an opinion poll. The Opposition's position on taxes was perfectly clear to the British people in May 1979, June 1983 and June 1987.

I happen to believe that there is a coincidence between the principles and commitment of the Conservative party and the wish of the British people. If the Opposition want to go into the next election as the party of a higher basic rate of income tax, we shall be happy to accept that challenge from them.

I said that I thought the reductions in income tax were prudent because they were accompanied by a proposal to repay £3 billion worth of debt. It would come as no surprise to me if the repayment of debt in this financial year exceeded £3 billion. My right hon. Friend the Chancellor is a cautious man; he predicted in the past financial year that there would be an increase in borrowing—there was not. Even in the past financial year, there was repayment of debt, and I believe there will be a greater repayment than the £3 billion that my right hon. Friend has forecast in this financial year.

Reductions in income tax in the past nine years have been accompanied by an increase in the gross domestic product—the wealth created by the nation. It is possible for the Opposition to advocate a policy of higher taxation on incomes, but that would be accompanied by a reduction in the rate at which the economy grew. That is why it was right for my right hon. Friend the Chief Secretary to point out that reductions in income tax have been accompanied by higher and unprecedented spending on social security, notably the Health Service. It is a continuing irony that Opposition Members, who constantly claim to be the compassionate and caring party, presided, when in office, over a Health Service in which there were 65,000 fewer nurses than there are under the flint-faced regime of my right hon. Friends on the Treasury Bench. There is an extraordinary paradox in this: the Opposition preach the need to show greater compassion, but when they are in office they cannot deliver that compassion because they cannot run the economy in a way that creates wealth.

Mr. Nigel Griffiths

Will the hon. Gentleman admit that if the Government double unemployment and triple the number of people who depend on state benefits, more will of course be spent—more than by the last Labour Government or any Government in history? That is the result of a dreadful economic and social policy, not a successful one.

Mr. Gow

That certainly cannot be said of the Health Service on which, as the hon. Gentleman knows, we are spending more than a third more in real terms than did the "caring" Government, when they were in power. The Labour party cannot have been particularly successful in the recruitment and payment of nurses if 65,000 more of them work for the National Health Service now than when the right hon. and learned Member for Monklands, East (Mr. Smith) was in the Cabinet. Why did he tolerate a regime in which there were 65,000 fewer nurses than now?

The proposals in clauses 22 and 23 mark a great philosophical change from the levels of taxation that we had when the Opposition were in power, and, as my right hon. Friend pointed out, from the taxation we have had since the war.

We have been obsessed by egalitarian rates of taxation. We have failed to take account of the move all over the world towards lower rates of tax on income. I do not know whether my right hon. Friend the Paymaster General has been able to confirm that the highest rates of tax on income in the Soviet Union is 41 per cent., 1 per cent. higher than that proposed in clause 23. The Labour party would do well to examine those economies which have been the most successful. Those are the economies which have had the lowest rates of income tax.

I shall vote enthusiastically for clauses 22 and 23 and I shall note with increasing bewilderment how the Labour party is able to resolve its own essential dilemma as to how to present to the British people the case for higher rates of income tax. That is what the Labour party will be doing tonight.

6 pm

Mr. Robert Sheldon

My hon. Friend the Member for Durham, North-West (Ms. Armstrong) put the right question to the hon. Member for Eastbourne (Mr. Gow) when she pointed out that direct taxation may well come down, but indirect taxation may well go up. I want to refer later to the proportion of those two forms of taxation.

I wish to deal first with the matter raised by Professor Brown and his attitude survey, which was a very interesting and useful survey. I am always a little unsure about how much weight to attach to attitude surveys. It makes it easier for me to be unsure because I can quote a number of examples that tell us exactly what happened about certain matters in the past. In 1962, when the levels of surtax were lowered, it was held that that would be the great incentive that would release the energies of people at the highest levels of taxation, but nothing happened. There was a collapse, an overseas disaster and the stop-go cycle was resumed a couple of years later.

The same claim was made in 1972 when Lord Barber introduced the unified tax system. He claimed that that would produce great incentives for the wealth creators of our country, the great industrialists and entrepreneurs, but disaster came a couple of years later.

I accept the normal Conservative argument in this matter. Let us abandon theory for the time being and consider what happens in practice. Little case can be made out for improving incentives, leading to an improvement in the economy. I am sceptical about these matters. We must remain sceptical and hope that the Treasury does not make too much use of these incentive arguments in the future.

The compression of the rates of tax represents a staggering change between this Government and all previous Conservative Governments. The lowest level is 25 per cent., plus 9 per cent. national insurance contribution, making 34 per cent., while miles away, at the other end of the scale, the wealthiest people pay 40 per cent. That was not always so.

The Chief Secretary to the Treasury answered with great courtesy the questions put to him, which the House appreciates, but I was staggered that he did not understand that the long gradation, enjoyed by so many other countries, is to be admired. Other countries say that that is the way a tax system should operate—the more one receives, the higher band one moves up to. That is how such matters should be run, but it was not done, simply for reasons of administrative simplicity. Computerisation will make some things more easily possible which were not so easily possible in the past.

At the same time, child benefit is not being increased in line with inflation. In undertaking such matters, the House is essentially reversing what used to be regarded as fair taxation. About 10 years ago, the Chancellor of the Exchequer introduced his notion of truth in taxation, according to which we had to index taxation automatically, by statute, to ensure that people were paying income tax, not on the basis of inflation, but on the basis of the retail prices index, as a fair test of indexation. That was called the Rooker-Wise amendment. The Chancellor of the Exchequer added his name to it, although the Conservative party was strongly against it. There were fierce battles about that in Committee. That was truth in taxation.

We now have what I call unfair taxation. There is only one candidate for that—the Chancellor of the Exchequer. This clause will be known as the Lawson clause. We must ask ourselves why all previous Governments believed in progressive taxation, yet this Government do not. It was not because they were not Conservative Governments. We are going back a century to the time of Gladstone. All those Governments—Right wing, Left wing, Liberal, Labour and Conservative—believed in progressive taxation until this Government came along and said, "No, that's a load of old nonsense. We really want a flat rate. Even 34 per cent. to 40 per cent. may be too wide a band."

I seemed to catch a hint of that from the hon. Member for Eastbourne, although perhaps I was wrong. He appeared to suggest that 34 per cent. to 40 per cent. was a little too wide and might be compressed at some stage. Clearly that is a fundamental change, and that is why many hon. Members want to speak in the debate.

Mr. Gow

As I have already said that I approve of 40 per cent. for the highest rate, perhaps the right hon. Gentleman will tell the Committee what he thinks should he the top rate of tax.

Mr. Sheldon

I believe that the top rate of tax should be substantially above 40 per cent. The precise levels and graduations would have to be worked out, but I am in favour of a progressive system.

Let us consider the rates of taxation when Alec Douglas-Home was Prime Minister. According to a report of the commissioners of Her Majesty's Inland Revenue, until 1963 the standard rate was 38.75 per cent.—7s 9d in the pound—but there was earned income relief. If one earned one's money rather than received it in dividends, one received relief and that made the rate about 30.13 per cent. However, below that there were three reduced rate hands. The first £60 was taxed at 8.75 per cent. After earned income relief, that gave a figure of 6.8 per cent. which was the first level of tax. The second rate was 16.52 per cent., the third 24.3 per cent. and the full rate was 30.13 per cent.

The levels of surtax went up from 38.75 per cent. to 48.75 per cent., to 51.25 per cent., to 56.25 per cent., to 61.25 per cent., to 66.25 per cent., to 71.25 per cent., to 76.25 per cent. to 81.25 per cent., to 86.25 per cent., to a top rate of 88.75 per cent.

Mr. Campbell-Savours

What was the number of people unemployed?

Mr. Sheldon

There were fewer than half a million people unemployed.

That was a Conservative Government who believed in three reduced rates, standard rates and 11 levels of surtax. Every other Government believed in that. However, there were different approaches. A Conservative Government worked on the basis that the broadest backs should carry the greatest burdens. That respectable view was held by Conservative and Liberal Governments. The Labour party believed in that as an engine for redistribution. We called it redistribution for greatest equality. The Conservatives called it the greatest burdens borne by the strongest backs. However, it had essentially the same theme. The progressive system of taxation existed for 100 years. We called it different things, but it had certain aspects in common. It was valuable because it had so much in common.

Of course the rates would be different. We had different views about how the money should be raised and spent. There must always be a divide between the two sides of the Committee on those matters. However, on the simple question of how people should be responsible for financing the operations of the Government, there was general agreement in the broadest sense.

We also had child tax allowance and child benefit. During the term of the Labour Government about 10 years ago—the hon. Member for Eastbourne has drawn attention to some of the things that happened during that time—we brought in child benefit. Until then there was the child tax allowance. According to the Rooker-Wise theory, to which was added subsequently the name Lawson, that allowance was to be increased with inflation. We said that w give tax allowances to those who paid no tax was nonsense and that it should be a benefit, and if we regarded it as such the problem was that it would count for public expenditure. That was serious because public expenditure, through the arcane way in which we operate these things, is treated differently from income. Negative expenditure and positive expenditure might he nonsense, but we understood the way in which they operated.

Iain Macleod agreed with us on behalf of the Conservative Opposition at the time that child allowance should not count for public expenditure because it was directly related to the income tax allowances that existed before. We agreed that it should be treated in the same way. That firm undertaking was given and I witnessed it in the House. The great tragedy is that that co-operation was withdrawn and child benefit is now fixed and not increased as it should be.

The whole point about child allowances and taxation in general is that the schemes were originally devised for the middle classes. That is why we have a married allowance. We needed that allowance because the middle-class wife did not work. Before the war, when a couple married, the wife lost her job in the bank or Civil Service. That was an automatic consequence of marriage. The burden fell on the husband and he needed an allowance to help him. Therefore, the married allowance was born.

The position is different today because as a rule the wife works. Although two may not live as cheaply as one, they normally manage to get by on a little less than twice their combined income. However, the greatest problem lies with the child allowance. When family benefit was first introduced it was held that it should not be given for the first child. It was believed that the first child would not cost very much on the basis that the middle-class mother did not work. As she was not working, the first child did not cost much. However, for a working mother a child represents a staggering drop in income as it stops her working.

Subsequently we have been coming to grips with those problems. They should have been dealt with through an increase in child benefit as a direct consequence of the change from tax allowances.

As I have said, there were three reduced rates and 11 higher rates. In the 1963 Budget the three reduced rates were reduced to two. In the 1969 Budget they were reduced to one reduced rate and in 1970 the reduced rate disappeared. The surtax levels remained the same and were incorporated in the new system of taxation introduced by Anthony Barber. We understood the reasons for getting rid of the reduced rates. They involved problems with the Inland Revenue and the complications in its having to deal with fairly small sums for large numbers of people as they entered the tax net.

All those issues can be opened up afresh with computerisation. I should have liked the Chancellor to say that he agrees with the whole system of progressive taxation and understands some of the difficulties, but that these matters might be reconsidered when computerisation is completed next year. It is my great hope that my right hon. and learned Friend the Member for Monklands, East (Mr. Smith) will be able to introduce those changes which will restore the fair tax system that existed for the past 100 years.

6.15 pm

Under Alec Douglas-Home there was a tax range from 6 per cent. to just under 90 per cent. I keep hearing people refer to the 98 per cent. level that was introduced for a few years. That must be compared with the whole panoply of history in which we charged what we thought to be reasonable burdens on those backs that could readily bear them. We need that kind of approach to be restored, but perhaps not precisely in those terms.

Mr. Kenneth Hind (Lancashire, West)

I have listened very carefully to the right hon. Gentleman. With regard to having a completely progressive system such as that which existed in 1963, is not the flaw in the argument that today we see an increase in the income tax revenue to the Treasury over and above the revenues brought in by the progressive taxation of the past? Does not the right hon. Gentleman believe that if we reintroduce that progressive level the tax take will decrease proportionally and therefore money will not be available to be directed to those groups whom the right hon. Gentleman rightly stated need that money and should be helped to provide the necessary services in health, welfare and education?

Mr. Sheldon

I should be astonished if that was so. The precise levels of tax and the bands would have to be examined completely afresh, as I am sure that they will be. However, those points can be dealt with readily.

The important point about the reason for the high tax take is that so many people at the top are voting themselves mega-pound salaries. That used not to happen in this country. People, in my view rightly—perhaps wrongly in the view of some Conservative Members—believed that it was right to have great wealth without due cause or need. Of course, the need was for investment. Great wealth simply for display or consumption was not so prominent in this country as it is now. It existed elsewhere, but not here. That has changed now. I think that that is a pity, but others may draw their own conclusions.

In 1973 Anthony Barber introduced the investment income surcharge, the unified tax. He still regarded it as right that those people who received unearned income should pay taxes at a different level from those who worked. That was right. There must always be a difference between those who earn their living, whatever that may be, at whatever level, and those who receive dividends. That is not a punishment. They are more capable of bearing that burden.

In 1859 Gladstone—I am sorry to refer to this, but it is important because certain things remain important throughout history and this is one of them—called income tax an engine of gigantic power. He had great hopes of bringing about the situation that has existed over the past 100 years which, to a great extent, has been brought to a halt by this Government.

Sir Peter Hordern (Horsham)

The right hon. Gentleman refers frequently to Gladstone. Will he remind the Committee of the top rate of tax during Gladstone's time? May I also ask the right hon. Gentleman why he prefers child benefit to family credit? As child benefit is paid tax free, it is the best benefit that any rich taxpayer could possibly have.

Mr. Sheldon

We had these arguments at the time when child benefit was introduced. It was accepted on both sides of the House that the change could be made and would be made to the benefit of mothers. There were great difficulties at the time, but they were overcome.

Gladstone did not introduce income tax. It began long before his time. However, he did introduce reduced rates of tax, which was important. He began the long process of spreading the burden of taxation according to people's ability to pay.

Mr. Matthew Carrington (Fulham)

Does the right hon. Gentleman remember that Gladstone fought the 1874 general election on the basis that he had reduced income tax rates and would eliminate income tax altogether? The whole basis of Gladstone's economic policy was to transfer completely from direct taxation to indirect taxation.

Mr. Sheldon

The hon. Gentleman knows full well that all that was long before the state took over so many of the functions that it subsequently did, in both the first world war and the second world war. Therefore, it is not possible to make any useful comparisons in that respect. Where one can make comparisons to some advantage is when assessing which people bear the burden of taxation of all kinds. Income tax took its place as the great engine of gigantic power, and we can compare that with the situation in 1988.

We have seen a difference in the proportions of taxation. It is expected that taxation will raise £40 billion in 1987–88. VAT will raise £23 billion, and petrol duty will raise £7.8 billion. There are then the other indirect taxes. The whole balance of taxation is changing under the present Government. The importance of that is that it becomes possible to reduce rates of income tax while retaining a great deal of unfairness—quite apart from the distribution of that taxation—because indirect taxes are not as progressive as direct taxes can be, if properly employed.

Gladstone said also that income tax was inequitable because its demands pressed too hard upon intelligence and skill and not hard enough on property. That criticism remains valid today. Indeed, it is more valid because investment income surcharge has been removed. That surcharge was a result of property ownership, and one paid it on the basis of the dividends received from one's investment. It was in effect a tax on that property. The removal of that charge is a further consequence of the changes made by the present Government.

After more than a century, equitable taxation is facing its most serious setback. We are reversing a century of fair taxation. We need a Government who will consider taxation matters again and try to restore some of the notions of equitable taxation which we have long taken for granted but which are being seriously damaged by this Government.

Mr. Ian Taylor

It was interesting earlier, when the hon. Member for Dunfermline, East (Mr. Brown) was on his feet, that he failed to answer my intervention. I asked him what his taxation policy would be, given that he seemed to oppose our own. I asked him in particular about the nurses, who have benefited from the ability of the Government to fund their award in full. The hon. Gentleman failed to answer that question and went off into the realms of global financial policy.

The trouble is that the Labour party does not have a policy on taxation, other than to make it penal. There is no level of taxation that the Labour party would accept other than one so high that it would destroy initiative and penalise all those who tried to work and put effort into the economy. It was the right hon. Member for Leeds, East (Mr. Healey) who, not that long ago, made the infamous remark that he wished top taxpayers could be squeezed until the pips squeaked. He did not succeed in convincing the electorate that that was a good thing, and Labour consequently lost the election.

Even at the last general election we found that the Labour party had not worked out who were the top taxpayers. Were they the people earning £100,000 a year, or £50,000 a year? Or were they people earning £15,000 a year who—as was inadvertently admitted in one programme by the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley)—were the top taxpayers whose pips should be squeaked? That is a savage indictment against Labour, in respect of the average working person in this country, with expectations about the kind of wage to which he could aspire—which is by no means the kind of wage which he would consider would put him in the top tax bracket. Is it suggested that these people should now be squeezed until their pips squeak, along with the other supposed multi-millionaires whom the Labour party has traditionally opposed?

The reality is that, under a Labour Government, rates of tax were so high that the biggest industry they ever produced was that of tax dodging. One Opposition Member mentioned that one of the benefits of the Government's proposals to reduce the top rate of tax was that more declarations would be made. To that I said, "Hear, hear." I have no doubt that if we can destroy the tax dodge industry, we shall release a great deal more energy into the. economy, as well as more revenue into the Exchequer.

The question that the Labour party has to answer is: how can this Government cut income tax progressively—to 25 per cert. as it is now proposed—while at the same time increase year in, year on, the amount of money dedicated to the National Health Service? How can the Government cut rates of tax and at the same time ensure that the top taxpayers are contributing—if one takes the top 5 per cent.—a greater amount; up from 24 per cent. in 1978–79 to 28.5 per cent. in 1987–88? The reality is that in the Budget the Government have achieved a number of remarkable things while at the same time reducing rates of taxation.

