§ [Relevant documents: European Community document No. 8887/88, Annual Economic Report 1988–89 and the unnumbered document, "Annual Economic Report 1988–89" (final version as adopted by the Council).]3.49 pm
§ Mr. John Smith (Monklands, East)
Yesterday the Chancellor of the Exchequer presented his Budget for 1989 without a word of apology for the damage done to our economy and to our society by the Budgets—now totalling six—for which he has been responsible. Last year we had a Budget for the rich. It was the most unfair redistribution of income and wealth that has occurred this century. However, it was also more than that: it was foolish as well as divisive and unfair. As is now startlingly clear, it was manifestly wrong in its assumptions about the economy and foolishly complacent about the policies it promoted.
The Chancellor was warned by the Opposition and by a few voices elsewhere about the dangers of a deteriorating balance of payments deficit on the current account. His response was to predict—in one of the most massive failures of prediction that has been offered to the House—that the deficit for 1988 would be £4 billion. We now know just how wrong he was. The outturn was a deficit of well over £14 billion, and the Chancellor confirmed that he expects the deficit to be just as bad this year. In an interesting insight on his own embarrassment, the Chancellor did not state the actual figure. Almost as if he could not bring himself to utter the words "£14.5 billion", he took refuge in the circumlocution of saying that the current account deficit would remain at the same level as last year.
The Chancellor's forecasts for the trade deficit are worse than ever before, but they may still be an under-estimate. The latest trade figures for January are running well ahead of the forecast that the Chancellor gave the House only yesterday. The deficit in manufactured goods for last year was in excess of £20 billion. I am forced 418 to observe that the surplus—not the deficit—in the balance of trade in manufactured goods when the last Labour Government left office was over £3 billion.
We hear a little less today, but occasionally, in tones of fading echoes, we hear about the economic miracle wrought by the Government. It could, of course, be thought to be a miraculous achievement to turn a £3 billion surplus in manufactured goods into a deficit of £20 billion, all within a decade in which the Government gained the enormous windfall of £78 billion of North sea oil revenues, but, unfortunately, it would be a miracle in the wrong direction. The truth is that it is the Government's pretensions, their glosses on the truth, the hype that modern advertising has perfected to an alarming degree and the absurd claims and exaggerations, which are so faithfully repeated by acolyte organs of communication, that are miraculous. The reality is depressingly not so good.
Let us take as examples three critical and indisputable facts about Britain's economy. We have the highest balance of payments deficit in our history, the highest interest rates in the industrialised world and, with the exceptions only of Greece and Portugal, the highest rate of inflation in the European Community. We clearly have the highest rate of inflation among the G7 countries.
However, let us cast our minds back to just one year ago—almost a year to the day. Was there a hint of the danger ahead from our intrepid navigator, who was too busy moving the best furniture in the ship into the first-class cabins to notice the directions in which he was heading? There was not a word. Even after he had been warned in our debates on last year's Budget, in his reply the Chancellor complacently affirmed that we had an economic miracle.
There was no talk then of a soft landing or a hard landing. I suppose that some perception of reality must have penetrated the Treasury over the year, as it now recognises that there must be a landing. However, if we are still involved in an economic miracle, it is difficult to understand why we do not keep on flying. Perhaps we are landing just to refuel or to change the pilot, or perhaps—even more likely—to give an extra seat in the cockpit for Sir Alan Walters.
When, in the period between the Budget of 1988 and now, it became clear that the Chancellor had gravely underestimated the boom in demand that the huge expansion of credit and his irresponsible tax handouts to the rich had caused, he started the relentless increase in interest rates that moved up from 7.5 per cent. to the current 13 per cent.—and there he is stuck. Interest rates have been lowered on or shortly after the Budget for yearspast—it is almost an annual ritual—but there has been no announcement of a cut in interest rates this year, nor is there likely to be.
The Chancellor dare not. Higher interest rates are the Lawson risk premium that must be paid to the foreign holders of the short-term money which finances the balance of payments deficit for which this Chancellor is responsible. They are the beneficiaries of the Chancellor's repeated rounds of one-club golfing. However, as is painfully clear, the losers are industry and the British people as the cost of living soars. British industry is saddled with an uncompetitive exchange rate and higher costs for investment as it seeks to compete in the world market place. Industry is being urged to prepare for 1992 with one arm tied behind its back by its own Government.
419 Home owners have borne the brunt of the Chancellor's chosen instrument of credit control. They have seen any tax benefits that they received in last year's Budget vanish like snow from a dyke. To be fair, not all those who received tax cuts are worse off—the rich are still well ahead. They have so much that they can finance any increase in mortgage payments—those of them, of course, who need mortgages.
Let us consider those with more modest means. For the vast majority of home owners their mortgage payment is by far their largest domestic outgoing. A family with two children on £12,000 per year—£240 a week—received £12 per month in tax reductions last year. If they had a modest mortgage of only £25,000, their monthly repayment is up by £42. Last year the Chancellor with one hand gave them £12 and in the course of that year they were relieved of that and suffered an extra penalty of £30 per month. The Chancellor gives with one hand and then takes back with the other. It is a use of the invisible hand that even Adam Smith may not have envisaged.
I state those figures in a moderate way, because I know that my right hon. and hon. Friends will tell me of constituents who pay £60, £70 or £80 more in mortgage repayments per month—and they are right. I gave my example to show how at modest levels of income and of mortgage the last Budget was a boomerang.
The Chancellor described his Budget last year—I noticed him in the press doing the same this year—as a milestone, but for the majority of people in Britain the Lawson milestone has become a millstone around their necks. This year's Budget offers no relief, because 1989 will be another year of mortgage misery for millions of home owners.
Of course, the high interest rate—the Chancellor's sole instrument to curb demand—increases the cost of living and makes the inflation rate worse. It is little wonder that the Treasury would like to fiddle the figures and take mortgage costs out of the retail prices index. But mortgage bills consume personal income just like any other price rise. The Chancellor constantly makes utterly spurious comparisons with other industrialised countries that do not include mortgage costs in their calculation of retail prices. However, the pattern of home ownership in those countries is very different and other forms of housing costs—usually rents—are taken into consideration in their calculations.
It is invidious of the Government to disclaim the inflationary effects of increased mortgage payments; and offers precious little comfort for hard-pressed home owners this year. The truth is that, after a decade of Conservative rule, the Prime Minister's anti-inflationary rhetoric is hollow. Her hype about zero inflation is exposed as humbug, and her Government provoke, not prevent, a spiral of rising prices.
The Chancellor's forecast of the rate of inflation has proved only slightly less reliable than his forecast of the trade deficit. Last March he said that inflation would be 4 per cent. Last September he told us that there was only a "temporary blip". But yesterday he confirmed that inflation is 8 per cent. and, even on his own estimation, it will stay high for the whole of 1989. According to the Chancellor, it will fall to 5.5 per cent., which I think even he might view as being relatively high.
420 To make matters worse, the Government themselves have created those inflationary own goals. [Interruption.] I hope that Ministers will pay attention, because this matter is one for which they are uniquely responsible. The Ministers seated opposite me on the Conservative Front Bench are responsible for heavy extra charges for water, electricity, public transport and National Health Service prescriptions. Those price rises sharply increase the cost of living. It is within the power of the Government not to have caused them and to reverse them. The Government are responsible for a very large part of the inflation from which we suffer.
It was no doubt for that reason, among others, that the Financial Times commented:Inflation is simply a headache for Finance Ministers who get things wrong.As the United Kingdom's inflation rate surges upward. the Chancellor's headache is getting worse. One might imagine that we suffer from a world contagion, but if one examines the inflation rates of competitor and analogous countries one realises that our inflation is significantly higher than theirs. We are not receiving inflation in some contagious way from those other countries, and the Chancellor has had the good fortune to be in office during a period of remarkably low commodity prices. Inflation in this country is a home-grown phenomenon—and we are looking at some of the gardeners on the Government Benches.
The Chancellor of the Exchequer is a disillusioned monetarist who displays no real understanding of the contemporary causes of inflation. [Laughter.] The Chancellor may laugh, but I can easily demonstrate the extent of his lamentable ignorance. Inflation can either be demand-led or pushed by rising prices. The Government, remarkably, have achieved it with both. The credit boom and last year's tax cuts allowed demand to surge beyond the capacity of industry supply, creating bottlenecks and skilll shortages. Meanwhile, rising charges for public utilities have added price-pushed inflation to fuel the problem even more.
In a celebrated phrase, the Chancellor said that inflation would be his "judge and jury". Let us, in an exercise of charity, overlook the Chancellor's attempts to fix the evidence by arguing that mortgages should be removed from the retail prices index. However much he wriggles, he will be unable to avoid the verdict. It is not for us to suggest an appropriate sentence for the criminal, because the Prime Minister is about to inflict a very severe punishment. Few of us would relish the prospect of daily tutorials in economics from Sir Alan Walters.
§ Mr. Tim Smith (Beaconsfield)
Is there not an element of being wise after the event in all of this? Does the right hon. and learned Gentleman recall the policies that he advocated in the House on 5 November 1987 when, on an Oppositon motion, he called for significant cuts in interest rates and increases in public spending? Is it not clear that, if those policies had been followed, interest rates and inflation would be back at the levels that we associate with the last Labour Government?
§ Mr. Smith
I suppose that the Chancellor might be wiser after the event of his daily tutorials from Sir Alan Walters. I shall answer the hon. Gentleman's question very directly. Neither I in any speech, nor the Opposition in any motion, commended the Chancellor's credit boom and his irresponsible relaxation of credit. We voted against his 421 irresponsible tax cuts for the rich. As we are talking about being wise after the event, I ask the hon. Member for Beaconsfield (Mr. Smith)—who no doubt talked about zero inflation—now that inflation is running at 8 per cent., who is wise after the event?
§ The Chief Secretary to the Treasury (Mr. John Major)
It is within my memory and that of the right hon. and learned. Gentleman that on "Newsnight" last night he expressly denied that just after the stock exchange crash he called for further public expenditure and tax cuts. My hon. Friend the Member for Beaconsfield (Mr. Smith) mentioned a motion moved by the right hon. and learned Gentleman, and I have several press releases in his name suggesting precisely that. Perhaps he would care to withdraw.
§ Mr. Smith
The right hon. Gentleman knows perfectly well that I said I was in favour of the small reduction in interest rates that was made at that time. That was made perfectly clear, and it does not do the right hon. Gentleman or the House any credit for him to try to change chat. We can look at the transcript of the television interview.
§ Mr. Smith
Treasury Ministers are experts on wriggling.
I remind the hon. Member for Beaconsfield that in the debate to which he referred massive public expenditure was called for by one of the leading apologists for the Government on the Government Back Benches.
Of course we have asked for increases in public expenditure. If well-planned increases in public expenditure had been carried out as an alternative to the misguided tax cuts made in last year's Budget, we would be able to spend today, but because the Government failed to spend we now have the ludicrous position of a Government with a surplus of £14 billion or £15 billion who are frightened to spend a penny piece of it.
Having fuelled inflation, the Chancellor now finds himself stuck with the consequences. Surely it is clear that Britain needs to invest. It needs to invest more in education and training to reduce the skill shortages by which many British companies are harmed. It needs to invest more to improve roads and railways to ease congestion, reduce pollution and promote safety. We need to spend more on the National Health Service to retain more qualified nurses and improve the quality of health care.
Every opinion poll shows that the British people want better roads, hospitals and schools. All the evidence shows that this would be good for the British economy. Above all, we need to invest in the talents of our people so that Britain produces quality goods that other countries want to buy. As we approach the 1990s, we need an economic miracle if we are to compete successfully against the Germans, Japanese and Americans in the world market place.
Labour Members make no apology for saying—we constantly insist on it—that our priority must be investment in training, education, research and regional development. The Chancellor and his fellow Ministers fail to understand that such public investment is non-inflationary and counter-inflationary. Investment that releases bottlenecks in skills is clearly counter-inflationary. 422 Investment in the regions, where there are unused resources and unemployed people, would certainly be non-inflationary.
Public investment is not only vital to strengthen the economy but, for most of us, it is the key to improving the quality of our lives. Across the range of public services—health, education, water, the environment and transport—the effects of under-investment and penny-pinching over the years of this Conservative Government have reduced quality, safety and efficiency.
There are one or two items in the Budget that we welcome. Some 10 years after it was promised, the Chancellor has abolished the earnings rule for pensioners. He has given a tax preference to the use of lead-free petrol. He has reduced national insurance contributions at the lower end of the earnings scale. [Interruption.] It is of particular benefit to people on the lower earnings scale. Of course it helps people throughout the earnings scale, but perhaps some of them do not deserve as much benefit as those at the bottom end of it.
§ The Chancellor of the Exchequer (Mr. Nigel Lawson)
The right hon. and learned Gentleman is being censorious.
§ Mr. Smith
The Chancellor says that I am being censorious, but I am only being fair. I have old-fashioned notions about relating taxation to the ability to pay. I can tell the Chancellor that I do not mind being censured for holding those views; indeed, I am rather proud to accept such censure.
The Chancellor should have done much more for the lower paid. He increased income tax personal allowances by the bare minimum he was obliged to give, as opposed to the minimum he dared to give, and by an amount less than the present rate of inflation, and below the increase in average earnings. As a result, as he knows well, the proportion of income paid in income tax, even for the lowest paid, will increase.
For many others, the Chancellor has done nothing at all. The freezing of child benefit at £7.25 a week is a scandal. Child benefit replaced the children's tax allowance, which would have been updated every year if the Conservatives had kept to an all-party agreement to do so.
While we are on the subject of taxation, I should say that one of the more sedulously spread myths of this Administration is that the tax burden has been reduced. It should be well enough known that the burden of tax as a percentage of national income is substantially higher now than it was before the present Government came to office. But I regret to say that that is still not widely enough appreciated, and I am always on the lookout for pieces of evidence in the presentation of the Government's own statistics that reveal this important fact yet again. I found one of some interest on page 18 of the "Financial Statement and Budget Report"—the Red Book. In table 2.5 the Government approached this matter by assessing non-oil taxes and national insurance contributions as a percentage of non-oil-money GDP. They can do it any way they like, but it is the same question that is being asked: what percentage of income is going on taxation?
We discover that, on the basis of this analysis, the tax percentage of GDP in the six years of the present Chancellor's period of office has moved from 37.75 to 37.5—a reduction, over six years, of 0.25 per cent. The same table tells us helpfully that in 1978–79 the percentage, 423 under the Labour Government, was 34.25. Clearly the Chancellor has some way to go to catch up with the percentage under the last Labour Government. Indeed, at this rate of progress—one quarter of 1 per cent. every six years—it would take the Chancellor 78 years to reach that level. Perhaps I should counsel the Chancellor against an excess of prudence and caution in this matter.
When we look at the effects of these tax changes and at the failure to increase benefits, we see how sad they are for many people in this country. Every time the Conservatives refuse to uprate child benefit they deny even modest help to the poorer families. We proposed that the Chancellor should increase child benefit to £8.35—what it would have been if it had been increased in accordance with inflation. We said that he should also increase personal income tax allowances above the increase in earnings, particularly for the low paid, and make radical reforms in national insurance contributions to make them fairer. Had he done so, a family with two children, earning £190 a week, would have gained over £6 per week—and it is worth remembering that nearly half the wage earners in Britain earn less than that amount. That would have been a real help to the lower-paid.
Of course, the living standards of the most vulnerable people in our society will fall still further this year because the Chancellor has chosen to increase pensions and unemployment benefit by less than 6 per cent., even though, as he told us yesterday, inflation will reach 8 per cent. But it is hardly surprising that this Government overlook the less well-off. Last year the Budget was followed by the savage cuts in social security benefits caused by the new regime for income support and housing benefit. Regrettably, the effects of that continue to be with us.
Many pensioners receiving transitional payments, which were to protect them from some of the effects of these changes, will receive no net increase in payments this year. Their transitional addition will be reduced by the amount of any uprating. My hon. Friends and I see such people at our surgeries every week. I had an unfortunately large collection at my most recent surgeries. For them, the uprating will be not just insufficient—it will be non-existent. They will have to face the relentless rise in prices caused by 8 per cent. inflation, without any help at all from the Government.
But there is one proposal, which was mentioned only briefly by the Chancellor yesterday and with which we shall deal when we consider the Finance Bill, which we believe to be not only wrong but grotesque. I refer to the strange idea that the taxpayer should find a subsidy for private medical insurance for people over retirement age.
It may be that that was not the Chancellor's idea. There was a rumour when it emerged during the health review that it was being resisted by the Chancellor and the Secretary of State for Health. But, as we know, resistance to the Prime Minister does not last long in this Administration. In what we might well imagine as an exercise in the adopted royal perogative, the gentlemen concerned would have been told, "We have decided." In an exercise of a distinctly non-royal we, they would conclude, "We had better do as we are told." I am confirmed in the impression that the Prime Minister was 424 the author of the scheme because, after all, she is one member of the Government whom we know could benefit personally from it.
I confess to having listened with some impatience over the years to lessons in the virtue of targeting benefits from the Prime Minister, the Chancellor and nearly every occupant of the Government Benches, but I confess that it is not immediately evident to my hon. Friends or to me that we should subsidise from our taxes the private medical insurance of people such as the Prime Minister who are already well provided for.
§ Mr. Ian Taylor (Esher)
Since many thousands of trade unionists benefit from private health insurance, why is the right hon. and learned Gentleman trying to deny pensioners the same rights?
§ Mr. Smith
As far as I know, neither trade unionists nor non-trade unionists have been the beneficiaries of tax privilege in pursuit of private medical care until this suggestion was made in the Budget.
My constituents, many of whom, I am sorry to say, are in the poor category, when they apply for income support or housing benefit are subjected to the most rigorous tests of income and capital. For even small and modest amounts of savings, they are completely excluded from any assistance from the taxpayer because, we are told, benefits must be strictly targeted.
Why does the same principle not apply in this case? What is the justification for an open-ended subsidy for private medical care. Bear in mind that we are talking about payments made not simply by pensioners but by those who make them on their behalf, many of whom will be paying tax at the higher rate. Why should the rest of us who pay our taxes and depend, and are happy to depend, on the NHS for our medical care subsidise by 40 per cent. the private medical bills of the hon. Gentleman, the Prime Minister or anyone else in Britain?
No test of income or capital is applied in this case. There is no invidious inquiry into means. We know that every time Conservatives want to advance their own interests they forget about targeting, particularly when it helps the better-off and the object is privilege. Indeed, the arrangements are extremely convenient. People do not even have to fill in a form to ask for tax relief. According to BUPA advertising in today's newspapers, it will be deducted directly and the Treasury will then pay. That advertisement may be familiar to the Chancellor. It is a slightly unfair depiction of the right hon. Gentleman—
§ Mr. Smith
—as he wrestles with his difficulties. All I can say is that he is in this pickle because the Prime Minister insisted that this particularly daft scheme be put into his Budget.
We know that this is not a Budget of much substance. None the less, it is highly revealing. It reveals how fearful and defensive the Chancellor has become as he contemplates the results of his misguided policies. He has been forced to promise to maintain high interest rates for as far ahead as he can see. But with falling growth, rising inflation and a worsening deficit in our overseas trade, our economy is clearly not under wise or prudent supervision.
The Chancellor yesterday did not dwell on the perils which lie ahead, but he knows only too well the dangers of being dependent on the good will of the foreign holders of 425 short-term money, whose financing of the balance of payments deficit he requires to secure by his policy of high interest rates, and on whose appreciation of their own interests the future of sterling depends.
This country has, under Conservative rule, not only seen the dissipation of North sea oil revenues which could have been used to rebuild our industry and achieve civilised standards of service and opportunity; we have also seen this country move from a position of oil strength to a position of dependence on short-term hot money. For that unfortunate outcome the Government will he held to account.
§ The Chief Secretary to the Treasury (Mr. John Major)
This is my right hon. Friend's sixth Budget. In these Budgets his measures have dramatically improved the supply performance of the economy and simplified the corporate and income tax system to an extent that few people anticipated. He has reduced the rates of tax and the number of taxes. He has abolished more taxes than any other Chancellor this century. He has reduced tax distortions and tax breaks and moved steadily towards a much simpler and more efficient tax structure. No Chancellor for generations has so reformed our fiscal structure, and that work has continued in this Budget.
The right hon. and learned Member for Monklands, East (Mr. Smith) said, correctly. that the tax burden has gone up. He is right about that, and I will tell him why. It has gone up because we are repaying Labour's borrowing—[Interruption.]—which, had we not done so——
§ Mr. Major
The Leader of the Opposition would learn something if he listened; it would be a novelty for him.
As I was saying, had we not done that, it would today amount to a PSBR of £25 billion in today's terms. That is not a burden that we are prepared to have and to pass on to the next generation, even though Labour Members were prepared to do so.
The right hon. and learned Member for Monklands, East may not believe it, but perhaps he does not understand these matters. Indeed, he has as much likelihood of understanding how the economy works as Donald Duck has of winning Mastermind—[Interruption.] I see the hon. Member for Glasgow, Garscadden (Mr. Dewar) leaving the Chamber. If that Donald returns, he at least will be extremely welcome.
The right hon. and learned Member for Monklands, East has noticed none of these developments. He has also ignored many of the effects of the changes that have been brought about—the increased growth, the dramatic increase in investment, the greater prosperity, the rise in the number of people in work and the falling numbers of people who are unemployed.
§ Mr. Speaker
Order. The hon. Member for Falkirk, East (Mr. Ewing) has been a Member for a long time. He knows the rules.
§ Mr. Major
The hon. Gentleman has been here a long time. We welcome his presence and I promise to give way to him later.
The right hon. and learned Member for Monklands, East has been disparaging about the Budget. He thinks—I believe he has said so in explicit terms—that it is a missed opportunity. It is far from that. It is a prudent Budget, as my right hon. Friend said, and it is the right Budget to help bring down inflation, with the strong fiscal and monetary stance that the Government now have.
It is a Budget that is good for savers, is good for those in work—with a £3 gain for the vast majority of employees from the national insurance changes, is good for the elderly, is good for small companies and is good for the environment.
When in office, the Labour party produced Budgets—several a year, as I recall. People combed through them to see if anybody did not lose. One has to comb through this Chancellor's Budget to find someone who does lose. That is the significant change, and most people understand that only too well.
The right hon. and learned Member for Monklands, East had some critical things to say about my right hon. Friend's stewardship. Of course, it is the right hon. and learned Gentleman's job to be critical, and he spares no effort in being critical. He makes even less effort in being accurate. He accuses my right hon. Friend of losing control of demand, yet I return to a point that we have debated before. After the stock exchange crash, there were genuine fears of a widespread recession. At that time, my right hon. Friend relaxed monetary policy, as everybody advised him to do, but the right hon. and learned Member for Monklands, East and his colleagues urged both cuts in interest rates and large increases in public expenditure. If we had done that—we did not increase public expenditure—the growth in demand about which the right hon. and learned Gentleman now talks would have been far worse.
The right hon. and learned Gentleman has forgotten that. Indeed, he has forgotten it to such an extent that last night on "Newsnight" when I specifically asked him, he categorically denied having called for public expenditure increases and said that he had called only for interest rate cuts. As my hon. Friend the Member for Beaconsfield (Mr. Smith) pointed out, the right hon. and learned Gentleman not only called for increases in public expenditure but moved a motion to that effect. [Interruption.] Last night the right hon. and learned Gentleman denied it. Last night he neglected to remember—I remind him in case he has forgotten—that he had twice issued news releases calling for increased public expenditure and increased demand:Smith Urges Action to Avert RecessionandSmith Calls for Boost to Real Economy".That was immediately after the stock exchange crash. If that action had been taken then, the growth in demand and inflation and the trade gap which the right hon. and learned Gentleman attributes to the crash would have been far worse.
The right hon. and learned Gentleman's critcisms were met fairly and squarely yesterday in my right hon. Friend's Budget. My right hon. Friend explained the origin of our trade gap. Exports are at an all-time high, but imports 427 have risen much faster as a result of rapid growth in general and a massive investment boom in particular. It is interesting that fully three quarters of our imports of manufactures now consist of production and investment goods. Consumer goods are only a small proportion. The trade gap is not driven by a public sector deficit; it is investment led, and that investment is the source of future growth in production, exports and jobs. That is the difference between this trade gap and its predecessors, and the right hon. and learned Gentleman should understand that.
Having explained the cause, my right hon. Friend the Chancellor explained the remedy. The right action has been taken. The only effective way to slow excessive demand is to put up the cost of borrowing. That worked before and it is working now. It will choke off inflation and the trade gap will in due course diminish, and meanwhile we have no difficulty in financing it. There is no credible alternative.
The right hon. and learned Gentleman has also been criticial of my right hon. Friend's forecasts. He had some fun with them. That reminded me of something, and I wonder whether the right hon. and learned Gentleman remembers who said this in defence of Government forecasts of the trade gap:Obviously these are matters which are extremely difficult to forecast. I do not think that getting them right or wrong is the prerogative of any particular Government."—[Official Report, 12 March 1979; Vol. 964, c. 18.]Does the right hon. and learned Gentleman remember who said that? I shall tell him. [An HON. MEMBER: "Disraeli."] It was not Disraeli. It was the Secretary of State for Trade in 1979—the right hon. and learned Gentleman himself.
§ Mr. John Smith
Can the Chief Secretary tell me whether at any stage in my previous career I forecast a balance of trade deficit that was over four times wrong on a rate of inflation that was over twice wrong?
§ Mr. Major
I can tell the right hon. and learned Gentleman what happened. As I recall, he was a very distinguished Secretary of State for Trade for five months. During that period, we moved from a surplus to a deficit, inflation rose by 3 per cent. and heaven alone knows what happened to export performance: it did extremely badly. Mercifully, the general election cut off the right hon. and learned Gentleman's career at that stage.
§ Mr. Harry Ewing
I know that the Chief Secretary's hat is in the ring for the Chancellor's job. Given the choice that the Prime Minister must make, I would say, "Better the devil you know than the devil you don't."
The Chief Secretary waxed eloquent about repaying the national debt. Will he make it clear whether it is now part of the Government's economic policy to repay the national debt rather than investing in education, research, industry, the Health Service, the environment and everything else that improves the quality of life?
§ Mr. Major
I refer the hon. Gentleman to my right hon. Friend's Budget speech, in which he made it perfectly clear that our policy in the medium term was a balanced Budget but that it would take a period to achieve that balanced budget.
428 On public expenditure, the hon. Gentleman may care to recall that as a result of the public expenditure round last year there was a real increase of more than 3 per cent. in the priority programmes. That is a far more substantial increase than has taken place for many years and it was particularly well targeted. Capital expenditure rose—or, at least, it is to rise in the year beginning in April—by a record amount, particularly expenditure on the National Health Service. I should have thought that the hon. Gentleman would welcome that. [HON. MEMBERS: "Answer."] The position is as I have described it and as my right hon. Friend the Chancellor explained yesterday.
