Finance Bill

HC Deb 25 April 1989 vol 151 cc817-900

Order for Second Reading read.

[Relevant document: Second Report of the Treasury and Civil Service Committee of Session 1988–89 on the 1989 Budget (HC288)]

Mr. Speaker

Before I call the Minister, I must announce to the House that a very large number of right hon. and hon. Members wish to participate in this debate. In view of the late start, I propose to limit speeches between 7 and 9 o'clock to 10 minutes, but I hope that hon. Members who may be called before that will bear the limit in mind.

4.21 pm

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

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

This Bill embodies the legislation that flows from my right hon. Friend's Budget. Over the past 10 years we have seen a transformation in economic policy and performance. Policies of demand management and state intervention that failed have been replaced by policies of free enterprise within a sound medium-term framework that have succeeded. The underlying performance of the economy has improved dramatically as a result.

The evidence for this is overwhelming: output has expanded by over 20 per cent. since 1979, business investment has risen to its highest ever level as a proportion of GDP, the public finances are now in large surplus and not in large deficit and there has been a marked rise in productivity and employment and a drastic reduction in inflation. As a result, real living standards are now much higher than they were 10 years ago and have every prospect of improving further.

There are two measures that illustrate the improvements we have seen. First, the performance of our economy has been transformed compared with its own performance in earlier years; but, secondly, and equally importantly, it has also been transformed when compared with the current performance of our competitors. That is why in the 1980s output and investment have grown faster here than in any other major European Community country, a marked contrast to earlier decades, particularly the 1960s and 1970s; and manufacturing productivity has grown faster here than in any other major industrial country, including Japan. In all these measures the United Kingdom was bottom of the league of performance in the 1960s and 1970s. Our position has now dramatically improved.

Also, in the 1980s, small businesses are being created at an unprecedented rate. In the year to March 1989 the net increase in the number of firms registering for VAT was nearly 70,000, an increase of over 40 per cent. on the previous year, which was itself a record. This means that on average over 1,300 new firms are being established every week. I cannot imagine that this has ever happened before in this country. It is noticeably higher than the 1,000 new firms a week we previously claimed.

This is by any yardstick an outstanding record of success and this year's Budget seeks to build on it. But there are difficulties as well which we acknowledge. The Budget was framed against a background of an unwelcome increase in inflation at home and abroad. Inflation in all the major nations is currently at its highest level for three and a half years. In the United Kingdom, current inflationary pressures, although much exaggerated by the perverse effect of mortgage interest payments on the RPI, had their roots in the events of October 1987. At the time of the stock market crash commentators feared that is would precipitate a world wide slide into recession, as it had done in 1929. That fear was shared by many right hon. and hon. Members.

It was precisely to avoid that risk that we, along with the other major industrialised countries, deliberately made sure that monetary conditions at that time were not too tight. We were successful in that aim, in that the effects of the crash were not remotely as bad as we, or anyone else, including Opposition Members, feared. It is clear that the current strength of the world economy owes much to the prompt and co-ordinated action taken by the major nations in the wake of the crash. But it is also clear that in response to the inflationary pressures there has been similar prompt action to tighten monetary policy around the world. I hope, believe and expect that that reflects a worldwide determination to get inflation under control, and to keep it under control.

The Budget was also framed against the background of the current account deficit. This largely reflects an excess of private sector investment over private sector saving, and not the reckless public spending which was the hallmark of previous deficits. It is thus fundamentally different from those of the 1960s and 1970s. The investment boom we are now experiencing underlines the confidence which domestic and foreign investors have in the United Kingdom economy and will stand us in good stead for the future.

Against an international background of rising inflation, this had to be and was a prudent and cautious Budget. That was undoubtedly the right judgment, and it is generally shared. Our long-term aim is a balanced budget, but in the current circumstances my right hon. Friend judged it appropriate to budget for a further year of substantial debt repayment. That means that, in three years, we will have paid back roughly one sixth of the public debt accumulated over two centuries, thus saving about £3 billion a year in interest payments. That saving will continue in each and every future year. The burden of debt interest as a share of GDP will be the lowest since 1915. That both lightens the burden on the shoulders of future taxpayers and, at the same time, leaves room for further tax reductions, further debt repayment or for higher spending on areas we judge to be priorities, and those decisions can be taken in each successive year.

Much of the economy's success is a direct response to the favourable tax structure created by my right hon. Friend and his predecessor in the past 10 years. Successive Budgets have broadened the tax base, lowered tax rates and made the tax system more coherent, more intelligible and a great deal simpler. The tax climate is undoubtedly a significant factor in attracting the stream of welcome inward investment recently and magnificently continued by Fujitsu, Bosch and Toyota. That inward investment, as a result of tax and other changes, should be welcomed by hon. Members in every part of the House—[Interruption.] —or nearly every part of the House.

The 1989 Budget made further progress. It contained a major reform of national insurance contributions and the abolition of the pensioners' earnings rule. Those two measures were considered during the Report stage of the Social Security Bill yesterday. Both have received widespread support. Both will remove significant distortions and disincentives. The reform of national insurance contributions will also increase take-home pay for the majority of those in work by about £3 a week; and the abolition of the earnings rule, long necessary and now effected, will give significant help to pensioners, who will also benefit further from other measures in the Bill.

In his 1987 Budget, my right hon. Friend recognised the special needs of older pensioners by introducing a new and more generous age allowance for those aged 80 and over. Clause 29 extends this higher allowance to people aged between 75 and 79. This will take an additional 15,000 elderly single people and married couples out of tax altogether. In real terms, the age allowance for those aged 75 and over will be 19 per cent. higher than in 1978–79. Three quarters of all those aged 75 and over will not be liable to income tax at all.

The clause also reduces the rate at which the age allowance is withdrawn for those with incomes above the income limit. It is clearly right to concentrate the benefits of the age allowance on elderly people with relatively modest incomes, but we received a number of representations from hon. Members calling for a reduction in the marginal tax rate faced by those with incomes in the withdrawal band. I am pleased that the Budget met these concerns, which were expressed forcibly by hon. Members—among others—in Committee on last year's Finance Bill.

These changes ensure that pensioners keep more of their own money. They also build on what is already an impressive increase in pensioners' incomes. Between 1979 and 1986, the average net incomes of pensioners increased by 23 per cent. in real terms. By contrast, despite the concern I know exists among Opposition Members, pensioners had an increase of only 3 per cent. in the years of the Labour Government between 1974 and 1979.

The Budget has been hailed as a Budget for the elderly —[Interruption.]—a view endorsed by the director general of Help the Aged in a recent letter, which I will quote for the benefit of Opposition Members. He wrote: I thought you would appreciate hearing how much we applaud the actions you have taken in your Budget to help pensioners. We are especially pleased at the abolition of the age related earnings rule and are grateful too for the changes you have made in VAT regulations in connection with charities. This will be of considerable assistance to us in our efforts to help elderly people, both in this country and overseas. That letter was from Mr. John Mayo—[Interruption.]—and I read the whole of the letter.

This Bill contains one other measure to help the elderly. Clauses 51 to 54 will give tax relief for private medical insurance premiums for the over-60s. Unlike Opposition Members, I do not want to endow this measure with a false importance. It accounts for just 1 per cent. of the tax reductions announced in the Budget. It addresses a very real problem, and I make no apology for the measure, for I fully support it.

In recent years, employers' health insurance schemes have expanded rapidly, and I welcome that. It is attractive to see independence and choice increasing, and I regret that Opposition Members are hostile to that. It is largely due to such schemes that some 50 per cent. more people are covered by medical insurance schemes today than in 1980. But membership of these schemes usually ends on retirement. People are then faced with a double increase in costs: not only do their employers cease to pay their premiums, but the premiums tend to rise at precisely the moment when people's incomes fall.

We have had a large number of representations over the years from people caught in this trap who did not think it was fair that they should suffer this double penalty. I agree with them, and the relief is designed to deal with that specific problem. It also encourages the overall provision of health care and investment in it, and thus eases the demands in that fashion on the NHS.

Indeed, in a curious way, the greater the take-up of this relief, the more that effect will be apparent. In particular, pressure on waiting lists will be eased, which will benefit all of us who continue to depend overwhelmingly on the NHS for medical treatment. Even non-taxpayers will benefit because they, too, will pay their premiums net of tax relief.

The medical insurance industry has begun to introduce policies which are aimed at those who cannot afford, or do not want to take out, more expensive cover. Some of the policies are intended specifically for people in retirement, and I welcome that extension of choice for them.

Although this measure is important, it needs to be seen in perspective. Our public expenditure plans mean that, overall, the NHS will have an extra £2,500 million in 1989–90, and a further £2,500 million in 1990–91—a total of £5 billion—before resources for it are reconsidered in subsequent public expenditure rounds. The cost of tax relief is nothing in 1989–90 and £40 million in 1990–91—less than 2 per cent. of the increase in planned spending on the NHS. I must say to the Opposition in all charity that if they have chosen to target their attack on the Budget on this measure, it serves simply to underline how little they find to criticise both in the Budget and the Bill.

Mr. John Battle (Leeds, West)

Can the Chief Secretary tell the House why the Secretary of State for Health and the Minister of State for Health welcomed the measure in lukewarm fashion, saying that, at best, it was an interesting detail in the Bill, and, at worst, would damage attempts to sell the White Paper on health about which the Government are struggling to convince the country?

Mr. Major

It is within my knowledge that both my right hon. and learned Friend and my hon. and learned Friend strongly support this measure. There is no doubt about that.

A dominant feature of the Bill is the improvement of the taxation of savings. It contains a series of measures to increase and deepen the ownership of shares, especially by employees and smaller investors. In the post-war period up to 1979, there was one clear trend in the composition of personal savings and that was the dramatic decline in direct share ownership. In 1957, shares and unit trusts accounted for around 20 per cent. of personal sector wealth. By 1979, their proportion had fallen to 8 per cent. That decline had nothing to do with the pre-tax return on equities because, historically, they have tended to out-perform other savings instruments. But it had a great deal to do with the post-tax return that investors received on their investments.

In contrast to saving through large tax relieved institutions, such as occupational pension schemes, direct equity investment subjected the saver to a range of punitive taxes. A top rate of tax of 83 per cent., combined with an investment income surcharge of 15 per cent., meant that direct investors in equities could receive as little as 2p in the pound of dividend income. On top of that, they were taxed not only on real capital gains, which I am afraid were few and far between from 1974 to 1979, but also on inflationary gains, which were in considerably more plentiful supply. If the investor wanted to hand on his shares to his children, he was subject to yet another confiscatory tax in the form of capital transfer tax, where rates could be as high as 75 per cent. It is hardly surprising that direct share ownership went out of fashion in the 1970s; the only surprising thing is that it survived at all. Since 1979, my right hon. Friend and his predecessor have given share ownership a dramatic boost.

The trend has changed— I hope irreversibly. Shares and unit trusts now account for a growing share of personal wealth. Moreover, share ownership has widened dramatically. There are now 9 million shareholders. That represents 20 per cent. of the adult population, compared to only 7 per cent. in 1979. That has come about partly through a programme of privatisation which has proved immensely successful and which will continue in this Parliament and the next. But even more important for the longer term has been the creation of a more sensible tax system. Now that no tax rate is higher than 40 per cent., investing in shares is again a worthwhile proposition.

We believe that it is right to go further to promote private saving through equity investment. Direct share ownership must be allowed to compete with institutional saving. That is why my right hon. Friend introduced personal equity plans in 1986 and further improved them in the Budget. The increase in the overall investment limit from £3,000 to £4,800 and in the unit trust and investment trust limit from at best £750 to £2,400 will give PEPs an additional impetus. Unit and investment trusts allow investors to spread risk and are a good introduction to equity investment for the small saver. Along with the important PEP deregulation measures announced by my right hon. Friend, the changes have been widely welcomed. More plan managers are setting up plans and a number of new products are being marketed. As the chairman of the Unit Trust Association has said: PEPs should now be the major success that for investors they deserve to be. We all look forward to that.

Employee share schemes are specifically designed to encourage direct share ownership by workers in their own companies. As such, I know that such schemes have supporters in each and every part of the House. They have the particular advantage of giving employees a direct stake in the company that they work for, and have been an important factor in breaking down the "them and us" mentality which pervaded British industrial relations, resulting in great damage, in the 1960s and 1970s. That mentality is going, and good riddance to it. The sooner it is gone, the better. The House will know of the success of all-employee share schemes, 1,600 of which have been approved to date against only 30 in 1979. Clauses 59 to 62 are designed to give them added impetus by increasing the limits for relief and relaxing the material interest rules.

Employee share ownership plans, known generically as ESOPs, provide an alternative means of encouraging employee ownership. Clauses 64 to 71 and schedule 5 provide a statutory basis for tax relief for company contributions to those plans. For some companies they offer more flexibility than normal all-employee share schemes. The point is that ESOP trusts can borrow to acquire shares rather than relying entirely on funds provided by the company. That enables a substantial number of shares to be held in trust for longer-term distribution to employees. Those clauses ensure that payments by a company to an ESOP trust, set up to acquire and distribute shares to its employees, will qualify for corporation tax relief, provided that certain qualifying conditions are met.

The most important of those conditions is that the shares must be distributed to employees within a maximum of seven years of their acquisition by the trust, and on an all-employee, similar terms, basis. ESOPs have a number of enthusiastic supporters on both sides of the House, and I am sure that those clauses will be welcomed. As the right hon. Member for Birmingham, Sparkbrook (Mr. Hattersley) said on Second Reading of the Finance Bill three years ago: I wish to make it clear that I support genuine extensions of share ownership schemes which enable and encourage employees to acquire stakes in their companies. The schemes that I want would carry voting rights proper to share ownership, and would be available to all company employees".—[Official Report, 29 April 1986; Vol. 96, c. 819.] I hope that the right hon. Gentleman will use his voting rights to support this measure because I agree with what he said three years ago and it is contained in this Bill.

The changes to the taxation of pension schemes set out in clauses 72 to 74 complement the wider share ownership measures. They will increase pensions choice and encourage greater personal responsibility for pension provision. They will also deregulate an area of savings which has become excessively and undesirably circumscribed by Inland Revenue rules.

The Government's record on improving private pension provision has been substantial over recent years. We have introduced personal pensions and free-standing additional voluntary contributions. We have made it easier for employees to contract out of the state scheme if they wish to do so, and we have improved the rights of scheme members, in particular those of early leavers.

Those clauses build on that record. The rules for additional voluntary contributions, or AVCs, will be greatly simplified, reducing the administrative burden on employers' schemes; and the anomaly whereby successful investment performance of the AVC led to a reduction in the employee's occupational pension will be ended. In future, excess AVC funds will be returned to the employee subject only to a special tax charge.

Ending the link between Inland Revenue limits and the maximum pension payable by employers also makes the pensions regime more flexible. Employees and employers will now be free to negotiate whatever pension package they jointly think is appropriate. Inland Revenue rules will no longer constrain the size of the pension, only the extent of the tax relief.

The cap on tax privileged pension benefits completes the changes begun by my right hon. Friend the Chancellor in 1987. Based on earnings of £60,000, the cap has been pitched at a generous level. It will still be possible to receive a privileged pension of £40,000 a year, or, where benefits are commuted, a maximum tax-free lump sum of £90,000. Moreover, the limit will be indexed annually to prices. The transitional arrangements are equally generous. Only new schemes and new members of the existing schemes will be subject to the cap on benefits. Most ordinary scheme members will simply not be affected.

I believe that a cap is necessary. Although we are committed to widening private pension provision, that should not he at an ever-increasing cost to the majority of taxpayers who do not receive such large pensions themselves. There is a limit beyond which tax-privileged saving is unfair and crowds out other ordinary saving. Other tax reliefs are subject to monetary limits, and it is time the tax relief for pensions was put on a similar basis.

These changes have also provided an opportunity to redress the balance between occupational and personal pension schemes. Many members of personal pension schemes start contributing late in life, for reasons well understood in the House. They have no access to the accelerated accrual available in the best final salary schemes, and often have lower pensions in retirement as a result. Although tax-relieved contributions to personal pension schemes will be subject to an annual cash limit, we also propose that the limit on contributions be raised as a percentage of earnings for those aged 36 and over.

To take the example of someone aged 56, under the old rules he received relief on contributions up to 22.5 per cent. of his earnings; under the new rules he will receive relief up to 35 per cent. of his earnings. This change will give a further boost to personal pensions and will be of special value to those who, in their earlier working life, need to plough back every penny available into building up their business. On Budget day, my right hon. Friend the Chancellor reported that more than 1 million people had taken out personal pensions by the end of 1988. I am pleased to tell the House that that number has risen to 1.5 million.

The Bill also contains important measures for business. In his first Budget my right hon. Friend introduced a major reform and simplification of corporation tax which enabled the main corporation tax rate to be reduced to 35 per cent., one of the lowest in the industrial world. That low rate, together with the removal of the old bias against employment inherent in the old system, has made a significant contribution to rapid economic growth, employment growth and the high investment that we have seen in recent years.

Of no less importance was the reduction in the small company corporation tax rate from 42 per cent. in 1978–79 to 25 per cent. today. It is now right to extend the benefits of that rate to more companies. Clause 33 therefore raises the profit limit by 50 per cent., far more than was required to keep pace with inflation. That measure will enable firms to make profits of up to £750,000 a year before paying the average rate of 35 per cent.

Mr. Dennis Skinner (Bolsover)

In this and in other Budgets in recent years, many in the Government would argue that they have given large sums of money through taxation relief to the top salaried people. The last set of figures shows that the salaries of company directors have increased by 26 per cent. Does the right hon. Gentleman take the view that those company directors who have been fed pretty well by the Government in the past few years are perhaps biting the hand that feeds them? What has the right hon. Gentleman to say about the 26 per cent. increase when low-paid workers are being packed off with increases of 4, 5 or 6 per cent.?

Mr. Major

We have made significant changes in taxation affecting people at all levels of income and not just those on high incomes. The basic rate of taxation, which affects all the 20-odd million people at work, has been reduced from 33 per cent. to 25 per cent. The hon. Gentleman will know—perhaps in view of what he has just said he will support it—that it remains our objective to reduce that as soon as we prudently can from 25 per cent. to 20 per cent. I am pleased that he thinks that that is a desirable objective. I hope that he carries the support of his colleagues.

Mr. Gordon Brown (Dunfermline, East)

Will the Chief Secretary confirm that the very people who have been calling for wage restraint from the workers have seen their standard of living rise, after tax, by 26 per cent. in the last year? Is he aware that, according to the British Institute of Management, the standard of living of senior directors has risen by 47 per cent. in a year and that, according to another study, the standard of living of those on unearned income has risen by 87 per cent. in one year alone? Will he condemn those rises?

Mr. Major

The hon. Gentleman should bear in mind that payments to directors of companies are not a matter specifically for the Government. Taxation rates are legitimately a matter for the Government to determine. Incomes are not directly under the control of the Government. I have no intention of responding in detail and directly at the Dispatch Box on each of those points.

Mr. Neil Hamilton (Tatton)

Does my right hon. Friend agree that that little exchange shows with the greatest possible clarity the difference between the Opposition and we on this side of the House on taxation? Opposition Members see taxation as a fine on success regardless of whether it brings more money to the Treasury. The decrease in taxation rates on higher levels of income has increased the amount of money brought into the Treasury, which is then available for redistribution to those on lower incomes.

Mr. Major

My hon. Friend is entirely correct in what he says about the tax yield. It is equally true to say that under the management and guidance of the people criticised by the hon. Member for Bolsover (Mr. Skinner) there has been a dramatic increase in investment, employment, the profitability of companies and the general well-being of people in this country. We see tax changes, at both the upper and the lower level, as supply-side measures, and they have proved to be so over recent years.

Mr. James Lamond (Oldham, Central and Royton)

What my constituents in Oldham cannot understand is that, in the midst of this success story which the Minister has just told us about, last year, when they went on holiday to Spain, they got 202 pesetas for their pound, while this year they are getting only 192.5 pesetas. Does that reflect a strengthening of our economy?

Mr. Major

What the hon. Gentleman misses out of that interesting illustration is how many more of his constituents have been able over the past 10 years to afford to go abroad as a result of the policies of this Government.

Returning to the necessary, if perhaps esoteric, area of small companies corporation tax from which I was unruly ripped, I was about—

Mr. Nigel Griffiths (Edinburgh, South)

Untimely.

Mr. Major

I am grateful for that Shakespearian memory. "Untimely ripped" is the correct quotation from "Macbeth", appropriately coming to me from a Scottish Member.

The measure in clause 33 will enable firms to make profits, as I reminded the House a few moments ago, of up to £750,000 before paying an average rate of 35 per cent. What is relevant about this is that it strengthens once again Britain's claim to have the most favourable tax regime in Europe for small companies and it has been very widely welcomed by business men and managers, who, as the director general of the British Institute of Management wisely said—and the Opposition should listen to this— prefer stability and good sense to histrionics. How wise the director general was.

A substantial chunk of the Bill will complete the reform of the administrative framework for the main taxes, which began with the setting up of the Keith committee in 1980. Clauses 138 to 165 simplify and update the system of interest and penalties for tax offences and revise the information powers of the Revenue. They will help to ensure that the operation of the tax system is effective and efficient, while at the same time remaining fair and just. They are the product of an almost unprecedented degree of consultation on tax matters and have been widely welcomed in responses as achieving a proper balance between the rights and obligations of the taxpayer and between the powers of the Revenue and safeguards for the citizen.

Clauses 17 to 21 implement last June's judgment of the European Court on VAT zero rating. As my right hon. Friend said in his Budget statement, we have made every effort to minimise the unwelcome burden of tax that we have been obliged to impose on businesses and, more especially, charities. Again, we have consulted widely with those who will be affected; indeed, consultation began on a contingency basis even before the judgment was given. I am glad to say that my right hon. Friend was able to meet their main proposals for minimising the judgment's impact. We have delayed implementation for as long as is possible and the transitional arrangements are said to be and are generous.

One of our main concerns has been the effect of the judgment on charities. We have managed to ensure that for their basic non-business activities charities will continue to benefit from zero-rated construction services and fuel and power. Homes for children, the elderly and the disabled will continue to be zero rated. In addition, charities will be relieved from VAT on fund-raising events, classified advertising and sterilising equipment for medical use. These measures have met with the approval of many charities. As a Royal National Lifeboat Institution spokesman put it: We stage all sorts of fund-raising events where the admission charge carries VAT. It will mean a good few thousand saved for our coffers. I certainly hope so.

Mr. Robert Sheldon (Ashton-under-Lyne)

The right hon. Gentleman has been speaking for more than half an hour in dealing with the details of the Finance Bill much more fully than is normal on Second Reading. When will he turn to the critical report of the Treasury and Civil Service Committee?

Mr. Major

The right hon. Gentleman is entirely correct in saying that I have been speaking for half an hour, but a considerable part of that time has been taken up by interventions. He says that I am dealing in detail with the Finance Bill. That is what we are discussing, and it is a courtesy to the House to deal with what we are discussing.

There are a number of other provisions in the Bill which will benefit charities. Clause 25 exempts from car tax vehicles leased to the disabled. This will reduce the cost of each car by £400 and it has been widely welcomed. I quote from the deputy chairman of Motability: Without doubt this measure will help to enhance mobility for disabled people, especially those with very limited resources. As a former Minister of State for the disabled, this gives me particular pleasure.

The best way to help charities is to encourage people to contribute to them. In recent years in budgetary measures we have improved relief for charitable covenants, introduced relief for companies making one-off donations and, most recently, introduced relief for payroll giving.

The response has been encouraging. Between 1978–79 and 1987–88 covenanted giving to charities grew by 140 per cent. in real terms. Payroll giving has also grown steadily since its introduction in 1987. There are now over 3,600 schemes in operation covering 100,000 participants. Clause 55 gives a further encouragement to this form of charitable giving by doubling the limit for relief. I am delighted that this measure has met with considerable approval among charities. It also shows that tax reductions and growing net incomes have increased charitable giving and that we are by no means the selfish and materialistic society that the Opposition sometimes claim.

Finally, and perversely, I would like to draw Members' attention to clause 1. This contains the measures designed to promote unleaded petrol, which have met with universal approval.

Despite the growing availability of unleaded petrol, its lower price and clear environmental benefits, at the time of the Budget it still accounted for only around 5 per cent. of petrol sales. That was, frankly, extremely disappointing and it prompted my right hon. Friend to try a new approach. He made it clear that he expected the full tax reduction of 3.6p a gallon on unleaded to be passed on to consumers. This has happened. The price differential at the pumps between four-star and unleaded is now generally between 9p and 10p per gallon compared with 6p before the Budget. Furthermore, the increase in duty on two and three-star has raised prices to at least the level of four-star, leading to a reduction in the market for these two grades and creating more capacity for unleaded.

All the signs are that those changes are having the desired effect. The proportion of garages now selling unleaded petrol is close to 40 per cent. and is expected to top 50 per cent. by mid year. I hope and expect that that will increase still further. The onus is now firmly on individual motorists—be they two, three or four-star users —to ensure that, where they can, they switch soon to the cleaner fuel. I hope that they will do that.

The Bill contains a series of measures to improve the taxation of savings, to widen share ownership, and to help small businesses. It will simplify and modernise the administration of the tax system. It underpins the continued strength of our public finances, takes forward our programme of tax reform, and improves the supply performance of the economy. It is a Bill well worthy of support, and I commend it to the House.

5 pm

Mr. Gordon Brown (Dunfermline, East)

We welcome some of the measures contained in the Finance Bill as explained in what I suppose the press may call a less than robust defence of the Chancellor's policies by the Chief Secretary to the Treasury.

We welcome and will support the improvement in the age addition for pensioners and the change in the earnings rule for pensioners. We welcome and will support the differential in unleaded petrol, although many of us believe that the Chancellor could have gone further in that. We welcome and will support, with regard to the Chancellor and the Bill, the changes in the management of the Inland Revenue recommended by the Keith committee. Although we do not believe that they go far enough, we will welcome the changes in national insurance set out in the Social Security Bill.

However, we cannot support a Finance Bill, an economic strategy and a Budget which has done little for the vast majority of people throughout the country and which will do nothing to tackle the underlying weaknesses of the British economy.

Ten days ago inflation crept up to 7.9 per cent. when at this time last year it was half as much at 3.9 per cent. Tomorrow, even if the best hopes of the Chancellor are realised, we will still be running the worst trade deficit in our history and certainly a worse trade debt than our European competitors.

Ten months after interest rates began rising, home owners could be excused for hoping that it was time that they came down. However, once again they fear that interest rates are in danger of rising, even when interest rates are 5 per cent. in Japan, 6.5 per cent. in Germany, 10 per cent. in America, but are already 13 per cent. in Britain.

Interest rates have been at 13 per cent. for five months and they have been above 10 per cent for nine months. Inflation has been rising for 13 months in a row. The balance of payments deficit has been worsening for just about all the time that this Chancellor has been in office. As a result of the need to finance that deficit, the high interest rates have meant that 9 million mortgage holders have had to pay on average an extra £40 a month in mortgage repayments.