The Government have been able to afford to take 750,000 people out of taxation altogether, by doubling indexation. They have repaid public debt, so that we now have a public sector surplus. The Government have enabled people who particularly want to provide for individual charities or health charities the ability substantially to do so through the payroll giving relief of £240 per annum—a remarkable and well-targeted measure allowing taxpayers to give to those causes which they consider most needful. At the same time, the Government have increased National Health Service spending.

The last Labour Government apparently believed that higher taxes assisted the Exchequer in social policy, but they ended by cutting the real rates of pay to nurses and by cutting back the hospital building programme by 30 per cent. The argument made by the Opposition should be covered by ignominy when one compares their record and taxation policy against ours.

Mr. Morgan

Does the hon. Gentleman recall that between 1974 and 1979 the Western world was hit by the shock effect of the OPEC price rises of July 1973? All countries in de West suffered a massive transfer of income from consumer pockets and from the taxable capacity of those consumers to the OPEC countries. Does the hon. Gentleman recall that event?

6.30 pm
Mr. Taylor

Of course I recall that event. Opposition Members, when they are under pressure, immediately try to call the oil crisis to 'their aid, but that is no longer a possible excuse. There is a clear decline in the economy's dependence on oil, and at the same time the rate of growth in the economy as a whole is increasing. This year, it is the oil sector that is holding back the economy, because the non-oil sector is growing faster than the oil sector.

Tax revenues do not respond to higher tax rates. I am surprised at what has been said, because a spokesman for the Labour party conceded this fact. He has not had the courage to go as far as we have, but I read clearly the other day that, when asked what he would do about top rates of tax, he said that they would probably have to go down to about 50 per cent. That is interesting. I will willingly give way to any Opposition Member who thinks that my information is wrong, or that the Labour party does not actually believe that rates should be reduced. But Labour Members are disguising the fact that, on the one hand, most of them do not know what they mean, and, on the other hand, they are effectively saying that the concept of reducing top rates of tax is becoming attractive. It is becoming attractive regardless of the academic evidence that they purport to put forward, because there is a consistent trend in the 1980s for tax revenues to the Exchequer to increase when tax incentives are given by reducing marginal rates.

I ask Opposition Members this question—perhaps the right hon. and learned Member for Monklands, East (Mr. Smith) will consider it. If, as we posit and believe, tax revenues to the Exchequer increase as a result of the reduction in the top tax rates, has not what we are doing this year become politically irreversible? In the unlikely event that the Labour party were ever in power again, he would find that he was not able to increase top marginal rates of tax, because by that very act he would be reducing revenues to the Exchequer and thereby would be unable to spend more money on the social services.

Mr. John Smith

As the hon. Gentleman has invited me to contribute, I shall do so. Only a fool would believe the propaganda that if the rate of taxation is reduced the amount of revenue is increased. If the hon. Gentleman looks at the Red Book, he will find that the cost of the reduction in the higher rates is calculated at over £2 billion. If there is anything in his argument, why does he not also argue that the rate should come down from 40 per cent. to 35 per cent.? Presumably, even more money would come in then.

Mr. Taylor

The right hon. and learned Gentleman may well anticipate a further reduction, and I would not be embarrassed by that. I am a realistic and modest man. I should like to see the figures prove my argument this year, and by the time of next year's Budget we can have another look at the position. [Interruption.] Whereas Opposition Members have absolutely no concept of what risk they are prepared to take on tax rates, I have made my position clear. I will accept the wisdom of the Chancellor in bringing the rate down to 40 per cent. this year, but I see no reason why it should not come down further next year.

If the argument is proved, it will be found that it is politically irreversible. No succeeding Government could increase taxes knowing that they would thereby over a period reduce revenues to the Exchequer. That shows the shift of public opinion in its reaction to tax cuts, and it will be proven over the years to come. It will ensure a continued period of opposition for Labour Members, because they have simply not understood that in the 1980s the fundamentals have changed and the Government can now increase public expenditure without necessarily increasing tax rates. Because they cannot understand that that they also do not understand why the present Government have increased the number of risk-takers who are prepared to invest in the country. Under the Conservative Government, 9 million shareholders have come forward—about the same number as are currently registered as members of the TUC. The other risk-taking schemes have also been very successful. People realise that the risk:reward ratio of such invesments has improved, because the Government will take less of the reward if they are successful.

This is also effective internationally. I should have thought that the right hon. and learned Member for Monklands, East would be extremely pleased with the information provided by the Chief Secretary to the Treasury recently that inward investment in Scotland last year was £2.6 billion—a record. Last year, the figure for the United Kingdom as a whole was over £6 billion. That shows that other countries, and other companies in them, find this country an attractive place. Why? Because they believe at last that the British Government are prepared to provide an internationally attractive incentive, and not only for companies. We are not discussing the corporation tax rates, which have been improved; we are merely discussing income tax. They know that if workers are paid good wages and their tax rates are attractive internationally, that is a good foundation on which to base not only the company but the home market, because of the growth of the economy and the ability of people to purchase.

Dr. Reid

Does the hon. Gentleman accept that the basis of his argument is entirely falacious, and flies in the face of all empirical evidence? The report that was mentioned earlier, carried out with Professor Chuck Brown at Stirling university—the biggest empirical study of the relationship between tax rates and work incentives—has shown that there is no such relationship as the Government posit. I discussed the matter at some length with Professor Brown.

It is no good Ministers telling us that the conclusions of a massive empirical report can be negated because it was commissioned under a Labour Government. First, that suggests that Chuck Brown and his academic staff were playing the tune of the paymaster. That is a terrible slur on an esteemed academic. Secondly, it is disingenuous of Ministers to refer to the report as having been commissioned by a Labour Government, for two reasons. For one thing, although it was commissioned in 1978, it was not started until September 1979, three or four months after a Conservative Government——

The Temporary Chairman (Mr. Patrick Cormack)

Order. This is rather a long intervention.

Dr. Reid

I think that it is also an important one, Mr. Cormack, as a Minister brought it up. But I shall be brief.

The report was commissioned under a Labour Government, but it was put into practice and ratified under a Conservative Government. Moreover, the initial study from 1978 was for three years, and twice the Conservative Government——

The Temporary Chairman

Order. The hon. Gentleman really is testing the patience of the Chair. He must resume his seat.

Mr. Taylor

I am grateful to you, Mr. Cormack, although I did not really need protecting. When I hear an intervention as long as that, including several uses of the word "empirical", I begin to wonder whether it should be taken seriously.

This is the importance of being a politician. We are not hiding behind great academic tomes commissioned under a Labour Government, and, from that viewpoint, we are not making the same calculations about the productiveness of the growth in the economy. As a politician, I say that I am prepared to be judged on the results this year. We have reduced the highest rate of taxation to 40 per cent., and all the calculations that I have seen, all my own beliefs and all the experience in America, suggest that we are now likely to find that, for a variety of reasons, revenues to the Exchequer will not decline. Indeed, they are likely to increase. That is a statement of belief, based on my considerations, and I find it a good deal more convincing—certainly as a mast from which I am prepared to fly my flag—than a dry academic tome commissioned some years ago. That seems a reasonably argued proposition.

I believe that when we see the results in public documents in a year's time, we will see quite clearly that the Labour party will be in a desperate fix. If it continues to do what it is doing tonight, voting against these tax reductions, effectively it will be showing that if it reverses that policy it will be decreasing the amount of money available to the Exchequer for social policies.

I conclude on the point on which I began. It seems incredible that Opposition Members claim to be concerned about average wage earners, yet threaten those average wage earners—which include the nurses—with a tax increase. What rate are they proposing? We are reducing taxation from 27 per cent. to 25 per cent. What rate are the Opposition proposing? I should like Opposition Members to address themselves to that question during the course of the debate.

Mr. Campbell-Savours

The Government's case is based on the proposition that the policy that they are pursuing is one of reducing taxation. I submit to the Committee that that policy is an illusion, that the Government are raising money in the same volume that was raised in 1979 and that the public is being duped.

The strategy has been simply to switch from direct to indirect taxation, and, more interestingly, to place a form of taxation on the goods and services provided by the state. I submit that the boom in consumption that has taken place during that same period has little to do with illusory tax cuts and far more to do with the expansion of personal credit.

Are the tax cuts an illusion? The tax cuts have meant a reduction from 33p in the pound to 25p in the pound, but at the same time, as we all know, there has been an increase in the burden of taxation for a married couple with two children from 35 per cent. to 37.48 per cent.

If we examine where the increases are to be found, we find the infamous doubling oil VAT from 8 per cent. to 15 per cent., which, in effect, was an across-the-board increase on most consumption in this country. There are other forms of indirect taxation of a special nature that are Government-induced. Rates have increased by 164 per cent. since 1979, compared with an 87 per cent. increase in the RPI. In the same period the average unrebated rate per hereditament in this country has gone up from £131 to £467—an increase of 256 per cent. Clearly that is just a switch from one tax to another tax—a tax through local government.

There has been an increase in the cost of mortgages. Mortgages have gone up 167 per cent. during that period against an RPI increase of 87 per cent. Some might say that that was a Government-induced increase in the cost of living, and in effect it was a form of tax. There have been increases in rents of council housing and in the private sector of 165 per cent. Telephone charges have increased by 111 per cent. The price of alcoholic drink has increased by 106 per cent. I am not opposing those increases, but the point is that the Government are raising more revenue in real terms than they were in 1979 and the increases are substantially higher than the RPI.

The cost of fuel and light has increased. The price of coal has gone up by 121 per cent., gas has gone up by 124 per cent. and electricity charges by 94 per cent. Household services generally from local authorities have gone up by 102 per cent. Fares and travel costs have risen by 95.6 per cent. Prescription charges have gone up by 1,200 per cent.—from 20p to £2.60. Annual repayment certificates for prescription charges have risen by 971 per cent.

Water rates have increased. In 1979 the average calculative water rate was £37.50. Last year it was £97.18, an increase of 165 per cent.—twice the level of the RPI. That is a form of hidden taxation. We must add to those the local authority services increases, the increases in the cost of school meals, school milk, capitation allowances, music lessons, school trips For kids, library charges, bus services, school transport, the planning charges of local authorities, home helps, community centres, day care centres, day nurseries and charges for residential home accommodation. Those have all been substantial increases, far in excess of the RPI.

6.45 pm
Mr. Michael Jack (Fylde)

The hon. Gentleman was talking about hidden taxation. Does he agree that inflation is the worst of the hidden taxations? Would he care to tell us about the record of the Labour Government on inflation?

Mr. Campbell-Savours

We are now dealing with Government-induced inflationary increases in excess of the RPI. Would the hon. Member for Fylde (Mr. Jack) care to identify any one of those that I have listed which was not Government-induced and which did not lead to an increase in the RPI?

Mr. Anthony Coombs (Wyre Forest)

Is the hon. Gentleman aware that in 1975, under the Labour Government, Government borrowing as a proportion of GDP was 9 per cent.—an all-time record? Is he trying to persuade us that that was a non-inflationary factor in the economy at that time?

Mr. Campbell-Savours

I shall come to borrowing in a moment, as I have some interesting statistics about borrowing.

Added to those hidden increases is the reduction in student grants, which in effect means an increase in student fees, and the increases in central Government charges to farmers for Department of Industry services where they affect individuals. The massive house price inflation that has taken place since 1979 means that for every £1 spent on housing, people simply get less space. So who is getting a good deal: the house buyer in 1979 or the house buyer in 1988? In 1979 people bought more space for their money.

Hon. Members may think that the Government are reducing taxes, but, by pursuing that policy, they are increasing the costs for people in this country. We now have increased spectacle charges, charges for sight tests, passports, dental charges, museum charges and charges on culture through the theatre. Ironically, there are increased health costs for those who are driven to pursue private medicine. It might be said that their costs would have been lower had they been able to secure that standard of health care within the public sector. Indeed, that must be part of the inflationary equation that we are examining.

Mr. Ian Taylor

Will the hon. Gentleman give way?

Mr. Campbell-Savours

No. I have given way twice already and I have to think of my hon. Friends.

Legal costs have increased, particularly with the reduction in legal aid that we are to discuss in the House tomorrow. This so-called policy of reducing taxation is an illusion. All that has happened is that taxes on income have been switched to taxes on expenditure and on services—particularly those run by local authorities and by central Government.

Let us examine where the money that people seem to have in their pockets has actually come from and what is its origin. If we examine the expansion of credit, we find some very interesting figures. There has been a vast increase in the amount of credit available to the average householder in this country. If we examine credit from finance houses and specialist credit agencies and banks, we find that in 1979 the total of all private borrowings under those important headings, in so far as they affect the amount of coinage that one jingles in one's pockets, was £6.9 billion. In 1987 the figure was £23.6 billion. The amount of credit taken on by individuals in this country has almost quadrupled.

The amount of credit per household has risen from £345 in 1979 to £1,123 in 1987. The average person in Britain in 1979 was in hock to £123. Today that person is in hock to £423. There we have, once again, a threefold increase in the amount of personal credit to individuals in Britain. They fund that credit with the illusory tax deductions that they have received over the past seven years.

With a sleight of hand and clever talk at the Dispatch Box, and because people feel more money in their pockets, the British public have convinced themselves that they are better off. They are no better off at all. This is all an illusion. That is why, under the solid financial arrangements that characterised the Labour Government's management of the economy, they were far better off.

Mr. Carrington

I am grateful for the opportunity to intervene in the Committee's deliberations on clauses 22 and 23, because together they constitute the fundamental economic policy that the Government have been pursuing since 1979. It is the engine that has created the tremendous growth and strength that have turned Britain round from being the sick man of Europe, with an economy that looked to many to be in terminal decline in the 1970s, to what is now considered to be a miracle economy on a par with the German economy in the 1960s and early 1970s.

Mr. Morgan

The hon. Gentleman says that in the 1950s and 1960s the German economy was considered to be a miracle economy. If that is the case and he now considers Britain to be a miracle economy, how does he explain the Jaguar company having to draw to the attention of its work force the fact that Mercedes workers produce 50 per cent. more cars per man per shift than they do at Jaguar?

Mr. Carrington

The hon. Gentleman will recall that Britain's motor car industry was destroyed by the previous Labour Government's policies in the 1960s and 1970s. I regret that Jaguar, like British Leyland, has still not succeeded in recovering entirely from the Labour Government's policies, despite its excellent export achievement to the United States, even with the strong dollar and, consequently, the high value of sterling against the dollar.

The German economy was based on more than that, as the hon. Gentleman knows. It was based on private enterprise and incentives for people to work. That is what the Government have been doing since 1979. That has been our great achievement and that is what has created a strong, prosperous economy, with the potential for continued growth, out of the disaster of the late 1970s.

" I want to look for a moment at the specific tax changes which clauses 22 and 23 cover. The reduction in the basic rate of tax to 25 per cent. is to be welcomed not only because it reduces the tax burden that the individual has to pay and so encourages incentive and enables people to look more towards their own income to pay for what they are doing, but because it has the effect of enabling companies—a point often missed by Opposition Members—to pay their employees better because they can retain more of the pay that the company gives them. That in itself enables the company to invest more in its activities rather than having to pay, through the prosperous production of goods and services, more in income to its employees, which is then taken by an ever-grasping Government.

Therefore, tax cuts not only encourage people to work much harder, but, more important, enable much more of Britain's wealth to be retained by the companies, which enables them to invest their earnings in more productive activities.

Mr. Butterfill

Does my hon. Friend agree that tax cuts also encourage people to save and thereby encourage the provision of savings to industry through borrowings, making it much easier to expand the economy? For example, does he agree that Japan is much more advanced than we are because its level of savings is so much higher than ours?

Mr. Carrington

I agree with my hon. Friend, but I shall come to that very point when I discuss the 40 per cent. rate of tax, when it becomes even more important.

Most people outside the House, and the majority of hon. Members, will agree that the tax on the lower paid is still far too high. It is too high partly because the income tax band of 25 per cent. is still too high, as my right hon. Friend the Chancellor of the Exchequer said in his Budget statement, but also because the national insurance contribution raises that tax rate to an unacceptable level. We still have a long way to go in reducing that tax band even further so that those who do not receive additional support from the Government through the social security system can retain more of their own money and pay less to the Government, thus enabling them to provide adequately for themselves and their families. We have a lot further to go in reducing that tax band. I should like to see it reduced to 20 per cent. as soon as possible, and I should also like to see an adjustment on the national insurance charge at that level.

The benefit of the 25 per cent. band is incontrovertible. It benefits the less well off——

Mr. John Battle (Leeds, West)

How does the hon. Gentleman explain the fact that 3.5 million working people do not earn sufficient to pay tax in the first place, even under the proposals in the Bill? In other words, they are on low wages. It may well be that it is the low-wage economy that has enabled employers to retain some money. We must face the fact that 3.5 million people will not benefit from the Budget.

Mr. Carrington

It is an extraordinary fact that Opposition Members are always looking at those whom the Budget does not address rather than those to whom it is directed.

Ms. Armstrong

They are all citizens.

Mr. Carrington

The citizens who do not pay tax are addressed through the social security system and the increased money that we are giving to it. The changes within the social security system also reduce the poverty trap. Whatever the problems of such people, there is no excuse for not addressing the case of those who pay too high a rate of basic tax.

Mr. Butterfill

Does my hon. Friend agree that it is a tribute to the Government that we have progressively increased tax thresholds by more than the rate of inflation, so that we keep increasing the number of people who are no longer within the tax system? The hon. Member for Leeds, West (West Battle) is trying to use that fact to prove the converse. Surely it is the very success of the Government's economic policy in taking people out of tax that creates the position about which he is complaining.