The frankness revealed in my quotation from the right hon. and learned Member for Monklands, East is refreshing, although 10 years on it seems to have deserted him. As we saw a moment ago, when the right hon. and learned Gentleman talked about the growth of credit, his frankness is not all that has deserted him; his memory appears to have gone, or at least become selective.
I set out our solution to the trade gap a moment ago, but what was the right hon. and learned Gentleman's solution? It was a dynamic solution. [HON. MEMBERS: "What about the Budget?"] I am coming to that: it is a very important Budget. The right hon. and learned Gentleman told the House—I shall quote him whether he is embarrassed by it or not——We believe that the best way to do that"—to improve the trade gap—is to engage the attention of the sector working parties".—[Official Report, 12 March 1979; Vol. 964, c. 9.]So that is it. All we need is a sector working party—no incentives, no productivity growth, no supply side reform, no firm fiscal or monetary stance, just a sector working party. Nor did the right hon. and learned Gentleman propose a specific remit for the working party. His ambitions were more limited. We had only to engage the working party's attention and the trade gap would disappear. Clearly, the right hon. and learned Gentleman believed in the smack of firm indecision.
§ Mr. John Smith
Whatever the policies for which I was responsible—I remind the House that we then had a manufacturing trade surplus—can the right hon. Gentleman tell me why, if monetary discipline, supply side reform and so on are so wonderful, a £3 billion surplus 10 years ago has been reduced to a deficit of £20 billion?
§ Mr. Major
The right hon. and learned Gentleman will have noticed that as a result of our policies over the past few years there has been a more dramatic rise in the living standards of people in Britain than we have experienced for many years, and that is the final indicator of the success or failure of Government economic policies.
The right hon. and learned Gentleman proposed to the shadow Cabinet a shadow Budget package of tax cuts and spending which he costed at £3 billion. That was an odd piece of costing but I shall gloss over that for today. There is a curious feature about the costing of the £3 billion package. A day or so after unveiling that package of tax cuts and spending, the right hon. and learned Gentleman criticised my right hon. Friend's Budget of last year as the cause of the growth of credit and the trade deficit. That Budget cut taxes in the current year by £4 billion.
If the right hon. and learned Gentleman believes that the £4 billion tax cut last year created the trade deficit, why did he propose in his shadow Budget a further £3 billion 429 tax cut this year? The logic of the right hon. and learned Gentleman's argument is that he should be clawing back last year's reductions, not proposing more.
If he really believes what he has said in recent months, he should not have proposed that package, or, in doing so, he should have said that it would worsen the trade gap. But he did not say that. The truth is that the right hon. and learned Gentleman has been caught out. It is now perfectly clear that he knows that last year's Budget did not create the trade gap, despite all that he and his colleagues have said repeatedly in recent months. Because he knows that, the right hon. and learned Gentleman considered it prudent to propose a tax and spending package almost as large as last year's, and larger than my right hon. Friend's proposals this year. It simply illustrates beyond doubt the sheer brass-necked hypocrisy of what the Opposition have been saying in recent months.
That brings me to the Leader of the Opposition and what he said yesterday.
§ Mr. Major
I am referring to the right hon. Gentleman's speech on the Budget. Is the right hon. and learned Gentleman suggesting that the Leader of the Opposition did not mention the Budget? He said yesterday, and I agree with him:Governments do not have their own money … Governments only have the taxpayers' money."—[Official Report, 14 March 1989; Vol. 149, c.315.]He then implied, although he did not say it explicitly, that the tax burden should be reduced by taking the basic rate down by 6p, to take it to the tax burden that he believed existed under Labour.
I thought that we had found a convert in the right hon. Gentleman, but that feeling lasted only for a moment. Within minutes of allocating the surplus to cuts in the basic rate, the right hon. Gentleman was allocating it to increases in public spending. He went further than ever before and allocated all the surplus £14 billion to increases in public spending. What the right hon. Gentleman had described as the taxpayers' money did not stay with them for very long. It was soon snatched back to be spent by him. But he overlooked one thing. With Labour policies, that surplus would not exist in the first place to be snatched back.
The electorate understand that very well. Labour is the party of high taxation. We are the party of low taxation and that is why we sit on this side of the House and Labour Members sit opposite and will continue to do so for a large number of years to come.
§ Mr. Major
In a moment.
The Leader of the Opposition said that the Government had been a bonanza for the rich and that the top 1 per cent.—which presumably includes the hon. Member for East Lothian (Mr. Home Robertson) who sought to intervene—has gained £16 billion since 1983 and £26 billion since 1979 in cumulative tax cuts. But he did not say that the same top 1 per cent. will be paying a higher proportion of total income tax in 1989–90 than they paid in 1978–79. That means that they will have paid £5.75 billion more in taxation. If they were not making that contribution, the difference would have to be made up by the other 99 per 430 cent. of taxpayers. But that is the right hon. Gentleman's policy. The Opposition believe in increased taxation for everyone, as they repeatedly make clear.
It is not only the top 1 per cent. who provide a higher proportion of the total tax take than they did in 1979. The top 5 per cent. were contributing 24 per cent. of the total tax take then and now they are contributing more than 29 per cent.
Amazingly, the right hon. Gentleman tried to pose as the friend of the low-paid. He said that the Government has removed their rights. I shall tell the Leader of the Opposition about the rights that we have given the low-paid. We have given them the right to keep more of what they earn, and they will welcome that. We have reduced the basic rate of tax from 33p to 25p in the pound—and that is before the latest reform, which provides an extra £3 a week for most people in work.
§ Mr. Home Robertson
The right hon. Gentleman talks about his concern for taxpayers. May I draw his attention to what the right hon. Gentleman for Henley (Mr. Heseltine) described as the Tory tax? Is he aware that poll tax forms are being delivered to households throughout Scotland this very week? What does the right hon. Gentleman have to say about the fact that people like me, as he so charmingly put it, will end up paying less in local taxation because of that Tory tax whereas people on lower incomes throughout Scotland this year and in England next year will be paying substantially more tax?
§ Mr. John Smith
I repeat the question put clearly by my hon. Friend the Member for East Lothian (Mr. Home Robertson), in case the right hon. Gentleman does not understand it. Why should people who are better off receive the same treatment as those who are much worse off? Can we have a straight answer to that question?
§ Mr. Major
The majority of local government expenditure—[HON. MEMBERS: "Why?"] I am answering the question and the right hon. and learned Member for Monklands, East may learn something if he listens to my answer.
The majority of local government expenditure has been met in the past, and will be met in the future, by central Government grant, which comes out of the progressive tax system. The balance is met from the community charge, and payment of this element should be according to the services received.
My right hon. Friend's Budget this year falls between the most far-reaching tax reforms for a generation and the introduction next year of independent taxation for husbands and wives. [Interruption.] The Leader of the Opposition is welcome to intervene if he wishes.
§ Mr. Major
I beg your pardon, Mr. Deputy Speaker. No one would ever suggest that you would ever lose control of your temper, or anything else.
As my right hon. Friend the Chancellor of the Exchequer promised, this is a prudent and cautious Budget. It makes no reduction in the overall tax burden and provides strong fiscal backing for a tough monetary stance. My right hon. Friend continues with the policies that have produced the strongest fiscal position of any leading country. As a result, we are forecasting a further fiscal surplus of £14 billion—that will be the third successive year of surplus. As a result of these cumulative surpluses over three years, we will have repaid 16 per cent. of public sector debt and saved £3,000 million in interest payments each successive year. That £3,000 million will be available for more productive purposes than paying interest on past debts, many of which were run up when Labour was in government.
This strong fiscal position has been unmatched for decades and has enabled my right hon. Friend to promote several important themes which he has pursued steadily during his six years as Chancellor. The predominant theme continues to be tax reform, designed to improve and simplify the tax system, remove tax distortions and maximise the freedom of individuals and companies to spend their own money and organise their own affairs. In that context, the main reform in the Budget is to restructure national insurance contributions. We should be entirely clear as to what yesterday's reforms mean.
At present, people earning just below the steps for each rate band face a reduction in take-home pay as a result of an increase in their earnings. For example, someone whose earnings were near the threshold of £115 who received an increase of £ 1 would, as a result of moving to a higher rate of national insurance, find his or her take-home pay reduced by £1.37. That is clearly unsatisfactory. My right hon. Friend's reform has entirely abolished two of the three steps and goes even further to help those on lowest incomes. He retained the first step of £43 income a week—the point of entry to the whole range of contributory benefits—but at a much reduced rate. The initial contribution has been reduced by 60 per cent.—from £2.15 to only 86p. That is the cheapest entry fee to the highest contributory benefits since the Beveridge system was introduced in 1948. By any yardstick, it must be the bargain of the century.
The reform not only introduces this low cost contribution to benefits, but removes distortions and disincentives in the national insurance system and increases take-home pay for the clear majority of people in work by about £3 a week. Seventy per cent. of the total benefit goes to those earning less than average male earnings. The reform carries with it a substantial cost to the Exchequer of £2.8 billion in a full year. It provides a simple but well-structured system of contributions for the low paid.
§ Mr. John Battle (Leeds, West)
The Chief Secretary has said that people will gain £3, but those who are also on family credit and housing benefits will have their benefits deducted and will therefore lose. Simply increasing wages in this manner does not free people from the poverty trap.
§ Mr. Major
The hon. Gentleman is right about the impact on some benefits. As a result of the changes in National Insurance contributions, however, take-home 432 pay will rise by £3. If we took the hon. Gentleman's view we would never either reduce national insurance contributions or raise tax thresholds, both of which the Opposition are keen for us to do.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
By laying such stress upon the £3, the Chief Secretary has led many people to expect that they will be better off in terms of national insurance contributions. Will he confirm that someone earning £70 a week—which, by my standards and his, is surely low pay—will be only 21p a week better off?
§ Mr. Major
Yes. The reason for that is that—with, I believe, the hon. Gentleman's support at the time—my right hon. Friend, to help those very same people, reduced the national insurance steps in 1985. People have already been paying reduced contributions. That is why I said that the vast majority will receive another £3—as I said, 70 per cent. of the total benefit.
In his shadow Budget, the right hon. and learned Member for Monklands, East also proposed a reform of national insurance contributions, but his proposal was to abolish the upper limit on contributions. That would add massively to public expenditure on state earnings-related pensions in the long term—as I hope that he will acknowledge—unless the contributory principle was ignored, with a "shadow" upper earnings limit on pension entitlement and employees receiving nothing in return for higher contributions. The right hon. and learned Gentleman is a little unclear about that, but with a "shadow" upper earnings limit—which is presumably what he has in mind—nearly 2 million employees would immediately be worse off, with the person on about one and half times average earnings paying £3.75 a week more.
My right hon. Friend's reform maintains the contributory principle and helps the low-paid without creating losers—a much sounder system. I hope, therefore, that the right hon. and learned Gentleman and his party will support it.
§ Dr. David Owen (Plymouth, Devonport)
Surely the Chief Secretary is not defending the national insurance contribution on the contributory principle. The contributory principle is a fraud in NIC terms. Surely the next step must logically be to go a stage further in each successive Budget to bring the national insurance contributions and income tax into the same relationship.
§ Mr. Major
I am afraid that I do not agree with the right hon. Gentleman, although I understand his argument and am familiar with the arguments in the Green Paper. I think that the contributory principle has much to commend it. The introductory entry fee is now very low at 86p, and I think it entirely right that we should sustain the principle now and in the future.
If the Opposition support the national insurance changes, the possibility of a parliamentary novelty will be opened up—that is, the Opposition actually voting for a reform that puts more money into the pockets of those on modest earnings. They voted against cuts in the basic rate of income tax in 1979, 1987, and 1988, and we shall watch with interest to see how they vote on national insurance contributions this year.
Another significant measure in the Budget is my right hon. Friend's pensions proposals. We believe that they will make an important contribution to simplicity and flexibility in pensions provision. The change follows the 433 overwhelming logic of previous deregulation policies to maximise freedom and minimise Government interference. The proposals effectively take the Government out of the business of artificially limiting pension arrangements, and will leave employers the freedom to offer their employees whatever pensions they see fit to offer. No longer will their decision be determined by the tax regulations of the Inland Revenue.
The restriction that my right hon. Friend does propose is the limiting of tax relief to pensions based on earnings of £60,000, with full protection of existing rights, for existing members of occupational pension schemes. Their current arrangements will not be adversely affected. The £60,000 tax relief limit will be increased in line with inflation to ensure that it retains its value. Those earning more than that and others who find the Inland Revenue limits restrictive, will be able to receive a top-up pension without tax relief, which will not in future affect the tax privileges of the main scheme.
§ Mrs. Maria Fyfe (Glasgow, Maryhill)
On the matter of employers who would like to do something of benefit to their employees, why has the Chancellor not lifted the high burden of taxation on workplace nurseries? Does he not want to get more women back to work in Britain to fill the jobs gap? Does he not talk to the Secretary of State for Employment?
§ Mr. John Smith
The right hon. Gentleman was asked a straight question by my hon. Friend the Member for Glasgow, Maryhill (Mrs. Fyfe). He was asked to justify why workplace nurseries are the subject of taxation. That is a Treasury responsibility. Will he give us the answer?
§ Mr. Major
It is a benefit in kind and all benefits in kind fall into that category. We are not in the business of dividing up benefits in kind in the arbitrary fashion proposed by the right hon. and learned Member for Monklands, East. It is not a' wise way to proceed.
As a consequence of removing those artificial tax restraints, my right hon. Friend has also been able to make some other worthwhile changes in the pension regime. The rules affecting those who retire or leave early have been simplified and the arrangements for personal pensions and additional voluntary contributions have been improved. Contribution limits have been increased substantially for those over 35 and, for the first time, people will be able to manage their own personal pension investments. Taken together, those reforms will increase choice and reduce bureaucracy for employers and employees. I hope that these and earlier pension reforms will remove much of the complexity and mystery in pension provision.
Last year, the Inland Revenue published a consultative document setting out three main options for reform of the 434 life assurance industry. As a result of the representations made, my right hon. Friend has accepted that reform was necessary but that it should be achieved within the existing system. The measures he proposes have three advantages: they remove current anomalies; they enable my right hon. Friend to reduce the rate of tax on policy holders' investment income from 35 per cent. to 25 per cent. and the rate of 30 per cent. on capital gains to 25 per cent; and they also enable him to abolish entirely life assurance policy duty. We believe that those measures will result in a fairer and more effective tax regime as well as removing uncertainty and anomalies and establishing a stable regime for a unique industry.
The second theme that runs through this and previous Budgets is the Government's determination to widen the ownership of property and capital. In this Budget my right hon. Friend has proposed a number of measures to encourage saving and capital growth through wider share ownership. Ten years ago, share ownership by individuals appeared to be a dying habit. There were only 3 million shareholders of equities, and the number was dwindling. As a result, companies found it increasingly difficult to raise equity capital from individuals. All that has changed. Partly as a result of the extensive programme of denationalisation—that is what privatisation is—there are now 9 million shareholders, one fifth of the adult population. Becoming a shareholder in industry and commerce and building up capital is now much more commonplace, and that is a welcome trend.
The Budget proposes a range of measures to give further encouragement to share ownership again building on schemes already in place. The most important of those is the personal equity plan scheme which is to be expanded by increasing the annual investment limit from £3,000 to £4,800 and by relaxing the limits on investment in unit and investment trusts. Furthermore, shares from new issues can now be held in a PEP. The scheme has been simplified and better tailored to small investors.
A further characteristic of the Budget is that it removes a number of fiscal injustices and anomalies. The most obvious example is the ending of the cliff-edge steps in the national insurance system, but there are others as well. In particular, there are two measures which will remove anomalies affecting elderly people. First, we have fulfilled the single unredeemed pledge from the 1979 manifesto and abolished the pensioners' earnings rule. As a result, pensioners who choose to go on working will no longer be penalised for doing so. It is simply not wise to inhibit pensioners from working if they wish to do so. Overwhelmingly, they have a great deal to contribute and, in future, they will have every encouragement to do so if they wish.
Secondly, we are reducing to well below 40 per cent. the marginal rate of tax in the short band of income where age allowance is withdrawn. That was the subject of many representations last year, not least from hon. Members who served on the Finance Bill Committee. I hope that the change will be generally welcomed. At the same time, we have extended the higher level of age allowance, which my right hon. Friend introduced in 1987 for all those aged 80 or over, to those aged 75 or over. As a result, those aged between 75 and 79 will be significantly better off, with a gain of £1.73 a week for a single person and £2.55 for an elderly couple. Moreover, three quarters of those in that age group will now pay no income tax at all. That is a welcome measure which matches the social security 435 increase in income support of £2.50 for individuals and £3.50 for couples over 75, which comes into effect in October.
The Government's economic and fiscal objectives are clear, and the Budget reaffirms them. We wish to ensure growth without inflation and to minimise tax rates to enable the greatest possible degree of taxpayer choice. We do not believe that the Government know better than the taxpayer how to spend the taxpayers' money. We continue to move towards our objective of a basic rate of income tax of no more than 20p in the pound as soon as it is prudent to do so.
By way of contrast, the Opposition are committed to increasing tax in every way they can. They are committed to increasing tax for basic rate taxpayers, abolishing the ceiling on national insurance contributions, increasing contributions by 9 per cent. on earnings over £17,000, imposing a wealth tax and much else. All that is well documented.
In this Budget we have further reformed the tax system. We have helped pensioners by abolishing the earnings' rule. We have removed high marginal rates for those on low incomes by reforming national insurance contributions and further measures have been put in place to widen share ownership, including substantial improvements to PEPs. The taxation of pensions and life assurance has been modernised. All that has been done within a prudent and cautious fiscal framework in which we plan to make a further massive repayment of debt next year, thus providing a fiscal stance which will buttress monetary policy in its task of bringing downward pressure on inflation.
§ Mr. Kinnock
The right hon. Gentleman has referred several times to the great virtue of using the Budget surplus to repay the national debt. Can he confirm that that will continue to be an objective of the Government, should they have surpluses, and that it will continue until the next general election and not be impeded by any desire that the Government may have to make a tax cut before the next general election?
§ Mr. Major
Clearly, the right hon. Gentleman is aware of the danger to his party as the high-tax party and the support for us as the low-tax party. He is aware that we are enjoying the longest period of growth since the war, latterly combined with dramatic falls in unemployment. He does not care that our policies are working. The Budget sticks with our policies and I commend them to the House.
§ Mr. Dennis Skinner (Bolsover)
On a point of order, Mr. Deputy Speaker. You will be aware of the Royal Commission on standards of conduct in public life, especially as it applies to Ministers. I see that Rambo—the Chancellor of the Exchequer—is leaving. Recommendation No. 8052 says:Ministers must so order their affairs that no conflict arises, or appears to arise, between their private interests and their public duties.In today's Evening Standard, there is an advertisement using a picture of Rambo—the Chancellor of the Exchequer. I wondered how much he had been paid for it, whether he had posed for it and whether he will give the money to charity. Is that where the manufacturing surplus 436 has done? Does the suggestion of enlarged breasts imply the use of steroids? Can you investigate the matter, Mr. Deputy Speaker?
§ Mr. Harry Ewing
Further to that point of order, Mr. Deputy Speaker. That appears to be a very authentic picture of the Chancellor of the Exchequer. Can it appear on his security pass for circulating round the House of Commons?—[Laughter.]
§ Mr. Deputy Speaker
Order. I do not accept any responsibility for anything that appears in the Evening Standard.
§ 5 pm
§ Mr. John Evans (St. Helens, North)
In my maiden speech in the Budget debate on 1 April 1974, I said:I have always been puzzled by the mystique which has surrounded an annual Budget."—[Official Report, I April 1974; Vol. 871, c. 946.]Fifteen years and umpteen Budgets on, the only point that still puzzles me is why we still carry on with the pompous nonsense. But yesterday's Budget was not only the usual nonsense. It was at times boring nonsense, but more importantly, it was an affront to the impoverished in our society who have suffered so grievously at the hands of this Government and for whom this Budget does nothing. Nothing that the Chief Secretary to the Treasury has said this afternoon has changed my views about what the Chancellor said yesterday.
It will come as no surprise to the Chancellor that my constituents in St. Helens have not welcomed the Budget. He knows well that the Government's policy does not put at the top of the agenda the interests of the low-paid, the unemployed and the poor, of whom there are, unfortunately, a disproportionate number in St. Helens. He knows that the interests of poor people take second place in his order of priorities to the interests of the rich, of whom there are disproportionately few in St. Helens. There is no need for argument; let us look at the facts.
Last year, the Chancellor cut the highest rates of tax for each member of the wealthy elite in this country. He gave out more than £1.6 billion to people who were already swimming in cash. This year, another year of misery for the poor, he has the effrontery to give just a fraction of the poor a few crumbs from his 14 billion surplus in reduced national insurance contributions. He calls that benevolence. It is the height of audacity to suggest that this is a Budget for the low-paid.
The litmus test of the honesty of the right hon. Gentleman's claims for this Budget is that the Government are, at this very moment, forcing through the Social Security Bill, which will force unemployed claimants to accept any low-paid, unskilled job which is offered to them, no matter how humiliating. Tory Ministers know that the people who will be forced to accept those low-paid, unskilled jobs will come from areas of the country such as mine. The Government have also made it clear that they intend to abolish the wages councils, the only protection for the low-paid in Britain and for hundreds in my constituency who are covered by wages council agreements. The Chancellor's effrontery almost beggars belief. Even the worst tinpot dictator could not conjure up a more reliable recipe for a low-wage and low-skilled economy in areas such as mine.
In St. Helens, half the population are living on or below the poverty line. Almost one in 10 people, even on the 437 Government's corrupt unemployment figures, are still out of work. Hundreds more are on half-baked training schemes devised by the Government at minimum cost. Real apprenticeships are a thing of the past. Investment in manufacturing, on which the triumph of the north-west economy and this country's industrial success were built, is now stagnant. On the last available figures, the fall in north-western manufacturing investment shows a net loss of one-third since 1979–33 times the loss suffered in the south-east.
§ Mr. Keith Mans (Wyre)
Does the hon. Gentleman agree that, although manufacturing in the north-west may have declined, that is more than compensated for by the huge increase in the service sector?
§ Mr. Evans
I agree that there has been a savage decline in manufacturing industry, but the hon. Gentleman knows as well as I do that the jobs in the manufacturing sector were highly skilled, highly paid jobs. Unfortunately, some of the jobs created in the service sector are low-paid, part-time and unskilled.
The United Kingdom's balance of trade in manufactures has been in deficit since 1983 and nothing in any of the Chancellor's past six Budgets has addressed the regional disparity which that has created. Almost 40 per cent. of manufacturing jobs in the north-west have disappeared since the Tory party took power—a third more than the loss in the south-east and Britain as a whole. The point is that the demand which he is now trying desperately to contain has been import-led and the consumer demand comes not from constituencies such as mine, but from the affluent south-east. He has done much to promote that demand by sweeping tax cuts for the rich. High interest rates are now hitting my constituents before they have even started to enjoy any economic upturn.
We are told that the Budget deals with revenues. I shall talk briefly about the revenues in the pockets of some of my constituents. At the social security offices in St. Helens, the amounts paid to the very needy have dropped dramatically since the Government introduced the social fund. Those people will not be affected by the changes to national insurance contributions.
At my advice bureau in Haydock last Friday night—significantly, the Prime Minister was in Haydock last Friday night, but was not speaking to my constituents about their problems—a 66-year-old widow produced her pension book to show me that in 1987, her weekly benefit was £42.34 a week, with the Department of Health and Social Security paying her rent and rates. In April 1988, her benefit increased to £45.75, but she then had to pay £4.87 for rent and rates. Her real income had slipped to £40.91—a drop of £1.43 a week. She will receive a rise in April and she had the counterfoils in her book to prove it. She will receive £46.10 a week—a princely increase of 35p a week. My elderly constituent, who is a sick woman, does not know which way to turn because she now owes more than £120 in rent arrears. I do not think that she will be interested in what the Chancellor offered yesterday.
Last Saturday morning, in my St. Helens surgery, a 70-year-old diabetic, who had his left leg amputated last December and whose wife is crippled with arthritis, informed me that their total income for two invalids was £80.43 a week. He had just been informed that his rent and rates had been increased by more than £7 a week and they 438 simply could not afford to pay. I do not think that that couple will be interested in private medicine bonuses or personal pension equity plans.
The 4,500 unemployed in my constituency—that is the official figure, and there are far more than that in reality—will not see any increase in their weekly revenues. What has the Chancellor done for them? He has given them almost 8 per cent. inflation, but, as a Billinge pensioner protested to me on Friday night, when pensioners receive their increase in April, it will be just 5.9 per cent., based on last September's inflation rate. It has not passed them by that wealthy admirals and judges have just received their annual increase index-linked at the full inflation rate.
We are not defeatists or given to complaining for the sake of it in our region, but this Government have treated us economically like paupers in comparison with their attitude to the south-east. For all the millions of pounds spent on new roads for the south-east to ease its economic boom, pennies have gone to the north-west. Billions of pounds are to be spent on rail links in the south-east, linking the Channel tunnel to London, but apparently nothing will be spent linking the rest of Britain to the capital. That is utterly unacceptable.
New businesses have been created in the north-west, but the growth rate over the past seven years has been just 7 per cent.—half that for the rest of the nation and lower than that of any other region according to VAT registrations and deregistrations. The number of retail outlets has fallen by 6 per cent. since 1980 and there has been double that fall in the number of units in agriculture.
Living standards for those in the south-east have jumped by over 20 per cent. since the Government took office, but in the north-west we have not seen even half that level.
The Government have no commitment to the regions. They have reduced regional assistance and grants by 55 per cent. in the past few years and virtually scrapped any coherent regional policy. What happened when the Prime Minister came to Merseyside last weekend? What hit the headlines? Another 1,000 workers were laid off on Merseyside. That is what Tory policy has meant to the north-west of England.
Contrary to what the Prime Minister's propaganda machine tells us, the north-south divide not only still exists: it is still growing. We are two nations in Great Britain, and the figures prove it. Why could not some of the Chancellor's enormous surplus be spent on the many schemes that local authorities, especially in the north, are only too anxious to put into operation? I refer to just one that I have brought to the attention of Ministers in the past few months. Excellent work has been done with a relatively small amount of assistance to reclaim the derelict Ravenhead glassworks site in my constituency to bring it back into productive capacity and activity.
This Budget has done virtually nothing for the impoverished in our society. The Chancellor has, at long last, abolished the earnings rule for pensioners; I welcome that, but there could have been a real effect if he had increased pensions in line with the real rate of inflation. He could have announced that yesterday, but he did not.
The Chancellor should also have increased child benefit in line with inflation, because in my constituency over 9,000 families have children who are under five and many are desperate for help. Such an increase would have been 439 a real benefit to the poorest in my constituency. However, he did not, and I leave the House to draw its own conclusions.