In the face of all that, people will want to know why, after 10 years of this Government, after 10 years of North sea oil revenues when the Government have received £76 billion in tax returns from the North sea, we are going to end this decade with the highest inflation, the highest interest rates and the worst trade deficit of our major competitors. Is it not therefore surprising that the Treasury and Civil Service Committee, whose report I will mention even if the Chief Secretary to the Treasury would not, said that the Chancellor is walking on a tightrope? Is it not also surprising that almost all the expert evidence which the Committee has been able to assemble has been critical of the Chancellor's policies? I commend the Chairman and his Committee for doing such a thorough job in examining the economy.

Is it surprising that at least one Cabinet Minister has deigned to come above board and criticise the full thrust of the Chancellor's policies when referring to the Chancellor's high interest rate strategy and the impossibility of one simplistic economic dogma solving a nation's economic problems? The Secretary of State for Wales called for regional and industrial investment and expressed his fears about what is happening in the economy at the moment. He said: Capitalism could be severely damaged if we continue a system where currency exchange rates fast fluctuate as a result of the decisions not of Governments or of major industrialists but of those who command the vast flows of hot money circulating throughout the world. The Chancellor has brought us to that as a result of his policies.

Perhaps the most astonishing criticism among the growing criticisms of the Chancellor was that made in a recent speech by the director general of the Confederation of British Industry, Mr. John Banham—[Interruption.] The Chancellor may laugh at Mr. Banham, hut Mr. Banham may read the report of our debate in Hansard.

Mr. Banham compared Britain in the 1980s, not, as the Chancellor does, with Japan in the 1980s, but with Britain in the 1930s. He said that the Chancellor's policies reminded him of Churchill's phrase about the 1930s—the "locust years." He questioned whether the "locust years" was a term which could be applied to the 1980s. He questioned also whether we are in danger of making the same terrible mistakes today and being guilty of the same short-termism for which we have rightly criticised Chamberlain and Baldwin.

Mr. Tim Boswell (Daventry)

Did the hon. Gentleman also notice that John Banham is quoted in the CBI's house journal as saying that this Budget is a cautious responsible budget with some useful measures for business which will help smaller companies in particular."? How is that consistent with the slashing attack which he has recently given?

Mr. Brown

Mr. Banham was referring to the kind of measures which we have welcomed. Mr. Banham, in his speech of 16 March, criticised the Government for bringing us to a position where the 1980s may be the "locust years."

Mr. Banham has been even more critical of the Government's record on inflation. He blamed the Government for water and electricity price rises as being the single most important factor in pushing up inflation. He said that the Government are creating inflation in a way which will postpone vital investment which could deal with the underlying causes of inflation. The hon. Member for Daventry (Mr. Boswell) cannot look for much comfort in Mr. Banham's comments. He should reflect on the remarks by the CBI. He should also consider the results of surveys like that carried out in Scotland which showed that investment intentions are now the worst for 18 months and that there are worries that manufacturing employment may fall.

Mr. Tim Yeo (Suffolk, South)

Will the hon. Gentleman give way?

Mr. Brown

No, I want to proceed.

We have the highest interest rates of our competitors, the highest inflation rate and the worst trade deficit in our history. I believe it was the Chairman of the Treasury and Civil Service Committee who first said in November that the jury was out on the Chancellor. That was almost six months ago. Three weks ago the Governor of the Bank of England said that the jury was still out.

The jury has been out for a long time now. It has been out so long that the Chancellor has had the benefit of one of the longest trials in recent experience and undoubtedly, for the nation, one of the most expensive. It is about time that the jury returned. Is the verdict not now overdue? Perhaps the verdict on the Chancellor's performamce will be delivered in the expected Cabinet reshuffle. Perhaps the best that he can hope for is leniency and that he may get off with a suspended sentence or probation under the personal supervision of Sir Alan Walters, who is due to provide what he calls his "independent advice" on 1 May.

Inflation is twice what it was a year ago and twice what it was when the Chancellor took office and pledged to eliminate it. It is 7.9 per cent. in Britain, 1.4 per cent. in Japan and 2.6 per cent. in Germany. Despite the freezing of excise duties, which will prevent the rate rising by 0.5 per cent., the inflation figures have yet to show the nine price rises that came in the first weeks of April, for most of which the Chancellor was directly responsible. Those include the 7 per cent. rise in electricity, 3 per cent. rise in gas, 10 per cent. to 30 per cent. rise in water, rate and rents, prescription charge rises, television licence fee rises, the new health charges and the petrol price rises, about which the Chancellor has been strangely silent when faced with the behaviour of oil companies as they push up petrol prices.

Perhaps the Chief Secretary regrets saying in the Second Reading debate last year: What is vital, and unusual for post-war recoveries … is that this … sustained growth in the economy has been achieved without a resurgence of inflation."—[Official Report, 26 April 1988; Vol. 132, col. 215.] The tragedy is that the inflation that he did not forecast is the inflation that he and his Ministers caused. Last July—

Mr. George Walden (Buckingham)

The hon. Gentleman paints a bleak picture of the British economy. If, for the sake of argument, one accepts his analysis, will not the position grow even worse than he describes it if higher-than-inflation wage settlements are reached? What would the hon. Gentleman advise those unions seeking higher-than-inflation wage settlements?

Mr. Brown

The hon. Gentleman is joining me in criticising the 26 per cent. post-tax rises for directors and the 47 per cent. rises to senior directors. I shall tell the hon. Gentleman how the Chancellor could begin to tackle inflation. He could postpone the electricity and water price rises, imposed for one purpose only—to fatten up the industries for privatisation. When the hon. Gentleman looks at the figures, I think that he will agree with me and others that the Government have been responsible for most of the inflation from which we now suffer.

Mr. Keith Mans (Wyre)

The hon. Gentleman mentioned rate rises. Does he agree that the majority of rate rises have been due to Labour councils?

Mr. Brown

The hon. Gentleman shows a strange misunderstanding of what has been happening to central Government expenditure in relation to local authorities. Over the past 10 years the Government have not only cut their contribution but cut their proportionate contribution to local authorities so that rates have been forced up for those local authorities trying to maintain services. In Scotland, we now have the final result—the poll tax, which is basically a flat rate charge, and is being imposed against the wishes of the vast majority of people in Scotland.

Our case against the Chancellor and the Government is not merely that we have the highest inflation and interest rates, and the worst trade deficit, or that we have returned to stop-go economics even before North sea oil has run out. It is not only, although this is bad enough, that the Chancellor's solution to the problem—creating high interest rates and by discouraging investment—is part of the problem rather than the solution. Our case against the Chancellor is more than that. It is that, having made all these mistakes by engineering a consumer boom that was not properly backed up by adequate investment, he has no greater desire in life than to keep his job and to repeat them at a later stage.

Mr. Yeo

rose—

Mr. Brown

I shall not give way.

Having engineered a consumer boom that was preceded by high interest rates, and having used for tax cuts resources that should have been used for investment, the Chancellor intends to engineer another pre-election boom, preceded by the present high interest rates, which are so damaging to investment. He will use the Budget surplus not for investment in our future, but for tax cuts. That is the mistake that the Chancellor makes when planning the long-term future of the economy. The result is—

Mr. Yeo

rose—

Madam Deputy Speaker (Miss Betty Boothroyd)

Order. The hon. Gentleman has made it clear that he is not giving way.

Mr. Brown

The result is that we end the 1980s in the astonishing position in which household consumption has increased by 30 per cent. during the past 10 years, but industrial production has increased by only 10.5 per cent. The obvious result is that imports have had to increase by 50 per cent., giving the trade deficit that is causing all the problems that the Chancellor will sooner or later have to face.

Even more astonishing is the fact that in the past 10 years manufacturing production has risen by only 8 per cent., while manufacturing imports have risen by about 100 per cent. That is the position to which the Chancellor's policies have brought us. The problems are due to the neglect of investment over a long period, the inability to prepare our industry for the future. We face the 1990s and the harsher marketplace of 1992 with the worst trade deficit in our history and a Chancellor who has no policy for sorting it out.

Our complaint against the Chancellor does not stop there. Even when he has a Budget which he claims will help the low paid, he ends up, as usual, helping the higher paid. National insurance changes mean that there is nothing for anyone earning less than £43 a week. There are about two million people in that position. There is £1.50 less in some cases, far less than £1.50 a week for those earning less than £115 a week. None of that will be paid until October, whereas the Chancellor was very keen to give his top-rate tax cuts of last April in April. The figures show that those at the top benefit far more than those at the bottom.

The Budget was not one for low income Britain, but one which compounds last year's errors by giving most to upper income Britain. It does not do anything for people faced with high mortgage repayments, many of whom as a result of building society decisions saw their mortgage rates rise on April 1, on the annual basis used by companies such as the Halifax building society.

In a lecture, the Governor of' the Bank of England said that it was unlikely that last year's experience with mortgage arrears would be sustained. He said that building societies were already reporting an increase in short-term arrears and that the full impact of higher mortgage rates was yet to be felt. Last year, for the basic rate taxpayers, those who are home owners, tax cuts amounted to about £1.5 billion in a full year, but the mortgage rises for that period would be about £4.5 billion. For 118 out of the 120 months of the Chancellor's period in office, mortgage rates have been above 10 per cent. As we work out the figures, we realise that for the vast majority of home owners the tax cuts have already been clawed back by the mortgage rises and the vast majority of people are already worse off and suffering a deterioration in their standard of living as a result.

What do the Government say about this? Far from helping home owners or the majority of pensioners—although we welcome the changes in the earnings rule and age addition—and far from unfreezing child benefit, about which there was a debate last night in which the Government took a hard line, the Finance Bill gives far more to those who have than to the majority of people who have not. It seems that the Chancellor is not content with the £2 billion that he gave to the top 1 per cent. in last year's Finance Bill, the £26 billion that he has given over 10 years, the £10,000 each that those in the top 1 per cent. have received each year, or the £100,000 that he has given cumulatively in tax cuts to the typical person who falls within the top 1 per cent.

The Finance Bill contains a series of changes which can only be said to raise the incomes of those who are already rich, without doing anything for those on low incomes. The changes in inheritance tax will cost £35 million but will cover only 39,000 taxpayers. There are changes in capital gains tax, from which any personal possession that is sold off and is worth up to £6,000 is exempt. The Government have closed the obvious and glaring loophole in closed company tax relief in relation to the business expansion scheme, but have not made the change retrospective although they have been aware of the abuse for some time. They have not dealt with the fundamental flaws of the business expansion scheme, which provides rented housing at a far greater cost than if local authorities or housing associations were given the same money to build.

We shall support the Government's attempts to implement the recommendationss of the Keith committee. We regret that they have not faced up to a number of its recommendations, such as the power of entry and inspection of business records in respect of transfer pricing. We might have expected them to act on the taxation of non-residents as well, especially after the Treasury paper issued last summer which said that the current loopholes encourage the setting up of arrangements overseas which can be more or less artificial. There is nothing of substance in the Bill to deal with that abuse, and we shall press the point in Committee.

What justification have the Government for failing to sign the OECD agreement on an international campaign to clamp down on tax evasion?

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

Can the hon. Gentleman name any country that has signed?

Mr. Brown

A number of countries are very concerned that the agreement be signed. Why has Britain refused to sign it? Why have the Government given us the explanation that they are doing quite enough about lax evasion already, when all the available evidence suggests that massive evasion on an international scale is taking place and is not being properly dealt with, and that international agreements are required for it to be so dealt with? When that matter is raised in Committee, I believe that the Economic Secretary will be persuaded of the need for further action.

Another proposal that the Chief Secretary said had achieved a false importance in debates on the Budget and the Finance Bill is the proposal for private medical insurance. We shall, of course, discuss that at length later, as we are entirely opposed to the relevant clause. Last week the Treasury issued an explanatory memorandum, although the regulations which are vital to an understanding of how the scheme will work have yet to be issued in full. The Treasury said that the test for private medical insurance was that the £40 million or more—we believe that it is more—would relieve pressure on the National Health Service". I will tell the Minister the best way of relieving pressure on the National Health Service—give the money to the National Health Service. Is it not clear that the best way of providing health care for anyone is to provide it for everyone? That is the proper way in which to use the available resources.

We shall debate all these matters in Committee, both upstairs and on the Floor of the House. It is interesting to note, however, that this Finance Bill ends a 10-year period under the present Government in which Ministers have claimed that there has been an economic miracle and an industrial resurgence, and that Britain has been transformed by their policies. The Chief Secretary started to say that earlier this afternoon.

What sort of economic miracle is this? Despite all our revenues, the growth rate of the British economy has been only 2 per cent. a year in the 10 years since 1979, half that of Japan. It has been 2.5 per cent. in Italy, 2.5 per cent. in the OECD countries as a whole, 2.7 per cent. in America and 4 per cent. in Japan. What sort of economic miracle is it when manufacturing output has grown by 1 per cent. a year in Germany, by 1.5 per cent. a year in Italy, by 2.5 per cent. a year in America, by 4 per cent. a year in Japan and by 2.2 per cent. a year in the OECD countries, but by only 0.8 per cent. a year in the country that the Chancellor claims is hosting an economic miracle? What sort of miracle is it when exports have increased by 3 per cent. in Italy, by 4 per cent. in Germany, by 5 per cent. in America and by 7 per cent. in Japan, but by only 2.8 per cent. in Britain?

On all those indicators, Britain is not leading the world; it is very near the bottom of the table—and the reason is that the policies of the Chancellor and his predecessors have been wrong.

Yesterday the Government voted to freeze child benefit for 7 million mothers and 12 million children. In the past few weeks, half a million pensioners and others on benefit have been denied any uprating at all. This month, destitute teenagers who have already lost their unemployment benefit are now losing many of their housing benefits. Pensioners faced with price rises that are way above their pension rises are seeing their living standards fall.

On top of that, this month has brought the new health charges. We have already experienced housing benefit cuts, and, in Scotland, the imposition of the poll tax. Yet at the same time—as the British Institute of Management confirmed yesterday, and as was pointed out by my hon. Friend the Member for Bolsover (Mr. Skinner)—huge windfall bonuses have been paid to people who are already rich as a result of tax changes made last year which the Government have been prepared to maintain this year.

For directors the average pay rise, with the tax cut included, has been 26 per cent. According to the survey, the increase for those in the senior directors' grade has been 47 per cent. For those with unearned income—the top 1 per cent.—it has been 86 per cent. I can think of no occasion in this century when the living standards of pensioners and others on fixed benefits have fallen at the same time as there has been such a huge and disproportionate increase in the benefits of those at the very top.

In this Finance Bill, the Chancellor had a unique opportunity to correct last year's errors and to introduce a truly radical element into Tory Budget policy—fairness. By failing to apply that test the Bill compounds rather than corrects those errors, which is why we shall vote against it this evening.

5.26 pm

Mr. Terence Higgins (Worthing)

On Second Reading of the Finance Bill, every Chief Secretary faces the dilemma of whether to be extraordinarily dull by going through every single clause or whether to be highly controversial. Given the experience of my right hon. Friend's predecessor, who tried the second course, I well understand why he thought it right this afternoon to take a more balanced approach.

None the less, my right hon. Friend did not resort entirely to going through the Bill from clause 1 to the end. He made a number of points at the beginning with which I certainly agree. He was right to stress that the Bill is of substantial importance to the elderly, and also to point out the extent to which the Government have succeeded in repaying the national debt, and the scope that that will provide in future years in relation to taxation or public expenditure on priority items.

I do not wish this afternoon to concentrate on the details of the Bill. Let me just say in passing, in reply to the points that my right hon. Friend stressed about investment in equities and shares, that it is important to strike a balance between them and more institutional forms of saving.

This is a mammoth Finance Bill, with 250 pages. The Select Committee on Procedure, which I chaired some years ago, considered whether we should have a separate tax Bill—perhaps in the autumn—which would be dealt with at a more leisurely pace than is necessary under the Provisional Collection of Taxes Act 1968. We must consider carefully whether it will be possible for any Standing Committee to give the Bill the attention that it needs if our financial legislation is to be properly scrutinised.

The report of the Select Committee on the Treasury and Civil Service is based on evidence given to us by the Chancellor, the Governor of the Bank of England and officials. It is undoubtedly the case that the evidence we now get subjects the Chancellor, the governor and officials to far more intensive scrutiny than was ever the case. That is an advantage for this House when it comes to consider matters connected with this Bill.

The Select Committee report is unanimous. It brings out the various problems inevitably being faced at present. The report also draws attention to matters affecting the origin of the present financial situation. The hon. Member for Dunfermline, East (Mr. Brown) referred to the remarks made by Mr. Banham about the 1930s. We must be clear that many of the present problems are the direct result, as the Chief Secretary pointed out, of action taken by the Chancellor in conjunction with other Finance Ministers, with virtually unanimous support—with the exception of perhaps one of my hon. Friends—to prevent a world slump of the 1930s type after the stock exchange crash in autumn 1987. As we make it clear in paragraph 11 of the Select Committee report—and we quote the Chancellor and the governor.mistakes were made at that point in relation to monetary policy. In a way, we are now suffering a hangover from the stimulus which was given to the economy in 1987, for the reasons that I have explained. In that context, hon. Members must appreciate the point stressed by the Select Committee again and again, that the statistical basis on which the Government and, indeed, Parliament are taking decisions is seriously defective. I welcome the fact that an inquiry has been conducted and that the Government have responded, but the statistical situation must be improved, otherwise inevitably mistakes of the kind recorded in the Select Committee's report will be made.

It is also important to appreciate the speed with which the economy accelerated following the stimulus given to it. As the Select Committee's report points out, the Government and the House are now on a tightrope, with a real danger on either side. On the one hand, if the measures the Chancellor has taken on interest rates have a rapid and too dramatic effect the country could fall into recession. On the other hand, if those measures take too long to produce an effect, confidence in sterling will weaken, and the decline in the value of sterling will generate inflationary pressures. The essence of the problem, as the report makes clear, is essentially one of timing. The dilemma is that we do not know at what rate the increase in the interest rate will actually have effect. As the report makes clear, this situation is likely largely to affect those who have mortgages, having borrowed on an appreciation of house prices. Therefore, there is a lagged effect. It is important that the Chancellor should therefore seek to maintain the balance that he is presently achieving. He should take appropriate action as the occasion arises.

We need to ensure that we do not rush hastily into other measures that push the economy on one side or the other of the tightrope to which the Select Committee has drawn attention. In that context, what is clearly needed is significant evidence that a slowdown in the economy is taking place. In his evidence to the Committee, the Chancellor referred both to house prices and the extent of house purchase transactions. He also referred to the indicator MO on the money supply. I hope that action will he taken to ensure that such evidence as we have on these matters is also improved.

It is also of grave concern that we are likely to suffer from the actions of foreign Governments. Against the background of international monetary co-ordination, which the Chancellor has played a prominent role in fostering, I hope that there will be some co-ordination. The hike in German interest rates last week was unfortunate. The response of the international community generally to that development seemed rational in the circumstances.

The Committee's report also brings out clearly the fact that, in addition to treating interest rates as its main instrument, the Government have taken appropriate action on the fiscal front. We are undoubtedly running a budget surplus of totally unprecedented size. My personal view is that it does not seem reasonable to argue that last year's Budget was too slack if we end up with an all-time budget surplus. However, the Committee's report brings out the fact that we are operating against a background in which consumers are being inundated with appeals to borrow more money. So last year's Budget created an air of confidence that had a greater effect on the economy than could easily have been predicted. I believe that the Chancellor's monetary measures are likely to have an effect. Labour Members have rightly pointed out that interest rates have been increased successively to a very high level. It is right and proper that we should maintain that position.

In many respects, we are in a dangerous position. The balance of payments situation certainly gives cause for concern. Unlike some members of the Select Committee, I do not believe that the solution to the present problems is to be found in a depreciation of the exchange rate. I believe that the Chancellor's attitude in this respect is correct. If we were to have a sterling depreciation when the economy is operating close to capacity, the danger would be that the inflationary pressures would become quite uncontrollable.

A policy of no depreciation of the currency combined with deflation will inevitably take a considerable time to have effect, and this is a cause for concern. The deflation in this case is against the background of very high profit levels, so that the resistance to wage settlements by the private sector is likely to be a rather lengthy process. Overall there are causes for concern, but I believe the Chancellor is right to say that the exchange rate should be maintained at the present level. None the less, he should take deflationary action to deal with the inflationary pressures and bring the economy back into equilibrium.

I believe that the stress the Chancellor is putting on the ability of capacity effect to improve the export side is likely to be an over-estimate. The Select Committee seeks to bring out this point. There are likely to be effects with regard to the import side of the equation.

Basically, I believe that we must hope that international events do not disturb the present equilibrium. We shall need to maintain the exchange rate and keep interest rates at a very high level for a considerable time. None the less, my hope is that it will be unnecessary to increase them further against the background I have just outlined.

Mr. Tim Smith (Beaconsfield)

rose—

Mr. Higgins

I will not give way. I was about to say that short speeches are in order.

I want to make one final point in a wider context about the Delors committee report. The argument has been put forward by Delors that we should progress from 1992 into a situation where we eventually end up with monetary and economic union. Once we have begun going down that path there is to be no turning back. I feel bound to say, in the context of a debate on Second Reading of a Finance Bill, that the whole basis of authority of this House has always rested on the control of money—the control of taxation on the one hand and of expenditure on the other. The ultimate aim sought to be achieved by the Delors committee report is one where there are constraints on the budgetary policies of national Governments. In that context the Chancellor is right to have responded as he has to the Delors committee report. The matter is of great importance. It does not mean that we should not proceed to 1992 and seek to make progress and, if need be, go along with some of the other proposals—for example, the exchange rate mechanism—at whatever may be an appropriate speed. But we should not commit ourselves to a course of action that is explicitly designed to take from this House the fundamental authority that it has in respect of money matters. I hope that my right hon. Friend will put that point clearly to his colleagues in the European Economic Community. I find it extraordinary that the French Prime Minister should attack us for going too slowly when we abolished exchange controls about 10 years ago, and when France still has a considerable way to go in that regard.

Finally, as the Treasury Select Committee report makes clear, as does the evidence from my right hon. Friend the Chancellor and the governor, we are in a difficult economic situation. I hope that as a result of the policies now being pursued we shall see our way out of the present difficulties, albeit that they are very considerable.

5.40 pm

Mr. A. J. Beith (Berwick-upon-Tweed)

It is a pleasure to follow the Chairman of the Treasury Select Committee, who guides that Committee so well. There was an indication in his comments that we disagree on some matters. I disagree with the right hon. Gentleman about the need for a move towards economic and monetary union in Europe. The illusion that the House has autonomy and that the Government possess sovereignty over many economic matters is at the root of many of our difficulties. What sovereignty is there when a 0.5 per cent. rise in the Bundesbank's interest rate sends tremors through the whole of our system? We are very interdependent. However, it remains the case that a Select Committee whose members hold many different views as to what precisely should be done analysed the situation and arrived at common, shared conclusions on some of the weaknesses and dangers that exist. The Chancellor of the Exchequer cannot be as dismissive of that as he originally sought to be.

The Finance Bill is lengthy, but that is not a tribute to its gravity or radicalism. The Bill does not achieve any of the radical, tax-reforming changes that remain to be effected. I refer to proper integration of the tax and benefit systems, for example. The Bill does not even integrate properly the tax and national insurance systems. Instead, it turns aside from elements of normal taxation policy, such as indexation of excise duty on alcohol and tobacco. We all know why that was done—because the Chancellor was so terrified of what might otherwise happen to the retail prices index.

My right hon. and hon. Friends and I, along with others, will seek to amend the Bill in a number of respects. We shall strongly oppose tax relief on health care, which the Chief Secretary to the Treasury said is not as important as has been widely suggested. It is like the housemaid's baby—just a little baby. But it is intended that that baby will grow. It is certainly the Prime Minister's intention that it will be the starting point of a much wider system of encouraging people to get out of the National Health Service and to provide for their health needs by private insurance. That is being done in the knowledge that that will be a wholly inadequate way of providing for the health care of many people, and one that will fatally damage the Health Service itself.

We shall seek also to correct other faults in the Bill. The Chief Secretary made mention of the clauses dealing with charities. I still believe that more can be done under the European ruling to ease the position of village halls, for example, without completely defying that ruling. I hope that the Government have not closed their minds to the charitable aspects and that they will be examined in more detail.

We want to close some of the loopholes in the business expansion scheme. One wonders whether anybody will use that scheme to invest in manufacturing while it is so heavily loaded towards property investment, which is protected from serious depreciation by the value of the property itself. The use of the business expansion scheme in manufacturing is no longer seriously attractive and it needs to be modified.

We want to consider also the matter of nursery care, where we believe there is scope for tax relief—particularly as we enter a period of potential labour shortage.

Most right hon. and hon. Members view this not as an occasion to debate Committee points but to examine the background to the Finance Bill and the Budget. Had the situation not changed so dramatically, we might have expected an announcement from the Dispatch Box as to the current state of the economic miracle. That is what the Government used to talk about, but there was nothing miraculous about the Chief Secretary's comments. The "Oxford English Dictionary" defines the word "miracle" as A marvellous event exceeding the known powers of nature … an act … exhibiting control over the laws of nature, and serving as evidence that the agent is either divine or is specially favoured by God. We now clearly see that control over the laws of nature is not within the grasp of the Prime Minister and that she is not a divine agent.

As was seen last year, too much money chasing too few goods produces classic inflation. High interest and high exchange rates increase the difficulty for industry in its efforts to improve exports and achieve the turn-around that the Chancellor requires. None of those laws of nature has been changed. It is time to examine the miracle.

We start with the Government's strong point, which is said to be productivity. That is where the Government say they have achieved the greatest transformation. The Government have a tendency to choose the base year for their statistics very carefully. In 1979, productivity fell by more than 2 per cent. Last year it increased by only 1 per cent. Average growth in productivity since 1979 is only 1.8 per cent., compared with 2.2 per cent. in the previous 20 years. The improvement in productivity has been nothing like as good as the Government suggest.

There have been certain improvements, but some of them are the painful results of a recession that the Government themselves brought about. Others are associated with the ending of restrictive practices and with changing much of the climate of wage bargaining. The situation is not all bad, and there have been some significant improvements. However, the end result is not a more competitive industry. Unit labour costs have not been reduced as a result of productivity gains, and British industry is still not sufficiently competitive. So the Government's productivity record, which is said to be their strongest point, is not really very good.

Inflation is the Government's highest priority, but the picture there is appalling. We have inflation of 7.9 per cent. under a Government who think that they have removed all the basic causes of inflation. The situation is bound to worsen. Wage inflation has seriously taken off. Average earnings last month rose 9.25 per cent., and the danger of a wages spiral is clear. Commodity prices internationally are strong, and the Government themselves are increasing public sector prices. Water charges, transport costs, electricity costs and many other increases are dictated by other Government policies. They are not the result of increases in costs to those industries but of the Government's desire to restructure the water industry, for example. Water industry chairmen—particularly those already in the private sector—are imposing increases of 20, 30 or even 40 per cent. on the basis that they are necessitated by Government changes rather than by cost increases. It is estimated that without North sea oil inflation would be 11 per cent. higher than it is. The Government rely on the benefits of North sea oil to hold at bay a very worrying situation.