Mr. Carrington

I agree with my hon. Friend. The Budget has taken another 750,000 people out of tax. That is a great benefit, not only to them, but to everyone else, because of the effect of that in reducing the bureacracy that is needed to collect that tax.

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I should like to see, as I am sure my hon. Friend would, far more people taken out of the tax system. One of the great problems in our country is that the tax system still bites far too low down in the system. I believe that the increase in the thresholds in clause 24—which we are not discussing, Mr. Cormack, so I shall not digress to it—is very much to be welcomed.

I turn now to what is possibly the more contentious side of our debate this afternoon—the reduction of the higher rate of tax to 40 per cent. As has been said, this increases the incentive to work and I believe that that will be shown as the change develops.

Dr. Reid

I am sorry to come back on this point, but if the hon. Member is correct in saying that the decrease in tax increases the incentive to work, why is it that the most extensive study on the issue, costing £500,000, extending over eight years and 22 papers, and based on interviews with thousands of people, has found exactly the opposite?

Mr. Carrington

I was rather expecting that intervention. I refer the hon. Gentleman to the answer that my right hon. Friend the Chief Secretary gave. It appears that that study—the hon. Member for Motherwell, North (Dr. Reid) has the advantage over most Government Members of having seen the study—addresses the short-term effects. Taxation and economic policies should address the long-term effects, not just the short-term ones. The reduction in the higher rate of tax is designed to ensure that long-term growth in the economy is sustained.

I agree with the hon. Gentleman in that I do not believe that the argument for the reduction of the higher rate of tax to 40 per cent. relies nearly as strongly on the incentive to work as does the reduction of the basic rate to 25 per cent. I believe that the argument is much stronger and much more easily shown to exist elsewhere. If people are given all their own money to look after, they will invest it.

My hon. Friend the Member for Bournemouth, West (Mr. Butterfill) referred to the much higher saving rates in Japan, and indeed they are two or three times those in this country, if I am not mistaken. That is a major difference between the success of the Japanese economy and the success of ours. However, because of the policies that have been followed by the Government since 1979, there has been a major change in savings. Whereas at one time 5 per cent. of the population owned shares, the figure is now 20 per cent.

I recognise, as I am sure some Opposition Members will wish to point out, that owning shares that are listed on the stock exchange does not mean direct investment in industry. The strength and liquidity of the stock exchange are the medium by which industry can get the funds that it needs for productive investment, so the increase in the number of people who own shares is the necessary precursor of a high investment economy and the high saving ratios that we need to achieve.

Mr. Jack

Does my hon. Friend agree that the initial foray into the stock market in buying an existing company has assisted small investors to fund new issues, which are a form of net investment?

Mr. Carrington

I am most grateful to my hon. Friend for that comment, because it brings me on to my next point, which I believe to be the strongest argument in favour of reducing the top rates of tax. It is that our economy needs people who will take risks.

Is the hon. Member for Durham, North-West (Ms. Armstrong) trying to intervene?

Ms. Armstrong

No, I am listening

Mr. Carrington

I am very grateful to the hon. Lady for listening to me and I am glad that waving her finger is one of the ways in which she listens most keenly.

Risk taking in investment is one of the major ways in which new industries start up and in which the future economic growth and success of this country, as of most other countries, will develop. I take the point that has been made by the Opposition about gambling. People will invest in what they believe to be a potentially successful project, one in which they have faith, but in which perhaps few other people have faith.

That is not a risk that a committee will take. It is not a risk that a Government can take with other people's money. It is a risk that the investor can take with his or her own money. That is something that needs to be encouraged, and the only way to encourage people to take risks is to make sure that the potential return on the investment is enough to reward them, enough to make the risk of failure, the chance of bankruptcy, acceptable.

That return was impossible to achieve with a tax rate of 83 per cent., particularly as so much of the earnings of any successful company turned into unearned income, so-called, which was then taxed at 98 per cent. We reduced that to 60 per cent., and that in itself was a great achievement, but 60 per cent. of an investor's return from a high-risk venture still went to the Government. We are now reversing that ratio so that 40 per cent. will go to the Government, who benefit enormously but take no risks, while 60 per cent. will go to the risk taker. That is a major advantage, and a major encouragement to people to invest in the new industries on which we all rely to produce the great wealth that this country needs to see us over the decline of North sea oil revenues in the 1990s and the 21st century.

I believe that the country will greatly welcome these tax cuts. I believe that they will be the engine for increased economic prosperity and that the Committee should vote with enthusiasm in support of these two clauses.

Ms. Armstrong

I agree with one thing that the hon. Member for Esher (Mr. Taylor) said—that as politicians we are concerned not simply with numbers but with the wider aspects of decisions that we make in economic policy. In many senses, that is what we are faced with tonight. We are faced with numbers that people have been arguing about and about which there is very little consensus. Government Members have not been able to offer any direct evidence or any certainty that their supposition that decreasing the top rate of tax will necessarily increase investment and incentives to work harder is correct. They suppose that, but they are not able to give us any evidence for it.

As politicians, we are inevitably concerned with more than that. We are concerned with what a tax will do in those terms, but we are also concerned with the nature of the society that we wish to create. Any financial decision made by the House has a value attached to it and a morality underlying it. In many senses, the Opposition are in contention not just on the figures but on the morality—I might say lack of morality—demonstrated in the tax change with which we are dealing.

As I have said, the evidence that Government Members have been able to produce about precisely what this tax change will mean in terms of increased incentive is at best neutral. The evidence from them is nil. The evidence from reading the texts and the economists is at best neutral. How will the Government monitor their assertion? What will they do to demonstrate the validity of their assertion that cutting back the top rate will result in increased investment, increased productivity and the creation of more jobs? I shall be interested to hear the precise manner in which the Government propose to monitor it. Will they leave it to rhetoric? I hope not; we deserve a little more than that.

Mr. Ian Taylor


Ms. Armstrong

No, I shall not give way. I am sorry, but I shall not collude in any more filibustering.

Mr. Taylor

On a point of order, Mr. Crowther. I wished to ask a perfectly clear question. It might have been interesting. It certainly was not part of a filibuster.

The Temporary Chairman (Mr. Stan Crowther)

The hon. Member knows that that is not a point of order.

Ms. Armstrong

The essential point about the clause is what it demonstrates about the Government's view of fairness. We have heard something about that from the Government. More than anything else, it demonstrates the Government's complete abandonment of any sense of fairness. Every citizen has an important contribution to make, and each contribution should be measured and valued. That fact is as important to unemployed people and low income earners as it is to high income earners.

Who has made the greatest contribution to the economic recovery that we hear about? As an example, I cite someone in my constituency who, eight years ago, worked for the Consett Iron Company. As hon. Members will know, that company is now closed. Ministers have been lauding the improvements that have been made in Consett as an example of Government success. I welcome any improvements and any jobs that are created. But an example of the cost to people who work at Consett—there are still many who do not—is a man who, eight years ago, worked in the steelworks. He now performs a higher grade job but takes home exactly the same amount as he took home eight years ago. That is an enormous cost for him and his family to pay. They have paid and will continue to pay that contribution to the economic recovery. We have heard from the Government that those who have gained substantially from the economic recovery are to be rewarded, while folk such as that man have been severely penalised in the past few weeks by the attack on housing benefits and by changes in the family income supplement and other benefits.

We are debating the Government's sense of values and morality. I was sickened by much of the preaching by Ministers about what other people should do about morals in this country. My constituents and I live day by day with the real effects of moral values. Last weekend, someone came to my surgery and said, "I am almost ashamed to live in a country whose Government are prepared to reward the rich at the cost of the poor. They are prepared not only to do that but to justify it."

Mr. Jack

I am grateful to you, Mr. Crowther, for invitingme to contribute to the discussion about these two clauses of the Finance Bill.

The hon. Member for Durham, North-West (Ms. Armstrong) spoke with her characteristic passion about matters relating to the north-east of England.

Let me entertain Opposition Members for a moment with a political creed that may be more to their own tune. I refer to events in the Soviet Union that were recently depicted on the BBC's "Money Programme". We have heard much about incentives. If there is a video nasty that Opposition Members should watch, it is a rerun of the first of three reports from the Soviet Union. That video nasty will show them what the word "incentive" means for a group of workpeople who, for years and years, have had their Government on their backs. The message of that programme is clear—"Let us have the freedom to express ourselves; let us earn what we can; let us keep it and invest it; let us go forward and provide products that people are looking for and that our state enterprise is clearly not able to provide."

I am delighted to see Opposition Members nodding their heads in agreement. The thesis of incentive is precisely what our approach to tax cuts is about. I wonder how many Opposition Members have sat, as I have, and negotiated wage claims with workpeople—albeit in places where wage rates were not particularly high. One of the crucial parts of that negotiation concerns who is to pay the rate of income tax. If tax rates are coming down, such negotiations are far more realistic when one is talking about a rate of pay for a certain job and not negotiating who is to to pay a given tax rate.

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Dr. Reid

As the hon. Gentleman is maligning the Soviet Union for the dreadful state of its economy, is he surprised to know that the highest rate of tax in the Soviet Union is precisely the rate that the Chancellor has introduced in the Budget—40 per cent.?

Mr. Jack

I am delighted that people in the Soviet Union are paying taxes. Perhaps some people were under the impression that everything is a freebie in the Soviet Union and no tax is paid. I was not, as the hon. Gentleman suggested, slighting the Soviet Union. I rejoice in the outburst of the realisation of the benefit of incentive, as the television programme showed. If the hon. Gentleman cares to watch the rerun, he could learn a useful lesson.

As I was saying before the hon. Gentleman intervened, the benefit of lower taxation is that negotiations on the rate for the job are far more realistic. One does not negotiate who is to pay the tax. More important, it shows workpeople that it is worth putting in the extra effort. That is where the incentive element comes in. In 1979, when I started to negotiate wage rates in the produce industry—they were 35 per cent. under the Labour Government—people were asking, "Why should I bother? Every extra pound that I earn will he taken from me by the tax man." Opposition Members should cut out all the rhetoric and fancy economic history lessons. It is what the man sees on the bottom line of his pay cheque that makes all the difference.

Mr. Battle

As the hon. Gentleman is introducing the notion of what the man sees on the bottom line, what advice would he give my constituents who have jobs and who earn less than half the average wage—according to the Government's figures, that is £224 a week—and gain precisely nothing from the Budget? They are angry because tax cuts have gone primarily to those who earn well over £50,000 a year and not to those earning below £7,000 a year.

Mr. Jack

I listened to what the hon. Gentleman said, but he should bear in mind that since this Government came to office some of the lower-paid workers to whom he referred have been lifted out of paying tax altogether. In addition to those who, by the indexation of allowances would otherwise have come out of paying tax, 1.7 million people today no longer pay income tax. That is what the Government have done. I agree with my hon. Friends who have said that still fewer people should be paying tax. I subscribe to the view that the income tax rate should go further down from 25p.

Mr. Battle


Mr. Jack

I should like to make this point before the hon. Gentleman intervenes again. In order to address the point about a man on average or below earnings, I should say that in the tax year 1978–79 average earnings in this country were £92.80. The tax rate was 35 per cent. In the current financial year, average earnings in this country are £244.70, and the tax rate is 25 per cent. That is a0 tribute to the strength of the economy under the Chancellor's direction. It enables us to have a debate as to whether we should approve in this Bill a tax rate of 25 per cent. As has been said, perhaps that is part of the reason why Conservative Members are able to make the proposition and you are attacking us for doing so.

The Temporary Chairman

Order. I am not attacking the hon. Gentleman. He must address his remarks to the Chair and the use of the word "you" gives rise to certain misunderstandings.

Mr. Jack

I apologise, Mr. Crowther, if I give the impression that I am using you as a tool with which to attack Opposition Members. My remarks were directed across the Chamber, not at your good self.

I have made the point about average earnings and the relationship with tax. One of the strongest weapons in my campaign during the election was the ability to tell people what a Labour Government would cost in terms of income tax. Some of the estimates referred to a tax rate of up to 50 per cent. As one of my hon. Friends has said, it was difficult to work out precisely what the rate of income tax would have been under a Labour Government. I am certain that that is what encouraged people to vote for the Conservative party. However, next time, when I tell them that I sat opposite the pro-tax party—the people who wanted to vote against reductions in income tax—they will come flocking back to vote for me. There may he a few side issues that may deflect people on Thursday, but the dawn of realisation will come as Opposition Members expound the cost of their policies.

One Opposition Member asked what people think of a 25p rate of income tax. Unlike Opposition Members, I went out and asked my constituents. Conservatives do not just listen; they go and ask questions. I went out with some of my younger supporters and did a survey. One Saturday morning I spoke to a random sample of 100 people in the shopping square in St. Annes. Hon. Members may be surprised to know that 70 per cent. of the people to whom we spoke were in favour of the income tax cuts that the Government have proposed. However, I advise my right hon. and hon. Friends on the Front Bench that they will have to do a little more persuading to get the message across that we are spending nearly £2 billion extra on the National Health Service, because that message has not filtered through. Despite what Opposition Members have said, people will be persuaded that they can have tax cuts with fairness. It is important to know that people are in favour.

I carried out another survey last year, also before the election. I met an 18-year-old man who was the reserve goalkeeper for Tranmere Rovers football club. He was not on high earnings, and I asked him what he thought of the previous Budget when tax cuts were made. He said, "Marvellous. With taxes down, I can go to work. It will not cost me any more and I will have a bit more in my pocket." Think about how much happier he will feel this year. It is the kind of save that any 'keeper' would want to make.

I want to point out to Opposition Members one or two salient facts about higher-rate taxpayers. In the tax year 1978–79 there were 760,000 higher rate taxpayers. Today there are 1,170,000. When we came to office, those taxpayers contributed £800 million at today's prices. Today, higher-rate taxpayers contribute £3.1 billion. Their share of the tax burden in this country has risen to 28.5 per cent. They are paying their way.

The change in top rates is a good measure, because it will increase tax revenues, as will the reduction in standard rate tax. In 1978–79, when the tax rate was 33p in the pound, the revenue from income tax was £18.5 billion. This year is is estimated to be £31.1 billion. There seems to be an inextricable causal link between increasing the tax revenue and reducing the tax rate. That has enabled the Government to spend record sums of money on health, social services and social security. I have to advise Opposition Members that that is why I shall go into the Lobby tonight and vote in favour of these clauses.

I make a plea for a group whose income tax rates deserve special consideration—elderly people. I realise that an elderly person who enters a rest home, and who has no savings, will pay no income tax and will effectively receive £7,500 of income without tax. However, a person on the new income tax rate of 25 per cent. has to have a gross taxable income of about £8,500 to be in the same position as the elderly person. I believe that we have work to do on the taxation position of the elderly. I see that my hon. Friend the Minister has taken note of that. Perhaps he might comment on it in his reply.

These are good clauses. They are worthy of our support. The case that Conservative Members have made is incontrovertible.

Dr. Lewis Moonie (Kirkcaldy)

contribution will be brief. I am not a member of the Committee that will be considering the Bill upstairs. Therefore, I shall confine my remarks to the National Health Service and the relationship between public spending and the level of financing of that service. I have heard so much flatulence from the Government Benches tonight that, if anyone wishes to avail themselves of may professional services I shall be pleased to oblige. I shall not charge anything, because, of course, I am against that.

There are many causes to which national income can be applied more worthily than the tax cuts about which we are speaking.

Mr. Barry Field (Isle of Wight)

Will the hon. Gentleman give way?

Dr. Moonie

No, I will not give way. I have only just started.

Among those causes is the relief of poverty. I sometimes wonder whether Conservative Members understand what poverty means, when they blithely talk about average earnings of £240 a week. I assure the hon. Member for Fylde (Mr. Jack) that in my constituency there are not too many people who earn that amount, particularly in a manual or skilled job in a factory. Certainly the vast majority of people in the Health Service do not earn that amount. I have not met many people, when I have been canvassing during the past few weeks, who earn that amount. I would be very glad to meet this mythical average person, as I am afraid there are very few in Kirkcaldy.

There are more worthy causes to which we can devote our income—for example, housing and the NHS in which I have worked for many years.

I should like to confine my remarks to the need for additional spending on health and social services. I am not naive enough to believe that spending on the NHS alone will improve the nation's health. However, when measured on the rather crude indices by which we measure health in this country, it will, on the whole, increase spending on the relief of poverty and on the other areas that I have mentioned.

However, there are several areas in the NHS, which. during the past few years, have had prolonged underfunding. I compare that underfunding with the perceived needs of the people in this country. There are several areas in which increased spending on the NHS would have great effect. My hon. Friend the Member for Dunfermline, East (Mr. Brown) has touched briefly upon them.

We should remember that the funding of the pay awards for nurses, doctors and paramedical staff a few weeks ago will do nothing for the present problems of the NHS. They will only stop them becoming worse. I am glad that those pay increases have been funded. However, I would feel happier if there were the same pay increases in the pipeline for other groups of workers in the National Health Service. Otherwise, the position will get worse than it was even last year.

During the past seven years, there has been cumulative underfunding of the NHS of nearly £2 billion at today's prices. The Select Committee, of which I am glad to be a member, said that £1 billion should be spent in the short-term on remedying some of the deficiencies in the NHS.

There are seven sectors on which money should he spent. The first and most important is community care for people who are unable to look after themselves, such as those who have a mental handicap or illness, elderly people who are infirm or suffering from dementia, and physically disabled people.