If the quality of a nation's civilisation were judged on the basis of the care and attention it bestowed on its elderly and its children, most of the people of St. Helens would regard this Budget as truly barbarian.
§ Sir Ian Gilmour (Chesham and Amersham)
Tactically, I think this year's Budget well judged, and I congratulate my right hon. Friend the Chancellor of the Exchequer on his prudence. Those people who gaze wide-eyed at the large Budget surplus and shut their eyes to everything else in the economy are seriously out in their thinking. My right hon. Friend was far too sensible to do the same.
The hon. Member for St. Helens, North (Mr. Evans) was churlish about unemployment. Of course it is still high, but, as my right hon. Friend the Chief Secretary to the Treasury said, there has been a dramatic fall recently and I am happy to say that my constituency still has the lowest unemployment rate in the country.
I greatly welcome the Chancellor's reform of national insurance contributions, which is an important step forward, as is the abolition of the earnings rule. If only my right hon. Friend had been able to announce the rescinding of the Government's mean and unjustified failure to uprate child benefit, tactically I could have given the Budget three cheers, but as it is, it still deserves at least two and a half.
However, strategically—unfortunately—the verdict must be different, because the Chancellor has done little or nothing to improve the competitiveness of British manufacturing industry, which should have been his main strategic objective, and because of his attitude to the balance of payments.
Once again, my right hon. Friend the Chancellor talked yesterday about the transformation of the economy, but, far from the current position being different, it is all too drearily familiar in many respects. Once again, we have a consumer boom, culminating in inflation and in a serious balance of payments deficit. We have seen that story countless times before. We are witnessing not a transformation, but yet another repeat performance.
I found my right hon. Friend's optimism difficult to square with the fact that the balance of payments deficit was 3 per cent. of GDP in 1988, rising to 4 per cent. in the second part of the year. We have had a similar deficit only once before, in 1974, when there had been a rise of over 40 per cent. in import prices. Although there has been some rise in import prices recently, there has been nothing like that rise, so there can be no such alibi on this occasion. The deficit is the straightforward result of British industry's continued failure to compete successfully, especially in its own market. Imports of manufactures have risen 12 times faster than domestic production since 1979—nearly doubling in the process.
A balance of payments deficit of the present magnitude was not foreseen by the Chancellor this time last year, and since then his response has been variously to assert that it does not particularly matter and to predict that in any case it will go away of its own accord. My belief is that he is dangerously mistaken in both those contentions.
440 The view that a current account deficit of the present size does not especially matter and can be allowed to continue strikes me as reckless. In the short term, there will be the perpetual risk of a run on sterling, with dire consequences for inflation. It could also lead to even higher interest rates. In the longer term, a deficit of this size means first that we shall lose the net overseas wealth that was painfully acquired in the early 1980s and, if it were allowed to continue, that we would eventually join the company of debtor nations. In any case, what possible value can a medium-term financial strategy have if it does not even try to keep us solvent? That is the policy's fundamental defect.
The external deficit will not go away or get much better of its own accord. It is no blip: it is the result of deeply entrenched adverse trends. My right hon. Friend the Chief Secretary was right to say that it is not the result of the tax cuts last year. It has a far deeper and more entrenched basis than that——
§ Mr. Mans
Does my right hon. Friend agree that one reason for the deficit is the huge increase in manufacturing investment in the past few years, which contrasts with previous deficits and suggest that in the future the deficit may go down as a result of more efficient manufacturing in this country?
§ Sir Ian Gilmour
I am afraid that my hon. Friend is seriously mistaken—there has not been an enormous increase in manufacturing investment. In the period from 1979 to the present day, manufacturing investment has been negative. Although it has certainly increased in the past year or so—that is encouraging—over that period as a whole it has been low. I fear that my hon. Friend's optimism is not justified.
The fact is that those adverse trends are deep-seated and our competitive performance has shown little improvement. Those trends were masked for a long time by North sea oil and then by the serious depression at the beginning of the 1980s which checked the growth of imports, but the crunch has now come. The balance of trade in manufactures has gone from a surplus of £5.5 billion in 1980 to a deficit of £14.5 billion last year, rising in the last quarter at a rate of £17.5 billion.
Oil production is now falling, and property income is probably falling also as our foreign assets run down. We cannot be saved by the service industries. I cannot speak for the north-west to which my hon. Friend the Member for Wyre (Mr. Mans) referred when he intervened in the speech of the hon. Member for St. Helens, North, saying that service industries in the north-west are making up for the decline in manufacturing production. I do not know about that, but they certainly cannot make up for it nationally because the scope of any international expansion in tourism services is intrinsically limited. The Japanese or the Germany will not come to London for a haircut, so there is a limit to what can be done. In any case, the balance of trade in services has recently been falling, not rising. Manufacturing industry is absolutely vital.
What makes it more serious is that the crunch has come much sooner than it should have done, because at least when it came in 1974 unemployment was down to 400,000. Now, of course, it is only just under 2 million. Also, the crunch has come despite the fact that, in the whole period from 1979, the growth rate has been unusually slow. The growth of manufacturing output since 1979 has been the 441 slowest of the post-war period—that is, slower than any nine-year period before 1979. The growth of total output at about 2.1 per cent. has been the equal slowest in any nine-year period.
The motor of growth has not been chiefly enterprise or efficiency, but personal consumption swelled by credit, which has risen faster than in any previous nine-year period taking up 90 per cent. of such growth in GDP as occurred. So nine years of slow growth have nevertheless driven us to the limit of our capacity to produce. Not only has the balance of payments gone into record deficit, but inflation, as we know—that judge and jury—is still climbing. It does not look like a supply side miracle.
§ Mr. John Marek (Wrexham)
I am grateful to the right hon. Gentleman for saying what he has. I remember the Chief Secretary not perhaps half an hour ago saying with great pride that we have been in the longest period of growth since the war. The right hon. Gentleman, however, quite rightly is painting the true picture. Would he say that the Chief Secretary was being slightly dishonest a little earlier?
§ Sir Ian Gilmour
Of course I would never say that my right hon. Friend was either slightly or in any way dishonest. No doubt there are different ways of looking at these matters. I am sure that everyone in the House has the highest respect for my right hon. Friend's integrity.
Not only is my right hon. Friend the Chancellor taking great risks in allowing the deficit to continue at such a high level, but I am not at all sure that the improvement that he forecasts, such as it is, will in fact take place. He appears to be forecasting a very bumpy soft landing, with growth continuing overall but with net exports steadily taking over from domestic demand. The trouble is that high interest rates act uncertainly, randomly and perhaps excessively on domestic demand, and they act perversely on net export demand by raising the exchange rate.
The worry is that the Chancellor's balance of payments forecast looks optimistic. As I understand the Red Book, he is forecasting nearly a 5 per cent. increase in exports this year and rather more than 5 per cent. in 1990, while he is forecasting only a 2.5 per cent. increase in imports in 1990. All that is well out of line with what has happened in the past decade.
If we take out oil, from 1979 to 1988 the average yearly increase in exports was about 2 per cent. and the average yearly increase in imports was about 5 per cent. So I am not persuaded that there are strong grounds for believing that the next two years will be so very different from the last nine—or that, unless there is a slump, which would certainly improve the balance of payments, this improvement will take place.
The Red Book talks about the extra capacity available from the current investment boom, but that is only recent. The total net investment between 1980 and 1987—namely, investment less capital consumption—has been 25 per cent. lower than in the 1960s and the 1970s, while net investment in manufacturing industry has been nil or even negative. Therefore, recent investment is unlikely to make up for the previous dearth.
The Chancellor appears to be taking a big risk in permitting the continuation of such a large balance of payments deficit, and he is taking a gamble in hoping that the improvement he forecasts will take place. Over the years, my right hon. Friend has been warned by many 442 people, including myself, that we would be in trouble when North sea oil began to run down. He ignored those warnings and now the trouble has begun he is still refusing to act to improve our manufacturing performance. That is why the Budget, although tactically excellent, is strategically a failure.
§ Mr. A. J. Beith (Berwick-upon-Tweed)
It is not for the first time that I have found myself in agreement with much that the right hon. Member for Chesham and Amersham (Sir I. Gilmour) has said. It is not without significance that there is a common thread of criticism of the Budget strategy from different parties on this side of the House and from Conservative Members who are looking to the longer-term needs of the country. I disagree with the right hon. Gentleman, however, on one simple point. He quoted the Red Book forecasts and regarded them as unrealistic. I believe that the Chancellor has now conceded that point. I assume that, by indicating in the Budget statement yesterday that there would be no improvement in the balance of payments, he had abandoned his Red Book forecasts and the process of improvement which it is alleged is imminent.
§ Sir Ian Gilmour
My right hon. Friend the Chancellor is reckoning on an improvement, because the deterioration was so great in the second half of last year that to keep it the same this year means an improvement.
§ Mr. Beith
The Chancellor hopes that the Red Book forecasts will therefore merely enable the appalling balance of payments deficit to remain as bad as it is now.
Yesterday I argued that this was the Budget of a frightened Chancellor, and my right hon. Friend the Member for Yeovil (Mr. Ashdown) added that it was a Budget of tiny measures. I shall start with the tiny measures and, of course, not all tiny measures are bad. There are a number of quite good ones that are worth commending.
The first measure that the Chancellor announced was something that we had pressed upon him, which was that the smaller firms' rate of corporation tax should be the subject of a higher threshold so that it would benefit more firms and benefit them to a greater extent. Small firms have experienced greater problems as a result of the current interest rates and exchange rates than larger firms, which on the whole have been able to cope quite well by hedging. It is only a third of the way that we asked the Chancellor to go, but nevertheless I welcome it. The charity VAT reliefs are also welcome. Although long awaited, the abolition of the earnings rule is no less welcome. Although I would have liked to see a 15 per cent. differential between the price of leaded and unleaded petrol, I hope that the 10p differential will prove sufficient to encourage universal use of lead-free petrol.
We welcome the improvements in incentives for employee share schemes and profit-related pay, to which we have long attached importance. I was disappointed by the little that the Chancellor did for savings. We argued that his PEPs scheme—much loved by himself but little loved by anyone else—was a vehicle that could be built on. He tried to do that, but he still did not do enough to make it attractive to new savers. He made it administratively simpler for new savers to participate, but the primary attraction of the scheme remains for people who have 443 already used up all their capital gains tax relief. It does not offer sufficient incentive to attract new savers into investing in industry, which is its purpose.
One of the Chancellor's small measures is in fact deplorable—tax relief for private medicine. He has diverted considerable funds to assist people who have already decided that they can afford to fund separately access to private health care, when those same funds could have been used in the National Health Service.
This Budget is paying for last year's mistakes. It is not simply a matter of saying that the Chancellor's tax cuts last year caused all the problems, although they contributed in large measure. It was a combination of tax cuts to those whose disposable incomes were already high and who therefore were more likely to spend their increased means on imported goods, together with the big bang, the credit expansion, the increased competition in credit, the intense salesmanship in credit in that more competitive period, and, of course, the decision to delay the ending of multiple mortgage tax relief until 1 August 1988. That clearly put a great deal of pressure on the housing market in the summer months of last year. That whole series of measures added together—some that the Chancellor was doing himself and others of which he should have been aware—led to that Budget having disastrous consequences.
The Chancellor has now sought to reconfirm that inflation is his overriding priority. One is bound to ask initially how it can be a problem. All the reasons that the Government used to advance for inflation relate to matters that they reckon to have disposed of: no longer do we have a public sector deficit generating inflation; no longer are the unions rampaging around the country forcing unrealistic pay increases; no longer can it be blamed on the Labour Government; and no longer can it be blamed on those favoured villians of the piece—the preceding Conservative Government so often criticised by[Interruption]—indeed, by Conservative Members.
How could inflation have happened when the Government were doing what they now say they will do—monitoring the growth of broad money? Is not that precisely what they have been doing? However, with all those measures, we have inflation touching 8 per cent. and a very worried Chancellor.
That inflation has determined the shape of the Budget. The Chancellor's remarks in the early part of his speech gave the impression that he was reasonably confident that he could soon get on top of the inflation problem—but his Budget measures reveal a different picture, and we must judge the Chancellor by his actions, not by his words.
He has avoided, because of his fear of the inflationary consequences, measures that he either wanted to implement or ought to have implemented. We saw none of his cherished standard rate tax cuts, and no additions to tax allowances over and above those required by inflation. We see the extraordinary step of not putting a penny on any of the many excise duties—for the pure and simple reason that it is a way of holding off an increase of half a percentage point on the retail prices index. There can be no other reason.
The Chancellor has received advice from within the Government and even from the Committee whose Chairman is the Leader of the House that the duty on alcohol ought at least to be indexed and that he should 444 probably increase it by more than that, to make up for his failure to do so in previous years. The Chancellor's decision in that respect is a more vivid demonstration of his fears of inflation and of the inflation already built into the system than anything else.
The Chancellor reaffirmed his continuing dependence on high interest rates. That dependence on high interest and high exchange rates is also about preventing the re-importing of inflation. The Chancellor is fond of saying that underlying inflation is only 5 per cent., because he does not believe that mortgages really matter in inflationary terms. We disagree with him about that. Additionally, however, underlying inflation is a far more serious problem than is shown by that 5 per cent. increase. A great deal of our inflation has been exported as a result of the pound being high. If the value of the pound were now to fall, we would see that inflation re-exported into this country and a still higher domestic rate of inflation.
In addition to the factors known to be causes of inflation, if the Government's overriding priority is to tackle inflation, why are they increasing it themselves? Why have they selected measures that will increase prices and bear most heavily on the ordinary members of the community? I refer to public sector price increases relating to privatisation. Electricity charges have increased by 6.8 per cent. this year, on top of 10 per cent. last year. However, the prices that the Central Electricity Generating Board has to pay for oil and coal are down, so now is not a time when electricity prices should be increasing by 10 per cent. one year and 6.8 per cent. the next.
Water charges will increase by 9.8 per cent. this year, but for nearly one quarter of the population they will increase much more than that, by an average of 22 per cent. That was announced yesterday. The statutory water companies have said that that is so that they can cope with the effects of privatisation and can fit themselves into the new regime that the Government are introducing in their privatisation measures. The private water companies have long charged less than publicly owned water companies, but point out that the increases they are implementing now are the direct consequence of the regime that the Government are introducing in the course of privatisation. Health charges are also being increased. We are seeing a series of Government-sponsored inflationary measures.
The key sufferers will be the low-paid. I remind the Chief Secretary that it is very misleading to suggest—the newspapers are more guilty of this than the right hon. Gentleman—that all low-paid people will be £3 per week better off in respect of their national insurance contributions. The Chancellor has not organised his reforms of national insurance in such a way that they will secure such an improvement. He has not turned the threshold into an allowance, like a tax allowance, but has retained the arrangement whereby someone who falls within the national insurance bracket will immediately pay national insurance on the whole of his income, rather than on the amount of his income that is over the threshold level.
The practical effect is that only those people who enjoy just below, around or just above average earnings will benefit by a £3 per week reduction. Most of the low-paid will be lucky to enjoy a £1 improvement. Most people with an income below £110 per week will enjoy a reduction of between 81p and £1.30. As I pointed out earlier, those who are earning £70 a week will be only 21 p per week better off.
445 As was pointed out in an intervention earlier, a family earning £85 per week will, after benefit withdrawals, be only 26p per week better off as a result of the Budget. Who can say that that is a Budget for the low-paid? A typical low-paid family will be in a ludicrous situation as a result of the Budget.
§ Mr. Julian Brazier (Canterbury)
The hon. Gentleman gives the right figures, but there is a very good reason for the situation that he describes. A family having an income of £1 or £2 per week less than the family he cited will be considerably better off and will enjoy the full £3 reduction. It is the anomaly of sudden steps under the existing system that my right hon. Friend's new measures are designed to eradicate.
§ Mr. Beith
Such a family will still not receive the full £3 reduction in their national insurance contribution. If they are lucky, they might be 61p better off, or £1.41 if they receive only £80 per week. Moreover, the figures I quoted took account of benefit withdrawals. The hon. Gentleman and the Government must consider more carefully the precise effects of the measures on people whom we all agree are low-paid. The Government have not achieved the objective that they set themselves.
None of the figures I quoted take account of the poll tax, increased council house rents or mortgages, higher water and electricity charges, and the loss of transitional payments for many people who depended on them after last year's housing benefit fiasco.
As the right hon. Member for Chesham and Amersham pointed out, the Government have failed to address the trade deficit problem. The Chancellor forecast a £4 billion deficit, but it is now £15 billion, and he forecast the same figure for next year. What has happened to the process by which that problem was to be cured? The Chancellor, Ministers and officials argued publicly and before the Treasury Select Committee that home demand would slacken and that resources would be applied instead to exports. However, in his forecast yesterday, the Chancellor recognised that if that process takes place at all, it will be sufficient only to maintain the trade deficit at its present level for the next year. That is inadequate, and the Chancellor should have addressed ways in which industry's competitiveness could be increased to cope with the trade deficit.
What better position could one be in than a Chancellor of the Exchequer presiding over an enormous surplus? It is ironic that the Chancellor has more money at his disposal than any of his predecessors, but he dare not spend it because of the danger of destroying confidence in so many of his previous policies.
One of the interesting points about the surplus is that about half of it is the result of asset sales. I refer to the privatisation of national industries, sales of council houses, and other disposals—much of which income should be re-invested in the economy. A business that sells off its assets looks at ways that it can re-invest, to equip itself for the future. It does not fritter that capital away, and does not necessarily use it to pay off its mortgages or existing borrowings—not if it can identify useful ways in which re-investment can help it to trade effectively in the future.
It is interesting to speculate why the forecast of the future surplus is low. Some commentators believe that the surplus will prove to be much higher than the Government 446 predict, since the Government's growth forecast is surprisingly low. One wonders whether it represents the Conservative's secret war chest, and whether the Government will use it to disburse inflationary tax increases so close to a general election that inflation will not have time to work through before polling day. The Government are certainly understating the possible future surplus. I hate to shock the Chief Secretary to the Treasury, who has a wonderful, unshockable look about him, with the suggestion that political considerations might enter the minds of Treasury Ministers.
§ Mr. David Steel (Tweeddale, Etterick and Lauderdale)
My hon. Friend said that the Budget cruelly failed to deal with any of the problems of the lower income groups. However, he has not yet noted that under the new proposals concerning pensions for those earning up to £60,000 a year, we, the taxpayers, could contribute as much as £4,800 per annum.
§ Mr. Beith
I am glad that my right hon. Friend has applied his mind to the details of that section of the Budget. I noted that those proposals might require more detailed study.
Some of the uses to which the Chancellor could and should have put the surplus would have had few of the inflationary dangers that are implicit in the tax cuts that he rightly declined to make. It would be interesting to know at what stage he decided against going ahead with tax cuts. Was it when he received the retail price index figures the other day? Was it a week ago, a fortnight ago or a month ago? Perhaps we shall never know until he demits office and writes a book about it.
§ The Financial Secretary to the Treasury (Mr. Norman Lamont)
The right hon. Member for Tweeddale, Ettrick and Lauderdale (Mr. Steel) suggested there has been an increase in tax privileges for higher-paid people. My right hon. Friend the Chancellor announced a restriction. The right hon. Gentleman has got it the wrong way round and should correct it.
§ Mr. Beith
My right hon. Friend has worked out precisely the amount by which tax relief can accrue up to the £60,000 ceiling. I am sure that we shall have a useful seminar on the details of this at a later date. I noted that the Chancellor had placed a ceiling on it, but it was quite high. Perhaps I can encourage my right hon. Friend to join me and the Financial Secretary on the Committee dealing with the Finance Bill.
I shall give some simple examples of ways in which the surplus could have been used that many people would have liked which would do some good and would have no inflationary consequences. Why did not the Chancellor take the opportunity to increase our overseas aid budget? Many of us feel that it would be reasonable to do so, and it would not have inflationary consequences. There is surely not such a desperate shortage of potential overseas aid field workers that huge wage inflation consequences would result. If we made more effort to help other countries it might result in long-term trading advantages.
Non-inflationary measures could have been taken in the home economy that would have helped to make industry more competitive, such as investment in training, in regional policy in areas where the economy is not overheated—and there are quite a number of those—and in environmental measures. The burden of such measures 447 is at present being placed on the consumer, of which the water industry is an obvious example. Skill shortages and bottlenecks in employment occur because people are unable to move to suitable low-cost housing. Investment in communications would not have been inflationary if it had been carefully tailored.
The Chancellor could have given more help to groups whose expenditure is so close to the breadline that it is the least inflationary. They will not rush out and buy imported goods, because their expenditure is so constrained that it will provide only a little extra for food and basic essentials. I heard the hon. Gentleman mutter, "Cigarettes" sotto voce, which is an extraordinary comment to make given that the Budget failed to increase the tax on tobacco.
§ Mr. Beith
I attributed it to the Financial Secretary to the Treasury, unless there is a ventriloquist on the Government Benches.
We should have had a Budget for the future, but we have a sackcloth and ashes Budget in which the Chancellor has said, "I got it wrong." The result is a Budget of missed opportunities, which does not tackle the problems at the heart of our balance of trade deficit. It does precious little for the environment and next to nothing for the low-paid.
The confident Chancellor has been replaced by the chastened Chancellor. We have yet to see the compassionate Chancellor or the constructive Chancellor. That transformation will not be achieved by the present occupant of the office or any of the prime ministerial favourites who are sometimes discussed as possible replacements for him. Indeed, I do not think that it will be achieved under this Government.
§ Mr. Charles Wardle (Bexhill and Battle)
Like my right hon. and hon. Friends and many commentators elsewhere, I applaud my right hon. Friend the Chancellor for his unequivocal warning in the Budget that inflation is the greatest threat to this country's renewed prosperity and for his clear signal that the fight against inflation will continue to be his overriding priority.
If my right hon. Friend had not adopted such an explicit anti-inflationary stance, I am certain that the international money markets would instantly have taken a jaundiced view of sterling. If they did so, it would lead, in short order, to more costly imports and upward pressure on inflation in the sort of sprial that was uncomfortably familiar before 1979. Instead, the initial response of the currency markets seems to have been firm for sterling, which seems to suggest that my right hon. Friend's message that caution is his watchword has been well received in the quarters where it counts.
No doubt the achievements of the British economy in the 1980s's, which my right hon. Friend listed in his opening remarks of his Budget speech, will have helped to remind his wider audience how far Britain has progressed over the past decade. The longest period of sustained economic growth since the second world war, substantial improvements in productivity, capital investment outpacing consumption, higher exports and a record number of 448 people in work are features of a healthy economy that must not be allowed to succumb again to the disease of inflation.
The dead hand of Socialism, state intervention and the mindless self-interest of undisciplined trade unions are things of the past. Britain is now confident enough to know that enterprise and individual ownership stimulate the creation of wealth, by which the nation can afford the means to care for those in genuine need. That is why growth in gross domestic product, reduction in national debt and greatly increased public spending have become a reality at one and the same time, and why inflation is rightly regarded by my right hon. Friend as a sinister threat that could undo so much of what has recently been achieved.
To the extent that my right hon. Friend left himself some room for tax changes, within the constraints of a balanced Budget dominated by such a large public sector debt repayment, he should be congratulated on targeting extra relief for pensioners and people on lower-thanaverage earnings. Neither group looms large in consumer spending, but both will welcome greater help.
Changes in employees' national insurance contributions are one of the most efficient ways of putting more money in the pockets of the lower-paid and alleviating the poverty trap without fuelling greater spending power among the better-off. I hope that my right hon. Friend's proposal will be the first of several steps in this direction during the remainder of this Parliament.
The earnings rule has long been an iniquitous charge on the old-age pension, which individuals have contracted in good faith with the state through regular national insurance contributions. To have that contract with the state broken and the old-age pension reduced, simply because an individual chooses to work after the statutory retirement age, has always seemed to be daylight robbery without a shred of actuarial justification. The proposal to abolish the earnings rule is long overdue. It is especially timely as the labour force of normal working age is shrinking, and active and experienced minds and hands aged over 60 or 65 will be in progressively greater demand.
The extension of the higher age allowance from those aged 80 and over to those aged 75 and above is another important move because it will bring some relief to pensioners of an age who may justifiably feel that the economic boom of the 1980s has, to some extent, passed them by. They retired a decade or more ago before the state earnings-related pension scheme was under way, so many receive no more than a token ex gratia payment from their employers, the basic old-age pension and perhaps a modest income from savings. They are just above the income support bracket and do not have an occupational pension. They are a stark exception to the Government's accurate—but in this context confusing—assertion that the average income of pensioners has risen 23 per cent. more than inflation since 1979. The average is no doubt correct, but the pensioners to whom I allude have not kept up with the average, and those who qualify for the higher level of age allowance sorely need the proposed relief.
There will be many such beneficiaries from this proposal in my constituency, who have raised families, fought wars and paid their taxes throughout their working lives without demanding a penny of social security, except perhaps housing benefit to relieve their rates bill. They deserve the extra allowance that has been proposed and I 449 hope that my right hon. Friend has it in mind to lower the qualifying age for the higher level to 70 and over before long to cater for women who retired at 60 a decade ago.
Of my right hon. Friend's other measures, the proposals to encourage wider share ownership, and the further incentives for personal savings, are welcome, but they will need to be promoted more vigorously than has been the case with previous schemes if they are to have the desired effect.
In the corporate sector, the changes in profit limits for small companies' corporation tax will provide an important stimulus for retained earnings in many developing businesses. By contrast, however, the changes in tax on company cars will no doubt be met with howls of displeasure in some quarters. I trust that my right hon. Friend will ignore the protests, because the benefit in kind of a company car will remain a substantial perk. I have no doubt that, even after the latest scale changes, the underlying benefit in kind is a significant addition to salary.
I hope the day will come when a purist approach to tax reform can be taken, with a much lower basic rate, funded by full taxation of benefits and the abolition of mortgage interest relief, which I raised in Committee on last year's Finance Bill. It would be a fairer system in the end, but, for the time being, some anomalies are expedient. Thus, in the medium term at least, tax relief on private medical insurance will serve to shift many people from National Health Service waiting lists to the private sector, to the immediate advantage of others further down the NHS waiting lists.
While my right hon. Friend's Budget proposals are suitably cautious for the uncertain circumstances that prevail in the face of higher inflation, it is difficult to ignore the external factors beyond his control, which could yet put a strain on our economic performance. Worries about the United States trade deficit, and an upward movement in interest rates in the United States and elsewhere, could yet put sterling under pressure, with inflationary consequences in this country, in spite of my right hon. Friend's determination to maintain high interest rates here as long as they are needed.
There are two other factors that I should like to mention. First, employers and employees will have to reach pay settlements within the rate of inflation if interest rates are to bite into consumer spending and into higher levels of personal debt. Higher pay settlements will simply nullify the interest rate medicine.