The Government's high interest policy may have become a necessity because of their fear of what would happen to inflation if the exchange rate fell. It may not slow the economy enough, or may take so long to do so that the prescription will be worse than the cure. The monetarists within the Government face something of a crisis. Traditionally, they are both monetarists and free marketeers. That was all very well when one could attribute inflation to a high public sector deficit. Then, the monetarists could say, "We shall deal with that. It is in the public sector." But when monetary expansion occurs mainly in the private sector, it is difficult to sustain a monetarist policy and to apply remedies. The Government are frightened of applying remedies to monetary expansion in the private sector.

The Chancellor's fears are illustrated by the extent to which he concentrates on the instrument of high interest rates. We argue that Government policy should be more broadly based. We say that they should drop those public sector price increases that are dictated other than by inevitable cost increases and take steps to stop by persuasion the aggressive marketing of credit. Having advanced that view several times in debates, I have at last evoked some response from the Financial Secretary, who told the Finance Houses Association that its members' advertising gives the impression of "profligate and imprudent" lending. The Government are moving towards what the Japanese call firm administrative guidance. Why not? Why should not the Government exert some pressure on banks and other lenders to improve the situation?

We have argued that the Government, as an obvious anti-inflationary discipline, should have already got Britain into the European monetary system, and we argue that there is still scope for improving the attractions of saving in order to reduce the rapid credit expansion in the private sector. There is scope for increasing saving. The Government themselves concede that what they have done on the PEP scheme, for example, is more likely to "deepen" than to "widen" share ownership. I quote the Chancellor's words. The Economic Secretary to the Treasury is so used to my pressing this argument that he must recognise that there is no real sign that the measures in the Budget will bring about a wide increase in savings.

In addition, the Government have scope to use investment in prudent, non-inflationary ways to tackle the trade deficit problem. Unless they do something like that, there is no sign that anything else will do so. The Government's prophecies about the trade deficit are really quite extraordinary. Having moved from a forecast of a £4 billion trade deficit, they now recognise that we will have a trade deficit of at least £14.5 billion. But they see it going down to £3 billion by 1991. That is the implication of the figures that they have given us. The assumption is that there will be a massive switch in capacity from the home market to exports. There is no evidence to suggest that anything like that is beginning to happen, or is likely to happen, at a time when world trade growth is forecast to slow down, and United Kingdom cost competitiveness is likely to slow down as well. Indeed, there is some danger that the United Kingdom now has a structural deficit, which cannot be changed unless other measures also are taken. It requires far more of a miracle than there has been any sign of so far to bring about that change in competitiveness.

The other star point of the Government's miracle is supposed to be the surplus—the ability to repay public sector debt on a considerable scale because of the budget surplus. But this surplus is derived, in very large measure, from asset sales. Certainly, half of it can quite clearly be attributed to asset sales. It cannot be sensible steadily to diminish our national public investment at such a rate, and on such a scale, when there are obvious needs that the public sector can meet. Maybe those needs are different from those that the public sector has traditionally met.

I would go some way with the Government in saying that there is, indeed, a logic in releasing resources trapped in earlier forms of public investment, and shifting them into other forms, and, indeed, arguing each case on its merits. But there is clearly an urgent need for investment in training, in transport, and in communications—in things that can help to make industry more competitive. The Government should be identifying the areas of difficulty—areas like skills shortages and transport costs arising from weakness in the transport system—and directing public investment into those areas.

Of course, one of the illogicalities of the present system, to which the Treasury Select Committee has pointed in previous years, is that we never consider these things at the same time. If there is any stronger reason for considering expenditure and revenue at the same time than suddenly finding a surplus far greater than the Government themselves predicted we would have, it is hard to find. When the Government find themselves with an immensely larger surplus, surely there is a case for considering again the expenditure decisions that were made at the time of the Autumn Statement.

Hon. Members of all parties have spent a lot of time over the years telling various groups of constituents that they are in favour of what those constituents suggest, that their ideas are very good, but that the nation cannot afford them. The situation now is that the nation could afford a number of things if—and only if—it could manage the economy in such a way as to ensure that the spending on those things was not inflationary and did not generate dangerous economic pressures. That is the challenge to the Chancellor, but it is a challenge that he is totally failing to meet, because he does not accept the case for public investment in those areas that could make industry more competitive.

The Treasury Select Committee report has helped to remove a lot of the flannel and waffle that have surrounded recent discussion on economic matters and has, I hope, dispelled some of the myths and fallacies. It has attributed quite a bit of blame to last year's Budget, but also to decisions that were taken last year in the aftermath of the stock market crash. To that extent, nearly all of us must accept some share of the blame, because the Chancellor had very few critics for his interest rate policy a year ago. But, having embarked on that policy of lower interest rates, he himself should have realised that to take measures which would give people the expectation that borrowing would be easier, and a very good thing for them, and at the same time to take measures that put a time limit on people rushing out to buy houses and get multiple tax relief on them, would be bound to exacerbate the situation. That is detailed and set out in the Treasury Select Committee's report, and the Chancellor cannot escape the blame for it.

I think that, for that and other reasons, the Chancellor now finds himself, in the Committee's words, "on a tightrope". But he is not alone on the tightrope; also on it are all those people who do not know how they are going to carry on paying their mortgages, and all those people who do not know whether they will still have a job if the only way in which the economy sorts itself out is by a slump. When they fall off the tightrope, it will hurt them a great deal more than it hurts the Chancellor. It is to those issues that the Chancellor must now address himself.

5.56 pm

Mr. Tim Smith (Beaconsfield)

When I went canvassing in part of my constituency on Friday evening—it was an area that my agent had recommended because, he said, the Social and Liberal Democrats were putting up the strongest challenge there—it was with some trepidation. Recently my postbag has not been full of letters congratulating the Government on the excellence of their policies. I have received a lot of criticism and a lot of complaint. I know very well that, as we have been told during the course of this debate, all those who have mortgages, including, no doubt, many hon. Members, have had to put up with much higher monthly mortgage payments. That can never be popular.

I was, therefore, very pleasantly surprised to discover that support for the Government is holding up very well. I believe that the reason for that is well illustrated by this debate. Although the speech of the hon. Member for Dunfermline, East (Mr. Brown) on behalf of the Opposition was effective at the most superficial level, he told us absolutely nothing about the Labour party's alternative to the Government's policies. I believe, and I think that opinion polls show that the electorate believe, that if at present we do have some economic difficulties to cope with, it is the Conservative Government and their Treasury Ministers who are best equipped to cope with them.

In a sense, it would be a little unfair to direct that comment to the hon. Member for Berwick-upon-Tweed (Mr. Beith), who has just spoken for the Social and Liberal Democrats, because he at least put forward a number of constructive alternatives to the Government's policies. However, I have to tell him that the people to whom I have spoken are not too enthusiastic about his party, simply because it cannot agree with the other party that is supposed to be in the centre—the SDP—about anything, and because two candidates are being put up, not just in the current by-election but all round the country in the forthcoming elections. The hon. Gentleman needs to think about that, but at least he did put forward some constructive proposals.

Yesterday, as I read the Treasury Select Committee's report on the Budget proposals, I felt—and I hope that my right hon. Friend the Member for Worthing (Mr. Higgins) will forgive me for saying this—that there was an element of using the benefit of hindsight about the way in which what had occurred was being looked at.

Mr. Higgins

We said that several times.

Mr. Smith

I think that the report says so, but the way in which it was portrayed in the press today was such that one would think that the Committee had been extremely critical of the Treasury's handling of policies. But anybody who listened to my right hon. Friend's speech just now will have noticed that he did not criticise the present exchange rate policy or the present interest rate policy. Although there is an element of trying to balance on the tightrope in respect of what is going on at the moment, he did not make any major criticism of the way in which the policy is being handled. Everybody needs to be a little modest, a little humble, about the present situation. As the hon. Member for Berwick-upon-Tweed has just said, there was a pretty good degree of consensus about all this just over a year ago, after black Monday. Then the concern was really that we would have a repeat of what had happened in the 1930s. We knew that if we were to make a mistake, the right mistake would be to have too lax a policy rather than a major recession on our hands. We just need to reflect a little on that as we find ourselves in the present situation. Naturally, everybody is frustrated. People want to see the effects of the present policy coming through.

We have been told that the jury has been out for an awfully long time, and people have asked whether it is not time that it came back with a verdict. Unfortunately, the verdict on these policies is that we shall have to be a little patient, because the policies will take time to work through. The danger is that we shall over-react. The Treasury should hold the line with a 13 per cent. interest rate. The policy of the last five months should be allowed to continue and to work itself through. It will eventually lead to a satisfactory outcome.

Ms. Diane Abbott (Hackney, North and Stoke Newington)

The hon. Gentleman urges us to wait and to allow the policy to work itself through. People in my inner London constituency who last year took on an average mortgage are now paying £133 a month more in mortgage interest repayments. Many of them cannot meet their basic domestic commitments. How long must my constituents wait for this policy to work itself through and how high is the hon. Gentleman prepared to see interest rates go?

Mr. Smith

I have every sympathy with the hon. Lady's constituents. Many hon. Members have had to face that problem. First-time buyers mortgaged themselves up to the hilt when interest rates were relatively low. It must be very painful for them at present, but I have had a mortgage for about 17 years and I know that it gets better. It will get better for the hon. Lady's constituents, but they will have to be patient. If experience is anything to go by, the proportion of their monthly income that people spend on mortgage interest repayments reduces. The fact that people took on such high mortgage commitments last year was a reflection—perhaps a misguided one as it turned out —of their confidence in the future. Had it been otherwise, they would not have made such a decision in the first place.

Mr. John Heddle (Mid-Staffordshire)

Does my hon. Friend not agree that the best advice that he can give to the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott) to pass on to her inner London constituents is that they should put their problem to their building society or to the institution from which they borrowed their money? They are likely to receive a very charitable and most understanding response. Their capital and mortgage interest repayments will probably be frozen; an accommodation will probably be reached over a short-term period.

Mr. Smith

I am most grateful to my hon. Friend, who is an expert on these matters. Lending institutions of all kinds are always sympathetic. The loan will have been taken out over a long period. Lending institutions may well be prepared to consider such an accommodation as my hon. Friend suggests.

I share the concern of those who have complained about the length and complexity of the Finance Bill. It amounts to 250 pages. The House needs to reflect on how it will consider future tax legislation. It is 10 years or more since my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), who is now the Foreign Secretary but who at that time was the shadow Chancellor of the Exchequer, suggested that we should have a technical tax Bill. I understand why the Treasury does not relish that prospect. It is bad enough having to deal with one Finance Bill a year; to have another would perhaps be a bit much. It would not fit into the parliamentary timetable. However, it will not be easy adequately to consider all the clauses in this long Bill.

The Select Committee on Procedure—if that is the right Committee—should consider how the House ought to deal with tax legislation. We want it to be simplified. My right hon. Friend the Chief Secretary told us that this measure will simplify matters, but the net result will be a substantial addition to the quantity of tax legislation. I have come to the conclusion that the best and perhaps the only way to simplify tax legislation is to abolish whole taxes. We do not seem to be able to make progress in any other way.

The Red Book shows which taxes raise the largest proportion of revenue. Far and away the largest revenue raisers today are income tax, corporation tax and value added tax.

Mr. Chris Smith (Islington, South and Finsbury)

And national insurance.

Mr. Smith

Yes, but national insurance is paid into a separate fund. The community charge will also raise a large proportion of total revenue.

At the other end of the scale, inheritance tax raises only £1.1 billion and capital gains tax raises only £2.1 billion. In an ideal world there would be no taxation. The only object of taxation is to raise revenue for spending. I believe that we should tackle some of the taxes that raise relatively small amounts of revenue and get rid of them, not just to simplify matters but because every tax that has ever been raised affects people's economic behaviour. Taxation changes make people change their economic behaviour. That is particularly true of capital taxes; they have a disproportionate effect on people's economic behaviour.

I am concerned about the capital gains tax rate. A 40 per cent. capital gains tax rate is too high. Such a high rate of tax deters people from investing. If someone were to say to me, "I have £1 million in cash that I should like to invest, so can you tell me what is the most tax-efficient way to invest it?" I should say to him, "The best thing to do is to buy the largest possible house that you can afford." It is no wonder that estate agents in London still have queues of people who want to buy houses in the home counties at £1 million or more. It is because it is tax-free.

If that person then said to me, "I've still got some cash over", I should feel bound to say to him, "You had better put your money into a business expansion scheme, because you will get up front income tax and capital gains tax relief." If he then said to me, "I should really like to invest in my own business—in a high-risk, high-tech business start-up", I should have to tell him that there was no tax relief up front for his investment and that if he were successful he would have to pay 40 per cent. capital gains tax as the price of his success. That seems to me to be a crazy sense of priorities.

Mr. Boswell

I am following my hon. Friend's argument with interest and some sympathy. Does he not agree that many hon. Members have received representations from their constituents about specific proposals in the Finance Bill that are connected with the treatment of settlements and discretionary trusts and about the possibility of reallocating the affairs of a taxpayer and the settlement of a will after a death? Are these not matters that we shall have to consider carefully, together with the point that my hon. Friend has made about the high level of capital gains tax that is now in force?

Mr. Smith

My hon. Friend has raised an extremely important point that we shall want to consider in detail in Committee.

Clauses 51 to 54 deal with tax relief for medical insurance. My right hon. Friend the Chief Secretary said that in some ways the debate on the subject had been inflated out of all proportion. I have major reservations about the introduction of such a tax relief. I have read the submission of the Royal College of Nursing, which many hon. Members received today. I sympathise with the view that if £40 million is available, it would be better to spend it on the National Health Service. There are good tax reasons why this would not be a sensible change to make. I believe strongly in having as wide a tax base as possible and, therefore, rates of tax that are as low as possible. Before we introduce a new tax relief such as this, we need the clearest possible evidence that it would be effective and that the change is genuinely needed.

We are told that when the change is introduced in 1990–91 it will cost £40 million. Almost all of it will be a deadweight cost. In other words, the relief will go to people who are already making those payments without tax relief. The Red Book says that the Treasury has assumed that in 1990–91 the number of people paying premiums, as a result of the relief, will rise by 10 per cent. I do not believe that that is a sufficiently large percentage; if it were a much larger percentage, there might be some justification for it. I do not believe that the case for the new relief has been proved. It sets an unfortunate precedent.

All hon. Members have received representations from constituents who believe that there ought to be tax relief on the cost of commuting into London. The only result would be that people would move even further out of London. We have also received representations about tax relief on the cost of private education. The same argument is used—that it would relieve the pressure on the state-maintained education sector.

I am all in favour, of course, of allowing people to make a choice whether or not they use the National Health Service, but I have never understood the argument used by the Leader of the Opposition, who complains that the Prime Minister does not use the NHS. Anybody who does not use it is obviously relieving it of a certain degree of obligation and a certain amount of work.

It is quite another thing to take a further step and to use taxpayers' money—because that is what it is—to give one group special relief. Not only could we give this £40 million to the NHS, but we could give it to all retired taxpayers rather than discriminating. I do not believe the case has been made, but of course there will be a major debate on this in a couple of weeks' time, and we shall be able to explore the arguments more fully. I look forward to hearing what my hon. Friends have to say to support this in rather more detail.

Finally, I make it clear that, subject to that one proviso, I support this Finance Bill. I support all the measures in it. Many of them have been welcomed, particularly those which help old people and charities. Many of them make further changes which will help the performance of the economy. I therefore support Second Reading.

6.10 pm

Mr. Robert Sheldon (Ashton-under-Lyne)

The hon. Member for Beaconsfield (Mr. Smith) made two points which interested me particularly. We can admire him for his stand on medical insurance and look forward to his further contributions on that. This kind of tax law is wrong, as he rightly says, as well as the other things which we on the Opposition Benches also believe to be wrong. However, he left out stamp duty. After all, if there were a tax I would have expected this Government to do something about, the £2 billion raised by stamp duty might have been one of the front runners.

The Chief Secretary today broke a long-standing tradition, which has been going ever since the Treasury and Civil Service Committee came into being, of congratulating the right hon. Member for Worthing (Mr. Higgins) on his work. We heard neither the congratulation nor any mention of the report, which was quite surprising, particularly since the Order Paper for today says: "Finance Bill: Second Reading The Second Report of the Treasury and Civil Service Committee of Session 1988–89 on the 1989 Budget (HC288) is relevant." However, it was not relevant to the Chief Secretary to the Treasury, who did not mention it at all. What we have had instead of useful discussion and debate is a mammoth Finance Bill. I believe one always gets a mammoth Finance Bill when a Government run out of ideas. Experience over 25 years has taught me that.

Such a Bill deals with the boring detail at which a Government start looking when they do not know what else to do. The Inland Revenue pours out representations which would produce a Finance Bill of thousands of pages if they were all accepted, but what a resolute Chancellor of the Exchequer, Chief Secretary and Financial Secretary should say is, "This is nonsense. We cannot have this," and run the Finance Bill according to the wider policies. It did not happen on this occasion.

I support the Chancellor of the Exchequer strongly on one matter. I supported entry into the Community but, like the right hon. Member for Worthing, I am wholly against economic and monetary union as proposed in the Delors report. If we were to get it—and that is a very big if at the moment—the question would arise as to who controls it, who implements the decisions, who really decides these matters. We had the argument right up to 1945 with the Bank of England. We had the gold standard. The bankers were in charge. They ran the whole show, because no Government knew very much about it, and the Bank of England was a powerful body with that level of expertise; it knew how markets operated, and in the end generally got its own way.

The crucial thing we learned was that banking decisions are political decisions. Exchange rates and interest rates are not decisions for bankers alone. To control the banks with a strong, united British Government even now is not an easy matter, as any Chancellor of the Exchequer or Treasury Minister will confirm, but to control a Eurobank, with inevitable disunity among the 12 states, means in effect that the bank will make the decisions. There is no other central body powerful and knowledgeable enough to contend with such authority.

In Britain it is thought that the Government decide and the bank influences. That is far too simplistic a view. In fact, there is an inter-relationship with the power of the Chancellor of the Exchequer, who, after all, can appoint the governor and has many other powers as well. This inter-relationship is very complicated. It is only in recent years that we have had in the Treasury a level of expertise which can take an overview of the bank's problems and involvement. Until the last 10 years we did not even have that; the governor view was the only view based upon experience and understanding. We now at least have in the Treasury something that contends with that view; not wins but contends. As a result, there is a more useful dialogue than there used to be when the bank jealously protected its power through the knowledge and understanding it had.

Let us not be fooled by those who will tell us we should have our own voice in the central bank and we will all be part of the decision-making process. It will be another British banker's voice, and my guess is that it will be indistinguishable from that of the others who will find a dominant role as a consequence of the transfer of functions. We should be aware that there is no power to give the politicians in any of these countries the ability to operate the bank for the interests of the Community as a whole and of the individual member states. So I welcome the strong views expressed by the Government and support them fully.

Turning to the balance of payments, my criticism that what the Government did was wrong was not to do with the consequences of the stock exchange fall. What they did was right but too late. There should have been a credit squeeze last autumn. It was a terrible mistake. They could have introduced credit controls. Of course, we know that none of these measures is perfect. Nothing a Government ever did is perfect. They take certain actions which are better than others, but they could have had an immediate impact.

We all know, of course, that they can borrow from overseas banks, but the question we have to ask ourselves—the sensible political question which, after all, we are here to ask—is what the ordinary person would do if, having been told by Curry's or some other high street store that there was a deposit to be paid on a new video, he was told that his British bank would not allow the loan. Would he go straight to an overseas bank and negotiate a dollar loan? Of course not. We are politicians; we see our constituents. How many of them would do that?

Mr. David Shaw (Dover)

Some of mine would.

Mr. Sheldon

Over time of course there would be some; there would be some like the constituents of the hon. Member for Dover (Mr. Shaw), who would go straight to the overseas bank, but that is not true of my constituents. Over a period of time they would begin to learn and understand about these things, but by that time something would have been done. There would have been an immediate impact. It is no use coming seven months later, when we still have those high levels of sales in the high street. It is a disgrace. The Chancellor of the Exchequer has failed miserably in doing now what should have been done seven months ago, and it is because he had a simplistic approach. Of course, we all know that if exchange rates are kept long enough and high enough they will reduce the level of economic activity. But they do not discriminate.

There were methods by which the Chancellor could have brought about a quicker change. Every month we have delayed, the adjustments to high spending have made the landing much more likely to be hard. This should have been the overriding principle: the sooner we act, the softer the landing is. The Chancellor of the Exchequer ignored that, and the results are there for us to see.

As my hon. Friend the Member for Dunfermline, East (Mr. Brown) and others pointed out, we have not heard much about the economic miracle today. We heard a little about it, but not much. We know that the economic miracle was based on North sea oil, which produced the balance of payments surplus.

We can forget about the revenue, as that is small stuff compared with the balance of payments surplus which allowed the Government a profligate spending spree and permitted the elevation of financial services, with money passing from hand to hand with bits sticking to fingers on the way. It allowed us a stature in excess of our true position and it allowed us to scorn our manufacturing industry. The Government call it an economic miracle. North sea oil solved the balance of payments problem for the seven fat years, but now we may have to prepare for the seven lean years. Obviously, North sea oil will continue but it will not provide the cushion or the feather bed that it has provided so far, and we do not have the manufacturing industry that we once had.

Ten years ago things were very different. The Government destroyed one third of the companies in my constituency, which had levels of pay and employment far better than most parts of the country, and high skills and medium technology industries which, alas, exist no longer. If I were superstitious I would instance the curse of oil —the way in which so many countries have abused that wondrous gift. Iran, Iraq, Libya and Mexico have reacted to the unexpected arrival of the fortunes of oil by abusing their good fortune. It might have been expected that a mature economic and political power would have had the good sense to avoid folly when arriving at great fortuitous wealth by using it to prepare for the future. Well, the future has arrived and the Government do not know how to deal with it because they did not prepare for it.

The memorial to the Government's lack of foresight is our balance of payments deficit, compounded by our dilapidated society with unmade roads and railways, where accidents happen and schools are not properly maintained, while countries such as Germany, Japan, Italy and France have flourished without the oil. The oil revenues have some of the characteristics of capital rather than income, which can be renewed and increased. Through depletion, our oil rigs and the fuel they provide represent a finite resource which, like the nationalised industries being privatised, can be sold only once. In the selling-off we should have obtained true lasting value for those precious assets, rather than the meretricious goods we have obtained.

What should have happened is that our industry—our main renewable source of wealth—and the educational advancements which are its main protection should have been the beneficiaries of the capital windfall. But we face the future in a worse position than when North sea oil was just a gleam in the eye of the Treasury.

I shall deal briefly with the monetary mania which we do not hear quite as much about as we used to. I have noticed with amusement the changing patterns of sterling, M3, M1 and MO. It is like a person trying to lose weight who changes his diet at every meal and then is surprised and confused when he remains overweight. But M3, M1 or MO have been dealt with with unbelievable naivety. Those hard-headed men and women of the world are supposed to be knowledgeable about markets as well. I would not trust them in the Petticoat lane market let alone the Chicago futures market or the London metal exchange. That view was reinforced when the former Chancellor of the Exchequer had his trousers stolen on the London to Manchester sleeper. Despite their formidable presence at international meetings, the Government are naive in their adulation of what they do not understand—the way in which the market system operates.

When the Government applied those naiveties to public expenditure, first they aimed to cut total expenditure, but they did not. Then they decided to stabilise public expenditure in real terms, but they did not achieve that either. They then decided that public expenditure as a proportion of national income should fall. It moved from 43¼ per cent. in 1979 to 47 per cent., although it is coming down now. None of those crucial elements of the operation of the economy—whether crucial is defined by the Opposition or by the Government—has been at all successful. I am not sure whether the presence of Alan Walters will improve matters. It is rather humiliating to have as one's next-door neighbour someone who has been brought in to examine the way one is running things.

Despite what has been said, the outlook is not rosy, the economic miracle has not happened and the optimism is ludicrously misplaced. The Finance Bill has failed to deal with a truly serious position, and we shall have to return once again to our basic economic problems.

6.24 pm

Mr. James Arbuthnot (Wanstead and Woodford)

I thought at the time that last year's Budget was the best Budget I had ever heard. This year's Budget continues what has now become an established tradition—sound financing of the economy, sensible, far-reaching tax reform, repayment of some of the national debt to the benefit of future generations, and more help to pensioners, particularly through the abolition of the earnings rule.

I shall concentrate on two points, one a major matter and the other less so. The major matter concerns the thresholds of taxation, the points at which low earners enter tax. It is important to make sure that the thresholds of taxation do not bite too hard. The higher the thresholds, the greater the incentive to work and the less damaging the effect of the poverty trap. So the Government were absolutely right gradually to increase the thresholds of income tax over the years in a way which has removed or at least reduced the poverty trap. But this year my right hon. Friend the Chancellor of the Exchequer increased the thresholds by introducing a major and welcome reform of national insurance thresholds.

National insurance is a quite extraordinary animal. In the past two years I have called on my right hon. Friend to abolish it outright, and perhaps my hon. Friend the Member for Beaconsfield (Mr. Smith) should add it to his list of taxes which should be abolished. Nevertheless, my right hon. Friend the Chancellor severely weakened my case for abolition by removing the steps between 5 per cent., 7 per cent. and 9 per cent. and by reducing the initial payment of national insurance from £2.15 to 86p a week, while preserving the entitlement to contributory benefits which result from paying national insurance.

As so often, my right hon. Friend has found a solution which seems obvious but which had eluded us for a long time. I believe that there are still grounds for examining the long-term value of national insurance and whether we need to keep it separate from income tax with separate bureaucracy and paperwork. I join the hon. Member for Birkenhead (Mr. Field) who yesterday hoped that my right hon. Friend the Chancellor would not rest on his laurels. Nevertheless, I warmly welcome the Government's latest move, which is a major step forward which will benefit the low paid and improve the economy.

And now to minor matters, as Lady Bracknell would say, although the point I wish to raise is not so minor. It concerns clause 167 which limits the value of instruments of variation for the purpose of inheritance tax. I should declare an interest as I am a Chancery barrister and see quite a few wills and applications to the court by dependants who feel that they have not received sufficient or reasonable provision from someone's estate. I see a number of these instruments of variation, or deeds of family arrangement as they used to be called. They are agreements between the beneficiaries of a person's estate to rearrange the way in which that estate is divided between those beneficiaries. As the law stands, that rearrangement is given retrospective effect, as though the testator had included that rearrangement as part of the provisions of his or her will.

It has been said that people have been using these instruments of variation to avoid tax, and in a sense they have. But the great value of instruments of variation is that they allow people to be relatively relaxed about the contents of their wills. They do not have to keep updating their wills to keep up with changing tax legislation or changing family circumstances.