For many years I worked to try to develop a service in Fife for those groups. Shortly before I left that employment, I identified a £10 million spending programme that would have alleviated between 10 and 20 per cent. of the immediate need for those services in that area. I used a crude measure—most indices used in health are crude—but when scaled up it came to £150 million for Scotland and 10 times that amount for the United Kingdom. I defy any Conservative Member to say that it would be less.

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Accommodation, caring staff, special services and research will be needed merely to indentify the needs of those groups, particularly elderly people, who, unlike the other groups, live at home, often in desperate deprivation. I think that £1.5 billion is probably an underestimate of the amount needed, but it shows that the Select Committee's request for £1 billion in total was not unreasonable.

The second and third sectors, which are linked, relate to after-care in the community. Full advantage must be gained from the efficient system for acute care introduced by the Griffiths proposals. I accept that those proposals have increased the efficiency of the acute sector and that more people are passing through the system. However, they are doing so more quickly. That means that the burden of after-care falls on general practitioners and nursing staff in the community. I have received many representations from GPs, who say that they are unable to provide the level of after-care that is needed because of the needs of their other patients.

Clearly, more money needs to be spent to increase the number of trained nursing staff in the community to deal with after-care. There is no point in pushing people through the system faster if that leads to ill effects because of people being discharged from hospital to their homes too quickly with inadequate care being provided. It is ridiculous that over the past six months efficient units have had to close because of insufficient funds rather than work to relieve waiting lists for operations. No private industry would accept such nonsense, so I do not see why the National Health Service should.

The fourth sector on which more money should be spent is preventive medicine. It is more difficult to define the total sums needed in preventive medicine, to which the Government have rightly given priority in their White Paper on primary health care. The Government have not said that they will put money into preventive medicine, but considerable increases are clearly required. In that regard, one needs to think only of the vast increases in costs associated with tackling AIDS, developing screening services and the many other parts of preventive medicine that could have a real effect on the health of our people.

The fifth sector is information systems. It is clear that we need better information systems to be able to function effectively. To do so we need not only to develop computer systems—at present they do not exist in an effective form in the Health Service—but to staff them. I know of no health authority that can recruit the necessary staff because the wages paid are so low compared with those paid by private industry. If we do not get the staff to develop computers properly, we shall not be able to attribute costings properly or to take full advantage of the improvements in efficiency and effectiveness that would flow as a result.

The sixth sector, which is often overlooked, concerns alleviating low wages in the National Health Service, which directly contribute to ill health. When porters, cleaners and kitchen staff are taking home wages of £70 or £80 a week, clearly something is wrong with the National Health Service. There is no way in which a family can live on such an income. Rather than prate about taking people out of the tax net altogether, it would be better if they were paid enough to get back into it. That would at least give those people some self-respect. People to whom I have spoken have told me that they would be only too pleased to earn enough money to be able to afford to pay tax.

The seventh sector was covered by my hon. Friend the Member for Dunfermline, East—the need to address the backlog of maintenance and repairs and the cuts in spending on essential equipment which have been such a feature of the National Health Service over the past few years. If we looked at hospitals within a five-mile radius of this Chamber, we would see peeling walls and damaged windows and stonework. That is what has happened as a result of the spending restrictions. Clearly, vast amounts of money need to be spent.

As a whole, I do not believe that the Select Committee's demand for £1 billion comes anywhere near reflecting the needs of the National Health Service. If I had a choice—I shall vote against these proposals—I would wish to see the money spent on the service in which I have worked for so long, which I thought would provide adequately for the people in this country but which, sadly, has not.

Mr. David Heathcoat-Amory (Wells)

The hon. Member for Kirkcaldy (Dr. Moonie) made a Health Service speech. I do not wish to follow him except to observe that one justification for reducing income tax is that it often leads to an increase in tax revenue. That is one of the reasons why the Government have been able to increase substantially the funding of the National Health Service.

It is demonstrably true that tax reductions improve the supply side of the economy, which is how the Government have made additional allocations for the National Health Service. I noticed that the hon. Member for Kirkcaldy did not deny that point.

Opposition Members speak as though they have a monopoly of concern about these matters. The hon. Member for Durham, North-West (Ms. Armstrong) littered her speech with the word "morality". There is nothing moral about high taxation. The Labour party's idea of compassion and concern seems to be compulsorily to extract more money from citizens and redistribute it according to a centrally determined formula. That shows a touching and misplaced belief in the automatic efficiency and effectiveness of collective provision, as against the voluntary system of earning, saving and giving, which has been the engine of success of this Government.

My main reason for supporting the income tax reductions is that they tilt the taxation system in the right direction—in favour of earning and income. For far too long in this country it has been difficult, if not impossible, to build up capital out of earnings, which is why the savings institutions rely far too much on the tax privileges of certain forms of saving such as purchases of housing, through mortgage interest relief, and saving through pensions. Perhaps Chancellors will address themselves to those matters in future Budgets, but it is much better that everyone should keep much more of what they earn and make their own decisions about the form of savings that they wish to make, free of distortions from allowances and exemptions. The reductions outlined in clauses 22 and 23 go a long way in that direction.

Of course Opposition Members do not welcome these reductions. They look back., like fiscal dinosaurs, with nostalgia to the old days of high marginal rates of income tax. I look back on those days with mixed feelings because I am an accountant and I made a reasonable living out of advising people to avoid penal—indeed, confiscatory—levels of personal taxation. The real damage done was that such tax rates gave every incentive to the taxpayer to pursue capital gains rather than earnings from salaries and wages. Coupled with clause 92, which equates the rates of capital gains and income tax, clauses 22 and 23 decisively end that damaging distortion.

Rather than making party political points, which would perhaps be more appropriate to a Second Reading debate, I wish to pursue the effect of the changes on the dividend policy of companies—a subject that I believe has received too little attention. When we had very high rates of income tax, shareholders naturally preferred to go for capital growth, taxed at 30 per cent., rather than receiving the profits of the company by way of dividends taxed at up to 98 per cent. As I said, the equation of the rates of capital gains and income taxes removes that bias.

I ask my right hon. Friend the Financial Secretary why it is necessary to retain the close company provisions on the statute book that continue to assume the opposite incentive—that is, that it is still in shareholders' interests to keep profits within companies rather than distributing them. I am sure that I do not need to remind the Committee that a close company is one controlled by fewer than a certain number of individuals or trusts. Before the war, such companies were very common because most of our big industrial concerns started as family companies controlled by comparatively few shareholders.

The difference in tax rates at that time between the standard rate of income tax, which applied to so-called registered companies, and the higher rates of income tax meant that those shareholders had every incentive to keep the profits within the companies that they controlled. It was therefore necessary to put on the statute book a range of anti-avoidance provisions, known as close company provisions, which, in certain circumstances, taxed those companies as though the profits had been distributed.

Close companies are now very much less common. By and large, they have been replaced by public limited companies with thousands of shareholders who do not have a direct and controlling influence over their distribution policy. More important, the alignment of capital and income taxes removes the incentive to keep the profits within those companies. It could be argued that under the imputation system of corporation tax, which we have had for about 15 years, it is in the interests of both shareholders and company to distribute profits because advance corporation tax, paid at the time when a dividend is paid, is allowable to shareholders as a tax credit.

By reducing the upper rate to 40 per cent., the Bill brings it down to very near the rate of corporation tax, which is 35 per cent. Therefore, there is now almost no advantage in accumulating profits within a corporate structure. Indeed, there may be a disadvantage. It is often overlooked that there is a potential double charge to capital gains tax if that gain is made within a company. The company pays capital gains tax once on the sale of the asset and the shareholder pays a further full 30 per cent. capital gains tax upon selling the shares.

I conclude that recent changes—in the Finance Bill and particularly in clauses 22 and 23—have completely altered the comparative advantage in holding appreciating assets as an individual and holding those appreciating assets within a corporate structure. They have also profoundly altered the balance between keeping the profits within a company and distributing them by way of dividend.

If we combine those two factors, we find beyond question that the old incentive to use a non-distributing company as a way of sheltering income has completely gone. Yet we retain on the statute book a whole range of close company provisions that are complex to understand and expensive to administer. Therefore, I ask Ministers to consider reaping the full benefit of the simplified and lower tax rates that they are rightly putting before the House and to take an early opportunity to remove the close company tax provisions.

7.45 pm
Mr. Alistair Darling (Edinburgh, Central)

As I listened to the hon. Member for Wells (Mr. Heathcoat-Amory), I was reminded of a suggestion made just after the war, I think by Churchill, that there ought to be two Chambers of the House of Commons—one to deal with foreign affairs and one to deal with economic affairs; the two were entirely different. It seems to me that this debate is entirely different from last Wednesday's debate in which we discussed the plight of millions of people under the housing benefit changes. Today we hear of the plight of the poor shareholder denied his benefits and unable to shelter his income. Last week we heard of many people who simply do not have an income behind which they can shelter.

Conservative Members owe much to Samuel Smiles when they outline their economic policy for the 1980s. Samuel Smiles wrote a particularly turgid volume whose only point was contained in the first few pages. Conservative Members' policy may be fine in theory, but it has little to do with the reality of economics for most people in this country.

Opposition Members have been chided because we have not outlined our proposals for basic rate tax. There are arguments for saying that the basic rate should be much lower than 25 per cent. Some of us would argue that a graduated system would be more appropriate than what we have at the moment, which is almost a flat-rate system—especially when one considers the effect of national insurance. Certainly marginal tax rates are too high for the low paid and, I would argue, too low for the high paid. it is absolute nonsense to have a system under which somebody pays the same whether he is earning £19,000 or £9,000.

I resent the lectures that we have received on the plight of those who pay higher tax. We are accused of being a party that supports higher tax. When one considers that the percentage of tax and national insurance paid by the low paid has increased under this Government, it is clear that it is wrong to criticise us as a party of high taxation. Those on low incomes are paying more in direct and in indirect taxation than when the Government came to office.

Our beliefs about tax rates are properly the subject of another argument. We are discussing what should be done in the current financial year and the argument is about the division of wealth in our society. We are told that the country is doing well. For years, we were told that people could not have more because the country was not doing well. Now that the Chancellor says that the country is doing well, more people should surely benefit.

We are witnessing a shift from the poor to the better off in society. We have had the benefits of North sea oil and the benefits, we are told, of the sale of nationalised industries, which we all used to own but which are now owned by a minority. Why should not all of us benefit rather than simply those at the top of the income scale?

We must also remember that those who have enjoyed tax cuts have benefited partly because of the £4 billion removed from those who are worse off. The question that we should address tonight is what could the tax cuts be spent on that might make some individuals not so well off directly, but might make everybody better off?

There has been much talk about incentives. I hope that Conservative Members will tell me why rich people need more money to make them work harder while poor people need less money to make them work harder. In talking about incentives, let us consider scientists. We are told time and again that scientists leave this country because of the incidence of personal taxation, whereas I suspect that scientists leave jobs in this country, especially in the public service, because we do not spend enough on infrastructure, resources or laboratories.

For example, a scientist neighbour of mine says that he will benefit from the reduction in the basic rate of tax, if it is approved by the House. But he complains that he does not have the materials or facilities for his work. That makes him consider leaving this country to go abroad. It is a question not of personal taxation but of the low value that the Government attach to investment as a whole.

The tax burden is disproportionately high on those with low incomes. Income is much more than cash in hand. The value of our Health Service, our schools, the roads, buses and transport costs all contribute to one's income. Perhaps it is a benefit in kind, although not a direct benefit. But we ought to consider it, as well as the negative effects. For example, electricity price rises come into the equation when one considers disposable income after meeting one's outgoings, in the normal course of life. When those indirect benefits are under attack from the Government, it is no wonder that we fear a reduction in the basic rate of tax to 25p.

Most people do not want to live in a dependency culture. In Scotland we are constantly told that we live in a dependency culture. That is why we did not vote for this Government. I understand from reading the press today that the Prime Minister will visit us more often. I welcome that because every time she comes to Scotland the Labour party does better. Indeed, it is a pity she cannot come to Scotland before the Thursday elections.

We do not want to live in a dependency culture because we are well aware of the fact that these tax cuts are paid for by cuts in the living standards of those who are less well off. We have to contrast the fact that some people will be better off as a result of the reductions that these two clauses would implement with the fact that more and more people will go to the social fund—that latter-day soup kitchen of the 1980s—for basic necessities. The Government have cut more than £1 billion from social security benefits. They will achieve that saving in the next five to six years. We have to contrast that with the fact that the minority of higher-rate taxpayers will be better off directly. At the same time, the tax breaks and tax shelters, whatever one calls them, will still be available to the well-off.

When we discuss the effect of the two clauses, we should consider what else that money might have been spent on. Take child benefit. Since 1979, the real value of the benefit has fallen by 3 per cent. The failure to uprate it has meant that the Government have more money, which they can make available to the better-off. Indeed, the abolition of higher rate tax bands above 40 per cent. will cost £2 billion once they are implemented. That same money could have been spent on child benefit to increase it by £4.29 a week.

It has been said that one of the most effective ways of dealing with the problems of poverty and bringing help to children is through child benefit. That was said by the Secretary of State for Employment in 1982. If it was right then, surely it is right now.

It is the same story with pensions. Under the previous Labour Government pensions increased in real terms by 20 per cent., whereas under this Government they have increased by only 2.2 per cent. in real terms. I stress that the benefits given to the minority in this country who pay the top rates of tax, as well as the benefits of those of us who are fortunate enough to be working, are paid for to a great extent from money that is being taken from those who do not earn their income but are dependent on pensions or benefits.

It is certainly the case, as many Conservative Members have said, that this Government have increased expenditure in some areas—for example, the social security programme, which has increased by about 15 per cent. One has to remember, however, that more people are claiming benefits than in 1979, which is one reason why the amount of money that the Government spend has increased.

The Government say that we are spending too much. The answer is to reduce not the amount that individuals get, but the number of people who are forced to claim and to live in a dependency culture. That is illustrated effectively by the level of unemployment, which has increased dramatically under this Government. It is true that it is coming down now, although that has been achieved mainly by fiddling the way in which the figures are calculated.

Despite all that, unemployment in my constituency is still 20 per cent. A study has been carried out by Professor Sinfield at Edinburgh university, in which he calculates that the indirect cost of each unemployed person is about £6,557 a year. In my constituency in central Edinburgh alone it costs £33 million to maintain 20 per cent. unemployment. The money that we propose to give taxpayers by the reduction in basic and higher rates could have been used to prime the economy and get people back to work, thus reducing their dependence on unemployment and other benefits. The Government could have addressed their attention to that.

The better-off will get their tax cuts, which enable some people to buy their way out of trouble, whether they do so by means of a private operation or by buying education for their children. But the tax cuts are funded by cuts in the indirect income of the majority of people in this country. They are a benefit in kind to which people are entitled and which they value. Those indirect benefits have been eroded by the Government time and again. They believe in precious little provision of communal benefits and services, and say that that money ought to be given to individuals who can choose to buy things because they have the economic power to do so.

All of us have a contingent interest in health, schools and all public services. That contingent interest is under attack, and has been attacked by the Government for many years. The price of the tax cuts is an erosion of that communal wealth upon which most of us rely, and which we want to continue to rely on and support. Public services in Britain used to be the envy of the world. That whole philosophy is under attack by the Government in their aim to give tax cuts to a minority. I do not begrudge people the extra money, particularly those on basic rates. Of course they will welcome it. But we must remember that, although they may get a few pence extra each week overall, they as individuals and we as a country are much poorer.

Mr. Barry Field

Higher-rate income tax has existed since 1973–74, when unified income tax replaced the previous income tax and surtax systems. Since 1978–79, the number of higher-rate taxpayers has increased significantly. In 1987–88 there were 75 per cent. more higher-rate taxpayers than in 1979–80 when the pattern of five higher rates from 40 per cent. to 60 per cent. was introduced. As a consequence, revenue from the higher rates has doubled in real terms. This growth in the impact of the higher rates reflects the fall in the higher rate threshold relative to average earnings.

In 1987–88 a married man started to pay tax at 60 per cent. when his income reached 3.8 times the average. In 1979–80 the same ratio was 4. times. These tax reductions show clearly that less tax equals more revenue. The desire to make everyone poorer to help the poor is part of the same dependency culture that requires every hon. Member to contribute to my wife's child benefit. The desire to spread a little jam thinly has been the bedevilment of our society.

I welcome the clauses, and I did so at the time of my right hon. Friend's Budget, when I said that lower taxes would create jobs in my constituency. It has done so. At the weekend I visited the boat yards in my constituency and the owners told me that they had had more inquiries and more orders than ever before. Some of those businesses date back scores, if not hundreds, of years. The craftsmen, the shipwrights, the timber yards, the steel works, the engine manufacturers and the electronics industry will benefit from that extra activity, which has resulted from the lower tax rates.

8 pm

My constituents know full well what it is to live in a low-wage, high-unemployment area. They also are aware of the benefits of low taxation because, biannually, the island witnesses the Admiral's cup series. Last year, incidentally, the first Japanese team visited the island. Every year the island witnesses the power boat race. My constituents see international wealth on their doorstep, especially when our EEC neighbours come over to compete in such races. In the past they have enjoyed a far lower tax rate than we did.

My hon. Friend the Member for Fylde (Mr. Jack) mentioned his days of wage negotiation. He mentioned the bottom line of the wage packet. He obviously comes from a far posher background than me. In my day the bottom line meant accounts of businesses and wage packets meant stoppages. There is no doubt that the tax rates of previous years created a resistance to overtime. I encountered that time and again when I spoke to factory owners. When we had a lower rate of tax, the old disincentive was removed. Now that there are fewer stoppages, we find that there is a greater desire to work overtime in our factories and manufacturing industries.