Secondly, it would be unwise to assume that the supply side transformation is by any means fully accomplished. The removal of controls, the shake-out of surplus labour and more flexible employment legislation have all been vital to business, but that does not mean that manufacturing industry can respond, at the drop of a hat, to the expected lower levels of domestic demand and achieve instant export gains in order to alleviate the balance of payments deficit overnight. As the House knows well, export markets are much more complex than that, and changes in business direction need rather more time for product planning and marketing than is sometimes suggested.
In order to complete the supply side transformation, the United Kingdom business environment still needs to step up a gear, with more skills training, more enterprising and internationalist management, and greater investment in research and development from the private sector.
450 Further changes are needed from the Government as well, including amendments to financial services legislation, and a much more efficient transportation infrastructure—to highlight just two areas.
Much remains to be done, but my right hon. Friend's Budget proposals address the immediate inflationary circumstances with realism. They are sound measures, which are most welcome.
§ Mr. Peter L. Pike (Burnley)
When considering the effects of this Budget, one has to take into account what the Government have done in total. One cannot isolate the Budget from the total package—the legislation that the Government have introduced and the actions they have taken over the past 10 years. This Government can no longer hide behind the Labour Government of 1974–79. They can no longer blame the previous Government. They have been in office almost exactly 10 years, and they must be prepared to stand up and defend their record—and what an appalling record it is, so far as the majority in this country are concerned.
It cannot be claimed that this is a Budget for the poor or the low earners. That would be a total fallacy. The Government must accept that they have forced people into low pay and poverty—whether they be unemployed, pensioners or, indeed, people in employment. Workers have been forced to take lower pay as a result of this Government's action over a period of years. Government Members have often said that low pay is better than no pay. While there may be some truth in that statement, I do not accept the basis on which it is made. It is time to say that fair pay is better than no pay. Fair pay and fair conditions are what we should be working for, but those things are not acceptable to Tory Members.
Let me give some examples of the way in which the Government have attacked the lower-paid over the last two years. We know what they have done to curtail the wages councils. We know what they are doing to reduce the protection afforded to some of the lowest paid. The Employment Bill, which is now going through Parliament, will result in people being denied benefit if they refuse a job on grounds of pay. Indeed, I am currently dealing with constituents who have been refused benefit because, according to the Department of Employment, under the current rules governing availability for work, they went too far by asking for £80 a week. In 1989, £80 a week is very much on the low side for a married person with a family, even in a low-pay area such as north-east Lancashire. That is what the Government have done.
In transport, let me mention the Government's competition policies. They claim that the new transport law has saved money for the country. How has it saved money for the country? By giving a worse package of conditions to the people employed in the industry. Almost all of those who work on the buses have worse conditions of employment now than they had before that legislation was passed.
Then there is the Local Government Act that was passed last year. When local authorities are compelled to go out to competitive tendering they cannot lay down any conditions with regard to conditions of employment. The sole purpose is to worsen the working conditions and reduce the pay of employees. In response to a debate in Committee, the Minister said that many local authorities 451 have to put up with restrictive practices. He said that it was appalling that people working on Sundays had to be paid double time, that competitors could get them to work for time and a half, or ordinary time, or even less. Of course there is some truth in that. The present levels of unemployment make some people willing to accept conditions that they would not otherwise accept. But that does not make it right. The Minister said that Labour Members were defending the unions and attacking people's right to work and that, in his view, that was quite appalling. So long as I am in this House—and I know that this applies to my colleagues also—I will fight to protect the conditions of working people.
The claim that this Budget will help working people is galling. A person earning £10,000 a year will be better off by £45 a year. For a person earning £28,000 a year, the saving will go up to £282. Again, the higher-paid benefit. A person on £50 a week will be £1.01 better off because of the national insurance saving. Of course, we welcome what is being done about national insurance, but it does not go far enough. A person on £600 a week will save £6.63, £1.21 of it national insurance. The Government could have increased the level at which national insurance contributions start. Yesterday, the Chancellor's excuse for not doing so was that it was a system of benefit relative to contributions, but we have always had a scale on which some people are exempt. Whether the figure is £43, £53 or £60 is something that the Government could determine. If they had wanted to take more people out of the national insurance bracket, they could have done so.
The Government could also have helped the lower-paid by increasing the single and married person's allowances more than they did. Instead, they increased them to just slightly above the minimum established by previous Finance Acts. This is not a Budget for the poor or the low-paid.
Since 1979, £23 billion has been handed out to the top 1 per cent. of taxpayers. Combining this and last year's Budget, the top 5 per cent. of taxpayers have had more handed out to them than the lowest 70 per cent. put together. That may be justice and equity for the Tory party but it is not for the majority of people.
Next month, the people of Scotland will pay the poll tax for the first time, and next year it will come into force in England and Wales. I accept that there are many anomalies in the present rating system, but the poll tax replaces a system that has existed for many years with a tax that is dearer to collect and has no fairness or equity because it does not take into account ability to pay. That must be wrong and it must be condemned. I am sure that the Government will find that the British people overwhelmingly reject it.
Some 200,000 pensioners on income support, who were on supplementary benefit before the changes introduced in April 1988, will receive no increase. The protection that they enjoyed last year, and will enjoy again this year, means that they have not suffered a cut in cash terms, but, with inflation running at 7.5 per cent. and having increased last year, they are now at least 10 per cent. worse off in real terms than they were before April last year.
A further 300,000 pensioners on income support, who were on supplementary benefit before April last year, will not receive a full increase this year, although they will 452 receive something. Those in receipt of housing benefit transitional payments will also find that they will not receive the full uprating of benefit. They will not be very happy with a Budget that is supposed to be helping the lower paid and the poorer people.
We know that the increases in mortgage interest rates have affected many people purchasing their houses over the past year, and we know too how the Government's policies have affected rents. In 1979, my local authority in Burnley received a subsidy of £1.6 million to help those renting their houses, but for the past few years it has received nothing. That shows clearly where the pressure to increase rents comes from.
One factor that will soon have to be taken into account in considering whether people are eligible for the full housing benefit is whether they live in a bigger house than they need. An elderly couple living in the four-bedroomed house in which their family grew up may not wish to move. They will not recieve the full housing benefit because they will be deemed by the Government not to need such a big house. That may be true, but at the end of the day the Government talk of choice. People will not welcome the removal of their choice to continue to live in the house that they have lived in for many years.
When the Government talk of choice they link it with the ability to pay. That is the big qualification. What we should be talking about is opportunity—the opportunity for people to have decent education, decent housing and a decent Health Service, regardless of their ability to pay. It is particularly important that children should not have their educational rights limited because of the inability of their parents to meet the cost of student grants, or loans, as they may be in the not too distant future.
I welcome the tax concession on unleaded petrol as a move in the right direction. However, if the Government were serious about protecting the environment, they could have increased that figure. They claim to be the green party, concerned about the environment, but profitability and cost always come first for the Conservative party. They will always be overriding factors whatever is being considered.
When we consider the Water Bill, currently going through Parliament, the quality of our bathing water and beaches, the deterioration of river quality and our drinking water quality, which fails to meet the EEC guidelines, we know our failures. If the Water Bill is to be enforced through the National Rivers Authority, there will be a considerable improvement, but there have already been derogations and concessions to allow more time.
The Government know that nobody will invest money in the water industry unless they write off considerable amounts of debt and considerably relax the limits on the time allowed to deal with the problems of pollution to ensure that we bring our water, rivers and beaches and sewage treatment works up to the required standard. Unless the Government fiddle the figures and dodge the issues, they know that people will not put their money in the industry. That is why the Government announced yesterday that people will be able to put some of the money in their personal equity plans into the privatised industries. They have to do everything possible to persuade people that that is where they should be putting their money.
The Government have a surplus of £15 billion, but they are unable to deal with the problems of our water, rivers and waste tips. The Select Committee on the Environment was unanimous in its report published last week that it was 453 a miracle that we had not had a disaster as a result of contamination, or an explosion. That is a failure of Government. The Government will not take enough action on chlorofluorocarbons and all the other issues, because for them money is the most important thing.
Manufacturing industry still has a massive trading deficit—the £3 billion surplus in 1979 has become a £20 billion deficit. At the end of the day, the manufacturing industries are Britain's bread and butter. We must get our manufacturing industry into surplus if Britain is to have a future—that does not mean that I dismiss the importance of the service industries and tourism—they are important and we want to develop them and do well from them—but at the end of the day manufacturing is our base and our future depends on it. That is what our past was built on and we must get it right. There is no way in which the Government can do that because they do not believe that it is their problem. Until they recognise the problems of manufacturing industry, we shall not find the cure.
An increase in interest rates from 7.5 per cent. to 13 per cent. affects investment in manufacturing industry and its ability to compete abroad. Energy costs are rising again. There is to be an increase in electricity charges in excess of 6 per cent. That is at a time when the price of coal and other costs have been going down, and when the cost of energy, in relative terms, for industry should have been reduced. One of our industrialists' biggest anxieties is not wages or rates but comparative energy costs, which are far higher in Britain than elsewhere in the EEC, and they are being deliberately forced up again by the Government. In addition, a 22 per cent. increase in water charges is to be imposed by the private statutory water undertakings. The Minister said that they were already private. So they are, but they are controlled under different legislation than will be the position when the Water Bill is passed. The statutory water undertakers were asking not for 22 but 50 per cent. until the Minister intervened.
§ Mr. Pike
That claim is exaggerated, and, being a Lancashire Member himself, the hon. Gentleman must know that our area has a history of good industrial relations. Yet Burnley, in north-east Lancashire, is the fastest shrinking town in England. It has lost 9.7 per cent. of its population because of the decline in manufacturing industry. People are leaving to look for jobs and we have many empty houses. The same applies to Pendle, Rossendale, Hyndburn and other places in north-east Lancashire.
In the way that people moved in the 1930s, so today people are moving from Lancashire to seek work in those areas which the Government are encouraging and developing. We want more jobs brought to our areas. The Government must have a positive policy of direction of industry, with proper regional policies. We must have good communications by road and rail to encourage investment in north-east Lancashire and the north-west.
We can have no optimism on that score in view of what the Conservatives did when they came into power in 1979. Having brought about industrial closures, they then created a consumer demand, which we then were unable to 454 meet. To meet it, we had to suck in exports. We are still doing that, and the process will continue until we enlarge our own manufacturing base.
While investment is slightly ahead of what it was in 1979, there are exceptions in some parts of the nation. We have had a low rate of investment for the last 10 years in manufacturing industry. We shall have to pay the price for that in the coming years, and the Conservatives will be held responsible for that.
In constant terms, output in the north-west is 19 per cent. down. It now stands at £7.453 million, compared with £9.171 million in 1986. Investment is 38 per cent. down over the same period. Indeed, in the year 1985–86 there was a drop of 10 per cent. in investment in the north-west, that despite the fact that the north-west and Lancashire is a key manufacturing region in which we should be investing. Employment in manufacturing industry fell by 38 per cent. between 1979 to 1986. About 34 per cent. of the total work force in 1979 was engaged in manufacturing industry. By 1988, that had fallen to 23 per cent.
The EEC announced recently, under objective 2 of its regional economic development fund, wide extensions of areas for benefit, and today most of Lancashire and large parts of the north-west are covered by objective 2. That state of affairs has come about because of the failure of the Government to develop the regions to their full potential. In addition, the whole of Northern Ireland is covered by objective 1 of the EEC's regional economic development fund plans.
We have the largest share of objective 2 money of any EEC country, with 20 million people in the United Kingdom living in areas receiving objective 2 assistance. In other words, 39 per cent. of the Community population eligible for this assistance live in the United Kingdom, plus those who live in Northern Ireland coming within objective one.
We must ensure that those funds from Europe reach their target. The British Government must not make that money subject to additionality, so that we finish up losing Government resources in the way that has happened in the past. It must be additional money. The areas concerned must benefit, and the Government must not take it from them.
Considering that the Government had a surplus of £14 billion, one wonders why they have not done more to tackle the many housing problems that exist. Five areas in my part of the world—they are not all Labour-controlled; one is Conservative and one is Liberal—Burnley, Pendle, Rossendale, Ribble Valley and Blackburn, had an HIP allocation, in constant terms, of £59,730,000, but their bid in 1979 was for £67,916,000. That represented 83 per cent. of the bid. The bid for the current year for those areas is £47,709,000, and they are getting £9,900,000, or only 21 per cent. of the bid. They have appalling housing conditions and need a great deal of money to effect improvements. That is an indictment of the Government's record, particularly in view of the enormous surplus available to them.
The Chancellor is in a cleft stick. He dare not allow inflation to rise, so he cannot spend money where it should be spent. The Government are failing all along the line. That will continue to be the story until we have a change of Government and a new Chancellor.
For its inner-city programme, Burnley received in 1988–89 £1.8 million, and in the current year it is receiving 455 slightly more, £1.89 million. But that represents a cut in real terms. The eight areas in the north-west received £43,250,000 in 1988–1989, and collectively they will be receiving, in 1989–90, £42,903,000, yet the Government have declared that they want inner-city improvements to be a priority.
The Government announce new schemes and produce glossy booklets about the inner cities and so on, but as the booklets become more glossy, the packages have less content, and the problems continue to exist. When they give local authorities money to deal with local problems, they are really only returning to those authorities a fraction of what they have taken from them in the last 10 years.
Lancashire put in a bid for £34 million for its educational capital expenditure. The area is committed to spending £16 million on schools alone, yet it received an allocation of only £13.5 million. School buildings remain in urgent need of repair, yet it is well known that investment in schools has a strong bearing on the education of our children.
My area sought £27.5 million for roads expenditure, but received an allocation of £12.82 million. All around us we see decay and decline as a result of the Government's failure to tackle the transport and other problems of communication. Conservative Members may not like to hear these facts, but they are true, and they will ensure that, when the next general election takes place, the people will vote for a party and for policies which will tackle these problems and ensure that people have a decent standard of living and a fairer deal than they will ever get under Toryism.
A wind of change is blowing across the nation. People throughout the country can feel it. Only Conservative Members fail to recognise its existence. Many of them occupy marginal seats. I advise them to seek safer seats or to look for other jobs. They might then make a better contribution than they are making in the House to the well-being of the British people.
§ Mr. John Biffen (Shropshire, North)
As I listened to the hon. Member for Burnley (Mr. Pike) I began to fear that indignation would inhibit peroration, but I was delighted that we were taken for a tour. The hon. Gentleman demonstrated in graphic form the values and judgments by which he hopes to fight, and triumph at, the next election. This is a Budget that is necessarily related to that future election, so we should not in any sense be self-effacing but should put our value judgments before the House, even at this early stage.
I know that there is great potential pedantry about considering Budgets present and Budgets past and I should like to make a passing reflection. Last year, when we had a Budget, we had evident and emerging inflation. We had a substantial Government surplus and a most ambitious range of direct tax cuts which, it was alleged, would be non-inflationary because of the absence of a Government public sector borrowing requirement. This year—the stage is reasonably familiar—we have established inflation and an even greater Government surplus, but there has been a delicacy, a development, a nuance. No longer are we given the prospect of substantial tax cuts to 456 give emphasis to supply side economics. We are told that they must be reined back almost in their totality to secure a more progressive addressing of inflation.
I welcome these changes. I have no wish to be personal, but I feel as though my mere rowing boat were taking on the full complement of the Titanic. Make no mistake, the House is being asked to consider a redirection of economic policy—in a direction that is welcome but none the less offers clear prospects and disciplines to both sides of the House about the development towards a general election. There is an initial stage, which is the business of dealing with inflation at a high and challenging level and which will require compelling and consistent policies. That initial challenge successfully surmounted, we come to the second stage—how the two sides of the House will consider the use of a Government surplus which is not intended to be permanent and which exists for use in public spending, taxation and reassessed debt repayment, all of which will engage judgments that are central to the conduct of the next general election.
Opposition Front-Bench Members agree in their hearts with every word I say. What was fascinating about the speech by the right hon. and learned Member for Monklands, East (Mr. Smith) was not that it had all the advocate's professionalism but that it did not say, "Here is a cautious Administration which has the capacity to use 1 4 billion to regenerate the economy and bring about higher levels of activity and lower unit costs, thus having an impact on inflation." There was none of that. The right hon. and learned Gentleman knows perfectly well that he would like to sit this one out. He would like to be around to benefit from the inevitable difficulties that arise in reducing inflation. The right hon. and learned Gentleman is taking no view on the £14 billion surplus which is to be used for accelerated repayment of the national debt.
The right hon. and learned Gentleman shows good strategic sense. He leaves it to the hon. Member for Burnley—I hope that the hon. Gentleman will not leave the Chamber when all these plaudits are to be heaped upon him—and the hon. Member for St. Helens, North (Mr. Evans) who had a litany of public spending increases which they thought were instantly appropriate to deal with the current position and which were made plausible by the existence of a £14 billion Government surplus. We have been given a useful insight into the Opposition's tactics over the coming months. On the Front Bench there will be sobriety and moderation of the most impeccable kind while the rough stuff will be delegated to the franc-tireurs from the Back Benches who will argue without inhibition the true causes that they champion.
I should like to speak about the two facets of the Budget position—inflation and the Government's surplus. My right hon. and hon. Friends should be under no illusion that the present inflationary climate is serious and that its overcoming does not invite analogies with soft landings. Such analogies induce a sense of good-natured optimism about the quality of Front Benches and the general nature of good luck in public life, and on the whole are matters that we would do well without.
At 8 per cent., the inflation figure is much higher than anyone would have forecast a year ago. I take no view as to whether the Treasury is optimistic in the downward trend that has been predicted. I notice that today in The Times Mr. Tim Congdon, who probably has as good a track record as any commentator on these affairs, has written: 457all previous cyclical experience is that, once a credit-driven boom has started, it takes much longer than expected to bring inflation under control.We could add to that from our anecdotal experiences.
I believe—I realise that this will not be accepted by the hon. Member for Burnley—that the labour market today tells us the story not of the 2 million unemployed, with its echoes of the 1930s, but of high levels of activity in the economy and emerging shortages of labour throughout the country. As Government statistics are somewhat at a discount these days, certainly for the Opposition—[Interruption.] well, "Whom God hath joined …"—I shall quote from the fourth quarterly survey of the Association of British Chambers of Commerce, which said:It is therefore abundantly clear that skills and labour shortages are widespread and not at all confined to the South East.I understand that interest rates are the primary weapon of my right hon. and hon. Friends—it is a distinguished Treasury Bench at present. I fully understand that that has serious economic and political short-term consequences; none the less, it is the central weapon, and I believe that they are right to make it such.
I recognise that there are always siren calls about physical controls of credit, but those calls are generally made in headlines and not in footnotes. I suspect that such physical controls are inoperable as an adjunct to my right hon. and hon. Friends' monetary policy. They are unwise, none the less, to give any credence to the cruel jibe that the Chancellor has only one club in playing this game of golf—a point made last year. Therefore, I ask, what gilt funding policy will they pursue in the context of a £14 billion debt repayment, since this could well supplement interest rate policy? I hope that, before the debate is through, they will say how they interpret that situation and opportunity.
Let us consider the challenge that both parties will face come the next general election, when we shall have to decide how to present our cause and our aspirations to the public we serve. We do not know how long it will take to bring down the rate of inflation. I think that the process will be slower rather than quicker, although it is in the interests of all of us—economic as well as political—for the process to be as quick as possible. Having said that, I assume that, by the time of the next general election, there will be a genuine public debate about what we should do with a public sector repayment figure of something like the magnitude that the papers issued with the Budget suggest.
The background against which we shall fight the next election, which I assume will be in 1991, will not be the same as the background to the previous election: 1991 will not be a re-run of 1987. Let us not think that inflation will have abated only to allow a recrudescence of the consumer boom. The social and political atmosphere will be quite different, and I think that there will be a stronger case to be made for the Tory tradition of social spending than hitherto.
I yield to no one in my commitment to market economics and economic liberalism, but I have always regarded that as part of a balanced ticket—with the mechanics of wealth creation on the one hand, and what we do with wealth in the public sector on the other. A public sector policy does not undermine the free enterprise ethic—indeed, it sustains it, because we live in a society in which there is the expectation of public collective provision in social policy. I shall choose only two examples— 458 education and health. I have studied the spending plans for 1989–90 to 1991–92, elaborated in Cmnd. 621. A look at the planning totals in real terms shows that for the National Health Service the increase is about 5 per cent. and for education there is no increase. We have in prospect a chance to remedy that. We have in prospect a chance to preach a message of collective provision and investment which stands in the long tradition of Tory Chancellors and Tory Governments.
My right hon. and learned Friend the Secretary of State for Health will have a great role to play in all this. He has taken to phrase-making—always a high-risk strategy for a politician to adopt. He talks of "wallet-reaching". The people who will have to do the wallet-reaching for the Health Service before the next general election are Treasury Ministers, and that attitude will have to be broadened to cover other aspects of social policy, including infrastructure and education. I must say to the Government and to my hon. Friend in general that if in 1991 we are not inspired in social policy by one-nation Toryism, that if we do not master the language, rhetoric and reality of one-nation Toryism, the nation will master US.
§ Mr. John Battle (Leeds, West)
It seems to me that the Government rely on image and presentation. Their idea seems to be to create an initial impression—before the facts have been checked—and hope that it will stick later. No one will have been left with the impression that the social spending to which the right hon. Member for Shropshire, North (Mr. Biffen) referred has started with this year's Budget. The Budget was heralded in the press as a Budget for the low-paid and pensioners. The impression has been given that, although the Government did much to help the richest last year, it will be the turn of the low-paid and the pensioners this year. That argument is belied by the facts of taxation changes, compounded with social security changes.
We have made a start, at least. The Government now actually accept that low pay exists. I served recently on the Standing Committee on the Social Security Bill. It was with some difficulty that we convinced the Minister that some of the pay on offer in Britain is incredibly low by modern standards and by the standards that we ourselves would be prepared to accept. When I pointed out that in my constituency £2 an hour and less was being offered for some jobs and my hon. Friend the Member for Birkenhead (Mr. Field) gave similar figures, the Minister asked the civil servants to telephone the jobcentres to check whether our figures were correct. He did not believe them. Those figures have been confirmed. Nearly a third of the work force—9.9 million people—earn less than two thirds of the average wage.
We ought to scotch the rumour that this is the Budget of the low-paid and the pensioners. The Chancellor sets his speech in the context of the medium-term financial strategy. A two-tier economy is developing as a result of that stategy. On the one hand, we have those in relatively secure, reasonably paid work who may receive decent pensions while on the other we have those in part-time, temporary, low-paid work. The Budget serves to reinforce that divide in the economy.
We need to challenge the media myth that one can tackle poverty simply by reforming the national insurance 459 contributions. The changes will not put an end to wage bunching just below the threshold, because what people will gain in earnings through the national insurance changes they will lose as they lose their entitlement to benefit.
The Government say that the Opposition have no policies. We are entitled to ask them why they have failed to do as we suggested and turn the national insurance earnings limit into an allowance. That would go somewhere near to breaking people out of the poverty trap. I note that the Chancellor steered clear of increasing allowances by any more than he was legally obliged to increase them. The Chancellor tells us that he has taken from us more than he needed but that he dare not give it back because he is scared of the effect on inflation.
Let us consider in detail the changes in national insurance contributions. Anyone earning more than £43 a week must now pay 2 per cent. in national insurance on the first £43 and 9 per cent. on earnings over that amount. It has been suggested that a step-by-step gradation is being replaced by a straight line. In fact, the earnings of low-paid workers—especially women who work part-time—will still be bunched at £43 a week and below, but they will not now be entitled to essential benefits such as maternity allowance, family credit, unemployment benefit and housing benefit. In other words, they will lose as a result of the changes. Moreover, as employers' national insurance contributions have not changed, employers will still want to keep wages below the national insurance contribution threshold. The Chancellor's national insurance reforms will give less than £1 to 5 million people earning less than £100 a week.
Our proposals for an allowance system would have nearly doubled that gain. But the injustice is perpetuated because those earning more than £15,800 will continue to pay no extra national insurance contributions on anything they earn over that amount. Last year's injustice, whereby the rich gained the most and the poor gained the least or lost out, remains built into this year's Budget. The unemployed, pensioners living on the state pension and women receiving child benefit gain nothing from the Budget. It is worth reminding the Chancellor that 48.1 per cent. of female manual workers in full-time employment earn less than £100 a week. According to the recently published new earnings survey, the bottom 10 per cent. of the earnings distribution now receive only 31.3 per cent. of the gross weekly earnings of the top 10 per cent. compared with 42.3 per cent. in 1978.
The proportion of male full-time workers earning less than the Council of Europe decency threshold has doubled since 1979. It is notable that, although the Government use the rhetoric of Europe and 1992, they are not yet prepared to accept the Council of Europe decency threshold of two thirds of the average wage as a means of assessing low pay. More than 50 per cent. of adult women in full-time employment earn less than that decency threshold. The tax burden of a married couple on three quarters of average earnings has increased. The figures that Ministers have given in answer to questions in the past weeks and months demonstrate that, although the Government have refused to acknowledge it.
Many people in Britain earn well below the average wage of £254, around which the Government base their 460 figures and statistics. Not only are the earnings of the lowest-paid male manual workers lower compared with the average wage than they were in 1986, but the Government's failure to uprate personal allowances and thresholds by earnings levels means that an additional 160,000 families on low incomes will pay income tax. That is the economic reality of the Budget. Those people will be brought into tax because the Chancellor has done nothing to tackle the inequitable nature of the income tax structure. With a mere two bands the Government are perpetuating the injustice of a tax system operating on a huge ratchet mechanism—those at the top of the ladder get the most every time there is a step up. That has not been changed.
The Government's failure to enmesh the tax system with the benefit system through the eligibility of those in low pay to family credit and housing benefit is surprising. It is a classic case of giving with one hand and taking away with the other. Because means-tested benefits are based on net income, any rise in net income will reduce the total benefits received, so that tax cuts have little or no effect on the poverty trap as people lose access to benefit. As the Chief Secretary to the Treasury conceded in reply to my intervention, what is offered as a teaspoonful of aid will be meaningless as the Government's hand seems to be around the windpipe of the main benefits structure so that people lose.
On 10 April there will be effectively another Budget—the budget for the poor, in which benefits will be uprated by 5.9 per cent. That increase is below the inflation figure that the Government have accepted in the Budget. In two weeks' time poor people will be worse off as a result of the Budget.
To tackle low pay and end the poverty trap, we need to raise non-means-tested benefit. What could be better than raising child benefit instead of freezing it year after year in the hope that it will eventually fade away? That is the best means of tackling family poverty. Another way of tackling low pay and ending the poverty trap would be to ensure that basic wage rates increase in relation to the average wage and are not so low that people need to claim benefit to supplement them.