If people do not have to change their wills every six months or so, they do not have to incur significant legal fees, and I wonder whether we want to produce the effect of childen prodding their 80-year-old parents into rearranging their wills every six months or every year. As each grandchild is born, a new will may be needed; and as each Finance Bill is published, people may have to consult their lawyers—the lawyers always benefit; I admit that —to see whether a new will is needed.

As a Chancery barrister, I shall do well out of it, and perhaps I should not complain, but as one who hopes to see the Finance Bill as a whole become law, I question whether what is proposed is a sensible way of going about what the Chancellor wishes to achieve. If people begin to change their wills more often, the natural effect must be that clause 167 will not produce the yield of £15 million which was suggested in the press release. It is a small enough yield anyway in some respects, and if it does not materialise the whole business may be pointless. Not only will people have to change their wills more often, but it will be unacceptable for a person to die intestate. That was previously acceptable because one could simply rearrange one's affairs if the provision on intestacy were irrelevant or if it were not advantageous from a tax point of view.

Further, the clause as drawn will be easy to avoid by the skilful—indeed, even by the not very skilful—drafting of a will. Disclaimers, for example, have been left untouched by the clause. One can think of extraordinary ways of including in a will contingencies by the use of a disclaimer. That would have exactly the same effect as an instrument of variation, yet would produce no tax benefit for the Inland Revenue. The only benefit would be for the lawyers, who, as usual, would earn their fees.

We should be sure that new legislation will have some effect and will hit the target at which it is aimed. If it does not, it will not produce the yield expected of it. If it does, it will produce that yield only from those who are not properly advised. That will mean that the relatively poor will suffer and the rich will not, and that is not a sound basis for changing our tax law.

The Bill says that the change will not affect certain variations, being variations which are ordered by the court, which are bona fide settlements of applications to the court or which could have been ordered by the court. Those provisions are, if not absolutely meaningless, verging on meaningless. In any event, they will be the cause of an enormous amount of litigation. Again, those who will benefit will not be the Inland Revenue.

Therefore, despite my general support for the Bill and for another excellent Budget, I urge the Chancellor to reconsider the clause about which I have been speaking, because it is aimed at a mischief which, rather than being a mischief, is a benefit; because it does not stop even the supposed mischief at which it is aimed; because it penalises those who cannot afford good advice, while leaving richer people untouched; and because it will represent an absolute bonanza for lawyers.

6.34 pm

Mr. Giles Radice (Durham, North)

For all its length and detail, the Bill can hardly be described as epoch-making. For that reason, and because I am a member of the Treasury Select Committee, I shall devote my remarks to the economic background to the Bill.

As usual, I begin by congratulating—I almost called him my right hon. Friend—the right hon. Member for Worthing (Mr. Higgins) on his chairmanship of the hearings and proceedings which led to the Select Committee report, which was unanimous. We owe our unanimity, at least in part, to the Chairman's skill. Another reason is the concern felt by all members of the Committee about the seriousness of the economic situation which faces the country, and I was surprised that the Chief Secretary did not refer in his speech to the report.

I wish to underline what I see as the three most important messages of the report. The first is that the country now faces difficult problems in two connected, though separate, areas—the rate of inflation and the balance of payments deficit. The Chancellor and the Government accept that our inflation rate, which is the worst of the major industrial countries, is far too high.

But there has been a great reluctance, particularly on the part of the Chancellor, to admit that the balance of payments deficit represents any difficulty at all. The report makes it clear that the Treasury Select Committee considers that a current account deficit of over 3 per cent. of GDP—not only in 1988 but in 1989 and probably in 1990 as well—is an extremely serious matter which cannot be shrugged off.

The second message of the report is that the Chancellor is, at least in part, to blame for what has happened. As we say in the report, in the months leading up to the 1988 Budget, domestic demand was allowed to become unsustainably high, in part because of excessive monetary relaxation. The 1988 Budget then added fuel to an already overheated situation. As we point out in paragraph 50, "the combination of intense competition in retail credit and the expectations generated by the announcement of tax cuts seem likely to have added to the growth of credit and had a powerful effect on demand through its effect on consumers' confidence. The Chancellor himself admitted to us that mistakes were made in monetary policy in the period leading up to the Budget and that the four months' grace allowed before the ending of multiple mortgage relief gave a large boost to borrowing. Had the Chancellor come completely clean, he would also have accepted that his fiscal prudence of 1989 was in itself an admission of the malign impact of his 1988 Budget.

It is often said that the Chancellor's critics are speaking only with hindsight. That is factually incorrect—here I disagree with the right hon. Member for Worthing—because many economists and City commentators, as well as Opposition spokesmen, urged the Chancellor last year not to make tax cuts.

I hesitate to quote my own speeches, and I do so only to demonstrate that those who adduce the hindsight argument are wrong. On 14 January 1988, before last year's Budget, I warned the Chancellor that if he cut taxes imports would be sucked in at a time when our balance of payments was already beginning to deteriorate. In the Budget debate in March, I criticised the Budget as being not only morally repugnant but economically risky. I pointed out that tax cuts, coming on top of a consumer boom, fuelled by an explosion of credit, would make the balance of payments deficit worse.

I also remind hon. Members that the Treasury Select Committee warned in paragraph 24 of its report on the 1988 Budget that tax reductions could contribute to overheating and, therefore, to our trade deficit. In paragraph 29, we also stressed the risks of allowing the balance of payments deficit to deteriorate. The Chancellor cannot claim that he was not warned about the gamble that he was taking with the direction and balance of the economy in his 1988 Budget.

The third message from our report is also an uncomfortable one for the Government. We are frankly sceptical about the Government's predictions of a rapid slowdown in inflation or a reduction in the current account deficit. On prices, we point to the underlying inflationary pressures in the economy, including those from labour costs, increased prices in nationalised industries and other Government-induced prices. On the current account, we find the Chancellor's prediction of accelerated export growth in manufactured goods over-optimistic. As the right hon. Member for Worthing mentioned, the Chancellor is over-estimating the so-called "adjustment effect" by which, as demand is squeezed, firms automatically switch from domestic to external production. Our witnesses could provide little evidence of that process taking place.

As a Committee, we have been criticised for not coming up with any firm policy recommendations drawn from our agreed analysis—that the Chancellor is on a tightrope between a recession and a collapse of the currency. It would be wholly unreasonable to expect a Committee drawn from such a wide variety of opinions to agree on solutions, especially when they go to the heart of the party political debate. The fact that we have agreed broadly on what is happening to our economy and what is wrong with our economy should, in itself, be a benefit to the House and a warning to the Government.

I shall now turn to policy recommendations and I shall concentrate on one of the main aspects of the problems facing the Government—the balance of payments deficit. I accept that one cannot isolate the balance of payments from other aspects of the Chancellor's policy, especially his strategy for inflation. As my right hon. and hon. Friends have pointed out, the Chancellor is now in a cleft stick. On the one hand, he has stressed the importance of raising interest rates and maintaining a strong pound to bring down inflation. On the other hand, as our report points out in paragraph 31, there is no evidence that it is possible to bring about an improvement in the current account without either a currency depreciation or rising unemployment and falling output.

I will deal with the balance of payments deficit because it represents the most immediate danger. We shall need to tackle our enormous balance of payments deficit much sooner than the Chancellor seems to envisage. If we do not, we run the danger of allowing our economic policy to be dictated by the holders of sterling, who may start to lose patience with the Government's handling of the economy. A run on the pound and a precipitate fall in the value of currency could follow, with all that that could mean for inflation and the economy. Our problem is that the balance of payments deficit reflects not merely an overheated economy, but a growing lack of competitiveness and, possibly, a fundamental gap in the range of goods that this country now produces.

The director general of the National Economic Development Office has pointed out recently that our current account may be suffering both from an overvalued currency and from not producing the kind of goods that people want to buy. There is evidence of that in table 3.2 and chart 3.4 of the Red Book, for example. There is evidence both of lack of competitiveness—or loss of competitiveness—and of growing import penetration. Those are serious matters. It will clearly take some time to improve the range of our goods, but it is possible, by depreciation, to compensate for our lack of competitiveness.

I want to quote what I consider to have been wise advice: our problem is that, taking the trade cycle as a whole … imports have a persistent tendency to rise faster than exports. We are, as a nation, uncompetitive in the only economically meaningful sense of the word: namely, that if we are to expand our national wealth at the rate of which we are physically capable, … then our balance of payments is in deficit … Conservatives … may feel that this is a field in which market forces and the price mechanism may ultimately be preferable … They may feel, in short, that the chronic imbalance in our international payments … is best dealt with by altering the price of the pound in the foreign exchange markets of the world. That was written by a well-known teenage scribbler called Nigel Lawson, writing in 1966. The House should take note of his wise advice.

I accept that there are inflationary risks involved in devaluation and that is why we should consider not only devaluation, but joining the exchange rate mechanism of the European monetary system, which could act as an effective counter-inflationary discipline. Is the Chancellor now the right person to carry out the shift in policy and direction required if we are to bring our economy back into balance? I admit to a sneaking admiration for the right hon. Gentleman. He is a clever man who is at home with economic issues. I also find his boundless self-confidence, especially when he is making up economic theory on the run, quite engaging. But I doubt whether his particular qualities are what is required now.

The problem for the Prime Minister is that there are no obvious replacements for the Chancellor on the Government Front Bench. Judging by his performance as Secretary of State for Energy, I do not find the right hon. Member for Hertsmere (Mr. Parkinson) to be a credible candidate. In many ways, there are now more obvious candidates for the Chancellorship on the Government Back Benches. If, for lack of suitable successors, the right hon. Gentleman is made to soldier on, he will have to learn to change his tune. He will have to learn to become the Chancellor of the bad times, which we are now experiencing.

6.46 pm

Sir Peter Hordern (Horsham)

I agree with the hon. Member for Durham, North (Mr. Radice) in one respect: the Chancellor is in an extremely uncomfortable position. It appears that he is caught in a cleft stick, while sitting on a tightrope while the jury is out interminably. The jury has not been out at all. Whenever the Select Committee on the Treasury and Civil Service issues a report, it is free with its criticisms and that is its verdict. However, I have noticed, especially from the criticisms of the Opposition parties, that it tends to be wrong.

The hon. Member for Durham, North puts his finger on it. He pointed out the balance of payments deficit and he said that it represented a potential threat to the economy and to the Government. But I draw his attention to this difference. In sharp distinction to what has happened in previous years, the Government are operating a substantial Budget surplus. Foreign holders of sterling take real account of the internal balance within an economy when deciding whether to support it. They would observe, as my right hon. Friend the Chancellor has observed in the past, that we are suffering at the moment from an excess of demand which is going rather higher than our productive capacity can meet. That is a serious matter in itself, but I do not agree with the hon. Gentleman that it represents a threat in the sense of a balance of payments run.

Nor do I agree that we should devalue the pound, which has been the recipe followed by virtually every Labour Government. It would be just as unpalatable now as it has been in the past and would be the surest way to create inflation. I am dead against it.

As my right hon. Friend the Chief Secretary said, the Bill is the largest on record. Like my hon. Friend the Member for Beaconsfield (Mr. Smith), I could have done without clauses 51 to 53, which I understand we shall be debating later. Private medical insurance does not seem to be the most obvious cause for tax concessions. One of my right hon. Friend's great achievements in successive Budgets has been to broaden the tax base and to reduce sharply the levels of direct taxation. That is exactly what we said we would do, and we have done it.

However, the tax concessions that we have given have generally been acknowledged to be in the national interest, whether in helping to promote the property-owning democracy, share savings schemes of one sort or another, or, through the business expansion scheme, to assist in finding rented accommodation, and so on. Those schemes have benefited the country. I wait with interest to see how clauses 51 to 53 are explained, but this proposal seems to be of a rather different order. It is a tax relief not just for the elderly but for those who may be well off to encourage them to assist their parents. It may be that those who are well off need education and some incentive to help their elderly parents, but many of us are in that position and this is not the most obvious candidate for tax cuts. I regret that this measure has appeared.

Apart from that, I warmly commend the Bill and my right hon. and hon. Friends' general approach to the economy. We have a substantial revenue surplus, yet there have been no tax cuts on this occasion and that is a responsible attitude to adopt. We are in as sound a fiscal position as we could be, but I am confused about what is happening to demand. I see what is happening in the south-east. House prices are falling. However, I also see the evidence of a shortage of labour, and skilled labour in particular, not just in the south-east but in other parts of the country. Wage rates are increasing and one-day strikes are just beginning. The BBC is not the most obvious candidate, but we had the Underground strike. These people feel that they will obtain more money and pressures are still building up.

The question is whether that pressure and the higher increases in borrowing will sustain domestic growth and keep imports too high. I agree with my right hon. Friend the Member for Worthing (Mr. Higgins) that it looks as if we are stuck with a high level of interest for some time to come because that is the only way of reducing demand to make room for more exports and to reduce inflation and to correct the balance of payments deficit.

Some economic commentators say that economic growth will have to fall to 1 per cent. if we are to reduce the balance of payments deficit to 1 per cent. in terms of GDP—a deficit of £5 billion. We do not have to be too precise about those figures, but there is no sign of the economy slowing down to such a rate of growth. Yet we might have to raise interest rates still further in order to provide room in the economy to achieve more exports. If we were to do that, we might once more see all the harmful effects, such as the soaring rate of exchange, that the economy and manufacturing industry experienced in 1981–82, and that would be damaging.

There was a strong reason for that in 1981–82, because inefficiencies were built into the system. The right hon. Member for Ashton-under-Lyne (Mr. Sheldon) made a charming speech, looking back on the 1970s when Ashton-under-Lyne was a great manufacturing centre. But the world has moved on since then. We are still a great manufacturing country, but fewer people are engaged in manufacture. There has been much greater efficiency in the past few years, but I doubt whether we can withstand another large rise in the exchange rate.

We need a different attitude and policy, and that is the one that my right hon. Friend the Chancellor has suggested before—to align our currency with the deutschmark and, necessarily, to enter the European monetary system. That would not have any quick effect, but I ask the House to understand the difference that would make in dealings on the foreign exchange markets. While the pound is loose and unhitched, all companies with overseas interests have to protect their interests every week, look at their position and renegotiate or switch their loans from one currency to another. The demand for such foreign exchange operation would diminish substantially if we were to announce a formal link with the EMS, and the deutschmark in particular. I do not see why we should wait any longer. It would take time, but interest rates would not have to be as high as they are if we were firmly fixed within the EMS. In due course, interest rates would approximate to German rates.

Having joined the EMS, that is where we should stop. Despite what Mr. Delors said, we do not need a common currency, still less a European central bank. The Bundesbank is effectively a European central bank and we should lend it every support. Together, the deutschmark and sterling would become the Euro-currency. There is a lot to be said for the ecu, but, in reality, traders, business men and companies would deal in the strongest currencies, and they would remain the deutschmark and sterling. Those are the currencies in which most business would be done.

We should not be wet about Europe. We need to be involved. Indeed, we need to be in the driving seat. Our interest has always been the balance of power. We should not be isolationist or integrationist. We must do our best to stop this Euro-Socialism and Euro-bureaucracy which is suggested by Mr. Delors. The way to stop it is not to build Euro-bureaux for bureaucrats to man. It is a necessary part of Socialism to create a tightly enclosed, inward-looking, small band of nations, but that is not in the interests of the United Kingdom, still less in the interests of world trade.

The purpose of the EC should not simply be to be anti the United States, as it so often appears to be, but to reflect the increasing internationalism of finance and manufacture. A report which says that we are not manufacturing enough of the goods that we wish to buy has been mentioned, but one reason for that is the increasing internationalism of manufacture and distribution. That can be seen in the motor industry. We make parts here, but some of the biggest companies in Britain are buying and assembling agents rather than manufacturers, and that process will not stop. Britain is too small a base to manufacture everything and we are rapidly coming to the time when Europe may also be too small. Therefore, it is in our interests to open Europe to more investment and competition. We have seen that already in the amount of investment that the Japanese are bringing in.

We should expand the borders of the EC to include the European free trade area countries and then look wider still, beyond the European free trade area, to countries such as Hungary. This is a most exciting time. We are talking not just of arms and disarmament but of trading blocs. In the words of General de Gaulle, we can imagine a Europe sans frontier, extending from the Atlantic to the Urals. None of that will come about without willing it, and without our close involvement. We must take a grip on our affairs and engage ourselves in a common cause in Europe and the world beyond.

6.58 pm

Mr. Denzil Davies (Llanelli)

This Second Reading debate has shown that the House can discuss the tax details of the Bill and look at the changes in the economy and the effect upon the economy of the Chancellor's Budget in the time between that Budget and now. The Chief Secretary chose the former course. Wisely, he dealt with the tax changes and hardly touched upon the economy.

I agreed with much that the hon. Member for Horsham (Sir P. Hordern) said, except for his opening remarks when he seemed fondly to believe that we do not have a run on sterling because of the great confidence of the international financial community in Her Majesty's Government. The reasons are baser. The interest differential is just about sufficient to enable them to keep their money in this country. If interest rates go up, the Chancellor will have to put them up again as well otherwise there will be a run on sterling.

In the short time between the Budget and the Finance Bill it would be trite to say that the economy has deteriorated even further. Inflation has got worse, interest rates may have to increase, and bank lending and the consumer boom have not abated, according to the latest figures. The balance of payments deficit is horrendous. In his Budget the Chancellor forecast a deficit of £14.5 billion for this year. The Select Committee bore out the view that we are heading for a far worse deficit, probably £20 billion.

When the Chancellor and other members of the Cabinet were in opposition between 1974 and 1979 they never tired of lecturing the Labour Government about how the tax system and the Finance Bill should not be used for the purpose of what they called social engineering. They said that the tax system should be neutral and was there merely to raise revenue for the Government. The hon. Member for Beaconsfield (Mr. Smith) made the same point in his speech today. Once the Conservatives got in to power, the story changed. Over the last 10 years the Government have used the tax system for the purpose of social engineering to a greater extent perhaps than any Government since the war, or certainly since the early 1950s.

We have some examples in the Bill. The tax system is to be used to give a subsidy to rich, elderly taxpayers for private health insurance; that is to satisfy the Prime Minister. Also, there are a number of measures to give tax relief for investment in unit trusts and other institutions. Because popular capitalism has failed to deliver savings, the Chancellor will bribe institutional capitalism to try to save money for him. Apart from some instances like that, there is very litle social engineering this year on the ma in elements of income tax in the economy. The reasons are clear. The Chancellor dare not touch it because the economy is in such a precarious state.

When the Prime Minister came to power, one of the vogue phrases—perhaps even a vague phrase—which was used constantly, and is still used, was supply side economics. It is not a well thought out phrase but it conveys the impression of the need for British industry and the economy to produce more goods, better quality goods and goods that are competitive with those produced by our major industrial competitors. I think we can all agree that the phrase means that.

When the Government came to power in 1979, Ministers had very little idea of how to achieve that goal except through a mystical conviction in the ability of the free market to deliver and the belief that a substantial reduction in income tax, especially in the top rates for richer people, would somehow galvanise management and production, thereby increasing supply and improving the competitiveness of home-produced goods. After 10 years the experiment has failed.

Perhaps the only indicator in international society of the success or failure of supply-side economics in the production of goods, their quality and their competitiveness is the current account of the balance of trade. The figures for British exports, for imports of foreign goods and for the penetration of the British market by goods produced by competitors leads inexorably to one conclusion—there has been no economic miracle but rather an economic catastrophe.

Over the last eight years our share of world trade has fallen by 15 per cent. The deficit on the current account of the balance of payments in 1988, the year that has just finished, was larger than the total of all the deficits for the previous 40 years. In 1978, during the period of the much-maligned Labour Government, we had a surplus on the current account of the balance of payments of £5 billion, and we had no oil. We imported oil; we could not export any. In 1988 we had a deficit of £14.5 billion on the current account when oil was still worth £7 billion.

Let us consider the figures for the imports of specific items, the goods that people buy in the shops. They tell an even more depressing story. In 1978 we imported only 18 per cent. of the colour television sets purchased in the United Kingdom; in 1988 the figure was 40 per cent. For commercial vehicles the figure was 22 per cent. in 1978 and 40 per cent. in 1988; for buses and coaches, 3 per cent. in 1978 and 38 per cent. in 1988. As to electric irons, which I would have thought were simple to make, in 1978 we imported 15 per cent. and in 1988, 65 per cent. That was another triumph for Thatcherite supply-side economics. Last year 56 per cent. of our cars were imported; for medical instruments the figure was 57 per cent. On and on the sorry tale goes.

The command economies of the Soviet Union and eastern Europe—they used to be called command economies; perhaps they are not any more—generally were not allowed to import more goods than they could export. In other words, they had to balance not their budget but their trade. They tried to get round it by borrowing, as we are doing now. If we had had to balance our imports and our exports over the last four or five years, the queues for cars, videos, television sets and washing machines would have been almost as bad as those in the command economies of eastern Europe and the Soviet Union.

The position will not get better; indeed, it will get worse despite high interest rates. Next year the balance of trade deficit on manufactured goods is forecast at £15 billion by the Red Book. The Chancellor hopes that the position will be better in the first half of next year, which will really be about October 1990. Even that hope is not shared by many economists and forecasters. This year the deficit is running at £20 billion. We shall see what the figures bring tomorrow.

The Institute of International Economics in Washington believes that in 1992, when barriers to trade in the EEC come down, the deficit will be £45 billion. Of course, it will never come to that because long before that figure is reached the pound will have disappeared through the floor, and the Chancellor with it.

The Chancellor and the Government have very little confidence in the galvanising value of income tax reductions as a way of boosting the supply of British goods. If he still believes that last year's tax cuts were not responsible for the surge in imports, why did he not do the same this year? It would have been a very good year to do it. With a massive surplus of £14 billion, with a need to produce more goods and with a need to boost the supply side of the economy, why did he not cut taxes? Perhaps I should not call them the loony Right, but some Right-wing economists, perhaps even Alan Walters himself, were arguing before the Budget that tax cuts were needed. It was argued that interest rates should be even higher so that we would have a monetary squeeze and taxes could be cut to help the supply side of the economy. That was logical in their terms, but the Chancellor did not dare do such a thing. If tax cuts boost the economy, why did the Chancellor not cut taxes this year?

The Chancellor and other Conservative Members have tried to play down the importance of the deficit. Neither the City nor the public are fooled any longer. First, the Chancellor said that the balance of payments deficit was of no consequence because it balanced. That was an affront to common sense. He then said that it did not matter anyway so long as we could finance it. Then we were given the story that the deficit was really one of the problems of success. I suppose, on that reasoning, the German surplus is a product of failure. The deficit has been caused, apparently, by too fast economic growth. Indeed, it is a consequence, we have heard today, of the Thatcher economic miracle. Finally, we have another spurious reason being trotted out to us. Much of the deficit, it seems, is caused by British industry retooling and re-equipping itself, gearing itself up for a march on the markets of the world—again, of course, a consequence of the great economic miracle.

The only answer to all this is "baloney". A balance-of-payments deficit of this size is a serious matter. Even the Chancellor does not pretend otherwise. If it can be financed at all—and that cannot go on for ever—it can be done only by tripling rates of interest, which inevitably put up the costs of industry, very often causing new investment to be abandoned or postponed, thereby reducing the supply of the goods which we need to reduce the deficit.

One reason given by the Chancellor for putting up interest rates was to damp down the boom in the private housing market. But the irony is that if one borrows to buy a house, especially if one is a first-time buyer, one pays 12.5 per cent.; while if one is a small business man trying to borrow to invest and export one has to pay 15 or 16 per cent. to the banks. High interest rates put up the value of the pound and of course make imports cheaper and exports more expensive.

With regard to the retooling argument, I suspect that we are not a manufacturing nation any longer; we are an assembly nation. As has been said, we import to assemble; we have to import to assemble; and the idea that some of those imports are capital goods and are there to enable industry to retool does not accord with the facts.

Obviously, this Bill will do nothing to solve the problem of the balance-of-payments deficit, because, in my opinion, it is far too entrenched. Some time the Government will have to swallow their pride; some time they will have to put up taxes; some time they will have to try to escape if they can through the European monetary system or its exchange rate mechanism, trying to engineer thereby what they will call a realignment of currencies but which will, in effect, be a devaluation.

The tragedy of the last 10 years is that there have been so many opportunities in terms of oil and a favourable international climate and the Government have wasted them. The British public will pay for that for a very long time to come.

Mr. Deputy Speaker (Sir Paul Dean)

I remind the House that the 10-minute limit is now in operation and I appeal for the co-operation of hon. Members.

7.12 pm

Mr. James Couchman (Gillingham)

I trust that the right hon. Member for Llanelli (Mr. Davies) will forgive me if I do not follow him down the road which he has been traversing, for I wish to speak quite briefly on that facet of this year's Budget and tonight's Finance Bill which appears to have proved most contentious—the proposal to offer tax relief on premiums for medical insurance for the over-60s.

I must declare an interest, for I have lately been asked to advise a company called Denplan and I shall during the course of my speech refer to the unique service and product of that company, which I believe may well prove to be the most important financing scheme for primary health care in the private sector. Neither I nor my immediate family pay any private medical insurance.

I have long taken the view that those who pay directly or through individual or corporate provident insurance schemes for private medical care do so to the advantage, not the disadvantage, of the National Health Service. They have paid for NHS treatment through their income tax and national insurance contributions and then they pay again by way of an insurance premium so that they may unburden the Health Service of its duty to provide care in the event of illness. Without their additional payment to and treatment by the private sector they would have their malady treated eventually by the NHS. If they take away that burden from the state and in so doing receive treatment earlier than they might otherwise have done, we should rejoice in their earlier restoration to health rather than condemn them as queue jumpers, as the Opposition do.

It is unfortunate, therefore, that, at the very point where people's use of health care services begins to increase and their income falls as they near or reach retirement, the premiums for private medical insurance escalate sharply. The proposals to offset this escalation through tax relief for the over-60s means that in future fewer people will feel that the burden of premiums has become insuperable. More people who have formerly been covered by corporate schemes, either contributory or non-contributory, will feel able to pay individual premiums for themselves. Health care resources will thus have been extended by taking less tax off people than would otherwise have been the case, and thus resources for others using the NHS will have become greater.

Whatever the cost in tax relief—and my right hon. Friend the Chief Secretary gave several figures this afternoon, varying from £40 million to £70 million—that will be a direct subvention to health care generally and will make a direct contribution to reducing NHS waiting lists.

I wish now to consider dentistry. The White Paper speaks of medical insurance premiums being eligible for tax relief from April 1990. The Finance Bill that we are discussing today speaks about private medical insurance premiums in clause 51 and is specific about insurers in clause 52(8). However, clause 53(3)(a) spells out the conditions for eligibility of a scheme as follows: the contract either provides indemnity in respect of all or any of the costs of all or any of the treatments, medical services and other matters for the time being specified in regulations made by the Treasury, or in addition to providing indemnity of that description provides cash benefits falling within rules for the time being so specified". That is a good piece of drafting.