I look forward to the day when Michael Caine cannot afford not to live in the United Kingdom for tax purposes. One cannot cut the taxes of people who do not pay any. There is no better monument to the most radical tax-cutting Finance Bill than the actions of the oldest Parliament of the Commonwealth, the Tynwald in the Isle of Man. That Parliament has taken fright at my right hon. Friend's Budget because it realises that Britain is fast becoming a tax haven. Its Bill, now awaiting Royal Assent, will retrospectively reduce the Isle of Man's rate of tax to 15 per cent. from 6 April. Such is the effect of the Budget and the tax clauses. That Parliament's action, more than anything else, clearly demonstrates the far-reaching revolution that my right hon. Friend commenced with his reforming, renowned Budget.

Mr. Ronnie Fearn (Southport)

It is fitting, as the health spokesman for our parties, that I should contribute to this debate. I could find far better use for the money that the Chancellor has set aside for the tax cuts, not least the Health Service.

The Government's intention in the Finance Bill is clear. They intend to destroy the consensus that has been built up in the past 70 years. This consensus has meant the use of taxation to redistribute money from the better-off to the worse-off. It is 79 years since Lloyd George introduced his great budget which laid the foundations of the modern welfare state. It was a system based on fairness, whereby all citizens got a fair deal. I still believe that we have a long way to go to achieve that objective, and the Government seem determined to go in the opposite direction.

The Government argue that by removing the higher rates of income tax they will provide an incentive for the better-off to work harder. They provide no evidence for that—perhaps because there is none. In the New Statesmanon 25 March Mr. Russell Jones, an economist with Hoare Govett, said of the Budget: There is no evidence to prove that a drop in tax from 60 per cent. to 40 per cent. will encourage people to work harder. Why do the Government believe that one can make the rich work harder only by paying them more, but make the poor work harder only by cutting their tax? The Government do not have an economic policy. They are merely using the wealth of the country to reward their friends and penalise their enemies.

The billions of pounds that it cost, for example, to abolish the higher rate of tax would have been much better used to put an end to some of the most immediate problems facing the Health Service. It is an extraordinary situation when a Government can give away millions of pounds to the very rich in our society while waiting lists all over the country grow, ward closures are still a regular occurrence and some health authorities—notably in London—are forced to close all but emergency services and may even face total collapse.

I am sure that Conservative Members will say that they are doing something for the Health Service and that we should consider the nurses' pay rise. I naturally welcomed that pay rise, but the Government behave as if they have shown the Health Service special favour by helping the nurses. In fact, every indication of the public's view suggests that they believe that the Government should fund nurses' pay rises fully as a matter of course, not as a special concession.

What really galls me about this debate—I have been present for most of it—is that the Chancellor had the chance to provide tax cuts and to do something about the dire problems facing the Health Service or the sickening growth of poverty. Instead of taking that option, which would have been the just and compassionate course of action, he decided to give the money to the most well-off in our society. That was, as many people have pointed out, an extremely bold thing to do, but I do not believe that it was admirable.

I feel sure that the Chancellor would not have dared to behave in such a callous way a year before the election. It is little wonder that we read that so many ordinary Conservative voters feel guilty about the tax cuts. I am not surprised. Many Conservative Members probably feel guilty, especially if their post bags, like mine, bring regular stories of unimaginable hardship brought about by the Government's changes to social security.

I find it ironic that, on the day before the Budget, I spoke on the Lords' amendments to the Social Security Bill. I highlighted the withdrawal of benefit to 16 and 17-year-olds. That was another retrograde step that could have been avoided by the Chancellor.

The whole basis of the Budget changes are retrogressive and reactionary. They seek to encourage greed and to help the rich at the expense of the poor. In the Government's mind we can see the vision of a society full of great wealth and of great poverty. The tax reforms, together with the poll tax and social security changes, represent the cruelness and callousness which are the Government's hallmarks. We shall have no part of that.

Mr. Anthony Coombs

As befits a party that spends most of its time shuffling backwards into the future, tonight we have been invited by the Labour party to enter into an era of high taxation, high expenditure and high Government borrowing—the Labour party's hallmarks in the 1970s.

It was interesting to listen to the hon. Member for Edinburgh, Central (Mr. Darling) talk about the division of wealth in society, and the hon. Member for Southport (Mr. Fearn) talk about consensus. Those were precisely the arguments used in the 1970s when, although we were obsessed with how wealth was divided, no growth was created to provide for the demands that were made upon it.

The Labour party talks about a consensus. The fact is that Britain, together with the vast majority of industrialised countries, is adopting low borrowing, low taxation, low Government spending policies. The only exception to that was France in 1982, just after President Mitterrand was elected. He embarked upon a huge rush of Government spending and a rush for growth, high Government borrowing and the nationalisation of industries. Two years later, as a result of those policies, France was forced to slam on the brakes in exactly the same way as the Labour party was forced to slam on the brakes in 1974–75, when the IMF had to come in.

it is instructive, given that the Opposition point at consensus as a paradigm of fiscal virtue, to look at the way in which they ran the country, when corporation tax rates were 52 per cent., personal tax rates on the basic rate were 35 per cent. and upper rates were 98 per cent. At that time, the economy was sterile and unproductive and was called time and again "the sick man of Europe.

" Let us examine the statistics for the period over which the Opposition presided. Investment rose by only half a per cent. a year because people who were on higher tax rates were keeping only 2p in every extra pound that they earned. There was no risk cash nexus that would conceivably satisfy them, and justifiably so. Return on capital fell from 13 to 3 per cent. during the period of Labour control. As a result, productivity was only two thirds that of our OECD competitors. Small wonder, then, that Lord Shawcross, who had been a Labour Minister, talked about a hidden army of unemployment of about 2 million, because British industry was so hugely overmanned. The resulting inflation destroyed those same pensioners' savings that we have heard discussed today, with the shedding of so many crocodile tears.

The effective rate of taxation for average and low earners also rose because increases in income tax bands did not keep up with inflation, and a corollary of that was that our competitiveness, compared with that of our OECD rivals, fell, as unit labour costs increased by 117 per cent. in real terms in 10 years, while elsewhere they rose by only 45 per cent., so it was no surprise that we were locked out of the export markets that we had previously dominated.

Finally, the Labour Government borrowed 9 per cent. of GDP in 1975, which was a record. That meant that interest rates were so high that they squeezed the lifeblood out of industry. That is why the Government, together with virtually all our OECD competitors, have tried to recreate an environment in which enterprise, initiative and drive can flourish. That explains the huge increases in productivity in manufacturing industry—about 40 per cent. on average—in the past five years.

I recently went to an engineering plant in my constituency which makes wheels for the automotive industry and exports to companies such as DAF and Volvo. The plant has increased productivity in one part of its machine shop by about 30 per cent. in the past three months. As a result of the Government's policies, and virtually for the first time in 20 years, economic growth:is greater than the rate of inflation and we have had the fastest growing economy for the past five years. That is inextricably bound up—it is not merely coincidence—with the reductions in corporate and personal taxation that the Government have brought in.

It is not surprising that manufacturing investment has risen—by 6 per cent. last year—and is expected to grow by 8 per cent. this year. There is now an incentive for people to mortgage their houses and invest in plant and equipment. One gentleman in my constituency decided to take a stake in the company that he had previously managed and mortgaged his house to do so——

Dr. John Marek (Wrexham)

If the story has been one of continuing success, as the hon. Gentleman claims, will he tell us when manufacturing investment will reach the level of 1979, when the Labour Government were last in office?

8.15 pm
Mr. Coombs

At that time the increase in manufacturing investment made little difference to productivity and competitiveness in the way that I have described. It is the end result of what is done with investment, rather than the amount put in, that is important. Lower income tax rates are the reason why, for instance, my local chamber of commerce, which has done a survey on local firms since the Budget, found that 90 per cent. expect to maintain an increased turnover, that 60 per cent. expect to increase their profitability, and that 90 per cent. expect to maintain or increase their employment as a direct result of the tax-cutting regime that the Government have introduced.

It was interesting that when the last survey was done by chambers of commerce in the west midlands, the one item that they wanted the Government to take care of above all at a national level was the introduction of lower income and corporation taxation. We delivered on income tax, and they are justified in being well pleased.

Opponents of the reductions in tax that we are discussing use two arguments. First, there is the transparent arguments that the cuts are regressive. We have heard already that since the Government reduced the higher rates of tax from 98 to 60 per cent. the top 5 per cent. of taxpayers have increased the amount that they pay from £5 billion a year to £12.5 billion, and that the proportion of the total that they pay has risen from 24 to 29 per cent. Furthermore, these tax cuts will benefit all 25 million taxpayers. As a result of doubling taxation allowances, 750,000 of them will be taken out of tax altogether. If the Opposition are in favour of lower taxation, why did they not introduce it? If we had kept the same real levels of tax bands as were in place when they left office, 1.7 million more people would pay tax now.

The second argument that the Opposition use is about the impact of lower taxation on the balance of payments. Of course, there is bound to be some impact in the form of export substitution and increased demand which will, to a certain extent, suck in imports, but the projected deficit of £4 billion in 1988–89, at 3 per cent. of GDP, is sustainable in a healthy and growing economy. The way to improve that figure is not through fiscal policy and increases in taxation, which will inevitably damage incentive and home demand, on which a large proportion of the basic parts of our manufacturing industry depend. The Government have taken action to stabilise exchange rates over the past two months by lowering interest rates, and that is what the policy should target. Eventually, I hope that we will join the EMS and make these sorts of interest rates more automatic than they now are.

We have also heard the argument that lower taxes allow an increase in resources. That must be self-evident, given that lower corporation taxes have allowed a £5 billion excess of revenue over the past year. It was interesting to hear the hon. Member for Kirkcaldy (Dr. Moonie) speak of the lack of investment in the National Health Service. It is precisely this Budget that has allowed us not only to invest £1.1 billion more in the Health Service—the largest increase in monetary terms in NHS history—but to add to that by £700 million from a contingency reserve that depended on tax revenues that were engendered by lower taxation rates.

Most important of all, a number of factors point to the confidence of the business community—the people who provide jobs—in the taxation regime of this and other Budgets introduced by the Government. CBI News called the Budget "A Budget for Growth". The CBI did not receive any reduction in corporate taxes in the Budget, but reckoned that the lower income taxes would give it the basic home market in which to sell and in which to continue its increases in productivity and profitability.

The Budget gave the incentive to grow to the 500 new businesses that are springing up every week. It created the environment for the sustained growth that has made our economy the fastest growing in Europe over the past three years. The Bill provides the basis on which we can continue the reductions in unemployment that have occurred for the past 20 successive months. It also gives industry confidence. That was shown by David Nickson, the president of the CBI, who said: Industry is starting to succeed in a better environment than it has known for some time. That is a direct result of the tax-cutting regime instituted by the Government.

Mr. Morgan

Did he say that as well?

Mr. Coombs

No, but the implication was clear, as has been the implications through the Budget. It was a Budget for growth, prosperity and confidence for industry. That will lead to jobs and higher living standards. As we have seen over the past nine years, there has been a 27 per cent. increase in living standards for the average man. It will give hope to those on lower incomes that they can escape the dependency culture, and it will regenerate the confidence in industry that I have already described as occurring in my constituency.

If any further evidence of the importance of a low tax regime is needed, it can be seen in the relative figures since 1973 for the European Economic Community and the United States. Since 1973, with 50 per cent. of GDP taken in Government expenditure, the EEC, with a population of 300 million, has increased the number of jobs by about 1 million. In the United States, with a population of only 200 million, and with only one third of GDP taken in taxation and Government expenditure, the total number of extra jobs since 1973 has been 27 million, and 14 million in the past 10 years.

In short, a tax-cutting regime is essential for a dynamic, flexible and incentive-led economy. Lower taxes in an increasingly competitive international environment are no longer just an option, but a vital necessity.

Mr. Andrew Smith (Oxford, East)

We have heard many extraordinary claims, but I must focus on the claim that the cuts in income tax by the Government have led to an increase in manufacturing investment. They may have led to many things, but they have not led to an increase in investment in manufacturing industry. That is why the hon. Member for Wyre Forest (Mr. Coombs) was so bereft of an answer when questioned by my hon. Friend the Member for Wrexham (Dr. Marek).

The hon. Gentleman attempted to advocate the Budget and the content of the Finance Bill. Many Conservative Members have not done that. They have spent their time attacking what Labour Chancellors did in the past or hypothesising about what Labour Chancellors will do in the future. Conservative Members are equally uneasy about the economic consequences of the Finance Bill and the Budget as they are about their social consequences.

We are dealing with some of the most vicious parts of an unjust and vicious Budget. Clauses 22 and 23 are morally and fiscally indefensible and, as increasing numbers of Conservative Members have come to realise, politically indefensible.

Mr. John Townend (Bridlington)

As the hon. Gentleman is considering morally indefensible matters, does he believe that a marginal tax rate of 98p in the pound, leaving recipients with 2p, is morally defensible?

Mr. Smith

I do not find it morally defensible to cut the marginal tax rates for the very rich, while those stuck in the poverty trap have an effective marginal tax rate of 80 or 90 per cent. That is not justifiable.

In the attempts by the Conservative Members to justify the unjustifiable, we hear the most remarkable arguments that defy economic logic and common sense and contradict their own stated objectives. Let us consider those much-vaunted claims that reduction in the higher rates of tax result in greater enterprise and effort. What is the evidence for that? We have had no evidence for that whatsoever, and, as my hon. Friend the Member for Dunfermline, East (Mr. Brown) pointed out, the elusive lecturer Lindsey did not provide any evidence.

It is not good enough simply to claim that the top 5 per cent. of taxpayers will contribute a larger share of taxation. In itself, that proves nothing. Far from proving that the richest directors are working harder, it may simply show that they are finding it more worth while to pay themselves lavish increases, while holding down the wages of their employees. There is plenty of evidence from the new earnings survey that that is precisely what they have been doing since 1979. The 20 per cent. highest paid men have secured pay rises 42 per cent. greater than the lowest paid.

To make any sense of the claims about the share of revenue contributed by the top 5 per cent. of taxpayers, we must consider what is happening about the distribution of incomes and the share of tax revenue which income tax comprises. If, as is undoubtedly happening on the evidence of the new earnings survey, the very rich are able to get their hands on an increased share of the national income, their share of income tax collected will increase, even though the share of their own individual income falls. Similarly, as the share of the total revenue which income tax comprises falls compared with other taxes, the Chancellor can levy income tax on the very rich ever more lightly, at the same time loudly' proclaiming their increasing share of the total income tax take.

Indeed, if almost all taxation were collected through VAT—something I fear might appeal to some Conservative Members—and we levied income tax only on millionaires, the very rich would pay all the income tax, just as they would if the top 5 per cent. of taxpayers managed to cream off almost all the nation's income. It would not prove that such a tax regime was good for the country or that it was compatible with any sense of social justice. It would say nothing about incentives, or about how hard or otherwise the very rich were working, or who deserved what. It would simply tell us that the distribution of income and taxation was very unfair, which is precisely the position that we are in now and were in before the Budget, with the top 10 per cent. keeping more income after tax than the bottom 50 per cent. of the country put together.

How much incentive do those people need? I have always been sceptical about the claims made for the incentive effects of tax cuts at high income levels. We hear those claims trotted out every time a Tory Chancellor gives a tax break to the very rich. If the Government believe that they will receive a proportionate increase in effort for each of the cuts that the Government have brought in, those in receipt of the highest incomes must have been doing less than nothing to earn their already generous salaries when the Government started. Besides, we are always told that those high salaries were necessary in the past precisely because taxation was so high. I wonder how many people have been awarding themselves compensatory pay cuts because their taxes have fallen.

Let us suppose that there is something in the incentives argument and that all the richest income earners are precisely as calculating as the Government suppose. It is clear that any rational assessment of that incentive argument needs to distinguish between marginal and average rates of taxation. I have not heard Conservative Members agreeing to that.

Given that there are good grounds for supposing that, one will have an opposite effect to the other, if indeed there is any effect to be had. If average rates of taxation fall, people will have more money for the same work and could easily afford to give up an hour for leisure. At least some of our highly paid directors, being rational, cost-sensitive, market-orientated people, will work less. On the other hand, if marginal tax rates fall, the cost of that extra hour of leisure is increased in terms of income and the calculating director will work harder.

If Conservative Members wish to construct an argument about incentives, they must consider the tax changes in relation to marginal and average tax rates.

Mr. Hind

Will the hon. Gentleman give way?

Mr. Andrew Smith

No, I shall not give way.

For the very rich at least, the Chancellor has cut both average and marginal tax rates. He has thereby condemned the very rich and highly paid to sleepless nights with their calculators working out whether the higher amount that they can earn from an extra hour's work more than offsets the greater leisure that they can afford from their higher income from doing no work. That is nonsense, and so is the incentive argument at those levels of income.

8.30 pm

The fact is that the Chancellor could have eased the burden of that difficult calculation on the very rich by banging up their average tax rate even as he cut the marginal rate by reducing the real value of their allowances. For example, he could have made the personal allowances for the highly paid the same as for basic rate payers. He could have limited mortgage rate relief to the basic rate. However, the fact that he chose not to do that reveals a disdain for the real theory of incentives equalled only by his disregard for elementary social justice.

The Government had better be more careful about their use of international comparisons. Those comparisons, show that the cuts in higher rate taxes in Australia and even in the United States have been accompanied by closing tax loopholes and hitting fringe benefits harder. In contrast, the cuts in this country have been accompanied by larger tax breaks in personal equity plans and the business expansion scheme with more new opportunities in the Budget through the increase in the capital gains allowance for a married couple and the extension of the business expansion scheme to private rented housing.