I do not believe that the Government intend to eradicate low pay. The Chancellor referred to the Social Security Bill, but he did not refer to the fact that the central aim of that Bill, which has completed its consideration in Committee and will soon return to the House, is to force people to accept any level of remuneration however low or they will lose access to unemployment benefit. The Bill states that the level of remuneration will no longer be a good cause for not accepting a job. That is a charter for a low-wage economy.
§ Mrs. Alice Mahon (Halifax)
I am sure that my hon. Friend will recall that I told him that home workers in my constituency earn as little as 24p an hour packing Christmas cards, yet those Christmas cards were being sold in Woolworths for £1.69 a pack. That is the reality of the Chancellor's strategy for low pay.
§ Mr. Battle
It is worth reiterating that 24p an hour is being offered for hard work, not light work. That is a scandal and a disgrace.
The principles of the Social Security Bill will mean that people will no longer be classed as unemployed. In case hon. Members think that unemployment is not an issue in 461 the Budget, paragraph 3.04 of the Red Book states that employment is unlikely to rise. That can only mean that unemployment is expected to rise. That is the underlying strategy in the Budget, which is based on the fact that unemployment will not continue to go down but will rise. But unemployment will no longer be seen to rise, because those who do not accept low-paid jobs will be taken out of the system altogether. There will be no cost to the state in increased social security payments because the state will not pay. As has happened before, unemployment will become a tool to force people into work.
America now has its lowest unemployment ever, 5.1 per cent. What is the response? There is no celebration that people are finding jobs and contributing to society. The response is that there was an emerging skills shortage. Conservative Members have used that phrase this afternoon. In their terms it means that there may be increased wage demands which they see as inflationary; therefore, there has to be a pool of unemployment to drive down wages. That is the basis of the Government's strategy in the Social Security Bill, which is not about raising benefit but about building low pay into the benefit structure.
The Government's intention will be reinforced by the dismantling of the wages councils, which offer only minimal wage conditions. It is worth reminding the House of the figures. In the clothing and textile industry, the wages council level has been set at £1.99 an hour for some years. In Bramley jobcentre, in my constituency, job machinists are offered work at £2 an hour—1p above the wages council minimum. What will happen when the wages councils are dismantled? Does anyone imagine that the wages of job machinists will go up? Of course they will not; they will go down. The Government's real contribution to the low-paid will be to price more people into low pay and trap them in the part-time, low-paid temporary sector of the economy.
Contrary to what Conservative Members have said, the great weakness in the Budget is that there is no ending of the tax on child care—the one thing that would enable women to take full-time, permanent and relatively secure jobs. Women will still be trapped in part-time, temporary and low-paid work. It is not, as one journalist reported this morning, that the Chancellor'sconscience has caught up with him".However, the unemployed and low-paid who are forced to pay the price for the Government's policies will catch up with his conscience.
The majority of pensioners have not gained from the Budget. If the Chancellor really wanted to help pensioners, he would remove the £8,000 ceiling on savings for pensioners on housing benefit, which not only acts as a disincentive to save but means that they lose their housing benefit. If the Chancellor had restored the link between the rise in pensions and earnings, and pensions had risen at the same rate as inflation since 1979, from 10 April a weekly single pension would now be worth an extra £9.70, and that for a couple would be worth an extra £15.45.
Pensioners in our society who depend on state pensions have been short-changed for years. I received a letter from a pensioner in my constituency which said:If you are unlucky enough like me to be 68 and on income support you get the increase on your little pension (I don't get a full pension), straight away your income support withdraws it from you so you are back to square one … Seems to me 462 Sir that those who have have more, people like myself and goodness knows there are plenty of us, will still have to struggle.That is the equation—pensioners feel that this is not their Budget because they will be back to square one when the impact of the changes in social security and the changes in the Bill are taken into account.
The Budget contains proposals and changes for those approaching retirement and for those in work who will benefit from the incentives and the subsidies to private pension schemes, which undermine the SERPS that we talked about earlier. However, pensioners, and those approaching pensionable age, without jobs, and those in part-time, low-paid work who do not receive pension back-up will simply suffer a decrease in state pension. Therefore, I respond with some cynicism to those who say that pensioners should be allowed to work longer. It may well be that pensioners on state pensions will have to work a lot longer.
§ Mr. Ian McCartney (Makerfield)
Is is not true that, later this week, a fuel tax will probably be imposed on pensioners—an unnecessary 6 per cent.-plus increase to pay for the privatisation of the electricity industry? Is it not a disgrace that such a tax should be imposed on pensioners, and that those charges do not appear in the Budget? The Government obviously hope that the general public will not notice that the tax has been imposed on them.
§ Mr. Battle
My hon. Friend is right to remind us of that. We face rises in the charges for electricity, gas, water and medical prescriptions. In the last year we have seen the introduction of charges for sight tests and visits to the dentist which were all well above inflation. They will all have a particularly harsh impact on people—including pensioners—who live on below-average incomes.
The Chancellor suggested that we had enjoyed one of the longest periods of strong and steady growth, but he has not chosen to ensure that pensioners have a decent standard of living in their retirement. Surely they are entitled to that. Even with present economic growth, the Government cannot sustain their promises for transitional payments of housing benefit.
It is a marketing myth to describe this as a Budget for the low-paid or pensioners. The right hon. Member for Shropshire, North said that we should return to the Tory tradition of social spending. Such a tradition certainly does not start with this Budget. The people who will have to pay the price will do the arithmetic and work out that they have been short-changed by the Budget and the Government. They will know that the Chancellor had to introduce such a Budget because he needs a low-wage economy to be built under the structure of the upper-tier economy.
The buzz word of the Budget is "prudence". In the Oxford English Dictionary, that word is defined as theability to discern the most suitable, politic or profitable course of action".We should underline the words "politic" and "profitable". The Budget will certainly be profitable for insurance and pension companies, and it was certainly a politic Budget, geared towards the bribes that will be offered in the way of tax cuts in time for the next general election. In practice, the Budget may well consolidate the marginalisation of the poor by squeezing them out by means of the tax and benefits system.
463 On the BBC's "Newsnight" programme on 30 July 1985, the Prime Minister said:I do feel very strongly indeed that people on comparatively low wages and pensioners pay too much tax.That concern has not percolated through to the Chancellor's Budget, and the Government should not try to pretend that it has.
The people who are being made to pay the price for the Government's approach to the economy cannot and will not be deceived and, when they get the chance at the next election, they will ensure that this Government pay the price.
§ Sir Anthony Grant (Cambridgeshire, South-West)
The hon. Member for Leeds, West (Mr. Battle) made a sincere plea for the lower-paid and pensioners, and the House always listens with great respect to a sincere plea for the less fortunate in our community. I am sure that the Treasury Ministers will heed what he said. Certainly, his remarks about pensioners struck a chord with me. I agree that this is not a Budget for the lower-paid but it is prudent, sensible and in the nation's interests.
As all my hon. Friends who have spoken have said, I think the top priority must be the curtailment of inflation—the curse which inflicts everyone and everything in our society. The debate began with the customary vigour of my right hon. Friend the Chief Secretary to the Treasury. He is one of the best Chief Secretaries that I can recall in my time in Parliament. I hasten to add that he follows the distinguished precedent of my right hon. Friend the Member for Shropshire, North (Mr. Biffen).
Although we realise that public expenditure is dealt with at a different time, it is fair to pay tribute to my right hon. Friend the Chief Secretary. He has succeeded in reconciling the various voracious interests in public expenditure among the different Departments because of his skill and particularly pleasant personality.
My right hon. Friend the Member for Shropshire, North—to whom we always listen with great interest and with whom I always seem to debate—is a most interesting man. We have been friends for a long time and I am sorry that he has left the Chamber. Following discussions that we used to have during the Wilson Administration and that of my right hon. Friend the Member for Old Bexley and Sidcup (Mr. Heath), I never thought that I would hear him making a strong plea for further public expenditure. However, he is a percipient and far-sighted man—no other hon. Member could give a more long-sighted view of the future than he, and he may well be right. His views will certainly be carefully considered by Treasury Ministers.
I said that this was a wise and prudent Budget. Let us look at the background. We need to go back to the famous black Monday, when stock exchanges throughout the world slumped, with Governments as well as City institutions showing excessive nervousness. The fire was fanned by the media, which tried to paint the inaccurate picture of a second Wall street crash. There were worldwide and hysterical fears of a major recession, and interest rates were brought down by too much. My right hon. Friend the Chancellor himself admits that, although he had to follow the trend, that was an error.
Next came the failure of the BP flotation. The building societies were awash with money, which boosted the 464 housing market and fuelled inflation. I do not believe that the tax cuts in the 1988 Budget were the cause: I supported them at the time and still believe they were right. Although I appreciate that my right hon. Friend cannot reduce taxation in the present circumstances, I hope that the impetus for a reduction in direct taxation, which has been the main theme of this and previous Conservative Administrations, will be maintained. As I said last year, I can see no moral or merit in taking vast sums from a vast range of people, sloshing it around expensively in Government bureaucracy and then doling it out to whomever clamours loudest. That should not be part of the Government's philosophy or of that of society as a whole.
Although dull, this Budget is wise both tactically and strategically. Within the constraints in which he has operated, my right hon. Friend has been able to find room for some helpful measures, but I shall touch on only two. The first is the encouragement of wider share ownership. I was a founder member of the movement for wider share ownership 20 or 30 years ago. In those days, we had the support of Labour Members: the present Lords Lever and Houghton were enthusiastic members. That Labour enthusiasm, however, has diminished over the years. Wider share ownership was never very fashionable, but my right hon. Friend has picked up the theme probably more than any previous Chancellor, and I am glad that he has found himself able to help the cause in his Budget. I also welcome the improvements in the personal equity grant, which had got off to a rather dull start and was not taken up as much as it should have been. My right hon. Friend has improved profit-related pay and, in particular, employee share ownership schemes.
The hon. Member for Berwick-upon-Tweed (Mr. Beith) thought the additional incentives for people to join personal equity plans rather inadequate. Let me point out that the annual amount that can be invested—provided that it is invested in unit and investment trusts—has been quadrupled. I do not call that puny: I think it very encouraging.
§ Mr. McCartney
In his analysis of wider share ownership, perhaps the hon. Gentleman will tell the House whether he believes that the Chancellor should have made a statement about compensation for my constituents and others who took the Government's advice and put all their pension savings into firms such as Barlow Clowes and other City bucket-shop operators. Having lost tens of thousands of pounds, they are receiving no public redress for advancing their position in the share-owning democracy on the Government's advice.
§ Sir Anthony Grant
I share the hon. Gentleman's view. I too have constituents who have suffered from the Barlow Clowes fiasco. I am afraid that there will always be—I must choose my words carefully—people who are unsatisfactory for others to invest in, but there is always a certain number of casualties. I hope that I too brought pressure on the Government: I certainly thought that they should share some responsibility, and welcomed the news that the ombudsman was to look into the matter. I hope that reasonable redress will result from that.
§ Mr. McCartney
The Government launched a BP share repurchasing exercise because of the state of the market. Given that they felt that that was the correct response, should the Chancellor not use some of the £15 billion in his coffers to assist those pensioners, some of them now destitute, to provide redress?
§ Sir Anthony Grant
I do not want the Government to become involved, because when they do they get into a monumental mess. That is one of the reasons why I tend to agree with the hon. Gentleman about Barlow Clowes. The less the Government have to do with such matters the better, which is why I support privatisation.
My right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) spoke of the importance of the manufacturing base. Although I do not suggest that it will necessarily make a huge difference, I believe that the encouragement of worker participation and wider share ownership can make a useful and worthwhile contribution. Enthusiastic National Freight Consortium workers made substantial sums on the corporation's flotation, which they richly deserved, and I should like that to be extended throughout manufacturing industry.
It is important to get such schemes across to the public. Let me. a suggestion, because sometimes schemes are announced in the Budget and then forgotten. Ministers—not necessarily Treasury Ministers, but certainly Trade and Industry Ministers—constantly, I hope, visit companies all over the land. I suggest that when they go in to see the company chairman—after they have been adequately refreshed in the boardroom—one of the first questions that they should ask is "What is the company doing to encourage employee share ownership schemes, personal equity plans and profit-related pay?", and they should draw his attention to the improvements that have been made in the Budget.
I also welcome the encouragement of small firms. Small firms are one of my pet causes. I was Minister responsible for them at a time when they were not fashionable. They are now very fashionable and I am glad that my right hon. Friend has helped them with his changes in corporation tax, as they have been hit hard by the increase in interest rates. Having welcomed the simplification in VAT over the years, I was very pleased that my right hon. Friend lifted the VAT threshold for small firms to the EEC maximum.
I am glad that my right hon. Friend the Financial Secretary is on the Front Bench, as I know that he is interested in this subject. The VAT threshold of £23,600 is ludicrously low. Very small firms earn that amount; for such firms—often run by a husband and wife, or indeed an individual—to have to go through all the panoply of formfilling, Customs and Excise inspections and so forth is an undue burden, even with the simplification of VAT. I make this plea to my right hon. Friends in the Treasury: will they please continue to press the EEC to show some common sense? The EEC is supposed to believe in small and medium-sized enterprises; this is one way in which such enterprises can be encouraged. If the level is lifted—to £50,000, £100,000 or whatever—it will be a tremendous boost for the small firms sector.
This is a throughly sensible if dull Budget, and is in the interests of the nation as a whole. I certainly support it, and, more important, I believe that it will be supported by all sensible and thinking people.
§ 7.9 pm
§ Mr. William Ross (Londonderry, East)
I listened with interest to the speech of the right hon. and learned Member for Monklands, East (Mr. Smith). Whenever he accused the Government of being responsible for the 8 per cent. inflation we are now facing, I thought back to the performance of the previous Labour Government in the 1970s. I came to the conclusion that at that time neither he nor his right hon. and hon. Friends would have been so willing to accuse the Labour Government of being responsible for the inflation we were living through. I was rather surprised that his comments were not challenged instantly by the Ministers on the Treasury Bench. However, perhaps the Chancellor was remembering the comments he made yesterday. In a rather throwaway line he said that inflation was now fairly widespread and he seemed to be using that as an excuse for the inflation we are now facing. It is in direct contradiction to his comments in the 1970s when he said that inflation was the direct responsibility of the Government of the day.
§ Mr. Andrew F. Bennett (Denton and Reddish)
Will the hon. Gentleman accept that during the 1970s there was a massive world oil price increase, together with an increase in other commodity prices? That was the problem with which the Labour Government had to grapple and with which by 1979 we were coming to terms. Yet the first act of this Government was to increase VAT and start the inflationary spiral again. Today we do not have world pressure on prices. In fact, oil prices are falling, so there is no excuse, except the Government's actions, for the present inflation.
§ Mr. Ross
If one really wants to look for excuses, they can always be found. The hon. Gentleman's comments about oil prices are true. Today, as far as I can discover, in real terms oil prices are only about 60 per cent. higher than before the first oil price shock. I will leave the hon. Member for Denton and Reddish (Mr. Bennett) to argue that point himself if he catches your eye, Mr. Deputy Speaker. I will let the hon. Gentleman defend the previous Labour Government and let the Government of the day demolish that argument if they see fit.
There are several things in the Budget we should all welcome, not least the £1 billion give-away in relation to the changes in national insurance contributions. However, I am curious about whether we are seeing the first timid steps towards amalgamating the national insurance contributions and the general income tax structure. I appreciate what the Chancellor said yesterday about the contributory factor, but, despite that, surely they are both basically a tax on income. Since most benefits come from general taxation anyway, there is no good reason why we cannot look forward to an amalgamation of the two so that we can see what every individual is paying in tax as a proportion of his income.
As has already been adequately pointed out, the change does not deal with the real problem of the low pay structure found in some parts of the country, especially in the Province, of Northern Ireland where there is an over-dependence on benefits. I should like to see that swept away and replaced by realistic incomes. However, that involves another subject with which I shall deal shortly.
I welcome the fact that married women will be given their own entitlement under capital gains taxation. That 467 will help small family businesses which are so painstakingly built up. It will also help the farming community, especially in the Province where we have the peculiar situation of most farms being owner-occupied.
My party welcomes the increases in the price difference between lead-free and leaded petrol. The only sad fact is that in Northern Ireland we have only 91 outlets for lead-free petrol. I am not sure whether that problem is prevalent elsewhere in the United Kingdom but I suspect that it may be in the more sparsely populated areas. For that reason, if for no other, we should welcome the increasing differential in the price of petrol. If the difference could be increased further, it might be an added incentive, together with the other measures mentioned by the Chancellor, such as eventually getting rid of two-star petrol, to ensuring that lead-free petrol is available in every part of the country and that every petrol station has at least one pump selling lead-free petrol.
I welcome the general tidying up of fiscal policy, which covered a wide range of things and which will benefit both small and larger investors together with old people. I welcome the fact that some tax loopholes were closed. It is amazing how tax loopholes appear every time there is a change in taxation. No doubt the well-intentioned changes of yesterday will result in new loopholes which will have to be closed by subsequent Budgets.
However, there are some raspberries for the Chancellor. First, income tax starting points remain the same, except for indexation. There was some scope to go further or to reduce income tax by a small amount. I am dismayed that the Government are having to come to terms with the fact that the EEC is able to impose its demands upon the financial management of British affairs. That has not been mentioned in the debate so far and we should not allow it to pass unheeded. It is the first sign of a long shadow that will increase in intensity with passing years. More and more powers will be handed by this place to the Common Market. The end result will be that we lose all control over our Budget and the management of our economy. I see that there is some agreement for that view on the Government Front Bench and I am glad to see that. I cannot believe that the country will lightly throw away that freedom. The Prime Minister's Bruges speech some time ago was helpful in that respect. I hope that it is followed by action to re-establish the authority of the House over this country.
The EEC will eventually do this nation a great deal of damage. My party has always been opposed to it. We continue to hold that view, even if we are the only party in the House to do so. We are wholeheartedly opposed to it and hope eventually to gain a considerable number of converts from both the major parties as the real meaning of the Single European Act becomes more apparent to all who sit in this place.
I regret the failure to give further help to manufacturing industry. The manufacturing sector is about £14 billion in deficit, and I do not believe that all the talk about being competitive or about overseas investment being a help to us is good enough. Every £1 million that leaves this country and is invested in a factory somewhere else represents an export of jobs as well as capital. If we are ever to overcome the bottlenecks that have been made apparent by the deficit in our manufacturing industry, we 468 have to become more competitive. We can become more competitive only with better machinery, and that means the expenditure of large sums of money. That is a simple fact of life if we are to improve our efficiency. If we are not prepared to do that, we can expect the gap to get wider. Since manufacturing industry is the powerhouse of our wealth creation, we will slip further down the international league, and none of us wants to see that happen.
I listened with great interest to the Chancellor's comments on the national debt. The effect of that huge burden of national debt on the national economy is not widely understood in the country. We are told that the housewife at No. 10 runs a fairly tight purse in her own establishment, but who has ever heard of a family who were happy to go on paying huge sums of bank interest without reducing the loan? If any of us were in that position, it would not be long before we were slipping quietly and circumspectly past the bank manager's door or before he was saying, "Here, boy, I want a word with you. When are you going to do something about it?" It is not right to continue to carry that huge debt indefinitely.
Every 10 years we pay out as much as we owe, which seems a crazy way to proceed. There is, of course, a long history of wishful thinking behind the desire to get rid of the national debt, which extends back to Prime Minister Robert Walpole and the National Debt Reduction Act 1786. Attempts to diminish or get rid of the national debt are not new; they are two centuries old—and probably rather older than that.
This year we have a first-time surplus of £8 billion, after the sale of various assets through the privatisation process. We were alleged to have a surplus last year, but that happened only because the Government had sold the family silver. Any family would do that in times of crisis if they were really in need of money, because silver is a mere ornament and does not make much money sitting on the family sideboard. But if one sells the family silver and then spends the proceeds on current expenditure, such as buying the groceries, one has not got out of debt. That has always been my objection to selling off assets through privatisation and never diminishing the national debt. If we sell assets that belong to the nation, we should try to do something long-term for the nation.
In considering the debt, I am considering only the rather narrow definition of national debt in the sense of central Government debt rather than the wider area of public sector debt. That is because a great deal of local government expenditure included in the wider public sector arena relates to investments in, for example, water, sewerage and housing. Such expenditure produces concrete results which will remain after the debt incurred to build them has been repaid, although at a high rate of interest.
At the end of last March, the central Government debt was about £197 billion, which was a huge sum of money. It has, apparently, been reduced during the past year. At one time it was much higher, as a nominal sum. After the war, the national debt was two and a quarter times the gross national product. It has fallen as a percentage not because it has been repaid, but because of the country's increasing wealth.
In his speech today, the Chief Secretary to the Treasury talked about reducing the borrowings of the last Labour Government. I point out to the Treasury Bench that that is not strictly accurate. In 1979–80, the debt was £95.3 billion. At the end of last March, it was £197.5 billion.
469 During the Government's nine years in office, the debt rather more than doubled in nominal terms—if not in real terms. It was costing us £16 billion a year to service the debt. What could the Government not do with £16 billion a year? That is the amount that we are paying year after year. This year, the Government are repaying £14 billion. They are paying back what they themselves borrowed, not what the Labour Government borrowed and the House should bear that in mind. I welcome the fact that the Chancellor is paying back money and I hope that he continues to do so.
If the right hon. Member for Shropshire, North (Mr. Biffen) were still here, I would try to comfort him by pointing out that he is not alone in being practical about what the Government should do with the surplus. I admire the right hon. Gentleman because he is practical and he knows that the first duty of a political party is to continue to win elections. He is clearly prepared to spend money in doing that. We can, therefore, expect a give-away Budget, if not next year, the year after that at the latest. The Labour party had better watch out because it is not in a position to spend money and it will not necessarily he spent in the ways in which it would like it to be spent.
When the Chancellor and the Treasury redeemed the £14.5 billion, did they pay back only loans that had reached maturity, or did they go into the market place and buy, at above the nominal value, debt that was carrying a high rate of interest? Was that not the best way to spend the £14.5 billion? We would be interested to hear the answer.
I noticed with considerable dismay that, having reached the happy position of being able to redeem the debt, the Chancellor did not give a commitment to eliminating it, but said very much the opposite. With the present fears about inflation, I can understand why he did not plough the £14.5 billion back into the economy, but he may be making a virtue out of necessity. It is clear that the Government got all the figures wrong last year. Nobody expected £14.5 billion and the figure was out by £10.5 billion. They cannot be any more sure about the forecast of £14.5 billion for next year unless the figures are more soundly based than in the past year. Can the Chancellor assure us that the figures are correct, or do we have to wait until next year's Budget?
I return to the Chancellor's comments about the repayment of the national debt. He said yesterday:I set out the principle of a balanced budget as the proper objective of fiscal policy, in these terms:'A balanced Budget is a valuable discipline for the medium term. It represents security for the present and an investment for the future. Having achieved it, I intend to stick to it. In other words, henceforth a zero PSBR will be the norm. This provides a clear and simple rule, with a good historical pedigree.' …To go further than this, and seek to achieve the maximum possible repayment of public debt, would not be consistent with the Government's policy, as it would mean deferring for a very long time the benefits of a reduction in the burden of taxation."—[Official Report, 14 March 1989; Vol. 149, c. 297.]The right hon. Member for Shropshire, North can take comfort from those words because it is clear that the policy of reducing the national debt until it is eliminated will not continue. If I am wrong, I shall be happy to hear it. The reduction is temporary and has come about because of the peculiar circumstances in which the Government found themselves with an unforeseen and massive surplus, which they have put to good use.
470 We should eventually set out to clear the national debt. If we consider the £14.5 billion plus the £16 billion which we are paying in interest—and the Chancellor referred yesterday to the £1.5 billion savings that he would achieve at the end of next year on the national debt interest charges—the total is about £30 billion a year. That is a huge sum of money. I hope to see the day when we do not have to find such sums in interest charges and capital repayments to repay the national debt.
§ Mr. David Madel (Bedfordshire, South-West)
It is a pleasure to follow the hon. Member for Londonderry, East (Mr. Ross) who raised the question of the European influence on our tax system. Although I do not fully agree with him on that, some of the controversial proposals from Brussels would require unanimity, and to date the Government have said that they will not agree to a number of them.
As with any Budget, this Budget has been a balance between taxing and spending. The Autumn Statement is now an enshrined part of our financial scene—more is said about spending in the autumn than now. I have always regarded the Budget as the overture to the Autumn Statement because what the Chancellor says about the strength of the economy at Budget time is likely to tell us what we can expect in relation to spending in the Autumn Statement, six months ahead.
I welcome first the national insurance reforms. It is widely felt by the public that national insurance is nothing of the sort, but that it is merely a decision to tax and a decision to pay. I am pleased that the Chancellor has lifted a tax burden on the lower paid in his national insurance changes.
Secondly, the Chancellor has changed the tax system on unleaded petrol. He went into considerable detail on that. He has widened the gap between four-star and unleaded petrol. However, we now need a sustained advertising campaign by the motor manufacturers to get their message across and to tell us which engines will run on unleaded fuel without any changes being made. We also need to support the Chancellor's comments yesterday about the need for a complete conversion to unleaded fuel, following or running parallel with a greater availability of unleaded fuel at petrol stations.
I welcome immensely the fulfilment of the pledge to abolish the earnings rule for pensioners. That will have an additional impact on our retraining of older people, which is at last being carried out to a greater extent. However, as a result of the Chancellor's change, there will be a further demand and a further need for such retraining.
I turn now to excise duties and VAT. Before we even agree to the harmonisation or approximation of VAT with the EEC—I am not sure that we will and even if we do, it may be some years off—in my view, VAT does not have to stay at its present high rate for ever. It is possible to reduce it on certain items. Most people regard the retail prices index as applying only to essentials and they would not automatically class drink and tobacco as "essentials". Therefore, it might be possible for the Chancellor to reduce VAT in the future.
I turn now to the other taxes on spending. It has been pointed out for years that it is unfair to have a 10 per cent. car tax on top of VAT. If—I repeat if—we move to an approximation of indirect taxes with Europe, that 10 per 471 cent. car tax will have to go and we would achieve—industry will welcome this—an approximation of new car prices in this country with those of our European neighbours.
Therefore, I hope that for the time being we shall not rule out a reduction in VAT, which would obviously help the Chancellor in his battle to keep inflation down.
There has been much adverse comment in the debate about last year's Budget and about what the Chancellor did between the October 1987 crash and his 1988 Budget. I have never joined in that criticism because I think the Chancellor was right to do things after the crash to stop us going into recession. My right hon. Friend pointed that out in his Budget statement when he said:Output in the United Kingdom has grown faster than in all the other main European nations during the 1980s—a marked contrast to the previous two decades, when we were bottom of the league".—[Official Report, 14 March 1989; Vol. 149, c. 294.]In other words, the last thing that we needed in late 1987 and in 1988 was action by the Chancellor to tip the country into recession. My goodness, we needed to get to the top of the European output league to improve our manufacturing base and to provide more employment.