Does my right hon. Friend intend schemes to provide private dentistry to be included? He must make that clear. Does my right hon. Friend intend only insurance schemes in the traditional sense to be covered? I would caution him about too prescriptive a definition on the face of the Bill in the primary legislation, for new, exciting and innovative schemes are at present developing. The traditional provident insurance has been ideally suited to discrete episodes of illness requiring perhaps periods of hospitalisation and cold or non-urgent surgery. Insurance schemes have generally not been able to grasp the nettle of chronic illness or continuing care.

Successful dental care is based on routine and regular visits to the dentist, who will provide continuing care and preventive advice and treatment so that substantial tranches of heavy treatment do not suddenly become necessary. One of the problems of the present method of NHS remuneration is that it encourages short-lasting piecework and discourages prevention. Piecework mitigates against quality. It is worth noting that the best insurance against oral cancer is regular routine visits to the dentist. Oral cancer has become particularly prevalent among the over-60s who, because many of them have full sets of dentures, are less than assiduous in visiting the dentist. A six-monthly check-up would lead to a much greater likelihood of early diagnosis of oral cancer for the over-60s.

What is needed, therefore, is a scheme which offers continuing care by way of a contract between patient and dentist and which also insures against unforeseen dental misadventures, including those suffered abroad, in return for a regular modest premium paid monthly, so that preventive care by the dentist brings the reward of having less work to do later. The company which I have lately advised has developed such a scheme, which combines continuing care with insurance against traumatic episodes. Interestingly, treatment is free at the point of delivery and is given in return for a regular monthly contribution which averages £6 to £7. Individual contracts between patient and dentist are made irrespective of whether payments are made under individual or corporate schemes and the participating dentists monitor one another's quality by a unique system of peer review. This is a good scheme which has achieved accreditation from the British Dental Association.

Rumour has it that dentistry is to be excluded from tax relief on medical insurance premiums for the over-60s and that only traditional insurance-based schemes are to be eligible. That would be a shame because I believe that continuing care schemes which have been pioneered in dentistry could be developed into a most important contribution to primary care provision. What is good for 3,200 dentists and 45,000 of their patients could well develop into general practice and other branches of medicine and paramedicine. The wide definition of what constitutes a scheme eligible for tax relief and the inclusion of dentistry would give continuing care schemes a fillip. The resulting reduction in the burden on the NHS would allow earlier treatments for those not able or willing to pay private medical insurance. Only the ideologues on the Opposition Benches would oppose such a benign measure as the tax relief proposed in the Budget.

7.22 pm

Dr. Lewis Moonie (Kirkcaldy)

When the hon. Member for Gillingham (Mr. Couchman) referred to a unique form of care, I thought that he was going to talk about dentists operating on their own teeth. That would certainly be a unique form of care review. Apart from that, I will leave my comments on the merits or otherwise of private medical insurance to another debate.

The Bill and the Budget proposals from which it sterns must be considered in the context of the current economic situation and the prospects for the future. It is easy to be wise with hindsight, so I propose to do just that and consider what the Chancellor should have done last year and would have done had he been aware then of what he is aware now. It is easy to be wise with hindsight because it is difficult to forecast what is going to happen. Our economic indicators are so unreliable that forecasting is a discipline which is fraught with uncertainty and something on which we would not want to place too firm a reliance.

It is harder to say what the Chancellor should be doing now than what he should have done a year ago. When I read the Chairman's draft report of the Treasury and Civil Service Committee, I thought that it was remarkably anodyne. I was therefore surprised to read the press reports over the past few days stating how severely and stringently we had criticised the Chancellor and his team. Nevertheless, it is clear from the evidence which the Committee received that the present economic cycle has peaked. We must now ask how far we will slide down the other side, how deep will the trough be and how quickly will we fall into it.

The cliche of the Chancellor walking a tightrope has been mentioned several times. One slip and off he goes. Perhaps in the Chancellor's case, one decent job offer and off he goes—and perhaps not in the too distant future.

There is an awful inevitability about all this. Chancellor after Chancellor has tried to buck the trend, and to avoid falling into the trough which follows the peak, and failed. The Chancellor's problem is perhaps analogous to a surgeon who decides to conduct a delicate operation on the brain, reaches round to his instrument table and finds that he has only a saw and a sledgehammer. In addition, the quality of the team which he has with him is obvious.

It does not help to have blunt instruments, and most of the tools available to the Chancellor are sadly blunt instruments. It might help if he used more than one at a time. The effects of his blunt instruments take an indeterminate time to be felt and the total level of their effect is hard to predict.

The tightrope is not a very accurate description. Perhaps it would be better to describe the Chancellor as a man standing at the top of a very narrow peak with pitfalls on all sides. A tightrope would suggest only one or two sides—

Mr. Chris Smith

More like the inaccessible pinnacle.

Dr. Moonie

Exactly. My hon. Friend is trying to make me jealous. I have seen the inaccessible pinnacle and there is no way that I would try to climb it.

The Chancellor is standing on top of such a pinnacle and he is surrounded by potential disasters. The end point is recession, but the pitfalls include a multitude of inter-related factors such as inflation, capacity constraints which our economy has clearly run up against over the past year, the balance of trade, the value of the pound, the level of domestic demand, the level of investment and the rising level of wages.

The pre-election boom of 1986 and 1987 has come and is about to go and we are left with its after-effects. Excess demand has led to capacity constraints in the economy and to our worst ever balance of trade deficit in manufactured goods, and in construction materials to the extent of £2 billion last year. In order to make themselves more competitive, factories in my constituency must go abroad to find the machinery with which to retool. That is a result of the Government's policies.

Inflation has risen and will continue to rise. The abandonment of any coherent regional policy has meant that the south-east has attracted most of the investment and is now facing a critical and growing shortage of labour, while Scotland, the north of England and Wales still have unemployment levels of over or around 10 per cent., even using the Government's doctored figures.

The problem is compounded by our continued failure to retrain unemployed workers and by the present demographic trend with which I accept the Chancellor has very little to do. The number of young people entering the job market is falling. There is also a critical shortage of housing in the boom area of the south-east which makes it impossible for an unemployed worker in my constituency in Scotland to move here in search of work and bring his family with him.

It is therefore hardly surprising that wage increases are accelerating with the inevitable consequence of higher prices and increasing inflation. To cure the over-heating which has resulted from his policies, the Chancellor has selected his blunt instrument—interest rate policy—with the intention of choking domestic demand. He is predicting that the demand will switch to exports and that will reduce our current trade deficit. It is very difficult to find any economic analyst who agrees with the Chancellor about that.

I want to quote from some of the advice that was given to the Treasury and Civil Service Select Committee and which is included in the report: Finally the balance of payment deficit now faced by the United Kingdom is larger than at any previous cyclical peak. There seems little reason from the point of view of supply performance to believe that the deficit will be easier to eradicate than in the past. Furthermore, while the deficit is running at present levels, the risks of a really hard landing for the economy will remain. There has been no instance of a major economy successfully running a deficit on this scale for any length of time, at least not without substantial depreciation in the exchange rate. Interest rates at their present level have unfortunate side effects. They maintain the value of the pound and make us less competitive abroad. They increase industry's costs, making borrowing for investment more difficult. They increase the cost of mortgages, putting even greater pressure on wages, and that is compounded by the higher prices for water and electricity, as my hon. Friend the Member for Dunfermline, East (Mr. Brown) said earlier. The recent increases in petrol prices will not help. All those factors will drive inflation higher and place further pressure on wage levels.

High interest rates also attract hot money from abroad; money which could equally well flow out if conditions change. We are heading for the worst possible situation where the Chancellor will find that his crude weapon smashes domestic demand, which will lead to recession, increasing unemployment and inflation. The beneficiaries will be West Germany, the United States of America and Japan.

What about this Bill? The Government's policies have fuelled domestic demand and pushed up inflation, as a direct result of the Chancellor's folly. He has told us that he will not increase duty on tobacco and alcohol this year as that, too, would increase inflation. The result is a dangerous blow to people's health which, as he barefacedly admits in his interview with the Treasury and Civil Service Committee, he holds less important than fighting inflation or presumably his own political future. Frankly, I would rather he had concentrated his energies on avoiding the price increases in electricity and water, brought about as a direct result of privatisation, and on increasing the price of alcohol and tobacco.

The Chancellor has done nothing about the availability of credit. Conservative Members say that nothing can be done about it. I accept that, as we approach 1992 and the internationalisation of our finance market, it is becoming more and more difficult to do so. However, when I see advertisements such as those yesterday in the popular press offering people loans of up to £10,000, secured on their houses, with nothing to pay until April 1990, I refuse to believe that it is impossible for the Chancellor to do anything about that type of abuse of personal credit. There is no way on earth that such loans are justified and no way on earth that Conservative Members can say that nothing can be done about it. Something can be done to choke off the worst abuses of the credit system, even if general credit squeezes cannot, or will not, be applied by the Government.

If the Chancellor were sensible, he would have given some recognition in the Budget to the need for a proper regional investment policy to reduce the imbalances between the south-east and the rest of the country, and, hopefully, to allow the economy to continue to expand as it could do if those imbalances were redressed. He could have redressed the imbalance between rich and poor and done much more for those at the lower end of the earnings scale. He could have signalled his intention to increase capital investment and encourage saving rather than consumption. He has done none of those things, and therefore we must sit and await the consequences of his folly.

7.32 pm

Mr. John Heddle (Mid-Staffordshire)

As I wish to address my brief remarks to two specific points—the cost of mortgages and house prices, and value added tax on buildings and land as contained in clause 17 of the Bill —it is appropriate for me to declare two interests.

First, I am vice-president of the Building Societies Association. I agree with the hon. Member for Kirkcaldy (Dr. Moonie) that there is no doubt that great hardship has been caused, particularly to first-time buyers such as young married couples, who have been induced and persuaded to borrow more on mortgage than they can afford. Due to the lack of rented accommodation, they have hitherto perhaps had no alternative. Therefore, in some cases, they have borrowed more than was prudent or sensible.

Like the hon. Member for Kirkcaldy, I deplore the sort of irresponsible advertisements to which he referred and which I too saw in yesterday's popular press. Day after day other loan companies continue to lend money on consumer credit and take charge of the unwary borrower's house.

My hon. Friend the Member for Beaconsfield (Mr. Smith) kindly allowed me to intervene in his speech after he had answered a question put to him by the hon. Member for Hackney, North and Stoke Newington (Ms. Abbott) about the cost of borrowing on mortgage. Over the past three or four years, some banks, both national and international, and some building societies have done the house buyer no service and no favour by encouraging him to borrow money to a greater extent than was prudently sensible.

When I practised as a surveyor before becoming a Member of the House, most building societies, and most members of the Building Societies Association, encouraged members to borrow only two and a half times their incomes, or two and three quarter times their incomes if their wives were also working. Now advertisements encourage purchasers to borrow up to four times their annual income. This inevitably means that many borrow beyond their means which, because of the current level of interest rates, causes unnecessary hardship. Purchasers borrow beyond their means and, because more money goes into the housing market, it pushes house prices higher and higher. With the current level of interest rates, I sincerely hope, as I know does my right hon. Friend the Chancellor, that the leapfrogging has stopped.

I shall repeat what I said in my earlier intervention. I am certain that any borrower in my constituency who puts before me his current housing difficulties, born out of the current level of interest rates, has only to go to the branch office of his building society and explain the facts simply and honestly to receive a sympathetic hearing. The building society will reschedule the mortgage, freeze the capital repayment, and perhaps spread the borrowing over a longer period.

Secondly, I must declare my interest as a consultant partner to a firm of surveyors. I hope that the House will accept that I bring a modicum of practical sense to an apparently theoretical problem in the Finance Bill. That problem involves the imposition of value added tax on non-domestic construction work, which was brought about not at the behest of the Government but by a ruling of the European Court, published on 21 June last year.

I pay tribute to my hon. Friend the Economic Secretary to the Treasury who, in conjunction with the Customs and Excise, published on the same day—21 June last year—a consultative document explaining the practical implications of the European Court's ruling and suggesting certain measures to bring transitional relief. Following the publication of the consultation document, there was a consultation period which, I believe, expired at the end of September last year.

I pay tribute to the officials of the Customs and Excise who listened understandingly to the many representations. I pay particular tribute to my hon. Friend the Economic Secretary, whom I know from personal experience of taking constituents and others to see him to explain the practical effects of the ruling. He listened with sympathy and understanding. I also know that certain amendments were made to the transitional arrangements, because they were incorporated in the draft clauses published in February.

I put it to my right hon. Friend the Financial Secretary to the Treasury that the Treasury has not gone far enough in accommodating a number of schemes which, and contractors who, do not fulfil the conditions contained in the transitional arrangements. I relate my remarks particularly to schemes of inner city renewal, which are such a vital plank of the Government's manifesto. Arty scheme which was legally committed by 21 June—the date of the European Court's judgment—will not be subject to VAT. A number of schemes, although not legally committed, were commercially committed. It is in the nature of inner city redevelopment, and development generally, that the contractor will spend a considerable amount of money on infrastructure, planning, design and rerouting roads, under the broad umbrella of a head of agreement or a letter of intent that will fall short of a legal commitment. The imposition of value added tax, as contained in clause 17 and schedule 3 of the Bill, will cause considerable hardship and, no doubt, loss to a number of schemes committed to inner city regeneration.

I ask my right hon. Friend the Financial Secretary to consider with officials in the European Commission whether transitional arrangements can be extended—as I am sure they can—to ensure that those inner city schemes, which may well show a loss for the contractor, are included in the transitional arrangements.

7.38 pm

Mr. Ieuan Wyn Jones (Ynys Môn)

Earlier, the hon. Member for Wanstead and Woodford (Mr. Arbuthnot) eulogised about last year's Budget, which I thought was thoroughly irresponsible. This year, he complimented the Budget in part, which I did not think was much to write home about. I declare an interest because, like him, I am a solicitor involved in estate tax planning. I share his concern about the effect of clause 167 of the Finance Bill which has serious consequences for small businesses and many of the people whom we have heard mentioned in tonight's debate. When I refer to small businesses, I do not mean those run by the sort of people mentioned by the hon. Member for Beaconsfield (Mr. Smith) who wish to invest £1 million. In all my experience, I have never had a client who wished to invest £1 million. I am talking about small farmers and business men, shopkeepers, those involved in manufacturing, and all who make up the fabric of rural society and who are in danger from the clause.

In recent years, many owners of businesses have sought advice on how best to ensure that their families succeed to those businesses on their deaths. Their concern is a result of the incidence of inheritance tax—formerly capital transfer tax—on death and also capital gains tax on lifetime transfers if a transfer was contemplated either on retirement or owing to ill health.

Giving advice on such matters is not simply a case of considering the tax implications; many other factors must be considered, such as the ages of children, the assets that might be available to a surviving partner and the relationships within families. Nor is it a case of merely looking at tax advantages: it is a case of weighing up the available advantages and giving the best all-round advice, considering all the relevant factors.

Most proprietors of small businesses whom I know have only one thought in mind—how they can make arrangements that are in the best interests of their families and businesses. That is the sole criterion. If they can settle their affairs in such a way as to ensure the smooth transfer of the business to the next generation without being subjected to substantial capital taxation on death, or on lifetime transfers, they will be content.

I want the House to understand—I make this point time and again—that I am not talking about wealthy landlords or City whizzkids. I am talking about ordinary people in rural areas who have a small or medium-sized venture, the value of which has risen in recent years as a result of roaring inflation in the property market. They cannot be blamed for that, and they do not seek to exploit it to realise their assets. They have few liquid assets on which they can lay their hands; all their investment is linked with the business, and all the capital is unrealisable.

Those with access to expert tax advice normally arrange their affairs in the way that I have described, and in such cases no problems usually arise. Circumstances, however, can and do change, and as such changes cannot be predicted there must be a period during which alterations can be made to meet the new circumstances without families being penalised.

Let us take the case of a farmer and his wife who have two sons and a daughter. At the time when the arrangements are made, one son farms at home and the other is at school, while the daughter is married and living away. It would perhaps be appropriate for the bulk of the estate to be left to the son who is at home, with separate arrangements being made for the other son and the daughter; but, as I have said, circumstances change.

Let us say that both the father and the eldest son are killed in an accident. The family may want to make new arrangements in such tragic circumstances. They may want to rearrange the estate so that the other son—who, say, is now at agricultural college—will have the bulk of the estate. Unfortunately, owing to the changes in clause 167, that cannot happen because of the resulting tax implications: in other words, the changed circumstances will mean that the family will lose out. Possibly the asset will have to be sold on the open market and divided among the rest of the family. They will have cash, but a family asset will have been destroyed. That surely cannot be the Government's reason for introducing the clause, but that will nevertheless be its effect.

We are not talking only about changing circumstances. We are also talking about people who have not the resources to gain access to expert tax planning advice, or who choose not to do anything about it. Those people themselves are not being penalised; they have left the scene. It is the families left afterwards who will have to face the crippling circumstances.

In my experience over the years, the variation rules are used not for tax avoidance purposes—as is claimed by the Government—but as an opportunity to solve two kinds of problem. First, they are used to put families in a position no worse than would have resulted had proper arrangements been made; secondly, they are used to take into account changes that have occurred since arrangements were made which there has been no opportunity to amend.

In my opinion, tax avoidance schemes are stitched up well in advance. They do not rely on discussions after a death, which can often be traumatic, hazardous and difficult to predict. All the variations that we are talking about require the consent of all the parties who are to benefit. Some will lose out: clearly, if there is a variation, there will be some gainers and some losers. It is very difficult to obtain consensus within a family after a death, and the Bill will make it impossible for any such arrangements to be made. The real tax avoider would not leave it to chance.

The Treasury, in my view, is aiming at the wrong target. The provision must be reviewed; otherwise, for the sake of an insubstantial gain for the Treasury in duty, many small businesses will be driven to dispose of their assets, and the fabric of some of our rural communities may be endangered. I believe that that is entirely unnecessary.

7.46 pm

Mr. William Hague (Richmond, Yorks)

I wish to speak only briefly, but in so doing I shall give my reasons for supporting what I consider to be a very good Finance Bill, and to raise a few questions that Treasury Ministers may wish to consider.

Many right hon. and hon. Members have discussed the overall economic position at length, and I do not intend to follow them. Let me say merely that if it is true, as I believe it is, that our key economic objective at present is to restore low inflation—low, that is, by international standards—we should understand that the Treasury's current policy is heavily focused on that objective. We have the tightest fiscal and monetary policy that we have had for many years—tighter than many people appreciate. The instruments of that policy—public sector debt repayment and high interest rates—have come in for considerable attack, and no doubt the policy has its risks, as the Treasury Select Committee has pointed out. I believe, however, that the emphasis has been rightly placed on dealing with inflation, and that that will be shown to be so. All the other arguments that we may advance about competitiveness, employment and output eventually depend on it.

The Bill deals with the overall level and indeed the detailed structure of taxation. The reason I support it so strongly is that it takes us nearer to the point at which taxation is structured so as not to discourage people from earning more, working harder or achieving success, whatever their income levels. That, I believe, is the main principle on which taxation should be based; it should raise the required amount of revenue, with the minimum interference with the industry and efforts of the people.

To many outside the House, that may seem a statement of the obvious, but it is a new development for the tax structure in Britain to be consistent with that principle. Not many years ago the reward for success was to be penalised by massive marginal income tax rates: it cannot be many years ago, for even I can recall it. Those tax rates were presumably designed to discourage the payment of high salaries. Certainly their objective was not to obtain the required revenue, as the total revenue from the highest earners went up considerably after the rates were reduced.

It was only last year that people stopped losing more than half of any increase in their pay if they were paid more than a certain amount. Only following this year's Budget will some low wage earners cease to face their own excessive marginal tax rates, as represented by national insurance contributions. The changes that are to be made in national insurance contributions are welcome, as they concentrate what are in effect reduced tax rates on many of the lowest wage earners. Even so, it is hard to view national insurance contributions today without wondering about their long-term future.

Mr. Battle

Is it not the case that when the analysis is done what has been gained in the national insurance changes by people on lower wages is in fact taken away if they claim the family credit allowance, so that they do not gain a penny as a result of the changes and people are not taken out of the poverty trap?

Mr. Hague

It does deal with the excessive marginal impact of the national insurance contributions. However, we will always need to do more work in that area. Clearly further action can be taken to improve the situation.

The integrating of income tax and national insurance contributions would be an immense administrative task, given the contributory principle behind the benefit system. In the long run, we must ask whether the contributory principle is worth the trouble of having two types of income tax whose combined effect is to cause the payment of tax to start at a lower level than might otherwise apply, to produce some very strange ups and downs in the marginal rates at higher levels of income and, indeed, to make the benefits system more complicated.

I believe that the abolition of the pensioners' earnings rule also fits the same theme. Few of those penalised were earning a fortune. The change made in the age allowance is also very good. Previously some pensioners paid more than a 40 per cent. marginal tax rate, while the rest of the country had ceased to do so. Again, people will now have a greater incentive to earn a bit more. The changes in corporation tax for small companies are also part of this theme. People will have an incentive to do a bit better and earn a little more.

Thus, this Bill can be seen as part of a continuing and, I believe, healthy process. Last year's Budget did much to move the tax system away from stamping on effort and success; this year's Budget takes a few more steps in that direction. It is a Budget that does not menace, frighten, threaten or act out any vendetta against any section of the population. Having regard to some of the tax legislation in previous decades, this Budget therefore represents a rather refreshing and considerable achievement. We have not yet obtained a perfect tax structure, as even my right hon. Friends on the Treasury Bench would concede. It would be good in future to see fewer people pay tax and to see many doing so at a lower rate. As my hon. Friend the Member for Beaconsfield (Mr. Smith) said, it would be good to get rid of some of the taxes currently paid.

We cannot complain that this Bill lacks anything in volume. It is a daunting sight even to one who has never set eyes on such a Bill before. Clearly some changes which are buried within it and which have been spoken about by my hon. Friend the Member for Wanstead and Woodford (Mr. Arbuthnot) and the hon. Member for Ynys Môn (Mr. Jones) have not yet received wide publicity but merit careful consideration. They referred to changes in clause 167, which refers to deeds of family arrangement. As I understand it, the effect of the Bill will be that people who would have had a chance to reorder the affairs of a deceased person by general agreement will no longer have that opportunity. The people most likely to be adversely affected are not the super rich who could have their wills rewritten every other day if they so wished, but the small farmer or business man who has never been rich but who has considerable assets in his business and who made his will many years before his death. The intention of the will may be frustrated in such cases by economic or legal changes in the meantime. There may be good arguments for the clause, but we need to hear them.

Members on both sides of the House accept that taxation is used still as an instrument of social and environmental policy. The increased differential between leaded and unleaded petrol is an example, and is widely applauded in the country. Another example is the imposition of duty on tobacco. I hope that the possible impact of the increase in duties on retail price inflation is the only reason why my right hon. Friend has not taken more action on that this year.

The encouragement of charitable giving is another use of tax policy for social purposes. The doubling of the amount allowed under the payroll-giving scheme is an excellent proposal. However, I wonder whether the time will come before long to consider further tax incentives for charitable giving on a larger scale. I also wonder whether the Treasury has exhausted the limits of examining whether it is necessary for VAT to be imposed on village halls. Much is being said about the age of the active citizen, so it will be good if we could do a bit more sometimes to encourage the active citizen in his activities.

In summary, then, I applaud the Bill which, with appropriate caution, takes us closer to a fair structure of taxation in this country and deserves the support of the House.

7.57 pm

Mr. Tony Worthington (Clydebank and Milngavie)

My attention was directed yesterday to an article about the Secretary of State for Energy who was billed as the top table Tory who probably understands industry best. It was interesting to read the article, because it may well refer to the thoughts of the next Chancellor of the Exchequer, given that the present one is clearly on borrowed time. It was depressing to read the words of the Secretary of State for Energy because, if he became Chancellor, judging from those words there would not be any change in thought about the respective roles of manufacturing and service industries.

I found it depressing to read that the Secretary of State for Energy saw manufacturing industry very much as a phase from the past. He was saying that if we looked at the trend worldwide we could see that we would never need the same number of people in manufacturing to produce an absorbable quantity of goods.

It is important that he should say that, because it contradicts the experience in Japan where, over recent years, a growing number of people have been employed in manufacturing industry. The Secretary of State for Energy was told, in the article, that whole sectors of British industry, for example, machine tools, had never come back. He was asked whether he considered that that mattered. It is interesting that if one goes around the country visiting factories one cannot find a British machine tool industry, and there seems no willingness in this country to find the means by which it would return. In answer to the question asked by the interviewer, the Secretary of State for Energy said: Comparative advantage has to be the basis on which you trade. If other people make things better than we do and we deny ourselves the opportunity of buying for some false nationalistic reasons, we just put ourselves at a disadvantage. Indeed, we certainly have put ourselves at a disadvantage in recent years. When one looks at the consumer goods in one's life, one can see how few come from this country. We must challenge the idea that there is a maximum number of goods that can be produced or absorbed. I cannot imagine that Japanese industry is saying that it must hold back because the world cannot absorb any more of its products. The idea that we can just leave manufacturing and that services industries will take over is specious. The idea that fewer and fewer people should be involved in manufacturing as being a measure of the strength of the economy is specious. The idea that people will turn their surplus funds to the use of the services of people is also specious.

I have already referred to the increase in the number of people in Japan who are involved in manufacturing. In the United States as well there has been a negligible decline. It seems that service industries depend on manufactured goods—that they are packed full of manufactured goods. I assume that we shall continue buying from abroad. All the services that I can think of will ultimately be replaced by goods. There is a tendency constantly to development technology which will allow the provision of a service to be by machine.

We used to have laundries, but they have been replaced by machines that do the same work. Dry cleaning is a service industry that will disappear once a machine is developed for use in the home. Cinemas—although there is a degree of recovery—are being replaced by video production. Many manufactured goods are designed to provide a service, and people choose to buy such goods rather than have those services provided by people. One does not go into a bank, for example, but draws cash from a machine outside it. There is no longer the need for the cashier inside the bank that there used to be. The interval between car services grows longer.

It is unlikely that there will be a growth in the number of people required in service industries in future. In the financial services industry, for example, people will be progressively replaced by machinery and by goods. It is essential that we change our attitude about manufacturing. The service industries cannot replace manufacturing industry, particularly in respect of exports. There has been a massive expansion in air travel, for example, whose export earnings are equivalent to what was earned in the past from the motorcycle industry. However, service industries cannot be exported in the way that manufactured goods can.

We must follow the Japanese pattern of spotting the manufacturing future. I refer to the home entertainments industry as one example. We cannot leave it to be continually dominated by the Japanese. We know that in future we must look more seriously at the whole area of fibre optics, high definition and digital television, if we are to operate on a European scale and ensure that we claw back our share of that industry.

The Government appear to take a hostile attitude to manufacturing. In particular, we are massively under-equipped in terms of work force skills. In 1985, the number engaged in manufacturing training was only one quarter that of 1968. In Scotland, Scottish Enterprise will rely on the private sector to provide better training, but the private sector has conspicuously failed to deal with that aspect in the past.