Taken with the continuing generosity of tax reliefs on pension contributions and mortgage interest relief for higher rate taxpayers, those breaks dwarf into insignificance the changes that were made with regard to forestry and company cars. They leave this country with some of the biggest loopholes as well as the most generous taxes for the very rich. International comparisons merely highlight the particular injustices of the tax changes. They similarly highlight the manifest injustices and nonsense of the Chancellor's decision not to alter the way in which national insurance operates. It is especially and appallingly unfair that the lowest paid should pay more in national insurance than in income tax and are subjected to wholly unjustifiable and indefensible marginal rates of taxation.

Indeed, the increasing burden of national insurance rates imposed by this Government is in no small part responsible for the fall in the share of post-tax income going to the lowest 50 per cent. of income earners whose share of total incomes has fallen from 26.2 per cent. in 1978–79 to 24.9 per cent. in 1984–85.

Moreover, notwithstanding all the Chancellor's claims to have simplified taxation so much, national insurance also interacts with the income tax system to produce changes in marginal rates higher up the income scale for which there is neither rhyme nor reason. What on earth is the justification for allowing the effective marginal rate of taxation to fall from 34 per cent. to 25 per cent. at the national insurance upper threshold of.15,860? There is no reason for that.

The fact is that even before this Budget the rich were doing better relative to the average than they had done for the past 80 years. At the same time, the poorest one fifth of manual workers have fallen further below the average in income terms than at any time since records started being collected in 1886. The huge higher tax cuts in the Bill are totally without justice or justification. The Government are gratuitously rewarding the rich just as they are penalising the poor. They are doing nothing to lighten the total tax burden on the average income earner which we emphasise has continued to rise. Moreover. I believe that this Finance Bill will rebound on the Government politically as more people realise that it is nothing more than legislation in the interests of the very rich at the expense of everyone else.

Mr. Gerald Howarth (Cannock and Burntwood)

If the hon. Member for Oxford, East (Mr. Smith) believes that the Budget will cause unease on the Conservative Benches in its economic consequences, he is even more out of touch with reality than the rest of his speech betrayed him to be in his understanding of ordinary human nature and incentives.

Mr. Hind

Unlike his predecessor.

Mr. Howarth

Indeed, as my hon. Friend the Member for Lancashire, West (Mr. Hind) has said, his predecessor never fell into that trap. I hope that the hon. Member for Oxford, East understands reality because, if he does not, his predecessor may be back in this place. He would be most welcome on the Conservative Benches.

The most important point to understand about the Budget is that it is enacting a long-standing principle to which the Conservative party has been wedded from the outset—to reduce the burden of taxation on every level of income. That is what this Budget seeks to do.

I strongly welcome the tax changes announced by my right hon. Friend the Chancellor of the Exchequer. I encouraged him to continue the progress to reduce the basic rate of taxation from the inherited 33p in the pound all the way down to 25p. I would not suggest that mine was the only voice to which the Chancellor listened, but I am happy to say that mine was one of those to which he listened. It was the overwhelming view on the Conservative Benches that progress towards reducing the basic rate of taxation should continue.

I also warmly welcome the reduction in the top rate of taxation from 60 per cent. to 40 per cent. I am delighted that that begins to bring us into line—as I am sure that the hon. Member for Walsall, North (Mr. Winnick) who has just arrived in the Chamber will realise—with the USSR, a country and a system with which the hon. Gentleman has a great deal of sympathy.

Mr. Winnick

On a point of order, Mr. Crowther. The hon. Gentleman has said that I have a great deal of sympathy with the Soviet Union. I ask for your protection on the basis that I am one of the most active people in the Labour movement constantly protesting against the violation of human rights and the abuses that occur in the Soviet Union. I shall continue to protest about those matters. Will you request the hon. Gentleman, if he is an hon. Gentleman, to withdraw his remarks immediately?

The Temporary Chairman

In the first place, I do not believe that that is a point of order. In the second place, I do not believe that the hon. Member for Walsall, North (Mr. Winnick) needs my protection, as he is perfectly capable of defending himself. In the third place, I do not think that there was anything unparliamentary in what was said.

Mr. Howarth

In the interests of the Committee, I should be happy to tell the hon. Gentleman that I am delighted to have his assurance on that point. However, every time that the hon. Gentleman speaks in the House of Commons, one gets the strong impression that he is very sympathetic towards the draconian systems that apply in that part of the world. I know that he will have plenty of opportunities to disabuse us on that in future.

Many of my right hon. and hon. Friends have argued that there is nothing moral or worthy in high taxation. We have heard Opposition Members arguing tonight and previously that somehow they have a monopoly on morality and that Conservative Members are concerned only with economic gain and the theory of "get rich quick". That was the essence of the case made by the Opposition Front Bench spokesman. I am glad to see that the Opposition Members are nodding agreement. Conservative Members utterly reject that.

What we are trying to do with the basic rate and the high rate of taxation is completely moral. There is no morality in trying to impose draconian taxation on our people. There are two practical effects of such taxation. It leads to far greater evasion and a growth in the black economy. Indeed, the black economy is now entrenched in our culture and it is taking many years to wean the nation away from it.

Reference has been made tonight to the brain drain. Most people in this country have forgotten what happened in the 1960s, when many talented people left these shores to seek a more conducive economic climate in which to live, free from the shackles of Socialism and the nanny state which Socialism brought with it. If the hon. Member for Oxford, East wants evidence of the incentive effect of reducing taxation, I invite him to read an article in the Financial Times. Perhaps it is not the most Tory of newspapers but, even so, it said that the tax changes were likely to make Britain an even more attractive place in which companies and individuals could do business. It commented: Headhunting agencies and accountants expect a keener response when they try to entice overseas executives to work in the UK … the new tax structure could also reduce the number of top earners leaving for more profitable shores such as Singapore, Hong Kong and the Middle East, where tax is minimal. The hon. Gentleman may reject that suggestion as being merely an attempt to attract jobs to the City. However, increasingly we find that in the world of financial services, one can carry on business at any of a number of financial centres throughout the world. It is greatly to the credit of the Government that Britain's pre-eminent position in the financial world has been maintained as a result of the taxation policies that they have pursued, to ensure not only that the City of London is a good and efficient place in which to do business but also that the United Kingdom is a country worth living in and in which one does not have to pay penal rates of tax.

I say to the hon. Member for Oxford, East and his colleagues that if, heaven forbid, the Labour party were ever to return to power, saddled and burdened with the policies of the 1960s and 1970s which Labour has yet to shake off, it will find a flight not only of capital before it can reimpose exchange controls but also of talent. It will inherit a barren land.

It is only on the effective management of this nation's overall economy that the success of the past nine years has been built. That success is not entirely the doing of the Government, because they can only create the right framework and climate. It is the people of this country who have affected that economic revolution. Power has returned to the people, who have decisively rejected all the policies of Opposition parties of varying descriptions.

What concerns me in this debate is the thinly disguised contempt of some Opposition Members for success. I refer to the sneering way in which the hon. Member for Walsall, North, who is a neighbour of mine, referred to the "rich". It serves as a word of utter abuse in his vocabulary. It is as though the Opposition do not want people to be successful or to be rich.

Indeed, the hon. Member for Dunfermline, East (Mr. Brown), with a note of contempt in his voice, spoke at the Dispatch Box of how the savings made as a result of the tax cuts might be spent on boats. I sought to intervene, and apparently caused amusement on the Opposition Benches by mentioning that the business of one of my constituents, who employs 150 of my constituents in building power boats in the middle of England, had increased 50 per cent. in the past year. My hon. Friend the Member for Isle of Wight (Mr. Field), who is no longer in his place, built on my remarks by commenting that the south coast boat-building industry has also enjoyed an enormous boost.

The Opposition do not like the fact that people are choosing to spend their money on boats rather than in ways that the Opposition would like. However, expenditure on boats is directly generating jobs. It is disgraceful of the Opposition to attack a business which, I remind Opposition Members, is not subsidised by the taxpayer—unlike, on a bigger scale, the shipbuilding industry.

Dame Elaine Kellett-Bowman (Lancaster)

Does my hon. Friend not find it astonishing that the Opposition have so little faith in the capacity of British industry to produce what the consumer wants and believe that every time there is a tax cut people will spend their money on foreign goods? The CBI survey clearly shows that British-made goods are taking a larger share of people'sextra money—as is the case in the boat-building industry mentioned by my hon. Friend.

8.45 pm
Mr. Howarth

My hon. Friend is right. At the heart of this debate is the dislike of Opposition Members for the power of the market place, which is anathema to Socialism. Opposition Members do not like people making their own decisions and choices because the basis of the system which they espouse, and which has been so decisively rejected by the people of this country, is one in which money is taken compulsorily from the people and redirected not according to where the public think fit but where Opposition Members think fit.

Mr. Winnick

As the hon. Gentleman has an almost obsessive interest in bringing me into his speech, and a.s our constituencies are indeed adjoining, may I ask how many of the hon. Gentleman's constituents have lost out in housing benefit, and how many more would have lost out had it not been for public pressure and the strong opposition of Labour Members of Parliament, which forced the Government to climb down?

Mr. Howarth

Of course some of my constituents have been adversely affected by the reduction in housing benefit, but that is because, as in so many other instances, the Government have grasped the nettle of a very difficult problem. We not only introduced housing benefit, but it increased fourfold under the present Government. Even by the hon. Gentleman's criteria, this Government score. I shall not entertain any lecturing from him.

Mr. Hind


Mr. Howarth

I had better not give way because I know that others of my hon. Friends wish to contribute to the debate.

Further to what was said about consumer choice, it is a fact that, as a result of people having more money in their pockets, they are more willing to give to charity. Every Opposition Member will have in his or her constituency a worthy charity. That industry is now worth £13 billion per year.

Mr. John Smith

Charity is not an industry.

Mr. Howarth

It is an industry in the sense that it is an area of activity. I use the word in that sense. The average spending on charities per household is now £70 per year, which is an increase of 74 per cent. in real terms since 1980. That indicates that if one gives people choice, they know how to spend money far more effectively than Governments ever will. The public are much clearer in their minds as to what is deserving and what is not.

Mr. Charles Kennedy (Ross, Cromarty and Skye)


Mr. Howarth

I did not give way to my hon. Friend and I want to close now, because I know other hon. Members wish to speak.

These proposals demonstrate the Government's continuing commitment to do all they can to create the right framework in which our economy can be revitalised. We have seen record spending on those in need. We have helped the entrepreneurs and the wealth creators, without whom we would have no public services in this country. We have helped, as was said by my hon. Friend the Member for Wells (Mr. Heathcoat-Amory), middle management, those who want the opportunity to build up capital—an opportunity that was denied to them by the Labour Government—and those on the basic rate of taxation. Furthermore, in this Budget we have taken another 750,000 people out of taxation.

I can do no better than cite the words of a foreign newspaper, the Wall Street Journal, which made what I believe to be the right response to this Budget when it commented: The winners will be the British people, at all levels of income, and in all regions of the country.

Mr. Worthington

We believe that there should be a progressive taxation system and that we do not have one. Even the formal system of income tax, with a range of 25 to 40 per cent., is far too narrow. Conservative Members have failed to demonstrate that the tax cuts given to higher earners have fuelled any economic growth. It has constantly been said that cutting taxation rates has generated, more income. What Conservative Members have failed to point out, although it was partly pointed out by my hon. Friend the Member for Oxford, East (Mr. Smith), is that people on tax rates above 60 per cent. largely set their own incomes, deciding what to pay themselves. A consequence of that can be seen from any financial report of recent years. Those are the people who have received the most massive increases in salary or other payments.

There is another factor to be taken into account. The top 5 per cent. of income tax payers, who, it is said, have now generated more income, are not composed only of those who were paying rates of above 60 per cent. It includes many who have moved into the group paying between 40 and 60 per cent.—the group whose tax rate is now to be reduced to 40 per cent. It is simply not true to say that the same people are now paying more tax because of the changes.

There has been no proof of a link between income tax cuts and economic growth. Other factors have been neglected, such as privatisation, North sea oil and the role of consumer debt in fuelling economic growth. Interestingly, I cannot find a Conservative Member who is willing to say how much he has gained from the Budget, and what he has done with the extra money. Conservative Members will not say, first, because they wish to conceal it—that is a tradition—and, secondly, because, in many instances, they have not thought about it. I have enough respect for the higher earners on the Conservative Benches to think that they do not know how much they have gained. They have not worked it out, or decided what to do with it. They certainly will not go around looking for a means of risking their money. It has gone into their portfolios. It will be going into stocks and shares in this country as a standard investment, and will not be involved in the generation of the country's wealth.

The Government talk about incentives for the elite. I was struck by what was said earlier by my hon. Friend the Member for Dunfermline, East (Mr. Brown). He talked about 1 per cent. having obtained 31 per cent. of the tax benefits of the Budget, and said that that 1 per cent. represented about 200,000 households. Those people are already in a position to set their own incomes and incentives.

In last week's Second Reading debate, there was an objection when one of my hon. Friends said that the top 1 per cent. had hijacked their companies. There is a real sense in which the top 1 per cent.—whether in a firm, among National Health Service consultants or among lawyers—can set their own wages, and those of their own kind. They have already decided what they are worth.

I share the feeling of many Opposition Members about the obscenity of many firms' judgment about what their top executives or consultants are worth. They set expenses at absurdly high levels to profit from them. They set up their own private health schemes, frequently at the firm's expense.Their children's education is subsidised by the Exchequer to lower their tax burdens. Despite this Budget, their transport is still subsidised by the state. Their entertainment and their days out are subsidised as expenses.

I hope that all the boats that have been referred to are being paid for by individuals, and that the firms are benefiting. I suggest, however, that a good many are likely to have been bought by firms for their senior workers and dealt with on that basis.

Mr. Hind


Mr. Worthington

I shall not give way at this stage.

Pensions are subsidised, and it is arranged for them to he non-contributory. Compensation for anything that may happen to employees is arranged in the form of handshakes. In an untargeted way, they receive mortgage interest relief not on the basis of need but as of right. They have access to cheap credit. They set own performance rewards, and their own shares are purchased for them.

Those are the realities. The top 1 per cent. are already controlling their economy and their assets; then they get the Chancellor to give them the icing on the cake. As my hon. Friend the Member for Dunfermline, East pointed out a few weeks ago, it is not impossible in this country to have an income of £1 million a year and pay no tax whatever because of the schemes set up by the Government. Every shift that the Government have made in the taxation system has benefited them, and no research has been undertaken to demonstrate the worth of that to the country.

I was struck by the Financial Secretary's statement last week that redistribution had been chosen, used and thrown away, because it did not work. We are entering, very seriously, the era of redistribution of income, but it is redistribution from poor to rich rather than the other way round. The Government have achieved a scale of social engineering that has never been attempted before.

In none of the spheres that I have mentioned is there any talk of targeting and need: it is just give. The move is all towards a more regressive system. The poll tax is an example, in that those who are most well off will pay least. We also know that the poll tax will substantially increase property prices, so that in the more prosperous areas a house that would have sold previously at £200,000 is likely to increase in price by about 10 per cent., or £20,000. Another gift of capital is provided by that regressive tax system.

Two things happen to the people who benefit from this. First, they believe that they deserve the money that they earn—that they have unique talents, which are curiously invisible to the rest of us. Throughout my life I have looked for those unique talents in the captains of industry, and have found myself curiously disappointed. Secondly, they suffer from an immense poverty of imagination about the life being led in the rest of the country, the life that must be led by those who have not much money. Someone who feels that he can spend £50 on a meal finds it impossible to imagine what it is like to have £50 as a weekly income.

Conservative Members have constantly described the present Government as a tax-cutting Government, but nothing could be further from the truth. Even the Government are forced to admit that on occasion. What they are talking about is tax cuts for those on the higher income levels. We know that in 1987–88 taxes formed 37.9 per cent. of GDP, and that in 1978–79 the share was 33.9 per cent.

In 1978–79 a one-earner couple on average earnings with two children paid 23.5 per cent. of their income in income tax, national insurance contribution and VAT. In 1988–89 the figure will have risen to 25.1 per cent. for that typical family.

9 pm

The tax rates for people at the other end of the scale have gone up dramatically. My hon. Friends the Members for Edinburgh, Central (Mr. Darling) and for Oxford, East have spoken about that, so I shall not go into great detail. However, in the past eight years council house rents in Scotland have increased by 198 per cent. One might argue that there is a housing benefit system for those people, but fairly typical people in my constituency are getting a £2.50 increase in their pensions of which they lose about 91 per cent. because of the cuts in housing benefit.

Effectively, those at the lower end of the scale are being taxed at a much higher rate than they previously had to suffer. Therefore, particularly among poorer people, there is a mounting degree of personal debt. I hope that we can look at that problem in more detail in Standing Committee. There is certainly concern in Scotland in terms of the inquiries to the citizens advice bureaux in the past few years.

In 1983–84 there were 13,000 cases of consumer debt. By 1986–87 there were 42,000. such cases. I do not wish to make a party political point, but I feel that hon. Members on both sides of the Committee should take much more seriously the issue of consumer debt. All political parties must try to find a cheaper way of financing credit for those on average and below average incomes.

The only examples I know of that work are the credit unions which curiously have been neglected in this country compared with the United States of America or Ireland. Credit unions are formed where there is a common bond between people in a neighbourhood or people who work together. They form savings unions and grant each other credit. Some of the most successful credit unions in this country involve people who work in the transport industry, in taxis or in the police force.