I can remember reading—I was not a Member of the House then—that the then Mr. Harold Wilson hugely enjoyed himself in the 1960s when he referred to the late Mr. Harold Macmillan and Mr. Selwyn Lloyd as "Stop-Go and Son" in relation to their Budget policies. No such criticism could be levelled at my right hon. Friend the Chancellor today. There has been no stop. There has been an improvement in output and investment—something that we have all wanted—and, above all, that has created more jobs and improved our competitiveness.
As my right hon. Friend the Financial Secretary to the Treasury is in his place, I should like to raise the question of tax relief for people who are seconded from industry into education or business. The Government have just announced a welcome new scheme, which they call Bridge, which is Government and business investing in each other. My hon. Friend the Under-Secretary of State for Corporate Affairs sent us all a letter, stating:We also want to see more people from business getting first-hand experience of working in Government Departments.Obviously, the Government want to see more civil servants going into business but I was interested to read about business people going into Government Departments.
I raised that issue with my right hon. Friend the Financial Secretary earlier this year in relation to tax relief for such people. In his letter to me of 11 January 1989, my right hon. Friend stated:Any costs which a company or individual trader incurs in connection with the employment of the person on secondment (and in practice this is likely to mean mainly the cost of his or her salary) are allowed as a deduction in calculating the profits of the business for tax purposes.The new scheme is about secondment and we should welcome the move to get business, the Civil Service and Government working more closely together. From what my right hon. Friend stated in that letter, I assume that tax relief applies, but further tax incentives may be necessary to encourage firms to release and second people into the Civil Service so that Government and business can better understand what each is trying to do.
472 The hon. Member for Londonderry, East referred to the challenge to industry and the need for us to be much more competitive. Page 26 of the Red Book states:The maintenance of competitiveness in the year ahead will depend on success in restraining unit cost increases.Because of 1992 we must see the challenge to our manufacturing industry in European terms. Although we have greatly improved our performance, there is a considerable way to go in terms of output and fixed investment in manufacturing.
Because of the changes in the labour market, trade unionists and employees are in a strong position, not because we have suddenly tipped out the important reforms on trade unions that were made in the early 1980s, but simply because of the state of the labour market and the growing skills shortages. That presents a great challenge to management in responding constructively and effectively to what the Chancellor said about the need for increased competitiveness. There is an obvious need for a better use of machinery at work and for a change in working practices—in other words, for better organisation of how we work.
There is also a need to take full advantage of the Chancellor's changes on share option schemes for employees, which he went into in considerable detail yesterday. In my view, there is a need to move to two or three-year wage deals rather than having the annual difficulty and tug-of-war about what should be paid. I hope that as an employer, the Government might feel that in some areas they can move towards such two or three-year wage deals.
If we are to improve our competitiveness, much will depend on the speed with which we can retrain our people when new industries appear. Although industrial relations in this country have improved, in many industries there is an armistice rather than a lasting peace. If we are to move to a German standard of industrial efficiency and output, we must also have a German standard of compromise and co-operation between management and employees. That still eludes us in some industries and it damages our competitive performance. A terrific challenge now faces management, the unions and employees to get industry better organised because nothing can change the fact that 1992 is rushing upon us with all the challenges to industry that that will entail.
I shall just say a word about Government spending. As I said, the Budget was a balance between taxation and spending. The Chancellor referred to that in relation to the repayment of debt. He said:net debt interest costs will be lower by over £1.5 billion a year.This saving is being put to good use, allowing extra spending on departmental programmes within our overall public expenditure constraints."—[Official Report, 14 March 1989; Vol. 149, c. 296.]The question is, are the public expenditure constraints too tight? My right hon. Friend the Member for Shropshire, North (Mr. Biffen) mentioned health and education as two matters requiring increased but careful, planned public expenditure.
I shall give one example. Each year Her Majesty's inspectorate of schools issues its annual report which is entitled "Standards in Education" and the latest one for 1987–88 has just come out. In that report, the inspector says:In many ways, then, the education service is well placed to face the future with some confidence. But some old, familiar problems persist. Pupils and students of below 473 average academic attainment continue to get a generally poor deal. Accommodation in many secondary schools and in some FE colleges is in poor shape, shabby in appearance and deteriorating as repair and maintenance are further delayed.It is true that the Secretary of State for Education and Science has made provision for increased expenditure, but, when the next annual HMI report comes out, I hope that the inspector will not use those words, but he will be able to say, "Some old and familiar problems are diminishing as the Government get to grips with the questions of accommodation for our secondary schools and equipment in secondary schools and in further education."
I am not suggesting that we can cure it overnight, but after 10 years in government, what will help the party and the Government is for such independent reports—which are so crucial for our children—to point to a steady improvement in what we are providing for the state education system rather than saying pessimistically, "Old and familiar problems exist."
Another item of public expenditure to which the Government will soon have to turn their mind is the community charge and the revenue support grant that will be needed to underpin it. This is the time of year of the Grand National. As the Government rush around the legislative track, in 1990 there is this Becher's brook of the community charge to be jumped. I beg my right hon. Friend to err on the side of generosity when fixing the revenue support grant for local authorities for the first year of the community charge in 1990. I did not vote against it; in fact, I supported the Government on the community charge, because, as long as the flat rate is reasonable, I believe that it will be acceptable to the public. I know that it is early days for the public expenditure round, but now is the time for us to put in our bids and draw attention to what we believe will be contentious matters.
I regard this as a safety first Budget, but "safety first" is not a bad slogan. it was used by the Conservative Government in 1929. Before historians leap to their feet and say, "But Mr. Baldwin lost that election by using `safety first'," I shall point to one historical fact. The evidence is that the Conservatives lost the 1929 general election because they were not perceived to be doing enough to cure unemployment. I believe that we can use "safety first" again. We certainly have a good safety first record on defence, a safety first Budget and prudence with Government finances.
However, we want to avoid what happened in 1929, albeit on a different matter. We do not want the public to say, "We are not too sure about you, because you are not paying sufficient attention to certain public services." I have mentioned the education service and other hon. Members have mentioned the National Health Service. If the public see that we are steadily attending to what needs to be done in those aspects of Government expenditure, safety first will pay off and we shall be returned to power in 1991.
§ Mr. Andrew F. Bennett (Denton and Reddish)
I am pleased to follow the hon. Member for Bedfordshire, South-West (Mr. Madel). Since coming to the House in 1974, he has been one of those hon. Members who have diligently argued for the education and employment services. It is a sad reflection on the Tory party that he has never achieved office—perhaps that was because he stuck 474 to his principles, unlike many others. I certainly agree with his comments about needing more investment in the public services.
I believe that the best way to test this Budget is to show how it would affect my constituents. What would have happened if the Chancellor had delivered his Budget last year and this year to the Reddish or the Denton pensioners associations? If the Chancellor had gone to those two groups of pensioners, they would have torn him apart. They are extremely bitter about the way the Government have treated the average pensioner. Last year, they were insulted by the slogan that it was a give-away Budget, because for almost all the pensioners in my constituency there were no give-away provisions. They did not benefit from the Budget, but they were almost all caught by the social security changes that followed. They knew that they were the people who last year were paying the price for that give-away budget with cuts in their social security, pensions and housing benefits. Not only did they pay last year, but they are now paying because of the inflation that that Budget stoked up. They have actually been asked to pay twice.
Last year, because of the outcry from the Opposition and from those outside the House, in the end the Government came up with transitional benefits to ease the cuts for pensioners. However, all they have done is delay those cuts for a further 12 months. Therefore, this year many of my pensioners will receive no increase at all in their pensions. If the pension is increased, not merely will it be increased by only 5 per cent. when the actual inflation rate is 8 per cent., but for many of them the extra that they receive in their pensions will be taken straight away by the loss of their transitional benefit.
People talk about 8 per cent. inflation, but it is much higher than that for many pensioners. They are the people who have been or will be on the direct end of those price increases that have been deliberately engineered by the Government. They are the people who are having to pay higher prices for their gas because of the Government's privatisation programme. They are the people who will have to pay higher prices for electricity when the electricity industry is set up for privatisation. They are the people who will have to pay a levy on their electricity prices to sort out the mess that the Government have caused in the nuclear industry.
They are the ones who will have to pay higher water charges. As residents in Stockport and Tameside, many are extremely bitter about the fact that over the years they have invested in the water activities of their local authority, originally through their water rates. They saw good reservoirs and, in many instances, good supply systems built. They believe that those are their systems. They do not see why they should now be sold for someone else to make a profit. Not only will someone else make a profit, but they will have to pay higher water rates.
Many of my pensioners are concerned about the way in which the Government changed the rules about the television licence. They believe that the Government were mean in taking away from people in sheltered housing the 5p licence and substituting the £5 licence. One of my constituents moved from an upstairs flat to a downstairs one in a sheltered scheme because the stairs were difficult to cope with; because of that, she became liable to the £5 rate.
Many of the pensioners in my constituency will feel bitter about the Government's action. They looked to this 475 Budget for some concession. They would have liked the Government to attempt to restore the link between pensions and earnings. They feel, as I feel, that if the country is doing well—the Government claim that the country is doing well—they should be sharing in some of that general prosperity. However, as long as the Government maintain a link merely with prices rather than with earnings, they are excluded from any share in that extra wealth.
My constituents continually remind me that, if the link between pensions and earnings had been retained, the single pensioner would be £9.70 better off and the married couple £15.45 better off. Many pensioners in my constituency are caught by the savings rule. To some, £8,000 may sound like a lot of money, but pensioners who have been forced out of their homes because they can no longer afford to maintain them and who move into sheltered housing find that even if they have relatively small savings, they are not eligible for state benefits.
My constituents ask also about the Christmas bonus. The Government constantly parade the fact that they restored the Christmas bonus, but it has been steadily devalued in real terms. My constituents ask why it cannot be uprated. If the Government cannot do that, why not provide a television licence concession for all pensioners, rather than for just those living in sheltered housing?
My constituents view with some cynicism the abolition of the earnings rule, because many of them were forced out of work by the Government long before they reached pensionable age, as a result of the way that the Government have destroyed jobs in my constituency over the past 10 years. My constituents would have loved an opportunity to continue working until pensionable age, so that they could have saved a little as a hedge in their old age. For them, that was not possible. Very few of my constituents will benefit from the abolition of the earnings rule, and the Reddish and Denton pensioners associations will be quick to point out that it is people such as the Prime Minister who will benefit most from that measure, rather than the ordinary pensioner.
They will make the same comment about private health insurance tax relief. A number of pensioners in my constituency have been waiting years for hip operations and treatment for arthritis and cataract operations. They feel that it is totally wrong that they should subsidise out of their taxes people who are rich enough to afford private health care and to jump the queue. My constituents will be very bitter about that. They will not greet the Budget with any enthusiasm.
A large number of my constituents are low-paid. They are already bitter at wages councils being abolished and at the way in which the Government are pushing the country into a low-paid economy. My constituents await with dread the imposition of the poll tax. For those on low pay, it will make a swingeing cut in their living standards, however generous the Government may be. The low-paid have already suffered because of increased prescription charges, and they have also lost because of higher council rents and the imposition of sight test and dental examination charges. Many of them are caught in the poverty trap, which the family credit system does little to overcome.
476 The low-paid are the people whom an increase in child benefit would have done most to assist. One of the meanest tricks played on the low-paid with children was the Conservative view that it would be better to replace tax relief for children with a child benefit allowance—and having done so, to renege on the promise to uprate the allowance in line with inflation and to freeze it instead.
Last year's tax give-aways meant nothing to the unemployed in my constituency, but the social security squeeze made a great deal of difference to them. A substantial number of people are receiving reduced benefits because they are repaying loans to the Department. The same applies to young people aged between 16 and 19 who have lost benefits altogether, and those same young people, perhaps because they have fallen out with their parents, face considerable difficulty in obtaining accommodation.
In particular areas of my constituency such as Brinnington, debt management problems for people on low incomes are substantially increased. The Government have done nothing for them. Some of my constituents have at least turned to self-help schemes. I was delighted to pay a visit at the weekend to the launch of the Brinnington credit union, established by people wishing to overcome the credit problems that the Government have created and by moneylenders' extortionate interest rates.
It may be thought that a mortgage interest rate of 13 per cent. is horrific, but some moneylenders in my constituency charge interest of 35 per cent., 40 per cent. or 50 per cent. to people who cannot afford repayments in the first place. I am delighted that my constituents have established a credit union that will help to channel local savings into relieving poverty there. It would have been nice if the Government could have provided help for such credit unions, because existing operational restrictions on credit unions are harsh.
For my constituents, the re-creation of full employment and of well-paid jobs would probably be worth more to them than anything else, yet the Government have been destroying jobs for 10 years, and today's high exchange and interest rates make it extremely difficult for the successful companies in my constituency to expand. A company's investment programme for the year ahead may comprise three or four schemes as the subject of investment. When interest rates are as high as 13 per cent., a board may approve the first scheme on the list but not the others. If this country is to return to full employment, and if there is to be the investment that will help us pay our way in the world and which will help my constituents to secure well-paid jobs, we must ensure that firms are encouraged to make the maximum investment in new schemes.
I turn to environmental matters. Reddish vale has been well preserved by the local authority, and the opening up of the vale by Greater Manchester council was a great achievement. It is spoiled only by the River Tame that flows through it. It is not the most polluted river in the country but certainly it is one of the most polluted. Government financial assistance to make it possible for effluent to be treated by the companies that are pumping it into that river, or to local authorities to ensure the efficiency of their sewerage works, is minimal. The Government trumpeted the Mersey basin scheme, but much of that money was spent on the lower parts of the 477 Mersey. If one wants clean rivers, it is better to start cleaning operations at the river source rather than lower down.
There is great concern in my constituency about the lack of Health Service provision. More and more of my constituents are resorting to raising funds for local hospitals. I admire them for holding raffles and other fund-raising events, but that also fills me with horror. I thought that, when the National Health Service was established in 1947, it would provide proper health provision for all, and that it would not need to rely on raffles for its funding. I admire the work of fund raisers, but greater Government resources need to be pumped into the Health Service. The same is true of the schools in my constituency.
The Government's refusal to allow local authorities to build houses means that more and more young people in my constituency are unable to obtain the housing that they need. A substantial number of elderly people who are in the wrong housing could he moved from family housing to sheltered housing if it were available. The Government must make it possible for local authorities to build housing to rent if they are to relieve misery in areas such as mine.
The Budget has failed my constituents. There is nothing in it for pensioners or the low-paid and there is little for those on average earnings. Nothing in it will encourage my constituents to believe that the shortcomings in the Health Service, pollution in rivers or the housing crisis will be resolved. It is high time that the Chancellor and the Government went and we had a Government that cared about ordinary people rather than the extremely rich.
§ 8 pm
§ Mr. Julian Brazier (Canterbury)
I should like to speak about the impact of fiscal measures in successive Budgets on employment. Then I shall touch briefly on two unrelated tax concerns.
I firmly believe that in the long term unemployment is not caused primarily by macro-economic factors. It is possible to find countries that have been prosperous for a long time yet still have high unemployment, of which America of the 1960s and 1970s is a good example. It is possible to find countries with low standards of living yet little unemployment. Korea is such an example, but before it is said that Korea has had high growth for a long time, there are other countries that have a low growth rate and low unemployment, of which Sweden is an example. The key causes of unemployment lie not in macro-economic but, micro-economic factors. There are many but I shall dwell on fiscal ones, especially the fiscal balance between tax treatment of capital and labour.
If we take a long view of unemployment in the United Kingdom, smoothing the economic cycle by taking a five or six-year moving average, we find that unemployment rose slightly in the 1950s, rose slightly faster in the 1960s, accelerated in the 1970s and early 1980s, peaked in 1986 and fell.
It is interesting that 1979 was the watershed in macro-economic policy. The Government followed a quite different policy from their Conservative and Labour predecessors. The watershed in the fiscal treatment of capital and labour was not 1979 but 1984, as I shall try to show. It is why I believe unemployment turned round much later than the general economy—in 1986—and why it will continue to fall sharply.
478 In the framework that we inherited in 1979, which was bequeathed to us as much by previous Conservative Governments as Labour Governments, a number of features were biased to capital and away from labour, such as 100 per cent. capital allowances and regional grants which were paid indiscriminately for investment in capital goods. Even if such investment was purely labour-saving and would not have a chance of standing up on normal market grounds, it may have been profitable because of the combination of 100 per cent. first-year allowances and lavish regional grants. Furthermore, we had penal rates of personal taxation and employers' national insurance contributions were 13.5 per cent. As a result the gross cost to the employer of providing even quite a modest net wage was extremely high.
In the 1960s and 1970s, successive Governments built up a strong bias in the economy against employing labour and in favour of investment, resulting in a steadily rising rate of unemployment. I firmly believe that a high level of investment is a feature of a successful economy, but it does not follow—and I have never discovered any evidence throughout the world—that the artificial subsidy of uneconomic investment by Government is a short cut to prosperity.
§ Mr. Richard Caborn (Sheffield, Central)
The hon. Gentleman said that he has considered different models throughout the world. Has he considered the Swedish model? Conservative Members may scoff, but full employment is the centre of its policy and it is accepted by capital and labour.
§ Mr. Brazier
I am not an expert on the Swedish economy, but if the hon. Gentleman will forgive me I shall make a number of points about other countries a little later.
In the first five years of our term of office, while I wholly supported the transition to what are generally called dry macro-economic policies, we did little about the balance in tax treatment between labour and capital. We made a little progress with basic rates of income tax and employers' national insurance contributions, but, unfortunately, it was partly outweighed by a failure in one Budget to index personal allowances and a rise in employees' national insurance contributions. The big change occurred in 1984, with a clear commitment to phasing out 100 per cent. first-year capital allowances so that investment would have to stand on its merits and not be subsidised by the taxpayer. It was followed by further cuts in income tax and employers' national insurance contributions and the abolition of indiscriminate regional grants, which were doing more harm than good. If I had more time I could cite one or two examples in which, for relatively short periods, factories benefited from those grants, which led to unfair competition and some of those factories subsequently folding.
In 1988, those cuts in personal tax were boosted by almost doubling benefits to the working poor by replacing family income supplement with family credit. Finally, this Budget made a considerable reduction in employees' national insurance contributions.
The net result of those changes over the past five years is that we have completely restored the balance between labour and capital. Although growth rates throughout Europe over the past 10 years have been comparable, our unemployment, according to the figures of the 479 Organisation for Economic Co-operation and Development, is about 7 per cent. and falling, while the average for the rest of the EEC is about 11 per cent. and rising. Most of southern Europe heavily subsidises capital, especially through regionally directed subsidies. Most of northern Europe, especially Germany, has heavy social charges, which are the equivalent of employers' national insurance contributions. Thus Europe has not righted the imbalance, and in some countries the figures are rising.
§ Mr. Stuart Holland (Vauxhall)
While the hon. Gentleman is giving us this geographical tour, will he admit that the reason for the introduction of new capital and technology in northern Italy—whether it be Tuscany, Emilia Romagna or Veneto—and in Germany is that there is co-operation between management, capital and labour? Labour is involved through participation schemes or co-operative ventures in the introduction of new and flexible techniques of production.
§ Mr. Brazier
I understand the hon. Gentleman's point. I said that there are other micro-economic factors involved besides fiscal factors but all the parts of Italy that the hon. Gentleman mentioned are outside the regions at which grants are directed. Most of the grants are directed at southern Italy, where, despite them, unemployment continues to worsen.
I shall make one final geographic point to complete a quick Cook's tour. America has moved dramatically in the same direction as us. It has undergone considerable tax restructuring, which in some respects is following ours. It has managed to get rid of most of the market-distorting, investment-directed tax breaks for companies. As a result, companies are paying much more tax. At the same time the Americans have substantially reduced the burden of personal taxation. The net result across the Atlantic has been a reversal of what the previous generation experienced. In other words, America has much lower levels of unemployment than continental Europe.
For all these reasons, in addition to a 10-year period of sound macro-economic policies, we now have five years of sound fiscal balance in the treatment of capital and labour, of which this Budget's changes in national insurance contributions represent the final building block. I congratulate the Chancellor of the Exchequer on that.
I want to move very quickly to the two specific measures that I mentioned earlier. The first concerns armed forces housing—a subject on which I have touched in a ten-minute Bill. The heart of the property-owning democracy that this country has seen develop over the past 10 years is the ownership of a home. In the civilian population as a whole, home ownership is now running at 63 per cent.
The sad fact is that the armed forces, in particular the Army and that section of the Air Force that deploys heavily in Germany—mostly personnel involved with the Harrier and the Tornado—have not shared in this. The very simple reason it is not possible for them to do so is that over half of our Army is abroad, and the rest is very heavily dispersed with soldiers seldom going to the same place twice—so it is impossible for a serving member to become a home owner. He can, of course, become a house owner and be an absentee landlord, with all the problems 480 that that entails—and, by God, I have a thick file on those problems: tax, tenants and, even worse, no tenants. Such a person cannot be an owner-occupier.
I hope that my hon. Friend will convey to my right hon. Friend the suggestion that he consider whether, in the PEP scheme that he is developing, provision could be made for a special scheme for members of the armed forces, to enable them to accumulate, in a tax-effective manner, a capital sum that they could use to buy a home on retirement. The MIRAS advantage that is available to the civilian population should be extended to the housing payments of those members of the armed forces who do not own houses. Payments could be made into a PEP scheme to make that possible.
The second of my two points concerns the Merchant Navy. It was very disappointing that an otherwise excellent Budget did not touch at all on the present very sad state of our merchant fleet. I am relieved to hear that numbers of some categories of ships are now stabilising, but at a very low level. I remind my right hon. Friend the Chancellor that the early-day motion on this subject, which was tabled only two or three weeks ago, already has the signatures of more than 170 Members from all parts of the House. I put it to my right hon. Friend that fiscal and other measures, but especially fiscal since we are talking about the Budget, at a minimal cost—such as extending roll-over relief to three years, or extending the upper limit for the BES as it applies to merchant shipping—would make a very big difference to ship owners, at a very small cost to the Exchequer.
Overall, though, I believe that this is a very good Budget on both macro-economic and micro-economic grounds.
§ Mr. Calum Macdonald (Western Isles)
Yesterday's was a standstill Budget from a boxed-in Chancellor, making a mockery of his claim to be a Chancellor who concentrates his attention on the supply side of the economy. He found himself boxed in by supply side constraints that are quickly snuffing out his economic boom. The two major constraints, of course, are a lack of productive capacity in manufacturing industry and, equally, a lack of skilled and properly educated labour to man that capacity. The consequence is a British economy throttled by bottlenecks. Of course, the biggest bottleneck has been in the south-east, whereas constituencies like mine, where unemployment is rising again, are not getting even a glimmer of the prosperity of which we hear so often from Ministers. That is why regional policy must be at the heart of any credible economic strategy.
It is the effect of this and past Budgets on the regions that I want to talk about. This Budget is a testimony to failure—the failure of the Government to promote balanced growth and balanced development in Britain. It shows that Thatcherite free market policies have led to gross overheating in the south-east, while the rest of the country has been crying out for more activity.
It is also a Budget of fear. Despite having accumulated a surplus of some £14 billion over the past year, the Chancellor has had to run away from his own goal of lowering the overall burden of taxation. He was too scared yesterday even to increase the tax on cigarettes. The only cure for these supply side constraints on productive capacity and skilled labour is supply side investment. This 481 is not just a private responsibility but also a public responsibility—it is a responsibility of government. This, I feel, is the crux of the divergence between the Opposition and the Government—not just in respect of this Budget, but in respect of a succession of Budgets and Autumn Statements.
In the past, the Government's policy has been to fuel the demand side only, with their tax cuts for the rich and their irresponsible and inflationary credit booms. The Opposition have called instead for investment in the supply side of the economy, investment in the prime factors of production—machinery and men. That is why we call, for example, for measures to improve investment in manufacturing industry, and it is a disgrace that, even now, manufacturing investment is below the level of 1979. That is why we have called again and again for investment in education and training. It is a disgrace that access to higher education—universities and polytechnics—and to colleges of further education has actually diminished during this Government's period of office.
I want to spend a moment on that subject. I see that a quizzical look is coming over the Minister's face, but I can tell him that that is true, that access to education has fallen at a lime when industry is crying out for more skills. [Interruption.] I am referring to the ability of people in the relevant age groups to enter higher education.
§ The Economic Secretary to the Treasury (Mr. Peter Lilley)
§ Mr. Macdonald
Yes, the proportion. It is astonishing that the Minister does not know the effects of his own policy on higher education. [Interruption.] Well, I refer the Minister to the response to a question put to the Secretary of State for Education and Science last month by my hon. Friend the Member for Oxford, East (Mr. Smith). The Government's own figures show that the percentage of 18 to 24-year-olds entering first degree courses—universities, polytechnics, colleges of further education—actually fell between 1979 and 1987. In 1979 it was 1.95 per cent. [Interruption.] These are the Government's own figures.
§ Mr. Macdonald
Including polytechnics. Access to polytechnics has increased by 28 per cent., but access to universities has fallen by 17 per cent. The percentage of 18 to 24-year-olds entering these forms of higher education fell from 1.95 per cent. in 1979 to 1.92 per cent. in 1987.
§ Mr. Brazier
Let me give the hon. Gentleman the actual percentages. The total proportion of people going into all forms of higher education—universities and polytechnics—when the Government took office was about 12 per cent. That has risen to about 14 per cent. and it is on target to rise to 18 per cent. in five years through a combination of extra places and demographic changes.
§ Mr. Macdonald
I refer the hon. Gentleman to the figures given by the Under-Secretary of State for Education and Science for the percentage of 18 to 24-year-olds entering first degree courses in Great Britain in universities, polytechnics and colleges of further education. The situation is the same in Scotland as in England and Wales.
It is the grossest hypocrisy for the Secretary of State for Education and Science now to make pious statements of his intention to increase access to higher education when 482 he is part of a Government who have systematically reduced that access. Moreover, they have done that at a time when there was an opportunity to increase access because of the fortuitous biological fact that that part of the population was increasing. Therefore, the Government had the opportunity to increase the number of people with skills and training. I see all kinds of hurried consultation on the Conservative Benches.
The Government's policy over the years of focusing on tax cuts has exacerbated the problems being experienced by the regions and the problems caused by the dismantling of regional policy. This Budget and last year's Budget taken together have given the great bulk of the tax cuts to the south-east. That is simply because on average the south-east has the people with the highest incomes and it is they who have been helped by the tax cuts. Fifty-two per cent. of all top rate taxpayers live in the south-east.
This year's standstill Budget has hardly begun to make up for last year's Budget when top rate tax cuts simply fed the consumer boom in the south, giving the rich money which they simply spent on imports. The south-east alone saw 57 per cent. of the 1988 tax handouts for the rich compared with just 3 per cent. for Wales, 3 per cent. for the north, 5 per cent. for the west midlands and 6 per cent. for Scotland. This year there have been not so much tax cuts as new tax loopholes, new perks and old ones being widened, which again benefit the richest, and consequently the south-east, disproportionately.