I cannot but be fearful about the future, when the Americans eventually get around to dealing with their own budget deficit. There may be some idea around that they are tackling that aspect. Recently, I have been very impressed by the publication by William Cline dealing with the global impact of the American trade adjustment. As an outsider, he has no reason to be deceitful. He observes that when the Americans get around to sorting out their budget deficit, it will be extremely worrying for the British because the weakest external sector outlook is that of the United Kingdom, which stands in a class of its own. When the recession hits, as it is almost certain to do, then because of the way in which the Americans will have to operate—by raising interest rates, or by protectionism, or by using other means—Britain, which already has a considerable budget deficit, will be hit even harder. It is possible to forecast a further decline in Britain's manufacturing industry.

We find ourselves in the situation we do because of our historical neglect of manufacturing industry by Governments of both parties over a long term. We have not given our workers enough training, and neither have we invested enough in research and development. We have fallen behind. The only reason why investment per person in recent years has not plummeted is that we have one third the number of people employed in manufacturing industry that we had in the past. It is a simple fiction to think that in future we shall have low unemployment because service industries will take over. That is not true. We must tackle the problems of manufacturing industry with vigour and with a sense of interventionism that is conspicuously absent from the Government's proposals in the Bill.

8.5 pm

Mr. William Powell (Corby)

I am sorry that my right hon. Friend the Paymaster General has just left his place because I intended to begin my remarks by commenting that I suspect that for him the most important and interesting pages in today's newspapers are the cricket pages. I must confess that for me they are the racing pages—not only for their intrinsic interest but because the racing pages in both the national newspapers and the specialist press subject their writers and tipsters to the relentless discipline of having their forecasts checked there and then, that day, by the actual result on the race course. I cannot help thinking that if only the economic tipsters were subjected to the same relentless discipline, we might see a great deal more caution, and much more humility, among those who forecast in the House and outside it.

Let us take that notion one stage further, and reverse the situation so that the economic writers become the racing tipsters and the racing tipsters become the economic forecasters. I imagine that the quality of information that would then become available for national policy making would be a great deal better and more reliable than it is at the present time.

We have listened to a great deal of speculation—and that is all it is—about what might be happening in our economic life. We know perfectly well that most of last year's speculation was wrong—often badly wrong. The Chancellor was criticised, but most of his critics were just as badly wrong as he has ever been. We should bear that in mind. Economic policy is not determined by short-term factors of the kind so often identified this afternoon and this evening, but by much longer-term factors. The British economy in the 1980s is very dependent upon what happened in the 1970s. What happened in the British economy in the 1970s was totally dependent on what happened in the 1960s. What happens in the 1990s will be the product of what happens in this decade.

The House will bear in mind my interest in the racing pages when I forecast that there is a rich harvest to be gathered for this country in the 1990s as a consequence of the fundamantal structural changes made during the present decade. My hon. Friend the Member for Horsham (Sir P. Hordern), in describing the speech of the right hon. Member for Ashton-under-Lyne (Mr. Sheldon), used the expression "charming". I extend that expression to cover the speech of the right hon. Member for Llanelli (Mr. Davies) because he and the right hon. Member for Ashton-under-Lyne had responsibility in the Treasury in the 1970s, and they may look back with nostalgia upon their success during those days.

However, those successes were not viewed as such by the rest of this House, nor are they so viewed by the rest of the country at the present time. At that time they were not viewed as successes, and the position does not look good in retrospect either. So that those two right hon. Gentlemen are welcome to go down memory lane, but they should not imagine that they deceive anybody in the Opposition, anybody on the Government side of the House, or anybody outside.

The right hon. Member for Ashton-under-Lyne talked about how one third of the manufacturing industry in his constituency had been wiped out—so he said—in 1980 and 1981 by this Government. My constituents remember March 1979, when the Labour Government announced that Corby steelworks, which employed three quarters of the population of the main town in my constituency, was to close. My constituents do not look back with nostalgia upon the so-called golden days of the 1970s—far from it. That kind of analysis deceives nobody.

What my constituents do notice now are the enormous changes brought about by the investment that has taken place in the 1980s. At first, those changes were rather fragile, then they gathered steam, and now they amount to a raging boom. Every single week, when I return to my constituency, I see still more factories being constructed. Each week, changes are taking place—and this in an area that undoubtedly experienced some of the highest unemployment levels in this country earlier in the decade. That is why I am so confident that there is a rich harvest to be gathered in the next decade as a result of the structural changes that have been made in our economy during the course of this decade.

I welcome this Finance Bill. I welcome most of its proposals with very considerable enthusiasm. However, I have to say to my hon. Friend the Economic Secretary to the Treasury that there are aspects of it that I find disappointing, and one or two aspects that are unwelcome. I will deal first with those that I find unwelcome. My hon. Friend the Member for Wanstead and Woodford (Mr. Arbuthnot) and the hon. Member for Ynys MÔn (Mr. Jones) mentioned clause 167. We shall have to look again at that clause, and the criticisms by two people who are experienced practitioners in this field will have to be taken on board. In the course of the deliberations of the Standing Committee, I shall certainly do my bit to see that these matters are looked at again very carefully.

I agree entirely with the criticisms of my hon. Friend the Member for Horsham in his very wise and perceptive speech, and of my hon. Friend the Member for Beaconsfield (Mr. Smith) about whether tax relief should be extended to people over 60 who have private health insurance. As the argument stands, I shall be unable to join the Government in the Lobby when these matters come to a vote in due course. I say so on the basis that it is entirely wrong to extend tax reliefs further and further unless there are the most profound reasons of national endeavour for doing so. At this stage I am not persuaded by the arguments that have been put forward for this extension.

I am disappointed by the inheritance tax provisions in the Bill. My hon. Friend the Member for Beaconsfield identified tax abolition as an entirely noble and proper course for Chancellors in their Budget speeches and in the ensuing Finance Bills. I have to say that it is time that the inheritance tax was abolished. It brings in only just over £1 billion a year. There are already enormous exemptions, and the fact is that, because of its arbitrary nature, it is capable of doing immense damage, particularly to the business fabric of this country. My hon. Friend knows of my interest in unquoted and family businesses. In the case of these businesses, inheritance tax can be paid only out of active assets. That leads to take-overs, sell-outs and centralisation of a most undesirable sort.

If we are to have the sensible regional policy for which a number of hon. Members have called during this debate, we must face up to the implications for regional policy of inheritance tax and its predecessors. Over a generation, enormous damage has been done to our regions by nationalisation, by the huge and burgeoning growth of pension funds based in London and using London as the base for their investment decisions, and by the subsidy to public companies taking over private companies, usually in the form of roll-over relief—that itself being necessitated by capital transfer tax, inheritance tax, estate duty, or whatever it may have been called.

I want to make two final points. First, I welcome the ESOP provisions that have been introduced in this Budget, but I hope that my right hon. Friend the Chancellor will not regard them as a panacea. They will be useful in encouraging employees, in giving incentives to certain types of companies, but many family businesses will find them irrelevant to their necessary task of ensuring that their employees too enjoy the kind of incentives that are increasingly widely available outside family businesses. I warn my hon. Friend the Economic Secretary that when we come to discuss in detail the Finance Bill's proposals for the abolition of the closed companies legislation I shall make it clear that I do not think that my right hon. Friend has selected the best means of doing this. There are potential nasties in the scheme that he has put forward, and we will need to look very closely at the proposals.

Lastly, I welcome very strongly the added incentives to motorists to use unleaded petrol. I am one of a growing number of people who, since the Budget, have taken advantage of that incentive, and I hope that many thousands will follow. They will not only benefit from lower prices but do their own little bit to see that further damage to our environment is limited to the greatest extent.

8.17 pm

Mr. John Battle (Leeds, West)

Opening the Second Reading debate the Chief Secretary to the Treasury used again the oft-repeated tale about booming Britain. He talked about a dramatic improvement; he said that the country had never been in such a good position; he spoke of its outstanding record of success. I suggest that such descriptions have developed a very hollow echo for millions of people in Britain, who are not experiencing what the hon. Member for Corby (Mr. Powell) referred to as "a rich harvest".

During yesterday's debate on social security, hon. Members on the Government side, faced with evidence of social security reductions for those on the lowest incomes, had real difficulty in claiming that real living standards are rising. We are entitled to ask whether all the people in our society are participating in this much-vaunted boom in Britain. Are all getting their share of this increasing wealth? Recently, The Sunday Times published a comprehensive study of Britain's richest people. That may give us some idea who has been gaining as a result of this Government's finance policies. The next day one of the tabloids published an article under the banner headline It's still the posh that's got the dosh". In view of the grammar, I hardly need say which tabloid it is. A sub-head says: Try Eton or the Guards if you want to get rich [Interruption.] Is the hon. Member suggesting that his name was in the list? I fear that it may not have been.

Mr. David Shaw

As someone slightly experienced in business, may I offer the hon. Gentleman a suggestion? Today, if one is to succeed in business, it is a positive disadvantage to have gone to Eton and to have been in the Guards.

Mr. Battle

I will deal precisely with that point later.

In this article there was a portrait not of the hon. Gentleman but of Mr. Ian McGlinn, a Sussex garage owner who, at joint 158th place in the league of the 200 richest people, proves that hard work and an eye for the main chance can catapult ANYONE into the jet set. Did he do it by building up his car business? Sadly, he did not. The article says that in 1976 he dabbled in shares. He put £5,000 in Anita Roddick's fledgling Body Shop firm—now that it has been floated on the stock exchange he's worth £40 million. That view—that share and equity ownership is the key to personal wealth in Britain today—was emphasised today by the Chief Secretary to the Treasury.

To return to the question put to me by the hon. Member for Dover (Mr. Shaw), The Sunday Times put an entirely different interpretation on the wealth story. It said: The very limited success of the Thatcher revolution in transforming British society is graphically and grimly illustrated by the league table of wealth published in The Sunday Times Magazine today. Of the 200 richest people in the country we have identified, old Britain still looms large: more than half the list is made up of inherited money. Some 57 of the 200 are landowners, 55 went to one school … and 25 even served in the same regiment … No wonder Japan, America and West Germany continue to beat the pants off us in the league table of economic performance. In these countries people have grown rich through industry; in Britain the rich still come disproportionately from those who have managed to hold on to their ancestors' land and property … The bias towards old money is not just bad for the balance of payments. A country in which people can grow rich through industry is also a country which creates jobs. But there are precious few jobs in simply passing wealth on from one generation to another and the only industry involved is in avoiding the taxman. There is another flaw in the tabloid approach that is often adopted by Conservative Members. Those in poverty do not have the choice whether to be rich or poor. They do not have £5,000 to put down on a shares gamble. That is not an option for the 15 million people who are living in poverty. It is not true that anybody can make himself a millionaire. He cannot.

The trickle-down theory has run dry. Real incomes have increased on average by 6 per cent. in the last 10 years, but the poorest 20 per cent. have seen their share of household income fall from 6.1 per cent. to 5.6 per cent. How does that contrast with the richest 20 per cent.? Their share has risen from 40 per cent. to 43 per cent. The trickle-down theory is not working; nor is the myth of the average wage that is peddled by those who sit on the Conservative Benches. Their view is that if the average wage increases, everybody will get that increase. However, those on the lowest incomes do not find that their incomes increase if the average wage rises. The average wage may rise as a result of those at the top end getting even more.

The Government are involved in all kinds of contortions in an attempt to present their economic efforts as a success. Yesterday they claimed that they were celebrating a rising average wage. However, all their noises about the need to keep down inflation mean that they have to insist on wages being kept under control. I make no apology for returning to the British Institute of Management and Remuneration Economics survey of wages that was published in the Financial Times on 23 April 1989. It said: Britain's directors last year received their biggest increase in take-home pay for 16 years … The survey found that the reduction in the top rate of taxation in the 1988 budget had helped to increase directors' take-home pay by 26 per cent. Their gross earnings, before tax and national insurance contributions increased by 13.9 per cent. The Government's tax policies are manufacturing tax inflation. Emerging wage inflation is the product of last year's economic mismanagement when the rich were given back so much.

If the Government's economic policies have led to an illusory sleight of hand in the management of taxes and wages, the same is true of the Government's previous claim that the National Health Service is safe in their hands. The introduction of tax relief for private health care represents a serious breach in the principles of the National Health Service. The Government are clearly going down the road of tax subsidies in the Finance Bill. Its provisions are the first steps down the road towards tax subsidies. They will lead to tax relief on direct payments for health care, to special tax-free savings for private health care and eventually to tax relief on all such schemes, regardless of age, need or type of operation.

An article in The Independent on 15 April was headed Clarke urged to extend tax relief to over-60s. The article spelt out how key advisers to the Government, when formulating their White Paper proposals—such as Dr. Michael Goldsmith, the medical director of Medisure, the medical insurance advisers, and David Willetts, the director of the Centre for Policy Studies—are urging the Government to go even further. According to the article, Mr. Willetts said: I hope that tax relief will not cover just insurance, and that it will cover any direct payment mechanism. It is time that the Government made absolutely plain what their attitude is to private health care. It is no use the Secretary of State for Health and the Minister of State saying, in an aside, that they believe that the changes in the Finance Bill are minor, interesting details. They may undermine the principles of the National Health Service.

If there is to be a tax break on private health care, it will lead to an erosion of the tax base, to a loss of income to the Exchequer and in turn to a reduction in the funds available to the National Health Service.

In July 1988 the Select Committee on Social Services reported: In our judgment the creation of a new tax subsidy on all private health insurance cannot be demonstrated to extend the total availability of health care. The Finance Bill will undermine the National Health Service. It reinforces the Government's past policies and demonstrates that the Government are undermining their own stated intentions.

8.27 pm

Mr. Andrew Mitchell (Gedling)

In contrast to the hon. Member for Leeds, West (Mr. Battle), whom it is always a great pleasure to follow, I must make it clear that I believe that the 1989 Budget and Finance Bill will be seen in retrospect as fundamental to securing good economic performance and rising living standards in the 1990s, as well as to securing a soft landing later this year.

I have read with great interest the report of the Treasury and Civil Service Select Committee. It refers to the loose monetary policy adopted in the wake of the October 1987 stock market crash and says that it is now clear that nearly all conventional wisdom underestimated the tremendous strength of the British and other economies. However, it certainly did not look like that at the time. Perhaps the Select Committee allowed itself just a touch of the Monday morning footballer syndrome.

Earlier in the debate the Chairman of the Select Committee, my right hon. Friend the Member for Worthing (Mr. Higgins), seemed to concede as much. I hope that my right hon. Friend will not mind if I quote his words to the House on 5 November 1987 in the debate on the financial markets. In stressing the importance of effective action he said: The response of the Chancellor in reducing interest rates following recent events was the right one. He then went on to say: However, there is still further scope for us to reduce interest rates …"—[Official Report, 5 November 1987; Vol. 121, c. 1134.] I make that point to underline the fact that to have done otherwise at that time would in the short term have been extremely dangerous, would have flown in the face of conventional wisdom, and might well have precipitated a yet greater and more prolonged crisis of confidence in the market.

Clearly we still live with the effects of that decision, but we also live with the specific difficulties of a dynamic economy whose supply side has been transformed and where progress has been so rapid and marked that change and growth pains are endemic and unavoidable. Unemployment has been markedly reducing, yet we now face serious skill shortages. The problem is turning on its head as a result of the growth in our economy.

We should be very wary of knee jerk and over-simplistic reactions to the size of the deficit. Certainly it is extremely high and we want to see a change in trend. I have no doubt that change will come as a result of our very high current interest rates, but the present high level of demand and credit is a consequence of other aspects of our economic success. We should be very wary of further rises in interest rates before the present level has been allowed time to achieve the necessary result.

Much has been said in this context about the performance of the Government's statistics office. I welcome the intention now to get to grips with these difficulties by placing at least part of the Central Statistical Office under the wing of the Treasury. I am sure that this will lead to more accurate statistics being made available. However, the inability to explain the £15 billion hole in the accounts is rather disturbing. Perhaps much of it is unrecorded exports. There is a revaluation at the end of each year of the export figures; they are adjusted and normally turn out to be much more favourable. The various measures of gross domestic product simply do not add up. Tomorrow dealers in the City will be staring lugubriously at their screens awaiting the trade figures and subsequently making judgments about our economic performance based on unreliable figures. We should pay far less attention to those figures and accept that a deregulated, dynamic, free enterprise economy such as ours is extremely difficult for the CSO to monitor effectively.

Following last year's Budget, which accomplished so many historic necessities at one go—the tax emancipation of women, the ending of confiscatory income tax rates, the translation of the PSBR into a PSDR—it was inevitable that this year's Budget would be lower key and more technical.

This year's Finance Bill underlines that. It can hardly be described as a user-friendly document—perhaps it never is—but it is certainly a considerably more challenging document than last year's Finance Bill, which I had the good fortune to examine in Committee. I fear that its comprehension and interpretation will provide a very good living for many City lawyers and accountants for the next few years. Nevertheless, if its complexity was foreshadowed, many of the Budget's measures themselves were not.

I believe that there will be radical effects on the savings market as a result of this Budget. The Chancellor has made a major contribution to the development of employee share ownership by allowing the contributions of a company towards an ESOP to qualify for corporation tax relief. It is encouraging to know that our representations to the Chancellor last year during the Committee stage, and particularly those of my hon. Friend the Member for Esher (Mr. Taylor), who is currently detained overseas on parliamentary business, have been noted and heeded.

The measures which affect profit-related pay and employee share schemes will also be extremely helpful in promoting genuine employee participation in the enterprises for which they work. It is this Conservative approach to encouraging harmony and productivity in commerce and industry which is itself a landmark in industrial relations and which will have the most far-reaching and profound effects over the long term.

The measures for promoting personal equity plans are equally significant. They too will not only encourage savings and share ownership but will have a significant effect on the mortgage market. The financial institutions may well be able to demonstrate that a PEP mortgage is at least as competitive as an endowment mortgage and thereby wake up a rather sleepy corner of the market to the great benefit of the consumer both in terms of choice and competition.

As the reasonable man surveys this Bill and the Budget which forms its foundation, it will be hard to find much wrong with it. Certainly the abolition of the earnings rule and changes in national insurance contributions are pivotal. I particularly salute the Economic Secretary in his work on the promotion of lead-free petrol. I am delighted to see Gedling, as so often in other matters, leading the way in this. In my constituency now practically all garages supply lead-free petrol; one petrol station has 16 out of 20 pumps supplying it.

I do not wish to insult the ingenuity of the shadow Opposition Treasury team but, with the exception of the health proposals, there is very little they will be able to complain about in Committee. Yet those health proposals were announced in January and their announcement was therefore not part of the Budget. More important surely is the overall perspective on health. Our successful economic policies have provided for unprecedented increases in health spending, but throwing money at the Health Service is not a sufficient discharge of our public duty. We are now reforming its structure to ensure value for money and value for the taxpayer. That surely is our duty.

It is because the 1980s have seen such a fundamental change in our economic performance—indeed, it is no exaggeration to say that the 1980s are the decade of the supply side revolution—that the future needs of the National Health Service, and indeed of the rest of the public sector, can continue safely to be met by this Government.

I support the Bill and look forward to its rapid implementation.

8.36 pm

Mr. Pat Wall (Bradford, North)

According to the radio today, the CBI sees some signs that high interest rates are beginning to slow down the economy and hopes that will bring down the rate of inflation, which, even excluding mortgage payments, means we have the sixth highest of the seven major European countries. It is interesting to note that in real terms, excluding inflation, interest rates are the highest they have been in this country since the Napoleonic wars. Perhaps that gives a clue to how the Chancellor sees his present role, as the Napoleon of the British economy, the revolutionary tax reformer. Like Napoleon, the right hon. Gentleman normally stood with his hands in his jacket. However, Napoleon Bonaparte won real victories before his eventual defeat and exile. The Napoleon of Blaby's victories have been somewhat illusory, though he also, I suspect, will go into political exile.

The CBI also sees prospects of a reversal in the rising rate of inflation and—with illusions—holds on to the belief that it can contain the increase in ex-factory prices to 5 per cent., the present rate. That is in conflict with the evidence of the retail sales figures and the money supply figures. However, even the CBI has no faith whatsoever in the Chancellor's ability to tackle the balance of payments problem. It makes the point that a decrease in the rate of inflation will lead to further losses of manufacturing jobs and in the wealth-creating section of the economy. Already the figures from the textile industry, which is often a barometer for the rest of the economy, show a growth in redundancies in the knitwear and other sectors.

The Chief Secretary today boasted yet again of the Government's achievements in economic growth, productivity and production. I would like to look at each of those aspects of the British economy.

The British economy has grown less than its major competitors since 1979, despite the bonus of North sea oil, which was worth about £18 billion a year in the mid-1980s and is worth about £7 billion a year now. Since 1979 the average annual rate of growth has been 1.8 per cent.—a miserly figure, even compared with the 2½ per cent. rate of growth under the last Labour Government which has been much maligned by Treasury Ministers. Manufacturing output fell by 14 per cent. between 1979 and 1981 and did not return to its 1979 level until 1987. In the same period manufacturing output increased by 38 per cent. in Japan, 25 per cent. in America, 16 per cent. in Italy and 12 per cent. in West Germany. Although the 4 per cent. increase in output in the past two years is above that of our major competitors, the figures I have quoted illustrate that Britain has a long way to go to compete with our major competitors.

The Chief Secretary boasted a productivity growth rate of more than 4 per cent. between 1979 and 1988—which is higher than that of our major competitors. But Britain is still 25 per cent. behind the EEC average in terms of productivity and still further behind Japan and America.

In 1988 investment per worker stood at £3,000 per head —lower than all our major competitors and only half the investment per worker in Japan. Even if we had a slave society worse than the restrictions that the managerial counter-revolution have placed on the conditions under which people work in recent years, investment in new machinery and new methods would always win and that is lacking in the British economy at present. Between 1979 and 1987 investment in industry rose by only 9 per cent. —less than half the increase in consumer spending. Manufacturing investment is still slightly below the level it reached in 1979. The annual rate of growth in capital stock—that is machines and plant— between 1979 and 1986 was only 11/2 per cent. which is about half that of Britain's major competitors.

The Government's investment in real terms in schools, hospitals, housing, roads and general economic infrastructure has fallen by 50 per cent., and is likely to fall by a further 6 per cent. in the next two years. Without taking into account the decline in oil and energy revenues between 1985 and 1988, manufacturing exports rose by 23 per cent. while imports increased by 48 per cent. That created the balance of trade deficit, which is continuing to run at an annual rate of more than £20 billion per year. The net outflow of private capital of £6.3 billion in the first nine months of 1988 plus a further outflow of £5.6 billion in portfolio investment abroad amounts to almost £12 billion in nine months. That, in addition to the balance of trade deficit, shows that if there were a run on the pound—which could happen given the general rise in world interest rates and the poor performance of the British economy—even the Chancellor's much-vaunted currency reserves of £30 billion would be under serious threat within a year.

The Finance Bill and the Government's economic prospects cannot be considered in isolation from the rest of the world. The massive $155 billion America budget deficit, the further $130 billion American trade deficit and the massive surpluses in Japan and West Germany have created a total imbalance in the world economy. In America there is the added problem of corporate debt to finance huge takeovers. Many American loan banks have gone into default and in the next five or 10 years could cost the American Treasury anything between $50 billion and $150 billion. The world's major capitalist economies are in a far from rosy position. In addition, there is a continuing problem of Third world debt with a net outflow from poor countries to rich countries of $46 billion last year. Therefore, the situation is very different from the picture that the Government have painted of the British economy and the major world economies.

Although the world economies avoided a recession after the stock exchange crash more than a year ago, by cutting interest rates and priming the economy, that policy is now being reversed. Interest rates are rising and productivity and growth are falling. That brings us back to the situation which one would normally have expected to follow the stock exchange crash—the possibility of a growing trade war and a recession and all that means in terms of human misery.

I conclude by drawing a comparison between the Government's claims and what really happened which was so well explained by my hon. Friend the Member for Leeds, West (Mr. Battle). The top 100 millionaires in Britain gained more from last year's Budget than the bottom 1 million people in Britain. Under this Conservative Government the top 1 per cent. of people in Britain received a 55 per cent. increase in income while the bottom 10 per cent. have lost 8 per cent. of their income. The Government represent a class-divided society. The world economy is split so that, even in so-called boom years, billions of people live in absolute poverty and a tiny handful live in riches. I believe that that is becoming increasingly apparent and that a democratic Socialist society which controls and shares its wealth evenly will become more and more desirable in this country and throughout the world.

8.46 pm

Mr. David Shaw (Dover)

It is always interesting to listen to the hon. Member for Bradford, North (M r. Wall). I remember his previous speeches on the economy which covered many world issues. He reminds me of the man with a sandwich board who goes round proclaiming that the world will end tomorrow. Unfortunately, his speech that the world was due to end tomorrow which he delivered last year appears to be wrong. The world is still around, the United States economy is still growing, the British economy is still growing and the only notable failure in the world economy in recent years is the Marxist-Leninist and Socialist economy in the Soviet Union.

The Finance Bill has been introduced against a background of a good economic position. The good news is that inflation is nowhere near as high as it was in 1979, earnings are much up on 1979 and economic growth is considerably higher than it was in 1979. Manufacturing productivity is a key statistic because of the very statistic that the Opposition always quote. The fact that we have lost 2 million jobs in manufacturing industry is good news because the 5 million people now employed in manufacturing are producing more goods than the 7 million people who were producing under Labour. Manufacturing productivity has increased by 50 per cent. since 1979—[Interruption.] The Opposition should listen and learn from those statistics so that if they ever get into government, which is extremely unlikely, they will know what to do.

Capital investment in Britain is going up at record rates, but, leaving aside capital investment in buildings and dwellings, the investment in manufacturing plant and machinery has gone up by 25 per cent. in real terms since 1979. That has produced the balance of payments deficit because about 22 per cent. of the growth in imports is the result of manufacturing plant and machinery having to be imported.

Machine tools are having to be imported as the British economy grows because the Labour Government in the 1970s destroyed the machine tools industry, just as they destroyed many industries. The motor car industry is a good example of that. In 1976, the balance of trade on motor cars was positive. The success of the Conservative Government in the early 1970s left Labour with a balance of payments surplus. By the time Labour left office in 1979, there was a deficit on motor cars. They had totally and utterly moved towards the destruction of that industry.

The Conservative Government have begun to reverse that decline. We have encouraged the Japanese and others to set up here. We have encouraged Jaguar and other companies to be more efficient. The way in which we have reversed the declining situation caused by Labour has been good for jobs and growth. I welcome the Finance Bill because it is a continuation of the achievements of Conservative Administrations. The Bill is part of the process of getting Britain right. It was not right under Labour.

I welcome the news for pensioners—the abolition of the earnings rule and the tax relief to be granted for contributions to private health insurance schemes. I welcome the benefits for low-paid employees through the changes in national insurance. I also welcome what is being done for share ownership. Everybody should have a stake in the community. All workers in Britain should have an opportunity to buy shares in the companies and businesses for which they work, and in other enterprises.