In my constituency, the Dalmuir credit union, which has 1,900 active members, lent £300,000 last year. Ordinary people lent £300,000 last year and over a 10-year period they have lent £1 million. The interest rate is such that, if one borrowed £100 now, one would have to pay back £106.25 in a year's time. That contrasts with the interest rates that one would have to pay in other circumstances. In that £1 million they had £19,000 of bad debts—less than 2 per cent. That is staggering.

One case that came to the union's attention last week involved a woman whose marriage had broken down. She had more than £2,000 in debt and was paying firms £290 per month. That was reduced to £100 a month by using the credit union.

Hon. Members on both sides of the Committee should be much more concerned about the mounting misery that is being caused by intolerable levels of personal debt. They should be seeking to get people out of the grip of a financial system which, frankly, crucifies them. I hope that hon. Members will consider this matter. I mention it because absurdly, at the present time, credit unions are stuck with a credit limit of £2,000. It would be of no cost to the Exchequer to allow them a more generous credit limit. For example, if a taxi driver wished to buy his cab, £2,000 would go nowhere near financing the purchase. We should consider adding a new clause to the Bill which would allow more generous credit limits for credit unions.

In summary, a point that I want to make with some force is that we must stop talking about Britain's taxation system having a progressive element. We cannot do that any more because when we look at the combination of taxation and benefit systems we find that we have a highly regressive tax system, a review of which is long overdue.

Mr. Roger King (Birmingham, Northfield)

If I were to ask any of my constituents how they felt about the Government's tax cut policy, I am convinced that they would willingly support it, as they did in 1983, and again in 1987. I prefer to tell them that the Government have just given them not 2p in the pound off their income tax, but 8p in the pound, which amounts to a great deal to the average British worker.

I cannot understand any political party saying that that is a bad thing. Nurses, car workers and many other members of our society who do middle to low-paid jobs have benefited substantially since 1979 from a reduction in taxation. It is morally indefensible to say that that is a bad thing and that we are immoral to introduce such a policy.

Of course, we understand that by following a policy of tax reduction we are taking away one of the basic tools of Socialism, which is to tax people and to redistribute it according to the priorities of that political party. It is the party that decides who to bestow its largesse upon.

Reductions in income tax merely increase the desire to work. One of the problems within our community is the black economy: the pound in the back pocket rather than the pound earned honestly. A policy of lower and lower direct taxation must be the way forward.

Cuts at the top end are not necessarily beneficial only to those who are earning large sums of money—the so-called Ralph Halperns of this world. It does not matter very much to them, but it is a clear sign to all those hard-working members of our society that monetary awards are available. They have a target to achieve. That is what we have set out to achieve in our community and the investment and dynamism now prevalent in our economy is proof for all that our policies are right.

Those at the top end of the salary scale in the bad old days of the Labour Government were taking their rewards in fiddles, in tax perks, in cars, in houses and all the other things that we knew were wrong or immoral. Now, as a result of our tax cuts, more and more are taking their reward, as it should be, in monetary remuneration. That is the only sensible way of rewarding people.

The Labour party encourages the fiddle society—the people who believe that the only way to prosper is to try to fiddle the tax man because they do not want to pay the ever more penal rates of tax levied upon them. That is the policy of the Labour party.

The Labour Government set an immense track record. They created the selective employment tax to get more taxation out of people. When that did not work, they created the national insurance surcharge, a payroll tax which destroyed hundreds of thousands of jobs in Britain in one fell swoop. That is another tax that we have cut. Surely Labour Members are not saying that our action in cutting that tax is immoral.

Twenty-five million people have a great deal to thank the Government for in the reduction of taxes. The 40 per cent. element is a guiding light for those who want to attain prosperity within our community. It can now be achieved much earlier.

We can see that our taxation policy is proving successful, nowhere more so than in the west midlands. We have a regional newspaper which last year published 26 pages of job advertisements. Last Thursday there were 32 pages of job advertisements. The opportunities for people to take up employment now are as never before. As one looks around, one can see the investment going into our cities and manufacturing processes.

It has been said that we do not have the same investment that we had in 1979. One has to look back over the few years before 1979 to get a direct comparison. I maintain that investment in British industry has never been higher year by year as an on-going process. Those of us who visit our factories and our industries can see the amount of investment that has gone into them; and as our economy expands, so we have more resources for health and social services.

On the doorstep in the local election campaigns the message has been coming back loud and clear that people understand what we are doing with our economy and in creating the real wealth. They understand the incentives that we have introduced for people to work and get a fair reward for their work. They also understand the direct connection between the wealth-creating process and the ability to spend on our national services in health, welfare and housing and in our cities. They understand that, without the incentives that we have continued to provide over the last eight or nine years, none of the things that we want to achieve as a society can be achieved.

I said to a number of people on the doorstep who felt that they were already getting enough in their back pocket or in their wage packet that, if they wanted to decline their tax cuts, they could do so. The system that we have sets a minimum amount of tax that has to be paid, and I told them that if they wanted to pay more they should by all means make the necessary arrangements with the Inland Revenue.

I believe that the Government are well on course towards achieving the sort of community, society and prosperity that we want, and I applaud their progress.

Mr. Morgan

It is clear that most Government Members have a very strong belief in the causal relationship between lower taxation and higher economic growth. They may not know what the causal relationship is, but they certainly have a powerful religious fetishist belief that there is such a relationship.

If they really believe that this relationship holds good at all levels of taxation, they will be voting against the Government tonight, because they will believe that the Chancellor should have cut the tax rates not to 40p and 25p but to, say, 25p and 15p and that the only reason why the Chancellor did not cut tax much more was that he was worried about the wall of money that would hit him from the higher tax receipts that he would get. After all, if the belief is exactly as we have had it put to us by Government Members throughout this debate—that lower taxes mean higher tax revenue—why is it 40p and 25p? Why was not tax cut this year to a much lower figure?

I presume that Government Members do not believe that if tax was cut to zero one would get more revenue. Nobody has produced any calculations that indicate that if taxation were cut to the utmost, to 0.1 per cent., that would maximise and optimise the tax revenue. Unfortunately, the Chancellor of the Exchequer would not know what to do with all the extra money that he would get if he cut the taxes by twice as much, so he has got it dead right, they think.

All that Government Members have told us is that they are party loyalists. It does not matter what the level of taxation is; whatever the Chancellor said it would be in the Budget must be the right level. It is not the wall of money that I have referred to as the fear in the Chancellor's mind that is the major problem, but the way that his lower taxes have pushed him into a corner as regards the macroeconomic effect of lower taxation. If he had not skewed the economy so badly by cutting the top rates so sharply and cutting the basic rate modestly, he would now have much greater room for manoeuvre and ability to play around with interest and exchange rates. He has run out of options as regards the balance of payments and the general macroeconomic effects of the economy. The overall level of taxation has now become skewed.

This has not prevented the dyed-in-the-wool monetarists working at No. 10 Downing street behind the Prime Minister from crawling out of the woodwork and attacking the growth path which the economy was set upon two and a half years ago. The economy took a sharp upturn two and a half years ago and it had nothing to do with lower taxes; it had to do with low exchange rates, low energy costs, holding back energy price increases—which have been made since the election—and taking the attitude that at least until the general election the economy would be pushed on to a growth path by means of the greater competitiveness provided by lower exchange rates.

Then the worry started to come from the Treasury, from the gurus behind the Prime Minister, and from Professor Brian Griffiths and others. They said, "We do not like this growthmanship. It will lead to a reversion to trade union militancy. We shall find out whether we really have demonstrated that all the so-called sacrifices of the period 1979–81 really work." With such worries, they have started to emerge and say, "Now the economy is over-heating: we must turn it down."

9.15 pm

The Chancellor has weakened his ability to resist the loonies from No. 10 Downing street, and the think tanks that advise the Prime Minister have caused her to come out into the open and split Government economic policy wide open in the past two to three weeks. If the Chancellor had been less skewed in his attitude towards high rate tax cuts, he would still have had a few options open to him. He would still have been able to demonstrate to the financial community in London and elsewhere that we did not want the wall of money that has hit the country and sent the exchange rate soaring since the Budget.

That wall of money worries Opposition Members. It is a direct consequence of the low tax rates that were introduced in the Budget. They have severely weakened the Chancellor of the Exchequer's position and his ability to resist the monetarist maniacs who, once again, have attempted——

Mr. Carrington

It is widely assumed that foreign investment in this country comes from high interest rates and not from low tax rates. I do not think that there is a causal relationship between high interest rates and foreign investment, but I have not heard anybody expound the theory that low personal tax rates encourage foreign investment.

Mr. Morgan

I am grateful to the hon. Gentleman for making that point. He is perfectly right. There is no direct interrelationship between low tax rates and the wall of money. The wall of money has hit this country and has sent the exchange rate soaring because of the indirect effects of low tax rates. Low tax rates caused concern in the City because they were not tight enough. That meant that the Chancellor has been unable to play the low interest rate card sufficiently strongly to keep away the wall of money.

I assume that the Chancellor agrees that we do not want to see exchange rates rise to the level that they have reached. I assume that he is with me in saying that, if we want to keep the economy on a growth path, we need to keep exchange rates at a reasonable competitive level with the deutschmark. I assume that he agrees that we want to see energy costs kept at a reasonable level. We do not want electricity prices to be increased by 9 per cent. with the 4.5 per cent. that the electricity industry wanted. We do not want to see gas prices going up as they have. We want to see modest utility costs that are comparable with those of competitor industries. We want to see interest rates at a level comparable with those in our main competitor countries. Low tax rates have meant that the Chancellor cannot play that interest rate card at the moment. He has modestly reduced interest rates, but he has been unable to keep away the wall of money.

What is more, we now have two simultaneous economic policies—one run by the Prime Minister, and one run by the Chancellor of the Exchequer. That is extremely damaging for British industry. I do not know where she got the idea, but the Prime Minister has heard that it is good to have two economic policies. I have heard that she may have got the idea from China. Perhaps it is the benefits of competition. The Chinese Government say that, when they take over Hong Kong, it will be proper to have one Government and two economic policies.

Is that what we shall have? Industry does not like that idea. It regards it as a complete abortion to have lack of clarity about the main purpose of the Government's exchange rate and interest rate policy. Is it to keep industry producing the goods? If it is not, we shall be in serious balance of payments trouble by the end of the year. It may be intended to cane workers who are again demonstrating early signs of militancy.

The London financial community thinks that it is extremely worrying. If hon. Members read their stockbrokers' circulars, as I am sure they do, they will have seen that there is concern that trade union militancy is rising at twice the level of unemployment of 10 or 15 years ago. So much for the great Thatcher revolution, as it is known. So much for the great supply revolution. The Phillips curve is now double the employment level of 10 years ago. Is that a great achievement? That is what the stockbroker circulars are saying.

Having sold the pass by skewing the economy in the direction of high priced imports by massive cuts in the higher rates of taxation, the Chancellor is in real difficulties. That must be worrying to anyone who has at heart the long-term interest of industry. The Prime Minister said that one cannot buck the market. The Chancellor thinks that by a policy of managed currency floating and a form of deutschmark shadowing, it is possible at least to assuage the market in order to obtain a relationship inwhich British industry can work. Industry will, therefore, know that if the currency rises it will not rise by more than the deutschmark.

All that has gone out of the window because the Chancellor found himself caught in the religious fetish of low personal income tax rates. He cut them to a rate that is too low to allow him freedom of movement in cutting interest rates, which was what was needed in order to correct the balance of payment problems that are looming on the skyline as we move towards a probable figure of £7 billion to £8 billion for our balance of trade deficit. That is the projection in the Red Book for the current financial year.

There is sectoral overheating in the economy. It has not yet emerged in retail prices index inflation, because it is mostly in the form of asset price inflation. We have seen it occurring in certain sectors of the economy, because the economy has become skewed towards the financial community in the south-east of England and the activities of the building industry.

Inflation in the building industry is moving rapidly upwards. I had an example in my constituency recently. We have been encouraged to become involved in charitable projects and recently I was involved in fund raising for a building project. The quantity surveyor's estimate for the project was £150,000. There was no delay between the quantity surveyor's estimate and the building tenders, but the lowest building tender was £225,000. That is 50 per cent. inflation. That kind of asset price inflation is caused by this skewing of the economy, which in turn is caused by reducing too much the top rate taxes.

We emphasise—I hope that there would be some support for this on the Government Back Benches—the long-term interest of rebuilding productive capacity in this country to take the place of North sea oil. Anything which merely causes the import of expensive luxury goods cannot be good for this country. We are already in a severe balance of payments crisis. We are consuming far more than we produce. That cannot be healthy. Our priority must be to invest in manufacturing industry and in research and development. We must lay emphasis on industrial training. We are training far fewer skilled workers than our main competitor countries, such as Italy, France and Germany.

If anyone were to ask British industry what it regards as the most important priority, not just for this year's Budget, but for the next two or three Budgets, it would say that there should be a clear policy from the Government as to where they are leading this country, as we move out of the North sea era and back to normality. When there is no windfall from the North sea, we will have to earn our living. As that problem becomes greater for us, we must revert to a policy whereby the taxation system, the interest rate system and the exhange rate policy of the Government are unified in order to make this country more productive, with its consumption and production in balance.

We appeal to the Chancellor and the Prime Minister to come together to resolve their apparently irreconcilable position on the exchange rate and on managed floating against free rising currencies. That penalises workers, who arc beginning to show greater balance between supply and demand for labour, which is having an impact on trade unions and wage bargaining. If Molotov and Ribbentrop could sign a pact, surely the Prime Minister and the Chancellor can do the same.

The Chancellor should not feel beleaguered. He should not be subject to finger-wagging in the Conservative Lobby or have to tell the world through magazines that his favourtie Shakespearian play is "The Taming of the Shrew." This policy will not give industry confidence to invest for the future to produce the goods that this country wants. It will not reduce unemployment to a level at which the Government will be able to say that social security payments can be reduced because unemployment has decreased and the country is productive again.

Mr. John Townend

The debate is drawing to a close, so I shall deal specifically with clauses 22 and 23.

I support these clauses, first, on the grounds of principle, and, secondly, on economic grounds. Penal levies of personal taxation, as practised by the last Labour Government, are immoral. To take 98p in the pound from any recipient is equivalent to confiscation. To take 83p in the pound from the salaries of executives, entrepreneurs and sportsmen is a disincentive. It cannot be justified on economic grounds. The only basis for it is that of envy and prosecuting the so-called class war.

What was the effect of those penal rates of taxation? A growing number of people did not pay those rates and under-declared their income. We saw the growth of the black economy. The Labour Government turned an honest country into one of tax fiddlers. Those who were not dishonest avoided the higher rates of taxation by legal means, such as by employing armies of lawyers and accountants, who converted income into capital. No hon. Member has mentioned the fact that this Government have increased the capital gains tax rate for higher tax earners from 30 to 40 per cent., thus doing away with the artificial methods of paying tax.

The penal rates of tax resulted in a growth in perks. It was ridiculous that successful export sales managers were given, not an increase in salary, but a better car. If that was not a sufficient incentive, they simply left the country and became tax exiles. What greater condemnation can there be of the Labour Government than that they drove out some of the country's best brains, top doctors, sportsmen, business men, bankers, dancers, and pop stars? At the end of the day, those high rates of tax reduced the amount of tax that was paid.

In 1979 the in-coming Conservative Government couragously sliced the top rate of tax to 60 per cent. What has been the result? More revenue has been raised by taxes and there has been a resurgence in enterprise. My right hon. Friend the Chancellor of the Exchequer, with even greater courage in his first Budget after the election, reduced the top level of tax to 40 per cent. We now have an enterprise culture for the first time in 50 years.

The wealthy, the talented and the tax exiles will start to drift back. A tremendous boost is being given to the United Kingdom. It is becoming a place where international companies are establishing their headquarters. The reputation of the City as a financial centre will be reinforced. Indeed, it is already the financial centre of Europe.

There has been a reduction of 8p in the basic rate since the Government took office, and we are committed to reducing it further. I am amazed when Opposition Members oppose reductions in the basic rate. They talk about the high level of national insurance. Under the last Labour Government the basic rate was 35 per cent., plus 9 per cent. national insurance, making a total of 44p in the pound. Is it what the man on average earnings should be paying as a marginal rate?

Reducing taxation is popular and it signifies the difference in principle between our party and the Labour party. We believe that people should be allowed to keep money and spend it as they wish, whereas Opposition Members believe in taking more and more of an individual's income and spending it as they think best. To the Labour party, the man in Whitehall knows best. To us, the individual knows best.

9.30 pm
Mr. John Smith

The contribution of the hon. Member for Bridlington (Mr. Townend) was useful because it illustrated to the Committee the psychology that pervades the Conservative Benches. To hear the hon. Gentleman speak, one would think that a high rate of personal income tax, such as existed under the previous Labour Government and, indeed, under previous Conservative Governments, constituted a positive obligation to act illegally and that people were entitled to avoid the law, to cheat, and to be dishonest because of high rates of taxation—[Interruption.] That was the whole burden of the hon. Gentleman's speech. He said that under high rates of tax——

Mr. John Townend

Will the right hon. and learned Gentleman give way?

Mr. Smith

I am not giving way until I have finished the indictment that I am fashioning for the hon. Gentleman. He argued that if we had high rates of tax, people broke the law. If that is so, we should prosecute those who break the law. Let me remind the hon. Gentleman that tax evasion has increased seven times since the Government came to office. The coincidence that he suggested does not exist, and, if there were such a coincidence, we should be doing something about it.