The tax concessions on personal equity plans have been widened. There are tax concessions on the purchase of shares in privatised industries. Yesterday we had the most scandalous single item in the Budget—the introduction of tax concessions on the purchase of private health insurance for the over-60s. Contrast that with the Government's failure to do anything about what we can call the toddler tax, the tax on workplace nurseries. Toffs who ride around in company cars can continue to enjoy their tax reliefs. Toffs who send their children to Eton can continue to send them to a tax-free institution. But ordinary working people who send their toddlers to workplace nurseries continue to be hammered.
It is scandalous that the Chancellor is continuing to lavish such largesse on the south-east when regional aid to industry has been slashed mercilessly in recent years. Aid to the north has dropped from £325 million in 1979 to £108 million today. Aid to Scotland has fallen from £314 million when the previous Labour Government were in power to £152 million today. That policy of giving money to the south-east is not only unfair: it is economic nonsense when the economy is overheating.
§ Mr. Lilley
When is the hon. Gentleman going to compare public expenditure per head in Scotland with that in the United Kingdom? Since that is 28 per cent. higher in Scotland than in England, does he think that that is unfavourable to Scotland?
§ Mr. MacDonald
I should love to have a proper analysis of that figure, since it does not include defence expenditure. If Scottish public expenditure included items such as mortgage tax relief and defence expenditure and it was compared not with the United Kingdom—because the north is also badly done by—but with the south-east, we would have a different story. The Library tells me that such an analysis would be enormously difficult, but I am working on it.
483 The policy of giving money to the south-east when the economy is overheating is economic nonsense, yet that is done despite 2 million unemployed, even on the Government's own figures. We need a rebalancing of demand away from the overcrowded south-east to the regions, where more activity is needed. That is the only way to secure sustainable balanced growth without creating a balance of payments deficit and rising inflation.
§ Mr. Keith Mans (Wyre)
I want to make a few comments on this year's Budget and, more specifically, on some of the national indicators that lie behind it. Before, doing so, I want to consider some points made by the hon. Members for St. Helens, North (Mr. Evans) and for Burnley (Mr. Pike), from my part of the country—the north-west.
It never ceases to amaze me that Opposition Members, particularly from the north-west, always seem to talk down the area. The fact is that there is a good success story to tell in terms of increased employment throughout, much higher than the increases in employment in many other parts of the country; increases in manufacturing industry, on which I shall have something to say in a minute; and, more specifically, big increases in a widely expanding service sector, particularly in areas such as Liverpool and the area in which I live, the Fylde.
One could say that we in the north-west are suffering—at least in some areas—precisely the same skills shortages that exist in the south-east. Therefore, some of the comments, particularly those made by the hon. Member for St. Helens, North, are pretty wide of the mark and do not encourage employment in areas such as my own, giving a false impression of what it is like in that part of the world.
We in Lancashire have the largest concentration of aerospace factories this side of the Atlantic. It is a highly technical and highly skilled industry, where skill shortages are building up. That contrasts starkly with the picture painted by Opposition Members about the economic viability of the north-west.
The hon. Member for Burnley mentioned Lancashire and education. I want to try to put the record straight. My right hon. Friend the Secretary of State for Education has given Lancashire this year a grant 40 per cent. higher than the average for shire counties throughout Britain. Indeed, the grant is the second highest of any shire county. That shows that the Government care about education, a subject to which the hon. Member for the Western Isles (Mr. Macdonald) referred.
§ Mr. Caborn
Will the hon. Gentleman explain why the European Community, in designating objective 2 of the regional fund, decided that 36 per cent. of the total funds available should come to the United Kingdom? The criteria for receiving that assistance is unemployment and a declining industrial base. In Lancashire, Accrington, Blackburn, Bolton, Burnley, Bury, Liverpool, Pendle, Rochdale, Wigan and St. Helens are all now included in objective 2 because of their rate of unemployment and declining industrial base.
§ Mr. Mans
By far the majority of the towns the hon. Gentleman mentioned are not in Lancashire, so I cannot comment on the point he made. I assure him that a number of other areas in Lancashire did not get the grant.
I had intended to make the main point of my speech the merits of employee share ownership plans, but following the Budget statement it is clear that much of what I wanted to see achieved in that context has been achieved. I am pleased about that, because it represents an important step forward in this area of industrial development. I shall deal with that issue later, but I wish first to refer to the various national statistics, in particular the manufacturing output statistics, on which the Budgets are based.
Members in all parts of the House pay great attention to those statistics, but they are relied on particularly by Opposition Members, who regard them as a good guide to the general health of the economy. I do not attach the same importance to that set of statistics because manufacturing industry is becoming more sophisticated. Peripheral activities such as design, marketing and training are gaining in importance at the expense of the core manufacturing activity on which the statistics are generally based.
In some areas—for example in the manufacture of computers—the peripheral activities, which may in a sense be considered to be in the service sector, are now taking a larger share of the total value of the product than the product itself. Manufacturing output statistics are no longer accurate because certain items—for example, design, marketing, training and software production—may or may not be included in the statistics, depending on whether they are carried out by the manufacturing company; in other words, whether they are in-house or contracted from outside.
If such activities are carried out by the company producing the product, they are included in the manufacturing output statistics. But if, as is increasingly the case, firms go outside for those activities, they are not included in the figures. They are, nevertheless, an important part of our total wealth-creation machine, and that is why I intervened in the speech of the hon. Member for Burnley on this point and why, as I say, I do not attach as much significance as many people do to that set of statistics.
Consider, in that context, such mundane items as employees' canteens. If they are provided within the firm, they count as part of the total manufacturing output of that firm in terms of the statistics. But if that activity is contracted out to a firm in the service sector, they are not, so there is a distortion in the figures. We should either modify the statistics extensively in the near future or pay less reliance to them and use instead statistics that take into account advances not only in the manufacturing sector but in the service sector as well.
Another set of statistics is the balance of payments, which again, I argue, is becoming increasingly difficult to compile accurately. The removal of exchange controls was one step in the direction of uncertainty, and in 1992, with the creation of the unitary market, it will become incredibly difficult to decide what our balance of payments are on a monthly basis.
For that reason, one must ask whether, after the creation of the unitary market, there is any point in deciding the relative trade balance between London and Paris, for instance, any more than there is in deciding the relative trade balance between London and Birmingham. 485 As a guide to the viability of the economy, slavish regard to what the balance of payments is saying for a specific month is no longer the right way forward. I suspect that the financial markets already realise this, considering the way in which they understand that Britain continues to be a good place in which to invest.
In considering the balance of payments, one must also consider the nature of the deficit itself. Here I disagreed with my right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour). He maintained that our present deficit was similar to deficits which occurred in the 1950s, 1960s and 1970s, that they were composed largely of an imbalance of consumer goods and that we were importing more consumer goods than we were exporting.
I suspect that the deficit this time is not quite the same. It is made up this time of a much higher percentage of industrial—capital—goods and items which fall between the two sectors, items such as photocopying machines and office equipment which has traditionally come from abroad but which is necessary for the future to create the right productivity increases in that sector of industry.
I suspect that my right hon. Friend was right when he said, in answer to my intervention, that in the last two years industrial investment has increased substantially. In my view, that is significant. There is a clear parallel between that and the fact that our balance of payments deficit has increased during those two years.
I believe that a high percentage of the deficit is composed of capital goods and that, rather than being similar to deficits we experienced in the past, our present deficit is similar to the deficit Japan had in the 1950s and 1960s when it was successfully rebuilding its industry. We are seeing the results of that rebuilding now.
When trying to rebuild the industrial base to produce tomorrow's rather than yesterday's goods, it is vital to equip it with first-class and world-beating machine tools and other capital goods, even though they may come from abroad. That is what I believe is going on now, and from that point of view I suspect that from 1990 onwards we shall see a rapid improvement in our balance of payments, when our consumer goods become as competitive as those from the rest of Europe and other parts of the world.
In relation to employee share ownership plans, I am delighted with the progress that has been made in the Budget, particularly in connection with profit-related pay and in the tax relief given to payments by companies to ESOP trusts. I should like to see those moves go further. While I realise that that may not be possible this year—because of the complications in organising the tax regime successfully—perhaps we shall get next year or the year after some roll-over relief for capital gains tax when applied to employee share ownership trusts.
In creating the right environment for the new vehicles of wealth creation to prosper, we should not be too rigid about the type of model that we want. The historical and large model of worker ownership in the Soviet Union has been a monumental failure and is rapidly being dismantled, to be replaced by a model similar to those that exist in this country.
On a smaller scale, we have the evidence from the late 1970s when the right hon. Member for Chesterfield (Mr. Benn) tried to set up a workers' co-operative at Meriden. That showed that we must not specify too much the type of model in which we want people to be involved. It must he left to people to decide the type of employee share ownership scheme best suited to their needs and those of 486 the industry. I suggest that we should create a tax environment that takes account of as many different models as possible and that we allow individuals to decide which one to follow.
The Budget recognises that the thrust of economic policy must be to continue to fight inflation and recognises the increasing importance of demographic changes and the environment as factors in economic decision making. I am especially pleased with the comments made by my right hon. Friend the Chancellor on unleaded petrol. This tax reduction is a beneficial environmental move which I hope will result in a large uptake of unleaded petrol in the coming months.
The most important feature of the Budget is that it will be remembered as the one that finally put employee share ownership schemes on the map.
§ Mr. Richard Caborn (Sheffield, Central)
I endorse everything that my hon. Friend the Member for Denton and Reddish (Mr. Bennett) said, because he reflected many of the worries in my constituency both before and after the Budget. As an inner-city seat, my constituency faces all the major social problems that my hon. Friend described.
I want to deal with regional policy, the north-south divide and the structural weaknesses in the economy, especially our manufacturing base. We hope that the Single European Act will work to our benefit, but I have grave doubts about the Chancellor's short-sightedness in looking only at the straight balance sheet rather than to this country's future and ability to create wealth. As the hon. Member for Wyre (Mr. Mans) said, we must make our economy and industrial base much more competitive and productive. There are major discrepancies in our transport infrastructure alone. A golden opportunity was lost to upgrade that infrastructure so as to move goods to and from the continent as efficiently and effectively as possible.
The Channel tunnel project could have as significant an impact in our northern regions as the French wish it to have in their northern regions. They have tackled infrastructure development with considerable public investment. In the United Kingdom, however, the Opposition struggled five times to include in the Channel Tunnel Bill provision for consultation with British Rail and the Channel Tunnel Group on the tunnel's impact. We see no light at the end of that tunnel and no sign that the Government will move in a concerted way to ensure that the regions are serviced by that innovation.
There has been a decline in training and education. On average, people involved in management have about two days' training a year. We are woefully lacking compared with our major competitors. We are bottom of the league in terms of ability to co-ordinate on technology transfer with industry, academic institutions, local authorities and trade unions.
Conservative Members have argued about investment in small and medium-sized businesses, especially in the venture capital market. Only yesterday an article in the Financial Times on British venture capital groups stated:Mr. John Nash, chairman of the British Venture Capital Association, said yesterday that the rise in the volume of investments outside the south-east of England was encouraging, but there had been a drop in the percentage of funds going to technology-related companies from 16 per cent. in 1987 to just 9 per cent. last year.487The fall in technology-related investments emphasised concerns the association had about the number of new, innovative, wealth-creating companies being generated in the UK, Mr. Nash said. The association has begun a study of the difficulties of finding high-risk seed-capital finance for small and technology-related projects.The announcement of the investment patterns of venture capitalists came a few days after Lord Young, Trade and Industry Secretary, criticised venture capital organisations and the banks for failing to invest enough in high-technology business.That is a statement by those who are trying to organise venture capital, yet the reduction of nearly 50 per cent. in one year does not bode well.
The Minister said that public expenditure in Scotland per head of population was 28 per cent. higher than in the rest of the United Kingdom. I suggest that he look at the form of many of the grant regimes for Scotland resulting from the work of the Scottish Development Agency, which has been effective in co-ordinating an overall strategy. In England, the regional grant regimes have been abolished and there has been a reduction in grant in real terms. There has been a reduction also in local authority expenditure—£22 billion since 1980—much of the money having gone previously into infrastructure development of education, transport and so on.
The Government talk of their great plan for the inner cities and of urban regeneration, but we have merely seen two or three Ministers throwing a few crumbs from the Department of Trade and Industry, Department of Employment or Department of the Environment and going round developing task forces or urban development corporations. The Government's inner-city policy has been unco-ordinated and expenditure has been reduced. When departments have not been able to tackle the problems, they have abrogated their responsibilities by handing them to the private sector. As even Conservative Members have emphasised, training has been put wholly into the private sector's hands.
Last week, the European Commission was considering the European grant regimes for the next three or four years. Objective 2 concerns eligibility criteria, unemployment, the severity of industrial job losses and industrial decline. The Commission laid down the criterion that only 15 per cent. of the population of the Community should be covered, so that the money could be targeted. We find that the funds cover 50 million people in the Community of whom 20 million are in the United Kingdom. That means that about 37 per cent. of that part of regional structural fund expenditure is coming to the United Kingdom, simply because our industrial base has been undermined to such a large degree that even the Commission has decided to try to come to the rescue. The Government's policy is totally unco-ordinated.
The Government make much play of partnerships; they rely heavily on that concept. Opposition Members have nothing against partnerships—we encourage partnerships between the private sector and local authorities or trade unions and try to make them work—but in some areas partnerships have difficulty in developing because of lack of resources. I would go further than that. Many of the developments in the regions are based on the old transport and education infrastructures and we are having difficulty in replacing that infrastructure so that we can develop new ideas for the 1990s and beyond. Technology transfer, 488 cabling Britain and so on, are all essential not just in the interests of northern regions seeking to attract resources away from the south-east but because of the competition that our industry will face in 1992 and beyond with the implementation of the Single European Act.
It is not true to say that investment in the south-east has centered on the entrepreneur alone. One has only to think of arms procurement, on which £8 billion is to be spent. The success of the M4 corridor—the silicon valley of the United Kingdom—has been born out of public sector-led financing, especially in arms procurement. Transport is another example; again, a disproportionate amount goes into the south-east. The vast majority of the £6 billion in mortgage interest charges is going into the south-east.
Entrepreneurs have fed off public sector-led investment. There may be nothing wrong with that but it is worth comparing with the system operating in the Lander. Public sector-led investment has been dispersed around the Lander and the country. The Germans have invested in areas of growth and centres of excellence and the development of wealth creation has been more evenly spread around the country. Germany is not suffering from the overheating that the south-east is experiencing, which is no good for the south-east and certainly no good for the northern regions.
In the not too far distant future, decisions on investment will be influenced by the existence of the Channel tunnel. Investors will not come to the south-east because it will be too costly. They will not come to the north of England because we do not have the infrastructure—the means to get goods in and out of the area, the training, the technology or the cabling. Investors may well decide in favour of northern France or northern Europe, which will have built the infrastructure necessary to sustain an advanced economy.
Yesterday's Budget will do nothing to regenerate the north of England. I make my plea for the regeneration of the north not just on behalf of people in the north, but because it is in the interests of the economy as a whole. An opportunity has been missed. Partnerships exist in many areas of England; there is one in my own city of Sheffield, where there has been development in the transport infrastructure. An investment bank has been set up and work is being done on combined heat and power. Yet that partnership, and all the others like it, are struggling in the absence of central Government support.
In 1991, Sheffield is to host the second biggest sporting event in the world—the world student games. The event is to be three times bigger than the Commonwealth games, with 125 countries and 7,500 sportsmen participating. Sheffield will be a window to the world, yet we have already been told that no money will be made available from central coffers. The Government say, "We are not prepared to put in any cash. You must do it all through the private sector." No other country in western Europe would take such a negative attitude.
Let me compare the problems with which British industry must contend with what happens in one of the richest parts of West Germany. I was recently in Badenweiler and I spoke to the Conservative Leader of the Lander government. An innovation technology company has been set up which commands about 2,000 experts on a consultancy basis—a service paid for by the Lander itself. The Lander is spending 21 million deutschmarks on innovation technology to be matched by technology transfer units and again to be supported by the Lander. 489 When the innovation has been developed and the technology transfer has taken place and the company goes into production, it can go to the Lander bank and borrow at subsidised interest rates of 4 or 5 per cent. over 8 to 10 years. At federal level, the reconstruction bank of Germany will also put money in at 5 per cent.
Compare those rates with the figures in the venture capital statement and with the experience of any company in the United Kingdom seeking money to develop new technology. British companies pay 12, 13 or 14 per cent. The examples that I have given come from one of the richest parts of Germany. I asked the mayor the simple question, "Why do you do it?" After all, it is, in effect, a Conservative administration. They said, "We must keep ahead of the game. Entrepreneurs do not always deliver and we have to push them. To that end we are prepared to support our industry, either from the Lander bank or from the federal bank." The support for industry extends not only to hardware but to training, to the development of transport infrastructure and so on.
If we ask our industry—particularly small and medium-sized businesses—to take part in technology transfer schemes from our academic institutions with the necessary training without central Government support, we are tying not one of the entrepreneur's hands behind his back, hut both. The Budget will be seen as a missed opportunity, especially as we move into the much more competitive era following the implementation of the European Act in the 1990s. The Budget will have failed the nation.
§ Mr. Michael Irvine (Ipswich)
This year's Budget has produced even more confusion of thought and mind than is normal on the Opposition Benches. Some have reproached the Government for allowing inflation to gain the upper hand; others, totally ignoring the inflationary implications of what they are suggesting, have called upon us to spend some of the massive surplus that has been accumulated. The hon. Member for St. Helens, North (Mr. Evans) asked, "Why cannot some of that enormous surplus be spent?"
The confusion reached its apogee during the speech of the Leader of the Opposition yesterday afternoon. In the course of one and the same speech he reproached the Government, claiming that last year's Budget had allowed inflationary pressures to build up, and then went on to call for the spending not of part of the surplus, but, as I understood him, of the entire £14 billion.
One must make allowances. Rapid economic growth and a massive budgetary surplus are not characteristics associated with the financial stewardship of Labour Governments. It is not particularly surprising that Opposition Members, finding themselves in a new and unfamiliar landscape of high economic growth and a massive Budget surplus, become somewhat disoriented and confused. No doubt they feel more at home with high interest rates and a large balance of payments deficit, but there are major differences between the high interest rates and large balance of payments deficit prevailing now and those associated with Labour's term in office.
The current interest rates squeeze has crucial characteristics which mark it out from earlier interest rate squeezes under Labour Governments. When Labour was in government, interest rate squeezes ravaged industry and 490 led to sharp and immediate cuts in industrial investment. Not so this time. During this interest rate squeeze, exactly what the Chancellor intended is happening. Interest rates are having their principal effect on the personal sector. The corporate sector—and certainly the larger companies—has ample cash balances. Investment by our main-line companies is holding up well. That investment by main-line companies is the key to our industrial success. High levels of investment have continued for some six months after interest rates were raised substantially. The adverse balance of trade we are now experiencing is characterised by a large element of imported capital goods. That is a reassuring feature.
Table 3.4 of the Red Book sets out the percentage increase in the volume of manufactured goods year on year. The table shows that in 1987 and 1988 imports of capital and intermediate goods have recorded substantially greater percentage increases than consumer goods. In the short term, those imports of capital goods place a strain on our balance of payments, but in the longer term they mean that British industry is putting on muscle and becoming better equipped to meet demand in future.
It has been claimed that the Chancellor has been forced to rely solely on interest rates to curb inflation. That is not so. The massive Budget surplus is in itself disinflationary. I have no doubt that in the particular circumstances of this year it is right to run a Budget surplus of such a size because it restrains domestic demand, helps maintain confidence overseas and reduces the interest on the debt that the Government will have to pay in future years.
However, I am glad to see that paragraph 2.29 of the Red Book states:The Government intends to move gradually from the present surplus towards a balanced budget over the medium term.A substantial surplus is absolutely right for now, but it will not always be so. We do not want the Government to fall into what might be termed the GEC syndrome. The time will come when it will be appropriate to use that surplus for cuts in direct taxation which increase choice, act as incentives and help to generate the economic growth which augments Government revenue. In addition to tax cuts, I hope that future Government plans for reducing the surplus will include increased public capital expenditure. I stress the word "capital". Public sector investment is needed to complement rising investment in the private sector.
My right hon. Friend the Member for Shropshire, North (Mr. Biffen) mentioned expenditure on education and health. I have in mind expenditure on transport. Economic growth manifests itself rapidly in increased traffic movement and congestion. If our economic growth is to be sustained, we need to ensure that our transport infrastructure can cope. Otherwise, growth will be held back. Industrialists in my Ipswich constituency and in other parts of Suffolk are already telling me that their operational efficiency is being hampered by inadequate transport infrastructure.
Running a budgetary surplus and determining how to apply it is a novel experience for a post-war British Chancellor. It shows just how far we have travelled on the road to economic success. For the moment the watchword is and should be "caution". A massive budgetary surplus is clearly right—but as the Government move towards their medium-term target of a balanced Budget, what is required is a judicious mixture of income tax cuts to 491 increase incentives, combined with increased capital expenditure carefully targeted where it will best assist continued economic growth.
§ 9.6 pm
§ Mr. Stuart Holland (Vauxhall)
An effective Budget should combine social justice and economic efficiency, and this Budget does neither. It starts with the junk statistics that we have come to expect from the Treasury, to which attention has been drawn by advisers to the Select Committee. The Chancellor claimed:we have experienced the longest period of strong and steady growth since the war.We note that he made no international comparisons. That is not surprising, because at 1980 prices the average annual growth of GDP between 1979 and 1987 was 1.8 per cent. for the United Kingdom and 2.6 per cent. for the rest of the OECD. In Japan, with which the Chancellor is glad to make comparisons on productivity based on a few years' figures, the average growth in GDP was 4.5 per cent.
The Chancellor claimed:Between 1974 and 1979 inflation had averaged more than 15 per cent. Over the past six years it has averaged 5 per cent.".If we put that on a comparable basis for the lifetime of the Government, between 1979 and 1989 annual inflation averaged 6.7 per cent.—more than one and a half times the figure quoted by the Chancellor. We now know that it is set to rise again, so the long-term trend is not moving towards zero but is heading for 8 per cent.
The Chancellor claimed:our productivity growth in manufacturing has exceeded even that of Japan."—[Official Report, 14 March 1989; Vol. 149, c. 293–94.]That is true for certain years, but its aggregate productivity growth is not the issue when comparing our manufacturing performance with that of Japan. The key comparison is with the exporting sector in Japan which, as is well known, accounts for only about 12 per cent. of the economy. The amazing productivity of Japan's giant companies, the Kairetsu, is beating us hands down in world markets and in our own market. If there is such an economic miracle, why is the regeneration of the British Motor industry being carried out in Sunderland care of Nissan, and in Austin Rover care of Honda? The Japanese are efficient. Our productivity is rising, but some of the rise is due to Japanese companies in this country.
The Chancellor continues to claim that he has effected a miracle, but a miracle means helping the sick take up their beds and walk, not helping to walk off with the beds of the sick. A miracle means sustained domestic and export growth and full employment—not a go-stop growth of 2.7 million people unemployed, a balance of payment deficit of £14 billion and a currency standing only with the crutch of an interest rate of 13 per cent.
The Chancellor claimed yesterday:The role of fiscal policy is to bring the public accounts into balance and to keep them there, and thus underpin the process of re-establishing sound money.He said:Inflation is disease of money; and monetary policy is its cure."—[Official Report, 14 March 1989; Vol. 149, c. 293–4.]That sounds fairly familiar. Perhaps the Chancellor is trying to prove that he is still a monetarist. He certainly echoes the claims made by Milton Friedman: 492Inflation starts in one place and one place only—national treasuriesNo doubt the Chancellor has read that—he certainly seems to believe it.
Away from the footlights and television cameras, in a major statement in 1969 Professor Friedman said of the correlation between the money supply and inflation:changes of money income mirror changes in the normal quantity of money. But it tells us nothing about how much of any change in income is reflected in real output and how much in prices.In other words, there is no cause and effect but it is all done with mirrors—that is the essence of the monetarists' claim to superior scientific status above the derided economics of Keynes.
Mirrors are hazardous. If an ass looks into one, how can a brilliant Chancellor look out? Yet the Chancellor is doing precisely that—he is trying to do it by mirrors in a "now you see it, now you don't" type of policy. We can judge from the junk statistics. Since 1979 there have been 24 changes in the unemployment figures and only the first change put the figures up. Publication in British Business of the share of multinational companies in our export trade, or the share of leading firms in our export trade has stopped. The last figures were published in 1981. No wonder there is a problem about the nature of the balancing item. When 75 firms account for half our trade and 220 firms for two thirds of our trade, when 85 per cent. of our exports are by multinationals, the transfer pricing which those multinationals can employ is likely to be one of the major factors in that grotesque balancing item, which is bigger than the Budget deficit.
Another example of the mirror policy was the Government's attempt to revise the trade deficit just before the Budget and to take the mortgage rate out of the RPI. This is not the economics——
§ Mr. Holland
I am taking a note from the book of the Chief Secretary who accepts interventions in his time.
§ Mr. Lilley
Did the hon. Gentleman say he was following my right hon. Friend's good example? I am extremely grateful to the hon. Gentleman for giving way. The hon. Gentleman has just suggested that the balancing item is due to the understatement of the value of exports by multinational companies. Is he saying that the balancing items should be largely attributable to reducing the balance of payments deficit?
§ Mr. Holland
I do not know why the Economic Secretary had so much trouble making his point. Transfer pricing by multinational companies, which dominates our trade, means that our trade statistics are opaque. A standard means of transfer pricing is to inflate and overstate import prices. We should expect economic integrity from any Government and should be able to trust their figures, but such integrity is absent from this Government. Their economic policy is one not of integrity but of a massage parlour. They massage the figures to reduce the number of unemployed, to disguise the trade deficit and to understate the real trend in inflation. They massage the rich to get them to work and massage foreign investors by putting interest rates at a level that will support the pound.
Does the Chancellor remember the cost-push, demand-pull debate which was taking place when he was a student? 493 Does he not know that the simple argument on demand-pull is that of too much demand chasing too few goods? Does he not recognise that this is precisely what is happening in the economy today—irrespective of money supply—because he did not slow down his pre-election boom last year?
Has the Chancellor forgotten the basic principle of cost- push inflation, which is that pressure on capacity enables firms to push up prices because other firms are willing to pay a premium for components, rather than find their own production grinding to a halt? Has he never read Adam Smith's "The Wealth of Nations" which states:people of the same trade seldom meet together, even for merriment or diversion, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices"?Does the Chancellor of the Exchequer not realise that market forces are at work and that inflation cannot readily be wrung out of a booming economy by macro policies alone? Does he not know that coping with inflation in an overheated economy demands other measures, involving not only the structure of costs but also the regional and social distribution of demand and supply?