It is also good news to see encouragement being given to profit-related pay. Employees should be paid according to the success of the firms for which they work. It would be nice to have a Civil Service profit-related pay scheme. Indeed, we would welcome the Government defining "profit" in that sector.

I also welcome increased taxation on what I would call the car benefit. We should be taxing business perks. Indeed, there should be no need for such perks. People should be paid a fair and straight wage, not a wage with perks attached. Let us tighten up on all forms of business perks and tax them fully, with national insurance being charged on them as well. Pay should be related to the success of the firms for which people work.

I must comment on two slight disappointments—I would call them omissions—in this year's Finance Bill which I hope will be addressed in future measures. If I am fortunate enough to be a member of the Standing Committee, it might be possible to discuss at that stage the two key areas to which I wish to refer.

The higher rate of capital gains tax at 40 per cent. is too high. It has been recognised in the United States that it acts as a disincentive to investment in entrepreneurial-based companies. The 40 per cent. rate hits the gains of the very companies we want to help and in which we want people to invest. It hits the entrepreneurs who back those companies.

The hon. Member for Leeds, West (Mr. Battle) referred to Body Shop. Had he checked his facts he would have appreciated that the success of that investment of £5,000 has created 4,000 jobs—according to figures I have—in terms of direct employment. The degree of indirect employment is much larger. Had he examined the contribution that is made by the founding members of that organisation, he would have discovered that they contribute towards CND—not a contribution that I would recommend all business men to make—although the hon. Gentleman might have some sympathy with the views of the founding members in that respect. As I say, he should have researched his facts better.

Next, I am unhappy about the lack of help for business expansion scheme funds and the fact that the Government have not included in the Bill this year any measures for BES projects. It has been said that BES is too oriented to backing property and that we must return to a scheme which backs real companies and real investment, such as electronics and manufacturing.

In Committee last year we discussed at length the £500,000 limit and whether it should be raised for investment in BES companies in the manufacturing sector. I extracted a half promise from the Financial Secretary last year that he would look into the success that BES funds were having in attracting finance for investment in manufacturing companies. As I pointed out, funds cannot achieve tax relief at the time when investment is made in the fund. Tax relief is available only when investment is made in the company.

Some adjustment was made in the Budget last year, but I warned the Financial Secretary then that it might not be adequate. I hope that the Treasury is examining the statistics. If so, it will be found that investment in BES funds is not satisfactory now and that it is not high enough. I hope that the adjustment for which I appealed last year will be considered in terms of an amendment to the Finance Bill this year.

It would be wrong for me to conclude my remarks without referring to one aspect of the speeches by Opposition Members. We have heard a great deal of criticism from them, but they have supplied no positive answers, no policy and no solutions. Conservative Members are entitled to wonder whether there was an important economic policy announcement last weekend from the hon. Member for Oldham, West (Mr. Meacher) when he said that secondary picketing would be allowed under a Labour Government.

I hope that Opposition Front Bench spokesmen will now explain how secondary picketing would help the nation's economy; how secondary picketing would help to keep inflation at a low level and help British companies to be successful in exporting more. Let them tell us clearly whether Labour Members support secondary picketing and believe that it would improve the economy.

Mr. Mans

Does my hon. Friend agree that we recently had another example of the way forward by the Labour party in terms of its policy to provide fibre optic cable to every household in Britain at a cost of £21 billion to the taxpayer?

Mr. Deputy Speaker

Order. The hon. Member for Dover (Mr. Shaw) has half a minute left for his speech.

Mr. Shaw

My hon. Friend the Member for Wyre (Mr. Mans) makes a telling point. All Labour Governments have spent money regardless of benefit to the taxpayer.

We have had an important new economic indicator suggested from Opposition Members. I refer to the number of people who, according to them, can afford to holiday in Spain. I remind them that under Labour we had a £50 sterling limit. Indeed, under Labour people could not afford to go abroad on holiday. The statistics of the number of people who take holidays abroad under Conservative rule have gone on increasing, just as many other aspects of the nation's activities continue to improve.

I welcome this year's Finance Bill. It is an excellent measure that addresses many of the nation's problems. It is part of the Government's policy of solving Britain's real problems. The economy is improving under Conservative rule and I hope that the Government will go on introducing Finance Bills of this type in the future.

8.57 pm

Dr. Kim Howells (Pontypridd)

The hon. Member for Dover (Mr. Shaw) dealt with some important matters. I shall deal in particular with the reticence of the Finance Bill to address the question how our manufacturing industries are to be encouraged to devote greater resources to research and development and product innovation. We also have a desperate need to educate and train our work force in skills adequate to propel our manufacturing industries into the 21st century.

So dismal have been the innovative and research and development performances of certain key sectors of our manufacturing industries in the last decade that—as my right hon. Friend the Member for Llanelli (Mr. Davies) ably pointed out—in the unlikely event of Britain adopting some of the trade barriers favoured by the Japanese, our manufacturers would not be able to fill the gaps left by the prohibited imports, be they cars or wrist watches.

It is true that there has been in recent years, even in constituencies such as mine in the coalfields, a welcome influx of jobs in the electronics sector. It is also true that those jobs have the sheen of newness and modernity and that they are frequently a boon to communities that have suffered badly from industrial decline over the past decade. I hope that they are jobs that will stay, if only because, all too often, they have arrived because hard-pressed local authorities have risked precious funds to attract them in the first place. I also hope that they stay because they give constituencies such as mine a toehold on the hazardous slopes of the international electronics trade.

I am afraid that all too often, when the sheen of newness and modernity is rubbed away, constituencies such as mine find themselves engaged in a sector of the electronics industry that is dependent for its competitiveness and health not on the productivity records of its work force or on the excellence of its industrial relations record—important though those elements are—but on the innovations and development strategies worked out and decided on the other side of the world.

The Finance Bill seems to have been drawn up in the belief that there is nothing wrong in simply hoping that market forces will, somehow, resolve automatically our research and development problems. In fact, that is a belief that tends to encourage the views of an increasing number of transnational corporations that Britain is a fine place to set up assembly lines. We are often extremely generous with financial incentives for them to site here. In constituencies such as mine there is a prevailing low-wage economy and there are few pressures from the Government to source the key components of the electronics goods being assembled with United Kingdom producers. Of course, that is mainly because we do not produce many of the key components. All too often, those in Government whose job should be to mould and shape this country's economic environment are content to sit back and allow transnational corporations based in the Pacific ring, north America or continental Europe to draw away from us in the manufacturing innovation stakes. I hope that the Financial Secretary will agree that it can not be in the best interests of the nation's economy to allow it to become subject to an increasing dependence on imported supplies of certain microchip technologies, the manufacture and supply of which are determined in boardrooms remote from the effective influence of our manufacturers.

In the past four years alone, the trade deficit in electronic goods has risen by a staggering 40 per cent., and that is just the main story. The subtext carries an even more ominous message. It says that our ability to win for ourselves a leading place in the world manufacturing stakes over the next decade will continue to be seriously impaired unless we recognise that there are mechanisms available to us to win that place other than the manipulation of interest rates and the wholesale surrender to the notion that the free market—and only the free market—can determine the rate and nature of manufacturing innovation.

I am not advocating a centralised Government think tank which would distribute funds to research and develop huge projects. We have seen the results of that in the disastrous Magnox and advanced gas-cooled reactor nuclear power station programmes, which swallowed up precious research and development funds at an unprecedented rate and produced little other than a troublesome, inefficient and unsaleable technology. I am advocating that the Government should reassess their priorities about where they see fit to bestow their financial blessings. In particular, they should concern themselves less with easing the tax burden of the best off and more with priming the pump of manufacturing investment and with strengthening and extending the opportunities for educating, training, and retraining those who will develop and manufacture the innovations to which I have alluded.

There has been little success in reducing the lag in training in this country and there is widespread concern about the continuing decline in our comparative research and development position. Those features constitute serious impediments to the transformation of our economy to one capable of rapid growth in the long term, as distinct from rapid growth from a comparatively low base in the short term. I have no doubt that industry recognises that it could have much to gain from an increase in training, but that does not mean that industry is prepared to meet the costs associated with increased training, especially as employers perceive that there is a risk that trained personnel may choose to shift their skills, after training, to a rival. The Government will allow that situation to continue only at the peril of our manufacturing economy.

The Finance Bill gives no suggestion that the Government are paying the attention and the respect warranted to those key problems. If that policy continues, it may result in more jobs on the assembly line of the foreign transnational corporations. But it will not result in an economy that is able freely to determine its own future.

9.6 pm

Mr. Quentin Davies (Stamford and Spalding)

My right hon. Friend the Chief Secretary made it plain when he introduced the debate this afternoon that the Government are introducing the Finance Bill against the background of the incipient overheating of the economy. That is a danger which my right hon. Friend the Chancellor correctly diagnosed almost a year ago and which he has addressed by a series of stepped increases in interest rates. I am convinced that that was the right response and that after the normal time lag of six, 12 or 18 months the increases in interest rates will begin to have an impact on the real economy. However, we need to take account not merely of the immediate problem but of the causes behind the incipient overheating.

There will be general agreement in the House that that overheating is due, more than anything else, to the precipitate decline in the net savings ratio of the household sector, which is in itself an astonishing reflection of the degree of confidence that has been generated by our prosperity in this country. If it is a problem, it is a problem of success, but, none the less, it is a problem that we must redress. In those circumstances, we should examine the Finance Bill against the three criteria that, in such circumstances, the Finance Bill must meet.

The first requirement is that the Finance Bill should be conservative. It should be clear that the Government are determined that until and unless private sector saving, especially household saving, revives there is no question of the Government reducing their own savings—that is, reducing their own surplus. There is a natural trade-off between monetary policy and fiscal policy, between the Government's surplus and the level of interest rates. The higher Government savings are, the less the need to increase interest rates to induce households to save a greater proportion of their current incomes. It is utterly fatuous for Opposition Members to argue at the same time that interest rates should be lower and that the Government should spend more of their surplus.

This Budget is conservative. My right hon. Friend is going for a surplus of around £14 billion again this year and one could hardly be more conservative than that. If the growth rate continues on its present course, the surplus is likely to be higher. Events over the past few weeks have thoroughly vindicated my right hon. Friend's essential budgetary decision. We have found that the financial markets have not collapsed, there has not been undue pressure for a further rise in interest rates and it has been possible to maintain business and investing confidence precisely because we had such a conservative Budget, which made it less likely rather than more likely that we would need a higher level of interest rates in future.

The second great requirement is that it should do something to stimulate the supply side. That is difficult when, by definition, there is no scope for a massive reduction in taxation and no scope for an immediate reduction in interest rates. Considerable ingenuity is required, and my right hon. Friend the Chancellor has displayed that.

First, my right hon. Friend has greatly increased the ceiling for the corporation tax rate for small companies —an important measure. Other most important measures in that area were incorporated in the Social Security Bill that the House discussed yesterday. There is no question but that the reduction in national insurance contributions for the low paid will reduce the employment trap. Other measures in that Bill which will encourage people to make an even greater effort to go back to work will also tend in that direction.

What is more, the reduction of the earnings rule previously applied to pensioners must also have not only desirable human consequences, but the desirable economic consequence of persuading many people to remain in employment longer, making their skills available to the economy and reducing the skill shortages from which we suffer and are likely increasingly to suffer during the 1990s when we move into a demographic trough.

Thirdly, in the circumstances that I have described, we must address the root cause of the overheating and do what we can to increase household and personal savings. I congratulate my right hon. Friend on resisting the considerable pressure from the Inland Revenue to burden the life assurance industry with substantially greater taxation. The regime that he has now come out with, and which is expressed in the Bill, will give renewed confidence to those contemplating taking out contractual savings schemes or increasing their existing commitment to contractual savings.

Most of all in that context I welcome my right hon. Friend's provision for expanding the personal equity plan scheme, doubling the maximum amount and permitting half of it, £2,400, to be invested in unit trusts. For the first time, the PEPs will be aggressively marketed. The financial pages of the Sunday papers over the past few weeks have given us considerable evidence that that is happening.

Personal equity plans are an ideal mechanism for mobilising savings on the part of the small saver and investment in unit trusts—I have no interest to declare on behalf of the unit trust industry—is particularly desirable for the small saver because they enable him to achieve a degree of diversification in his portfolio which would otherwise not be possible.

Within this apparently technical and complicated Finance Bill there is an extremely coherent nucleus of sharply focused economic policies which address very effectively the problems immediately before us. The Bill deserves the full-hearted support of the House.

9.12 pm

Mr. Chris Smith (Islington, South and Finsbury)

We should be having this debate tomorrow because it is crucial to see the Finance Bill and the fiscal decisions that it enshrines against the broader economic background, and tomorrow's balance of payment figures will, I suspect, once again emphasise how stark that background is.

My right hon. and hon. Friends have in large numbers drawn attention to precisely that problem. My right hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) talked about the balance of payments problem and spoke of the mistakes that were made last year when it became obvious that credit was spiralling out of control. My hon. Friend the Member for Durham, North (Mr. Radice) spoke of the balance of payments deficit as the most immediate danger that we face. He rightly said that we run the risk of our economic policy being dictated by the holders of sterling. My right hon. Friend the Member for Llanelli (Mr. Davies) spoke about the deficit being likely to be far worse than predicted even at Budget time a month ago. He spoke of a possible deficit of £20 billion this year and he perceptively pointed out that last year's deficit was larger than the combined deficits of the previous 40 years.

My hon. Friend the Member for Kirkcaldy (Dr. Moonie) spoke of a deficit of £2 billion last year in construction materials alone. My hon. Friend the Member for Clydebank and Milngavie (Mr. Worthington) said that we had lost whole sectors of British industry over the past 10 years. My hon. Friend the Member for Bradford, North (Mr. Wall) spoke about the specific problems facing the textile industry. My hon. Friend the Member for Pontypridd (Dr. Howells) spoke movingly of the damage done to the electronics industry in his constituency and the importance of innovation, training and research to its future. All identified the balance of payments problem as one of the key issues facing our economy which the Government should be facing up to. Sadly, the same concern has not been shown by Conservative Members at any stage during today's debate.

Last year's balance of payments deficit was at a record level. All the indications are that this year's deficit is likely to be worse. The Government's predictions are hopelessly unachievable. Table 3.3 of the Red Book, which was also highlighted by the Select Committee's report which came out yesterday, gives the game away. That table predicts that export volume will grow by 7.5 per cent. in 1989 as opposed to a growth figure of 3 per cent. last year, and that import volume will grow by only 4.5 per cent. in 1989, as opposed to the staggering figure of 14.5 per cent. last year. Can such changes from domestic consumption to export orientation be achieved in such a short period, especially when interest rates are at a crippling level for small businesses wanting to invest, coupled with an overvalued pound that makes exporting more difficult? Of course not.

It does not just need a shut down of major North sea production fields to throw the Government's predictions out of kilter. Those predictions are unachievable anyway. We must remember that even on the basis of those predictions the Chancellor is forecasting a balance of payments deficit of £14.5 billion in 1989. I warn the Government now that it will be worse and that will be a direct result of the Government's policies towards industry, investment, the exchange rate and interest rates.

Britain's share of world trade has fallen faster during the past 10 years than that of any other major country. That is the real economic miracle of 10 years of Thatcherism. In terms of our balance of payments and balance of trade, 10 years of the Prime Minister have produced not an economic miracle but an economic disaster.

What of the other key economic factors that we should be looking at as the background to the Bill? The Government constantly tell us that their central objective is the control of inflation. Let us look at their record on that. The hon. Member for Dover (Mr. Shaw), in an entertaining speech, took time off from his researches into the net book agreement to tell us that there was good news on inflation. When the Prime Minister came to power Britain's inflation rate was 10.3 per cent., lower than that of the United States, France and Italy, and just above the average of 9.7 per cent. of all the OECD countries. It is now 7.9 per cent. and rising. It is higher than in any major industrial country and twice the OECD average.

Just to ensure that that miraculous transformation continues, the Governmment's direct decisions on water prices, electricity prices, transport fares, rents and rates, together with the immediate impact of the Chancellor's own chosen anti-inflationary weapon of interest rates, have all ensured further twists to the current inflationary spiral. The attempts to mitigate the rise in inflation in the Finance Bill, by means of the alarming decision not to uprate the duty on tobacco and alcohol, pale into insignificance beside that overall picture. That picture shows clearly that a Government who set out to make the lowering of inflation their target, their principal goal, their judge and jury, have roundly failed in that task.

What of the high interest rate policy that the Chnancellor has chosen in response to the problem? He has chosen it with three apparent objectives—to help finance the balance of payments deficit and coterminously to keep the exchange rate high, to try to dampen demand, and indirectly to influence the inflation rate. It is a blunt and inadequate instrument at the best of times. To rely so heavily, so exclusively and with such blinkered vision on that one policy instrument alone is sheer economic madness.

That policy is leading the Government and the Chancellor into deeper and deeper trouble. With interest rates already rising in Germany, and likely to rise in Japan, with bank lending still rising sharply, and consumer spending obstinately high, with a continuing deterioration in the balance of payments and with a blind attachment to interest rates as his only weapon, there are likely to be even further interest rate rises ahead, bringing with them further mortgage misery for home owners, further investment difficulty for small businesses and the spectre of recession.

Yesterday's Select Committee report has been rightly much quoted in the debate, except of course by the Chief Secretary. The report pointed out that the Chancellor was walking a tightrope between inflation and recession. It is a tightrope of his own making, determined directly by his own decisions and policies. He cannot remain on it for ever. His policies dictate that he cannot avoid either the prospect of inflation or that of recession without embracing the other. On all these fronts—on the balance of payments, on inflation and on interest rates—the Government's performance has been and continues to be lamentable.

It is against that background that the fiscal decisions in the Finance Bill need to be viewed and judged. The balance between monetary and fiscal policy is clearly seen by the Select Committee. Last year's fiscal decisions directly fuelled demand. They were not only unfair but imprudent. We said so at the time. They staggeringly bettered the already better off. This year's Finance Bill does nothing to redress the balance, nor does it do anything to address the overall and pressing needs of the economy.

Let us lay to rest one myth right from the start. On 15 March the Chief Secretary said: We"— that is, the Conservatives— are the party of low taxation".—[Official Report, 15 March 1989; Vol. 149, c. 429.] That claim is nonsense. The Tory party has perpetrated a great fraud on the nation. By adjusting the marginal rates of income tax downwards whilst at the same time raising other forms of taxation, it has hoodwinked many people into thinking that their taxes are lower. They are not. The people are beginning to rumble the Government.

In 1978–;79, before the first Tory Budget, taxes took just over 34 per cent of GDP. Now they take 37.5 per cent., effectively a 10 per cent. increase in the tax burden over 10 years. The Finance Bill ensures that the percentage will remain the same. Indeed, Lloyds Bank Economic Bulletin estimates that the burden may even rise by a further 1/2 per cent. in the coming year. Interestingly, that bulletin also points to the adverse impact of the poll tax this year in Scotland and next year in England and Wales. It says: The community charge will wipe out the lightening of the income tax burden over the last decade, effectively cancelling out a large part of the value of personal income tax allowances. That is on top of an already tightening tax burden.

If, instead of considering the overall national income, we consider the fate of ordinary householders, and if we take not just income tax, which has gone down, but VAT, rates and national insurance, all of which have gone up directly at Government behest, we see that the average household has found its total tax burden rising from 35.1 per cent. of income in 1978–79 to 37.3 per cent. in 1988–89. That is from a purportedly low tax party.

Mr. Mans

Does the hon. Gentleman agree that he is misleading the House in saying that the rate of taxation has gone up? Taxation and national insurance have gone down since 1981. The increase that the hon. Gentleman is talking about took place during the first two years of the period that he mentions. Since then the rate has gone down to 37 per cent.

Mr. Smith

I am looking at the record of the Government. It may not have escaped the notice of the hon. Gentleman that the Government, as they claim widely in current circumstances, have been in office for 10 years. I am taking their 10-year record; I am taking not just income tax and national insurance but the other things that people pay, such as VAT and rates.

Even worse, if we take the way tax changes operated throughout the income spectrum, we find staggering differences between those at the top and those at the bottom. My hon. Friend the Member for Leeds, West (Mr. Battle) charted the widening gap between the rich and the poor. Taking just direct deductions for income tax and national insurance, the tax contribution for a married couple with two children, on half average earnings, has gone up in the past 10 years nearly three times as a proportion of their income. For those on 10 times average earnings, in the same 10-year period their tax burden as a proportion of income has virtually halved. This is not a low tax Government. It is a Government who believe in low taxes for those at the top and high taxes for everyone else.

Of course, the Government got a little worried about that feature of their policy and about the impression that they were giving, especially in last year's Finance Act. So they trumpeted this year's Budget in advance as a Budget for the low paid. It was not. They include one measure that will be of some help, but not very much: the reduction of initial national insurance contributions to 2 per cent. It is not in this Bill, of course, because it is an insurance change. This is welcome, but its inadequacies are none the less manifest. By refusing to alter the contributions regime for employers at the same time as that for employees the Government have kept in place the bunching effect that keeps hundreds of thousands of appallingly paid part-time workers, most of whom are women, at a point just below the figure of £43 a week in earnings. Even those who benefit from the 2 per cent. change will in many cases face a corresponding reduction in family credit and housing benefit and end up hardly better off at all. This change, welcome though it is, does very little to solve the problem of the poverty trap.

One other major Budget change is missing from the Finance Bill because it is subject to regulation rather than legislation. The extension of personal equity plan tax relief to the purchase of newly privatised shares is nothing short of a naked bribe to improve the prospects of the flotation of public assets. We ordinary taxpayers will, in effect, be subsidising those people who seek to purchase assets which we already own as citizens. The sellers will be subsidising the purchasers and we shall not be receiving any direct payment for the sale of what we own.

Mr. Stuart Holland (Vauxhall)

Bring back Adam Smith.

Mr. Smith

There is, however, plenty in this 180-clause, 17-schedule Bill quite apart from these two principal exclusions. It is a long Bill. I am tempted to agree with my right hon. Friend the Member for Ashton-under-Lyne that the size of the Finance Bill is in inverse proportion to the quality of the ideas that the Government have put in it. I am also tempted to agree with the hon. Member for Gedling (Mr. Mitchell), who described it as not exactly a user-friendly Bill.

Some of the measures in the Bill are undoubtedly ones to which we give a welcome. Clause 1 brings forward a differential duty on unleaded petrol. We would have wished to see the Government go further, but even some degree of movement is welcome. Ringing declarations of environmental concern from No. 10 Downing street are all very well, but it is about time that we saw some other action on the environment.

Clause 44 brings about the abolition of closed company borrowing relief in relation to business expansion scheme investment. This is a welcome end to abuse, and indeed we demanded it before the Budget. I am pleased to see that the Government have for once taken our advice. BES investors, now overwhelmingly those investing in private rented property—the hon. Member for Dover is right about the way in which that scheme has skewed the whole purpose of the business expansion scheme—were able not only to claim tax relief at the higher rate on their investment but, by using the closed company structure, to claim a further tranche of relief on any borrowing they undertook to finance the investment. In addition, they were set to make a tax-free capital gain after five years. It was money for old rope.

We wish that the Government had acted retrospectively and had seen their way to abolish the whole wretched private property scheme altogether, but as far as it goes it is a welcome change.

Mr. Arbuthnot

Does the hon. Gentleman approve of retrospective tax legislation and, if so, where does he see it ending?

Mr. Smith

In this particular instance, yes, of course I approve of retrospective tax legislation and we shall be tabling an amendment to that effect when we come to consider that clause in detail. I point the hon. Gentleman in the direction of clause 167 of the Bill, about which a number of his hon. Friends have spoken and which enshrines retrospective legislation in terms of tax.

Clause 114 extols the regulatory powers for the control of the lump in the construction industry. It is a useful marginal change in tackling a continuing abuse of the tax system which also acts as a tool for the exploitation of workers.

There are various detailed anti-avoidance measures, provision for employee share ownership plans and partial implementation of the recommendations of the Keith committee. All this is to be broadly welcomed, although we shall want to trawl very carefully and thoroughly through the detail in Committee.

There are many other provisions in the Bill, however, which we shall want to oppose as strenuously and vigorously as we can. The first is the provision for tax relief for private health insurance for the over-60s. By definition, this will be available only to those who are rich enough to afford to take out private health insurance and well enough to be eligible to benefit. It is a precisely targeted benefit, targeted on those in the least financial need and the least medical need, and everyone else will have to pay for it.

Interestingly, a number of hon. Gentlemen, especially the hon. Member for Horsham (Sir P. Hordern) and for Beaconsfield (Mr. Smith), have expressed their doubts, along with ours, about the wisdom of this scheme. The only major pleading in its favour from the Conservative Benches came from the hon. Member for Gillingham (Mr. Couchman) who seemed to argue for its expansion to include the services provided by the company which he runs. To be fair to the Chief Secretary to the Treasury and to the Chancellor, we know that they were very unhappy about the change, however much they now try to shrug it off as unimportant. It was forced on them by No. 10. Perhaps it was even given express authorisation by Mr. Charles Powell and Mr. Bernard Ingham. Perhaps it is also a foretaste of what will shortly happen when Sir Alan Walters returns to take up residence next door to the Chancellor and even closer to the Prime Minister's ear.

The proposal for health insurance relief is only the most blatant of a number of atrocious measures in the Bill. Take, for instance, the decision to uprate the personal allowances by only 6.8 per cent.—the very barest minimum required by law which sets the increase by reference to the previous calendar year's inflation rate.

As we now know, inflation is nearly 8 per cent., and rising. The real value of the tax threshold has been cut by the clause in the Bill relating to relief. That will have the direct effect of drawing more low-paid workers into tax. There will be about 150,000 more taxpayers as a result of the Bill and that clause. More people will be stuck in the poverty trap.

We should also consider the changes to the schedule E regime contained in clauses 34 to 39. The change from an earnings base for calculation to a receipts base sounds neat and logical. However, it opens up enormous opportunities for tax avoidance over and above the projected substantial loss of £60 million in a full year to the Exchequer, as envisaged in the Red Book.

Our principal criticism of the Bill, of the Budget and of all the associated economic decisions taken by the Government must be that the Bill represents a massively wasted opportunity. It does virtually nothing for the low paid. Last year's Budget was a gravy-train for the rich. The Chancellor should have redressed the balance this year, but he did not.

The Bill does nothing for the needs of women. It does not remove the iniquitous tax on workplace nursery provision which acts as a direct disincentive to discourage women from joining the work force. The Financial Secretary to the Treasury has told me in answers to questions that he has no idea of the benefit to the Exchequer of the tax. Nor has he any idea of the cost to the Exchequer of the minimal incentives which exist at present for employers to establish nurseries. The Bill should have scrapped that tax, but it did not. I give notice that we shall be seeking to change the Bill to ensure that it does.

The Bill does nothing for the needs of those with children. The House will be aware that yesterday we debated the need to uprate child benefit properly in line with inflation.

Dame Elaine Kellett-Bowman (Lancaster)

Where were Opposition Members then?