The hon. Gentleman argued that reductions in the top rates of income tax were necessarily a good thing for the country. That assertion has been at the heart of the debate. It has been convenient for us to consider clauses 22 and 23 together, although we shall have separate votes on them. Most of the debate has centred on the justification that Conservative Members have offered for the steep reductions in the higher rates of income tax. My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) put it succinctly in his admirable contribution when he said that this Budget has effectively marked the end of progressive taxation in this country.

We now have only two rates of personal income tax—25 per cent. and 40 per cent. Historically—for most of the long period since the introduction of an income tax system, and certainly this centuryl—this country has had a progressive principle embedded in its income tax system. Most countries—particularly the countries similar to ours—in the European Community still have the progressive principle embedded in their taxation system.

The progressive principle has been abandoned in this Budget on grounds of simplicity. It is not good enough to say that we should have only two rates because that is simpler. The question is whether it is fair to have only two rates. Is it fair that a person on a very modest income should have a marginal rate of tax of 34 per cent., when income tax and national insurance are taken together, while a person of unlimited income—an income of £2 million to £3 million a year—pays only 40 per cent.? That leaves a difference of only 6 per cent. between the two. We have almost eliminated the notion of progressive taxation.

Clearly, Conservative Members have not comprehended the progressive principle of taxation. It is a simple, equitable idea that if one has more resources one should pay proportionately more to the cost of running the community than those with rather meagre resources. Of course, the person who earns a larger salary will pay a larger total, even if he pays at the same rate, but that is not the progressive principle. The progressive principle is that the more one has and the broader one's back, as my right hon. Friend the Member for Ashton-under-Lyne put it, the more of the burden one should he capable of carrying and the more of the burden one should be willing to carry.

One may have been blessed with good fortune which has given one brains, talent, energy, good luck or inherited wealth. Privilege, as well as ability, can contribute to one's income. When one has that income, one should not want to get rid of one's obligations as the rich in this country almost seem to want to do; one should shoulder that obligation as part of one's citizenship and be proud of it. Fortunately, I think that is still the view of many people in this country. I detected a note of embarrassment, almost of shame, in some well-off people when they were told the results of the Budget for them.

Of course, the notion that somehow we can justify all this unfairness on the ground of its alleged incentive effect is the biggest and most bogus argument in the whole debate. Conservative Members have been striving to find evidence for the assertion. The hon. Member for Beaconsfield (Mr. Smith), who is not in the Chamber now, did not bother with evidence; he asserted that it was just common sense. The hon. Gentleman's connection with common sense is usually coincidental so I shall not take what he says as reliable authority. One could assert equally well that it is a good argument for having high taxation because it would he an incentive to earn more to pay the tax. One proposition is as much common sense as the other.

One would need to look for empirical evidence to support the proposition that a huge incentive effect was created. We have heard about Professor Brown's study. The Chief Secretary to the Treasury knows perfectly well that it was commissioned by the Treasury. It cost £600,000 to carry out the study, yet the Chief Secretary tells us today that he has not even read this study, which is highly relevant to the major change proposed in the Budget. The Chief Secretary says that he has not even bothered to read it. He should now and again tear himself away from Woman's Own, which seems to be his favourite reading, and occasionally cast his eye over a Treasury paper. It would be more fitting to the responsibilities that he has to discharge to the Government and to Parliament.

What is said is that it does not really matter because my right hon. Friend the Member for Leeds, East (Mr. Healey) commissioned the study. My hon. Friend the Member for Motherwell, North (Dr. Reid) is not so naive as some hon. Members. He does not necessarily believe what he is told by Ministers. He telephoned Professor Brown this afternoon to find out whether that was the case. Professor Brown confirmed that he was originally commissioned by the Treasury, under the Labour Government, but that his study did not begin until September 1979, some months after the Conservatives took office. Not only that, he was asked to do it for three years, and the period of study was extended twice. Therefore, the notion that this study was left lying for the Conservative Government by a previous Labour Administration, an impression that they were keen to create, is proved totally false by the facts.

The reason why the Conservatives are so embarrassed about Professor Brown's study is that it blows up the whole theory. It shows that many people cannot alter the amount and pace of their work, or the number of hours, and they cannot be much affected in an incentive direction. Now all that has been swept aside.

Another study was mentioned. I think that my hon. Friend the Member for Dunfermline, East (Mr. Brown) has dealt effectively enough with the mysterious Professor Lindsey, who is the favoured supporter of the Financial Secretary to the Treasury. No doubt he will tell us in more detail of the clever studies on which we can rely.

Let us not fool ourselves with the notion that the Conservative Government believe all this nonsense about incentives. They do not. But they must say something to the public and to Parliament when they make these huge and unfair changes in taxation. Sometimes they tell us that we must target things cleverly, and that a lot of precise targeting has gone into social security benefits and changes in housing benefit. I do not notice very much targeting between the productive and unproductive rich. It does not matter whether one is a highly paid industrialist or lying on one's backside in San Moritz, or Monte Carlo, or sunning oneself in the Caribbean. It makes no difference because there will be exactly the same amount of loot from the Budget. There is no such thing as targeting when it comes to spreading out benefits to the rich. But we have to target carefully every penny, every 5p and every pound when it goes to the needy, the poor and the disabled in this country.

What of the argument about inherited wealth, which is another feature of the Budget? We are not discussing this tonight, Sir Paul, but in passing I shall point out that the Government have reduced the rate of inheritance tax to 40 per cent. What kind of incentive is that? The only one that I can work out is an incentive to get rid of rich relatives earlier than one would otherwise wish. Indeed, it is an inventive to kill off relatives. That is the only sense that I can make of it. Surely a capital taxation has the opposite effect—it distinguishes the incentives. If we want to create incentive in the community, we should have heavier capital and inheritance taxes

Mr. Hind

Does the right hon. and learned Gentleman agree that one of the major reasons for the alteration in inheritance tax was to give the opportunity to thousands of owners of small businesses, which have been built up and helped to attack our unemployment problems, to pass on their businesses and keep them within the family? The purpose of the alteration was to help the new entrepreneurs who have created the wealth of this country and whom the right hon. and learned Gentleman denigrates

r. Smith

The hon. Gentleman is typical of the Conservative party. Whenever we deal with inheritance taxation the small business man is always in mind. He knows perfectly well that the greatest benefit from inheritance taxation—[Interruption.] The hon. Gentleman should listen to my answer. The greatest beneficiaries of inheritance tax are the large conglomerations of wealth that pass on relentlessly from one generation to another. That extinguishes every form of incentive in the people who receive those large amounts of money. We are driven to the conclusion that that tax has nothing to do with incentives, in either income or wealth; it is a deliberately unfair distribution.

My hon. Friend the Member for Dunfermline, East exposed that unfairness in a way that I hope the rest of the country will note with interest. In a parliamentary answer given to him by the Financial Secretary, who will reply to the debate, he was told that 1.1 per cent. of the taxpayers of a household will get more than 31 per cent. of the benefits of the Budget. Only 1 per cent. will get 30 per cent. of the benefits. Who could possibly justify that on any ground of fairness?

Certainly it cannot be justified when we are faced with social security cuts of a nature never seen before, when people are coming to see my hon. Friends and Conservative Members with panic in their voices. They describe the circumstances that they face with savage cuts in their income and no way in which they can do anything to replace that income. I hope that we shall not say to the retired, the disabled and the widowed that they should go out and work harder or some such rubbish when faced with a severe cut in their incomes.

Mr. Major

What about the basic rate?

Mr. Smith

I shall tell the right hon. Gentleman about the basic rate.

Hon. Members

Tell us about it now.

Mr. James Pawsey (Rugby and Kenilworth)


Mr. Smith

No, I shall not give way.

We now have the poll tax coming at the end of it all—[Interruption.]

Mr. Neil Hamilton (Tatton)

That has nothing to do with this debate.

Mr. Smith

It has a great deal to do with this Budget. It is the fundamental demonstration that the concept of fairness in taxation has been totally abandoned by the Conservative party.

We do not need two rates of tax—a so-called basic rate and a higher rate. We want, in common with all other countries that have sense and intelligence regarding taxation, a range of taxation starting lower than the present basic rate and finishing higher than the present higher level.

In conclusion, I wish to quote an article from the Financial Times of 19 March 1988. It was written by Mr. Michael Prowse—[Interruption.] Hon. Gentlemen should listen to this because it is relevant to the debate. Mr. Prowse states: There is no long-run correlation between tax rates and economic growth. Japan has easily outperformed other industrial economies in recent decades and yet it has a highly progressive income tax.

Dame Elaine Kellett-Bowman

What about the Labour party?

Mr. Smith

All the squeaks in the world will not stop me from reading this particular document. The article continues: The top rate in 1979 was 93 per cent., little short of Britain, and the reduction since then, to 78 per cent., has been modest. There is a top rate of tax of 78 per cent. in Japan, yet we are told that lower rates of tax are somehow an incentive to economic growth and efficiency.

We shall vote against these tax proposals tonight—both the standard rate and the higher rate changes—because we believe that the money should have been spent on the Health Service, on ensuring a decent social security system and decent public services in this country. Those were the needs that Britain required. Instead, this foolish and immoral Government have chosen to give a vast amount of money to 1 per cent. of the population. The Government do not represent the people of Britain in doing that. The Opposition will speak for them by voting against these proposals.

9.45 pm
Mr. Norman Lamont

I agree with my hon. Friend the Member for Bridlington (Mr. Townend) that this debate has sharply illustrated the considerable divide in the approach of the two parties. The right hon. and learned Member for Monklands, East (Mr. Smith) has shown again that the Labour party is itching to put up tax rates —and not only the higher rates. He devoted a great deal of time to telling us how the higher rates provided no incentive, but he gave no justification for his obvious desire and eagerness to put up the basic rate for 23 million people.

Hon. Members have missed the fact that a large part of the measures in the Budget have gone to help not only the super-rich, with whom Opposition Members seem obsessed, but the man on average earnings, who will gain £5 a week from them. For 23 million people the marginal rate of tax is the basic rate, against which the Opposition will vote. I wish they would make their position clear. During the election they told us that they were opposed to the cut from 29p to 27p in the pound. Now they are against the cut from 27p to 25p. What would they put the rate up to—27p or 29p?

The right hon. and learned Member for Monklands, East complained that time and again my right hon. Friend the Chief Secretary had quoted from Woman's Own. I do not want to quote from Woman's Own, but I had the pleasure of hearing the right hon. and learned Gentleman early in the morning on the "Today" programme on 30 September last year, when he said: We want to make sure that people under a Labour Government will feel relaxed and content and happy about being prosperous. We, too, want them to be happy and content, and we also want to know what the basic rate of tax will rise to if there is a Labour Government.

These tax cuts need to be examined against the background of all the Budgets that went before this one, as my hon. Friend the Member for Birmingham, Northfield (Mr. King) said. The Budget gives substantial tax cuts to people at the higher end of the scale—no one denies that—but that needs to be judged against what has happened in all the other Budgets.

This is the sixth Budget in succession in which we have reduced income tax, which is far more than could ever be said of a Labour Government. Many of the benefits of these cuts in taxation have gone to the lower paid. Over successive Budgets, those with incomes below £5,000 have had their tax cut by about 38 per cent. Those with incomes between £5,000 and £10,000 have had their income tax reduced by about 28 per cent. Wherever the right hon. and learned Gentleman stands on the questions that he dodged and refused to answer, it is clear from the Labour party's expenditure plans and record that if it ever returned to office there would be a crippling increase in taxation, not only for the higher paid, but for the average and lower paid, who paid for the excesses of the Labour party's overspending before.

Mr. Bruce Grocott (The Wrekin)

The right hon. Gentleman is ducking the issue of incentives. Will he confirm that it is official Government thinking that people such as Sir Ralph Halpern, whose pre-Budget take-home pay was in excess of £500,000 a year, were not receiving enough incentives to work hard? Will he give us his estimate of whether Sir Ralph will break sweat now that his take-home pay has increased by £250,000 a year?

Mr. Lamont

If the hon. Gentleman will allow me, I shall deal with the question of management incentives. An incentive is needed for top management. I shall go into that in detail, but I want, first, to answer the point raised by the right hon. and learned Member for Monklands, East on the various studies by Professor Brown and others. The hon. Member for Dunfermline, East (Mr. Brown) misrepresented a little, although not deliberately, my position on the studies by Professors Brown and Lindsey. I made it crystal clear that the Government do not, and never did, think that we need to wait until some academic study has been completed before we decide to cut taxes.

We made no commitment at the election that we would wait until Professor Brown had completed his study before we cut taxation. As the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) said, there are plenty of ways—and I shall demonstrate them—in which one can show that there are benefits to the economy from cutting taxes. I see that the right hon. Gentleman is consulting Hansard. I shall just remind him of what I said: The evidence is all around us. It is in the tax cuts that we made in 1979".—[Official Report, 26 April 1988; Vol. 132., c. 296.] Those tax cuts have more than paid for themselves.

When the hon. Member for Dunfermline, East commented on the study by Professor Lindsey, he was riot quite up-to-date. He said that Professor Lindsey merely found that, in the United States, some cuts in higher taxes had resulted in income being declared that would riot otherwise have been declared. We have always made it clear that that is one of the effects of cutting higher rate taxes.

Opposition Members are shocked out of their wits about that, but it was not the only effect that Professor Lindsey had in mind. He went on to say that there would also be an effect from increased work effort. The hon. Gentleman may be interested to know that Professor Lindsey argues in his latest work that the combined impact of all those factors is to make it desirable to have a tax revenue maximising the rate of income tax at around 40 per cent. That may just be a coincidence.

It is a matter of judgment, but any tax rate of 50 per cent. or over will have a severe disincentive effect. It will give people every reason to want to shelter their income and will not be effective in encouraging management to come to this country. In a world in which all the top rates of tax are coming down, we were right to pitch our new rate of tax at the lower end, although there are many countries below us. A country such as ours, which needs to attract the best management talent from all over the world, should pitch tax rates at the lowest end.

The right hon. and learned Member for Monklands, East referred to Japan and said, "Well, of course, Japan has a progressive system of taxation which goes up to 65 per cent.," but he is out of date with Japan's new proposals. He does not know that the top rate of 60 per cent. starts at an income level of over £150,000.

Mr. D. N. Campbell-Savours

Why do the Government not do that?

Mr. Lamont

In Japan, on an income of £11,000, the rate is only 18 per cent., compared with a rate of 25 per cent. in this country. The hon. Gentleman says that we could do that, but if, instead of cutting the rates, we has increased the thresholds at which the higher rates become payable, we know that Opposition Members would have said exactly what they are saying now, that it is a Budget for the rich, and they would have opposed it just as much as they would have opposed the cuts in rates.

My hon. Friend the Member for Wells (Mr. Heathcoat-Amory) explained that we had reduced the rates of capital taxes as well as income tax and had increased revenue considerably. That has also been the effect on the top rates of income tax. As I said in an earlier debate which bore a little similarity to this one, whether we take the top 1, 2, 3 or 5 per cent., or all the higher rate taxpayers together, we see that today they are contributing a higher proportion of income tax revenues than they were in 1978–89. This reflects the increased dynamism and profitability of the British economy.

The hon. Member for Clydebank and Milngavie (Mr. Worthington) said that people have decided to pay themselves more. These mysterious people must be jolly lucky to be able to pay themselves more. The hon. Gentleman also said that the differentials were widening. There is bound to be an effect from the ending of pay controls, and rightly so. They were immensely damaging to our economy and management. I believe that widening differentials are good, quite apart from the fact that they have meant that more tax is being declared. There is no doubt that under the system of pay controls that existed under the previous Labour Government there was a lot of tax evasion, a great deal of remuneration by way of benefits in kind and ways to get round the pay controls.

We have also seen an increase in the number of self-employed in the top 5 per cent. of tax payers. Opposition Members will probably say that they are simply remunerating themselves more, because the Opposition have very little sympathy for the self-employed. However, Conservative Members know that if the self-employed are earning more that is because their businesses are doing better and creating more, and it is right that they should be rewarded.

Opposition Members wanted a rationale for the higher rate reductions. Another damaging effect of high marginal rates is that they obscure differentials between one job and another. They make it more difficult for management to move from one company to another, or from overseas back to this country because that is not worth while in post-tax terms.

One of the good points—not just because of our tax rates, but because our economy has improved so much—is that we have seen some of the leading companies attracting chief executives from all around the world to work here because this is a good competitive economy.

As my hon. Friend the Member for Cannock and Burntwood (Mr. Howarth) said, tax cuts enable managers to build up capital. We need managers, not only to work for large companies, but to go out and found new businesses and work on their own.

One of the best things to happen in this country over the past few years has been the increase in the number of people leaving big business to start up new businesses. We have seen considerable growth in the venture capital industry, which last year raised £750 million for small businesses. This industry is second only to that in the United States, and it is bigger than any other in Europe.

Although we listened to Opposition Members, we learned nothing about what they propose to do about tax. The hon. Member for Dunfermline, East would not tell us what the Opposition plan for the basic rate of tax. We know that they intend to abolish the married man's allowance, thus making 11 million couples more than £7 a week worse off. They want to abolish the upper earnings limit on national insurance contributions, so putting up the marginal rate for 2 million basic ratepayers by nine percentage points.

We do not know what the Opposition want to do with the higher rates. A report appeared in The Times, which the hon. Member for Dunfermline, East did not deny, that the Opposition would put the top rate up to 50 per cent. If that is so, their objection to our proposal is merely one of degree and their indignation is hypocritical and synthetic. If they intend to return to 60, 70, 83 or 98 per cent., they will damage the economy in exactly the same way as they did when they were in office. I urge my right hon. and hon. Friends to support the clause.

    1. cc822-5
    2. Finance (No. 2) Bill 1,849 words, 1 division