As for the argument that inflation should take priority over all else—which hon. Member would thank a doctor for reducing a patient's temperature if it resulted in rigor mortis? Why should we thank the Chancellor for his counter-inflationary measures which, through penal interest rates, will kill off many small and medium firms?
Let us consider interest rates. Is the Chancellor really unaware of the unequal impact which his policies have? The wealthy can invest their savings and therefore benefit by higher income at higher interest rates, while the less well-off—who accepted his invitation to join the democracy of property owners but then lost their jobs or the family wage earner or fell ill—could not meet their mortgage payments and were dispossessed.
Is the Chancellor unaware of the inequality of the cost of borrowing at higher rates on big and small businesses? Unequal competition for funds means that bigger businesses can borrow at lower rates than smaller businesses. The price-making power of the big firms gives them the ability to pass on higher interest rates in the form of higher prices. High interest rates may be not disinflationary but inflationary. Big businesses can operate self-financing to cover the major part of their investment needs—often up to 85 per cent.—without access to external finance. Small and medium firms cannot do that. Higher interest rates will not hit the big league but will penalise the small firms—that is quite apart from pricing techniques which are used to understate real profits, to which I have already referred.
Is the Chancellor or his Treasury team unaware that interest rates are both unequal, and relatively ineffective, as the major instrument of demand management? Does the Chancellor not realise that in using them to choke off demand he is strangling many small and medium entrepreneurs—the serving of whose interest once appeared to be the Tory party's main mission in government?
The Chancellor does not face simply the problem of fiscal drag, and whether he is a fiscal drag artist. The Government did not, at first—between 1979 and 1981—succeed by raising interest rates. Their subsequent policy of fail, fail and fail again is no way to run the economy. By raising interest rates nine times, the Government have 494 shown that their fiscal stance is really horizontal. The Chancellor is no longer the go-go Chancellor of yesteryear but the full stop Chancellor of today and tomorrow. His Budget was less a baleful admission from yesterday's whiz kid of the need for a soft landing than an ignominious belly flop. As several hon. Members have said, the Chancellor has the money but he cannot spend it.
Yesterday, using a vivid metaphor, my right hon. Friend the Leader of the Opposition asked why the Chancellor could not spend the money and referred to the numbers on the notes. Number 1 dealt with overheating. Where does that occur? It occurs in the south-east and parts of the midlands but not—as several of my hon. Friends have said—in the north-west, north-east, Northern Ireland or Scotland. An uneven and unbalanced regional distribution of growth is an essential part of the problem.
The Chancellor said that how soft or hard the so-called landing would be was not in the hands of the Government alone. One thing that the Government are clearly not prepared to handle is an effective regional development policy. They blithely abolished location controls through industrial development certificates; they blithely reduced regional development grants. They then cut the ground from under regional enterprise boards such as those in Lancashire and the west midlands. The result is that, while half the country is overheating, the other half is left out in the cold. The massive resources of the regions are being wasted, while the economy as a whole grinds to a halt.
Let us examine the numbers on the other notes. Let us take capacity utilisation. Of course there is pressure on capacity for some companies in some areas. For all the rhetoric about the supply side, the Government have no real supply side policy. Like President Reagan, the Chancellor appears to have fallen for the so-called economic theory behind the words "supply side"—used by Mr. Laffer, who drew a curve on the back of a napkin in a restaurant for President Reagan which claimed that people would work harder and pay more tax at lower tax rates.
The incentive effect in the Laffer curve is simply laughable: it is a bad joke. As John Kenneth Galbraith has rightly pointed out, first the argument assumes that the rich are idle, not working hard enough—some Opposition Members may share that premise. Secondly, in the United States the already rich could not find real investment outlets for their windfall tax gains and simply put those gains, through lower taxes, on the stock market. The result was a massive inflation of stock market prices, contributing to the crash of October 1987.
The fact is that the Chancellor cannot increase capacity use in the short term because the Government deny the relevance of a medium-term industrial strategy. In short, they will not plan. Yet every enterprise plans, more or less, the broad balance of its income and spending. Every manager plans if he deserves to survive the annual meeting with the firm's accountants. All our leading competitors plan—whether they use that wording, as France, Italy and Japan do, or whether they use words such as "investment co-ordination" as West Germany does.
Only our Government, with the worst structural deficit on the non-oil visible account of nearly £25 billion, fail their own industry, management and workers, because "She who must be obeyed" thinks only that "plan" is a four-letter word.
495 Let us deal next with the public sector debt repayment on which the Chancellor so prides himself. Here again we see the "home economics" policy of the Prime Minister, in practice reflected in her adage thatevery housewife knows that if by the end of the week you have spent more than you earned you are in trouble".Let the Government tell that to the banks, the building societies or the investment trusts, all of which know that the role of credit is what distinguishes big business from a corner shop. Even more, it is a key difference between an advanced and a primitive society.
If the expansion of an economy were limited to retained earnings, without external borrowing, no economy could fully achieve the potential increase in productivity made possible by new technology. Not least, all our leading competitors in OECD countries—other than the United States which faces similar problems to our Government in relation to competitiveness—use public sector credit institutions to ensure that their societies can invest in their own future and that low household savings, such as we now see in the Unted Kingdom, can be offset by public credit agencies.
Paying off the national debt is like putting money in the bank and telling the bank manager not to lend it. It is even worse than putting it in a current account, because once repaid it earns no interest for those who lent it. Nor does it earn real interest for society as a whole, in terms of public funds for investment in the nation's future.
The real reason why the Prime Minister wants to repay the national debt and has told the Chancellor to do it lies not simply in her ignorance of its real role but in her blatant prejudice against all things public and her gross praise of all things private. That brings us back to the real guru of the Government's economic policy, Milton Friedman—he who argued that public spending drains the private sector, and who spoke of "crowding out". In those arguments Professor Friedman is simply wrong.
Let us take the construction of council housing in the British economy. In England and Wales in the last decade, private contractors have built up to 95 per cent. of all council houses. In Scotland it is up to 98 per cent. That means that, of every £100 of public money that goes into council house building, between £95 and £98 goes straight into the pockets of private contractors. That public spending does not drain the private sector: it sustains it.
Likewise, cuts in the council house building programme do not simply hit the direct labour organisations that the Prime Minister hates so much; 19 times out of 20 they hit the private builders, the Rotarians, the local Conservative association members and the big building firms, many of which must be wondering why they put so much money into the Tory party's pocket when the Tories—with cuts of two thirds in the housing investment programme since 1979—have been taking money by the handful out of theirs.
The same applies to the National Health Service. In this country, not a hospital is built, not a ward or operating theatre equipped, not a drug prescribed that is not supplied by the private sector. Cuts in the NHS are actually restricting the growth and expansion of the private sector, not merely in the construction industry.
I grant the Chancellor that he has a problem with the Prime Minister. There is certainly no evidence that she has ever opened the main volume by the man whom she most 496 loves to hate among economic theorists, Maynard Keynes. Had she read it, Keynes could have warned her of the consequences of the policies that the Government are now pursuing when he wrote:the more virtuous we are, the more determinedly thrifty, the more obstinately orthodox in our national and personal finance, the more our incomes will have to fall when interest rises … Obstinacy can bring only a penalty and no reward.When they came to office the Government said that they would cut waste from higher education, public services and the National Health Service. In office, they have laid waste to higher education and public services, and they now plan to lay waste to the National Health Service. The Budget, with its implicit admission of errors on a massive scale, will penalise not only the poor but the entrepreneur.
Before long the electors will look back on the present Government and ask, "How could they have wasted so much that was on offer from North sea oil? How could they have missed the chance to use those funds to dynamise British industry? How could they have divided the nation so completely between rich and poor regions, rich and poor people, haves and have nots? The prejudice against public spending typical of this and the last Budget recalls the images of Eliot's "The Waste Land". It is the wasteland of our blighted inner cities, our derelict industrial areas, our closed hospital wards and our underpaid and overworked hospital staff. While for other countries 1992 means opening up Europe, this Government, with their penal interest rates and with this Budget, are closing Britain down.
Much has been said, in this debate and also in the report of the Treasury Select Committee, about junk statistics. We are less concerned with junk statistics than with the Government's junk policies. If any message is to reach the gilded salons of No. 10, it should be that the Prime Minister should junk the Chancellor before the British people junk the Government.
§ The Financial Secretary to the Treasury (Mr. Norman Lamont)
We have heard a number of interesting speeches and I was struck by the fact that hon. Members on both sides of the House managed to find aspects of the Budget to which they responded favourably. The hon. Member for Berwick-upon-Tweed (Mr. Beith) was good enough to praise the abolition of the earnings rule. The hon. Members for Burnley (Mr. Pike) and for Londonderry, East (Mr. Ross), together with my hon. Friend the Member for Bedfordshire, South-West (Mr. Madel) and others, praised the differential that my right hon. Friend established in favour of unleaded petrol. My hon. Friend the Member for Bexhill and Battle (Mr. Wardle) made a powerful speech giving strong support to what my right hon. Friend has done on company cars. I was especially grateful to him, because of his background in industry, knowing that it is not always the easiest policy to put across.
My right hon. Friend the Member for Shropshire, North (Mr. Biffen) caused a mild frisson on the Front Bench by prophesying that Ministers on the Treasury Bench might later have to reach for their wallets. However, he made a powerful speech with his usual eloquence and he warmly welcomed the fiscal stance in the Budget and underlined the need, above all, to get on top of inflation.
497 My right hon. Friend the Member for Chesham and Amersham (Sir I. Gilmour) divided the Budget into two halves—a tactical half and a strategic half. At least he was able to give the tactical part two and a half cheers, and for that we are extremely grateful. However, I do not agree with everything that he said about manufacturing industry. There has been a great structural change in the country in manufacturing industry but I cannot go along with the prophecies made to my right hon. Friend.
Throughout the debate there was a strong feeling, echoed on both sides of the Chamber, that it was, as my hon. Friend the Member for Bedfordshire, South-West said, a safety first Budget. The hon. Member for Berwick-upon-Tweed felt that in that respect we were making up for the mistakes of last year. That is a message and an argument that I, together with my hon. Friend the Member for Cambridgeshire, South-West (Sir A. Grant) reject strongly. Last year's tax cuts were right, they remain right and they will be seen more and more to be right. The tax cuts introduced last year will improve the competitiveness and the supply side of the economy. I have no doubt that in the long run they will also generate more revenue. I look forward to the day when we will be able to demonstrate that—I am confident that we will be able to do so—from the Dispatch Box.
If last year's tax cuts had been wrong, we would have been reversing them. In fact, my right hon. Friend the Chancellor was confirming them and in his Budget, he made further remissions of some £3 a week for the majority of people in work. It seems an extraordinary view that if one does not take immediate action again this year to cut taxes, it means that last year's tax cuts were wrong. That view is obvious nonsense and the fact that it is nonsense was confirmed by the way in which the right hon. and learned Member for Monklands, East (Mr. Smith) put forward his shadow Budget, with a package of measures costing some £3 billion. He was the man who advanced the argument that last year's tax cuts were wrong. If they were wrong, surely he would not now be advocating further measures totalling some £3 billion, which is not far short of the total of which he was so strongly critical last year.
Through the years my right hon. Friend and his predecessor have altered expectations as to what Budgets should be like. It is an unusual criticism and I do not find it a fierce criticism to be told that the Budget was boring or dull. Many of us would have been happy if some of the Budgets introduced by the right hon. Member for Leeds, East (M r. Healey) had been boring or dull. They were far from dull and they were very frequent. One of my hon. Friends turned up for me in a 1976 newspaper a cartoon of the right hon. Member for Leeds, East introducing one of his 1976 Budgets—his November Budget. The right hon. Gentleman was dressed up as Father Christmas, which is the way Chancellors tend to be dressed in cartoons. But in the cartoon, the taxpayers were queuing to give their presents to Father Christmas. That is how Budgets and Chancellors used to be seen. It is very different today, but we cannot always meet all the extravagant expectations that are sometimes built up.
Opposition Members have also complained about the increase in the tax burden. I find that a surprising line of approach for them. It is rather difficult for anybody, except perhaps for a member of the Salvation Army, to believe in overnight conversion. I find that concern with the tax burden extremely astonishing. The Opposition hooted with laughter when my right hon. Friend the Chief 498 Secretary, when replying to the question of the right hon. and learned Member for Monklands, East about the burden of taxation, pointed out that in our first years of office, we spent our time reducing debt and putting Government finances on a much sounder footing. That is why the tax burden, as a proportion of GDP, went up. It has been going down since the early 1980s, but it did go up as a result of the measures that we took in 1979 and the early 1980s. We have emphatically reduced the burden of income tax as a proportion of GDP and, furthermore, we have reduced income tax as it affects the ordinary citizen.
The Opposition, again, rather surprisingly, trying to have things both ways at once, like to argue that the burden of taxation has increased, although they always argue in favour of higher taxes. If the average amount of taxation has increased at all, it is only because real take-home pay has gone up so quickly under this Government. That is why average rates of tax may have increased. If we had simply taken the Labour Government's thresholds and tax rates and merely adjusted them for inflation, there is no doubt that a man on average earnings would today be paying about £18 a week more in taxation than he is doing now under this Government. If the Opposition think that the burden of taxation is too high—and I think that it is too high and we want to bring it down—why do they vote against year after year when we put forward measures to reduce the basic rate of income tax'?
We have been told that this Budget does nothing for that mythical thing, the real economy, and that it does nothing for the current account. But the main problem is not the current account, but inflation. The measures that my right hon. Friend has put forward in his Budget are consistent with the steps he has already taken to get inflation down. It is a Budget that takes no risk with the anti-inflation strategy and it underpins the measures that my right hon. Friend has already taken on the monetary front. The trade balance will be the last indicator to respond, but it will certainly eventually do so.
§ Mr. Andrew F. Bennett
If, as the Financial Secretary says, the real enemy is inflation, why have the Government deliberately allowed water prices and electricity charges to go up? If the Government were really keen to tackle inflation, they could have stopped both those increases.
§ Mr. Lamont
Both those charges are going up because of the needs of those industries for investment. The fact that particular prices go up is not inconsistent with the Government's overall determination to bear down on inflation in general and it is monetary policy and the monetary framework, whatever may be happening to individual goods or commodities, which will bring down that rate.
§ Mr. Lamont
I want to move on because I have one or two announcements to make. However, I shall give way.
§ Mr. Holland
We look forward to those announcements. The Financial Secretary reminds me of President Charles De Gaulle who once said that a president should be concerned with inflation, not the price of eggs. Perhaps we have some sympathy for him there. But when will the trade deficit improve? We have had forecasts of this and 499 that, but when will we get a J-curve effect on the export side—or is it really an S-bend and is the Financial Secretary going down the tube?
§ Mr. Lamont
As my right hon. Friend made clear in his Budget statement and in the Red Book, the size of the deficit this year is expected to be broadly the same as last year's. However, as my right hon. Friend the Member for Chesham and Amersham pointed out, that is likely to mean that towards the end of the year things will begin to improve somewhat.
There is evidence that interest rates are already beginning to have their desired effect. That is obvious from the fact that the monetary aggregates, M0, and figures to be published next week, are likely to show an annualised growth rate over the past six months of below 3 per cent. It is evident from the housing market also that interest rates are beginning to have their effect.
The result of that prompt and effective action will be that inflation will come down. While getting inflation down is primarily a task for monetary policy, it is vital that fiscal policy supports it. That is why my right hon. Friend has budgeted for a third successive year of debt repayment, something unprecedented since the late 1940s. The debt that we are now repaying has been built up by years of excessive Government borrowing. Not only have we put an end to that excessive borrowing, but we are now lifting the burden of debt and the interest payments that go with it from taxpayers now and from generations in the future.
When the Leader of the Opposition responded to my right hon. Friend's answer to his private notice question, he said that it was the people's debt, not the Government's debt. Of course he is right, but repaying debt is not just an abstract idea of no benefit to anybody. It is the taxpayers who pay the interest, and as a result of the repayments in the past two years and the repayment in the next year, the Government will be saving taxpayers the equivalent in interest of £3 billion per year. That is dead money and dead expenditure—of no benefit to the citizens of this country.
As my right hon. Friend the Chief Secretary to the Treasury pointed out in his Autumn Statement, he was able to give some increases to the priority areas in the public spending round because of the savings in debt interest. In that way, the programmes that Opposition Members regard as important were helped by what my right hon. Friend achieved on debt interest.
To listen to the Leader of the Opposition—no one imagines that he will ever confront the problem of a surplus—it was clear that he could not wait to get his hands on the £14 billion. Education, health, transport, pensions and welfare payments were all things on which, according to him, that £14 billion could be spent. Indeed, the right hon. Gentleman got very close to the £20 billion of extra public expenditure that only a short time ago the Opposition were denying existed in their manifesto. However, after what the right hon. Gentleman said, there can be no doubt that the Opposition are committed to a lavish and expansive programme of public expenditure.
Although, for reasons that my right hon. Friend the Chancellor made clear, we have not been able to cut the basic rate of tax in this year's Budget——
§ Mr. Lamont
It is not necessarily the Government's intention to do that. My right hon. Friend the Chancellor has made it clear that the objective is a balanced Budget. Indeed, my right hon. Friend explained that extremely clearly and the hon. Gentleman can read about it in the Red Book as well as in the report of my right hon. Friend's speech.
Although we have not been able to cut the basic rate this year, in this year's Budget we have been able to make a number of valuable reforms. The most costly—the one that allows people to keep more of their own money—is the reform of employees' national insurance contributions—something that has been welcomed by even Opposition Members. This year we have been able to finish the reform of employees' national insurance contributions that was started in the 1985 Budget. In that Budget we were able to reduce the size of the disincentive for people to work, but only by introducing more steps into the system.
In the Budget my right hon. Friend has been able to complete that reform and to remove those steps. The effect is to give people at the lower end an incentive to work, or rather it avoids that trap where people actually lose money by increasing their earnings. At the same time it is a measure that has given £3 a week to everyone earning more than £115 a week, which is 40 per cent. of average earnings.
In addition, we have been able to make some important improvements to the tax treatment of savings. I should like to comment on the alleged crisis that was mentioned by the hon. Member for Berwick-upon-Tweed. The total saving in the economy—that is, the private and public sector combined—is about 2 per cent. higher as a proportion of GDP than in the 1970s. It has remained unchanged since 1986. Even the fall in personal savings—about which I assume hon. Members are concerned—is more than accounted for by increased personal borrowing, which is what my right hon. Friend has already taken steps to deal with through his action on interest rates.
I have said that the Government have taken a number of steps to increase savings and especially share ownership. Earlier today I announced in a written answer the results of the latest joint Treasury and stock exchange survey of individual share ownership in the United Kingdom. That shows that in the past 10 years the number of shareholders has trebled. Nine million British people now own shares, and about 10 million have either shares or savings in unit trusts. The overwhelming reason for that change is the direct result of Government policies—notably, privatisations, employee share schemes and personal equity plans. I am sure that my hon. Friends will agree that what is especially encouraging about the survey is that it shows that, despite the stock market crash, the level of share ownership—which has dramatically increased under the Government—has kept up and small shareholders have continued to be shareholders.
My hon. Friend the Member for Wyre (Mr. Mans) mentioned what the Government are doing for wider share ownership and especially employee share ownership plans. My right hon. Friend announced in his Budget a new tax relief for employers wishing to promote employee share ownership. ESOPs involve trusts set up for the benefit of the company's employees. My right hon. Friend has removed any uncertainty by providing that corporation 501 tax relief will be due for payments made to ESOP trusts that satisfy certain requirements—for example, that the trust invests in shares promptly and distributes them within a reasonable time to all employees on a similar terms basis. I regard it as especially important that this tax relief is properly targeted to ensure that our objectives are met. lf, therefore, the trustees fail to distribute shares within a reasonable time, or to meet other requirements, they will be taxed at 35 per cent.
I should emphasise to my hon. Friend the Member for Wyre that the Government have taken a comprehensive approach to dealing with the problems of encouraging ESOPs, Company law currently restricts the extent to which companies can give financial assistance to ESOP trusts. My right hon. and noble Friend the Secretary of State for Trade and Industry expects, if some technical difficulties can be resolved, to table amendments to this year's Companies Bill to help ESOPs and to relax those restrictions.
My hon. Friend the Member for Wyre, the hon. Member for Berwick-upon-Tweed, and several other hon. Gentlemen asked what we are doing to improve the personal equity plans. The hon, Member for Berwick-upon-Tweed somewhat under-estimated PEP's impact. In 1988, 115,000 plans were taken out, and that was after the worst stock market corrections or crash—as we are now allowed to call it—since 1929, and 270,000 were taken out in 1987.
About £700 million has been invested in equities, which is not an insignificant sum of money. I am confident that by allowing the amount that can be invested in unit trusts and in investment trusts to increase, we shall make PEPs much more attractive to the market. My hon. Friend the Member for Bexhill and Battle said it is extremely important that managers should be motivated to market PEPs. The response we have received is that they will definitely do so, and I am confident that that will be so.
We introduced a number of simplifications as a result of consultations with managers. We abolished the minimum holding period, and plan managers will no longer have to maintain separate portfolios for different plan years. Other changes made as a result of those consultations include changing from a calendar year to a tax year basis, and a reduction in the degree of information that plan managers must give to the Inland Revenue. I am confident that all those changes will reduce the cost of PEPs and make them more attractive to managers.
It was interesting that when the Leader of the Opposition responded to the statement of my right hon. Friend the Chancellor of the Exchequer, he came to life when talking about PEPs and water privatisation. I was surprised that the idea that PEPs should be opened up to new issues and to privatisations, like any other new issues plainly shocked him. I can only ask, "Why not?" We want to encourage privatisation and new issues as well.
Last July, the Government issued a consultative document that considered the possibility of simplifying the rules determining residence in this country for tax purposes and of relating liability for United Kingdom income tax more closely to the degree of an individual's connection with this country.
It has always been recognised that any changes must take account of the wider economic implications and ensure in particular that our tax environment is broadly comparable with that of other developed countries. The United Kingdom derives considerable benefit from people 502 who come here from overseas to carry on business and other activities. We have no wish to see them leave. I am grateful for the many responses that we received. They expressed a variety of views, and considerable concern was expressed about the implications of moving to a world income basis of liability for certain categories of people not domiciled here.
We decided that the world income approach would not provide a satisfactory basis of taxation for non-United Kingdom domiciled foreigners who are resident in this country. Therefore, we do not intend pursuing it, and in those circumstances it is not our intention to bring forward any proposals at this time. I may say that we received representations from members of the Labour party as well as of the Conservative party on that matter, and they were both in the same direction.
The right hon. and learned Member for Monklands, East is interested in the cost of private medical insurance tax relief. It will cost about £40 million in its first year. In arriving at that figure, we presume additional take-up of 10 per cent. in the first year, 1990–91. I expect that in later years take-up will exceed present levels by a considerable margin. The exact figure will depend very much on the extent to which the medical insurance industry meets that new marketing challenge. As take-up increases, the diversity of private medical provision and choice should increase. At the same time, the greater proportion of people electing to take their medical treatment privately will help relieve pressure on the Health Service, to the benefit of those who continue to depend on it for their treatment.
§ Mr. John Smith
If the presumption is that the increase in take-up will only be 10 per cent. despite a 40 per cent. subsidy being offered, may I take it that if there is 100 per cent. take-up, the cost will be £400 million and not £40 million?
§ Mr. Lamont
Because take-up depends on how strongly insurers market insurance. It will take time for plans to be marketed and for the figure to rise. Obviously, it will not be high in the first year, but it will increase in the second, third and fourth years. Opposition Members have suggested that the burden on the taxpayer could be about £500 for each 65-year-old, which almost exceeds the cost of National Health Service care. Their arithmetic is no better now than when they were last responsible for the economy. The average cost of tax relief for each individual's cover is expected to be under £100, while spending per head on National Health Service care for the elderly is almost 10 times as much.
In the Finance Bill, we are bringing forward measures based on recommendations of the Keith committee. The main proposals deal with the system of interest and monetary penalties for tax offences. They will, inter alia, bring PAYE into line with the changes already enacted for VAT and corporation tax. Together with the measures in the past two Finance Acts they complete our programme of reforms of the administration of income tax, capital gains tax and corporation tax, except for the recommendations on the administration and conduct of appeals, which will be the subject of further consultation.
503 The right hon. and learned Member for Monklands, East has been jumping up and down and putting questions to us, which is proper because it is his job. We have heard remarkably little about what the Labour party intends to do about taxation. Labour Members have been remarkably quiet since the last election, when the exposure of their commitments to clobber all taxpayers ensured their defeat at the polls. Their addiction to taking and spending other people's money cannot be suppressed for long, as has been apparent from their remarks today.
The salary-snatchers are at it again. The right hon. and learned Gentleman has already committed the Labour party to the abolition of the upper earnings limit on national insurance contributions, which he confirmed last week. It would increase marginal rates by nine percentage points for 2 million people, thus making them worse off at a stroke. The hon. Member for Sedgefield (Mr. Blair) wants the top rate to be 60 per cent., which, together with the abolition of the upper earnings limit, would imply a new top rate of 69 per cent. Labour Members also want to reimpose the investment income surcharge, which would lead to taxes on savings at a rate higher than 69 per cent. Labour Members have been saying that they want a Budget for savings. Their Budget for savings would include increasing taxation to a confiscatory level.
In an interview on 12 February the right hon. and learned Member for Monklands, East admitted that he would increase income tax for many basic rate taxpayers. We still have not received answers to the two big questions, which the right hon. and learned Gentleman and his colleagues repeatedly refused to answer—by how much would the Labour party increase public expenditure, and, to pay for it, by how many pence would it increase the basic rate of income tax? We have put those questions repeatedly, but answer comes there none.
§ Mr. Pike
Does the Minister agree that many ordinary people, earning ordinary incomes, think it fairer to give cuts such as those given last year by increasing allowances rather than reducing the top rate of taxation? Would such a cut not be much fairer, if that is the direction the Government want to take?
§ Mr. Lamont
I am sure that those people welcome what my right hon. Friend the Chancellor has done to national insurance contributions, which is by far the most effective way of directing help to the lower-paid.
The essence of the Budget is that the medium-term financial framework should be used to continue a more stable economic climate. Confidence and certainty should be confirmed through careful budgetary control and economic management. There will be possible reductions in taxation in future years. There will also be a fundmental improvement in the supply side of the economy. This is a Budget that builds on a decade of economic success and financial prudence. It is a Budget that recognises the 504 tremendous advances made in tax reform over the last decade. It is a Budget that recognises the new concerns of the environment and the elderly as well as the saver. It is a Budget that may be cautious but, above all, one that is sensible and constructive, and I commend it to the House.
§ Debate adjourned.—[Mr. Alan Howarth.]
§ Debate to be resumed tomorrow.