Mr. Smith

I noted from the Division lists that all the Treasury Ministers voted against the amendment tabled by their colleagues yesterday.

The real value of child benefit has already fallen by 12 per cent. since the Government took office. It is now set to fall further. Child benefit still represents the most effective way, by far, of removing poverty. To take the decision alongside this Bill to use the Exchequer's surplus for the virtually useless depletion of the national debt instead of taking the proper action to uprate and improve child benefit shows how sadly perverse the Chancellor's priorities have become.

Above all, the Bill and its associated economic decisions do nothing to tackle the deep-seated economic problems that we face. The catastrophic balance of payments deficit, the imbalance between demand and supply in the domestic economy, the imbalance between the regions and the depleted capacity of manufacturing industry all point to the overwhelming need to ensure that the wealth-creating resources of the economy are boosted. From a Government who have done such grievous harm to our economy over the past 10 years, the Bill will do little to repair and much to intensify that damage.

9.40 pm

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

I am glad that the hon. Member for Islington, South and Finsbury (Mr. Smith) eventually mentioned the Finance Bill. I do not mind him taking up too much of my time because I have precious little to respond to as nobody has mentioned the Finance Bill in this debate. When hon. Members talked about the Budget, they tended to talk about last year's Budget, which has somewhat dominated today's debate. I make no complaint about that because last year's Budget was a watershed Budget, the supply side benefits of which will be with us for years to come.

If the Opposition believe that, despite the fiscal surplus that it created, last year's Budget has affected inflation and the current account, it is certainly curious that, just before the Budget, the Opposition put forward a package for tax cuts, higher personal allowances and higher national insurance. It is also extraordinary that, if the Leader of the Opposition believes that this year's and last year's Budgets were irresponsible, he should then advocate, in his response to the Budget, that we should run down the budget surplus. One cannot be simultaneously against tax cuts and also in favour of running down the budget surplus. That does not make sense.

In the earlier part of his speech, the hon. Member for Islington, South and Finsbury, reflecting the confusion of the Opposition, said that it was a mistake to cut taxes. However, in the last few minutes of his speech he said that the burden of taxation was far too high. I wish that the hon. Gentleman could make up his mind which it was. He referred to the proportion of people's income that went in tax. However, as we have debated endlessly in the House, the only reason that a higher proportion of people's income goes in income tax is simply because under the Government incomes have risen so much. I agree that the burden of tax is too high. We want to reduce it. If the Opposition think that the burden of tax is too high, why did they vote against us on every single occasion that we reduced the basic rate of tax?

This year's Budget was quite deliberately cautious because my right hon. Friend the Chancellor's priority is to keep down inflation. Inflationary pressures began to emerge last year. The current account was one sign; another was the evidence of faster than expected growth. There is already ample evidence that higher interest rates are having the desired effect. The targeted money aggregate, MO, has already slowed down and figures published last week show that the growth rate has fallen for the third month running and provide further confirmation of the sharp slowdown since last autumn.

While reducing inflation is primarily a task for monetary policy, it is essential that fiscal policy should support it. That is what the Budget does and that is why we have budgeted for another massive public sector debt repayment this year, which is the same as last year's in total, and, excluding privatisation proceeds, £2 billion more.

A number of Opposition Members suggested that the Government's interest rate strategy would damage industry's investment prospects, but there is no reason why it should because most companies are able to borrow long term. Long-term rates have risen very little, which is an indication of the market's confidence and its view of the long-term rate of inflation. That is why investment intentions in the latest survey by the Confederation of British Industry and in the DTI's investment intention survey remain strong by historical standards.

We have enjoyed a considerable investment boom in British industry over the past decade. Investment has grown by nearly 7½ per cent. a year on average in the 1980s, compared to just over 2¼ per cent. a year in the 1970s. Business investment is now a higher proportion of GDP than ever before. In the 1980s it has been in stark contrast to the 1970s. At the same time, the quality of investment has improved because the net rate of return on capital employed by British industry has nearly doubled since 1981. Excluding North sea companies, it has nearly quadrupled, and, whether including or excluding North sea companies, it is now back to levels that have not been seen for 20 years.

The hon. Member for Berwick-upon-Tweed (Mr. Beith) asks, "Where is the evidence of the miracle? Where is the evidence of the real sea change in the British economy? Where is the evidence of the transformation?" It is there, in the return on capital and the profitability of British industry.

My hon. Friend the Member for Beaconsfield (Mr. Smith), my right hon. Friend the Member for Worthing (Mr. Higgins) and the right hon. Member for Ashton-under-Lyne (Mr. Sheldon) have commented on the length of the Bill. I must say that, especially as it is about to go into Committee, I share some of their misgivings. Let me point out, however, that some 50 clauses deal with just three measures: the Keith committee recommendations, the abolition of close company apportionment—which I believe will be a major improvement and simplification—and the schedule E receipts, which again will become much easier for taxpayers to operate. Although the legislation to implement the changes is fairly lengthy, I believe that the end result will be much better and simpler.

The hon. Member for Dunfermline, East (Mr. Brown), who as we all know is a noted author, has been writing recently in Accountancy Age, and has said that the Bill contains no new measures to deal with tax havens and tax avoidance. Perhaps at that stage he had not read the Bill, but he repeated the accusation today. I can only say that the Government's record on closing tax loopholes is a thousand times better than that of Labour Members when they were in government, for all their humbug and rhetoric. They gave us no credit last year for abolishing the forestry loophole. This year's Bill abolishes capital gains tax rollover relief on gifts. It also deals with the close company provisions, the schedule E receipts provisions, the provisions relating to switches between offshore funds, the business expansion link scheme and, indeed, the cap on tax relief for occupational pension schemes. I am all in favour of such schemes, but I feel that there is a case for limiting relief at the top end. It has been one of the biggest tax shelters for the wealthiest in the country.

Did the Opposition acknowledge that? Not for a minute. Far from recognising what the Budget and the Bill do, the hon. Member for Dunfermline, East had the cheek to refer to "yet another Budget for the rich".

Let me point out that in this year's Budget the full year cost of the income tax and national insurance changes of over £4 billion will definitely help those on low incomes, and that well over half the total amount will be given to tax units with incomes below £15,000 a year. The percentage increases on net incomes show that the low paid will benefit by twice as much as the high paid. The net incomes of people earning £5,000 and £10,000 a year will increase by twice the percentage of those of people earning £25,000. The measures that we have taken on national insurance are the most effective way of helping the lower paid.

My hon. Friend the Member for Stamford and Spalding (Mr. Davies) referred to the measures designed to level out the playing field between different forms of savings. The changes in life assurance to which he referred are designed to achieve, among other things, a regime that is a little more on all fours with direct investment in shares. The changes in personal equity plans criticised by the hon. Member for Islington, South and Finsbury will, I believe, be profoundly attractive to investors, and, indeed, have been given a positive welcome by PEP managers and unit trusts. The hon. Gentleman seems to think it is wrong that we should extend the device of PEPs to privatisation, but why not? We want to encourage wider share ownership and, by marrying PEPs and privatisation, we can do a tremendous amount to boost wider share ownership in this country.

A number of comments have been made on tax relief for private health insurance. A number of my hon. Friends, including my hon. Friend the Member for Beaconsfield and my hon. Friend the Member for Horsham (Sir P. Hordern), have expressed reservations. Their objections are really in terms of tax policy. However, I must say that the proposed tax relief on health insurance seems to be the only measure in the Bill that gets Labour Members jumping up and down like dervishes. Their reaction has been extraordinarily overdone. They have not come here as guardians of fiscal neutrality, complaining that we are further than ever away from the platonic ideal of the level playing field in savings. As my right hon. Friend the Chancellor of the Exchequer has explained, that is not a readily obtainable ideal. It would be absurd if Labour Members put forward those arguments because they rarely speak in this House except to plead for tax relief or subsidy for something or other.

The main problem for Labour Members is that they believe that private medical insurance is really the exclusive prerogative of the rich. In believing that, they are as out of touch with medical insurance and the health market as they are with housing. About 5½ million people—one in 10 of the population—are now covered through private medical insurance. About 600,000 people aged over 60 are covered by medical insurance. Those people can hardly be the super-rich.

I point out that tax relief will be available to non-taxpayers as well. We expect that the majority of those who will take advantage of the system will either be non-taxpayers or basic rate taxpayers. It is perhaps because Labour Members have an exaggerated view of the wealth of people who take out health insurance that they have an exaggerated idea of what the cost of this relief is likely to be to the Exchequer. We believe that the cost of the relief will be less than £100 a person, and most people will be taking out budget policies. That sum of £100 a person compares with a cost of £850 for National Health hospital service for each person in the country aged over 65. When non-hospital services are added, the cost for each person in the country over 65 is £1,000 per head.

If we can generate just a little additional demand for health insurance, that will relieve pressure on the National Health Service and the resources of the Government. That would be in the interests of the whole country, particularly the users of the National Health Service.

My hon. Friend the Member for Beaconsfield said that the Opposition had not bothered to say much about their policies on taxation. Recently, we have had a few tantalising glimpses of such policies. We have had the odd appearance on the Jimmy Young show by the Leader of the Opposition, and he has made speeches in Preston and Nottingham. What seems to be emerging is that the Labour party objects to our very simple two-rate system of income tax-25 per cent. and 40 per cent. Most of us regard that structure as desirably simple in itself and think that it a good thing that we do not have a single rate of tax over 40 per cent. in the whole tax system.

Labour Members want to introduce a new starting rate and a new reduced rate band that would take us back to the situation in 1978–79 when there were 11 different rates of income tax on earned income and 13 different rates of income tax on unearned income. That is the regime that we had before and the regime to which the Labour party wants us to return. They want to finance such a scheme, first, by reversing the top rate tax cuts and then abolishing the ceiling on national insurance contributions. That would amount to about £3½ billion. That £3½ billion would buy such a narrow band of reduced rate tax that it would be of no benefit, or of benefit to precious few poor people. The drawback of a reduced rate band is that it goes to everyone, including the Duke of Westminster. It goes to all taxpayers. Only 10 per cent. of the cost goes to people whose total income is in the lower rate band.

If one takes people at the very bottom of the scale, earning just enough to pay tax—not necessarily the poorest people, because many of them are part-time workers—they would gain from a reduced rate band, but they would gain far more from the same costs spent on an increase in allowances. That is why, as well as reducing the basic rate, we have since 1979 placed emphasis on increasing allowances. Since 1979, we have increased allowances by some 25 per cent. in real terms. That is in sharp contrast to what happened under the last Labour Government, when the single person's allowance fell by a scandalous 20 per cent. in real terms.

The person at a slightly higher level of income—on three quarters of average earnings and above—will gain more, or as much, from a basic rate cut than from a reduced rate band. A reduced rate band, a new starting rate, is not effective for dealing with poverty because it is badly targeted, its benefits are an illusion, and it would be absurdly bureaucratic—requiring something like 1,300 staff to administer.

I am being absurdly fair to the Opposition, because I am assuming that their £3½ billion would be spent on introducing a reduced rate band. However, as right hon. and hon. Members on both sides of the House know, the Opposition have spent that £3½ billion over and over again. Last year, they spent £3½ billion increasing pensions, child benefit and benefits generally. This year, they spent it on a reduced rate band. Every time that the hon. Member for Dunfermline, East makes a speech, he devotes time to his favourite subjects of training, infrastructure, regional aid and education. An Opposition spokesman for the environment in a single statement spent that £3½ billion four times over in just a few minutes, when she promised a £½ billion package to clean up water.

We all know that it is not the Opposition's arithmetic that is at fault. They have only one answer—that it will all come out of the surplus. But we know, and the country knows, that under a Labour Government there would be no surplus. There never has been and there never will be.

It is no wonder that the right hon. and learned Member for Monklands, East (Mr. Smith) admitted that Labour's tax plans would mean many basic rate taxpayers paying more. He can certainly say that again. The near abolition of the ceiling on national insurance contributions would mean that 2 million people—every one of them a basic rate taxpayer—would suffer a 9 per cent. increase in their marginal rate. They are the people in the middle income groups—the managers, scientists and young professionals —for whom the Labour party claim to speak. The man on one and one half times average earnings would see his national insurance bill increased by £7.60 per week.

All the Opposition's plans are based on the assumption that raising taxes will generate more revenue—but it may not. All our experience shows that cutting taxes from absurdly high rates generates more revenue. After we cut the top rates last year, we expected the top 5 per cent. of income taxpayers to contribute some 28 per cent. of revenue. This year, we expect them to contribute 29 per cent., and next year almost 30 per cent. That compares with 24 per cent. from the top 5 per cent. in 1979. The truth is that top-rate tax cuts have become a new and more effective way of clobbering the rich. [Laughter.] Experience shows that Labour Budgets soak the poor and that Conservative Budgets soak the rich. The difference is that, under the Conservatives, the rich can actually afford it.

Unfortunately, the Labour party has ceased to think about taxation. Tax-cutting is an essential part of the process of reversing this country's decline. That is why we stand by the tax cuts that we made last year, which are confirmed in this Bill for the first full year of operation. We believe in an incentive-led economy that will benefit rich and poor alike. It has worked in the past, it will work again, and it is the philosophy embodied in this Bill, which I commend to the House.

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

The House divided: Ayes 271, Noes 186.

Division No. 175]	[10 pm
AYES
Adley, Robert	Butler, Chris
Aitken, Jonathan	Butterfill, John
Alexander, Richard	Carlisle, John, (Luton N)
Alison, Rt Hon Michael	Carlisle, Kenneth (Lincoln)
Amess, David	Carrington, Matthew
Amos, Alan	Carttiss, Michael
Arbuthnot, James	Cash, William
Arnold, Jacques (Gravesham)	Chalker, Rt Hon Mrs Lynda
Arnold, Tom (Hazel Grove)	Channon, Rt Hon Paul
Ashby, David	Chapman, Sydney
Aspinwall, Jack	Clark, Dr Michael (Rochford)
Baker, Nicholas (Dorset N)	Clark, Sir W. (Croydon S)
Baldry, Tony	Clarke, Rt Hon K. (Rushcliffe)
Batiste, Spencer	Colvin, Michael
Beaumont-Dark, Anthony	Conway, Derek
Bellingham, Henry	Coombs, Anthony (Wyre F'rest)
Bendall, Vivian	Coombs, Simon (Swindon)
Bennett, Nicholas (Pembroke)	Cope, Rt Hon John
Benyon, W.	Couchman, James
Bevan, David Gilroy	Cran, James
Biffen, Rt Hon John	Davies, Q. (Stamf'd & Spald'g)
Blackburn, Dr John G.	Davis, David (Boothferry)
Blaker, Rt Hon Sir Peter	Day, Stephen
Body, Sir Richard	Devlin, Tim
Bonsor, Sir Nicholas	Dickens, Geoffrey
Boscawen, Hon Robert	Dicks, Terry
Boswell, Tim	Douglas-Hamilton, Lord James
Bottomley, Peter	Dover, Den
Bottomley, Mrs Virginia	Durant, Tony
Bowden, Gerald (Dulwich)	Dykes, Hugh
Bowis, John	Evennett, David
Boyson, Rt Hon Dr Sir Rhodes	Fairbairn, Sir Nicholas
Braine, Rt Hon Sir Bernard	Fallon, Michael
Brandon-Bravo, Martin	Favell, Tony
Brazier, Julian	Fenner, Dame Peggy
Bright, Graham	Finsberg, Sir Geoffrey
Brooke, Rt Hon Peter	Fishburn, John Dudley
Brown, Michael (Brigg & Cl't's)	Fookes, Dame Janet
Browne, John (Winchester)	Forman, Nigel
Bruce, Ian (Dorset South)	Forsyth, Michael (Stirling)
Buchanan-Smith, Rt Hon Alick	Forth, Eric
Buck, Sir Antony	Fowler, Rt Hon Norman
Budgen, Nicholas	Fox, Sir Marcus
Burns, Simon	Franks, Cecil
Burt, Alistair	Freeman, Roger
Butcher, John	Fry, Peter

Garel-Jones, Tristan	McLoughlin, Patrick
Gill, Christopher	McNair-Wilson, Sir Michael
Gilmour, Rt Hon Sir Ian	Major, Rt Hon John
Glyn, Dr Alan	Malins, Humfrey
Goodlad, Alastair	Mans, Keith
Goodson-Wickes, Dr Charles	Maples, John
Gorman, Mrs Teresa	Marland, Paul
Gow, Ian	Marlow, Tony
Grant, Sir Anthony (CambsSW)	Marshall, John (Hendon S)
Greenway, Harry (Ealing N)	Marshall, Michael (Arundel)
Greenway, John (Ryedale)	Martin, David (Portsmouth S)
Gregory, Conal	Maude, Hon Francis
Griffiths, Peter (Portsmouth N)	Mawhinney, Dr Brian
Grist, Ian	Maxwell-Hyslop, Robin
Ground, Patrick	Mayhew, Rt Hon Sir Patrick
Grylls, Michael	Mellor, David
Gummer, Rt Hon John Selwyn	Meyer, Sir Anthony
Hague, William	Mills, Iain
Hamilton, Hon Archie (Epsom)	Miscampbell, Norman
Hamilton, Neil (Tatton)	Mitchell, Andrew (Gedling)
Hanley, Jeremy	Mitchell, Sir David
Hannam, John	Monro, Sir Hector
Hargreaves, A. (B'ham H'll Gr')	Morrison, Sir Charles
Hargreaves, Ken (Hyndburn)	Morrison, Rt Hon P (Chester)
Harris, David	Nicholson, David (Taunton)
Hayes, Jerry	Nicholson, Emma (Devon West)
Hayward, Robert	Norris, Steve
Heathcoat-Amory, David	Parkinson, Rt Hon Cecil
Heddle, John	Patnick, Irvine
Hicks, Mrs Maureen (Wolv' NE)	Pattie, Rt Hon Sir Geoffrey
Hicks, Robert (Cornwall SE)	Powell, William (Corby)
Higgins, Rt Hon Terence L.	Raffan, Keith
Hill, James	Riddick, Graham
Hind, Kenneth	Ridley, Rt Hon Nicholas
Hogg, Hon Douglas (Gr'th'm)	Ridsdale, Sir Julian
Hordern, Sir Peter	Rifkind, Rt Hon Malcolm
Howard, Michael	Roe, Mrs Marion
Howarth, Alan (Strat'd-on-A)	Rossi, Sir Hugh
Howarth, G. (Cannock & B'wd)	Rost, Peter
Howe, Rt Hon Sir Geoffrey	Rowe, Andrew
Howell, Ralph (North Norfolk)	Rumbold, Mrs Angela
Hughes, Robert G. (Harrow W)	Ryder, Richard
Hunt, David (Wirral W)	Sackville, Hon Tom
Hunt, John (Ravensbourne)	Scott, Nicholas
Hunter, Andrew	Shaw, David (Dover)
Hurd, Rt Hon Douglas	Shaw, Sir Giles (Pudsey)
Irvine, Michael	Shaw, Sir Michael (Scarb')
Irving, Charles	Shelton, Sir William
Jack, Michael	Shephard, Mrs G. (Norfolk SW)
Jackson, Robert	Shepherd, Richard (Aldridge)
Janman, Tim	Shersby, Michael
Johnson Smith, Sir Geoffrey	Sims, Roger
Jones, Robert B (Herts W)	Skeet, Sir Trevor
Kellett-Bowman, Dame Elaine	Smith, Tim (Beaconsfield)
Key, Robert	Soames, Hon Nicholas
Kilfedder, James	Spicer, Sir Jim (Dorset W)
King, Roger (B'ham N'thfield)	Spicer, Michael (S Worcs)
Kirkhope, Timothy	Squire, Robin
Knapman, Roger	Stanbrook, Ivor
Knight, Dame Jill (Edgbaston)	Stanley, Rt Hon Sir John
Knowles, Michael	Steen, Anthony
Knox, David	Stern, Michael
Lamont, Rt Hon Norman	Stevens, Lewis
Lang, Ian	Stewart, Allan (Eastwood)
Latham, Michael	Stewart, Andy (Sherwood)
Lawrence, Ivan	Stradling Thomas, Sir John
Lawson, Rt Hon Nigel	Summerson, Hugo
Lee, John (Pendle)	Tapsell, Sir Peter
Leigh, Edward (Gainsbor'gh)	Taylor, John M (Solihull)
Lennox-Boyd, Hon Mark	Thompson, D. (Calder Valley)
Lester, Jim (Broxtowe)	Thompson, Patrick (Norwich N)
Lilley, Peter	Thornton, Malcolm
Lloyd, Sir Ian (Havant)	Thurnham, Peter
Lloyd, Peter (Fareham)	Townend, John (Bridlington)
Lord, Michael	Townsend, Cyril D. (B'heath)
Lyell, Sir Nicholas	Tracey, Richard
McCrindle, Robert	Tredinnick, David
Macfarlane, Sir Neil	Trippier, David
MacKay, Andrew (E Berkshire)	Twinn, Dr Ian
Maclean, David	Vaughan, Sir Gerard

Waddington, Rt Hon David	Wiggin, Jerry
Wakeham, Rt Hon John	Wilshire, David
Walden, George	Winterton, Nicholas
Walker, Bill (T'side North)	Wolfson, Mark
Waller, Gary	Wood, Timothy
Ward, John	Woodcock, Mike
Wardle, Charles (Bexhill)	Yeo, Tim
Warren, Kenneth
Watts, John	Tellers for the Ayes:
Wheeler, John	Mr. David Lightbown and
Whitney, Ray	Mr. Stephen Dorrell.
Widdecombe, Ann
NOES
Abbott, Ms Diane	Dobson, Frank
Adams, Allen (Paisley N)	Doran, Frank
Alton, David	Duffy, A. E. P.
Anderson, Donald	Dunwoody, Hon Mrs Gwyneth
Archer, Rt Hon Peter	Eadie, Alexander
Armstrong, Hilary	Eastham, Ken
Ashdown, Rt Hon Paddy	Evans, John (St Helens N)
Ashley, Rt Hon Jack	Ewing, Mrs Margaret (Moray)
Ashton, Joe	Fatchett, Derek
Banks, Tony (Newham NW)	Faulds, Andrew
Barnes, Harry (Derbyshire NE)	Fearn, Ronald
Barnes, Mrs Rosie (Greenwich)	Field, Frank (Birkenhead)
Battle, John	Flannery, Martin
Beckett, Margaret	Flynn, Paul
Beith, A. J.	Foot, Rt Hon Michael
Bell, Stuart	Foster, Derek
Benn, Rt Hon Tony	Foulkes, George
Bennett, A. F. (D'nt'n & R'dish)	Fraser, John
Bermingham, Gerald	Fyfe, Maria
Bidwell, Sydney	Galbraith, Sam
Blair, Tony	Galloway, George
Blunkett, David	Garrett, John (Norwich South)
Boyes, Roland	Garrett, Ted (Wallsend)
Bradley, Keith	George, Bruce
Bray, Dr Jeremy	Godman, Dr Norman A.
Brown, Gordon (D'mline E)	Golding, Mrs Llin
Brown, Nicholas (Newcastle E)	Gordon, Mildred
Buchan, Norman	Gould, Bryan
Callaghan, Jim	Graham, Thomas
Campbell, Menzies (Fife NE)	Griffiths, Nigel (Edinburgh S)
Campbell, Ron (Blyth Valley)	Hardy, Peter
Carlile, Alex (Mont'g)	Harman, Ms Harriet
Clark, Dr David (S Shields)	Hattersley, Rt Hon Roy
Clarke, Tom (Monklands W)	Healey, Rt Hon Denis
Clay, Bob	Henderson, Doug
Cohen, Harry	Hinchliffe, David
Coleman, Donald	Hogg, N. (C'nauld & Kilsyth)
Cook, Robin (Livingston)	Holland, Stuart
Corbyn, Jeremy	Home Robertson, John
Cousins, Jim	Hood, Jimmy
Crowther, Stan	Howell, Rt Hon D. (S'heath)
Cryer, Bob	Howells, Geraint
Cummings, John	Howells, Dr. Kim (Pontypridd)
Cunningham, Dr John	Hoyle, Doug
Dalyell, Tam	Hughes, John (Coventry NE)
Davies, Rt Hon Denzil (Llanelli)	Hughes, Robert (Aberdeen N)
Davis, Terry (B'ham Hodge H'I)	Hughes, Roy (Newport E)
Dewar, Donald	Hughes, Sean (Knowsley S)
Dixon, Don	Illsley, Eric

Ingram, Adam	Randall, Stuart
Janner, Greville	Redmond, Martin
Jones, Barry (Alyn & Deeside)	Rees, Rt Hon Merlyn
Jones, leuan (Ynys Môn)	Reid, Dr John
Jones, Martyn (Clwyd S W)	Richardson, Jo
Kaufman, Rt Hon Gerald	Robertson, George
Kinnock, Rt Hon Neil	Robinson, Geoffrey
Kirkwood, Archy	Rogers, Allan
Lamond, James	Rooker, Jeff
Leighton, Ron	Ross, Ernie (Dundee W)
Lestor, Joan (Eccles)	Ruddock, Joan
Lewis, Terry	Salmond, Alex
Livsey, Richard	Sheerman, Barry
Lofthouse, Geoffrey	Sheldon, Rt Hon Robert
Loyden, Eddie	Short, Clare
McAllion, John	Skinner, Dennis
McAvoy, Thomas	Smith, Andrew (Oxford E)
Macdonald, Calum A.	Smith, C. (Isl'ton & F'bury)
McKelvey, William	Smith, Rt Hon J. (Monk'ds E)
McLeish, Henry	Snape, Peter
Madden, Max	Soley, Clive
Mahon, Mrs Alice	Spearing, Nigel
Marek, Dr John	Steinberg, Gerry
Marshall, David (Shettleston)	Stott, Roger
Martin, Michael J. (Springburn)	Strang, Gavin
Maxton, John	Straw, Jack
Meacher, Michael	Taylor, Mrs Ann (Dewsbury)
Michie, Bill (Sheffield Heeley)	Thompson, Jack (Wansbeck)
Michie, Mrs Ray (Arg'l & Bute)	Vaz, Keith
Mitchell, Austin (G'r Grimsby)	Wall, Pat
Moonie, Dr Lewis	Wallace, James
Morris, Rt Hon A. (W'shawe)	Walley, Joan
Morris, Rt Hon J. (Aberavon)	Wardell, Gareth (Gower)
Mullin, Chris	Welsh, Andrew (Angus E)
Murphy, Paul	Wigley, Dafydd
Nellist, Dave	Williams, Rt Hon Alan
Oakes, Rt Hon Gordon	Wilson, Brian
O'Brien, William	Winnick, David
Orme, Rt Hon Stanley	Wise, Mrs Audrey
Owen, Rt Hon Dr David	Worthington, Tony
Parry, Robert	Wray, Jimmy
Patchett, Terry	Young, David (Bolton SE)
Pendry, Tom
Pike, Peter L.	Tellers for the Noes:
Powell, Ray (Ogmore)	Mr. Frank Haynes and
Radice, Giles	Mr. Allen McKay.

Question accordingly agreed to.

Bill read a Second time.